25/2/15: QNHS Q4 2014: Employment, Part-Time, Full-Time, & Underemployment

In the first three posts covering the QNHS results for Q4 2014, I discussed

• Labour Force Participation Rate (poor news showing decline in the already historically low participation) and Unemployment Rate (goods news with unemployment - absent seasonal adjustment falling to 9.9% and the rate of decline in unemployment on quarterly basis accelerating): http://trueeconomics.blogspot.ie/2015/02/25215-qnhs-q4-2014-labour-force.html
• The size of labour force (which is worrying and static at and around crisis trough) and broader measures of unemployment (at high enough levels to arrant concern, but declining rapidly, although inclusive of the state training programmes participants and emigration figures the declines are shallower than across the officially reported numbers), here: http://trueeconomics.blogspot.ie/2015/02/25215-qnhs-q4-2014-broader-measures-of.html
• Employment growth overall and by sectors was covered here: http://trueeconomics.blogspot.ie/2015/02/25215-qnhs-q4-2014-employment-growth-by.html. Employment grew by 29,100 over 12 months of 2014 and the rate of growth has accelerated between Q3 and Q4. Private non-agricultural employment is rising faster than total employment and the rate of employment growth here also accelerated in Q4 2014. High value-added sectors employment is also rising, at a rate faster than the overall employment is increasing.

Now, let's consider labour force breakdown by economic status.

Total number of working age adults residing in Ireland (age 15 and over) rose to 3,601,900 in Q4 2014 from 3,595,600 in Q3 2014, up 0.13% y/y (+4,500).

Of these, numbers of those at work rose to 1,877,900 in Q4 2013, up 1.56% y/y or 28,800. This is a key number as it reflects total creation of jobs in the economy. The rate of increases in the number of those at work was slower in Q4 2014 than in Q3 2014 (+1.7%). Compared to Q1 2011 (when the current Government took office), there number of those at work in Q4 2014 was up 4.27% or 76,900.

Number of those unemployed fell 13.05% y/y in Q4 2014 to 263,900 - a rate of y/y decline that is faster than 9.76 drop recorded in Q3 2014. Which is very good news. Overall, there were 39,600 fewer unemployed in Q4 2014 than in Q4 2013. Which is also a good number.

Now, between Q1 2011 and Q4 2014, 76,900 more adults went to work, but unemployment fell by 101,800, which shows that 24,900 adults have moved out of unemployment but did not go to work.

Number of students in Q4 2014 stood at 415,100 which is down 0.1% y/y (-400) and is up 3% (+12,100) on Q1 2011.

Number of those engaged on home duties stood at 476,300 in Q4 2014, up 0.55% y/y (+2,600). This increase stands contrasted by a 1.63% drop in Q3 2014 y/y. Since Q1 2011, the number of those engaged in home duties fell 10.17% (-53,900).

417,800 individuals of age 15 and over were officially in retirement in Q4 2014, up 2.93% (+11,900) y/y and up 19.95% (+69,500) on Q1 2011 - a massive increase clearly driven in part by early retirement schemes deployed in the public sector.

The mysterious category of 'Other' - those neither working, nor studying, nor unemployed, nor working on home duties, nor retired - was at 150,800, up 0.8% (+1,200) y/y and down 100 (-0.07%) on Q1 2011.

Recall that there were 1,877,900 individuals at work in Ireland in Q4 2014, a number that is 28,800 higher than in Q4 2013 and 76,900 higher than in Q1 2011. Of these, 1,474,300 individuals were in full time employment - an increase of 38,300 (+2.67%) y/y and a rise of 91,300 (+6.6%) since Q1 2011. Which shows clearly that new employment growth has been more significant in full-time category and there have been some transitions from part-time to full-time jobs. This is excellent news.

Meanwhile, number of those in part-time employment dropped to 383,600, down 2.34% (-9,200) y/y but up 3,100 (+0.81%) on Q1 2011.

Taking a closer look at part-time employment: In Q4 2014, number of part-time workers who reported themselves not underemployed was 276,000, up 5.59% y/y or 14,600. Compared to Q1 2011, there were 11,000 (+4.15%) more phis too is good news. And it confirms the suspicion that jobs quality has improved in recent quarters. Further indication of same is the number of those who are employed part time but do report themselves to be underemployed. This number stood at 107,600 in Q4 2014, down 18.17% y/y (-23,900) and down 7,900 (-6.84%) on Q1 2011.

Two charts to illustrate the aforementioned trends:

Overall conclusion: the quality of employment is improving, with more increases in full time employment and in part time not underemployed jobs. Rapid rate of growth in those in retirement (+65,900 on Q1 2011) relative to those at work (+76,900 over the same period) is worrying, however.

25/2/15: QNHS Q4 2014: Employment Growth by Sectors & Activity

In the first two posts covering the QNHS results for Q4 2014, I discussed

• Labour Force Participation Rate (poor news showing decline in the already historically low participation) and Unemployment Rate (goods news with unemployment - absent seasonal adjustment falling to 9.9% and the rate of decline in unemployment on quarterly basis accelerating): http://trueeconomics.blogspot.ie/2015/02/25215-qnhs-q4-2014-labour-force.html
• The size of labour force (which is worrying and static at and around crisis trough) and broader measures of unemployment (at high enough levels to arrant concern, but declining rapidly, although inclusive of the state training programmes participants and emigration figures the declines are shallower than across the officially reported numbers), here: http://trueeconomics.blogspot.ie/2015/02/25215-qnhs-q4-2014-broader-measures-of.html

Now, let's take a look at employment.

Total employment across all sectors stood at 1,938,900 in Q4 2014, up 1.52% y/y - a rate of increase that is slightly faster than 1.45% rise y/y recorded in Q3 2014. In level terms, employment rose 29,100 in 12 months through the end of 2014. Taking annual average, employment over 2014 rose 1.74% compared to 2013 average level of employment.

Despite this, Q2 2014 employment was still down 2.88% on crisis period peak employment although it is 6.24% above the crisis period trough. Relative to 2008 average, current employment levels are down 8.9%.

In simple term, to sum this result up, things are improving, but they are far from normal or where they should be.

Stripping out agriculture and public sector, private sector non-agricultural employment stood at 1,335,400 in Q4 2014, up 2.6% y/y, beating 1.32% rise in the same over 12 months through Q3 2014. In level terms, employment in non-agricultural private sectors rose 33,900, beating the headline total employment figures - a major good news.

Nonetheless, compared to 2008 average, private sector non-agricultural employment remains down 13.19%, while public sector (including sectors dominated by public employment) employment is up 4.8%.

As chart above shows, total employment is doing well, rising to the levels that are above the pre-crisis average and close to the difference between Q3 and Q4 2009. However, private non-agricultural employment is lagging, current at the levels well below pre-crisis average and between Q4 2009 - Q1 2010 levels.

Public and state-controlled sectors employment rose to 487,600 in Q4 2014, up 1.24% y/y (slower growth than in Q3 2014 when it expanded by 2.33% y/y), adding 6,100 jobs. Full year 2014 average employment levels here are 1.13% higher than full 2013 average. Q4 reading marks the highest level of non-private non-agricultural employment for the entire crisis period and is 4.8% above the 2008 average.

Meanwhile, agricultural employment shrunk 9.33% y/y in Q4 2014, having posted a decline of 0.81% y/y in Q3 2014. Loss of employment in the sector in 12 months through the end of Q4 2014 was 10,900, which was most likely partially responsible for gains of 13,100 in construction jobs. Still, over 12 months of 2014, agricultural employment levels were averaging 2.08% above the same for 2013.

Chart above shows basically flat employment in the state and state-controlled sectors, which, when contrasted with official public sector employment figures suggests shift of some public sector jobs from state to private contracting.

High value-added sectors also added jobs in Q4 2014, with 14,000 new jobs additions y/y a rate of employment growth of 2.03% y/y, virtually identical to 2.02% growth recorded in Q3 2014. As with state-controlled sectors employment, employment in high value-added sectors posted peak reading in Q4 2014 for the entire crisis period and stood 6.56% above 2008 average.

Table below provides summary of changes in employment across all sectors reported:

To summarise, we have healthy employment growth of 29,100 over 12 months of 2014 and the rate of growth has accelerated between Q3 and Q4. However, some sectors did post declines y/y in Q4 2014 and some posted weak performance to the upside. Good news is: private non-agricultural employment is rising faster than total employment and the rate of employment growth here accelerated in Q4 2014. High value-added sectors employment is also rising, at a rate faster than the overall employment is increasing.

25/2/15: QNHS Q4 2014: Broader Measures of Irish Unemployment

In the previous post (http://trueeconomics.blogspot.ie/2015/02/25215-qnhs-q4-2014-labour-force.html) I covered the QNHS results for Q4 2014 from the point of Labour Force Participation Rate (poor news showing decline in the already historically low participation) and Unemployment Rate (goods news with unemployment - absent seasonal adjustment falling to 9.9% and the rate of decline in unemployment on quarterly basis accelerating).

Here, let's consider actual size of the labour force and the broader measures of unemployment, including numbers on state training programmes (e.g. JobBridge) and factoring in estimates of inward and outward migration.

Few definitions are provided in the note below the post, so feel free to consult these.

Now, onto numbers.

Total size of Irish labour force at Q4 2014 stood at 2,152,500 down from 2,172,400 in Q3 2014 and down 10,600 on Q4 2013. This is not good. Compared to peak, current Labour Force is down 147,600 and compared to crisis period trough it is up 15,000. Over the last 12 months, irish labour force average levels were down 117,100 on pre-crisis average. All indicators point to a decline in labour force, consistent with the weak labour force participation rate reported in the previous post. All of this suggests that some share of improvements in unemployment performance is down to people dropping out of the labour force rather than the unemployed finding jobs.

As chart above highlights, remarkably, there has been basically no change in labour force numbers from H2 2010 through Q4 2014, something that is not consistent with our natural demographics, but is consistent with the story of outward emigration and dropping-out from the labour force by working age adults.

Now onto more pleasant news. All broader measures of unemployment have registered declines in Q4 2014 both y/y and q/q:

PLS1 indicator - basically a measure of unemployment fell 2.0 percentage points y/y in Q4 2014 to 10.5%, marking an acceleration in the rate of decline from 1.9% drop in Q3 2014.

PLS3 indicator, capturing those employed, unemployed, discouraged, plus all those not seeking a job for reasons other than being in Education & Training - has fallen from 15.1% in Q3 2014 to 13.3% - a drop of 2.7 percentage points y/y accelerated from 2.4 percentage points decline back in Q3 2014.

PLS4 - the broadest officially reported measure of unemployment that includes PLS3, and also underemployed - has fallen to 18.5 in Q4 2014, marking the first reading below 20% since Q1 2009. The measure is down 3.8 percentage points y/y and this marks a major acceleration in decline compared to 2.9 percentage points drop in Q3 2014.

Adding State Training Programmes participants to PLS$ to produce PLS4+STP puts the broader unemployment measure to 22.34%. This is the lowest reading since Q4 2009 and also marks acceleration in decline exactly matching that for PLS4.

Accounting (and this is rough estimation, so be warned) for net outward emigration, however, PLS4+STP measure of broad unemployment rises to 29.8% in Q4 2014. This marks a decline of 2.8 percentage points y/y and acceleration of decline from 2.0 percentage points drop in Q3 2014. However, the rates of decline in both Q3 and Q4 were shallower than for other measures, save PLS 1.

To summarise, labour force levels are worrying and static at and around crisis trough. Broader measures of unemployment show significant improvements, but the levels of unemployment, especially adjusted for state training programmes and potential adverse effects of net emigration are still high and more worrying than the headline unemployment measures suggest. While we do not know exactly, indications are - the data is consistent with at least some declines in unemployment officially recorded by the CSO coming not from jobs gains, but from emigration, state training programmes and exits from the labour force.

For example, compered to H1 2011, there were 23,373 more individuals that were participating in state training programmes who are not counted as unemployed. Furthermore, estimated net 94,800 individuals of working are have left Ireland between end of Q1 2011 through end of Q1 2014. They too are no longer counted in the labour force or in employment/unemployment statistics.


Note:

• PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers.
• PLS2 indicator is unemployed persons plus Potential Additional Labour Force as a percentage of the Labour Force plus Potential Additional Labour Force
• PLS3 indicator is PLS2 plus others who want a job, who are not available and not seeking for reasons other than being in education or training as a percentage of the Labour Force plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training.
• PLS4 indicator is PLS3 plus part-time underemployed persons as a percentage of the Labour Force plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training.
• PLS4+STP is the indicator combining PLS4 above and State Training Programmes Participants but excluding those of working age who emigrated (net of those who immigrated). 
• PLS4+STP+migration numbers reported below are reflective of PLS4+STP measure and add estimates of net emigration from Ireland based on latest available data extrapolated linearly over the year from May 2014 and adjusted for working age and labour force participation rate in the economy.

25/2/15: QNHS Q4 2014: Labour Force Participation Rate and Unemployment Rate

Some good news today from the QNHS report for Q4 2014 covering labour market conditions in the Irish economy. I will be detailing these throughout the day today, so stay tuned for more posts.

To start with, consider the labour force participation and unemployment rates - two key aggregate metrics for labour markets.

In Q4 2014, Labour Force Participation Rate in Ireland stood at 59.8%, down 0.3 percentage points from 60.1% in Q4 2013. By definition: The labour force participation rate is computed as an expression of the number of persons in the labour force as a percentage of the working age population. The labour force is the sum of the number of persons employed and of persons unemployed, but it excludes people in education and training, unless training is directly associated with employment. Currently, Labour Force Participation Rate is 125 basis points below the Q1 2000- Q4 2007 average of 61.23% and full 490 bps below the historical maximum. Which is not good news.

On seasonally-adjusted basis, Labour Force Participation Rate fell 0.1 percentage point quarter on quarter in Q4 2014 to 59.9%, matching the previous lowest point over the last 8 consecutive quarters.

Meanwhile, the official Unemployment Rate fell to 9.9 percent, the first sub-10 percent reading in 24 quarters. Which is great news. Year on year, unemployment rate is down from 11.7% in Q4 2013. Seasonally-adjusted unemployment rate, however, remained above 10 percent marker at 10.4%, but is down from 11.1% in Q3 2014.

In terms of unemployment rate, quarterly rate of decline registered in Q4 2014 stood at 0.7 percentage points, which is the strongest performance for any quarter since Q3 2013 when it posted a decline of 0.8 percentage points. Year on year decline in unemployment rate was 1.8 percentage points, slightly better than 1.7 percentage points decline in Q3 2014, but lower than 2.1 percentage points drop in Q2 2014.

All in, the news are good on unemployment statistics front, but poor on labour force participation side.

More analysis to follow.

25/2/15: Baltic Dry Index: Another Poor Day for EUrecovery Stroy

Two weeks ago, Baltic Dry Index was at 556. Which was bad (http://trueeconomics.blogspot.ie/2015/02/11215-baltic-dry-index-another-low.html). Now, it is at 516 or below late 1980s trough. And the European economy is allegedly picking up.

H/T to @moved_average 

What can possibly go wrong with the 'EUrecovery' story?

24/2/15: Euromoney on E.C. Europe Growth

My comment for the Euromoney on the topic of growth prospects in Eastern Europe: http://www.euromoney.com/Article/3429613/Category/14091/ChannelPage/8959/Polands-improving-fortunes-highlight-pockets-of-safety-in-CEE.html

23/2/15: Ukraine CDS-implied Default Rate Shoots Above 97%

As noted by @Schuldensuehner Ukraine's probability of default is now just shy of 97.1%:

Which is spectacular in its own right. But one has to consider what this market pricing really implies.

As we know, Ukraine will receive super-senior debt injections courtesy of the IMF. This will alleviate the immediate crunch on Government liquidity (Ukraine FX reserves are now below scheduled debt redemptions for March-September). So the above risk spike cannot be attributed to the risk of liquidity crisis.

As I explain here: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html , this liquidity support comes at a hefty cost: the debt burden that will result from the international lenders intervention will be non-sustainable and it can exacerbate popular discontent with current Government.

Now, the latest news from the Eastern ATO are pretty disastrous, and, arguably, also unlikely to go well with the Ukrainians.

This is of course speculative, but given lack of the risk around future liquidity crunch, the latest spike in the CDS spreads suggests that the markets see serious political risks ahead soon.

23/2/15: Russian Policy Uncertainty Environment Moderated in January

January 2015 saw some easing in the overall policy uncertainty environment in Russia, based on the Policy Uncertainty Index that fell to 197.8 in January 2015 from 305.7 in December and down 22.6% y/y. The index is down 12.3% on the current crisis period average (January 2014-present)

You can see index methodology and get data here: http://www.policyuncertainty.com/russia_monthly.html

23/2/15: Russian Sanctions: Round 4 Looming?..

Big change in EU official language marks a major departure from the past diplomatic practice: https://euobserver.com/foreign/127667. Let's see if this continues, but at the very least, it lays foundations for renewed pressure on Moscow in relation to Ukrainian conflict.

Both the U.S. (see https://euobserver.com/foreign/127754) and the EU (see here: https://euobserver.com/foreign/127703) have stepped up pressure for new sanctions.

Here is my take on the prospect of the latter.

Rumours of the U.S. (and by proxy EU) sanctions extension include, once again:

• Cutting Russian bank's access to SWIFT system (spearheaded in EU by the UK and Poland back in August 2014 and backed by the EU Parliament resolution from September 2014);
• Widening sanctions against imports of Russian goods and services across broader categories and applying more pressure on the emerging markets (traditionally more important to Russian exporters of industrial machinery and capital goods) to abstain from dealing with Russian suppliers (though it is hard to see what can be added to the current list); and
• Expanding the lists of Russians banned from travel to the U.S. and Europe (which would be a weak form of response, unless it starts explicitly impacting travel for ordinary Russians - a suggestion that was floated in late 2014 by a number of former U.S. high ranking officials and analysts, with some going as far as suggesting the U.S. should ban all travel for Russian citizens, regardless of circumstances or their residency). In addition, expanding the list of sanctioned individuals to cover members of their families (to allow arrests of their property abroad, especially in those cases where such property ownership is de facto linked to the originally sanctioned officials and business leaders).

All of these proposals, at their extreme, will be firstly painful, but secondly non-reversible in the short- and medium- run.

The latter would signify that any restoration of normal relations between the U.S. (and Europe) and Russia will no longer be feasible even in the medium term and will demonstrably fail President Obama's own test of sanctions as being a tool for influencing short term policies' outcomes without directly adversely impacting ordinary Russians or sacrificing the objective of long-term normalisation.

In financial terms, cutting Russian banks off SWIFT will compound the already significant pressures on Russian corporates and banks, leading to retaliatory measures that will likely see Russian banks and companies suspending repayment and servicing of forex loans to non-affiliated entities based in the U.S. and the EU. This, financially-speaking 'nuclear' retaliation, is feasible given the downgrades of the Russian sovereign debt by Moody's and S&P: the lower the ratings go, the lower is the cost of counter-measures.

In return for this, Western lenders are likely to ask for (and easily receive) court orders to cease Russian assets abroad.

In effect, the worst case scenario here will be an all-out unwinding of Russian economic integration into the Western European and U.S. economies - a process that will make all sanctions irreversible in the medium term. The tail end of this risk is that a more isolated Moscow will face even lower future costs from taking a more aggressive stance in Ukraine or elsewhere. Economic escalation, at this stage, will most likely result in a political escalation along the lines of 'cornering Russia' into retaliation.

But beyond the Russian-U.S./EU theatre of confrontation, there looms another shadow.

In explicitly deploying economic agents and institutions in a geopolitical conflict against a significant global economic player, the U.S. is risking undermining the very foundation of its own economic power and with it, the power of the West. A long-term economic conflict with Russia is putting all emerging markets and non-Western economies on notice: the U.S. markets and institutions can be a high risk counter-parties, controlled and driven by the political considerations. Until now, targeted nature of sanctions has avoided this risk. And until now, SWIFT and its backers in Europe have made a cogent argument that excluding Russia from the system of banks payments clearance risks undermining the system itself. If Russia, in partnership with China, were forced to develop own system of parallel clearance to rival SWIFT, the West will lose control over the financial transactions pipeline that can be monitored and used to combat illicit trade, financing of terrorism and tax evasion. With time, we will also risk losing major transactions flows between other emerging markets and the West, with resultant de-internationalisation of the global financial flows and a reduction in the West's ability to tap emerging markets surplus savings and liquidity to underwrite long-term Western pensions and investment needs.

Similarly, tax evasion has been put on the declining trend by enhanced international cooperation - a process that is now driving the likes of the OECD reforms efforts in corporate taxation. This too will become more difficult to deliver if the global economic systems, largely based on Western institutions, revert toward regionalisation.

As I said, these are tail risks, but they are risks nonetheless.

Furthermore, broadening of sanctions to target explicitly Russian entities and citizens regardless of their affiliation or position vis-a-vis Moscow political regime will have another hefty long-term risk premium. The West is hoping for the sanctions to drive significant economic decline across Russia to effect a regime change, if not in terms of the physical head of Russian state, then in terms of his core policies. However, broadly anti-Russian (as opposed to counter-Kremlin) sanctions are likely to trigger more nationalist revival in Russia and any regime change in such circumstances is likely to lead to an even more bellicose stance from Moscow. Current political opposition within Russia, even theoretically capable of asserting control over power systems in the political and executive systems, is simply much more nationalistic and anti-Western than we, in Europe and the U.S., would like to believe.


None of this should override the consideration of the urgent need to restore peace in and territorial integrity of Ukraine, first and foremost. And, as I said on numerous occasions before, the onus is on Russia to act decisively to make this possible: by forcing the Eastern Ukrainian separatists to implement Minsk accord pro-actively, ahead of the Ukrainian counterparts and with fully verifiable results.

But, in the game of sanctions escalation, longer term losses for both, Russia and the West, will be significant.


It is worth noting that even Mikhail Khodorkovsky - hardly a supporter of the current regime in Moscow - has repeatedly warned against sanctions being deployed as a tool against the ordinary Russians and the Russian economy at large. See here: http://www.bbc.com/news/world-europe-27513321 and here: http://www.enpi-info.eu/eastportal/news/latest/39323/EU-needs-to-differentiate-sanctions-against-Russia,-Mikhail-Khodorkovsky-tells-MEPs.

Another prominent - and actually more important in terms of his popularity and position in Russia - opponent of the current Government, Alexey Navalny also called for strongly targeted sanctions that avoid damaging the economy and, thus, increasing nationalist axis power within the country: http://www.nytimes.com/2014/03/20/opinion/how-to-punish-putin.html although Navalny did contradict himself in some later statements (see for example a report here: http://joinfo.com/world/1001120_Alexei-Navalny-if-not-for-sanctions-Putins-army.html).

Beyond that, there has been significant enough analysts' coverage of the sanctions trap risks - the adverse impact of sanctions on the West's own objectives: the more effective the sanctions are in destabilising Russia, the more they reduce Western capacity to effect change in Russia in the longer run (see here: http://www.ecfr.eu/page/-/ECFR117_TheNewEuropeanDisorder_ESSAY.pdf).

22/2/15: Ifo on Eurogroup Conclusions

Ifo's Hans-Werner Sinn on Eurogroup deal for Greece:

I failed to spot where the Eurogroup allows for any 'additional cash' for Greece. 

The core point that Greece "has to become cheaper to regain competitiveness. This can only happen if Greece exits the Eurozone and devalues the drachma." On this, Sinn is probably correct. Unless, of course, there is a large scale writedown of Greek debts accompanied by a massive round of reforms. Both of these conditions will be required and not one of them is on the cards.

21/2/15: Russian Sovereign Wealth Funds: 2015 drawdowns

In the previous note I covered Moody's downgrade of Russian sovereign debt rating (see http://trueeconomics.blogspot.ie/2015/02/21215-moodys-downgrade-russia-risks-and.html). Now, as promised, a quick note on Russian use of sovereign fund cash reserves (also referenced in the Moody's decision, although Moody's references are somewhat more dated, having been formulated around the end of January).

Back at the end of January, Russia’s sovereign wealth funds amounted to USD160 billion, with the Government primarily taking a historically-set approach (from 2003 onwards) of arms-length interactions with the Funds management. This relative non-interference marked 2014 and is now set to be changed, with the Government looking at using SWFs to provide some support for the investment that has been falling in 2013-2014 period and is likely to fall even further this year.

Fixed investment in Russia fell 2.0% y/y in 2013, and by another 3.7% in 2014. Private investment is likely to fall by double digits in 2015, based on the cost of funding, lack of access to international funding and general recession in the economy. It is likely to stay in negative growth territory through 2016.

Thus, last week, Prime Minister Medvedev signed an executive order deploying up to RUB500 billion from the Reserve Fund. The money will be used, notionally, to cover this year deficits (expected to hit 2% of GDP), thus protecting the state from the need to borrow from the markets. The Fund was originally set up precisely for this purpose - to finance deficits arising during recessionary periods. In other words, this is stabilisation-targeted use of stabilisation funds. The fund is fully accounted for in the total Forex reserves reported by the Central Bank. Latest figures for end of January 2015 showed the fund to have USD85 billion or RUB5,900 billion in its reserves, so this year allocation is a tiny, 8.5% fraction of the total fund. All funds are allocated into liquid, foreign currency-denominated assets.

The second use of SWFs is via the economic support programme that will draw up to RUB550 billion worth of funds in 2015 from the second SWF - the National Welfare Fund (NWF). Part of this funding is earmarked for banks capitalisation, ring fenced explicitly for banks providing funding to large infrastructure investments and lending for the enterprises. The use of the NWF funds is more controversial, because the Fund was set up to provide backing for future pensions liabilities, including statutory old-age pensions. However, the NWF has been used for the economic stimulus purposes before, namely in the 2009 crisis. Currently, NWF holds USD74 billion or RUB5,100 billion worth of assets. Liquid share of these assets, denominated in foreign currencies, is also included in the Central Bank-reported Forex reserves, but long-term allocated illiquid share and ruble-denominated assets are excluded from the CBR reported figures.

Now, per Moody's note issued last night, "The second driver for the downgrade of Russia's government bond rating to Ba1 is the expected further erosion of Russia's fiscal strength and foreign exchange buffers. …Taking at face value the government's plans to proceed with its planned fiscal consolidation for 2015, Moody's expects a consolidated government deficit of approximately RUB1.6 trillion (2% of GDP) as well as a widening of the non-oil deficit. The deficit would likely be financed by drawing on the Reserve Fund, which is specifically designed for circumstances when oil prices fall below budgeted levels. …Moreover, under the stress exerted by a shrinking economy, wider budget deficits and continued capital flight -- in part reflecting the impact of the Ukraine crisis on investor and depositor confidence -- and restricted access to international capital markets, Moody's expects that the central bank's and government's FX assets will likely decrease significantly again this year, cutting the sovereign's reserves by more than half compared to their year-end 2014 level of approximately USD330 billion. In a more adverse but not unimaginable scenario, which assumes smaller current account surpluses and substantially larger capital outflows than in Moody's baseline forecast, FX reserves including both government savings funds would be further depleted. While the government might choose to mobilise some form of capital controls to impede the outflow of capital and reserves, such tools are not without consequences. Capital controls, which might include a rationing of retail deposit withdrawals and/or prohibition upon repatriation of foreign investment capital, would weaken the investment climate further and undermine confidence in the banking system."

21/2/15: Moody's Downgrade: Russia Risks and Politics

Moody's downgraded Russian sovereign debt last night from Baa3 to Ba1 with negative outlook. Moody's put Russian ratings on a review back on January 16.

The bases for the downgrade were (quotes from Moody's statement):

1. "The continuing crisis in Ukraine and the recent oil price and exchange rate shocks will further undermine Russia's economic strength and medium-term growth prospects, despite the fiscal and monetary policy responses". In more specific terms, "Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016. The decline in confidence is likely to constrain domestic demand and exacerbate the Russian economy's already chronic underinvestment. It is unlikely that the impact of recent events will be transitory. The crisis in Ukraine continues. While the fall in the oil price and the exchange rate have reversed somewhat since the start of the year, the impact on inflation, confidence and growth is likely to be sustained." As I noted on numerous occasions before, monetary policy environment remains highly challenging. Per Moody's "The monetary authorities face the conflicting objectives of keeping interest rates high enough to restrain the exchange rate and bring down inflation and keeping rates low enough to reinvigorate economic growth and bank solvency."
2. "The government's financial strength will diminish materially as a result of fiscal pressures and the continued erosion of Russia's foreign exchange (FX) reserves in light of ongoing capital outflows and restricted access to international capital markets." I will post a quick note on this matter later today, so stay tuned. Here's Moody's view: "Taking at face value the government's plans to proceed with its planned fiscal consolidation for 2015, Moody's expects a consolidated government deficit of approximately RUB1.6 trillion (2% of GDP) as well as a widening of the non-oil deficit. The deficit would likely be financed by drawing on the Reserve Fund, which is specifically designed for circumstances when oil prices fall below budgeted levels. Moody's also expects that widespread demands for fiscal easing are likely to emerge if, as the rating agency projects, the recession persists into 2016. In a scenario in which the government would turn to borrowing in the domestic market to finance at least a share of these deficits, higher spending could result in an increase of the debt-to-GDP ratio to 20% or more."
3. "The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service." In other words, we are facing a political risk. Capital controls and debt repayment stops are two key risks here and these were visible for some time now, especially if you have followed my writing on the Russian crisis.

What's the driver for the negative outlook? Uncertainty. Per Moody's: "The negative outlook on the Ba1 rating reflects Moody's view that the balance of economic, financial and political risks in Russia is slanted to the downside, with scenarios incorporating either an escalation of the Ukraine crisis and/or damage caused by recent shocks being greater than in Moody's baseline scenario. Essentially, the probabilities associated with the downside scenarios are higher than those associated with an upside scenario in which the recession is shorter and shallower than Moody's baseline."


Conclusion: an ugly, but predictable move by Moody's. One can say part of it is down to rating agencies activism in trying to establish some sense of credibility post-Global Financial Crisis, whereby getting tougher on ratings is a major objective, and it is well-served by getting tougher on politically softer targets, like Russia. But one can equally argue that the ratings downgrade is consistent with economic environment and some longer-run fundamentals. My view would be is that we are seeing both, with the balance of impetus tilted toward the latter argument.