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.

That adjustment is yet to happen this time – the deficit stayed almost unchanged over 2013 despite the currency’s steady depreciation against the dollar. But perhaps these are early days.

Asia’s ballooning debt

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.

First, some numbers and graphics:

a) Asia’s current account surplus stands now around $250 billion, less than half its 2007 peak as exports have slumped.

Optimism of the $5 mln+ in Spain, Ireland

Crisis, what crisis?

Wealthy investors across Europe are confident about the future of the euro zone and the efficiency of unpopular austerity policies, with the rich in bailed-out Ireland and Spain topping the list, according to a survey published by J.P. Morgan Private Bank on Wednesday. The study, conducted in May and June, said:

High Net Worth investors in Spain, Ireland and the UK were found to have the most optimistic outlook, with 92 per cent, 90 per cent and 85 per cent respectively believing the Eurozone will either manage to avert large defaults and is rewarded for stringent austerity, or one that survives but will look different than the current structure.

They were the most optimistic of the 325 individuals polled for the survey. Overall, over 75 percent for the investors had a positive view on the euro zone’s outlook.  Only six per cent said they expected a severe global depression.(The bank defines HNW investors as those with assets of over $5 million).

Picking your moment

Watching how the mildly positive market reaction to this weekend’s 100 billion euro Spanish bank bailout evaporated within a morning’s trading, it’s curious to look at the timing of the move and what policymakers thought might happen. On one hand, it showed they’d learned something from the previous three sovereign rescues in Greece, Ireland and Portugal by pre-emptively seeking backstop funds for Spain’s banks rather than waiting for the sovereign to be pushed completely out of bond markets before grudgingly seeking help.

But getting a positive market reaction to any euro bailout just six days before the Greek election of June 17 was always going to be nigh-on impossible. If the problem for private creditors is certainty and visibility, then how on earth was that supposed to happen in a week like this? In view of that, it was surprising there was even 6 hours of upside in the first place. In the end, Spanish and broad market prices remain broadly where they were before the bailout was mooted last Thursday — and that probably makes sense given what’s in the diary for the remainder of the month.

So, ok, there was likely a precautionary element to the timing in that the proposed funds for Spanish bank recapitalisation are made available before any threat of post-election chaos in Greece forces their hand anyhow. It may also be that there were oblique political signals being sent by Berlin and Brussels to the Greek electorate that the rest of Europe is prepared for any outcome from Sunday’s vote and won’t be forced into concessions on its existing bailout programme. On the other hand, Greeks may well read the novel structure of the bailout – in that it explicitly targets the banking sector without broader budgetary conditions on the government – as a sign that everything euro is flexible and negotiable.

India rate cut clamour misses rupee’s fall-JPM

Indian markets are rallying this week as they price in an interest rate cut at the Reserve Bank’s June 18 meeting.  With the country still in shock after last week’s 5.3 percent first quarter GDP growth print, it is easy to understand the clamour for rate cuts. After all, first quarter growth just a year ago was 9.2 percent.

Yet,  there may be little the RBI can do to kickstart growth and investment.  Many would argue the growth slowdown is not caused by tight monetary conditions but is down to supply constraints and macroeconomic risks –the government’s inability to lift a raft of crippling subsidies has swollen the fiscal deficit to almost 6 percent while inhibitions on foreign investment in food processing and retail keep food prices volatile.  

The other side of the problem is of course the rupee which has plunged to record lows amid the global turmoil. Lower interest rates could  leave the currency vulnerable to further losses.

Indian risks eclipsing other BRICs

India’s first-quarter GDP growth report was a shocker this morning at +5.3 percent. Much as Western countries would dream of a print that good, it’s akin to a hard landing for a country only recently aspiring to double-digit expansions and, with little hope of any strong reform impetus from the current government, things might get worse if investment flows dry up. The rupee is at a new record low having fallen 7 percent in May alone against the dollar — bad news for companies with hard currency debt maturing this year (See here). So investors are likely to find themselves paying more and more to hedge exposure to India.

Credit default swaps for the State Bank of India (used as a proxy for the Indian sovereign) are trading at almost 400 basis points. More precisely, investors must pay $388,000  to insure $10 million of exposure for a five-year period, data from Markit shows. That is well above levels for the other countries in the BRIC quartet — Brazil, China and Russia. Check out the following graphic from Markit showing the contrast between Brazil and Indian risk perceptions.

At the end of 2010, investors paid a roughly 50 bps premium over Brazil to insure Indian risk via SBI CDS. That premium is now more than 200 bps.

from MacroScope:

Netherlands at core of the crisis

The Netherlands has become the latest country to come into the firing line of the euro zone crisis.

The cost of insuring five-year Dutch debt against default jumped to its highest since January as the government's failure to agree on budget cuts spiraled into a political crisis and cast doubt over its support for future euro zone measures.

Dutch Prime Minister Mark Rutte offered to resign on Monday, creating a political vacuum in a country which strongly backed an EU fiscal treaty.

from Anooja Debnath:

When it comes to recessions, 40 is the new 50

If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.

Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.

After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.

DDD to DIY… and CCC in 2012

It’s just over a month until everyone winds down for a Christmas break — this means the season for the 2012 outlook briefings by various managers is starting.

Among the first I went to was ING Investment Management, which held the briefing this morning. Eric Siegloff, global head of strategy and tactical allocation, reckons the next year’s key theme affecting asset classes is summarised as CCC — crisis, contagion and credibility.

He believes 2012 is going to be an uncertain environment with the crisis in the banking system and the foundations of the euro zone threatening to spread beyond EU (contagion), hitting credibility of policymakers.

from MacroScope:

Dramatic ending to Greek tragedy

Greece is in the danger zone. Even as the country's finance minister sought to reassure his euro zone counterparts at a meeting in Poland, Greek credit default swaps were pricing in a more than 90 percent chance of default, according to Reuters calculations of Markit data. Economists in a Reuters poll see a 65 percent chance of that happening, probably within a year.

Such fears recently sent jitters across financial markets, prompting some words of comfort from German Chancellor Angela Merkel and French President Nicolas Sarkozy that they are determined to keep Greece in the euro zone. But speculation is growing that Greece will default, and that it will be a messy ordeal. Here are some of the potential dangers if it occurs:

* Greece may be seen as setting a precedent for Portugal and Ireland, analysts said. Yields on peripheral euro zone debt could surge rapidly, making funding costs increasingly unsustainable as yields on Italian and Spanish 10-year bonds surge back towards 7 percent. The ECB could have to intervene more aggressively in the secondary bond market to the detriment of its balance sheet.