14/5/2012: Russian Banks Credit Supply to SMEs

Moody's latest note on Russian banks, titled SME Lending in Russia: Growth Supports Profitability, but Cyclical Credit Risks Remain is available in Russian.

The note argues that since 2010-2011, Russian banks' origination of credit to SMEs has grown on the back of banks' strategic expansion within the SME sector that sees growth in lending to SMEs exceeding that for larger corporates.

"Overall, we believe that the banks' expansion of their SME portfolios and their plans to further this expansion are credit positive. The SME sector supports the banks' net interest margins, provides cross-selling opportunities and contributes to further diversification of banks' risks," explains Olga Ulyanova, a Moody's Vice President and author of the report. "However, if the economic cycle enters another phase of downturn, SME loans are likely to be the segment most vulnerable to weakened conditions, and credit losses might reach levels seen during 2008-09," adds Ms. Ulyanova. Doh, as Homer would say. See this note and this to check the likelihood of the Russian economy contracting...

On a serious note, of importance to anyone trading in Russian markets: Moody's said that relative to other asset classes, SME lending poses greater risks to banks credit profiles, due to:

1. Weak corporate governance and financial reporting practices of many SMEs; 
2. Their concentration and dependence on a small number of large customers and/or suppliers; 
3. Fewer refinancing options available to SMEs as opposed to large corporates; 
4. SMEs' elevated exposure to domestic currency fluctuations; 
5. Poor track record of SME loan recoveries, partly because of the low realisable value of collateral; 
6. Weak court and legal systems for settling debt; and
7. Weak enforcement mechanisms for court judgements.

I would agree with the above risks assessment. However, interestingly, Moody's reported that credit losses generated by SME loans originated after 2008-2009 crisis are currently running below those for pre-crisis vintages, "reflecting post-crisis economic stabilisation in Russia and the somewhat tightened credit underwriting procedures that the banks implemented".

Moody's identify key trends in Russian SME lending over the next 12-18 months:

• The total volume of bank loans to SMEs will exceed 10% of the country's GDP (compared with 9.3% at year-end 2011). 
• By 2015, SME lending will likely stabilise at around 15% of GDP, a level comparable with that of peer countries. 
• Net interest margins improvement is the core objective for banks diversification of lending to SMEs.
• Credit losses on loans issued in 2011-2012 to be contained within overall lower losses trend since 2010.

14/5/2012: De List of Mr Enda

In the world of totally planted and utterly absurd stories, this one takes at least an honorable mention prize. Now, just think - a secret meeting in the back of the pub. A 'source' - a 'Government source' - confiding to the author about the 'list' of 'special projects' to milk the EU subsidies into the sunset. You have to laugh... or cry... 

14/5/2012: Euro area austerity - a chart

Austerity in Europe? Ok, table below shows General Government expenditure as % of nominal GDP in 2011-2012 compared to 2000-2007 average.

Chart below shows nominal values of General Government expenditure, in billions of euros.

Chart above clearly shows that during the entire crisis, euro area General Government Expenditure dipped  only once - in 2011 compared to 2010. The 'savage' cut was €13.02bn for EA12 combined, or 0.14% of 2011 GDP. Continuing with 'savage austerity', 2012 is forecast by the IMF to post General Government Expenditure increase of €43 billion for EA12 and €43.9 billion for EA17. By the end of 2012, under 'severe austerity', euro area Governments will be spending €30 billion more than in 2010.

Things get even worse under the 'savage cuts' of 2013. In 2013, EA12 governments will be spending €66.2 billion more than in 2012 and €96.2 billion more than in 2010.

Oh, yes, and the trend continues into 2017 projections by the IMF.

In family analogy, 'Darling, with one of our jobs lost, try not to buy a fancier Gucci bag, next time you go out for groceries!' 

15/5/2012: Austerity, Stimulus & Euro Area Crisis

An excellent article for Bloomberg by Peter Boone and Simon Johnson, titled As European Austerity Ends, So Could the Euro.


Note the referencing of 90% debt/GDP ratio for the euro area. In 2012, per IMF more detailed WEO database, General Government Gross Debt in EA17 will rise to 89.95% of GDP from 88.08% in 2011. For EA12 (old euro area member states), the GGD will rise from 88.75% of GDP in 2011 to 90.61% of GDP in 2012, while removing Luxembourg out of EA12 (the country is a massive outlier for virtually all GDP-related parameters due to its huge 'brass plate' sector), implies EA11 debt to GDP ratio of 90.915% of GDP in 2012, up from 89.06% in 2011.


In addition to Table 5 in the GFSR (linked by Boone and Johnson), I suggest you take a look at the Statistical Table 9.a on page 69 of the report, especially columns 2-5. These detail parameters of sustainability of unfunded future health and pensions obligations.  Ireland, with its 'demographic dividends' is fourth worst-off country in the EA17 in terms of future pensions liabilities increases, although we are much better than average in terms of health liabilities.


Table 10.a page 71 of the said report (reproduced below) shows that Ireland is facing the worst 
Required Adjustment and age-related spending, 2011–30 and 2011-2020 horizon in the advanced economies, save for Japan and the US.

13/5/2012: Russian Economy forecasts H2 2012

Quick set of slides on Russian Economy forecasts for 2012:

13/5/2012: Russian economy - Inflation & Monetary Policy

Russia’s central bank (CBR) refinance rate was affirmed at 8.00% last week, with the overnight deposit rate at 4%, the minimum auction repo rate at 5.25% and the fixed repo rate at 6.25%. Per Danske Markets, “the CBR stated that it views rates as being acceptable for the coming months as inflation pressures arise in H2 12.”

The following analysis is based on Danske Markets forecasts and my own outlook. IMF latest projections are tabulated below.

Inflationary pressures remain at the core of the CBR concerns as economy is running on-track to hit 4.0-4.3 percent real growth (close but below 4.3% in 2011 and 2010 amidst more adverse global growth conditions in 2012). Core growth drivers are: Private Consumption (expected +4.9-5% yoy), Investment (+8.0-9.0% yoy and run close to 23.6% of GDP, slightly less than 20.7 and 23.2 in 2010 and 2011). Investment grew 6.0% and 5.5% in 2010 and 2011, so 2012 expectation is for acceleration. Exports growth (+7.5-8% yoy) is expected to fall short of imports growth (16.0-16.5%). Exports grew at 10.5 and 21.8 percent annually in 2010 and 2011, while imports expanded 22.1 and 25.4 percent, respectively. With trade surplus expanding at 7.0-7.3% against 8.6% growth in 2011. Current account surplus grew 4.7% in 2010, 5.5% in 2011 and is expected to slow down to 4.8% in 2012.

Unemployment is expected to remain intact of decline at 6.0-6.6% in 2012, close to 6.5% observed in 2011.

These dynamics suggest inflationary pressures not abating in 2012 on demand drivers, even absent robust employment growth, implying lack of easing momentum for CBR. Inflation is expected to come in at 6.3-6.7% in 2012, up on 6.1% in 2011 and down on 6.9% in 2010. On year-end CPI basis, expected inflation for 2012 is around 6.2% according to the IMF and average price increases on CPI basis should be around 4.8%. Furthermore, 2013 Russian economy is expected to experience structural de-acceleration in GDP growth to below 4% with 3.5% projected in real terms, with IMF forecast for 2012 real growth of 4.01% down from 4.3% in 2010 and 2011.

Additional factors strengthening inflationary expectations are delayed introductions of tariffs increases and fuel prices liberalization (revision up).

Meanwhile, owing to tighter monetary policy, consumer prices have posted another record low inflation in April (3.6% yoy) after similar post-Soviet period record of 3.7% yoy in March 2012.