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from Global Investing:

Waiting for current account improvement in Turkey

The fall in Turkey's lira to record lows is raising jitters among foreign investors who will have lost a good deal of money on the currency side of their stock and bond investments.  They are also worrying about the response of the central bank, which has effectively ruled out large rate hikes to stabilise the currency. But can the 20 percent lira depreciation seen since May 2013 help correct the country's balance of payments gap?

Turkey's current account deficit is its Achilles heel . Without a large domestic savings pool, that deficit tends to blow out whenever growth quickens and the lira strengthens . That leaves the country highly vulnerable to a withdrawal of foreign capital. Take a look at the following graphic (click on it to enlarge) :

In theory, a weaker Turkish lira should help cut the deficit which has expanded to over 7 percent of GDP.  Let us compare the picture with 2008 when the lira plunged around 25 percent against the dollar in the wake of the Lehman crisis. At the time the deficit was not far short of current levels at around 6 percent of GDP.  By September 2009 though, this gap had shrunk by two-thirds to around 2 percent of GDP.

An IMF paper at the time praised Turkey's response, noting that allowing the lira to weaken had limited the country's 2009 economic contraction to less than 5 percent compared to the 8 percent fall that would have been the case, had it held the lira stable.

from Global Investing:

Banks cannot ease Ukraine’s reserve pain

The latest data from Ukraine shows its hard currency reserves fell $2 billion over November to $18.9 billion. That's perilously low by any measure. (Check out this graphic showing how poorly Ukraine's reserve adequacy ratios compare with other emerging markets: http://link.reuters.com/quq25v)

Central banks often have tricks to temporarily boost reserves, or at least, to give the impression that they are doing so. Turkey, for instance, allows commercial banks to keep some of their lira reserve requirements in hard currency and gold. Others may get friendly foreign central banks to deposit some cash. Yet another ploy is to issue T-bills in hard currency to mop up banks' cash holdings. But it may be hard for Ukraine to do any of this says Exotix economist Gabriel Sterne, who has compared the Ukraine national bank's plight with that of Egypt.

from Global Investing:

The hryvnia is all right

The fate of Ukraine's hryvnia currency hangs by a thread. Will that thread break?

The hryvnia's crawling peg has so far held as the central bank has dipped steadily into its reserves to support it. But the reserves are dwindling and political unrest is growing. Forwards markets are therefore betting on quite a sizeable depreciation  (See graphic below from brokerage Exotix).

from MacroScope:

China at a crossroads on yuan internationalization project

As China marks the third anniversary of the first ever bond sale by a foreign company denominated in renminbi, questions are rife on what lies next for the offshore yuan market.

Since hamburger chain McDonalds sold $29 million of bonds on a summer evening just over three years ago, China’s yuan internationalization project has notched up impressive milestones.More than 12 percent of China’s trade is now denominated in yuan from less than 1 percent three years ago, Hong Kong – the vanguard of the offshore yuan movement – has more than one trillion yuan of assets in bank deposits and bonds and central banks from Nigeria to Australia have added a slice of yuan to their foreign exchange reserves.

from MacroScope:

Brazil’s foreign reserves are not all that big

Traumatized by several currency crises in the past, Brazil has made a dedicated effort in recent years to amass $374 billion in foreign reserves as China bought mountains of its iron ore and soybeans. When the next crisis came, policymakers figured, the reserves would act as Brazil's first line of defense.

It turns out that those reserves, which jumped from just $50 billion in 2006, may still not be large enough, Bank of America-Merrill Lynch analysts found in a report on the increased volatility in foreign exchange markets as the U.S. Federal Reserve prepares to scale back part of its monetary stimulus.

from Global Investing:

Paid for the risk? Egypt’s tempting pound

Surprising as it may seem, the Egyptian pound has got some fans.  The currency has languished for months at record lows against the dollar and the headlines are alarming -- the lack of an IMF aid programme, meagre hard currency reserves, political upheaval. So what's to like ?

Analysts at Societe Generale say that just looking at the spot exchange rate of the pound is missing the bigger picture. Instead, they advise buying 12-month non-deliverable forwards on the pound -- essentially a way of locking into a fixed rate for pound against the dollar in a year's time depending on where you think it may actually trade. They write:

from Global Investing:

Twenty years of emerging bonds

Happy birthday EMBI! The index group, the main benchmark for emerging market bond investors, turns 20 this year.  When officially launched on Dec 31 1993, the world was a different place. The Mexican, Asian and Russian financial crises were still ahead, as was Argentina's $100 billion debt default. The euro zone didn't exist, let alone its debt crisis. Emerging debt was something only the most reckless investors dabbled in.

To mark the upcoming anniversary, JPMorgan - the owner of the indices - has published some interesting data that shows how the asset class has been transformed in the past two decades.  In 1993:
- The emerging debt universe was worth just $422 billion, the EMBI Global had 14 sovereign bonds in it with a market capitalisation of $112 billion.
- The average credit rating on the index was BB.
- Public debt-to-GDP was almost 100 percent back then for emerging markets, compared to 69 percent for developed markets.
- Forex reserves for EMBI countries stood at $116 billion
- Per capita annual GDP for index countries was less than $3000.
Now fast forward 20 years:
- The emerging debt universe is close to $10 trillion, there are 55 countries in the EMBIG index and the market capitalisation of the three main JPM indices has swollen to $2.7 trillion.
- The EMBIG has an average Baa3 credit rating (investment grade) with 62 percent of its market cap investment-grade rated.
- Public debt is now 34 percent of GDP on average in emerging markets, while developed world debt ratios have ballooned to 119 percent of GDP.
- Forex reserves for EMBIG members stand at $6.1 trillion
- Per capita annual income has risen 2.5 times to $7,373.

from Breakingviews:

China FX swap may blur Bank of England mandate

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

The Bank of England is discovering the downside of being the City of London’s chief watchdog. The central bank is under pressure from financial institutions to set up a currency swap with the People’s Bank of China. Such a move would help to boost London as a centre for trading offshore renminbi. However, worrying about the City’s competitiveness also risks blurring the BOE’s main objective of preserving financial stability.

from Global Investing:

Asia’s ballooning debt

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Could Asia be headed for a debt crisis?

The very thought may seem ludicrous given the region's mighty current account surpluses and brimming central bank coffers.  But a note from RBS analysts Drew Brick and Rob Ryan raises some interesting concerns.

Historically speaking, most EM crises have been borne on the back of excessive capital inflows, Brick and Ryan write. And in many Asian countries, the consequence of these flows has been over-easy monetary policy that has left citizens and companies addicted to cheap money. Personal and corporate indebtedness levels have spiralled even higher in the past five years as governments across the continent responded to the 2008 credit crunch by unleashing billions of dollars in stimulus.

from Global Investing:

Carry currencies to tempt central banks

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Central bankers as carry traders? Why not.

As we wrote here yesterday, FX reserves at global central banks may be starting to rise again. That's a consequence of a pick up in portfolio investment flows in recent weeks and is likely to continue after the U.S. Fed's announcement of its QE3 money-printing programme.

According to analysts at ING, the Fed’s decision to restart its printing presses will first of all increase liquidity (some of which will find its way into central bank coffers). Second, it also tends to depress volatility and lower volatility encourages the carry trade. Over the next 12 months these  two themes will combine as global reserve managers twin their efforts to keep their money safe and still try to make a return, ING predicts, dubbing it a positive carry story.

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