Sunday, May 31, 2015

31/5/15: IMF slashes Ukraine Economy Outlook

IMF statement on Ukraine with some pretty ugly forecast revisions.

[Note, emphasis in italics is mine]

"Press Release No. 15/243, May 31, 2015

IMF Statement on Discussions with Ukraine on First Review under the Extended Fund Facility Arrangement

An International Monetary Fund (IMF) mission visited Kyiv during May 12-29 to hold discussions on the first review under the Extended Fund Facility Arrangement (EFF) in support of the authorities’ economic reform program (see Press Release No. 15/107).

At the conclusion of the visit, Mr. Nikolay Gueorguiev, mission chief for Ukraine, made the following statement today in Kyiv:
“The authorities’ commitment to the reform program remains strong. All performance criteria for end-March were met and all structural benchmarks due in the Spring are on course to be met, albeit some with a delay. This good program implementation has been achieved notwithstanding an exceptionally difficult environment, in part related to the unresolved conflict in the East, which took a heavier than expected toll on the economy in the first quarter of 2015.

Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent. Inflation was mostly driven by one-off pass-through effects of the large exchange rate depreciation in February as well as the needed energy price increases.

“In recent months, signs that economic stability is gradually taking hold are steadily emerging. The foreign exchange market has remained broadly stable. Gross international reserves, although still very low, have increased to US$9.6 billion at end-April. Banks’ deposits in domestic currency have been recovering. The budget outturn in the first months of 2015 was stronger than expected, partly due to temporary factors.

“The authorities recognize that decisive implementation of economic reforms is indispensable for entrenching financial stability and restoring robust and sustainable growth. They are committed to advancing fiscal consolidation and energy sector reforms, including further energy tariff adjustments to eliminate the large losses of Naftogaz, reduce energy consumption, and foster energy independence. They are also moving ahead with the rehabilitation of the banking system, and the improvement of the business environment to enhance the productive potential of the economy.

“The authorities are also determined to complete the ongoing debt operation in line with program objectives. This will ensure that public debt is sustainable with high probability and the program remains fully financed, which are requirements for the completion of the review. More broadly, continued financial support for Ukraine’s reform efforts from official and private creditors is vital for the success of the program.”

Let's hope IMF optimism wins over the reality, but just two and a half months ago, the IMF projected gross international reserves for 2015 at USD18.3 billion, and now they are celebrating reserves at USD9.6bn. IMF programme sustainability analysis was forecasting real GDP decline of 5.5% in 2015 - not 9% decline the Fund now projects. See: for more details.

One has to wonder, just how 'flexible' the Fund became in recent years when it comes to 'hard' numbers underpinning it's 'programme sustainability' arithmetic.

31/5/15: Russian Fiscal Performance: Red Alert in Jan-Apr 2015

Russian Government finances are showing some serious signs of strain in April, lagging the 1Q 2015 outruns. In 1Q 2015, public revenues (the consolidated budget including federal, regional and local governments, state social funds) rose only 1% y/y in nominal ruble terms. Adjusting for inflation and ruble revaluations, this suggests real contraction of around 9-10 percent. Over the first four months of 2015, export duties returns and production taxes in oil & gas sector were down more than 20% y/y with 1Q 2015 decline of 15% y/y. Ex-oil & gas revenues, consolidated revenues were up 8% in ruble terms (nominal) in 1Q 2015.

Real trouble, however, is brewing on spending side. 1Q 2015 consolidated expenditures rose 20% y/y in nominal terms, with defence spending rising 50% y/y in 1Q 2015 and 45% in the first four months of 2015. Pensions and Social Security expenditure rose by around 30% y/y. Nominal spending on education and health remained largely unchanged.

The consolidated deficit for 1Q 2015 was 2.5% of GDP.

Source: Bofit

Now, some of the expenditure items were significantly front-loaded, especially for housing expenditure and defence. Which means that over the rest of 2015 we might see some moderation in these lines of spending and weaker adverse impact on deficits. Still, things are not exactly encouraging, neither in terms of structural nature of imbalances nor in terms of sustainability of such spending given the levels of official reserves.

31/5/15: Remittances from Russia Sharply Down in 1Q 2015

Latest Central Bank of Russia data shown decline in private forex outflows in 1Q 2015 as migrants and Russian citizens cut back on transfers abroad. In 1Q 2015, based on CBR data, private money transfers from Russia were down to USD2.1 billion - the lowest level of transfers since 1Q 2010 and down on USD3.9 billion in 1Q 2014 and USD4.3 billion in 4Q 2014. The data covers only cash transfer (wire transfers) and does not include bank transfers. Still, the number is significant for two reasons:

  1. In 2014, cash wire transfers amounted to USD21 billion - or nearly 1/3 of total private residents transfers (USD69 billion).
  2. Transfers decline signals slowdown in remissions from migrant workers - a major problem for a number of countries net senders of migrants into Russia (see an earlier note on this here:

Transfers outside the CIS zone amounted to USD348 million (down 39% y/y and down 45% q/q), transfers to CIS zone states fell 47% y/y and 51% q/q to USD1.8 billion.

Net transfers deficit was USD1.1 billion in 1Q 2015, down from USD3 billion in 1Q 2014 and 4Q 2014. Reminder: net outflow of capital (corporate and households, plus banks) fell 31% y/y in 1Q 2015 to USD32.6 billion (see earlier notes on this here and here:

Key drivers for slower rate of capital and forex outflows are:

  • Ruble devaluation impacting earnings of migrant workers, while Ruble strengthening in 2015 so far reducing demand for forex accounts amongst Russian depositors and improved confidence in Russian banking sector (in part due to doubling of deposits protection levels to RUB1.4 million). Higher deposit rates offered by the Russian banks also helped.
  • Decline in real earnings (
  • External debt redemptions (see earlier links)
  • Exporters reducing overall demand for forex deposits

A side note: in 1Q 2015 household deposits in Russina banks rose RUB537 billion (+2.9% y/y to RUB19.6 trillion) in contrast to 1Q 2014 when deposits fell 2.3% (to RUB16.6 trillion). CBR projects deposits rising 8% over 2015 y/y.

Another factor responsible for improved outflows is change in the migration laws. Prior to January 1, 2015, citizens from countries with visa-free entry to Russia were allowed to remain in Russia for 90 days and could re-enter any time after exiting the country. From January 1, the new rules require them to stay maximum 90 days and after exiting the country, remain outside Russia for 90 days before re-entering. It is worth noting that this is identical to similar rules applying to visa holders in many Western countries. As the result, based on Federal Migration Service data, inflow of migrants into Russia fell 70%. One outcome of this is that unemployment levels in Kyrgyzstan, Tajikistan and Uzbekistan - three key net senders of migrants to Russia - jumped, while remittances from Russia to Uzbekistan fell 16% in 2014, and to Tajikistan  by 8%. Third largest net sender of migrants to Russia was Ukraine, with remittance to Ukraine down 27% y/y in 2014.

Saturday, May 30, 2015

30/5/15: Russian Demand Down Sharply in April

As BOFIT reports this week: Russian domestic demand shrunk at an accelerating rate in April with retail sales down 10% y/y after contracting 7.5% in 1Q 2015. Investment was down 5% in April, following 4% drop in 1Q 2015. Investment fall would have been even sharper if not for a massive +30% rise in volume of new housing completions (most likely a temporary rush to complete stock of unfinished housing int espouse to higher cost of carry).

Real wages declined also continued to fall in 1Q 2015, down 8% y/y, posting second consecutive quarterly decline. In April, real wages shrunk 13%. Pensions dropped 4% y/y in 1Q 2015.

Latest estimates from the Economy Ministry put Russian GDP at -4% in April, deeper than 1.9% contraction recorded in 1Q 2015.

30/5/15: Private Sector Counter-Proposal for Ukrainian Debt Restructuring

An interesting and far-reaching article on Ukraine's attempts to restructure some of its debts via Bloomberg:

In the nutshell, Ukraine needs to restructure its debt per IMF three targets for debt 'sustainability':

  • generate $15 billion in public-sector financing during the program period; 
  • bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and 
  • keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025

Note, these are different than what Bloomberg reports.

Key difference, however, is the matter of Russian debt. S&P note from February 2015 addressed this in detail: see more here: In simple terms, Ukraine's debt to Russia is not, repeat: not, a private debt. Instead it is official bilateral debt. As such it is not covered by the IMF programme condition for restructuring privately held debt regardless of whatever Ukrainian Rada or Government think. Full details of the IMF programme are linked here:

As I noted in March note, "IMF has already pre-committed Ukraine to cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme" ( Once again, Bloomberg 'conveniently' ignores this pesky fact about only private debt being covered.

Now, it appears we have the first private sector offer for restructuring. It is pretty dramatic, as Bloomberg note linked above outlines. But it is clearly not enough, as it involves no cuts to the principal. This is the sticking point because the proposal front-loads notional savings to the amount of USD15.8 billion, but it subsequently requires Ukraine to repay full principal - a point that is not exactly in contradiction to the IMF plan in letter, but certainly risks violating it in spirit. The chart below shows that beyond Q2 2017, Ukraine is facing pretty steep repayments of debt and there is absolutely no guarantee that by then Ukraine will be able to withstand this repayments cliff.

To further complicate issues, Ukrainian Parliament (Rada) passed a law last week that would hold off repayments of debt until there is an agreement with private holders on haircuts. This presents three key problems for Ukraine:

  1. The law can be used to hold off on repaying Russian debt, which is not private by definition and as such will constitute a sovereign default on bilateral loans. This will be pretty much as ugly as it gets short of defaulting on IMF.
  2. The law, if implemented, will also halt repayments on genuine private debt. Which will also constitute a default.
  3. If Russia refuses to restructure its debt (for example, citing the fact that it is non-private debt), Rada law will have to be applied selectively (e.g. if Rada suspends repayments on Russian debt alone), which will strengthen Russian position in international courts.

In case of default, be it on Russian debt or on private debt, or both, Ukraine will see its foreign assets arrested. Which involves state enterprises-owned property, accounts etc. The reason for this is that Rada has no jurisdiction over laws governing these bonds, which are issued under English law. In addition, Ukrainian banks - big holders of Ukrainian Government debt - will be made insolvent overnight as the value of their assets (bonds) will collapse.

Final point is that ex-post application of the law, there will be no possibility for achieving any voluntary restructuring of debt as all negotiations will be terminated because Ukraine will be declared in a default.

While Greece continues to attract much of the media attention, the real crunch time is currently happening in Kiev and the outcome of this crisis is likely to have a significant impact across the international financial system, despite the fact that Ukraine is a relatively small minnow in the world of international finance.

Here is Euromoney Country Risk assessment of Ukrainian credit risks:

Ukraine score is 26.30 which ranks the country 147th in the world in creditworthiness.

30/5/15: Irish Retail Sales: April

Some good news on Irish retail sales side for April with latest CSO data showing seasonally adjusted core (ex-motors) sales up 2.65% m/m in April in Value terms to 100.6 index reading - the highest since September 2008. Remember - value series have been lagging far behind the volume series. April 2015 m/m increase comes after 0.31% contraction m/m in March and is a strong signal of a positive momentum returning to the sector.

Volume series continued to perform strongly, jumping 3.07% m/m in April after disappointing 0.65% drop in March. The series now stand at 110.7 which is the highest since July 2007.

Strengthening of the positive correlation between volume (and now also value) of core retail sales and Consumer Confidence indicator is also signalling that we are on an upward trend (remember, Consumer Confidence indicator is pretty useless in timing actual trend reversals, but performs pretty well in tracking trends). Still, rate of increase in consumer confidence indicator is out-pacing increases in retail sales on 3mo MA basis.

3mo MA for Value of core retail sales is up 0.95% compared to previous 3mo period and Volume series 3mo average is up 1.78%. Both series posted declines in 3mo average in March.

As the result of April changes, Value of core retail sales was up 3.16% y/y and Volume of retail sales was up 6.67% y/y - both strong indicators of a positive trend.

Couple of points of continued concern:

  • y/y increase in Value (+3.16% in April 2015) is slower than y/y growth rates posted in the series in April 2014 (4.4%) with Volume growth rates basically identical.
  • Compared to peak, 3mo average through April 2015 is down 40.6% for Value of sales and down 34.8% in Volume of sales, so there is still much to be done to restore the sector to full health.

On the net, however, the figures are healthy and strong, and very encouraging.

30/5/15: The New Financial Regulation: Part 10: Legal v Operational Logistics

My post for @learnsignal blog on EU financial regulation covering operational logistics is now available:

Friday, May 29, 2015

29/5/15: Margin Debt: Another Zombie Hits Town Hall...

So you've seen this evidence of how global real economic debt is now greater than it was before the crisis... and you have by now learned this on how debt levels and debt growth rates are distributed globally. And now, a new instalment in the Debt Zombies Portraits Gallery:


Now, do keep in mind that just this week, ECB ostriches have declared that things are fine in the European financial system because 'leverage is low'.

Yes, Irish Financial Regulator of the Celtic Garfield Era, Pat Neary, would have made the Frankfurt stars-studded team with his knowledge...

Note: hare's China's rising contenders for the above distinction: h/t to @TofGovaerts

29/5/15: When the Chickens Come Home to Roost: EU 'Constitution'

Daniel Hannan on the 10th anniversary of French and Dutch referenda on EU Constitution:

This is a must-read, and it is short, but the best summary of the entire piece is the following passage: "As Jean-Claude Juncker put it the other day, “There can be no democratic choice against the European Treaties”. Which puts the coming British renegotiation into perspective. Whatever deal is notionally agreed, as long as the legal supremacy of the EU institutions remains, it will be interpreted by people whose commitment to deeper integration overrides whatever belief they have in freedom, democracy or the rule of law."

On the money, there, @DanHannanMEP ! 

29/5/15: Large Fiscal Policy Multipliers & Private Debt Overhang

"Private Debt Overhang and the Government Spending Multiplier: Evidence for the United States" by Marco Bernardini, Gert Peersman (March 31, 2015, CESifo Working Paper Series No. 5284) uses "state-dependent local projection methods and historical U.S. data" to show  that government spending multipliers are "considerably larger in periods of private debt overhang."

In low-debt state: there is a "significant crowding-out of personal consumption and investment" in response to fiscal spending stimulus, "resulting in multipliers that are significantly below one."

However, "conversely, in periods of private debt overhang, there is a strong crowding-in effect, while multipliers are much larger than one. In high-debt states, more (less) government purchases also reduce (increase) the government debt-to-GDP ratio." 

These results are robust to controls for the business cycle, government debt overhang and the zero lower bound on the nominal interest rate. Which lead authors to a conclusion that fiscal "spending multipliers were likely much larger than average during the Great Recession."

As a note of caution, the authors posit that "it is not clear what the exact reason is for the different behavior of the private sector in periods of debt overhang. Can it be explained by borrowing constraints or rule-of-thumb behavior of households?.. Is it driven by a much higher marginal propensity to consume of highly-leveraged households?.. Or are there alternative explanations?"

To add to this list, one needs to consider the sovereign capacity to actually undertake fiscal stimulus. In the current crisis, for many states (unlike the U.S.) room for stimulus is severely curtailed by already present public debt overhang. In addition, one has to be careful translating the U.S. results to other, smaller and more open economies, such as euro area states. Finally, the findings need confirmation in a setting with fixed exchange rates.

"Another relevant extension of our analysis is the question whether also tax multipliers are different across private debt states. Our findings also have some relevant policy implications. In particular, the state of private debt seems to be an important indicator for the consequences of fiscal consolidations and stimulus programs. In periods of debt overhang and deleveraging in the private sector, it is probably not a good idea to conduct austerity policies, because it could have dramatic effects on economic activity. In contrast, deficit-financed government purchases policies could significantly stimulate and stabilize the economy in periods when households are deleveraging and depressing aggregate demand. On the other hand, once private debt levels are again below trend, the timing is perfect to conduct fiscal consolidations, having little consequences for economic activity."

Fascinatingly, this evidence lends credence to the latest theory of financial imbalances, known as the "excess financial elasticity" theory, formulated by Borio: on which I have just submitted an article to a U.S. publication (stay tuned for the unedited version to be posted here later next month). I covered Borio's research recently here:

29/5/15: That U.S. Engine of Growth Is Going 'Old Fiat' Way

Folks, what on earth is going on in the U.S. economy? Almost 2 months ago I warned that the U.S. is heading for a growth hick-up ( Now, the data is pouring in.

1Q 2015 GDP growth came in at a revised -0.7%. And that's ugly. So ugly, White House had to issue a statement, basically saying 'damn foreigners stopped buying our stuff and weather was cold' for an excuse: Rest is fine, apparently, though U.S. consumers seem to be indifferent to Obamanomics charms and U.S. investors (in real stuff, not financial markets) are indifferent to the charms of ZIRP.

For the gas, the WH added that "The President is committed to further strengthening these positive trends by opening our exports to new markets with new high-standards free trade agreements that create opportunities for the middle class, expanding investments in infrastructure, and ensuring the sequester does not return in the next fiscal year as outlined in thePresident’s FY2016 Budget." Now, be fearful…

Source: @M_McDonough 

Truth is, this is the third at- or sub-zero quarterly reading in GDP growth over the current 'expansion cycle' - which is bad. Bad enough not to have happened since the 1950s and bad enough to push down 4 out of 6 key national accounts lines:

Source: @zerohedge

Good news, 1Q 2014 was even worse than 1Q 2015. Bad news is, 1Q 2015 weakness was followed by April-May mixed bag data.

Un-phased by the White House exhortations, the Institute for Supply Management-Chicago Inc.’s business barometer fell to 46.2 in May from 52.3 in April. Readings lower than 50 indicate contraction. Per Bloomberg: "The median forecast of 45 economists surveyed by Bloomberg called for the measure to rise to 53, with estimates ranging from 51 to 55. The report showed factory employment contracted this month."

Yep, that is a swing of massive 6.8 points on expectations.

Source: @ReutersJamie

Worse news, for the overheating markets that is, "Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $125.5 billion in the first quarter, compared with a decrease of $30.4 billion in the fourth. …Profits of domestic non-financial corporations decreased $100.4 billion, in contrast to an increase of $18.1 billion. The rest-of-the-world component of profits decreased $22.4 billion, compared with a decrease of $36.1 billion."

Source: @ReutersJamie

Gazing into the future, the doom is getting doomed.

Source: @GallupNews

The above is via The economic confidence index fell two points from the previous weekly score, Economic outlook component at -11, and Current conditions score of -6 higher than outlook. The index has been in negative territory for all but one of the past 14 weekly readings.

Source: @GallupNews 

Yes, the engine of global growth is spewing oil and smoke like the old 'Fix it up, Tony' Fiat... and the White House is just not having any new ideas on sorting it out.

Bad weather… Bad Double-Bad foreigners… Bad Triple-Bad Consumers/Savers…

Thursday, May 28, 2015

28/5/15: ECB does a "Funny Me, Tearful You" Macro Risks Assessment

You have to love ECB analysts… if not for the depth of their insights, then for their humour.

Here are two charts, posted back to back in the latest (May edition) of the ECB's Financial Stability Review.

The above says what it says: risks are low in financial markets, in fiscal policy and in the banks.

Now, Chart 2:

The above says risk-taking is high in financial markets, sovereign debt markets (fiscal side), and the economy's real investment is weak (to which the banks are exposed just as much as to the Government bonds).

So which one is the true chart? Or is there even a concept of coherent analysis in any of this?

"The sharp increases in asset prices relative to the fundamentals have pushed valuations up, particularly in the fixed income market, but increasingly also in markets for other financial assets. Nonetheless, a broad-based stretch in euro area asset valuations is not evident. Moreover, the recent increases in asset prices have been accompanied neither by growing leverage in the banking sector nor by rapid private sector credit expansion."

Now we have it: things are fine, because there is little leverage. And they are even extra-specially-fine in fixed income (aka bonds) markets. Because there is little leverage. The ECB won't tell us that this 'fine' is down to ECB itself buying bonds, pushing valuations of debt up, and incentivising risk-taking in the financial markets by its own policies. Oh no… all is just down to relatively sound fundamentals. But, guess what: even though things are fine, there is a "rise in financial risk-taking". But bad news is that there is no corresponding rise in "economic risk-taking".

"Financial system vulnerabilities continue to stem not only from the financial markets, but also from financial institutions, spanning banks, insurers and – increasingly – the shadow banking sector." But, wait… there is little leverage in the system. So how can financial institutions be responsible for the rise in financial system 'vulnerabilities' (which are at any rate negligible, based on Chart 1 'evidence'). Ah, of course they can, because the whole pyramid of debt valuations in the secondary markets is down to the ECB-own QE buying up of sovereign debt and years of Central Banks' printing of easy money for the financial institutions, including via LTROs and TLTROs and the rest of the ECB's alphabet soup of 'measures'.

Stay tuned for more analysis of the ECB's latest 'stability' missive...

Wednesday, May 27, 2015

27/5/15: No ELA Increase amidst Deposits Flight: Greece

Three quick updates to my earlier post on things getting crunch-time(y) in Greece:

Firstly, the U.S. is stepping up its pressure on the European 'leadership' to take Greek risks more seriously: U.S. Treasury Secretary Jack Lew : "My concern is not the good will of the parties -- I don't think anyone wants this to blow up -- but ... a miscalculation could lead to a crisis that would be potentially very damaging". Talks are going to be toasty at G7 summit and this time around not down to Vladimir Putin.

Secondly, as I said in the earlier post, we have EUR3 billion cushion left when it comes to Greek banks ELA and increases in ELA approvals by the ECB are getting smaller by week. So here's the bad news: "Greek banks have seen deposit outflows accelerate over the past week as fears rise that the euro zone country will default on debt, two banking sources said on Wednesday." This is via Reuters. Remember, last hike in ELA was EUR200 million. And today, ECB decided not to increase ELA limit - a sign that Frankfurt is getting edgy. Guess what: "The past week in May was more challenging compared to the previous ones in the month, with daily outflows of 200 to 300 million euros in the last few days," a senior Greek banker said. This might be mild after outflows of EUR12.5 billion in January and EUR7.57 billion in February, but the latest increase in outflows is coming on foot of already weak deposits and signals renewed increase in pressures. Outflows are up in April to ca EUR5 billion from EUR1.91 billion in March.

Thirdly, we now have rumours of real capital controls coming in: Athens introduced a 'small charge' on ATM withdrawals. Despite this glaringly 'capital control'-like measure, Athens subsequently said it has ruled out capital controls. But, two days ago, Greek opposition lawmaker Dora Bakoyianni said "the country could be forced into capital controls to stem deposit outflows if it did not reach a deal for aid with the government this week". And on May 20, Moody's issued a statement saying that capital controls in Greece are now "highly likely".

and CDS markets are not impressed, again...

Though the bond markets are actually pricing in continued ECB 'cooperation' - across all of the euro area peripherals:

The Euro Saga continues…

27/5/15: CCTB is Baaaack...

It's Happy Hour again in Brussels, as the EU is reviving its plans for tax harmonisation across the continent.

At stake, the EU proposal for CCCTB, or Common Consolidated Corporate Tax Base, which would set the first precedent for tax harmonisation, outside Vat. As reported in the media, the plans appears to have support from the EU Commission (predictably), France (predictably) and Germany 9again, predictably). UK (predictably) is opposed:

Today, the EU officials are discussing how to tackle tax avoidance and create a system of “fair, transparent and growth friendly” corporation taxation with discussion expected to “feed into” an announcement on corporation tax in June.

Key article on this is here:

27/5/15: Crunch Time Timeline for Greece

Crunch time continues for Greece. Here is the schedule of the upcoming 'pressure points':

Source: Citi

And an update to the Greek ELA increases: +EUR200 million on May 21st, to EUR80.2 billion with remaining available cushion of just EUR3 billion. Note: earlier ELA extensions are summarised here:

27/5/15: Creative Destruction vs Subjective Individual Wellbeing

There is one persistent question in economics relating to the issues of aggregate income attained in the economies: the connection between that income and happiness. In other words, does higher per capita GDP or GDP growth increase happiness?

A new paper by Aghion, Philippe, Akcigit, Ufuk, Deaton, Angus and Roulet, Alexandra M., titled "Creative Destruction and Subjective Wellbeing" (April 2015, NBER Working Paper No. w21069 looks at this matter. The authors "…analyze the relationship between turnover-driven growth and subjective wellbeing, using cross-sectional MSA level US data. We find that the effect of creative destruction on wellbeing is

  1. unambiguously positive if we control for MSA-level unemployment, less so if we do not; 
  2. more positive on future wellbeing than on current well-being; (
  3. more positive in MSAs with faster growing industries or with industries that are less prone to outsourcing; 
  4. more positive in MSAs within states with more generous unemployment insurance policies."

A bit more colour.

Existent literature

As noted by the authors, "…the existing empirical literature on happiness and income looks at how various measures of subjective wellbeing relate to income or income growth, but without going into further details of what drives the growth process. In his 1974 seminal work, Richard Easterlin provides evidence to the effect that, within a given country, happiness is positively correlated with income across individuals but this correlation no
longer holds within a given country over time."

This is known as the Easterlin paradox and there are several strands of explanations advanced: "…the idea that, at least past a certain income threshold, additional income enters life satisfaction only in a relative way… Recent work has found little evidence of thresholds and a good deal of evidence linking higher incomes to higher life satisfaction, both across countries and over time. Thus in his cross-country analysis of the Gallup World Poll, Deaton (2008) finds a relationship between log of per capita GDP and life satisfaction which is positive and close to linear, i.e. with a similar slope for poor and rich countries, and if anything steeper for rich countries. Stevenson and Wolfers (2013) provide both cross-country and within-country evidence of a log-linear relationship between per capita GDP and wellbeing and they also fail to find a critical "satiation" income threshold.3 Yet these issues remain far from settled…"

One common problem with all of the literature on links between income and wellbeing is that "…none of these contributions looks into the determinants of growth and at how these determinants affect wellbeing. In this paper, we provide a first attempt at filling this gap."


To address this problem, the authors "look at how an important engine of growth, namely Schumpeterian creative destruction with its resulting flow of entry and exit of firms and jobs, affects subjective wellbeing differently for different types of individuals and in different types of labor markets."

The authors "develop a simple Schumpeterian model of growth and unemployment to …generate predictions on the potential effects of turnover on life satisfaction. In this model growth results from quality-improving innovations. Each time a new innovator enters a sector, the worker currently employed in that sector loses her job and the firm posts a new vacancy. Production in the sector resumes with the new technology only when the firm has found a new suitable worker. …In the model a higher rate of turnover has both direct and indirect effects on life satisfaction. The direct effects are that, everything else equal, more turnover translates into both, a higher probability of becoming unemployed for the employed which reduces life satisfaction, and a higher probability for the unemployed to find a new job, which increases life satisfaction. The indirect effect is that a higher rate of turnover implies a higher growth externality and therefore a higher net present value of future earnings: this enhances life satisfaction."

Four theoretical model predictions are:

  1. "Overall, a first prediction of the model is that a higher turnover rate increases wellbeing more when controlling for aggregate unemployment, than when not controlling for aggregate unemployment."
  2. "…higher turnover increases wellbeing more, the more turnover is associated with growth-enhancing activities. 
  3. "…higher turnover increases wellbeing more for more forward-looking individuals." 
  4. "…higher turnover increases wellbeing more, the more generous are unemployment benefits".


The authors test theoretical predictions based on actual US data.

"Our main finding is that the effect of the turnover rate on wellbeing is unambiguously positive when we control for unemployment. This result is …remarkably robust. In particular it holds: (i) whether looking at wellbeing at MSA-level or at individual level; (ii) whether looking at the life satisfaction measure from the BRFSS or at the …Gallup survey; (iii) whether using the BDS or the LEHD data to construct our proxy for creative destruction."

"We also find that the positive effect of turnover is stronger on anticipated wellbeing than on current wellbeing. On the other hand, creative destruction increases individuals' worry - which reflects the fact that more creative destruction is associated with higher perceived risk by individuals."

"…When interacting creative destruction with MSA-level industry characteristics; we find that the positive effect of turnover on wellbeing is stronger in MSAs with above median productivity growth or with below median outsourcing trends."

"Finally, we find that higher turnover increases wellbeing more in states with unemployment
insurance policies that are more generous than the median."

Monday, May 25, 2015

25/5/15: Immigration and Entrepreneurship: Major Unknowns

A recent CESIfo study looked at the role of immigrants in driving entrepreneurship.

Per authors: "Immigrants are widely perceived as being highly entrepreneurial and important for economic growth and innovation. This is reflected in immigration policies and many developed countries have created special visas and entry requirements in an attempt to attract immigrant entrepreneurs. Not surprisingly, a large body of research on immigrant entrepreneurship has developed over the years."

Couple of interesting statistical summaries:

 Striking feature of the above data is low level of entrepreneurship within Indian and Philippines diasporas.

Key conclusions are: "Overall, much of the existing research points towards positive net contributions by immigrant entrepreneurs. The emerging literature on these contributions as measured by innovations represents the most convincing evidence so far."

Interestingly, distribution of entrepreneurship across educational categories, as exemplified above, is rather uniform, although this does not adjust for quality of entrepreneurship.

Caveats are: "First, there is little evidence in the literature on how much immigrant-owned businesses contribute to job growth. Although data exists on employment among immigrant-owned businesses no data are available showing the dynamics of employment among these firms."

Second, "...immigrant business owners are more likely to export, but we know little about how much they export in total dollars and how many jobs are created by these expanded markets for selling goods and services."

Lastly, there is indeterminacy as to the "....the contribution of immigrant businesses to diversity. Although the contribution of immigrant firms to diverse restaurants, merchandise and services is apparent in any visit to a major U.S. city, we know less about the contribution to diversity in manufacturing and design of innovative products."

Full paper can be read here: Fairlie, Robert W. and Lofstrom, Magnus, Immigration and Entrepreneurship (April 23, 2015). CESifo Working Paper Series No. 5298:

Sunday, May 24, 2015

24/5/15: Markets, Patterns and Catalysts: Irish Growth Story

Some of my slides from last week's presentation at the All-Ireland Business Summit, covering three key themes:

The Current State of the Irish Economy "The Market Section"

The New Normal of rising global risk "The Pattern"

A Policy Path to Growth "The Catalysts"

24/5/2015: Russian Economy: Weaker April Signals Renewed Risks

When I remarked recently on some less negative than expected developments in Russian economy over Q1 2015, I noted that these were fragile signs of potential stabilisation and that the risks remain to the downside. April industrial production appears to signal the same. April industrial production numbers are down 4.5% y/y and manufacturing is down 7% - the rates of decline that are significantly sharper than recovered over 1Q.

Remember that Russian GDP fell 1.9% in 1Q 2015 y/y, based on preliminary estimates - a decline that is shallower than what was expected by the analysts. Overall output (GDP at factor cost) fell slightly more sharply - by 2.3% over the same time, while domestic demand (Consumption + Investment) fell at just under 7%. The gap between output and domestic demand declines can be in part explained by imports substitution going on across a number of sectors, such as food, agriculture, industry and manufacturing, plus improved trade volumes also driven by ruble devaluation.

The decline in industrial production and manufacturing signals a feed through from collapsing investment to production sectors, as well as continued weakness in consumption and strengthening of the ruble. More significantly, ruble firming up is not helping imports substitution-driven demand. CBR has now returned to buying forex and selling ruble in order to, both, increase its reserves and also sustain lower ruble. Higher ruble valuations hurt fiscal balance and at the same time inducing weaker external balances. As the result, CBR is now regularly purchasing USD100-200 million daily and is raising cost on banks' access to repo facilities.

All in - just another reminder that the Russian economy is not out of the woods yet. For all the positive developments in recent months, the situation remains fragile and structural drivers for growth are still lacking, so any recovery, if sustained, will have to come from either external demand factors (oil prices, commodities prices, etc) and/or imports substitution effect supported by lower CBR rates.

Friday, May 22, 2015

22/5/15: Expresso: E agora, Cameron?

Portuguese Expresso on UK elections impact on the economy, quoting myself on the subject:

Click on the image to enlarge

22/5/15: You are What (and Where) You Eat

For a half-decent Italian, food is a part of defining both the value and the meaning of existence. For other cultures, food is at the very least definitive of our connection to culture, family, history, land and so on.

Gabriela Farfan, Maria Eugenia Genoni and Renos Vakis of the World Bank looked the the consumption of food away from home across the developing world. And instead of positing aesthetic or value questions relating to food, they look at the impact that ready-to-eat food purchases have on poverty statistics in one developing country for which such data is available: Peru.

Per authors, "…Peru is a relevant context, with the average Peruvian household spending 28 percent of their food budget on food away from home by 2010."

So to the findings, then:

  1. "…accounting for food away from home results in extreme poverty rates that are 18 percent higher and moderate poverty rates that are 16 percent lower. These results are also consistent, in fact more pronounced, with poverty gap and severity measures." Why? Because factoring in food consumed away from home boosts overall consumption of those above extreme poverty levels, making extreme poverty look worse in relative terms. However, for the poor who are not extremely poor, adding food away from home recognises more accurately their relative well-being.
  2. "…consumption inequality measured by the Gini coefficient decreases by 1.3 points when food away from home is included, a significant reduction." Which is to say, systemic inequality falls. Why? Because the improved scores for middle, low-middle and working poor classes more than offset worsening poverty measurements for the extremely poor.
  3. "Finally, inclusion of food away from home results in a reclassification of households from poor to non-poor status and vice versa: 20 percent of the poor are different when the analysis includes consumption of food away from home. 

Full paper: Farfan, Gabriela and Genoni, Maria Eugenia and Vakis, Renos, "You are What (and Where) You Eat: Capturing Food Away from Home in Welfare Measures" (May 5, 2015, World Bank Policy Research Working Paper No. 7257:

Thursday, May 21, 2015

21/5/15: IMF to Russia: Do What You've Been Doing, Because We Say So

So the IMF released the summary statement on its Article IV 'consultations' for Russia. The stuff reads like something generated by a pre-historic algo with insight of a first order non-stochastic linear equation.

"The Russian economy is in a recession due to lower oil prices and sanctions. In addition, long-term growth remains low given structural bottlenecks." You have to laugh. IMF knows that sanctions are tertiary to Russian recession. Oil prices are primary and structural slowdown that started in late 2012 is secondary.

"The authorities’ macroeconomic policies have helped stabilize the situation, but there remain significant uncertainties regarding oil prices and geopolitical risks. Given these risks, the macroeconomic policy stance must be prudent." In IMF-speak this means that the Russian authorities did an excellent job so far managing the crisis, but they have done it without using IMF 'advice' or 'tool kit'. Which means that, to IMF, they haven't done it as well as the IMF could have done it. Obviously. Really.

So the bad Russkies better deploy the fabled IMF's 'structural reforms' pack:

  • Stay low budget deficits (on which they really have no choice and are so far planning to do the same without the IMF 'advice'); 
  • Lower central bank rates (which they are already doing without the IMF 'advice'), 
  • Provide "limited stimulus" from the fiscal policy side (which, again, they are doing as much as they can). On Central Bank rates: to remind you, on 30 April, the CBR cut its key rate by 150bp to 12.5%. Without IMF's 'help'. I suspect the CBR will move rates below 10% by the end of 2015, unless there is a major reversal in ruble position, or if inflation reverses its (for now very fragile) moderating dynamics (inflation declined from16.9% y/y in March to 16.4% in April)... and… hold it… 
  • "Finally, re-invigorating the structural reform agenda and avoiding de-integration from the world economy remain crucial to lift potential growth." Ah, there, IMF said it… 'structural reforms'. 

In other words, IMF is clamouring for some credit in the above. Ex-post the start of Russian adjustments, IMF recommends exactly the same adjustments, so when anyone asks what did IMF do when Russia was clawing its way out of the crisis, the IMF can say: we recommended them.

Of course, another bit that fills one with wonder in the IMF statement is how can Russia 'avoid de-integration from the world economy' any differently than it has been doing to-date?

To recap last 12 months or even last 12 years: Russia initiated a huge whirlwind of 'global integration' projects and activities in Asia Pacific, the Central Asia, India and Latin America. May be these are not quite 'global' enough for the IMF? Or should Russia somehow magic up 're-integration' with the EU? Actually it is trying to do so on a bilateral basis (proposing trade sanctions relaxation with a handful of countries) and tried - unsuccessfully so far - with the EU itself. Did Russia 'de-integrate' itself out of South Stream? Did Russia de-integrate itself from joint energy projects in the Arctic? Did Russia 'de-integrate' itself from the debt and investment markets in Europe? Nope, not them - that was the EU de-integrating Russia. But Russia did continue to de-de-integrate itself in nuclear energy sector, for example, in Hungary and Finland and Turkey and elsewhere...

IMF's generalities aside, the Fund updates some of its point estimates for the Russian economy.

A month ago in its April World Economic Outlook update, IMF forecast Russian economy to shrink 3.83% y/y in 2015 and 1.096% in 2016. Now, one month later, the forecast is for the economy to shrink 3.4% in 2015 (a 0.4 percentage points improvement in one month) and post a "mild recovery" (as in positive growth) in 2016. The Fund 2015-2020 projection in April was for an average rate of growth of 0.096% and 2016-2020 average of 0.9%. This time around, the Fund is expecting a medium-term growth to be 1.5% per annum. Seems like at least someone in the Fund is starting to look at the real dynamics in the economy.

Here's more of what the Fund does get right: "Persistently low oil prices or an increase in geopolitical tensions could further weaken the economic outlook... However, in the near-term, sizeable buffers, including high international reserves, low public debt, and a positive net international investment position should help safeguard external sustainability." Yes, the risks are there. But, the idea that Russia is just going to run out of reserves by the end of this year - often repeated by numerous analysts, including some who should know better - is bonkers, unless something really massively negative happens. Which may happen. Or may not. IMF is of little help on this point estimate.

One interesting bit: "The re-pricing of the FX liquidity facilities was adequate. The central bank could consider limiting further the FX allotments to ensure that the facilities remain sufficient for emergency purposes. The announced program of FX purchases to build precautionary buffers is welcome."

Did you hear that? Yes, Russia is again building up its forex reserves. Not the stuff you normally read in the Western press. Things are short-term, for now, but Russian FX reserves bottomed out in the week of April 17th at USD350.5 billion. Last week, they were at USD362.3 billion. Again, things might change and these increases can be reversed, but when was the last time that you read in the mainstream media that the CBR is now buying dollars and euros rather than selling them?

Russia will need higher reserves. Its economy is being held back by the severe impairment to its companies access to capital markets - reaching well beyond the intended targets of the sanctions. The West, which imposed these sanctions under the explicit stipulation that they were not supposed to hurt ordinary businesses and households, is doing absolutely nothing to rectify the problem.

Meanwhile, gross fixed investment continues contracting: in March down for the 15th consecutive month at -5.3% y/y. Net capital inflows in the non-banking sector totalled USD18 billion in 1Q 2015, second weakest in 12 months period, while total net capital inflows were USD32.6 billion - second highest year-to-date. The IMF is forecasting Russian aggregate investment to drop from 21.6% of GDP in 2013 and 19.9% of GDP in 2014 to 17.6% in 2015, before recovering slightly to 17.9% in 2016. This clearly puts strong emphasis on the need to support investment activity in the economy.

The IMF does note the serious drag on medium term growth exerted by the structural weaknesses in the economy. In line with what many, including myself, have argued before, the IMF puts forward a set of very general 'directional' reforms needed:

  • "Less regulation and a reduction of the government’s role in the economy remain crucial to foster efficiency, confidence and investment". It worth noting that the Fund does suggest more and better regulation in the banking sector.
  • "…improving protection of property rights" - a perennial problem that can only be resolved over the long run
  • "…enhancing customs administration and reducing trade barriers" - a problem that is unlikely to be sorted because the Russian Government is pursuing medium-term growth strategy based on imports substitution - a strategy that, if executed correctly (a big 'if') can be quite productive
  • "…empowering the Federal Antimonopoly Service (FAS) to eliminate entry barriers to several sectors/markets" - really a pipe dream at this stage, unfortunately.
  • "…to improve labor force dynamics in the face of negative demographic trends, pension reform should be a priority" - which is something that was well underway prior to 2014 crisis, but got derailed by the extreme demand for dollar liquidity in the system triggered by the 2014 crisis.
Can't wait to see the 70-pages-plus full report. At least it promises colourful charts, if not an incisive insight... 

21/5/15: Global M&A and Economic Fundamentals

Here are some select slides from my presentation at this week's Alltech's Rebelation conference in Lexington, KY.

21/5/2105: The Darker Side of Transparency?

World Bank paper published earlier this month and titled "The Dark Side of Disclosure: Evidence of Government Expropriation from Worldwide Firms" raises some very interesting questions about the relationship between corporate transparency and government incentives.

The paper by Liu, Tingting and Ullah, Barkat and Wei, Zuobao and Xu, Lixin Colin (May 4, 2015, World Bank Policy Research Working Paper No. 7254:  looks at "the effects of voluntary accounting information disclosure through auditing on firm access to finance, exposure to corruption, and sales growth." The authors use data for more than 70,000 firms in 121 countries.

The authors find that "…disclosure can be a double-edged sword" with overall effect depending on institutional capital present in a specific country.

"On the one hand, audited firms exhibit a slightly lower level of financial constraints than unaudited firms." This is in line with traditional theory whereby voluntary transparency increases information quality about the firm, but also signals self-selection of better-governed and better-performing firms to the markets.

"On the other hand, audited firms face a significantly higher level of corruption obstacles." Which is really surprising, until you understand the underlying logic.

"The net effects of voluntary information disclosure on firm growth are negative, which can largely be explained by the fact that most of the countries in the sample are developing countries where institutions are weak. The beneficial effect of disclosure increases as a country's property rights protection improves. The qualitative results are robust to considerations of the endogeneity of auditing and to alternative measures of corruption and financial constraints. The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation where institutions are weak."

In other words, in more institutionally-advanced economies, voluntary disclosure is a positive factor for the firms, even she we control for self-selection bias. But in countries where institutional capital is weak, the effect is the opposite: in presence of corrupt and accountable governments, disclosing corporate information to the markets can trigger greater effort by the government to expropriate from the reporting firm.

There are serious ramifications for policy and development economics from this study. Traditionally, we tend to push more transparency and more disclosure for the firms operating in institutionally-weak emerging markets. In doing so, we may be aiding the predatory governments who, thus, gain greater ability to corruptly capture firm assets and/or profits over and above legally required taxation. This, in turn, strengthens the corrupt state institutions and government, instead of pushing them toward adopting more rule of law-styled reforms.

Beyond this, the study results suggest that at least in some setting, less transparency and greater ability for the corporates to operate within private information markets can actually be a good thing.

What is interesting is that in public domain, very little attention is paid to this issue. The results of this study, however, are broadly supportive of Acemoglu and Johnson ("Unbundling Institutions", Journal of Political Economy 113(5), 949–92005, 2005) work on the overwhelming importance of constraining government expropriation in facilitating economic development, ex ante other reforms.

On the other hand, transparency is value-additive in the advanced economies setting, where institutions are sufficiently high quality to preempt (or at the very least, diffuse significantly) the emergence of actionable incentives for state expropriation and information-led corruption.

Wednesday, May 20, 2015

20/5/15: Effects of commuting times on couples’ labour supply

"You’ve come a long way, baby. Effects of commuting times on couples’ labour supply" by Francesca Carta and Marta De Philippis, (Banca d'Italia, number 1003 - March 2015: [comments within quotes are mine]"…explores the effects of husbands' commuting time on their wives' labour market participation and on family time allocation. We develop a unitary family model of labour supply, which includes commuting times and household production. In a pure leisure model [model where there is a binary choice: work or leisure; as opposed to work, leisure or work at home] longer commuting time for husbands increases their wives' labour market participation and reduces their own working hours. However, a model that includes household production might determine the exact opposite result."

So far so good for the theory: the paper shows that when the non-principal earner is faced with a choice of either enjoying leisure only or working only, absent household production, the second earner will opt, on average, for work and the principal earner will take less effort in their own work. However, once household production is an option or a requirement (as in the case of, say, a family with children or other dependents), then the secondary earner will more likely opt for staying out of the workforce and devoting their effort to increased household production, while the primary earner will apply more effort in their own work.

That's in theory. But empirical application is a bit less straight forward:  "We then examine the sign of these effects by using data from the German Socio-Economic Panel from 1997 to 2010. Employer-induced changes in home to work distances allow us to deal with endogeneity of commuting times. We find that a 1% increase in a husband's commuting distance reduces his wife's probability of participating in the labour force by 1.7 percentage points, 2% over the mean. Moreover, it increases his working hours by 0.2 hours per week. The average effect masks substantial heterogeneity: lower participation rates are concentrated in couples with children and where the husband has higher levels of education."

Monday, May 18, 2015

17/5/15: ‘High’ Achievers? Cannabis and Academic Performance

For the libertarians around, sorry - one deflationary piece of research… "‘High’ Achievers? Cannabis Access and Academic Performance (CESifo Working Paper No. 5: looks at "…how legal cannabis access affects student performance."

To deal with a  bunch of pesky econometric issues, the study looks at data generated by "…an exceptional policy introduced in the city of Maastricht which discriminated legal access based on individuals’ nationality." So the authors used a difference-in-difference approach on a panel data set of over 54,000 course grades of local students enrolled at Maastricht University before and during the partial cannabis prohibition.

"We find that the academic performance of students who are no longer legally permitted to buy cannabis increases substantially. Grade improvements are driven by younger students, and the effects are stronger for women and low performers. In line with how THC consumption affects cognitive functioning, we find that performance gains are larger for courses that require more numerical / mathematical skills. We investigate the underlying channels using students’ course evaluations and present suggestive evidence that performance gains are driven by improved understanding of material rather than changes in students’ study effort."

Guess that explains why he wasn't any good in Topology either...

17/5/15: Forbes Opinion Piece on Ukrainian Crisis

An interesting, unorthodox - for Western media - perspective on the Ukrainian crisis and Russian longer term problem:

Note: as usual, my reposting of the material does not qualify as an endorsement of the views presented.

Sunday, May 17, 2015

17/5/2015: BlackRock Institute Survey: N. America & W. Europe, April

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 48% of 56 economists expecting the world economy will get stronger over the next year, compared to 52% from previous report. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy. At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or stay the same except Canada and Denmark."

Country results 6 months forward compared to current conditions assessment:

Note: (0,0) Corner point denotes Austria, Denmark, Norway, Spain, Sweden and the Netherlands

Country results 12 months forward:

"Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Finland, Greece and Italy to be in a recessionary state, with the even split between contraction or recession for Portugal. Over the next 6 months, the consensus shifts toward expansion for Italy. Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months except Canada where the consensus is split between mid-cycle or late-cycle states."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/5/15: Ukraine's GDP down 17.6% in 1Q

Some pretty bad numbers out of Ukraine this week. 

Remember that 1Q 2015 Russian GDP shrunk 1.9% y/y in real terms and the forecasts for 2015 full year decline range between 3% (official forecast) to north of 7% (some Western banks analysts), with the consensus at around 3.8-4.0%.

Now, Ukraine's economy is in the IMF programme and the Fund latest forecast for 2015 full year growth was -5.548%. That is the base on which the so-called debt sustainability analysis is based. Even the World Bank - which forecast -7.5% real GDP decline for 2015 - was contrarian to the IMF optimism.

However, this week official data shows real GDP decline of 17.6% in 1Q 2015 y/y and down 6.5% on 4Q 2014. Exports to the EU are down 1/3rd, exports to Russia down 61% and industrial output is down more than 20%. With inflation at around 60% y/y in April, retail sales are down 31% at the end of 1Q 2015 y/y. 

Good news is - it is likely that 2H 2015 will see some improvement in Ukrainian growth dynamics, just as the same is likely in Russia. But I fear that we are going to see a much sharper contraction for the full year overall, compared to the IMF forecasts. If that turns out to be the case, Ukraine can require restructuring of its IMF 'assistance' package, although much of that risk also hinges on the progress on haircuts negotiations with the private sector creditors. These negotiations have not been progressing too well, so far, but there may be a turnaround in the works. 

In short, Ukraine's 'debt sustainability' charade the IMF has put up is now firmly in crosshairs of two risks - the haircut slippage and economy collapse. And both risks are rising, not falling so far…