13/3/15: Emerging Markets Corporate Debt Maturity Squeeze

H/T to @RobinWigg for the following chart summing up Emerging Markets exposure to the USD-denominated corporate debt redemptions calls over 2015-2025. The peak at 2017 and 2018 and relatively high levels for exemptions coming up in 2016, 2019-2020 signal sizeable pressure on the EM corporates that coincides with expected tightening in the US interest rates cycle - a twin shock that is likely to have adverse impact on EMs' capex in years to come. With rolling over 2017-on debt becoming a more expensive proposition, given the USD FX rates and interest rates outlook, the EMs-based corporate sector will come under severe pressure to use organic revenue generation to redeem maturing debt. Which means less investment, less hiring and less growth.

The impossible monetary policy trilemma that I have been warning about for some years now is starting to play out, with delay on my expectations, but just as expected - in the weaker and more vulnerable markets first.

13/3/15: South Stream Redux: Rejecting the Hungarian-Russian Nuclear Power Deal

A pretty nasty confirmation of the overall hostile approach by the EU toward national autonomy in dealing with the energy markets by the member states came in yesterday. As reported in the FT: http://www.ft.com/cms/s/0/9a6467e2-c8c1-11e4-8617-00144feab7de.html#ixzz3UCYrZfix, the EU has blocked Hungarian deal with Russian Rosatom to develop and supply new nuclear energy facilities at Paks. The EUR12 billion, 1,200 MW facility was to be designed, built and maintained by Rosatom under a contract that is pretty bog-standard around the world and included (also standard) long term exclusive agreement to supply fuel. Paks current output accounts for 40% of total Hungarian electricity generation and the country effectively has no options other than either burn Russian gas, Polish and/or Ukrainian coal or using nuclear. Notably, Polish and/or Ukrainian coal is perhaps the dirtiest generation alternative available to Hungary.

As reported in the FT: "Many EU officials also expressed concerns that Moscow was using energy policy to divide Europe and undermine the bloc’s consensus on sanctions imposed on Russia over its actions in eastern Ukraine."

Which simply means that the EU is now arbitrarily exceeding its own sanctions and is using trade as a conduit for political influence.

It is worth noting that long-term supply agreement for fuel is a necessary part of the agreement that is part-financed (EUR10 billion) by Russian credits. Recovery of these credits is built-into the fuel supply contract.

Another thing worth noting: the EU rejection is not based on the separate concern as to the nature of procurement contract involved. Russia is not liable for the procurement procedures deployed by the Hungarian authorities that might have been in breach of the EU procurement rules.

Net impact: the EU rejection of the contract not on the basis of procurement rules violation, but simply because the EU does not like long term contractual fuel supply arrangements with Russia represents a drastic departure from the EU rhetoric of supporting free trade. Just as in the case with Nord Stream and South Stream pipelines, the EU is currently cartelising energy procurement and development policy (see earlier note here: http://trueeconomics.blogspot.com/2015/02/5215-gazproms-nord-and-south-streams.html). In addition, the EU is now clearly erring on the side of becoming completely unreliable trading partner for Russia, as even the areas not impacted by sanctions are now openly being used as a tool for strengthen sanctions impact.

The twin effect of these exchanges should accelerate Russian pivot East and South away from Europe. This pivot is costly to Russia, but it is also costly to the EU, signalling in the longer run EU's dropping out of the Asia-Pacific, Central Asian and Russian trade and investment blocks. For you may or may not be a fan of Russia or Moscow's policies, but what you cannot escape in all of this is the simple fact: EU has now fully politicised its energy markets. And if so, then who is to say it won;t do so in other markets? The ones that might be important to, say, India or China or Asia Pacific or Latin America? Who is to say that the current trade flows are a permanent and protected feature of the world that EU inhabits? And who is to say that the risk of EU politicising another sector - aviation? transport? industrial machinery? - under the pretence of creating another 'Energy' Union is a risk that the non-EU world should ignore in dealing with Europe?

11/3/15: IMF Approves Bailout 3.0 for Ukraine

IMF statement on Ukraine:

Backgrounders: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html and here: https://www.imf.org/external/np/sec/pr/2015/pr1550.htm

Key points to the above: IMF came through just-in-time after seeing Ukraine going down to the last USD 4.5 billion in reserves and only barely enough time to pay the loans due to be repaid to... IMF. In a sense, IMF decision avoids the risk of IMF engineering the most pesky form of sovereign default known to the humanity: a default on IMF debt. Congratulations, IMF.

The hope-filled IMF statement is worth reading, but apparently, Ms. Lagarde sees Minsk 2 agreements as "largely holding for now". Which is consistent with some reports but most certainly is at odds with the UK, US and Nato views.

Another part worth noting is IMF's continued insistence that Ukraine's economic collapse is just a temporary 'balance of payments' problem. And in line with delirium, IMF is lauding the Ukrainian authorities for allowing "the exchange rate to adjust", as if Kiev had not thrown every last bit of meagre reserves and every possible bit of capital controls at defending the exchange rate in a futile attempt to prevent such 'adjustment'.

That said, let us hope that Ukrainian economy is indeed provided some much needed support through this package and that the reforms, penned into the agreement, do not lead another Maidan.

11/3/15: Building & Construction Activity in Ireland: 2014

Irish Building and Construction industry production indices are out for Q4 2014 and full year 2014, so here is a quick look.

Quarterly data:

• All building and construction activity rose 6% y/y in Q4 2014 by value and 4.5% y/y by volume.Compared to series low, value is up 55% and volume is up 51%. However, compared to historical peak, value is down 70.2% still and volume is down 71.8%. Thus, the annual rise is not impressive: single digit growth off the base that is so low, we are still 36.3% below Q4 2000 in value and 52.8% below Q4 2000 in volume. Worse, Q4 2014 marks the slowest annual growth in value and volume since Q1 2013.

• Building ex-civil engineering index is up 9.8% y/y in Q4 2014 in value terms and is up 8.6% in volume terms. The series still trend 76% below historical peak in value terms and down 78 in volume terms. Compared to Q4 2000, the series are down 51.3% in value terms and 64% below in volume terms.
• Residential building production is up massive 36.9% y/y in value terms and 35.2% in volume terms. Again, however, the base of activity is low: the series are still down 76.0% on peak in value terms and down 88.9% in volume terms. Compared to Q4 2000, residential building activity is down 70.6% in value terms and down 79.3% in volume terms.
• Non-residential building activity fell 3.9% y/y in Q4 2014 in value terms and is down 5.17% in volume terms. The series are 15.3% below Q4 2000 levels of activity in value terms and are down 30.4% in volume terms.
• Civil engineering activity - the only area of activity where we have been performing relatively better over recent years - posted a decline of 1.6% y/y in Q4 2014 in terms of value of activity and a drop of 2.88% y/y in terms of volume of activity. However, compared to Q4 2000, the series still run 64% ahead in terms of value and 20.6% up in terms of volume.

On annual basis, 2014 was a better year for value of activity compared to volume.

• Across all building and construction sub-sectors, activity in 2014 was up 9.36% y/y in terms of value of production and up 8.29 in terms of volume. Both value and volume y/y growth rates were weaker in 2014 compared to 2013. Relative to annual averages for 2000-20002 period, activity across all sectors of construction is down 47% in value terms and down 58.7% in volume terms.
• Residential building activity in 2014 rose 19.0% y/y in value terms (improving on 11.5% growth in 2013) and by 17.5% in volume terms (also improving on 10.8% growth in 2013). However, as with quarterly figures earlier, activity is growing of extremely low base. Compared to 2000-2002 annual averages, 2014 activity in this sub-sector is still down 78.3% in value terms and down 69.0% in volume terms.
• Non-residential construction activity is up 8.3% y/y in value terms in 2014 (much worse than 19.4% rise recorded in 2013) and in volume terms activity is up 7.2% (also worse than 18.5% rise in 2013). Full year 2014 activity is still well below 2000-2002 annual averages (down 21.4% in value terms and down 31.7% in volume terms).

To conclude: 

1. Some welcome improvements in the building and construction sector, driven primarily by residential construction activities, but coming off extremely low base of activity in 2013. 
2. Key issue is how much of 2014 activity uplift was driven by planning permissions secured prior to major regulatory changes that are holding back current permissions activity. 
3. Another key issue is the apparent significant slowdown in 2014 rates of growth in activity compared to 2013 rates of growth. 
4. Third issue: despite still low levels of activity in the sector, builders appear to be chasing higher margins on price / value side, instead of lower cost projects.Thus value of activities is rising faster than volume for the second year in a row. If this scenario is sustained into 2015, we are unlikely to see construction sector gains translating into alleviating price appreciation pressures in the rental and house purchasing markets.

11/3/15: The looming computerisation of European jobs

Two and a half years ago (http://trueeconomics.blogspot.ie/2012/08/2882012-challenging-constant-growth.html), I highlighted the research by Robert J. Gordon on the secular slowdown in economic growth awaiting the global economy, linked to the 'flattening out' of returns to technological innovation hypothesis.

Recent research from the Bruegel Institute (see: http://www.bruegel.org/nc/blog/detail/article/1394-the-computerisation-of-european-jobs/#.VQAET3EABEU.twitter) attempted to provide some estimation of the related topic: the topic of jobs displacement via technological innovation.

This represents a very important and interesting piece of work, quantifying risk exposures across the European economies to computerisation, robotisation and automation trends. The map Bruegel provides clearly shows the link between lower value-added sectors activity share of country GDP and the risk of jobs displacement due to technological innovation. However, even at the lower end of displacement scale, 47-49 percent of jobs are at risk, and this is a significant number. Worse, as authors correctly (in my view) suggest, the impact will be more pronounced for lower quality jobs, more reliant on labour and less related to human capital and complementarity between human capital and technology. In other words, already sizeable economic impact is likely to be magnified by an even larger social impact.

This topic is one of the key ones to focus on when thinking about the future economic, social and political developments. Just to give you a taster for the thinking ahead of us: in the majority of peripheral economies and indeed across the EU, jobs losses during the recent crises - the Global Financial Crisis, the Great Recession and the Sovereign Debt Crisis - were relatively concentrated in lower skills end of jobs spectrum, although this concentration was not as high as the bias expected for exult from technological displacement of jobs. Still, the relatively benign polarisation of the employment markets during the crises produced a prominent backlash in political sphere across the EU, with strengthening of the extreme political forces. Now, imagine the effect a much more socially concentrated disruption will cause to the traditional political systems.

Note: some links to related research

• http://trueeconomics.blogspot.ie/2014/06/2462014-us-productivity-slowdown-its.html
• http://trueeconomics.blogspot.ie/2013/11/14112013-human-capital-age-of-change.html
• http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html
• http://trueeconomics.blogspot.ie/2013/11/11112013-great-tech-future-for-ireland.html
• And a series of links specific to the Financial Services sector being disrupted by technological innovation: http://trueeconomics.blogspot.ie/2015/03/8315-fintech-entrepreneurs-reshaping.html

10/3/15: Euro Area Growth Indicator Improved in February

In February, Eurocoin - a leading growth indicator from CEPR and Banca d'Italia posted a pretty decent rise to 0.23 from 0.16 in January. The 2 months average is now consistent with growth of 0.3-0.4 percent q/q.

This is the strongest reading in the indicator since July 2014. This time around, gains in Eurocoin indicator were based on improved exports and industrial activity, which is a much better indicator of actual underlying economic performance than gains from stock markets valuations that drove Eurocoin over previous months.

Nonetheless, Eurocoin remains well below its historical average of 0.32. 3mo average through February 2015 is 0.17 against 3 mo average through February 2014 of 0.32, so, once again, growth conditions, albeit improving, remain weak.

The above is confirmed by the recent weakening in the outlook for France. Yesterday, French Government lowered its forecast for Q1 growth from 0.4% to 0.3%.

As ECB went into its much hyped QE, the monetary policy remains firmly 'anchored' in zero growth corner:

10/3/15: Hedge Funds Returns: Part 3: Dealing with Funds and Benchmarks Selection

My latest post on measuring returns in the hedge funds industry is now available on LearnSignal blog: http://blog.learnsignal.com/?p=163

8/3/15: Euro area crisis timing: a problem of definition

Here is an interesting article comparing Euro area debt crisis and Latin American debt crisis: https://www.stlouisfed.org/~/media/Publications/Regional%20Economist/2015/January/PDFs/sovereign_debt.pdf

One question that is persistently present in the literature is about timing the start of the Euro area crisis. The problem is manifold:
1) Different countries have gone into crises in different years;
2) Different aspects of the crises define different sub-crises across various macroeconomic parameters

Here is my stab at the comprehensive definition:

And a legend and some counts stats:

8/3/15: FinTech Entrepreneurs Reshaping Finance: Euromoney

An interesting article on FinTech developments as drivers for change in the financial services: http://www.euromoney.com/Article/3433436/Technology-The-fintech-entrepreneurs-reshaping-finance.html?LS=Twitter&single=true via Euromoney.com.

In recent months, I wrote about FinTech sector extensively for the LearnSignal blog here: http://trueeconomics.blogspot.ie/2014/11/25112014-fin-tech-unraveling-retail.html as well as digital disruption in retail banking sector: http://trueeconomics.blogspot.ie/2015/02/18215-digital-disruption-and.html plus fintech innovation on trading side: http://trueeconomics.blogspot.ie/2014/11/3112014-tech-innovation-in-finance.html

And here is a link to BBC coverage of the Irish FinTech scene: http://trueeconomics.blogspot.ie/2014/09/2692014-bbc-covering-irish-fintech.html

7/3/15:Euro Area GDP per capita: the legacy of the crisis

I have posted previously on the decline in GDP per capita during the current crises across the euro area states, the US and UK. Here is another look:

Let's take GDP per capita at the peak before the crisis.

For some countries this would be year 2007, for others 2008. Keep in mind, many comparatives in the media and by analysts treat the peak as 2008. This is simply not true. Only 89countries of the sample of 20 countries comprising EA18, plus US and UK have peaked their GDP per capita in real terms in 2008, the rest peaked in 2007. Hence, for the former countries, the GDP per capita decline started in 2009 and the for the latter in 2008. Now, take GDP per capita declines cumulated over the years when the GDP per capita was running, in real terms, below the peak. Again, the sample of the countries is not homogeneous here: for some countries, GDP per capita regained pre-crisis peak by 2011 (Germany, Malta and Slovak Republic), by 2013 (Austria and U.S.) and by 2014 (Latvia). For all the rest of the countries, the GDP per capita peak was not regained through 2014.

Now, let's plot the overall cumulated losses over the years of the crisis (over the years from the crisis start through either the year prior to regaining pre-crisis GDP per capita levels for the countries where this was attained, or through 2014 for the countries that did not yet recover pre-crisis levels.

Chart below plots these in euro terms (remember, this is loss through end of crisis or 2014 per capita) (note figures for UK and US are in their respective currencies, not Euro):

Thus, per above, in Greece, cumulative GDP per capita losses during the crisis (through 2014) amount to around EUR42,200, while in Malta cumulative losses from the start of the crisis through the end of the crisis in 2011 amounted to around EUR500 per capita.

Since the crisis was over, before 2014, across 6 countries (in other words the regained their pre-crisis peak GDP per capita levels in inflation-adjusted terms), it is worth to note that through 2014, in these countries, losses have been reduced.  In Austria, through 2014, cumulative losses on pre-crisis GDP per capita levels stood at EUR 2,107 per capita, in Germany there was a cumulative gain of EUR4,078 per capita, in Latvia a cumulative loss of EUR5,696 per capita, in Malta a cumulative gain of EUR1,029 per capita, in Slovak Republic a cumulative gain of EUR1,352 per capita and in the U.S. a cumulative loss of USD258 per capita

Taking the above figures covering either gains  or losses from the start of the crisis in each country through 2014 as a percentage of the pre-crisis peak GDP per capita, the losses/gain due to the crisis through 2014 amount to:

And that chart really tells it all. 

7/3/15: Irish Services Sector Activity & PMI: January 2015

Irish Services Activity Index for January came out yesterday, offering some interesting data reading.

Contextually: Services PMI has averaged 62.2 in the 3 months through February 2015 and it averaged 61.9 for the period of 3 months through November 2014 - both showing blistering growth in the sector.

Now, January Services Activity Index came in 12.6% ahead of the same level in January 2014. 2 mo average through January (comparative to PMI averages we have) is 119.6 which is 9.44% ahead of 3mo average through the same period of 2014. This is rapid growth and it accelerated in December-January as chart below shows.

The acceleration was broadly-based:

• Information and Communication sub-sector activity rose 21.2% y/y with a massive 10.2% jump in m/m terms in January alone. The sub-sector growth rate is around 8.11% y/y in terms of 3mo average through January.
• Professional, Scientific and Technical sub-sector activity posted a big 14.0% jump y/y in January and was up 11.8% m/m. 3mo average through January was up 13.1% y/y.
• Wholesale and Retail Trade etc sub-sector activity rose 8.8% y/y and 9.5% m/m - also strong growth, although 3mo average through January was up weaker 7.2% y/y.
• Transportation and Storage sub-sector activity rose 8.4% y/y but was down 1% m/m, having previously posted rapid growth in November and December. 3mo average through January 2015 is up 16.5% y/y.
• Accommodation and Food services activity was up 14% y/y and down 0.33% m/m in January, with 3mo average through January 2015 standing 13.9% above 3mo average through January 2014.
• Administrative and Support services activity rose only 2.9% y/y and was down 0.8% m/m, with 3mo through January 2015 up just 2.1% y/y.

So, in summary - January figures show a very surprising (and thus suspicious) jump in overall activity across a number of sectors. CSO provides no explanation as to this jump nor any warnings on it. My suspicion is that we are seeing the effects of the infamous 'knowledge development box' introduction in Budget 2015 with MNCs pushing forward more aggressive tax optimisation strategies through it, whilst maintaining previous tax arrangements. I will post a small note on this later, so stay tuned.


Now, an update of the validity of PMIs as a measure of Services Activity recorded in the sector. Table below shows correlations between Services Activity Indices and Services PMIs

As the table shows, there is very little relationship between Services PMIs performance (I also did same analysis for rates of change in the indices that show even worse performance for PMIs as indicators of current or future actual activity) and actual Services sector activity. Out of 84 correlations, 53 are either negative of statistically zero and only 13 have strong positive correlation with either levels of activity or growth in activity. Crucially, PMIs perform stronger (relatively speaking) in correlations with levels of activity, rather than growth rates in activity (in which they perform absolutely disastrously across all time horizons and lags). About the only areas where PMIs are useful in relating to the level of activity (but not growth in activity) are: strongly with ICT, weakly with Admin & Support services and overall Services. Which suggests strong bias in PMIs toward MNCs-dominated ICT services sub-sector. Another miserable point for PMIs: they are more indicative of contemporaneous activity than providing insight into future activity.

7/3/15: Fitch on Russian Banks: January data

Earlier this week, Fitch Ratings published 'Russian Banks Datawatch', covering banks' balance sheet data as of 1 February 2015. Fitch Ratings noted the following key developments in January:

• "Corporate loans increased by RUB2.2trn (6.5%) in nominal terms in January", down -0.9% "after adjusting for 23% rouble depreciation against the US dollar"
• "Retail lending dropped by a moderate RUB46bn (-0.4%) in nominal terms", but fell -1.1% in USD terms. Majority of banks are deleveraging at a rate of 1-4%
• "Customer funding grew by RUB3.5trn (8.2%) in nominal terms", down only -0.1% "net of currency valuation effects as RUB328bn outflow from retail accounts was only partially compensated by RUB264bn inflow of corporate (excluding government entities) funding"
• CBR funding: "Banks repaid about RUB1trn of state funding in January, which had become expensive after the Central Bank of Russia (CBR) increased the key interest rate to 17% from 11.5% in December 2014 (before cutting it slightly to 15% in February 2015)". Note: these repayments offset official forex outflows recorded in the months when banks borrowed funds. As a reminder, when a bank borrows in forex from the CBR, the borrowing is recorded as forex outflow. When the bank subsequently repays the funds in forex, the repayment is entered as forex inflow. But if the bank repays borrowings in RUB, the repayment is registered as an inflow in RUB.
• Actual CBR funding deleveraging by the banks was even steeper: Banks repayment of RUB1trn is broken down into (1) "RUB1.6trn decrease of CBR funding" offset by (2) "RUB0.6trn increase in deposits from the Ministry of Finance, regional and federal budgets". Note: as deposits are liabilities, higher holdings of official deposits within the CBR account counts against the CBR balance sheet.
• Fitch notes that going forward, "This trend [of net repayment of CBR loans] is likely to continue unless the CBR lowers the key rate further ...CBR funding of the sector in foreign currency has become significant, totalling USD21bn (of which USD9.5bn was provided to Otkrytie) at 1 February 2015".
• Banks' profitability: "The sector reported a RUB34bn net loss in January (-6.2% annualised ROE). Alfa-bank significantly outperformed the sector with a net income of RUB30bn mainly due to FX-revaluation gains. Among state banks only Sberbank reported net income, at RUB3.7bn, while others were loss-making: VTB group had a loss of RUB21bn, Gazprombank RUB8bn and Russian Agricultural Bank RUB4bn. Retail banks performed poorly, and most were loss-making..."
• Banks capital ratios: "The average total capital ratio (10% required minimum) of the 100 sample banks decreased by 54bps in January. As at end-1M15, seven banks in the sample (of those publishing capital ratios) had a total capital ratio below 11% [one of them] Fondservisbank (10.4%), was put under CBR temporary administration in February."
• Capitalisation forward: "The announced state recapitalisation measures of over RUB2trn should moderately support banks' capitalisation, although these will be available primarily for larger banks" In other words, expect push for more banks consolidations from Q2 2015.

Summary: corporate lending is up in RUB terms but down in USD terms, retail lending is down both in RUB and USD terms. Deposits up in RUB terms and flat in USD terms, Profitability down significantly and the sector is generating net losses. Capitalisation down with a number of smaller banks heading closer to regulatory minimum, implying that recapitalisation funds will have to be used pretty soon and sector conslidation is likely to accelerate.