4/8/15: IMF Downgrades Ukraine Growth Outlook

IMF just published its Article IV consultation paper on Ukraine. Here are some key points (I am staying out of extensive commenting on these, but emphasis is added in the quotes).

Before we start, it is important to highlight that IMF notes significant breadth and depth of reforms already undertaken by the Ukrainian authorities, albeit warns about potential slippage in future reforms. Given the overall environment (geopolitical and domestic) in which these reforms are taking place, Ukrainian Government deserves a positive assessment of their work in a number of important areas.

"The 2015 baseline growth projection has been marked down to -9 percent (relative to -5.5 percent at the EFF approval), driven by a delayed pick up in industrial production, construction, and retail trade, and expectations of a weaker agricultural season." Note: this is a massive contraction compared to Programme projections.

"Domestic demand will be somewhat more constrained than anticipated earlier by tighter credit conditions and larger-than-expected decline in real incomes amid higher inflation."

"Growth is expected to start recovering in the second half of the year, supported by growing consumer and investor confidence, gradual rehabilitation of the banking system, and restoration of broken supply chains in metals, mining, and energy production. Later on, manufacturing should also start benefitting from the restored competitiveness of Ukraine’s exports. However, the recovery is expected to take hold only gradually through 2016. Medium-term growth projections remain unchanged." Note: you can see projections for following years in the table at the end of this post.

"The 2015 inflation has been revised upwards to 46 percent at end-2015, compared to
27 percent at program approval, driven by the faster-than-expected pass-through effects of the large exchange rate overshooting in March."

Note: again, this is a massive revision on programme-assumed inflation. Take together with the GDP revision above, it is hard to see how the IMF can continue arguing sustainability case for the programme at this stage, without hoping for massive recovery.

"Inflation is projected to recede quickly in 2016 to around 12 percent as the one-off effects subside and economic stabilization takes hold. Monthly core inflation rates are already well below 1 percent and expected to remain in such territory, as the negative output gap, subdued demand, and the stabilization of the exchange rate will put downward pressure on inflation."

Here's an interesting bit: Inflation 'one off' drivers include IMF-required adjustment in energy prices:

"The rapid pass-through of the large exchange rate depreciation in February and increases in regulated energy prices pushed inflation to 61 percent y-o-y in April. As the hryvnia recovered and stabilized in April–June, prices of some imported goods declined while increases in prices of non-tradables remained moderate. As a result, inflation in June moderated to 0.4 percent m-o-m, or 57½ percent y-o-y. The high y-o-y number masks the sharp disinflation that has already occurred: the seasonally adjusted annualized inflation in May–June 2015 fell to 13 percent."

But energy prices are yet to be fully inflated to their targets, so more is to come: "Gas and heating prices increases. Gas prices for households were increased by 285 percent on average, effective April 1. Heating prices were also increased by 67 percent, effective May 8. Despite these increases, gas and heating prices remain among the lowest in the region. The program aims to reach 75 percent of cost recovery gas and heating prices based on international prices by April 2016 and 100 percent by April 2017."

Which, of course, means there will be much more pain for ordinary Ukrainians, comes winter.

"The overall balance of payments remains broadly unchanged. The current account deficit is expected to widen to 1.7 percent of GDP in 2015, compared to 1.4 percent of GDP at program approval. Both exports and imports are projected to decline considerably this year, driven by (i) falling export prices and larger-than-expected loss of export capacity stemming from the conflict; and (ii) the weaker economy and steeper fall of energy consumption."

"Risks to the outlook remain exceptionally high. Risks to economic growth are predominantly on the downside reflecting (i) uncertainty about the duration and depth of the conflict in Eastern Ukraine; (ii) prolongation of the discussions on the debt operation (which could disrupt capital flows); and (iii) slippages in policy implementation. In addition, confidence could fail to revive due to these factors, or due to a more protracted bank resolution process. Higher-than-expected inflation—due to inflation expectations becoming more entrenched—could reduce domestic demand further. On the upside, an early resolution of the conflict could boost confidence and growth faster than projected."

"…Regarding program implementation, policy reversals, including regarding the flexible exchange rate policy and fiscal/energy price adjustment could lead to continuing balance of payments problems and raise repayment risks."

"Against significant headwinds, the authorities showed again their determination to stay the course of the program. ...However, although domestic support for a new Ukraine is strong, pressures from populist forces and vested interests are growing. Moreover, the local elections in the fall pose a risk that the reform momentum could fade."

Bad news on debt levels are:

Note: Public debt levels assume meeting IMF target for restructuring current debt. There is another dreamy feature to both graphs - as with all IMF programmes, debt peaks out in year one. Given past histories, however, the forecasts don;t quite turn to reality.

Another set of bad news: Non-performing Loans (NPLs) as % of total assets was bad in 2013 and getting massively worse now:

And a summary of macro performance indicators and projections:

4/8/15: Of Corporate Stash and Irish Cash

There are two things to notice in this Bloomberg chart:

Source: http://www.bloombergview.com/quicktake/profit-shifting-avoid-tax

First the obvious one: Our Not-a-Tax-Haven Ireland is in the company of Bermuda, Lux and Switzerland, alongside the equally Not-a-Tax-Haven Netherlands (that Double-Dutch Sandwich is an all-transparent arrangement to attract companies to Dutch quality workforce, only second to the best-in-class workforce of Ireland). That is trivial stuff, though.

Second (less trivial) is the quantum of profits domiciled in the likes of Ireland. It has been large and rising. And thus, if begs a question: What happens to Irish 'economic growth' when these profits are repatriated either for investment purposes abroad (e.g. in Asia Pacific or elsewhere) or on foot of any future tax amnesty in the US or both?

Answers to that question should be mailed to every Irish Minister so keen on confusing MNCs profits and Irish economic miracles.

4/8/15: Global Manufacturing PMI Signals Faltering Growth in July

Global Manufacturing PMI was unchanged in July compared to June at 51.0, signalling weak growth and stalled growth momentum. Overall, activity is now at "its joint-weakest reading during the past two years".

Per Markit: "Underpinning the increase in output was further growth in new order inflows. However, the pace of improvement in new business slowed as new export orders declined for the second time in the past three months. New export business decreased in China, Germany, France, the UK, Taiwan, South Korea, Greece, Turkey, Indonesia, Vietnam, Russia and Brazil, and was little-changed in the US and Malaysia."

You can read more on this in my coverage of BRIC Manufacturing PMIs here: http://trueeconomics.blogspot.ie/2015/08/4815-bric-manufacturing-pmis-july-2015.html

4/8/15: Irish Manufacturing PMI: July 2015

Irish Manufacturing PMI released by Markit showed accelerated growth in the sector in July, with activity growth signal rising from 54.6 in June to 56.7 in July. This marks 26ht consecutive month of index readings above 50.0 (23rd consecutive month of readings statistically significantly above 50.0).

Overall, the trend remains for high growth in the sector, albeit the rate of increase in growth (second derivative) is moderating (turning negative) since around February 2015.

It is worth noting that the moderating trend in PMIs is confirmed by the most recent QNA datum showing Industry sector - excluding Building and Construction - in a q/q decline in 1Q 2015 of 0.31%, while the sector posted a 9.63% growth year-on-year.

Overall, another month of gains in Manufacturing is a good sign of underlying strength in the sector.

4/8/15: BRIC Manufacturing PMIs: July 2015

Markit released Manufacturing PMIs for July for all BRIC countries, so here is the snapshot of the data:

• Brazil Manufacturing PMI rose marginally to 47.2 in July from 46.5 in June, marking 6th consecutive month of manufacturing activity in contraction (below 50.0), with five of these months PMIs statistically significantly below 50.0. 3mo average though July is now at extremely low 46.1 against 3mo average through April 2015 at 47.3 and 3mo average through July 2014 at 48.9.
• Russia Manufacturing PMI fell from 48.7 in June to 48.3 in June - details are covered separately here: http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html
• China Manufacturing PMI fell to 47.8 in July from 49.4 in June, signalling deterioration in sector performance and marking fifth consecutive month of contraction in the sector. This is the worst reading in the index since July 2013. 3mo average through July is now at 49.2 against 49.7 3mo average through April 2015 and 50.6 3mo average though July 2014.
• India Manufacturing PMI was the only PMI for the BRIC economies that stood above 50.0 in July, rising from 51.3 in June to 52.7 in July. This marks 21st consecutive month of above 50.0 readings. 3mo average through July 2015 is now at 51.7 (barely at statistical significance line) against 3mo average through April 2014 at 51.5 and 52.0 3mo average through July 2014.
• Three out of four BRICs economies have now been in Manufacturing activity decline territory every month since March 2015. 
• Based on 3mo averages, growth in May-July 2015 is down compared to same period in 2014 in all four BRIC economies.

Summary: BRIC manufacturing remains deep under water, with three of the four economies struggling with contracting manufacturing sector activity. Which is consistent with poor global trade performance (http://trueeconomics.blogspot.ie/2015/08/2815-global-trade-welcome-to-economic.html).

3/8/15: Europe as a Demographic Disaster

Here are the latest UN projections for population growth though 2100 (best viewed by clicking on the image to enlarge):

Source: http://esa.un.org/unpd/wpp/Publications/Files/Key_Findings_WPP_2015.pdf.

Of all major regions around the world: only three are likely to post negative population growth. These are:

• Europe - posting the most disastrous, by a mile, demographic prospect of all regions;
• Followed by Asia, where cumulated population decline will be less severe (through 2100) than in Europe; and
• Finally, by Latin America.

Here is a table calculated by me based on the UN projections showing 30 countries with largest declines in population over 2 periods: 2015-2030 and 2015-2050:

I group these countries by a historical sub-regions as follows:

• EU 
• Former USSR excluding currently in the EU

Several striking observations emerge:

• One hears quite frequently media comments about the disastrous situation with Russian demographics. Except: Russian Federation is not in 30 countries with worst population growth performance over 1950-2015 period, while its counterparts in the USSR - Ukraine, Georgia and Belarus are. Russia will be ranked 19th worst performing (demographically) country in 2015-2030 and 2015-2050 period. But compare this to Ukraine (to be ranked 4th in 2015-2030 period and 3rd in 2015-2050 period); Republic of Moldova (expected to rank 11th in 2015-2030 period and 4th in 2015-2050 period); Belarus (forecast to rank 12th in both periods); Georgia (ranked 20th in 2015-2030 period forecasts - better than Russia, but 15th in 2015-2050 forecast - worse than Russia). I have not heard much of 'disastrous policies' assessments in the media concerning their demographic collapse predictions.
• Another interesting aspect of the table is the exceptionally poor forecasted performance in demographics for the Eastern European states members of the EU.

You can see the above point 2 from the table below that selects EU member states:

Just for comparative reminder: Russian population (the benchmark case for media-covered demographic disaster) is forecast to shrink by 10.4% between 2015 and 2050. Which is bad, but better than 10 out of 29 EU member states (not benchmarks, according to the media, of a demographic disaster).

3/8/15: IMF on Russian Economy: Private Sector Debt

Continuing with IMF analysis of the Russian economy, recall that
- The first post here covered GDP growth projections (upgraded)
- External Debt and Fiscal positions (a mixed bag with broadly positive supports but weaker longer-term sustainability issues relating to deficits).

This time around, let's take a look at IMF analysis of Private Sector Debt.

As IMF notes, economic crisis is weighing pretty heavily on banks' Non-performing Loans:

In part, the above is down to hefty write downs taken by the banks on Ukrainian assets (Russian banks were some of the largest lenders to Ukraine in the past) both in corporate and household sectors.

However, thanks to deleveraging (primarily in the corporate sector, due to sanctions, and some in household sector, due to economic conditions), Loan to Deposits ratio is on the declining trajectory:

Note: Here is a chart on deleveraging of the corporate sector and for Russian banks:

In line with changes in demand for debt redemptions, FX rates, as well as due to some supports from the Federal Government, banks' exposure to Central Bank funding lines has moderated from the crisis peak, though it remains highly elevated:

Illustrating the severity of sanctions, corporate funding from external lenders and markets has been nil:

And Gross External Debt is falling (deleveraging) on foot of cut-off markets and increased borrowing costs:

So companies are heading into domestic markets to borrow (banks - first chart below, bonds - second chart below):

Net:

1) Corporate external debt is falling:

2) Household debt is already low:

3) But the problem is that deleveraging under sanctions is coinciding with economic contraction (primarily driven by lower oil prices), which means that Government reserve funds (while still sufficient) are not being replenished. IMF correctly sees this as a long term problem:

So top of the line conclusion here is that banking sector remains highly pressured by sanctions and falling profitability, as well as rising NPLs. Credit issuance is supported not by new capital formation (investment) but by corporates switching away from foreign debt toward domestic debt. Deleveraging, while long-term positive, is painful for the economy. While the system buffers remain sufficient for now, long term, Russia will require serious changes to fiscal rules to strengthen its reserves buffers over time.

3/8/15: IMF on Russian Economy: Debt Sustainability

In the previous post, I covered IMF latest analysis of Russian GDP growth. Here, another key theme from the IMF Article IV report on Russia: fiscal policy sustainability.

In its latest assessment of the Russian economy, IMF has reduced its forecast for General Government deficit for 2015, from -3.69% of GDP back in April 2015 to -3.3% of GDP in the latest report. However, in line with new Budgetary framework, the IMF revised its forecasts for 2016-2020 deficits to show poorer fiscal performance:

In line with worsening deficits from 2016 on, IMF is also projecting higher government debt (gross debt, inclusive of state guarantees):

Still, the IMF appears to be quite happy with the overall debt and fiscal sustainability over the short run and is taking a view that over the next 2-3 years, fiscal policy must provide some upside supports to investment.

One of the reasons for this is that IMF sees continued strong buffers on fiscal reserves side into 2020, with Gross international reserves of USD362.4 billion and 374.8 billion in 2015-2016 amounting to 13.6 months of imports and providing cover for 496% and 281% of short term debt, respectively.

Furthermore, IMF expects debt levels to remain benign, both in terms of Government debt and Private sector debt as the chart above shows.

Note: I will cover Private Sector Debt developments in a separate post, so stay tuned.

Overall, 

1) External debt situation remains positive and is improving in the sector with weaker performance (corporate sector):

Note: above figures do not net out debt written to Russian banks and corporates by their parent and subsidiary entities located outside Russia, as well as direct investment / equity -linked debt.

2) "...no sector shows maturity risk with short-term assets exceeding short-term debt in aggregate"

3) Fiscal stance appears to be expansionary, but moderate, with deficits below 4% of GDP forecast for the worst performance year of 2016.

4) "Exchange rate and liquidity risks are mitigated by the CBR's large reserve level"

Stay tuned for more analysis, including debt positions across various sectors.

3/8/15: IMF on Russian Economy: GDP Growth Upgrade for 2015-2016

IMF has just realised its assessment of the Russian economy. Several interesting aspects of this report are worth highlighting.

First up: economic growth projections. IMF actually upgraded, marginally, Russian forecasts for 2015-2016 across the key macroeconomic parameters. Here are three charts comparing GDP growth, Inflation and Current Account balance projections from the Fund across two separate reports: April 2015 WEO and today's Article IV.

And a summary of latest forecasts

Overall, small upgrade on GDP side compared to April release, for both 2015 and 2016. Expected return to positive growth in 2016 remains extremely weak and subject to huge uncertainty. Worse, when one looks into components of GDP, the picture that emerges is less 'positive'.

Domestic demand will likely remain a negative drag on growth though 2016, with expected improvement - albeit marginal - on investment side in 2017. Consumption, however, will remain a small contributor to the overall growth in 2018-2019. Investment is also to remain weak.

Structural nature of the slowdown is reflected in exceptionally weak productivity performance. This traces back to post-crisis period in its entirety. Russian economy did not experience a significant recovery on productivity growth rates post-2009 crisis and since 2010 there has ben a pronounced downward trend in productivity growth:

While relatively low unemployment is supported by decline in labour force participation rate (accelerating due to twin demographic problem of rising older and younger population shares, plus poor health performance amongst older adults):

Overall, however, declining labour force trend should have translated into increased productivity of the labour force. In Russian case, this is not happening.

Slight uptick in unemployment recently is likely to continue through 2015, but will not be enough to induce labour productivity growth acceleration:

The IMF forecasts come on foot of ruble posting woefully poor performance, falling to a 5-months low (http://www.bloomberg.com/news/articles/2015-08-03/ruble-drops-most-in-emerging-markets-with-crude-at-six-month-low) and with Manufacturing PMI showing acceleration in economic decline in July (http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html).

All of this is hardly a pleasant reading. However, not all is as gloomy as the above headline figures imply. In particular, in several key areas, macroeconomic position is relatively strong. I will blog on these in subsequent posts.

3/8/15: Secular Stagnation: Some [Still] Ask if It is Monetary or Technological...

So, is "Secular Stagnation" a Monetary-Financial Problem or a Fundamental-Technological Problem? asks Brad DeLong in his post for Washington Center for Equitable Growth http://equitablegrowth.org/2015/08/01/secular-stagnation-monetary-financial-problem-fundamental-technological-problem/ @equitablegrowth.

Of course, I already tried to answer that question and it is... both. Read here: http://trueeconomics.blogspot.ie/2015/07/7615-secular-stagnation-double-threat.html.

The reason why this makes things uncomfortable for normal economists is that admitting that the problem is two-sided makes it impossible to suggest a solution for dealing with it, except a default one of "let the time heal". And the problem with that is the pesky, nagging suspicion that time can both heal and hurt: if (or when) the next recession, however mild, strikes, in the dual demand- and supply-side secular stagnation scenario, there won't be any bullets left in the Central Banks and fiscal authorities policy 'guns' to fire at the approaching bear. The perceived omnipotence of either 'borrow to spend', 'borrow to invest' and 'print to stimulate' schools of economic thought will be going nowhere.

3/8/15: Russia Manufacturing PMI: July 2015

Russia Manufacturing PMI posted slight acceleration in downward momentum in July compared to June.

Per Markit release:

• Operating conditions deterioration was "reflective of soft demand which undermined production and new order intakes. Jobs continued to be lost, while firms reduced their inventories at a marked and accelerated pace."
• Profit margins were continuing to fall under pressure: "On the price front, competitive pressures and lower demand encouraged firms to cut their charges marginally during July. That was in spite of a marked and accelerated increase in input costs."
• July data, however, shows that "the rate of decline was fractional and remained centred on the investment goods sector as consumer and intermediate goods both recorded growth of production compared to the previous survey period."
• Forward looking indicators: "Similar trends were seen for new orders, with a fall in orders for investment goods leading to a decline at the aggregate level. …Levels of new business from abroad also continued to decline during July, with the rate of contraction accelerating since the previous survey period to the sharpest recorded since April."

In numbers terms:

• Manufacturing PMI is now down at 48.3 compared to 48.7 in June 2015 and 51.0 in July 2014. 
• 3mo average through July is at low 48.2 against 3mo average through April at 48.9 and against 49.7 3mo average through July 2014.
• Russian Manufacturing PMIs have been below 50.0 mark for 8 consecutive months now.

Overall, the picture is consistent with two key trends that have developed over recent months:

1. Manufacturing sector is not showing signs of stabilisation that are present elsewhere in the economy; and
2. Within the broad sector, imports substitution is presenting some upside opportunities in consumer goods and intermediate goods, while investment-driven capital goods are showing sharp contractions.

3/8/15: Greek Manufacturing PMI: In the Land of Imaginary Numbers

Markit Manufacturing PMI for Greece is outright disastrous.

Euro area Manufacturing PMI for July came out with a slight decrease on June 2015 reading, still beating (marginally) flash estimate:

Looking at countries ranked by PMI reading, Italy showed a surprise rise, while Austria posted a surprise fall:

But the real story is Greece:

One wonders, just how much more the Greek economy is going to contract before the Bailout 3.0 is finalised and just what new wondrously well-working structural reforms will be needed to get it out of the new hole?