17/4/15: Conservative to a Surprising Degree: S&P Russia Ratings

Two ratings agencies updated their ratings for Russia today. Here are some highlights:

S&P first (Fitch later, so stay tuned):

S&P kept Russia’s foreign-currency credit rating at BB+ or one step below investment grade with negative outlook. ""We are affirming our 'BB+/B' long- and short-term foreign currency ratings and our 'BBB-/A-3' long- and short-term local currency ratings on Russia".

The agency claimed that Russian policy makers are struggling to boost growth and the country financial system risks are increasing due to continued external funding drought caused by the sanctions. Per S&P statement, “Our base case assumes that the sanctions on Russia will remain in place over the forecast horizon, absent a resolution of the conflict in Ukraine.”

S&P first pushed Russian ratings below investment grade on January 26, based on the adverse impact of lower oil prices and ongoing sanctions.

The rating came in as expected, though negative outlook might be a touch gloomy for some observers. The reason is that since January, Ruble gained significant ground in value, while capital outflows projections for 2015 improved (in 2014 Russia experienced capital outflows of USD154 billion, and 2015 latest forecast is for outflows of USD90 billion). Ruble trade at 68.0 to USD back on the day of S&P previous decision, today it is around 52 mark. Growth outlook is stabilising, albeit remains highly challenging. Inflation is matching S&P previous expectations, but against lower CBR rates. Ukrainian conflict drags on, for sure, but there is at least a fragile pause in place and if in January new sanctions were looming, today there appears to be no momentum for their introduction. Finally, oil was at around USD48 pb then, at USD55 pb now. Russian authorities have said this week that they may return to foreign borrowing markets in 2016, while expectation in January was that the earliest date we might see Russian issuance in international markets is 2017.

On the higher risks side, March consumer demand appears to have worsened despite improved Ruble exchange rate as preliminary retail sales data shows a 8.7% drop y/y and consumer sentiment index down 14 percentage points on Q4 2014. Economy is expected to post a contraction of 2-4 percent in 1Q 2015. Preliminary data suggests investment declined 5.3% y/y and industrial production is down 0.6%. Inflation is running at 16.8% annualised rate, but that is, actually, a slowdown from over 18% earlier this year.

Still, at 2-4 percent, things in 1Q 2015 are not as bad, and certainly not worse, that full year consensus forecast of 4.1 percent this year. And capital outflows eased significantly in 1Q 2015 to USD32.6 billion from USD77.4 billion in 4Q 2014.

So it is a mixed bag, but crucially, the economy is performing close to previous expectations, with no significant downside surprise between January and today. Which means that it is rather unclear which part of expectations forward warrants 'negative' outlook, given there is already a 'negative' outlook reflected in the affirmed ratings?

S&P tries to explain: “The outlook remains negative, reflecting our view that we could downgrade Russia if external and fiscal buffers deteriorate over the next 12 months faster than we currently expect. We could also lower the ratings if Russia’s monetary policy flexibility were to diminish further.”

But contrasting this, is S&P own outlook published in recent weeks covering key sectors and economic activity. In April 13 note, S&P estimated that 5 largest Russian banking groups have lost USD4-5 billion in 2014 (ca 20-25% of their aggregate operating income) due to their exposure to Ukrainian assets. But forward outlook is not exactly any worse, as S&P said that 2015 losses from the same can be about the same. More significantly, S&P said that they "…estimate that Russian banking groups face aggregated Ukraine-related risks of less than 3% of their aggregated assets…. We nevertheless believe that Russian banks can withstand such costs, and that there will therefore be no rating impact for rated Russian financial groups."

And more. On April 7th, S&P itself upgraded outlook for the Russian economy: S&P own forecasts now expect 2016 growth of 1.9% (as opposed to 0.5% consensus forecasts) and a recession of 2.7% in 2015, as opposed to January 2015 forecast of 0.5% growth in 2015 and zero percent growth in 2016 and against the consensus forecasts cited above.

S&P is not the only research outfit upgrading Russian growth forecasts: JPMorgan revised recently its 2015 forecast from -5% to -4%. Russian official forecasts are also 'stabilising': Ministry of Economic Development forecasts +2.3% for 2016 and +2.5% over 2017 and 2018. CBR forecasts a drop of 3.5–4% in 2015 and growth of +1–1.6% in 2016, rising to 5.5–6.3% in 2017.

The bizarre nature of ratings agencies analysis - including inherent own-contradictions and lags - is one of the reasons why the CBR recently said they are considering gradually abandoning Big 3 agencies ratings for the country banking sector. The move would involve developing internal ratings system and, potentially, relying on other agencies in the mix.

Conclusion: altogether S&P latest ratings make some, but very limited sense and are conservative. So let them be. Russian bonds have been rallying recently and as long as oil stays firm-ish and Ruble does not experience another run, this rally will continue in the medium term. Any adverse repricing of bonds on foot of today's S&P action (and potential downgrade by Fitch) can actually create opportunities for distressed debt buyers, which will firm up prices again. Globally, there is too much money chasing too few bonds, so spike in yields in the short run can be seen by some speculators as an opportunity to pile into Russian paper. 

(Please, do not confuse this with an investment advice, as usual, for I do not do that sort of thing).

17/4/15: Pies in the skies & Irish exports: Jan-Feb 2015

Some interesting numbers on trade in goods for Ireland. As you know, I usually update these series on a quarterly basis - in part due to data volatility, in part due to lack of time. But there is something interesting afoot in the data, so here it is for the first two months of 2015 - subject to future verification of any trend.

Total imports of goods stood at EUR4.563 billion in February 2015, up 11.9% year-on-year, having risen 5.1% y/y in January. This means imports over the first two months of 2015 are up 8.3% y/y. February annual rate of growth in imports was the highest in 9 months.

Meanwhile, exports of goods and services shot to EUR7.937 billion in February, up 16.9% y/y, having posted an increase of 14.2% in January. Again, over the first two months of 2015, exports rose 15.5% y/y.

Trade balance at the end of February stood at EUR3.374 billion, up 24.3% y/y, after posting a 31.4% rise in January. Over January-February 2015, cumulated trade balance is up a whooping 27.7% y/y, and for the December-February 3 months period it is up 31.7% y/y.

These are bizarre and, frankly, unbelievable numbers. Last time we have seen this level of volatility in trade balance to the upside was in August 2012 (for one month only and then, nothing comparable to 41.1% y/y increase registered in December, 31.4% rise in January and 24.3% rise in February).

So something is brewing in the external trade stats. Last year, we had a runaway performance in the National Accounts-registered external trade numbers without having a corresponding rise in the customs reported figures, which was down to 'contract manufacturing' scheme (or whatever you want to call this accounting trick). This time around, either the said scheme is now also polluting our customs trade data or something new is afoot.

The 'new' bit appears to be the 'old' bit - look at the sources of growth in our trade:

and in our trade balance:

In simple terms, ex-Chemicals (pharma), our exports since the start of 2009. Pharma / Chemicals exports are up. Our trade balance in goods, ex-Chemicals is negative. That is right - negative (some 'exporting nation' we are) and pharma trade surplus is vast and on the rise again.

Let's take a slightly more detailed decomposition of movements in trade volumes, cumulated over the last 3 months (December 2014 - February 2015). What do we have?

• Imports of all goods ex-chemical sectors rose 6 percent year on year, or EUR561mln. Exports of same rose 8 percent or EUR683.6 million. So trade deficit here shrunk by EUR122 million y/y - a good result, but accounting for only 5 percent of the entire gain in trade surplus over the same period across the economy.
• Imports of chemicals and related products (pharma in broad sense) were up EUR423.4mln or 16% y/y, but exports of same rose EUR2.592 billion or 22% y/y. Trade balance here rose by EUR2.169 billion.
• So 95% of the trade balance gains in December- February 2015 was down to the category known as Chemicals and related products, n.e.s. (5) and only 5% of the gains were down to the rest of the entire goods-related economy.

And guess what: the 'old' news is truly 'old': the ratio of exports to imports in the economy excluding chemicals sector is falling - steadily, since at least 1995. Meanwhile, the ratio of exports to imports in the chemicals sector, having fallen on foot of patent cliff in 2009-2013 is now rising once again since Q1 2014. Purely as a coincidence, Q1 2014 is when the bogus exports from the 'contract manufacturing' schemes started showing up in the official national accounts data.

Incidentally, the above also explains the miracle of Irish productivity - the massive 'improvements' of which in recent years is nothing more than a pharma (and few other MNCs-dominated sectors, some not included in the goods data and polluting our services data instead) rebalancing into new tax optimisation schemes, post-patent ones.

Welcome to the land where sand castles are sold to visitors as 'de real ting' and pies in the skies are served for desert...

16/4/15: Newsweek on Russian Economic Recovery

An interesting piece on not-so-tanking Russian economy: http://www.newsweek.com/2015/04/24/putin-was-right-be-confident-about-russias-economy-321934.html

The key point is the same I have been repeating throughout my earlier notes: imports substitution.

The only problem is that absent investment, imports substitution is reversible. To make it sustainable, Russia needs reforms and investment. And the two are in short supply, still.

15/4/15: Official Sector Exposures to Greece

As Greek crisis enters a new turn of the spiral, here are full official sector exposures to Greece by country:

Source: @FGoria 

16/4/15: QE and Negative Rates: It's So Good, It Hurts...

Here is an unedited version of my article for Manning Financial on the upcoming pain in the global markets from the Central Banks activism.


With spring sunshine, the glowing warmth of the overheating bonds markets is bringing about the scent of optimism to the macro-analysts' desks. On March 19th, the NTMA issued EUR500 million worth of 6mo notes with a yield of -0.01%. With a few strokes of the 'buy' keys, the markets welcomed Ireland to the ever-expanding club of nations that enjoy the privilege of being paid to borrow from private investors.

In a way, this is the story of Ireland's recovery distilled to a singular event: with the Government borrowing costs at their historical lows, the memory of the recent crises is fading fast from the pages of our newspapers. Alas, the drivers of this recovery are illusory. All are temporary, none are structural or sustainable, in the long run. In fact, the current markets reprieve is concealing the real dangers for domestic investors – dangers of new asset bubbles and potential future losses.

Take a look at the euro area sovereigns at large.

After years of austerity, 2015 is shaping up to be a year of broadly-speaking neutral public spending. In other words, as the euro area Governments' debt remains sky high, public deficits are unlikely to shrink by any appreciable amount. Why bother with reforms, when you can be paid by the markets to borrow? Aptly, as the chart below shows, European economic policy uncertainty remains at crisis period averages, well above the safety range of pre-crisis years.


European Policy Uncertainty Index  (including period averages confidence intervals)

Source: data from PolicyUncertainty.com


Although the Government is usually quick to claim credit for the massive improvements in Irish yields, in reality, Dublin has little to do with these. At every point from Q3 2011 through today, large scale declines in the Government cost of borrowing came courtesy of the ECB. The latest gains are no exception: the ECB has just launched a sizeable bonds-buying programme and with it, the quantum of negative yield debt in the global markets has gone from roughly USD3.6 trillion in January to USD4.2 trillion by mid-March. As of now, 19 percent of the Global Bond Index-listed debt is trading in negative rates territory.

This, by far, represents the largest long term challenge for investors and the greatest risk to the global economies. Expansionary monetary policy pursued by the central banks around the world, including the ECB aims to push up economic growth and reduce the risks of deflation. It also attempts to repair the monetary policy transmission mechanism: that cheap ECB-supplied liquidity is being lent by the banks to companies and households in the forms of new credit.


TANGIBLE RISKS

However, from the investors’ perspective, this monetary activism can end up backfiring. For a number of reasons.

Firstly, as shown in Chart 2 below, monetary policy-driven credit expansion is propelling stock markets and debt markets valuations to all-time highs across the advanced economies with absolutely no tangible connection to real fundamentals, such as growth in economic activity, household incomes, employment, and even capital investment. By the very definition of the financial bubbles, current monetary policies activism is inflating returns expectations unanchored in reality.

Secondly, monetary expansion means that households and firms struggling with debt are given a short-run reprieve from facing the true costs of their borrowings. But the day of reckoning awaits in the future. This means that households and corporates are likely to continue engaging in precautionary savings even as the Central Banks drop rates and bonds markets bid the cost of issuing debt down. Meanwhile, households and companies with low debt exposures are likely to save more to offset declines in their returns on deposits. Taken together, these factors are likely to further suppress domestic demand, while setting us up for a major crisis once the cost of debt starts rising in the future.

Thirdly, negative yields are, like all bubble-generating factors, self-reinforcing in their nature. With central banks increasingly charging commercial banks for deposits, banks prefer buying bonds even in the presence of the negative yields. This means that negative policy rates are reinforcing the dysfunctional monetary mechanism, locking in more liquidity into government bonds and driving yields on government paper further down. The resulting increases in bonds prices incentivise commercial banks to gamble on future capital gains by buying even more bonds. This spiral of demand for government debt depresses banks future profitability as investors bid bonds prices up and loads more risk of significant future losses that will materialise once QE policies begin to unwind.

Another pesky side effect of this is the banking sector stability. Negative interest rates on Central Bank deposits lead to lower deposit rates for banks' customers. Banking sector loans-to-deposits ratios rise, making banks more dependent on the shadow banking system for funding and more levered. Interestingly, in the U.S. at least one large bank, J.P. Morgan has already announced that it will be charging customers for large deposits up to 5.5 percent annual fee.

Fourthly, negative rates and yields are increasing the probability of monetary policy misfires - a scenario where one or several Central Banks around the world can tighten policy too fast and/or too early, completely derailing economic recovery. This problem is global and contagious. Investment grade government bonds are effectively substitutes for each other in majority of investment portfolios. As the result, negative yields in the euro area today are keeping yields low in other advanced economies. This is already causing discomfort in the U.S. where dollar rise relative to other currencies is being driven by a combination of two factors: the expected mismatch between U.S. and euro area policy rates, and investors' fear of Fed policy errors over the next 3-6 months.

Fifthly, the demand for negative yield bonds appears to be setting the unsuspecting investors for a fall. In a recent research note, the investment bank Jefferies discovered that much of the demand for such paper comes from indexed funds. Investors in these extremely popular funds simply have no idea that the strategy the funds pursue is not designed for the world where top-rated bonds are paying negative yields. And as funds start posting losses, the same investors are likely to rush for safety into other asset classes – namely equity. Yet, with equities already at historical highs, the safety-minded investors will be left with buying even more assets at bubble valuations.

Sixthly, negative yields on Government bonds are a disaster waiting to happen for insurance, asset management and pension sector as they create huge risks at the heart of these companies long-term investment portfolios. As insurance companies and pensions funds chase the yield, premia will have to rise, risks embedded in pensions portfolios will jump and returns on longer term contracts will fall. As the result, some financial analysts are warning of not only economic, but also political consequences of the monetary policy activism.

The bankers' regulatory body, the Bank for International Settlements is not amused. In a recent statement, Claudio Borio, the head of the BIS monetary and economic department said it is simply impossible to tell how investors, consumers, voters and the governments are going to react to the negative yields and interest rates. "…technical, economic, legal and even political boundaries may well be tested. The consequences should be watched closely, as the repercussions are bound to be significant, on the financial system and beyond," Mr Borio said.


IRISH INVESTOR PERSPECTIVE

From Irish investors point of view, the risks arising from the euro area negative rates and yields environment are significant.

In a study published in 2005 (http://www.bis.org/publ/work186.pdf), BIS researchers found asset price busts, especially those associated with large property markets adjustments, to have much more painful economic impacts than deflation. The study covered all advanced economies over the period from 1873 through 2004 and included analysis of deflation effects on Government debt and growth. The same results were on firmed by another BIS study published earlier this year (http://www.bloomberg.com/news/articles/2015-03-18/the-central-bank-of-central-banks-says-keep-calm-about-deflation).


Global Markets, Irish Problems

Source: Author own calculations based on data from CSO, Central Bank of Ireland and Bloomberg

As of today (see Chart 2), Ireland is still experiencing property prices that are 38 percent below the pre-crisis peak (in Dublin 39 percent), private debt that is, once controlled for sales of mortgages, and Nama and bank loans to non-banking investors, stuck around mid-2005 levels, and growth predominantly driven by the multinational corporations' tax optimisation strategies. In this environment, negative rates are masking the extent of the problems still present in the economy, while euro devaluation, coupled with exports growth concentration in the MNCs-led sectors, are creating a false impression of improved productivity and competitiveness.

For domestic investors, this means that both equity, corporate and government debt markets  in Ireland and across the euro area are simply out of touch with macroeconomic reality on the ground. The global Central Banks-led policies are pushing our traditional investment and pensions portfolios into the high risks, low returns corner, commonly associated with financial assets bubbles. While some speculative exposure to the US and Emerging Markets assets is always welcome, the bulk of investment allocation today should be focused on conservative view of key risks presented by the negative rates and yields environment. Tax planning, portfolio cost minimisation, low gearing and high liquidity of investment allocations should take priority over pursuit of short term yields and capital gains.

15/4/15: Global Information Technology Report 2015: Who's the Best? Not We...

We have Silicon Docks and all the ICT IP stuffed into 'knowledge development boxes' and shipped via this country across the world that one can dream about, we have European HQs of dozens of ICT firms that are here solely for the reason of Ireland having the best workforce and skills in the world, and we have policymakers that cut ribbons on 'future jobs' reports on a monthly basis, promising tens of thousands of ICT sector employees 'in your neighbourhood near you' in the next 5-10-15-20... years… or sometime after the tenure of the Government of the day.

And we rank 25th in the world in the Global Information Technology Report 2015, right between the Digital/ICT Powerhouses of Belgium and France. Yes, that is right - we rank the lowest of all English-speaking advanced economies in the world: big, small, oil and natural resources rich and poor, small and large.

Don't believe me? Well, here: http://reports.weforum.org/global-information-technology-report-2015/network-readiness-index/.


In regulatory frameworks sub-index - the so-called "Environment Sub-index", Ireland ranks 12th. Which is, basically a bunch of political tosh. We rank 14th in "political and regulatory environment pillar (nine variables) [which] assesses the extent to which the national legal framework facilitates ICT penetration and a safe development of business activities, taking into account general features of the regulatory environment (including the protection afforded to property rights, the independence of the judiciary and the efficiency of the law making process) as well as more ICT-specific dimension (the passing of laws relating ICT or the software piracy rates)." Doh!

In laws relating to ICT we rank 23rd. Where it matters more… things are slipping and sliding and slipping again.

In IP protection, we do better - 14th place. Because someone needs to guard the prevailing interest of MNCs more than creating legal system to support general ICT sector.

We do better in Business and Innovation Environment - scoring 13th place, just ahead of Chile and Israel. But when it comes to availability of latest technologies - the cutting edge 'innovation' stuff - we are 22nd. Below Puerto Rico and New Zealand…

Capital of VCs is Dublin. And we have all the cash disbursed by state innovation funds and enterprise funds and entrepreneurship funds… but… we rank 46th in the world in Venture Capital Availability.

Tax rankings? Well, we do well-ish - ranked 26th. You see, many newcomers to the zero sum game of beggar thy neighbour tax competition are ahead of is, but majority of them are developing countries. Majority, but not all.

We rank 27th in the world in terms of time it takes to start a new business and 23rd in terms of number of procedures it takes to start a new business. That is pretty dire for a country aiming to be an entrepreneurship powerhouse. But then again, the report is not even looking at self-employment and sole traders. My guess, in that early stage entrepreneurship area we would be closer to 50th place.

Want a real wallop? Take Government procurement of advanced technologies - a proxy for how advanced is the public sector in ICT adoption and deployment… we rank dis-respectable 62nd. So our mandarins and ministers presiding over the digital strategies and ICT development and policies are working in an environment that is worse than many African countries when it comes to procuring advanced technologies for their own use. Never mind, abacus is fine for computing economic impacts and jobs potential for all those white papers on Innovation Ireland.

Per report, "The readiness subindex measures the degree of preparation of a society to make good use of an affordable ICT infrastructure and digital content, with a total of twelve variables." In readiness we are… 29th in the World (Ukraine is ranked 28th and Poland 30th). Like the 'neighbourhood'?

"The infrastructure and digital content pillar captures the development of ICT infrastructure" which ranks Ireland 26th in the world, below Slovenia and ahead of UAE. How? Well, our mobile networks coverage puts us into 66th place, between Georgia and Tunisia. Our electricity production environment is ranked 35th, our international internet bandwidth is ranked 20th, and in secure internet servers we rank 21st.

Here's a good one: "The affordability pillar assesses the cost of accessing ICT, either via mobile telephony or fixed broadband internet, as well as the level of competition in the internet and telephony sectors that determine this cost." Why is it good? Because we spent many years talking about cost competitiveness. And here Ireland ranks 87th in the world. Mobile tariffs here are so expensive, we rank 125th in this area in terms of affordability. Fixed broadband tariffs? Better - at 59th in the world. Level of competition index for Internet services, international long distance services, and mobile telephone services puts us at the top tier, ranked 1st with a long list of other 61 countries with the same ranking.

Now, wait a second: in a regulated sector with high degree of competition, prices are still dear. How can that be? Why, of course, only if the regulator is fixing them in excess of what the market would set them. Happy times all around, unless you are a consumer. Oh, and do note - our politicians endlessly talk about the need for 'labour cost competitiveness', but where we really lack competitiveness, it turns out is in the old fashioned regulated services that politicians and public sector regulate and/or legislate.

Finally - skills. The report measures these quite esoterically. "The skills pillar (four variables) gauges the ability of a society to make an effective use of ICT thanks to the existence of basic educational skills captured by the quality of the educational system, the level of adult literacy and the rate of secondary education enrolment."

So this is about basic skills, not specific ones. And here we rank well: 8th in the world overall, 5th in how well does the educational system in your country meet the needs of a competitive economy, but only 24th in the quality of math and science education in schools. This, by the way is the stuff of secondary education, not real level of ICT skills present in the economy (those require tertiary as an entry level and fourth and higher levels education for serious engagement). But, when it comes to high school enrolments (secondary education) we are tops of pops, ranked 6th.


So with all these 'skills' achievements, you would expect that we are heavy users of ICT and new technologies - skilled, savvy, early adopters... but, when it comes to actual usage of ICT in real life, Ireland ranks 28th in the world.

Stop and pause, again: for all the achievements of our Docks and Valleys, Centres of Excellence and Start Ups programmes, Innovation Academies and FDI, incubators and accelerators, hubs and labs, summits and venues relating to tech… Ireland's actual usage of real ICT is just a notch worse than Belgium's (ranked 27th) and a notch better than Saudi Arabia's (29th).


You really don't need to go any further than that to either throw the report into a bin or bring the Government policy papers on ICT sector strategies into your local recycling centre. Because either one spoofs or the other. The two are simply not compatible.

Unless, of course, you remember that we are the land of FDI… where everything is possible: technologically weak domestic economy, government and society can coexist with technologically advanced foreign/exporting economy and society; technologically un-enabled ministers and officials can write eloquent papers about technologically enabled economy… Ah, there, all good now... we are the best... there...


Update: h/t to @prfnv for the following link: http://www.shanghairanking.com/SubjectCS2014.html which lists top 200 universities in Computer Sciences... of which none are from Ireland.

15/4/15: In Case You've Missed it: Google Reply to EU Commission

Google reply to the EU Commission charges: http://googleblog.blogspot.be/2015/04/the-search-for-harm.html. From people who created one of the most successful platforms for innovation (predominantly - innovation by others), a response to the accusations levelled by the people who never succeeded in creating anything innovative.

Still wondering why Europe is celebrating the prospect of reaching 1.2-1.4 percent growth this year as an achievement?...

15/4/15: Ruble Trades Below 50 to USD

Russian Ruble has crossed an important marker today, closing below 50 to USD for the first time since the end (28th to be precise) of November, effectively erasing all of the losses sustained during the speculative run of December 2014.

There has been more volatility in euro markets, so a bit less of an event today there:

Longer-term chart shows Ruble dramatic gains in both Euro and Dollar terms from around February

As I said before, these gains can prove to be temporary, so stay long with care, if you are long...

15/4/15: S&P Ukraine Ratings and Reality Check on IMF Programme

S&P Ratings Services cut long-term foreign currency sovereign credit rating on Ukraine to CC from CCC- with negative outlook and held unchanged the long-term local currency sovereign credit ratings at CCC+.

Per S&P release: "The downgrade reflects our expectation that a default on foreign currency central government debt is a virtual certainty." S&P also warned that any 'exchange offer' - an offer mandated under the IMF latest loan package to Ukraine (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) - will constitute default. "Once the distressed exchange offer has been confirmed, we would likely lower the foreign currency ratings on Ukraine to SD and the affected issue rating(s) to D".

Per S&P: "The Ukraine ministry of finance’s debt operation is guided by the following objectives: (i) generate $15 billion in public-sector financing during the program period; (ii) bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025… The treatment of the eurobond owed to Russia (maturing in December 2015) is likely to complicate matters. The Ukrainian government insists it will be part of the talks, while the Russian government insists that the bond, although issued under international law, should be classified as "official" rather than "commercial" debt given the favorable interest rate and the fact that it was purchased by a government entity. …if Ukraine has to pay the $3 billion in debt redemption this year, it will make it very difficult for Ukraine to find the $5 billion in expected debt relief in 2015 that underpins the IMF’s 2015 external financing assumptions."

Forbes labeled the new rating for Ukraine as "super-duper junk" (http://www.forbes.com/sites/kenrapoza/2015/04/10/ukraine-debt-rating-now-super-duper-junk/)

Beyond the restructuring threat, there is economic performance that is not yielding much consolation: "The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,”

S&P forecast is for the economy to shrink 7.5% in 2015, following the decline of 6.8% in 2014. The S&P forecasts Ukrainian GDP to grow by 2% in 2016, 3.5% in 2017 and 4% in 2018. Inflation is expected to peak at 35% this year from 12.2% in 2014 and fall to 12% in 2016 and 8% in 2017. Government debt is set to rise from 40.2% of GDP in 2013 to 70.7% of GDP in 2015 and to 93% of GDP this year, declining to 82.6% in 2018.

Meanwhile, ever cheerful IMF is projecting Ukrainian GDP to shrink by 'only' 5.5% in 2015, and grow at the rates similar to those forecast by S&P between 2016 and 2018. IMF sees inflation rising to 33.5% this year. Government debt projections by the IMF are only marginally more conservative than those by the S&P.

Meanwhile, lenders to Ukraine have already pushed out a tough position on talks with the Government: http://www.bloomberg.com/news/articles/2015-04-09/ukraine-creditors-fire-opening-salvos-before-restructuring-talks

As I noted before, this an extraordinary 10th IMF-assisted lending programme to Ukraine since 1991. None of the previous nine programmes achieved any significant reforms or delivered a sustainable economic growth path. In fact, the IMF presided, prior to the current programme over nine restrcturings of the Ukrainian economy that produced more oligarchs, more corruption at the top of the political food chain and less economic prosperity, time after time.

Meanwhile, over the same period of time, world's worst defaulter, Argentina, has managed to have just three IMF-supported lending programmes. Argentine bag of reforms has been mixed, but generally-speaking, the country is now in a better shape than it was in the 1990s and is most certainly better off than Ukraine, as the relative performance chart of two economies over time, based on IMF WEO (April 2015) data, indicates:

Somewhere, probably in the basement of the 700 19th St NW, Washington DC, there exists a data wonk that truly believes that Ukrainian debt is 'sustainable' and that this time, things with 'structural reforms' will be different from the previous nine times. I would not be surprised if the lad collects Area 51 newspapers clippings for a hobby. He's free to do so, of course. But the Ukrainian economy is not free when it comes to paying for the IMF's bouts of optimism. And with it, neither are the Ukrainian people.

What the Ukrainian economy really needs right now is a combination of pragmatic political reforms to bring about real stabilisation, root-and-branch clearing out of corrupt elites, including business elites and not withstanding the currently empowered elites, assistance to genuine (as opposed to corrupt rent-seeking) entrepreneurs, all supported by assisted and properly structured FDI, direct development aid and a real debt writedown. The IMF-led package does not deliver much on any of these objectives. If anything, by passing the cost of reforms onto ordinary residents, it does the opposite - drains investment, saving and demand capacity from the economy, imperilling its ability to create new growth and enterprises.

15/4/15: Russian Foreign Exchange Reserves

Few weeks ago, based on the three weeks data from the Central Bank, I noted an improvement in Russian Forex reserves, while warning that this requires a number of weekly observations to the upside to confirm any reversal in the downward trend.

Now, with monthly data available for the full month of March, my concerns about temporary nature of improvements have been confirmed. Full month of March data shows a decline, not a rise, in forex reserves. Specifically, total reserves dipped from USD360.221 billion at the end of February to USD356.365 billion at the end of March - a m/m decline of USD3.856 billion.

Now, in monthly terms, March decline was the smallest since October 2014 and the second smallest (after September 2014) in 17 months. Nonetheless, forex reserves are now down to the levels of March-April 2007, having fallen USD129.766 billion y/y (-26.7%). Over the period of sanctions, total reserves are down USD136.961 billion (-27.8%). Over Q1 2015 the reserves are down USD29.095 billion.

Month on month, foreign exchange reserves (combining foreign exchange, SDRs and reserve position in the iMF) are down USD4.338 billion, with USD3.646 billion of this decline coming from foreign exchange alone. Gold holdings are up USD482 million month on month.

Gold, as percentage of total reserves, currently stands at 13.265%, the highest since November 2000. Gold holdings performed well for Russia over the period of this crisis, rising USD3.917 billion year on year through March 2015 (+9%) and up USD2.684 million since the start of the sanctions.

In terms of liquid cash reserves, foreign exchange holdings are down at USD298.665 billion at the end of March 2015, a level comparable to January-February 2007. end of March figure represents a decline of USD131.024 billion y/y (-30.5%) and the decline during the period of the sanctions is even steeper at USD136.9 billion (-31.4%).

Good news: Russian economy is past the 2015 peak of external debt redemptions (see: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html).

Bad news: there is another USD54 billion worth of external debt that will need repaying (net of easy inter-company roll overs) in Q2-Q4 2015. Worse news: Q1 declines in foreign reserves comes with CBR not intervening in the Ruble markets.

Good news: capital flight is slowing down.

Bad news: capital flight is still at USD32.6 billion over Q1 2015 (http://www.themoscowtimes.com/business/article/russian-capital-flight-slows-sharply-in-first-quarter/518927.html) although much of that is down to debt redemptions.

Which means there is little room for manoeuvre anywhere in sight - should the macroeconomic conditions deteriorate or a run on the Ruble return, there is a very much diminishing amount of reserves available to deploy. Enough for now, but declining…

As I said before: watch incoming risks.

14/4/15: Russian external Debt Redemptions: Q1 2015 - Q3 2016

With Q1 out of the way, Russia passed a significant milestone in terms of 2015 external debt redemptions.

In total USD36.647 billion of external debt matured in Q1 2015, the highest peak for the period of Q1 2015 - Q3 2016. Even controlling for inter-company loans and equity positions, the figure was around USD24 billion for Q1 2015, again, the highest for the entire 2015 and the first three quarters of 2016.

Here is the breakdown of maturing external debts:

All in, over the last 3 quarters alone, Russia has managed to repay and roll over USD156.23 billion worth of external debt, with net repayment estimated at around USD96.5 billion.

Painful in the short run, this is not exactly weakening Russian economy in terms of forward debt/GDP and other debt-linked ratios.

13/4/15: Greek Deposits: Worse Run than in the Previous Iterations

Couple of interesting graphs on the Greek crisis via @FGoria

First, the ECB supports vs ELA for Greek banks: 

Notable trend above is for support switching. At the rise of first round of Greek crisis (post PSI), ECB funding was displaced by the ELA. The same pattern is now replaying once again.

Next: Greek banks deposits:

Again, the above shows the re-amplification of the crisis and continued decline in deposits levels, with acceleration in the rate of deposits flight. Outflows are now present across all maturities of deposits, and there is a strong increase in outflows for deposits with maturity in excess of 1 year.

The above charts are dire: covering the period for January-February 2015, we are witnessing a full-scale deposits flight (a funders' run on the banks) that is more extreme (in volume and composition of deposits outflows) than during the previous iterations of the crisis.