Global Investing

Brazil going Turkey? Not quite

Could Brazil be on the cusp of  adopting a Turkish-style monetary policy,  J.P. Morgan analysts ask.

Many central banks have of late been forced to scale back interest rate cuts (here’s something I wrote on this topic last week) but one, Brazil’s Banco Central, remains resolutely dovish.

After four rate cuts it seems determined to take the official Selic rate into single-digit territory.  Aldo Mendes, a deputy governor at the bank, told investors in London last week that he was confident of meeting the 4.5 percent inflation target this year. Friday’s data showing annual inflation at an 11-month low of 6.22 percent should have given policymakers some more ammunition.

Yet it looks unlikely that inflation can fall this year to 4.5 percent  — on average analysts expect 5.3 percent. That’s better than last year’s 6.5 percent but government plans for a spending binge to boost growth are bad news for the central bank’s target. Inflation expectations are steadily trending higher — analysts surveyed by the central bank predicted 2014 inflation above 4.5 percent for the first time last November and now this is close to 5 percent, JPM analysts note. The risk for the central bank is it will lose credibility if it insists on keeping policy loose in the face of rising inflation expectations. There is no “free lunch”, JPM says:

Lower rates could mean credibility costs and in turn higher inflation….It seems the BCB is losing credibility as we see changes in the market’s inflation expectations for the medium term. Taking that and our strong activity forecast from the second quarter onwards we now believe it will take much longer for inflation to converge to the middle of its target range. Therefore we are raising our inflation forecast to 5.5 percent in 2013 from 5 percent previously.

Greece’s interest burden, post-PSI, will remain huge

It seems Greece has finally reached a deal on austerity measures needed for a bailout. But what about PSI?

(ECB President Mario Draghi just said he heard it was close to a deal. It’s been close for a few weeks though…)

JP Morgan says Greek PSI is hardly going to change the heavy interest burden on the country and the issue of default will inevitably come up.

Can Turkey confound the pessimists again? The numbers say no

Doomsayers have been prophesying Turkey’s economic boom to deflate into bust for many months now. The recent revival in positive investor sentiment worldwide ar has helped silence some voices. Others say it is a matter of time. 

Data on Friday showed annual inflation accelerated from last year’s 3-year highs to 10.6 percent in January. It is likely to remain elevated at least until May, analysts predict. And trade data released this week indicate Turkey will likely have finished last year with a current account gap of around 10 percent of GDP last year — the biggest of any major developing economy. All this appears to indicate that the central bank will have to keep monetary policy tight and might even have to even raise rates, should the current resurgence in risk appetite fade. But rather optimistically, the government is still forecasting 4 percent growth this year. The IMF says 0.4 percent is more likely. A report today by Capital Economics, entitled “Turkish boom hits the buffers”, says recession is a cinch.

Neil Shearing, the report’s author, notes that imports of both consumer and capital goods have fallen by around $1 billion over a 12-month rolling period. That indicates a contraction in private consumption and fixed investment, he writes. Some of this could of course be down to the lira’s weakness last year, that aided some import substitution, Shearing acknowleges. But he says that all signs are that:

Good reasons for rupee’s fall but also for recovery

It’s been a pretty miserable 2011 for India and Tuesday’s collapse of the rupee to record lows beyond 52 per dollar will probably make things worse. Foreigners, facing a fast-falling currency, have pulled out $500 million from the stock market in just the last five trading sessions.   That means net inflows this year are less than $300 million, raising concerns that India will have trouble financing its current account gap.  The weaker currency also bodes ill for the country’s stubbornly high inflation.

Why is the rupee suffering so much? First of all, it is a casualty of the general exodus from emerging markets. As a deficit economy, India is bound to suffer more than say Brazil, Korea or Malaysia.  And 18 months of interest rate rises have taken a toll on growth.

UBS analysts  proffer another explanation. They point out a steady deterioration in India’s net reserve coverage since the 2008 crisis. The reserve buffer — foreign-exchange reserves plus the annual current account balance, minus short-term external debt — stands at 9 percent of GDP, down from 14 percent in 2008.  Within emerging markets, only Egypt, Venezuela and Belarus saw bigger declines in net reserve coverage than India.

Turkish central bank reaps what it sows

Turkey’s inflation spike is here. And it is looking worse than expected.

Data today shows October inflation jumping 3.27 percent,  well above forecast and the highest in nine years. Compare that to 1.8 percent at this time last year. Annual inflation is now running at 7.7 percent and makes the central bank’s end-year forecast of 8.3 percent look optimistic –most analysts reckon it will be closer to 10 percent. Inflation has in fact been rising steadily in recent months — a consequence of the runaway credit boom of the past year and a policy experiment which saw the central bank cutting interest rates in the face of an overheating economy and raising banks’ reserve ratios instead.  Add in the pass-through from the lira’s big depreciation since August and a jump in  inflation is hardly surprising. The central bank has of late expressed some concern about inflation and used this to justify its actions to prop up the lira.

“Critics though might still argue that it is more a case of ‘as you sow, so you will reap’ and inflation being felt now is a reflection of the inappropriate policy mix earlier in the year,” RBS analyst Tim Ash writes.

Turkey was lucky today though. Shenanigans in Greece held investors attention and a rate cut by the European Central Bank boosted risk appetite, allowing markets to shrug off the Turkish numbers. Bond yields have risen only 5-6 basis points and stocks have rallied.  The central bank meanwhile is expected to stick to its guns and not raise interest rates, relying instead on its liquidity tightening exercise to do the trick.

from Jeremy Gaunt:

#ThingsStrongerThanTheKenyaShilling

Twitter does have some very strange Trends. These are the things that appear on the right-hand side of the page that show what people are talking about. They more they talk, the more likely it is that something will get listed.  More often than not they are about celebrities such as Justin Bieber.

But today's Worldwide  Trends was particularly unusual.

#ThingsStrongerThanTheKenyaShilling was right up there near the top.

As the graph here shows, the shilling has taken a heavy beating since the Lehman Brother collapse. This is one reason for the Twitter outburst.  "Kenyans are getting fed up," said @oreo_junkie, whose Twitter feed states it is from Nairobi.

And judging by some of the other "answers" to the trendline, it is not a matter for levity in Kenya. "Government's resolve to fight Corruption" was one;  "Stupidity of Kenyans to  reelect the same MPs" was another.