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Australia Is “Going Down Under”: “The Bubble Is About To Burst”, RBS Warns
Australia Is “Going Down Under”: “The Bubble Is About To Burst”, RBS Warns
Thanks to a variety of idiosyncratic political crises and country-specific stumbling blocks, Brazil, Turkey, Malaysia, and to a lesser extent Russia, have received the lion’s share of coverage when it comes to assessing the EM damage wrought by the comically bad combination of slumping commodities prices, depressed Chinese demand, slowing global trade, and a “surprise” yuan devaluation.
Put simply, the intractable political stalemate in Brazil, the civil war in Turkey, the 1MDB scandal in Malaysia (and the fact that the country was at the center of the 1998 meltdown), and the hit Russia has taken from depressed crude prices mean that if you want to pen a story about emerging market chaos, those four countries have plenty to offer in terms of going beyond the generic “falling commodities + a decelerating China = bad news for EM” narrative.
But just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine.
One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model.
Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below.
* * *
From RBS
Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities.
…click on the above link to read the rest of the article…
A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage
A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage
As we’ve documented extensively of late, a host of idiosyncratic political factors have served to exacerbate what was already a very, very bad situation for emerging markets.
This dynamic is most readily apparent in Brazil and Turkey, and although Ankara probably has a leg up in the race for “most at risk from domestic turmoil”, Brazil isn’t far behind as President Dilma Rousseff battles abysmal approval ratings and a recalcitrant Congress in an effort to shore up the country’s finances by convincing lawmakers to sign off on much needed austerity measures.
Meanwhile, a confluence of exogenous shocks that include slumping commodity prices, depressed Chinese demand, the PBoC yuan devaluation, and the threat of an imminent Fed hike have conspired with country-specific political turmoil to send the BRL plunging and that, in turn, has put Copom in what former Treasury secretary Carlos Kawall calls “crisis mode.”
Of course crises are often costly to combat, especially when you’re an emerging market in the current environment and when it comes to Brazil, the use of alternative measures (like effectively selling dollars in the futures market) to avoid FX reserve liquidation is now weighing heavily on the fiscal outlook. As Goldman noted earlier this week on the heels of the latest monthly budget data, “the overall fiscal deficit is tracking at a disquieting 9.2% of GDP, driven in part by the surging net interest bill, which was exacerbated by the large losses on the central bank stock of Dollar-swaps.” Here’s what Capital Economics had to say after an emergency swaps auction was called by Copom in a desperate attempt to shore up the BRL last week:
…click on the above link to read the rest of the article…
In Latest Sign Of EM Chaos, Turkey’s FX Reserves Fall Below Key Threshold Ahead Of Pivotal Elections
In Latest Sign Of EM Chaos, Turkey’s FX Reserves Fall Below Key Threshold Ahead Of Pivotal Elections
One of the key things to understand about the veritable meltdown that’s unfolded across emerging markets is that there’s more to the story than the headline risk factors.
That is, while the list of proximate causes that includes a decelerating China, collapsing commodity prices, and uncertainty over when or even if the Fed will hike goes a long way towards explaining the carnage that’s unfolded across EM, each country has its own set of unique circumstances to grapple with. Indeed, the idiosyncratic political risks playing out across emerging economies have taken center stage as Brazil attempts to navigate congressional gridlock, Malaysia struggles with the 1MDB scandal, and Turkey faces new elections in November.
While there’s no question that the political situation in Brazil is particularly troubling, it would be difficult to imagine a more precarious scenario than that which exists in Turkey, where President Recep Tayyip Erdogan has managed to subvert the democratic process by starting a civil war, and thanks to the strategic significance of Incirlik, the effort is co-sponsored by the US and NATO.
Of course extreme political uncertainty, a bloody civil war, and an unfolding proxy war just across the border do not inspire much confidence, which helps to explain the fact that Turkey’s FX reserves have now fallen below $100 billion for the first time since 2012:
And here’s an updated look at the lira which is in the midst of a rather epic decline (which threatens to destabilize inflation) thanks to everything noted above combined with a central bank that either i) doesn’t understand the gravity of the situation, or ii) is loathe to hike rates going into the election:
…click on the above link to read the rest of the article…
Brazilian Nightmare Worsens On Bad Budget Data, Record Low Confidence, Horrific Government Approval Ratings
Brazilian Nightmare Worsens On Bad Budget Data, Record Low Confidence, Horrific Government Approval Ratings
Last month, in “‘No Recovery For You!’ Brazil Officially Enters Recession, Goldman Calls Numbers ‘Disquieting’”, we outlined Brazil’s July fiscal performance and came away believing that the country had little chance of hitting its primary fiscal surplus targets. Here’s what we said:
The latest on the political front is that President Dilma Rousseff has 15 days to explain to the the Federal Accounts Court why everyone seems to think that she intentionally delayed nearly $12 billion in social payments last year in an effort to make the books look better than they actually were. And while we won’t endeavor to weigh in one way or another on that issue, what we would say is that if someone in Brazil is doctoring this year’s books, they aren’t doing a very good job because things just seem to keep going from bad to worse. Case in point, on Friday, Brazil said its primary budget deficit was R10 billion in July, far wider than expected. The takeaway: “no primary surplus for you!”
Just three days later, Brazil officially threw in the towel on the primarily surplus projection for 2016 only to reverse course a few weeks later when embattled Finance Minister Joaquim Levy promised to enact some BRL26 billion in primary spending cuts for the 2016 budget on the way to achieving in a primary surplus that amounts to 0.7% of GDP.
Of course implementing austerity in the current fractious political environment is going to be well nigh impossible which means any and all upbeat assessments of the outlook for the country’s fiscal situation should be looked upon with an appropriate degree of skepticism. Add in the abysmal outlook for commodities and you have a recipe for perpetual twin deficits on the current and fiscal accounts, a situation which portends more BRL weakness to come.
…click on the above link to read the rest of the article…
Petrobras Default Looms Under $90B Dollar-Denominated Debt
Petrobras Default Looms Under $90B Dollar-Denominated Debt
There is blood on the streets wherever you look in Brazil today, but probably of most interest to the hundreds of US asset managers (the ones managing your mutual funds) is what happens to Petrobras as it remains so widely held. As we noted below, bond prices are collapsing and default risk is soaring, and with the nation’s currency collapsing amid the lower-for-longer oil prices, $90 billion of dollar-denominated debt could soon potentially be too burdensome for the company to repay.
Default Risk is exploding…
And as New York Shock Exchange details,
S&P recently lowered Brazil’s credit rating to junk status. It later downgraded 60 corporate and infrastructure entities in Brazil, including cutting Petrobras (NYSE:PBR) two notches to “BB.” Petrobras has been reeling from a corruption scandalthat reportedly involved Petrobras’ executives and directors awarding suppliers over-inflated contracts in exchange for kickbacks. The scandal has cost the company billions of dollars, and has been a blow to the reputation of Brazil’s President Dilma Rousseff.
PBR is off about 70% over the past year, versus a 50% decline for the Brazilian ETF (NYSEARCA:EWZ) and flat growth for the S&P 500 (NYSEARCA:SPY). Investors should continue to avoid PBR for the following reasons:
Stagnant Revenue And Earnings
When it rains, it pours for Petrobras. In addition to the corruption scandal, a free fall in oil prices has stymied the company’s revenue growth. For the first half of 2015, Petrobras’ revenue was down 27% Y/Y from $71.4 billion to $52.0 billion, while EBITDA growth was flat. EBITDA margin increased to 26% in the first half of 2015 from 19% in the year-earlier period, as the company slashed cost of sales, SG&A expense and R&D.
…click on the above link to read the rest of the article…
Rousseff Coup Could Sink Brazil, Emerging Markets
Rousseff Coup Could Sink Brazil, Emerging Markets
Brazil’s President Dilma Rousseff’s approval rating has plummeted to 8% amid the country’s worst recession in two decades. Her job is at risk too. Earlier this week opponents filed a petition to impeach Rousseff due to allegations of corruption by former president Luiz Inacio Lula da Silva at oil giant Petrobras of nearly $2 billion:
This week opponents of Ms Rousseff, incensed by allegations that “pixulecos” mostly involving ruling coalition politicians have cost Petrobras at least R$6bn (US$1.5bn), took their campaign to congress by filing a petition for impeachment with the speaker of the lower house Eduardo Cunha … The petition from Mr [Helio] Bicudo, which was backed by the opposition in congress, marks the start of what could be a long process to try to topple the former Marxist guerrilla only nine months into her second four-year term.
Rousseff – hand-picked by Lula da Silva to succeed him – appears to be caught up in da Silva’s backdraft. Opposition parties also claim she violated Brazil’s fiscal responsibility law when she doctored government accounts to allow more public spending prior to the October election last year. Rousseff in turn described the attempt to use Brazil’s economic crisis as an opportunity to seize power a modern day coup.
Inopportune Time For A Coup
Petrobras In Dire Straits
Political turmoil could not have come at a worst time. The Petrobras debacle has been a point of contention for the populace. While the elite profited from bribes and kickbacks at the state-owned oil giant, Petrobras is laying off workers and cutting supplier contracts in order to stem cash burn.
And those efforts may still not be enough to stave off bankruptcy. With $134 billion in debt – $90 billion of it dollar-denominated – Petrobras is the world’s most-indebted oil company. With oil prices 60% below their Q2 2014 peak, Petrobras will likely crumbleunder its debt load.
…click on the above link to read the rest of the article…
Is Brazil About to Drag Down Spain’s Biggest Bank?
Is Brazil About to Drag Down Spain’s Biggest Bank?
The timing could not have been worse.
In July last year, an analyst working for Banco Santander Brasil did something he shouldn’t have. He warned the firm’s private banking clients about the economic risks posed by the reelection of Brazil’s scandal-tarnished president, Dilma Rousseff. Those risks included a sharply devalued Brazilian real, rising interest rates, runaway inflation and tumbling shares.
When the analyst’s report went public, it provoked outrage from Rousseff’s party, which saw it as a direct intervention in the country’s general election. Santander’s now-deceased CEO Emilio Botin was given a choice: either he castigated the analyst and rejected his findings, or his bank’s extremely cozy ties with the government of its most profitable market could be in danger.
It was not a difficult decision. Within days the analyst was fired for “making a mistake.” Now, a year and two months later, it’s obvious that the analyst’s warnings were spot-on. Rather than firing him, Santander should have listened to him.
Instead of reducing its exposure to Brazil’s fragile economy over the last year, as HSBC has done (read: Does HSBC Know Something Others Don’t), Santander has doubled down on its bet, forking out €4.7 billion on the acquisition of the remaining 25% of its Brazilian unit.
A Slap in the Face
The timing could not have been worse. Yesterday, Brazil’s already troubled economy was given another long-expected slap in the face when Standard & Poor downgraded the country’s debt from investment-grade to junk status.
The impact was immediate. Brazil’s currency plunged from 3.78 Real to the dollar to 3.9. It’s currently hovering at 3.88. Just a year ago, when news of the government’s Petrobras scandal began hitting and the economy’s biggest threats – a weakening China, the abrupt end of the commodity super cycle, a strengthening dollar, and floundering internal demand – were beginning to surface, the currency was clocking in at 2.35 Real to the dollar.
…click on the above link to read the rest of the article…
Brazil Cut To Junk By S&P, ETF Falls 5% Post-Mkt
Brazil Cut To Junk By S&P, ETF Falls 5% Post-Mkt
It’s not as if the writing wasn’t on the wall, and don’t say we didn’t warn you.
Brazil, whose economy officially slid into recession in Q2 – a quarter during which Brazilians suffered through the worst inflation-growth outcome (i.e. stagflation) in over a decade – and whose efforts to plug a yawning budget gap are complicated by political infighting and a growing public outcry against embattled President Dilma Rousseff, has been cut to junk by S&P.
- BRAZIL CUT TO JUNK BY S&P; OUTLOOK NEGATIVE
Unsurprisingly, the iShares MSCI Brazil ETF is trading sharply lower AH on the announcement:
S&P’s move comes as the country’s finance minister fights for his political life and as deficits on both the current and fiscal accounts paint a bleak picture, especially in the face of persistently low commodity prices, China’s move to devalue the yuan, and the impossible dilemma facing the central bank which, like its “LA-5” counterparts, can’t hike to combat a plunging currency for fear of exacerbating FX pass through inflation and can’t cut to boost the economy for fear of jeopardizing the 2016 4.5% inflation target.
Expect this to get far, far worse before it gets better. Here’s the headline dump:
- S&P SEES BRAZIL REAL GDP CONTRACTION OF ABOUT 2.5% THIS YEAR
- S&P SEES BRAZIL REAL GDP CONTRACTION OF 0.5% IN ’16
- S&P SEES BRAZIL REAL GDP MODEST GROWTH IN 2017
- BRAZIL GOVT DEFICIT TO RISE TO AVG 8% GDP IN ’15, ’16, S&P SAYS
- BRAZIL WON’T HAVE PRIMARY FISCAL SURPLUS IN ’15, ’16: S&P
Here’s a look at the country’s twin deficits:
…click on the above link to read the rest of the article…
Buiter: Only “Helicopter Money” Can Save The World From The Next Recession
Buiter: Only “Helicopter Money” Can Save The World From The Next Recession
It is to be expected that economists – even economists working for the same team – have different views about the likelihood of different future outcomes. Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air.
That rather hilarious characterization of the pseudoscience that is economics comes from the desk of Citi’s Chief Economist Willem Buiter and it’s apparently evidence that even if you don’t think too much of his views on “pet rocks” (gold is a 6,000 year-old bubble) or on the efficacy and/or utility of physical banknotes (ban cash), you’d be hard pressed to disagree with him when it comes to critiquing his profession. Of course we don’t want to give Buiter too much credit here because the quote shown above could simply be an attempt to stamp a caveat emptor on his latest prediction in case, like his predictions on when Greece would ultimately leave the euro, it turns out to be wrong.
As tipped by comments made at the Council of Foreign Relations in New York late last month, Buiter is out with a damning look at the global economy which he says will be drug kicking and screaming into a recession by the turmoil in China and the unfolding chaos in EM. Here’s the call:
In the Global Economics team, however, we believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so. To clarify further, the most likely scenario, in our view, for the next few years is that global real GDP growth at market exchange rates will decline steadily from here on and reach or fall below 2%.
More specifically, Buiter says the odds of some kind of recession (either mild or terrifying) are 55%. Not 54%, or 56% mind you, but exactly 55%, because as indicated by the introductory excerpt above, economic outcomes are very amenable to precise forecasting:
…click on the above link to read the rest of the article…
Globalized Crisis
Globalized Crisis
If there is a bright side to the turmoil that has roiled the global economy since 2008, it is that not every part of the world has erupted simultaneously. The first blow was the subprime mortgage crisis in the United States, to which Europeans responded with self-satisfied reflections on the superior resilience of their social model. Then, in 2010, with the outbreak of the European debt crises, it was America’s turn for schadenfreude, while Asian countries pointed to the over-extended welfare state as the root of the problem.
Today, the world is obsessed with the slowdown in China and the woes of its stock market. Indeed, to some, what is happening in China may be a modern version of the American stock-market crash in 1929 – a shock that shakes the world. And it is not only the Chinese economy that has hit turbulence; Russia and Brazil are in much worse shape.
As globalization connects far-flung people and economies, the consequences are not always what was expected – or welcome. And, with the economic crisis becoming ever more global in nature, the next challenge for policymakers will be to try to mitigate its effects at home – and to contain their constituents’ impulse to reduce engagement with the rest of the world.
By now, it has become clear that every success story has its dark side, and that no economy is likely to continue to rocket upward indefinitely. But, to paraphrase Leo Tolstoy, it is important to remember that every unhappy economy is unhappy in its own way, and that a fix for one country’s problems might not work for another’s.
Europe’s problems, for example, cannot be attributed to a simple, single cause – such as the adoption of a common currency. In the run-up to the euro crisis, Italy had undergone a long period of stagnation, while Spain had experienced an American-style housing bubble and Greece was suffering from too much government-fueled growth. The uniting factor was that each had adopted unsustainable policies that required corrective action.
Read more at http://www.project-syndicate.org/commentary/globalized-economic-crisis-by-harold-james-2015-09#f5oBvDqv7Zb9mM5A.99
“This Time May Be Different”: Desperate Central Banks Set To Dust Off Asia Crisis Playbook, Goldman Warns
“This Time May Be Different”: Desperate Central Banks Set To Dust Off Asia Crisis Playbook, Goldman Warns
Early last month, Bloomberg observed that plunging currencies were “handcuffing bankers from Chile to Colombia.” The problem was described as follows:
Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.That’s because the deepening price slump is also dragging down currencies in Colombia and Chile — a swoon that’s fanning inflation and tying policy makers’ hands.
That was six days before China’s decision to devalue the yuan.
Needless to say, Beijing’s entry into the global currency wars did nothing to help the situation and indeed, since the yuan devaluation, things have gotten materially worse. The real, for instance, has plunged 10.5%, the Colombian peso is down 6.6%, the Mexican peso is off 4.4%, and the Chilean peso is down a harrowing 8% (thanks copper). And again, that’s just since China’s devaluation.
Meanwhile, plunging commodity prices, falling Chinese demand, and depressed global trade aren’t helping LatAm economies. Just ask Brazil, where the sellside GDP forecast cuts are coming in fast (Morgan Stanley being the latest example) now that virtually every data point one cares to observe shows an economy that’s sliding into depression.
Of course a plunging currency, FX pass through inflation, and a soft outlook for growth is a pretty terrible place to be in if you’re a central bank, but that’s exactly where things stand for the “LA-5” (believe it or not, that’s not a reference to the Lakers, it’s short for Brazil, Chile, Colombia, Mexico, and Peru), who very shortly will be forced to decide whether the risks associated with further FX weakness outweigh those of hiking rates into a poor economic environment.
For Goldman, the outlook is clear: LatAm central banks will, in “stark” contrast to counter-cyclical measures adopted during the crisis, hike in a desperate attempt to shore up their currencies and control inflation.
…click on the above link to read the rest of the article…
The “Peña Nieto Bottom”
The “Peña Nieto Bottom”
When Enrique Peña Nieto’s government pushed a historic energy reform bill through the Mexican congress in 2013, it was hoped that it would serve not only to privatize but also modernize Mexico’s state-owned Pemex and allow it to compete with giants like Exxon. However, the one thing the government seemingly hadn’t counted on was the collapse in global oil prices.
At the time, Brent oil prices were sitting pretty at around $110 per barrel. It was assumed those prices were there to stay; instead, they have plummeted to $50 per barrel.
Peña Nieto Bottom
Despite the government’s constant denials, the pain is beginning to show. The first auction of off shore oil leases, in July, was an unmitigated disaster, with only two of 14 exploration blocks awarded, both going to the same Mexican-led trio of energy firms.
Oil is no longer a seller’s market. The financial arithmetic facing a potential investor has been turned on its head by the recent collapse of oil prices. As a result, many projects that were a slam- dunk just a year ago have become distinctly dicey propositions. At the same time fierce, competition among oil producing nations continues to drive prices southward.
As Bloomberg reports, Brazil and Mexico are preparing to compete for investments from some of the same oil majors when they hold auctions only a week apart at a time that the price rout is prompting spending cuts:
“In times of low oil prices, all companies need low costs and promising returns,” John Forman, a consultant and former director at Brazil’s oil regulator, said in an interview in Rio de Janeiro. “Brazil and Mexico will compete for resources and low-cost projects will be key.”
…click on the above link to read the rest of the article…
