Emerging Markets - Spotting the Good News ...
[Update added below; RGE's analysts take a thorough view on the emerging world]
... is getting increasingly difficult at the moment. Take Hungary for example. I take it that most economic commentators and analyst know that it is bad in Hungary and together with Ukraine I would submit that these two face the largest risk of sporting the next global macro blowout (assuming that Russia does not suddenly collapse prematurely).
Hungary's biggest problem at the moment is how on earth to stay worried about a dropping Forint while at the same time realizing that the country is headed towards the worst recession in several decades. As some readers will remember the reason that the Forint today is subjected to full force of currency punters is to be found one year ago. Back in February, Hungary as well as other emerging markets opted to loosen their pegs towards the USD, the Euro or both in an attempt to "allow" the currency to appreciate to quell the inflation everybody was so focused on at the time
The Hungarian forint tumbled to a record low against the euro as risk aversion spread and concern deepened the economic slowdown will worsen. The forint extended this year’s decline to 11.4 percent, the second-biggest drop among emerging-market currencies tracked by Bloomberg, as Hungary heads towards its worst recession in 15 years. The country was the first European Union member to seek international aid to avert a default last year, prompting a 20 billion-euro ($26 billion) emergency loan from the International Monetary Fund, the World Bank and the European Union.
“The forint is being dragged down by negative regional news,” said Nigel Rendell, senior emerging-markets strategist at RBC Capital Markets in London. “The weakening of the Russian ruble and the bank nationalization in Kazakhstan are weighing on the markets. They “may test the resolve of the central bank in Hungary” and in Russia, he said.
The forint dropped as much as 1.5 percent to 300.37 against the euro and was at 299.60 at 12:54 p.m. in Budapest. It earlier broke through the key 300 per euro level, where option barriers were set, according to BNP Paribas. The level at which the forint is trading is of “extreme concern,” Prime Minister Ferenc Gyurcsany said yesterday after a meeting with central bank President Andras Simor.
As we can see from the added graphics, the Forint has indeed taken a solid beating and in light of the fact that Hungary still have those Swiss denominated mortgages makes the depreciating currency sheet poison.
What happens next is indeed a good question. According to Danske Bank the Eur/huf may very well go beyond the 300 mark. Meanwhile, the daily plight of the economy muddles along with S&P announcing the downgrade to BBB of one of Hungary biggest insurance companies Generali Providencia. And the reason ... well because the investment portfolio of the company is heavily exposed to Hungary's sovereign risk of course, and speaking of which; financing conditions remain rather difficult for the the Hungarian government agency. Earlier today (Tuesday), the government agency received 37.8 billion HUF worth of bids for a pool of 40 billion HUF issuance of 3 month t-bills; yields were 26bps higher than for a corresponding auction a week ago.
And in Russia ...
If 2009 looks set to be a year to regret for the global economy it may be the year to forget for Russia. As Edward pointed out recently, the manufacturing sector in Eastern Europe has been jolted into near depression territory. However, the problem for Russia and by derivative for the rest of us, given the size of the Russian economy, may be great indeed. One particular thing which caught my eye recently was for example a small snippet from the Economist Intelligence Unit that laid out the disturbing facts (hat tip: AFOE). The EIU initiates its argument by noting that in mid 2008 Russia still had enough reserves (US$600bn) to cover the total sum of foreign debt (US$527.1bn) and although the debt was primarily held by companies the EIU makes the valid that;
(...) whereas the bulk of the debt was the responsibility of Russian companies and financial institutions, Russia’s huge commodity exports and its widening current-account surplus acted as an implicit guarantee for creditors (...)
Now, one key part of this guarantee was of course oil price of 100 usd a baril and thus the boost this gave the Russian external balance.
The rest, as they say, is history. There was a while when Russia stood tall and spent the reserves to defend the hitherto band of the Rouble but that quickly was abandoned for a policy of deliberate devaluations to restore competitiveness as the external balance heads towards deficit. So far the Rouble has lost more than 30% of its value against the USD and the central bank has expanding the trading range of the currency no less than 20 times since November. This sharp correction in the Rouble, although perhaps necessary to restore competitiveness, has not come without a cost since most of the before mentioned debt is denominated in foreign currency (USD and Euros) naturally making the liabilities for Russian companies increasingly unsustainable. In the context of hard currency reserves to cover increasingly hard currency liabilities the following point by the EIU is important;
State handouts cannot continue indefinitely, not least because reserves no longer cover total foreign liabilities: on the basis total debt was US$540bn at the end of September 2008, and that US$73bn was repaid in the fourth quarter, total debt is now US$467bn and private-sector debt US$425bn. Russia entered the crisis with the world’s third largest cache of central bank reserves, but it has been dwindling at an accelerating pace. By mid-January, reserves had declined to just below US$400bn, meaning that more than a third of the total was spent over the past five months.
So, once again reserves are less than the total stock of foreign liabilities and the mismatch does not seem set to get smaller as we progress into 2009. As Brad Setser points out this comes against a backdrop of a forecast by Danske Bank that Russia may contract a full 3% in 2009. Edward carries a much fuller analysis of over at GEM which focuses on a wide array of recent Russian data points; I can tell you that it is not pretty.
Emerging Markets; Decoupling or not?
In a more general light I would like to finish this small pot boiler with a point made by Brad Setser recently that, as the global recession tightens, we cannot look to emerging economies for good news. One part of this is naturally derived from the plight of Russia and the CEE, but also as Brad Setser points Asia is struggling too. Most significant in this regard is clearly the mounting evidence that China is headed down the roller coaster too. Has anybody really considered what will happen when they announce that the Yuan will be going down, not up, agains the USD. Good luck Geithner!
More specifically, Brad elaborates on the Asian situation in a recent very informative writ. It is a wonderful story really, building on top notch punditry by the Economist, about reliance on foreign demand and the connection between domestic investment and capacity elsewhere. The bottom line is that Asia needs to find a new way to grow and thus a new way to steer their economies; the question is of course which of these economies that can actually pull it off. The most recent significant data print came from South Korea's external balance in January; exports are down 47%(!) and as Macro Man succintly puts it;
So the theme of collapsing global trade looks to be alive and well.
Alive and well indeed, alive and well indeed; and with 2009 set to become a real bone cruncher all economies reliant on exports to grow are set to suffer, suffer a lot.
It is funny to think about all this in the context of the (in)famous discussion about de-coupling. The original discourse was cast in the light of a veritable switch-of-batons as the US economy slowed and thus how the rest of the world would aid to propel the global economy to a constant growth rate even as the US economy faltered. This was clearly not possible. Now it remains to be seen whether some economies can decouple not to the extent to contribute to a global recovery but to avoid a sharp recession in their own domestic economies.
RGE's lead analyst takes a real helicopter tour of the emerging world and the bad news is piling up indeed ...
As the U.S. recession is pushing the rest of the world into hard landing, the large imbalances in several economies – whether deficits or surpluses, high external debt or currency risks – make these countries vulnerable to a crisis and painful re-adjustment.
Eastern Europe tops the list of emerging market regions susceptible to a full-blown financial crisis. Unlike emerging markets elsewhere, Eastern European economies are heavily dependent on external financing and current account deficits have been the norm. So, the sharp drop-off in capital inflows - expected in 2009 - will not only be a major blow to growth, but it could also potentially trigger a regional financial crisis. The Baltics, Bulgaria, Romania and Hungary stand out as particularly vulnerable but a crisis in one country could trigger a regional domino effect.
The strong foreign banking presence in the region, long hailed as a strength, now increasingly looks like a potential weakness. Depending on the country, foreign banks hold about 60-90% market share. These foreign parent banks, under pressure from the global financial crisis and slowdowns in their home countries, are reducing lending to their Eastern European offspring. In an extreme (albeit unlikely) scenario, there is the risk that foreign parent banks, in the face of rising defaults and prohibitively expensive refinancing, would pull out of these markets.