Sunday, August 30, 2015

30/8/15: Migration & Changes in Irish Population: Working Age Population

In two previous posts, I looked at Irish migration and population changes data from the point of:
- Top level analysis of migration and natural changes in population; and
- Migration trends by nationality.

Continuing with analysis of population data from CSO released earlier this week, let's take a look at the age composition of population.

In what follows, I define two key categories within our population:

  • Working age group - population aged 20 years through 64 years. This is an approximate definition, and I prefer it to including 15-20 year olds into it, primarily because it allows for more accurate reflection of numbers in full time education. There are many caveats applicable here, so take the approximation for what it is - indicative, rather than definitive.
  • Non-working age population (rest of population). Again, that is not to say that younger students do not work (at least part-time) or that people beyond 65 years of age do not work. Some do. Majority do not. When many do work, they work less hours than is required to sustain independent living, so they still rely on either pensions or social transfers or family transfers or any permutations of the three to sustain themselves.

In simple terms, mindful of all caveats, etc, a ratio of working age population to non-working age population tells so a bit about how high is the dependency weight in the society due to age distribution in population. Lower ratio means fewer working age adults having to sustain themselves and non-working age people. By sustain I mean economically sustain - by working and adding value in the economy.

Chart below shows distribution of changes in working age population and non-working age population in y/y and cumulatively from 2008:

What stands out in the chart?

  1. Working age population overall has been in decline since 2010. In cumulative terms, number of working age adults has fallen 2.7% on 2008 level by April 2015 - a decline of 75,500. In 2015, the rate of decline was 0.4% - more moderate than in three previous years, but still steeper than 2010-2011 average.
  2. Non-working age population remains on the rise for every year covered by the CSO series and the rate of increase in 2015 (at 2%) was the highest since 2010. Overall, over 2008-2015 period, non-working age population those 13.3% or 225,900.
  3. The gap between working age population and non-working age population is now at 798,400 - the worst reading in series history and 301,400 worse than in 2008.

As the result of the above trends, ratio of working age population to non-working age population continued to fall precipitously in 2015:

In 2015, the ratio of working age population to non-working age population was 1.42 - meaning that for each non-working age person, there were 1.42 working age adults. This does not correct for the working age adults who are not in the labour force as well as for the unemployed. The best performance year in this metric was 2007 when the ratio was 1.66. In other words, in 2015, there were 24 fewer working age adults per each 100 non-working age persons than in 2007.

Saturday, August 29, 2015

29/8/15: Migration & Natural Changes in Irish Population: Migration by Nationality

Having looked in the previous post at top level data for population changes in Ireland reported by CSO, now let's take a look at composition of migrants flows by nationality. This is going to be charts-heavy.

Let's start with immigration flows. Chart below shows Immigration into Ireland over the recent years:

Several interesting aspects of this jump out:

  1. There has been a significant increase of inflows of people from the 'Rest of the World' (ex-EU). Numbers of those coming into Ireland from outside the EU are up at 30,400 in 2015 from 25,500 in 2014. Pre-2015, average annual inflows of immigrants from outside the EU was 15,722, so last year things were pretty much ahead of the average for the third year in a row. Much of this is probably driven by big hiring numbers from multinationals which are increasingly moving their EMEA and MENA operations into Ireland. 
  2. There has been a small uptick in the number of new comers from the Accession States (EU12), the numbers of which rose to 12,800 in 2015 compared to 10,000 in 2014. This is the second highest inflow rate since the start of the crisis. 2006-2014 average for these inflows (29,078) is still significantly above 2015 figure. Again, I would suspect that much of this increase is accounted for by MNCs and also by demand for particular skills. Note: I will blogging on skills matters subsequently in a separate post.
  3. There has been virtually no change in inflows of people from the UK over the last 3 years, so nothing worth spotting here in terms of trends. Rest of EU-15 immigration flows also were relatively static, up to 8,900 in 2015 compared to 8,700 in 2014. Nonetheless, this has been the busiest year for EU15 migration inflows (ex-UK and Ireland) for some time - since 2009.
  4. Number of Irish nationals returning rose from 11,600 in 2014 to 12,100 in 2015. Which, kind of directly flies in the face of a number of media reports about 'returning migrants'. Apparently, the migrants are not quite returning, as current rate of immigration in Ireland by Irish nationals was the second slowest on record and much closer to the lowest year (2014) than to the third lowest (2013).

Now, consider emigration figures:

Again, few things worth a closer look:

  1. Irish emigration continued to decline in 2015 for the second year in a row. 2014 emigration of Irish nationals stood at 35,300 down from 40,700 in 2014 and down substantially on crisis period peak of 50,900 in 2013. The rate of emigration is now closer to 2006-2014 average of 29,444 that before, but it is still substantially above that number. Crucially, in more normal times, emigration by Irish nationals stood at around 13,700, which is well below current levels.
  2. Emigration by UK nationals out of Ireland remained pretty much stable and on-trend. Historical pre-2015 average is for annual outflow of 3,467 and in 2015 the number was 3,800. Emigration by the nationals of the EU15 states (ex-UK and Ireland) was up in 2015 at 15,600 compared to 14,000 in 2014. The rate is rising now for two years and is well ahead of 9,078 average for 2006-2014 period. This is interesting, as it reflects some shift in MNCs employment: in the past, MNCs were focusing much of their hiring on old EU markets, demanding language skills from these countries. Now, it seems the momentum is shifting toward ex-EU15 markets. Notably, pre-crisis average emigration by EU15 nationals stood at 6,667 per annum, very substantially below the 2015 figure.
  3. In contrast to EU15 pattern, emigration by the Accession EU12 nationals fell significantly in 2015 to 8,500 from 10,100 in 2014. This is the slowest rate of outflow for any year from 2007 on and significantly below the 2006-2014 average annual rate of outflow of 15,478.
  4. Rest of the World (ex-EU) emigration picked up, rising to 17,700 in 2015 compared to 14,100 in 2014 and against the 2006-2014 average of 9,9833. The reason for this, most likely, is the turnover of MNCs-employed tech workers and specialists who tend to stay in Ireland for 2-3 years and subsequently leave. 

So last remaking bit of analysis will have to cover net immigration / emigration:

As consistent with the number discussed above:

  1. Rate of net immigration from the 'Rest of the World' (ex-EU) picked up somewhat in 2015, rising to 12,700 from 11,200 in 2014. This is the highest rate of net increase in ex-EU population in Ireland for any year between 2006 and 2015.
  2. Second noticeable change in 2015 was positive contribution of EU12 (Accession states) nationals, with their net immigration at 4,300 in 2015 marking the first positive net result since 2008.
  3. EU15 (ex-UK and Ireland) net emigration remained significant and increased, with 6,700 more nationals of EU15 (ex-UK and Ireland) leaving Ireland than coming into Ireland in 2015, up on 5,300 in 2014. This marks the third year of rising net emigration by EU15 nationals out of Ireland and 6th consecutive year of negative net immigration by this group of residents.
  4. Irish nationals net emigration from Ireland remained very substantial in 2015 at 23,200. The number is lower than 29,200 net emigrations recorded in 2014 and the lowest reading in 4 years, but it is still well above the crisis period average. In simple terms, things are getting worse slower in this metric, they are not getting better.

Combined 2008-2015 net movements of people by nationality are shown in the chart below. Since 2008 through April 2015, there are 5,200 more UK nationals residing in Ireland, while the number of EU12 migrants rose 11,100. By far, the largest net emigration on a cumulative basis relates to outflow of Irish nationals: between 2008 and 2015, 132,400 more Irish nationals left the country than came back into the country - annual average rate of net emigration of 16,600 and in 2015 annual net emigration for Irish nationals was 6,700 above that.

29/8/15: Migration & Natural Changes in Irish Population: Top Level Analysis of 2015 data

Irish migration and population data for the 12 months through April 2015 have been published by CSO recently. It is a tough read. 

Let's take a look at overall picture (2015 here references May 2014-April 2015 period as per CSO data):
  • There were 67,000 births in 2015, down on 67,700 in 2014 - a decline of 700. Compared to peak births year - 2010 - births are down 10,200.
  • There were also 29,600 deaths in 2015, compared to 29,800 in 2014 which is 3,200 lower than peak year (1990), but more significantly - below 2013 and 2014 readings. 
  • Which means that natural increase in population was 37,400 in 2015, compared to 37,900 in 2014. This is the lowest natural rate of population increase since 2006 and it is driven exclusively by decline in birth rate which fell to 1.445% (births as percentage of total population) from 1.469% in 2014. Current birth rate is the lowest since 2001.
  • Immigration into Ireland amounted to 69,300 in 2015, an uplift on 60,300 in 2014 and the highest reading since 2009. Immigration has been increasing every year starting with 2013. Note: I will be blogging on quality of immigration and emigration separately, so stay tuned. Current rate of immigration is ahead of 2008-2014 average (64,500) but behind 2000-2007 average (80,100).
  • Meanwhile, emigration slipped slightly  - the good news you heard by now, most likely - from 81,900 in 2014 to 80,900 in 2015. This brings 2015 emigration closer to 2011 level (80,600) and lowest in 4 years. However, historical comparisons are still weak: in 2000-2007 average rate of emigration from Ireland was 30,700 and in 2008-2014 period it was 75,571, which means 2015 figure is higher than either pre-crisis average (obvious, really) and crisis period average. 
  • Net emigration stood at 11,600 in 2015, down from 21,400 in 2014 - a decline that is accounted for by an 8,700 increase in immigration and by 1,000 decrease in emigration. Thanks to immigrants numbers rising, we are at the lowest crisis period level of net emigration

Over 2009-2015, cumulated net outflows of people from Ireland stand at 153,800 - or 3.3% of our population in 2015 - close to 4 last years of combined natural increases in population (births less deaths). Over the last 6 years, average annual net emigration from Ireland stood at 25,900. During the 6 years of 1987-1992 the average was 21,050. even with 2015 decline in net emigration rate, we are still sending more people abroad in the current crisis than in the late-1980s -early 1990s crisis.

Which brings us to the 'opportunity cost' of this emigration, or in simple terms - what would our population be were it not for the crisis. 

First up, our current population estimates: per CSO, in April 2015 there were 4,635,400 people living in Ireland - an increase of 25,800 on same period 2014. The rate of increase was the highest since 2009. Which is all good news. However, the rate of annual population increase in 2015 was lower than 2008-2014 average (33,386) and was way below the 2000-2007 average of 80,100.

Now, let's take three scenarios. Starting with 1997 - the year when majority of us think Ireland's catching up with EA15 states was pretty much well underway and things were not yet fully 'mad' in a Celtic Garfield sense. This is also happens to be the year when net immigration posted the first above zero trend, with 7 year average through 1997 at 4,600 being the first positive 7 year average on record (note, 7 year average is chosen because of the cut-off period and because it corresponds to the duration of the current crisis too). Now, let's define 3 scenarios:
  1. Scenario 1: take an average for net migration over 1997-2000 (capturing the period all of can agree was pre-bubble in the property markets) and take projection from 1987 through 2015 at this average net immigration rate and accounting for actual realised natural rate of population change. You get 2015 population at 4,662,700 or 27,300 more people than current official estimated population.
  2. Scenario 2: take an average for net migration over 1997-2003 (7 years period), capturing the period that some think was still pretty much pre-Garfield craze and, crucially, before the Accession of 2004 that brought into Ireland significant inflows of Eastern European workers. You get 2015 population of 4,784,500 or 149,100 more people than current official estimated population.
  3. Scenario 3: while a bit outlandish, let's just consider the period of the entire Celtic Garfield and take the average net immigration rate at 1997-2007. Extreme, I know, but what the hell. You get 2015 population of 5,701,300 or 1,065,900 more people than current official estimated population.

Stay tuned for more analysis of net migration flows.

Friday, August 28, 2015

28/8/15: Core Retail Sales for July: Less of a Cheer, More of a Smile

With much of hullabaloo around it, the Retail Sales figures for July were published today. The CSO headline on the matter read: "Retail Sales Volume increased by 11.6% in July 2015". Which is, of course, correct... to a point. The figure references sales inclusive of automotive sales. And it references volumes of sales.

So here are the actual retail sales figures, for retail sales excluding motors.

First, consider seasonally-adjusted sales allowing m/m comparatives:

  • Value of core (ex-motors) retail sales increased 0.3% m/m in July and this only partially (albeit substantially) corrects for 0.3% decline m/m in June. Compared to 2005 average level, value of sales today is only 1.09% higher, which is... before inflation is factored in. 3mo MA of Value indices in July was down 0.03% on 3mo MA average through June, while a month ago the same was 0.7% higher. In other words, there is nothing 'convincing' in the value of sales data. And this is concerning, because retailers don't get their revenues and profits from volumes of sales. They get them from value of sales.
  • Volume of retail sales (ex-motors) was up 0.64% m/m in July, having previously posted a decline of 0.12% in June. So July volumes of sales significantly over-compensated for June decline. Which is good news. Compared to 2005 average, July figure is 12.1% higher for the volume of sales, which means that deflation has resulted in more sales by volume, but barely any change in value: selling more stuff but getting less per unit sold is the retailers' margin nightmare and it has been going on for some years now. But the good news on Volume run out when you consider 3mo MA: 3mo MA through July was down 0.12% compared to 3mo MA through June, having previously been up 0.7%. So on 3mo MA basis (smoothing a bit volatility) value and volume of retail sales both fell in July.
  • Meanwhile, the never-ending exuberance of Irish consumers, as measured by Consumer Confidence Index posted some moderation in July, falling 3% m/m. Still Consumer Confidence in July 2015 is 97% (that's right - 97%) higher than the 2005 average. You really gotta wonder...
Two charts to illustrate the above trends:

As can be seen from the chart above, there is now divergence in the series for Value (rising slower) and Volume (rising faster) of core retail sales. This, with Value of sales running now persistently above the trend (suggesting risk of downward correction in the future), whilst Volume series running along the trend. Volume is converging with Consumer Confidence, while Value is diverging. Closer look at the latter next:

 And now to y/y data based on unadjusted series:

Per data charted above y/y changes were:

  • Value of core retail sales rose 3.40% y/y - which is a good performance, but not exactly stellar. In June, y/y increase was 2.0% and in July 2014 y/y rise was 1.2% which means this July growth was stronger. However, pre-crisis average y/y growth rate in Value of retail sales was 6.93% and this means that current rate of increase is just under 1/2 the rate of average rise in pre-crisis years. Smoothing out some volatility, 3mo average through July was 99.3 which is stronger than 3mo average through April 2015 (93.6) and is up 3% on 3mo average through July 2014. These are good figures, no arguing there.
  • Volume of retail sales, predictably, was up 6.7% y/y in July - double the rate of growth in Value of sales and above the pre-crisis average rate of growth of 6.2%. Volume of sales gained in July in annual rate of growth compared to June (4.7%) and compared to July 2014 (3.2%). And on 3mo average basis, the index was up 6% y/y for 3mo through July - double the rate of growth in Value.
  • Hence, overall we have the same picture in unadjusted data: rates of growth in Value of sales are healthy, but not spectacular, while rates of growth in Volume are strong. Volume is diverging from Value and there is nothing new here - it has been thus since the end of 2013.

Good news is that on 3mo average basis, May-July 2015 figures were

  • Positive in y/y terms for majority sub-sectors in value terms (excluding Food, Beverages & Tobacco and Motor Fuel) and for all sub-sectors in volume terms
  • The picture was a bit more fragmented for 3mo change through July compared to 3mo change through April, as shown in the table below.

Thus, overall, there are some good news in the retail sales figures. Do they warrant a huge wave of congratulatory backslapping exercises in the media? No. Do they warrant much of optimism that the sector is experiencing a big revival? Not exactly. 

28/8/15: Gold & Silver: Does technical analysis beat the market?

An interesting piece of research co-authored by Brian Lucey on efficacy of technical analysis in gold & silver markets:

"This paper studies whether intraday technical trading rules produce significant payoffs in the gold and silver market using three popular moving average rules."

And the conclusions are (emphasis is mine): "The initial results show that the SMA, WMA and EMA trading rules generate significant negative payoffs using the parameters common in the literature in the high-frequency gold and silver markets. This suggests that there is no significant profit to be gained from technical trading in the gold and silver markets. However, our parameter sweep results show that there are a number of parameter combinations that generate significant profit in the gold market, but none in the silver market. Further, the best performing rules have different parameters to those used the existing literature. We show that longer run averages should be used by investors on intraday data and that investors need to employ different parameters when utilising technical analysis on daily and intraday data. In order to examine whether investors could have actually utilised the best performing rules, we perform an in- and out-of-sample test and show that only the SMA rule for gold generates significant profits in the in-sample as well as the out-of-sample period. All of the other best rules in the in-sample period generate either insignificant or negative payoffs in the out-of-sample period."

28/8/15: Inflation Expectations: Euro and U.S.

Having earlier posted a chart on Central Banks balancesheets expansion (see here), here is an interesting chart plotting inflation expectations (5yr5yr swaps - effectively markets expectations for 5 years from now inflation average over subsequent 5 years)

The above shows that although there has been an uplift in Euro area inflation expectations over the course of 2015 to-date, consistent with QE carried out by the ECB, the expectations have tanked since the start of Q3 2015 in line with those in the U.S.

More ominously, expectations remain in the territory where neither the Fed nor the ECB are capable of convincingly exiting monetary easing.

While the U.S. expectations are closer to target (at 2.23%) but still weak, Euro area expectations are exceptionally weak at 1.63%. Gotta do some more printing (for ECB) and less talking about tapering (for both the Fed and the ECB)...

28/8/15: Patents & R&D expenditure effects on equity returns in pharma industry

Martina Feyzrakhmanova and myself have a new paper out with Applied Economics Letters titled "Patents and R&D expenditure effects on equity returns in pharmaceutical industry". Working paper (ungated version) is available here:

28/8/15: CBR and Ruble: Fiscal Balance in Oil's Shadow

As I noted earlier this month, Russia has officially entered the recession. The key drivers for 3.4% contraction in 1H 2015 were the same as the key pressures on growth back in 2H 2014: oil prices, investment collapse on foot of high interest rates, inflationary environment that restricts CBR's room for cutting rates, and sanctions (or rather geopolitical risks and pressures, linked in part to sanctions).

That said, in June and early July there were some hopes for economy starting to stabilise, although fixed investment was down 7.1% y/y in June, marking 18th consecutive month of y/y declines. These are now once again under pressure and the cause is... oil price.

Here is how closely paired has Russian Ruble been to oil prices in trend terms since July 2014, although correlation was weaker in preceding period. Overall, as the chat shows, there are two very distinct periods of Ruble valuations catch up with oil prices: June 2014-February 2015 and mid-July 2015 through present.

Russia's Central Bank is switching between little concern for Ruble to interventions and back to staying out of the markets appears to be more than a simply random walk. Instead, it is a game consistent with rebalancing Ruble valuations to fit budgetary dynamics.

The reason for this is that (as shown in the chart above) Ruble strengthening above oil-linked fundamentals earlier this year was an actual threat to budgetary dynamics, and over the last couple of weeks, correcting valuations of Ruble re-established closer connection to oil prices. Hence, in July, CBR managed to deliver a shallower cut to interest rates (-50bps) compared to June (-100bps).

With CBR continuing to stick to its June 2016 forecast for inflation to fall to 'under 7%' by then and hit 4% in 2017 compared to July 2015 CPI at 15.6%, Russia went on to issue its first CPI-linked bonds / linkers amounting to RUB75 billion (OFZ-IN, 8 year notes) at 91% of nominal, on cover of RUB200 billion (more than 25% of demand coming from foreign investors). Real yield at issuance was 3.84% - relatively high-ish, implying underpricing of the bond in a market with relatively hefty demand and forward expectations for significant easing in inflation. Something is slightly amiss here.

In line with up-down interventions, the CBR continued to trend flat on foreign exchange reserves. End of June, total Russian FX reserves stood at USD361.575 billion, and by end of July these fell to USD357.626 billion. As of last week, the reserves were back up at USD364.6 billion.

Weekly data from CBR does not allow for compositional analysis of reserves, but looking at the monthly data the pattern repeats.

Actual liquid FX reserves and gold stood at USD347.1 billion at the end of July against USD350.957 billion at the end of June. This is barely up on end-April period low of USD345.373 billion, although well within the FX- and gold-valuations range of change.

Meanwhile, data through July 2015 shows net purchases of dollars of USD3.76 billion against USD3.831 billion in June and USD2.531 billion in May by CBR. Overall, from January 2015 through July 2015, CBR bought (net) USD7.8 billion and there were no net purchases/sales of euro.

All of the above suggests that CBR will likely resume rate cuts if Ruble firms up from its recent valuations. Two weeks ago, RUB/USD was at 64.947 (72.197 to Euro), peaking at 70.887 four days ago (82.373 to the Euro) and currently at 66.8875 (74.984 to Euro), not exactly warranting a move by the CBR yet, but back in the relative comfort zone for the Bank to sit on its hands once again.

28/8/15: Central Banks' Activism in a Chart

Having been out of contact due to work and summer break commitments, I will be updating the blog over the next few days with interesting bits of information that have been overlooked over the last 10 days or so. So stay tuned for numerous updates.

To start with, here is a picture of the Central Banks' monetary activism to-date:

Source: @Schuldensuehner 

The chart above sets 2005 = 1000 and indexes the uplift in Central Banks' balancesheets expansions: Fed almost x5.6 times; PBoC almost x6.4 times, ECB almost x2.3 times and heading toward x3.3 times under the ongoing QE, BoJ almost x2.1 times... not surprisingly, the old Fed 'put' is now pretty much every Central Bank's default option...

Much of this mountain of money printing has gone to grease the wheels of sovereign debt markets. Much of the resulting revaluation of financial assets is simply not sustainable under the premise of the Central Banks' 'puts' withdrawal (monetary tightening).

In simple terms, the ugly will get uglier and we have no idea if it will get any better thereafter.

Monday, August 17, 2015

17/8/15: Euro: The Land Where Growth Goes to Die

So we have had a massive QE - even prior the current one - by the ECB. And we are having a massive QE again, courtesy again, of the ECB. And the bond markets are running out of paper to shove into the… you've guessed it… the ECB. And the banks have been repaired. And we are being fed our daily soup of alphabet permutations (under the disguise of the European Union 'reforms' and policy initiatives): ESM, EFSF, EFS, OMT, EBU, CMU, GMU, TSCG, LTRO, TLTRO, MRO, you can keep going… And what we have to show for all of this?

2Q 2015 growth is at 0.3% q/q having previously posted 0.4% growth in both 4Q 2014 and 1Q 2015. This is, supposedly, the fabled 'accelerating recovery'.

So what do we have? Look at the grey lines in the chart above that mark period averages. Pre-euro period, GDP growth averaged 0.9% in quarterly terms. From 1Q 2001 through 4Q 2007 it averaged 0.5%. Toss out the period of the crisis when GDP was shrinking on average at a quarterly rate of 0.1% between 1Q 2008 and through 1Q 2013 and look at the recovery: from 2Q 2013 through 2Q 2015 Euro area economy was growing at an average quarterly rate of less than 0.27%.

Meanwhile, monetary policy is now stuck firmly in the proverbial sh*t corner since 2012:

You'd call it a total disaster, were it not for Japan being one even worse than the Euro area… and were it not for the nagging suspicion that all we are going to get out of this debacle is more alphabet soups of various 'harmonising solutions' to the crisis... which will get us to becoming a total disaster pretty soon. Keep soldering on...

Saturday, August 15, 2015

15/8/15: Irish Universities: None in Top 100, One in Top 200 & Top 300

Academic Ranking of World Universities 2015 are out (see details here: and Ireland is not exactly shining.

Only 3 Irish Universities are ranked in top 500:

TCD managed to post flat performance on 2014, reaching its highest Institutional rank since 2003. Which is the best news we had.

Meanwhile, UCD ranking fell pretty substantially, with university ranked in 201-300 place in 2014 now ranked in 301-400 place:

UCC posted second consecutive year of declines in 2015, although it stayed within the 401-500 ranking group.

I will be blogging on data coming out of the survey more later this month, but for now, top line conclusion is: things are not getting better in top Irish Unis relative performance.

Time for more self-congratulatory government talk, promises and awards… and let's get few more Unis designated, just because stretching already scarce resources thin is, obviously, the best way to achieve greatness...

15/8/15: EEU: Kyrgyzstan the latest addition

On August 12, Kyrgyzstan became a member of the Eurasian Economic Union (EEU), joining Russia, Kazakhstan, Belarus and Armenia. Kyrgyzstan is the least developed of the EEU economies, relatively proximate only to Armenia in the group.

15/8/15: Russian External Debt: Big Deleveraging, Smaller Future Pressures

Readers of this blog would have noted that in the past I referenced Russian companies cross-holdings of own debt in adjusting some of the external debt statistics for Russia. As I explained before, large share of the external debt owed by banks and companies is loans and other debt instruments issued by their parents and subsidiaries and direct equity investors - in other words, it is debt that can be easily rolled over or cross-cancelled within the company accounts.

This week, Central Bank of Russia did the same when it produced new estimate for external debt maturing in September-December 2015. The CBR excluded “intra-group operations” and the new estimate is based on past debt-servicing trends and a survey of 30 largest companies.

As the result of revisions, CBR now estimates that external debt coming due for Russian banks and non-financial corporations will be around USD35 billion, down on previously estimated USD61 billion.

CBR also estimated cash and liquid foreign assets holdings of Russian banks and non-bank corporations at USD135 billion on top of USD20 billion current account surplus due (assuming oil at USD40 pb) and USD14 billion of CBR own funds available for forex repo lending.

Here are the most recent charts for Russian external debt maturity, excluding most recent update for corporate and banks debt:

As the above table shows, in 12 months through June 2015, Russian Total External Debt fell 24%, down USD176.6 billion - much of it due to devaluation of the ruble and repayments of maturing debt. Of this, Government debt is down USD22.1 billion or 39% - a huge drop. Banks managed to deleverage out of USD59.9 billion in 12 months through June 2015 (down 29%) and Other Sectors external liabilities were down USD88.8 billion (-20%).

These are absolutely massive figures indicating:
1) One of the underlying causes of the ongoing economic recession (contracting credit supply and debt repayments drag on investment and consumer credit);
2) Strengthening of corporate and banks' balance sheets; and
3) Overall longer term improvement in Russian debt exposures.

Friday, August 14, 2015

14/8/15: IMF on Two Unfinished Bits of Greek Bailout 3.0

IMF's Ms. Christine Lagarde statement on Greece:

Key points are:

1) Per Lagarde, “of critical importance for Greece’s ability to return to a sustainable fiscal and growth path", "the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail." In other words, the path to Eurogroup's 3.5% long term primary surplus target on which everything (repeat - everything) as far as fiscal targets go, hinges is not yet specified in full. The Holy Grail is not in sight, yet...

2) "…I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical …that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far." In simple terms, for all the lingo pouring out of the Eurogroup tonight, Greece has not been fixed, its debt remains unsustainable for now and the IMF - which ESM Regling said tonight will be expected to chip into the Bailout 3.0 later this autumn - is still unsatisfied with the programme.

"Significant debt relief" - off the table so far per Eurogroup - is still IMF's default setting.

14/8/15: Two Facts About Irish Minimum Wage

Having recently spoken about the issues of minimum wage, especially in the Irish context, here are some facts, based on Eurostat latest data.

Firstly - about the level of minimum wages in Ireland relative to the EU counterparts.

In monthly terms, Irish minimum wage comes in at EUR1,462 per month (1Q 2015 data). Despite some claims that we have the second highest minimum wage in Europe, this puts us in the 5th position just below 4th ranked Germany (EUR1,473 per month) and ahead of the sixth ranked France (EUR1,458 per month). It is worth noting that Denmark, Italy, Cyprus, Austria, Finland and Sweden have no national minimum wage.

However, when comparing minimum wages in different countries, it is worth looking at figures, adjusted for Purchasing Power Parities (controlling for cost-of-living differences, albeit imperfectly). Chart below shows these:

In terms of PPP-adjusted figures, Irish minimum wage is 6th highest in the EU at EUR1,238 per month (PPP). This is quite significantly ahead of the UK (ranked 7th at EUR1,114 per month PPP-adjusted), but below France (at EUR1,337 per month PPP-adjusted).

Another possible comparative is in terms of 'replacement rate' for minimum wage earners - in other words, how much worse-off (relatively-speaking) minimum wage earners are compared to, say, average wage earners. Chart below illustrates that:

Per chart above, minimum wage earners in Ireland earn on average around 41.6% of the gross average wage on a monthly basis. Comparable, but slightly more than their counterparts in the UK.

What the above two charts illustrate is that Irish minimum wage is not set at an extremely high level, as some claim. 

They also show that crucial point for people earning minimum wages is the cost of living in Ireland, rather than just the level of wages they earn. 

My view, within the context of the Irish minimum wage debate is that we must focus more of our efforts on the cost of living side, less on incrementally increasing minimum wage. And more crucially, there is little point, in my opinion, to increase minimum wage by a small (token) amount, as variability of hours worked and zero hours contracts offered will erase much of the benefit to be gained by those still holding minimum wage jobs after the wage increase. 

Sadly, for politicians, small/marginal give-aways to well-defined groups of voters bring in political returns. Large-scale, longer-term reforms bring in dissatisfaction of vested interest groups & lobbies. No prizes for guessing what path Irish Government will opt for ahead of the elections...

Update: with thanks to Seamus Coffey ( @seamuscoffey) here are two charts detailing tax burden for minimum wage earners:

Given the levels of progressivity in Irish tax system, it is quite un-surprising that Irish minimum wage earners are carrying low tax burden on tax side, which does push after-tax minimum wage in Ireland to higher poll position in the league tables. On the other hand, the Eurostat data on which my analysis was based uses 39 hour weeks for computing minimum wage earnings, without adjusting for working days. Which, probably, pushes our minimum wage earners' annual incomes down (especially given the prevalence of low hours and zero hours contracts in some sectors).

Thus, as a note of caution, all of the above data should be read as all economic data should be read: with caution and without attempting to make sweeping generalisations.

14/8/15: Individual Consumption and the Irish Crisis

Couple of interesting charts showing the latest annual data on individual consumption in the EU.

First, volume indices of real expenditure per capita in PPS (with index for each year set at EU28=100) (these figures are adjusted for inflation and exchange rates differences.

The chart shows how growth in consumption in the EU28 over time was coincident with decline in relative position of Ireland in terms of individual consumption throughout the crisis period. In 2003-2004 Irish individual consumption stood 8 and 7 percentage points above EU28 average. This was marginally below the EA12 average. In 2005-2007, Irish individual consumption grew faster than consumption for EU28 and EA12, rising to 110 in index terms, or 10 percentage points above the EU28 and roughly 2 percentage points above the EA12. Since 2008, however, Irish individual consumption fell both relative to EU28 and EA12 figures. In the second year of 'robust recovery' - 2014 - Irish individual consumption (adjusting for inflation and exchange rates differences) hit the period low of 93 - full 7 percentage points below EU28 and 14 points below EA12.

As the result of the crisis, our real consumption per capita was down 16.2% on 2007 levels, which is the second worst performance after Greece (down 17%). Our performance was much worse than a 13.6% decline registered in the U.K., 10.6% decline registered in Iceland, 9.9% drop in Cyprus, 9.7% decline in the Netherlands, 8.2% drop in Spain and so on.

In nominal terms (without adjusting for inflation), our individual consumption record was equally abysmal (comparing only euro area states to remove distorting effects of exchange rates variation):

In summary, even after the onset of the 'fastest recovery' in the euro area, Ireland's actual individual consumption of goods and services remained au-par. In 2014 itself, our individual consumption grew 6.0% y/y - second fastest in EU28 after Luxembourg - but years of past devastation meant that our consumption remained second worst hit compared to pre-crisis levels. In 1999, Ireland ranked 12th in terms of individual nominal consumption in the EU 28 group of states. Our best year was attained in 2008 when we ranked 3rd. In every year between 2011 and 2014, we ranked 11th. In simple terms, the entire history of the euro area membership for Ireland has been equivalent to, largely, standing still in terms of our relative wellbeing compared to other EU states. 

Thursday, August 13, 2015

13/8/15: Eurocoin: Marginal Strengthening of Euro Area Growth in July

Earlier this week I covered Ifo Institute Index of Economic Conditions for the Euro Area.  This time around, lets take a look at the leading growth indicator, Eurocoin published by CEPR and Banca D'Italia.

July 2015 reading for Eurocoin stood at 0.41, up on 0.39 in June and well ahead of 0.27 reading recorded in July 2014. This means that economic growth slightly firmed up at the start of Q3 2015 compared to the end of Q2 2015.

2Q 2015 Eurocoin average suggests growth at around 0.35-0.4% which compares to 0.4% growth recorded in actual real GDP in 1Q 2015. However, growth improvements are continuing to come against core inflation (HICP) remaining at 0.1 percent through May 2015.

This is despite the ECB rate remaining in the near-zero corner:

The reason is simple: per Eurocoin release, "the recovery in stock prices and the performance of industrial activity in several of the leading countries prevailed over the decline in confidence of households and firms." In other words, growth firming up is coming not from organic real activity on the ground, but from trade effects (weaker euro) and financial markets effects (monetary policy driving euro).

Wednesday, August 12, 2015

12/8/15: Ifo Index of economic conditions: Euro Area 3Q 2015

Latest Ifo Index of Economic Climate for the Euro Area fell from 129.2 for 2Q 2015 to 124.0 for 3Q 2015, running ahead of 118.9 reading in 3Q 2014 and at the second highest level since 4Q 2007.

Present Situation Index reading, however, is up at 148.3 in 3Q 2015, compared to 145.5 in 2Q 2015 and 128.7 in 3Q 2014. The index is at its highest reading since 4Q 2011. Overall, based on Present Situation assessments, 1Q 2015 - 3Q 2015 activity (average of 137.1) is running below the levels of activity during previous expansionary sub-cycle of 1Q 2011 - 3Q 2011 (average of 152.9), suggesting weaker growth conditions in the current recovery phase than 4 years ago.

Expectations for the next 6 months period Index slipped significantly in 3Q 2015 to 109.8 from 119.7 reading for 2Q 2015 and matching rather poor expectations reading recorded in 1Q 2015. The Index is down on 3Q 2014 when it stood at 113.1. Over the entire 2015 to-date, the index has averaged 113.1 against same period average of 117.5 for 2014, and identical to 113.1 average for the same period of 2011. On expectations basis, there is weak optimism among survey participants in growth conditions forward.

Expectations Index gap to Present Conditions is currently at 74% compared to 82.3% in 2Q 2015 and 93.4% in 1Q 2015. This suggests overall deepening gap between current assessment of economic situation and forward expectations to the downside on forward expectations. Still, judging by 6mo lags, current conditions continue to turn out better than previous expectations of the same would have implied, with 6 mo lagged expectations index under-shooting forward 6 months reading for actual conditions by 38.5 points.

Charts to illustrate:

As charts above show:

  • Expectations Index (6mo forward) suggests weaker conditions expectations in the future and remains consistent with poor producers' expectations prevailing from around 4Q 2013 on.
  • Current situation assessment, meanwhile, is improving, but remains relatively weak and only most recently (2Q-3Q 2015) reaching above historical average line.
  • Current economic sentiment published by the EU Commission has now been diverging from 6mo forward expectations published by Ifo for the period starting from 4Q 2014, with expectations being reported by Ifo running more subdued (and worsening) than EU Commission reading of current conditions.
  • Despite being more optimistic than Ifo Expectations, and despite running above its own historical average, the EU Commission Sentiment Index remains rather subdued by historical standards.

In simple terms, things are getting better, but these improvements appear to be more on the surprise side, rather than structural side.

Tuesday, August 11, 2015

11/8/15: Russian 2Q growth: beating forecasts on the wrong side

With apologies for a slight delay (I am actually away from work these weeks), here is a quick update on Russian 2Q 2015 GDP figures.

Those who read my musings on the Russian economy would recall that in recent months we have been seeing some signs of stabilisation in the economy performance, albeit I have been reluctant to call these signs a full turnaround as data required robustness confirmation and broadening of any improvements.

Good thing I stayed more cautious on the matter of calling a recovery. In 1Q 2015, Russian economy shrunk 2.2% y/y, surprising on the positive side the consensus expectation of a 3.7% drop. However, this time around, 2Q 2015 preliminary estimate for real GDP growth came in at 4.6%, worse than consensus forecast for 4.5%.

Now, 0.1 percentage points on expectation is not quite ugly, but -4.6% is ugly. Thus, in itself, the 2Q 2015 figure does not quite put under sever pressure the expected 3.4-3.6% annual contraction for 2015 as a whole, but it does put question marks around the thesis of Russian economy's recovery.

The contraction in 2Q takes us into July-August when oil prices have fallen even further and ruble devaluation pressures returned - both making it hard for the CBR to cut rates to support economy.

Noticeably, acceleration in the decline can be seen in q/q seasonally-adjusted figures. These are yet to be released, but Capital Economics shows estimates of 2.5% q/q decline in real GDP on seasonally adjusted basis, nearly double the rate of contraction (1.3% q/q) recorded in 1Q 2015.

The charts below show just how ugly 2Q 2015 figures are on a historical perspective:

 and over the shorter horizon:

Source: both: Capital Economics

As noted by Barclays, much of the deterioration in growth in 2Q was down to oil prices

 Source: @Schuldensuehner

Although in terms of pressures on growth, consumption component of the Domestic demand remains weak.
Source: @Schuldensuehner

The CBR policy rates are clearly weighing on the consumption and investment ability to rebound, with high policy rate (11%) compounding already tight funding markets for the banks, resulting in very high cost of credit.

We have no details on the GDP figure breakdown, yet, but Capital Economics suggested that based on 2Q headline figure, household expenditure fell at a rate similar to 1Q 2015 (-8.9%). Which implies that it was industrial production that drove growth figures further down in 2Q 2015.

The latter point is consistent with the evidence from Manufacturing PMIs in recent months:

So what's the top level conclusion from all of this? 2Q was ugly. Signs of stabilisation in the economy are still present, but robustness of these signals is now more under question than a week ago. In simple terms, we will need to see Q3 data posting closer to 0% change in GDP and beating 1Q 2015 reading, if we are to confirm expectation for growth recovery in 4Q 2015 - 1Q 2016. 

Monday, August 10, 2015

10/8/15: Europe: Where All Do What None Believe In

Here is Bloomberg report on the Finnish Government coalition position on the Greek Bailout 3.0 which, in simple terms, implies that at this stage, no one, save for Brussels and ESM, believes that the Greek Bailout can work. And yet everyone votes in favour of the bailout.

You can't make this up.

Per Bloomberg: "The Finns party, which in April became part of a ruling coalition for the first time, has no choice but to support a bailout since not doing so would cause the three-party government to collapse. That would only open the door for the left-wing opposition, Soini said."

Of course, as we all know, were the Left wing opposition to come to power in Finland, it too will vote for that which they think won't work. Promptly. Without kicking any fuss. Just as Syriza is doing now in Greece.

It no longer matters who, where and why is in power in Europe, as everyone - on political Left, Right and Centre - is hell-bent on doing that which none of them believe in. Except for the Middle Earth of EU 'institutions' who believe in nothing and hence have all the power to do precisely that which they believe in...

Saturday, August 8, 2015

8/8/15: Transactions Costs v Quality of Banks' Collateral

In standard financial theory (and practice), presence of transactions costs has an impact on asset prices traded in the markets. A recent ECB Working Paper, titled "Collateral damage? micro-simulation of transaction cost shocks on the value of central bank collateral", by Rudolf Alvise Lennkh and Florian Walch (ECB Working Paper Series, No 1793 / May 2015: "analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations."

The authors estimate the effect of a 10 basis point increase in transaction costs to be a decline of -0.30% in collateral value. Adjusting for the expected drop in the volume of trades for each asset (reduced liquidity), the decline in asset prices is shallower - at -0.07%. "We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease."

So far - benign?

The problem, of course, is in that second order effect. The authors look at 25% and 75% decreases in turnover of pledged collateral debt instruments (e.g. bonds pledged by the banks in repo operations). This second order effect reduces the loss of collateral value to -0.22% and -0.07%, for the two assumed turnover reductions scenarios, respectively. In other words, the lower the turnover rate of the pledged assets, the lesser is the impact of the transactions costs on collateral value.

Now, as the study notes, when collateral is held longer (turnover lower), liquidity in the markets is impacted. The longer the banks hold collateral assets off the markets and in the central banks' repo vaults, the lesser is market liquidity for traded collateral-eligible paper. Thus, the higher is the associated liquidity risk. Banks dump risk premium into the markets.

Cautiously, the ECB paper goes on: "The results underline that transaction costs in financial markets can be one among many factors contributing to the scarcity or decline of liquid, high quality collateral. …an upward transaction cost shock that occurs simultaneously with a market or regulation-induced shortage in collateral assets, and in particular high-quality collateral assets, could hamper the access of financial institutions to central bank liquidity. The central bank could [make] additional collateral eligible for monetary policy operations. As most of high-grade collateral is already central bank eligible, such a move could entail a shift to collateral assets with more inherent risk that would have to be compensated with appropriate haircuts. This in turn could increase asset encumbrance on banks’ balance sheets."

But there is another channel not considered in the paper: reduced turnover of collateral implies reduced supply of assets into securitisation pools, as well as into the OTC markets. Both effects are hard to estimate, but are likely to induce even higher risk premium into the markets for risky assets, pushing the above estimates of costs wider.

As an interesting aside, the table below summarises, by the end of 1Q 2014, one quarter of all collateral pledged into Eurosystem central banks repo operations was of low quality variety Non-marketable assets (in other words, assets with no immediate markets). This represents an increase in the share of low quality assets from 24.75% in 1Q 2012 to 24.96% in 1Q 2014. Medium-to-low quality stuff accounted for another 20 percent of the total.

Now, for all the esoteric debates about the ECB supplying liquidity, not providing solvency supports, one wonders just how much of a haircut would all of this proverbial 'assetage' gather were it to be collateralised into the markets to raise the said liquidity… for you know: if a bank is solvent, its assets would cover its liabilities, inclusive of haircuts, which means they are repoable… in which case, of course, there is no liquidity shortage to cover, unless markets were misfiring. The latter simply can't be the case in 2014 when the financial markets were hardly oversold.

Thursday, August 6, 2015

6/8/15: IMF Assessment of Russian Banks & Financial Markets

Alongside the Article IV (covered in three posts all linked here:, the IMF also released a series of technical papers, including one on the state of health of the Russian financial markets.

Top-level conclusion: "using a comprehensive index of financial development, to identify potential bottlenecks", the study "…finds that Russia’s financial markets are relatively deep, accessible and efficient, but that financial institutions, in particular banks, have much to do to improve their efficiency and create further depth. Russia could potentially gain up to 1 percentage point in GDP growth on average over the medium-term from further deepening and efficiency improvements. Policies towards this outcome include reducing banking sector fragmentation through consolidation via increased supervision and tightening capital standards; strengthening the role of credit bureaus and collateral registries to reduce information asymmetries; and removal of interest rate rigidities to foster competition."

Specifically, one key bottleneck is the distribution of sources for finance: "Russian companies rely much less on external financing in general and on bank financing in particular, to finance investment compared to their peers in Eastern Europe and Central Asia or in their upper middle income group. Typically, internal resources, state funds and controlling entities are responsible for financing up to 80 percent of business investment. As a result, banks contribute only 6 percent of funding for business investment, with the bulk of investment financed from retained earnings."

Couple of charts

Now, one can agree with IMF on the need for Russian companies to tap more diversified investment channels, but one has to also observe two key risks inherent in this suggestion:

  1. Debt levels overall are low in Russian economy, and much of these are accumulated in controlling entities relations with enterprises - in other words - linked to equity and direct investment. This is good, as this allows enterprises more flexibility and better management opportunities with respect to cash flow and business activity;
  2. Low debt levels also allow for absorption of political shocks that we are witness gin today, arising from political shutting down of Russian companies access to Western funding markets. If Russia is to retain meaningful risk buffers, accessing external finance via bond markets and equity markets abroad saddles Russian entities with higher risk of external shocks.

So IMF can propose, but I seriously doubt Russian companies will be rushing to borrow at a breakneck speed any time soon.

IMF uses a relatively new framework for assessment of the financial sector environment, the concept of financial development. "Financial development is defined as a combination of:

  • Depth (size and liquidity of markets), 
  • Access (ability of individuals to access financial services), and 
  • Efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues, and the level of activity of capital markets)."

So IMF main conclusion is quite surprising for those not familiar with Russian markets: "Russia’s financial markets are relatively developed but financial institutions lag behind in terms of efficiency and depth."

"Russia’s FD index (0.58) is higher than the average EM (0.37) and slightly lower than the average BTICS (0.64), a group of countries composed of Brazil, Turkey, India, China, and South Africa. …Russia scores much higher than the comparator groups for FM developments [Financial Markets development] as it features higher degrees of access and efficiency in the operations of its financial markets. Although the depth of financial markets is slightly lower than BTICS countries, it remains much higher than the average EM."

Big bottleneck is in financial depth, where "…financial institutions in Russia are comparatively dominated by the banking system, with fewer to non-existent assets, in percent of GDP, in pension funds, mutual funds and insurance industry. Moreover, the banking system lacks depth with domestic credit at about 50 percent of GDP being the lowest in the BTICS group."

Why? "With some 850 banks operating, the Russian banking system is highly concentrated at the top, and fragmented at the bottom":

  • "The top three banks (state-owned) accounted for more than 50 percent of total sector assets at year-end 2014 while the top 20 banks accounted for 75 percent of total sector assets."
  • "Lending is highly concentrated among the top 10 bank groups making about 850 banks contribute only 15 percent of total lending."
  • "…VTB Group alone with 16 percent share of lending accounts for a similar share as the 830 remaining banks."
  • "Most of the banks are small and act as treasury accounts for local firms, operating in particular in mono-cities."

This "…undermines lending to companies and SMEs as their ability to both extend credit and diversify across companies is limited while lending to consumers is usually the dominant form of credit."

What is there to be done to get Russian banking and financial systems up to speed?

IMF benchmarks the potential scope of reforms against the absolute best scenario (not scenario consistent with other comparative economies), which makes things sound quite a bit optimistic, or unrealistic. The menu is predictable and relatively straightforward:

  • Cut the number of banks without impacting degree of competition. Which is easy to say, hard to achieve, and at any rate, Russian authorities have been doing as much, albeit slowly, for a good part of almost 2 years now.
  • Increase supervisory pressures to remove even more banks out of the active list (again, has been ongoing since 2013).
  • Improve quality of collateral registries to lower the cost of collateralisation for SMEs. Which, in part, will also involve improving existent system of credit bureaus.
  • Link deposit rates paid by the banks to the banks' deposit insurance cover. In other words, remove Central Bank restriction on deposit rates quoted by the banks, but replace it with a restriction capping ability of highly risky banks to raise uninsured deposits. Which sounds like a good idea, assuming deposit insurance scheme is fully funded and solvent. Which, in turn, assumes no systemic crisis.
  • Privatise state banks. Which is strange. IMF also notes that "there is no urgent need in Russia for large scale privatization, especially in light of the fragmentary evidence that public banks in Russia are not less efficient than private ones." And the Fund stresses the importance of economies of scale in delivering improved banking sector efficiencies. Which begs a question: what is to be privatised? Large state-owned banks? If they are privatised with a break up, the system will suffer risks to the efficiency. If they are privatised as they are, the system will receive private dominant players in the market which, arguably, will be no different from the state-owned ones in any meaningful way.

As usual for IMF: neat pics, cool stats, a small pinch of useful proposals and a list of predictable ideas that make sense… only if you do not spot their faulty logic…