23/3/15: Credit, Domestic Demand and Investment: Euro Area in Three Charts

Three interesting charts outlining the big themes in Euro area economy:

First the 'limping leg' of the euro recovery: credit. Chart below shows decomposition and dynamics in corporate credit, with Q1 2015 reading so far pointing to a very robust demand for credit, and (even more importantly) credit driven by fixed investment. This should provide some support for Domestic Demand, albeit at the expense of re-leveraging the economy via bank channel (as opposed to leverage-neutral equity or non-bank credit, such as direct debt issuance):

Source: @FGoria

The importance of investment uplift is hard to underestimate in the case of the euro area, as the next chart clearly illustrates:

 Source: @FGoria

And this translates into depressed Domestic Demand (C+G+I bit of the national accounts):

Source: @FGoria

The gap between U.S. and the euro area is understandable. But the gap between Japan and the euro area is truly shocking, once one considers the state of the Japanese economy and the sheer magnitude of monetary stimulus that Japan had to deploy to push its Domestic Demand up from 2011.

In simple terms, the above charts show some revival in the euro area fortunes. In more complex terms, one has to wonder what this revival hinges on. In my opinion, we are seeing a bounce in credit creation that is not sustainable given the state of the global economy (with global trade flows remaining weak) and the conditions of households across the euro area (with domestic consumption and household investment still weak). 

22/3/15: Ukraine: disastrous growth figures

Ten quarters of shrinking GDP, out of 11 last. Ukraine:

Source: FT

When's the next 'rethink' by the IMF of the debt projections?..

21/3/15: Two Pesky Facts and Russian 'Liberal Democracy' Dream

Here's a problem, folks. Let's take two facts:

1. Vladimir Putin's approval ratings are currently in the upper 80s: http://www.bloombergview.com/articles/2015-03-16/a-year-after-crimea-putin-stands-strong  
2. Russia ranks as the third country in the world in terms of access to internet: http://www.pewglobal.org/2015/03/19/1-communications-technology-in-emerging-and-developing-nations/

Which gets you thinking.

If Russian public opinion is down to Kremlin propaganda and media control, then how come Russians, enjoying wide access to internet, are not rushing to their web browsers for the alternatives presented  in the Western free press (including in Russian), the independent Russian press (which does exist) and in the new media (which is very rich, diverse and widely available in Russian)?

In the USSR days, when there was no internet and there was no access to foreign publications, media etc and when the Soviet authorities actively suppressed access to foreign broadcasts, while closed borders were enforced for the few who dared to smuggle in foreign press, many Russians tuned to these voices. I grew up regularly listening to the BBC Russian Service and Voice of America and Radio Liberty. Many of my friends and their families did as well. Apparently, today, the survivors of the same channels - available freely - have very little impact on Russian public opinion. Why?

Russian culture is culture of extreme scepticism over authority. Scepticism that borders on cynicism. And Russian culture is a culture of kitchen politics (in modern world perfectly facilitated by social networks and alternative media). Russians have access to these sources at a rate of access that is extremely high and open. And yet their views remain non-liberal in the Western context of this term.

Is today's state of traditional media control reinforcing what is already a prevalent Russian public view: the set of beliefs that are largely consistent with those espoused by the Kremlin? Is it possible that Kremlin is not necessarily actively altering the public opinion, but rather tailoring its own positions to that opinion, while reinforcing existent biases? Can it be that such tailoring of policies is more democratic than the liberal alternative that has no popular support in Russia?

In this, who wags what? The proverbial dog of Moscow, the proverbial tail of the nation or the bone of free media access dangled on the web?

The uncomfortable nature of this problem is that in the West, we are told to believe in the potency of the Russian liberal opposition (which has access to internet and uses it extensively to promote ideas, sketches of policies and even more actively - acts of protest and own image) and that this liberal opposition is democratically anchored. We are told that, were the opposition leaders given a chance, they would win democratic mandate from the people to change and reform Russia. We are told that once Putin is gone, Russia will embrace change led by the liberal opposition. And yet, where is the evidence to support any of this?

I sympathise with the principles and values espoused by some of the opposition leaders (not all, since there is a huge range of views these leaders hold). But, any serious observer of Russian politics and economics will quickly discover that the liberal opposition is incapable of providing a properly designed reforms agenda. I cannot find credibly structured and costed alternative budgets, legislative proposals, regulatory white papers etc - all that we, in the West, tend to associate with functional opposition. The opposition cannot even provide its potential base with a coherent core message, beyond the incessant talk about the need for more democracy, the need for drastic (but unspecified) anti-corruption reforms, and the need for more liberalisation of everything.

While the Russian Government can also be very sketchy on policies impact assessments ex-ante their adoption, at least it provides some data that can be used to measure their effectiveness in the medium term. Russian liberal opposition? Not much, if any.

Western democratic opposition parties publish own policies, own alternative budgets, factually comment on Government policies and produce alternative ideas that are tested in the public domain. Russian liberal opposition is predominantly pre-occupied with promoting itself to its own support base. When personality clashes abate for short periods of time, what is left in the public view is the talk about big ticket changes (opening up to foreign investors, achieving peace and partnership with the West, combatting corruption etc - all good ideas), but no tangible, specific, cost-benefit weighted proposals. The opposition can freely use internet to promote such analysis and proposals. It does not. Instead, it uses the web for sloganeering. An average Russian interested in, say, the expected impact of liberalisation of the domestic monopolies (or near-monopolies) on, say, unemployment is left with vacuum of data, estimates and insight. One cannot expect any, even remotely rational person, to vote for the opposition leaders promoting such a policy, unless that person is fully insulated from any potential fallout from it. Hence, the core support base for the liberals in Russia is... yes, the urban upper middle class

In other words, we, in the West, are being told to trust the dream that has very little basis in reality and feasibility, and despite alleged claims of democratic nature has very little support within the electorate. It all reminds us of the policy that promoted regime change in Iraq as the means for creating a functional democracy there, to be led by the liberal Iraqi opposition. It didn't happen thus, not because we didn't try, but because we couldn't find liberal opposition capable of governing. We based our expectations of Baghdad on a naive dream and we missed the real Baghdad by a mile. Ditto for Cairo, ditto for Tripoli, ditto for Kabul... keep counting.

Yes, Russia is not Iraq - neither philosophically, nor ethically, nor socially, nor economically, nor politically, nor historically, nor culturally, nor geopolitically. In all of these terms it is more complex, statehood and institutionally more developed and stronger. Which means the pretty dreams of the post-regime change nirvana are even more out of touch in the case of Russia than they were in Iraq.

In the Soviet days, people of Russia could have been excused for not actively pursuing the alternative because they didn't know better - they had no access to alternative media, internet and to Western 'voices'. Yet, they desired such access and sought it whenever it was available. Today, Russians support the values represented by Putin, even though they are not actively denied access to alternatives. It is uncomfortable for the Western ideologues of regime change, but it is thus.

Here are some of the opinion polls on public approval ratings for various Russian parties and politicians:

Political parties first:

Yes, the hope of liberal opposition is clearly alive... in the minds of the West, but not in the minds of the Russian voters. About the only two - very remote - democratic choice alternatives per Russian voters are: Communists and LDPR (nationalists). The entire liberal alternative is about powerful enough (if they concentrated all their votes on Moscow alone) to win a couple of seats in the city government.

Politicians next:

And once again, there is no sight of liberal alternatives anywhere in the positive trust territory. And, incidentally, none were present even before the Crimea and during the 'softer' power periods of the Kremlin rule. The entire political spectrum besides Vladimir Putin, even if it were to include Putin's closest allies, does not reach 34% of the voters in terms of trust.

Which brings us back to the first two facts: Russian voters have access to alternatives (even if imperfect, but certainly much wider than their access to the same during the Soviet era); no they do not support any of these alternatives. Firstly, as Hertzen once said: "Who is to blame?" and lastly. as Lenin put it: "What is to be done?"

Just some food for thought...


Update: Here is a 2012 article from WaPo on the weak performance by Russian liberal opposition in the Presidential polls: http://www.washingtonpost.com/world/europe/russian-opposition-weak-at-polls/2012/10/14/60f7f9a8-1638-11e2-9855-71f2b202721b_story.html

21/3/15: Irish patents filings Q4 2014

Latest data on Irish patents, courtesy of NewMorningIP.com: chart below shows a decline in total patents filings in Q4 2014 compared to Q3 2014 with Q4 2014 patents counts at 699 down from Q3 2014 count of 786. Of these, Irish invention patents were down to 321 in Q4 2014 from 331 in Q3 2014, but up on 236 a year ago. In Q4 2014, Irish inventors accounted for 45.9% of total Irish patents filed, with Irish enterprises and individuals filing only 247 patents - the lowest for any quarter since Q1 2014, but ahead of the disastrously poor performance in Q4 2013 (188 Irish enterprises & individuals patents). Irish academia produced 74 patents in Q4 2014, the highest reading since Q3 2013, but still accounting for only 10.6% of total patents filed in Ireland.

Chart to illustrate:

21/315: Russia Forex Reserves: Down Another Week

Based on weekly data for the week of March 13, 2015, Russian Central Bank forex reserves fell to USD351.7 billion, down USD5 billion on previous week. The reserves are now down 28.7% (USD141.5 billion) y/y. Compared to the same week a month ago, the reserves are down 4.5% (USD16.6 billion).

The rate of weekly changes in reserves (USD5 billion) is slower than in the week of March 6th (USD6.3 billion) but well ahead the 3mo average weekly decline (USD4.61 billion) and 6mo average (USD3.57 billion).

Two charts to provide some historical comparatives in terms of period averages relative to both levels and rates of change.

It is worth noting that there have been virtually no Forex interventions (Ruble rate defence: http://www.cbr.ru/Eng/hd_base/Default.aspx?Prtid=valint_day and http://trueeconomics.blogspot.ie/2015/03/20315-central-bank-interventions-in.html) from CBR in February and March and there have been ongoing de-dollarisation of the household funds in February (http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html) that is likely continued in March (reducing forex deposits and cash holdings), which implies that declines in reserves are down to the following drivers:

1. changes in euro and other currencies, as well as gold and non-dollar denominated assets, valuations for assets held by the CBR - in other words the potential adverse effects of dollar exchange rates against other currencies, and changes in asset values due to changes in US bonds markets;
2. demand for Forex from corporates and banks (all of which would be in the form of loans from the CBR to these entities) all of which is associated with deleveraging the external debt; and
3. potential fiscal demand for forex.

20/3/15: Central Bank Interventions in Ruble Markets down to Zero in February

Don't hear much of "Panic at the Central Bank of Russia" reports as of late in the Western media - the ones that whipped into frenzy Russia 'analysts' back in November-December? Why, no surprise:

Per latest data, CBR interventions in forex markets defending the Ruble have shrunk in February 2015 to zero for USD and zero for EUR. Yep, zero.

Oh, and the table above shows, the panic of November-December 2014 Ruble crisis - real as it was - was not as bad as CBR supporting Ruble prior to the free float and during the peak of Crimean crisis.

So was the decision to let Ruble float wise? You decide. On the trend, it saved CBR some USD8.5 billion and EUR1.2 billion, even counting in December 2014 crisis.

20/3/15: Russia: Agri-food Sector and Falling Real Household Incomes

As BOFIT reported last week, 2014 marked the first year since 1999 crisis when Russian households experienced a decline in real household income. In 12 months through December 2014, real (inflation-adjusted) incomes declined by around 1% y/y, with the rate of decline accelerating to 5% y/y in November-December 2014, at the peak of the Ruble crisis. Even at the depths of 2008-2009 crisis, Russian real household incomes stayed in positive growth territory, as chart below illustrates:

One area of severe squeeze on actual (nominal) incomes has been in the public sector. As BOFIT noted: "As recently as 2013, public sector wages were rising nearly 20% a year. By the end of 2014, however, on-year nominal wage growth had fallen to zero, while inflation was running at 11.4%. Hence, real wages in the public sector fell substantially." Private sector wages shrunk by around 2% in dealt terms, y/y. Pensions rose by about 10% y/y in 2014, still below inflation increases.

As BOFIT reported: "The average 2014 wage (excluding grey-sector wages) was about €650 a month. In January this year, due to a massive drop in the value of the ruble, the average monthly wage was only about €450. The average pension last year was €220 a month, but in January, that amount had fallen to just €150."

Going forward, both public and private sectors are facing tough times in terms of wages growth. Meanwhile, composition of inflation - especially rapid inflation in food and other staples prices - is more significantly impacting retirees. As the result of inflation in food sector, Rosstat has revised its formula for the cost of consumer goods and services basket, increasing the relative weight of food by almost 1 percentage point to 37.3% of the total household spending. This means that going forward, higher inflation in food sector will have greater impact on CPI. And we can probably expect that higher inflation. 2014 was near-record crop year that is unlikely to repeat. Meanwhile, Russian agriculture is suffering from dire need of modernisation capes that is nowhere to be seen. There is some room for imports substitution via increased domestic production and via alternative supplies from outside the EU, US and other economies that imposed sanctions and suffered Russian counter-sanctions, but that substitution is severely limited by:

1. Bottlenecks in supply expansion in Russia; and
2. Lower exports revenues due to high oil prices.

Neither has much to do with sanctions: in the current oil price environment, lending to Russian corporates, even if it were available outside sanctions, would have been very subdued and expensive.

To lift production in the sector, the Government needs to simultaneously:

1. Increase capital investment supports to the producers;
2. Open and incentivise markets for agri-food production and supply sectors in Russia to foreign investment (lifting sanctions on imports of food will do absolutely nothing to food prices, as imports pricing will be linked to forex rates and cost of capital);
3. Set up long-term targeted incentives for Russian producers to increase output quality and volumes (preferably via tax system and streamlined land ownership, as well as improved access to markets). Less arbitrary enforcement of regulations would also help; and
4. In distribution and retailing, local authorities in a number of larger urban centres have tightened and consolidated control over retail markets, resulting in higher margins for retailers, lower margins for producers and cutting off producers' access to direct sales to consumers, especially for smaller producers. This should be reversed. 

Hedge Funds Returns: Part 4: To higher moments and beyond

My latest post for LearnSignal Blog on the topic of measuring hedge funds' returns: http://blog.learnsignal.com/?p=165

18/3/15: Russian Deposits Dollarisation and Capital Flight

I have written before about the nature of capital outflows from Russia. One aspect of capital outflows is how the aggregate reflects deposits shifts into forex, known as 'dollarisation' of deposits. When Russian residents withdraw foreign currency from the banks (either via drawing down existent currency deposits or by converting their Ruble deposits into forex), the transaction is registered as capital outflow from Russia, even if they park this currency in safety deposit boxes and in their coffee tins. In other words, capital outflow out of Russia is registered even if cash remains in Russia.

Based on the latest data from the Institute for Foreign Trade, The Gaidar Institute for Economic Policy and the Russian Presidential Academy of National Economy and Public Administration, as of February 1, 2015, share of forex deposits in Russian banks rose to 35.7% of total monetary base excluding cash, up on 19.4% a year ago. The degree of 'dollarisation' (conversion to forex) was higher in 2014 than during the 2009 crisis, when the share of forex deposits stood at 35.3% and is second highest after 1998 crisis peak.

In 2014, Russian residents directly withdrew USD28.6 billion in forex from the banks. A large figure, but significantly less than in 2008 when this figure stood at USD51.4 billion. Over 2014, Russian banking system lost, in total, USD40 billion of forex to cash conversions and deposits withdrawals - all of which was registered as capital outflow from Russia.

The research note can be accessed (in Russian) here: http://www.ranepa.ru/news/item/6869-monitoring-4.html.

Interestingly, it tells the story of banks running out of deposit boxes storage capacity around November-December 2014 as households rushed to convert to forex holdings (mistrusting the Ruble) and switched to holding this forex in cash (mistrusting the banks).

February data showed significant moderation in dollarisation. Forex deposits held by the Russian banks fell 10.7% to RUB5.1 trillion, while Ruble denominated deposits those 2.7% to RUB13.8 trillion, with changes driven predominantly by the strengthening of the Ruble (in February, Ruble gained 14% relative to the basket of USD and EUR).

Over the last 12 months, corporate forex deposits rose substantially, with 41.3% of all corporate sector deposits now held in forex - a sign that Russian companies are continuing to build forex reserves to counter existent and potential future sanctions. In effect, Russian companies are cutting back on exporting forex out of Russia in fear of losing control over these funds in the future. At the same time, household forex deposits fell by USD5 billion and Ruble-denominated deposits rose on improved Ruble exchange rate.

17/3/15: IMF Cries Wolf as Emerging Markets Currencies Plunge

Remember the Russian Ruble Melt of 2014? Now get ready for the Emerging Markets Currencies Shake-n-Bake of 2015:

H/T: @Schuldensuehner

It is a miracle that the Fed can do in the IMF-sponsored mercantilist world of Exports-led Recoveries...  And guess who is now crying wolf? Why, IMF, of course: http://www.imf.org/external/np/speeches/2015/031715.htm. Except they don't dare call it a wolf, just 'lessons to be learned'.

17/3/2015: Russian Banks Latest Stats: January-February 2015

Some interesting banking sector stats were reported this week by the deputy head of the Central Bank of Russia, Mikhail Suhov during the Russian Economic Forum in Geneva.  Here is a compendium of the latest banking stats reported by the CBR and in the Russian media.


Non-Financial Sector Credit

Russian retail banking lending to households fell 1.5% in February, down RUB165.4 billion with CBR expecting the trend to continue, stabilising at around 4-5% decline in household credit for the full year 2015. As of March 1, household credit outstanding stood at RUB11,060 billion.

According to Sukhov, household credit arrears rose 0.8 percentage points in the first two months of 2015 from 5.8% at the start of January to 6.6% by the end of February.

In January-February 2015, household credit declined by 2.1%, down RUB243.8 billion with RUB-denominated credit standing at RUB10,756 trillion against forex denominated credit of RUB304.4 billion.

Non-financial corporate sector credit fell 4.7% in dollar terms and 1.1% in Ruble terms. The figures do not reflect the latest CBR that lowered benchmark rate to 14% on March 13 from 15% previous. The CBR expects effects of the latest rate reduction to show in the aggregate data around May 2015.

Overall lending to the real sectors (excluding Government and financial sectors) fell 1.5% in February. Much of credit contraction is concentrated in a small number of banks, acceding to CBR deputy head.

Based on data from Finmarket, total real sector arrears stood at RUB730.4 billion, up RUB24.7 billion or 3.5% m/m. In January-February 2015, arrears rose RUB64.2 billion or +9.6%. As percentage of total banking assets, as of March 1st, real sector credit arrears were 6.6%, up 0.3 percentage points in February compared to January.

Sukhov also noted that current rate of increases in non-financial sector credit arrears is likely to continue, resulting in total arrears stabilising at around 7.5% for outstanding credit and 7% taking into the account new credit. CBR estimated 2015 total arrears increases of roughly RUB900 billion.


Bail-in Mechanism

Meanwhile, under the Financial Stability Board arrangement (FSB, set up in 2009 by the G20 group), the CBR is currently looking into establishing formal bail-in rules for the Russian banking sector and the system of bridging banks (licensed entities that act as bridging institutions temporarily holding banking assets in the case of bank shutdown). Bridge banks are supposed to take over assets of insolvent mankind institutions and hold these assets during the period of liquidation, allowing to extend the process of assets disposals to minimise the risk of fire sales. The bail-in mechanism proposed by the FSB includes automatic conversion of unsecured creditors (into equity and subordinated loans) to allow direct bail-in. However, the CBR has already stated that the automatic bail-in mechanism is not necessary for the Russian banking system at this point in time.


Forex Mortgages

Another interesting point raised by Sukhov in Geneva relates to the much-discussed in the recent past risk of forex-denominated mortgages held by the Russian banks. As a reminder, in December 2014, the CBR started a consultation with the banks on creating a mechanism for converting existent forex-denominated mortgages into RUB-denominated loans based on the exchange rate as of October 1, 2014. At the time, some analysts predicted that such a move would trigger significant write downs of banking sector assets. According to Sukhov, CBR currently sees no risk to the banking sector from forex mortgages conversions, with the number of banks exposed to such a risk being very small. The vast majority of such mortgages were issued prior to the Global Financial Crisis of 2008 with issuance of these loans slowing down very significantly after 2008.


Sector Consolidations

In 2014, CBR forced absorption of 7 Russian banks into bigger entities and the CBR is now expecting 2015 to be a much more active year for banking sector consolidation. Meanwhile, average T1 capital ratios for Russian banks remained above 12% in the first two months of 2015. As the result of organic changes in balance sheets, as opposed to sector players' consolidations via mergers and shutdowns, market share of 5 largest banks in Russia rose to around 52% in 2014 from roughly 49.5% in 2013. In 2015, the CBR expects market share concentration to increase to above 55%, potentially reaching 60% by the end of 2016.


Banks Profitability

This is consistent with the CBR view on the overall profitability across the banking sector. In February, banks' losses rose to RUB36 billion from RUB24 billion in January. However, Sukhov noted that the CBR does not expect banking sector losses to rise significantly over 2015, noting that some estimates of up to RUB1 trillion losses for 2015 across the Russian banking sector carry "very low probability" of materialising. Instead, Sukhov expects more polarisation across the banking sector, with greater concentration of losses. Sukhov's estimates for losses across the system of "one-two hundred billion rubles" is roughly half the estimate produced by CBR back in February (CBR forecast is for RUB300-400 billion in cumulative losses for 2015, against cumulative profit of RUB589 billion in 2014 and RUB990 billion profits recorded in 2013).

16/3/15: Ukraine's Government Debt Projections: Smiling IMF, Whinging Private Lenders

Few weeks ago I covered in some details the implications for Ukraine of the latest IMF-led lending package: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html. My projection was for the debt/GDP ratio reaching over 100% in the medium term (2016-2017) based on the timing of disbursal of the new loans package and the composition of the package at the time.

The latest IMF forecasts (http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf) show debt/GDP ratio peaking at 94.6% of GDP in 2015. IMF latest estimate is based on the assumption that, having posted primary deficit of 1.15% of GDP in 2014, Ukraine will return a primary surplus of 1.1% of GDP in 2015. As IMF notes, average primary balance in 2004-2013 in Ukraine was -2.4% of GDP, so, as some would say... 'good luck' with that.

And the programme is also anchored to the private sector-held public debt restructuring. Here's MOU from the Ukrainian authorities on this: "To secure adequate public sector financing in the coming years, while also putting public debt firmly on a downward path, we intend to consult with the holders of public sector debt on a debt operation to improve medium-term debt sustainability. To facilitate this consultation, and in line with international best practice, we have hired financial and legal advisors (prior action). While the specific terms of the debt operation would be determined following our consultations with creditors, it would be guided by the following program objectives: (i) generate US$15 billion in public sector financing during the program period; (ii) bring the public and publicly guaranteed debt/GDP ratio under 71 percent of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10 percent of GDP (maximum of 12 percent of GDP annually) in 2019–2025. The restructuring is expected to be based on the program baseline macro framework applicable at the time the debt operation is launched. The debt operation is expected to be finalized by the time of the first review." Or in more simple terms, the IMF has already pre-committed to Ukraine cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme. Something that is (a) questionable in terms of Ukraine's ability to deliver on, and (b) making a number of very powerful lenders quite unhappy (see http://www.themoscowtimes.com/article.php?id=517502).

And outside the baseline scenario, here is IMF's assessment of risks to Ukraine's debt profile: "Under a growth shock, entailing a cumulative growth decline of over 9 percentage points in 2016–17, the debt-to-GDP ratio reaches nearly 119 percent in 2017. A real exchange rate shock not dissimilar to the one in 2014 would also keep the debt ratio above 100 percent of GDP throughout the projection period. The combined macro-fiscal shock, an aggregation of the shocks to real growth, interest rate, primary balance and exchange rate, produces unsustainable dynamics, sending debt above 200 percent of GDP in 2017. The contingent liabilities shock highlights the risk of a further deterioration of the banking sector and associated higher fiscal costs. Its impact is mitigated by the buffer embedded under the baseline for larger-than-expected bank restructuring costs. By imposing a large associated shock to growth (14 percentage points below the baseline in 2016–17) and given the resulting deterioration in the primary balance together with an increase in interest rates, under the contingent liabilities shock debt peaks at 116 percent of GDP in 2017."

So in simple terms, I will largely stick with my original estimates that around 2016-2017, we are likely to see Ukraine's government debt around 100% of GDP marker.