4/1/16: Russian PMI in 4Q 2015: Signalling Continued Weaknesses

Having Russian PMIs for December 2015 allows us to take a look at the economy quarterly performance signals. As noted in the previous post (http://trueeconomics.blogspot.ie/2016/01/4116-russia-services-manufacturing-pmis.html) with the decline in output reflected across both manufacturing production and services activity, Russian economy’s composite PMI averaged 49.1 in 4Q 2015 which is much worse than 50.4 average for 3Q 2015, suggesting that not only did the economy failed to attain stabilisation, but that growth might have turned more negative in 4Q 2015.

Let’s take a closer look at the quarterly averages by sector.

Russian Manufacturing PMI for 4Q 2015 stood at 49.7, which is a gain on 48.4 in 3Q 2015 and marks the strongest quarterly reading since 4Q 2014, but also marks the fourth consecutive quarter of sub-50 readings. The weaknesses in Manufacturing are especially troubling, as the sector is broadly targeted for imports substitution - a major policy shift by the Government since the start of 2015. Making matters worse, the sector should have benefited from strong ruble depreciation over the last 12 months, which - as it appears so far - did not lead to substantial increase in exporting activity. In part, this reflects weaknesses in global demand, but in part it reflects structural problems in Russian manufacturing that find goods supplied by the sector of generally non-competitive quality for global markets, even amidst improved price competitiveness.

Overall, we now have four consecutive quarters of sub-50 readings in Manufacturing sector - for the first time since 3Q 2008-1Q 2009 period.

Russian Services PMI for 4Q 2015 stood at 48.5, down sharply on 50.7 reading in 3Q 2015 and marking the weakest reading in the series since the start of 2Q 2015.Disappointingly, 4Q reading for Services sector broke two consecutive quarters of above 50 readings and done so sharply. Since the start of 1Q 2014, the sector has now posted sub-50 readings in 5 out of 8 quarters, and it managed to post statistically significant readings above 50 in only two quarters.

The above has meant that the composite activity index (distinct from Composite PMI) for Russian stood at 93.9 in 4Q 2015, which is an improvement on 90.3 in 3Q 2015, but marks fifth consecutive quarter of the overall production growth being negative (across combined services and manufacturing sectors). While 4Q composite indicator was the strongest in three quarters, it remains extremely weak (statistically significantly below zero growth marker of 100) and the third weakest of all quarters since the start of 3Q 2009.

On the net, therefore, while Russian economy posted some 4Q signals of growth consistent with less sharp contraction across combined Services and Manufacturing sectors, than in 2Q-3Q 2015, the deterioration in growth conditions in the economy in 4Q 2015 remained pronounced and this strongly suggests that we did not witness stabilisation of the Russian economy in 4Q 2015.


Stay tuned for analysis of BRIC PMIs next.

4/1/16: Russia Services & Manufacturing PMIs: December 2015

Russian PMIs are out for December 2015, so here is monthly data reading:

Russian Manufacturing PMIs posted a deterioration in sector performance in December, falling to 48.7 from 50.1 in November. This reverses two consecutive months of above 50 readings in October and November. It is worth noting that October-November readings were not statistically distinct from 50.0. On a quarterly basis, 4Q 2015 average reading was 49.7, which is better than 48.4 average for 3Q 2015, but still below 50.0 line. Overall December reading was the weakest since August 2015 and signals that the much anticipated stabilisation of the Russian economy did not take place in December.

Per Markit release: “Leading the deterioration in business conditions at Russian manufacturers was a fall in production. The rate of contraction quickened to the fastest since May 2009, with the majority of panellists linking this to a drop in new order intakes. As a result, a lower volume of post-production inventories was recorded. Meanwhile, Russian manufacturers continued to shed jobs during December. Falling employment has been reported in every survey period since July 2013, with the rate of contraction quickening to the sharpest in three months. The decline in staff numbers was matched by a solid deterioration in outstanding business volumes. Backlogs of work have been depleted in each of the past 34 survey periods. Elsewhere, incoming new orders slipped into decline in December, ending a three-month sequence of growth. However, the drop in new work was marginal and centred on intermediate goods producers. Data suggested that the main source of weakness was external, as export orders were down sharply.”

Chart to illustrate:

Russian Service PMI also reported a fall in output marking the third successive month of declines, driven by a slight decrease in new business levels. Job cuts continued in the sector as outstanding business deteriorated. The headline seasonally adjusted Russia Services Business Activity Index fell to 47.8 in December from already contractionary 49.8 in November. In 4Q 2015, average Services PMI reading was 48.5 against 50.7 in 3Q 2015, showing stronger deterioration in growth conditions in the sector in 4Q 2015. Current reading of 47.8 is the joint-weakest (with October 2015) for nine months.

Per Markit release: “New business levels at service providers slipped further into decline during December. However, the rate at which new work deteriorated was only marginal. Where a lower volume of new sales was recorded, panellists linked this to a combination of waning demand in the sector and payment difficulties being experienced by customers… With business activity at Russian service providers declining, pressures on operating capacity fell further in December. The rate at which work-inhand depleted eased to the slowest in three months yet remained solid overall. Anecdotal evidence suggested that lower backlogs of work were attributed to a drop in new business. Falling staff numbers have been reported in every month since March 2014, with the latest drop at a faster pace than in November. There was some evidence that lower employment reflected squeezed cash availability at service providers.”

Chart to illustrate:

Finally, Russia’s Composite index slipped into contraction during December, falling to 47.8, from 50.5 in November, with the decline in output reflected across both manufacturing production and services activity. Overall, Russian economy’s composite PMI averaged 49.1 in 4Q 2015 which is much worse than 50.4 average for 3Q 2015.

The data strongly suggests that not only did the economy failed to attain stabilisation, but that growth might have turned more negative in 4Q 2015.

I will be posting on quarterly figures for PMIs next, so stay tuned for more.

2/1/16: Россия, Украина и ЕС: полтора года переговоров впустую

My comment for BBC Russian Service on the stalemate in EU-Russian-Ukrainian talks concerning the EU-Ukraine trade agreement:  http://www.bbc.com/russian/business/2015/12/151229_trade_russia_ukrain_eu.

In summary: the failure of the talks is mutual.

2/1/16: Bloomberg Guide to Markets: 2015 Summed Up

In case you want a neat (although narrow) summary of 2015 in the markets, here's one via Bloomberg:

For Equities:

For Currencies:

For Government Bonds:

And more here: http://www.bloomberg.com/news/articles/2015-12-31/here-are-the-best-and-worst-performing-assets-of-2015.

2/1/16: Don't miss that Urals spread

Over recent months, I have been highlighting the importance of considering, when it comes to Russian economy and Ruble analysis, not just quoted spot prices for Brent grade oil but also the Brent-Urals spread.

At last, some media (in Russia) is catching up: Падение спроса на российскую нефть и сильный доллар не дают рублю укрепиться - http://invst.ly/ocwh.

2/1/16: The Future of Global Finance: Moscow 2015

Back at the start of December, I spoke at an international finance conference in Moscow covering developing trends in global finance.  You can find the conference archive (in English) here: http://cmconference.ru/en/about including videos of presentations. My interview relating to the conference is available here: https://www.youtube.com/watch?v=g7Og2yIDaGY. Some coverage of the conference in the press here: http://www.vestifinance.ru/articles/65070.

2-я Международная финансовая конференция «Валютные рынки. Мировые практики» проходила в Москве 18-19 ноября. Она была организована ГК Teletrade, совместно с Dow Jones, Google и Московской школой управления «Сколково». Архив конференции, включая видео презентаций (Русская версия): http://cmconference.ru/ru/about.

2/1/16: QE for the People 2016

Back in March 2015, I have signed a group petition in support of the QE for the People idea of using monetary policy to directly inject funding into the economy via households' budgets. Since then the idea continued to gain traction and in December 2015 the campaign issued an in-depth analysis of the idea, and a renewed call for public and professional engagement.

2/1/16: SOSV Slingshot 2015: Mentoring Start Ups

Totally forgot about this event few months back, but thanks to Silicon Republic, have a video to post here. I was honoured to be invited by SOSVentures to speak and participate in mentoring rounds at the SOSV Slingshot: Dublin event for start ups.

Here are the videos from discussions that took place at the event: https://www.siliconrepublic.com/start-ups/2016/01/01/start-up-advice-accelerators-ireland.

Enjoy!

1/1/16: Another VEB update: things are getting crunchier...

And another update to the long-running saga of VEB - Vnesheconombank - that I covered over a week ago here: http://trueeconomics.blogspot.ie/2015/12/231215-vnesheconombank-where-things.html.

Latest rumour mill is that VEB will need "AUD24.67 billion" - which is within the range we've heard for some time already.

About the only new bits we get from Moscow are:

• That "the Finance Ministry has submitted proposals to aid VEB in 2016 to the government for approval, with some measures ready to be carried out in the first quarter, Svetlana Nikitina, an aide to the finance minister, said in Moscow on Tuesday," as quoted here: http://www.smh.com.au/business/world-business/vladimir-putins-bank-needs-a-2467-billion-bailout-20151229-glwkd4.html or if you want USD figures: http://www.ibtimes.com/kremlin-rushes-bail-out-russias-state-run-bank-2242266. The article, overall, is a good summary of the bank history, complementing my own post. 
• Both Russian Treasury and the Central Bank of Russia have cut the rates paid by VEB on their deposits to 0.25% (see report here: http://www.reuters.com/article/russia-veb-rates-idUSL8N14J07U20151230). On top of that, national wealth fund deposits with VEB will be extended to a maturity of up to 5 years. All of which should decrease significantly immediate liquidity pressures on VEB.

The key point of the VEB saga, however, is still not adding up. As covered in my post, VEB is facing some USD19.3 billion in debt maturing through 2025 with less than USD8 billion due through 2018. So why USD18 billion in capital hole, then?

Moodys note from earlier this week explained (emphasis mine):

"VEB Group's problem loans/gross loans ratio (including impaired but not overdue loans) increased to 39.3% as of end-2014 compared with 19.7% as of end-2013. Moody's estimates that the bank has already recognized a substantial portion of these problem loans and therefore further growth of problem loans should be contained. However, VEB remains highly exposed to single-name concentration risk and risks associated with its subsidiaries, particularly the Russian banks bailed out in 2008-09 and Prominvestbank in Ukraine.

Moody's notes that VEB's profitability metrics have substantially deteriorated, as reflected in its return on average assets (RoAA) ratio of -3.7% in the first half of 2015, following RoAA of -7.2% posted in 2014. ...At the same time, its net interest margin declined to 1.9% in H1 2015 relative to 2.7% in 2014, which reflected growing funding costs and an increasing problem loans.

Moody's anticipates some improvements in VEB's core profitability metrics following a normalization of Russian financial market conditions and gradual stabilization of problem loan levels. Nevertheless, VEB will not achieve breakeven over next 12-18 months due to still high provisioning charges and weak core profitability metrics.

VEB's standalone credit worthiness is also supported by its capital levels, which have historically been maintained by the government. VEB's statutory capital ratio (N1.0) was 12.4% as of H1 2015, which was higher than the regulatory minimum of 10%, which VEB has to respect due to its Eurobond covenant. Moody's notes that the government's regular capital injections have totalled around RUB559 billion in Tier 1 capital and $6 billion in Tier 2 capital since 2007. However, future capital increases may come in a less tangible form, e.g. via the provision of cheaper funding resulting in a fair value gain under IFRS, rather than through paid-up capital."

There are some EUR 9 billion worth of eurobonds issued by the VEB still outstanding.

In other words, we have a 'development bank' (not a retail bank) that is bound by 10% capital ratio, that, absent that ratio would require much less capital than USD18 billion. It will be interesting to see how Moscow can restructure capital in VEB to avoid an absolutely massive capital blackhole, but I suspect there will be some financial acrobatics involved.

1/1/16: Developers Questioning Banking Inquiry Report

While we do not know what is in the Banking Inquiry report signed-off this week, concerns being expressed by the two developers, namely Michael O’Flynn and Johnny Ronan, that the report is likely to be a whitewash of Nama is a legitimate one.

The inquiry basically and obviously failed to provide platform for the voices critical (or robustly critical) of Nama, opting instead to put forward testimonies of some developers who have potential coincident / congruent interest in seeing Nama escaping serious criticism.

Thus, legitimate suspicion can be (though we should wait to confirm or decline it) that the Banking Inquiry report will indeed skip over Nama's core role in creating a dysfunctional (and currently strongly legally challenged) crisis resolution environment in Ireland. And another legitimate suspicion (based on past record of coverage of the Inquiry in the media) is that most of Irish media will be unlikely to robustly challenge the report on any conclusions regarding Nama.

That said, let's wait and see the report...

1/1/16: Historical Default Cycles: Are We Testing the 'Norm'?

Having written before about the growing signs we are upon a new default cycle (see, for example, post here http://trueeconomics.blogspot.ie/2015/12/301215-us-junk-bonds-heading-into-new.html), it is only fitting that I should highlight the latest article from Carmen Reinhart in which she talks about default 'waves' or cycles: https://www.project-syndicate.org/commentary/sovereign-default-wave-emerging-markets-by-carmen-reinhart-2015-12#d0X1sQB3KuUHlp7A.99.

Key chart:

Reinhart says that "From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it."

I can add, either that, or count on a new wave of 'competitive devaluations' or 'currency wars' and forget about any 'normalization' in the interest rates.

31/12/15: 2016 Bonds Market Outlook

My take on 2016 outlook for bond markets for Manning Financial is available here: http://issuu.com/publicationire/docs/mf_newsletter_22122015_web?e=16572344/32155392 (see page 5)

Or you can click on the following images to enlarge