Global Investing

The haves and have-nots of the (energy) world

Nothing like an oil price spike to bring out the differences between the haves and have-nots of this world. The ones who have oil and those who don’t.

With oil at $124 a barrel,  the stock markets of big oil importers India and South Korea posted their first weekly loss of 2012 on Friday.  But in Russia, where energy stocks make up 60 percent of the index, shares had their best day since November, rising more than 4 percent. The rouble’s exchange rate with the dollar jumped 1.5 percent but the lira in neighbouring Turkey (an oil importer) fell.

Emerging currencies and shares have performed exceptionally well this year. Some of last year’s laggards such as the Indian rupee have risen almost 10 percent and stocks have jumped 16-18 percent. But unless crude prices moderate soon, the 2012 rally in the  stocks, bonds and currencies of oil-poor countries may have had its day. Societe Generale writes:

As oil prices are now flirting with $125 per barrel, it is reasonable to start thinking about the potential impact on global emerging markets of an oil price shock and the currencies likely to gain the most from elevated oil prices and those that won’t….Russia appears as the clear winner of a potential oil price shock, and the rouble is therefore the best hedge against this risk

 The bank advises its clients to buy the rouble and sell the currencies of oil importing Israel and Hungary. In Asia it suggests selling the Korean won. It also recommended exiting long positions on the Turkish lira.

Hungary’s Orban and his central banker

“Will no one rid me of this turbulent central banker?”  Hungarian Prime Minister Viktor Orban may not have voiced this sentiment but since he took power last year he is likely to have thought it more than once.  Increasingly, the spat between Orban’s government and central bank governor Andras Simor brings to memory the quarrel England’s Henry II had with his Archbishop of Canterbury, Thomas Becket, over the rights and privileges of the Church almost 900 years ago. Simor stands accused of undermining economic growth by holding interest rates too high and resisting government demands for monetary stimulus.  The government’s efforts to sideline Simor are viewed as infringing on the central bank’s independence.

So far, attacks on Simor have ranged from alleging he has undisclosed overseas income to stripping him of his power to appoint some central bank board members. But  the government’s latest plan could be the last straw – proposed legislation that would effectively demote Simor or at least seriously dilute his influence. Simor says the government is trying to engineer a total takeover at the central bank.  “The new law brings the final elimination of the central bank’s independence dangerously close,” he said last week.  
 
The move is ill-timed however, coming exactly at a time when Hungary is trying to persuade the IMF and the European Union to give it billions of euros in aid. The lenders have expressed concern about the law and declined to proceed with the loan talks.  But the government says it will not bow to external pressure and plans to put the law to vote on Friday. That has sparked general indignation – Societe Generale analyst Benoit Anne calls the spat extremely damaging to investor confidence in Hungary. “I just hope the IMF will not let this go,” he writes.

Central banks and governments often fail to see eye to eye. But in Hungary, the government’s attacks on Simor, a respected figure in central banking and investment circles,  is hastening the downfall of the already fragile economy. For one, if IMF funds fail to come through, Hungary will need to find 4.7 billion euros next year just to repay maturing hard currency debt. That could be tough at a time when lots of borrowers — developed and emerging — will be competing for scarce funds.  Central European governments alone will be looking to raise 16 billion euros on bond markets, data from ING shows. So Orban will have to tone down his rhetoric if he is to avoid plunging his country into financial disaster.

Hungary and the euro zone blame game

More tough talk from Hungarian officials on the ‘unjustified’ weakness of the country’s currency, which has dropped 11 percent against the euro this year to all-time lows.

This time, it’s central banker Ferenc Gerhardt arguing that the weakness of the forint is out of sync with economic fundamentals and blaming it on the debt turmoil in the euro zone.

Perhaps he should look a little closer to home.

Hungary’s drift from orthodox economic policy since the centre-right government took over the reins last year has made it the most exposed of eastern European economies.

Interest rates rise in Kenya, Uganda. Hungary next

Recent weeks have witnessed an interesting  split between countries that are raising interest rates to fend off runs on their currencies, and those cutting rates to spur on growth — check out my colleague Carolyn Cohn’s recent piece on this topic (http://tinyurl.com/4x58ny6) .The frontier economies of Africa fall into the first category — Kenya this week jacked up rates by an unprecedented 550 basis points to ward off a currency collapse, while Uganda’s benchmark rate was increased by 300 bps.  

Big stable economies such as Australia, Brazil and Indonesia have cut interest rates. On Wednesday, Romania became the latest  country to do so.  But an exception is investment grade Hungary, which may soon join the ranks of  frontier markets in currency-defensive rate hikes.

It may also soon lose its investment grade status –at least one of the three big rating agencies is expected to soon announce a cut to the sovereign credit rating.  That fear has triggered flight from the forint and short-dated bonds, pushing the currency to 2-1/2 year lows and causing significant flattening in the yield curve. The situation hasn’t been helped by signs the government is cooking up another sceme to subsidise indebted small businesses. More is to come, many predict –a ratings downgrade could see investors pull at least $1.2 billion euros from local bond markets. ING Bank estimates. That would be 10 percent of foreigners’ Hungarian bond holdings and would send the currency into a fresh tailspin.

from MacroScope:

New twist in Hungary’s Swiss debt saga. Banks beware.

A fresh twist in Hungary's Swiss franc debt saga. The ruling party, Fidesz, is proposing to offer mortgage holders the opportunity to repay their franc-denominated loans in one fell swoop at an exchange rate to be  fixed well below the market rate.  This is a deviation from the existing plan, agreed in June, which allows households to repay mortgage installments at a fixed rate of 180 forints per Swiss franc (well below the current 230 rate). Households would repay the difference, with interest, after 2015.

If this step is implemented and many loan holders take up the offer, it would be terrible news for Hungary's banks. The biggest local lender OTP could face a loss of $2 billion forints, analysts at Budapest-based brokerage Equilor calculate.  Not surprisingly, OTP shares plunged 10 percent on Friday after the news, forcing regulators to suspend trade in the stock. Shares in another bank FHB are down 8 percent.

But Fidesz' message is unequivocal.  "The financial consequences should be borne by the banks,"  Janos Lazar, the Fidesz official behind the plan says. The government is to debate the proposal on Sunday.

from MacroScope:

Emerging markets: Soft patch or recession?

Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets.
One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries.
On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk.
Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies.
"The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting," Goldman says, adding: "The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn."

Counting the costs of Hungary’s Swiss franc debt

The debt crises in the euro zone and United States are claiming some innocent bystanders. Investors fleeing for the safety of the Swiss franc have ratcheted up pressure on Hungary, where thousands of households have watched with horror as the  franc surges to successive record highs against their own forint currency. In the boom years before 2008,  mortgages and car loans in Swiss francs seemed like a good idea –after all the forint was strong and Swiss interest rates, unlike those in Hungary, were low.  But the forint then was worth 155-160 per franc. Now it is at a record low 260 — and falling – making it increasingly painful to keep up repayments. Swiss franc debt exposure amounts to almost a fifth of Hungary’s GDP. And that is before counting loans taken out by companies and municipalities.

Hungarian families could get some relief in coming months via a government plan that caps the exchange rate for mortgage repayments at 180 forints until the end of 2014.  But the difference will have to be paid – with interest — from 2015.  Meanwhile, the issue threatens to bring down Hungary’s banks which must pick up the cost in the meantime and will almost certaintly see a rise in bad loans –  no wonder shares in Hungary’s biggest bank OTP are down 25 percent this month.  “(The franc rise) suggests a massive jump on banks’ refinancing requirements going forward, ” says Citi analyst  Luis Costa.

These overburdened banks will end up cutting lending to businesses, meaning a further hit to Hungary’s already anaemic economic growth. ING analysts earlier this month advised clients to steer clear of Hungarian shares, “given the burden from (forint/franc) depreciation not only on loan-takers but also the implications this has for the domestic growth story.”

Emerging bonds this year. The riskier the better.

Politics have turned nastier than usual this year in emerging markets. Nonetheless, if you were a buyer of emerging bonds, you would have been ill-advised to play safe. That’s because the best performing emerging credit so far this year is Ivory Coast, which at the end of January effectively defaulted on its $2.3 billion dollar bond. Yes really, according to JP Morgan, which runs the most widely-used emerging debt indexes.

That’s because the bond has risen about 15 points since the start of the year on hopes Alassane Ouattara — seen as the rightful winner of last year’s election — would wrest back the presidency from Laurent Gbagbo who had refused to quit ofIVORYCOAST/fice. Ouattara, now installed in the presidential palace, is expected to honour the bond. So if you’d bought this bond at the end of December you would have earned a notional return of 25 percent, according to JP Morgan. The index overall has returned just 1.6 percent.

In second place? Ecuador. It too defaulted in 2008 — on $3.2 billion in bonds — but has benefited recently from oil prices at well over $100 a barrel. That should help its economy grow 5 percent this year.  Another oil power, Venezuela, is in third place. Its bonds may be trading at a 10 percent yield premium to U.S.  Treasuries, reflecting its riskiness, but Venezuelan bonds returned close to 10 percent so far this year, JP Morgan told clients. Many fund managers have piled in, noting  that despite the unpredictability of its President Hugo Chavez, he is raking in oil export revenues and  has never shied away from repaying debt.

What next for OMV, and for MOL?

omv-ceo.jpgFollowing an acrimonious and drawn-out takeover battle for Hungary’s MOL, Austrian oil and gas group OMV finally did as expected: it threw in the towel.

Yet according to OMV Chief Executive Wolfgang Ruttenstorfer, the consolidation pressures in central Europe — the strategic rationale which prompted him to launch the unsolicited offer in the first place — remain in place.

Analysts and investors have often pointed out that OMV could do better with the cash then parking it in a MOL stake. And while OMV sat tight and awaited the outcome of its unwanted approach, MOL busied itself stringing together a network of strategic allies, entering into ventures with Cez from the Czech Republic and Oman’s OOC.