Tag Archives: Argentina

The Weekly Mishmash: November 22

Posted on by emmuser
Reply

1. BRICs’ rapid growth tips the global balance
Jim O’Neill, Goldman Sachs

Jim O’Neill is best known for coining the term BRICs a decade ago, when he predicted Brazil, Russia, India and China would be the world’s future growth drivers. He highlights the critical importance of population dynamics in making his call: “Simply applying the most credible estimates of long-term demographic trends, especially for the working population, is the intellectual cornerstone of the argument for the BRICs’ potential.”

EM Muser: Demographics is an oft-ignored area of economics so it’s interesting to hear O’Neill cite it as a ‘cornerstone’ of his BRIC thesis. I think it’s paramount for long-term investors to look at a country’s population dynamics.

The demographic profiles of EMs vary greatly. Many countries in Eastern Europe have profiles similar to those of advanced economies. This will make it hard for them to avoid the public finance strain, productivity loss and slowing economic growth typically associated with aging populations. However, other EMs are still enjoying a demographic divided given their young and growing populations (eg. Brazil, Indonesia, Turkey).  (See my related post: The Double Whammy: Debt and Demographics)

2.  IMF Is No Cure-All for Hungary
Gergo Racz, WSJ Emerging Europe

Hungary surprised markets when it expressed interest in a new IMF agreement. The announcement marks a sharp U-turn from last year when the government abruptly broke off talks with the lender. Even if an agreement is reached, the post notes that the country’s fundamentals remain poor and its sovereign credit rating still teeters on the edge of ‘junk’.

EM Muser: This appears to be a ploy by the government to delay a sovereign credit rating downgrade. The fact that the government publicly expressed interest in an IMF deal before notifying its own central bank – or even the IMF itself – lends support to this idea.

Hungary wants an deal with no strings attached – that is, with no austerity measures. However, I find it hard to believe the IMF will go along without demanding some sort of structural reforms, which the country badly needs. In the meanwhile, the ploy may work, at least temporarily, as the mere prospect of a deal should help prevent borrowing costs from spiking dramatically. (See my recent posts on the country: Hungary’s Latest Debt Relief Plan: From Bad to Worse and Hungary’s Vicious Circle: Anemic Lending and Weak Growth).

3. Argentina: Balance of Payments Crunch?
Daniel Volberg, Morgan Stanley

Volberg describes the significant fall in Argentina’s international reserves, which have declined by more than $5bn since July. While he does not foresee a full-blown currency crisis, he does note several areas for concern, including the country’s deteriorating balance of payments and an acceleration in investors pulling money out of the country following the tightening of capital controls in late October.

Mr. Volberg believes the government’s currency policy could go one of two ways. The good scenario would involve a rise in interest rates to compensate investors for a weakening of the peso in an effort to keep capital from fleeing, while a bad scenario would feature a more severe tightening in capital controls along with a multiple exchange rate regime.

EM Muser: Argentina poses something of a conundrum. I discussed analysts’ widely varying perspectives on the country’s economic success last week. (See The Weekly Mishmash: November 13). On the positive side, the economy expanded by 7.7% in the year through September. However, this fast growth does not appear sustainable.

It’s increasingly clear that the administration’s policies are draining investor confidence and prompting capital to flee the country. President Cristina Fernandez Kirchner is due to announce her new cabinet in early December, which should give more insight into the government’s future policy direction.

4.  Brazil: ‘Pacification’ of Favelas Not Just a Media Circus
Fabiana Frayssinet, Inter Press Service

Last week, roughly 3000 heavily-armed soldiers and police took over Rio de Janeiro’s largest slum, Rocinha. Officials hailed it as a “recovery of territory” by the state.

The occupation is “part of a new security strategy that provides for a permanent community policing presence as well as services and projects for social improvement and infrastructure in favelas, replacing the traditional policy of head-on warfare on the drug gangs.” According to the article, Rio has some 750 favelas with 1.5 million people, about one-third of the city’s total population. The goal is to occupy 40 of them by 2014.

EM Muser: This is huge positive step forward for Brazil that hasn’t received much international attention. I lived in the country about a decade ago and still remember the power of the drug gangs. These are no common thugs. They have anti-aircraft missiles and were powerful enough to shut down Rio on a number of occasions – a pretty mean feat considering it’s a city of roughly 6 million people. In more recent years, they have managed to shoot down police helicopters.

Drug gangs effectively control large swathes of the city, and it’s encouraging to see authorities finally stepping in. In some ways, their hand has been forced. Brazil is hosting the World Cup in 2014 and the Olympics in 2016. These events represent a coming-out part of sorts for the country, and authorities can’t afford to let Brazil’s image be tainted by public security problems.

5.  Putin is booed at martial arts fight
Charles Clover, FT

The crowd unexpectedly heckled Russian President Vladimir Putin at a live televised fighting event. “Mr Putin was seeking to boost the popularity of the hegemonic United Russia party in forthcoming parliamentary elections on Dec 4, but the spectacle showed that the gulf between the regime and the people appears to be widening.”

EM Muser: This is not the first time one of Putin’s publicity stunts has gone awry. Last month, his spokesman admitted that Putin’s discovery of ancient Greek ceramic pieces on a dive in August had been staged (see here). Despite these stumbles, Putin still enjoys a 61% approval rating according to a recent poll and is expected to return to the presidency in 2012.

The Weekly Mishmash: November 13

Posted on by emmuser
Reply

1. Commerzbank: a chill wind for CEE

Stefan Wagstyl, FT Beyond Brics

Commerzbank, Germany’s second-largest, is in the midst of deleveraging in response to the EU-wide imposition of stricter capital requirements. Central & Eastern Europe (CEE) is in the firing line. The bank has said that it will temporarily suspend new lending outside its core markets of Germany and Poland.

EM Muser: I warned about the potential for a credit squeeze in the CEE in a recent post and it’s now moving from possibility to actuality (See: Is CEE Better Prepared This Time Around?) Western European banks dominate the CEE banking sector via subsidiaries. Most will not fully withdraw, but many will scale back support for their subsidiaries (out of precaution or necessity).

The Commerzbank announcement shows this trend is already underway. However, in and of itself, the announcement won’t have much of an effect. The bank’s exposure to the CEE region was just under just under €21bn in 2010, and this was mostly to Poland where it will continue to extend new loans.

2. Argentina’s president irks U.S. pundits

Paul Katz, Salon.com

President Cristina Fernandez is popular domestically and recently won reelection by a wide margin, but she remains a controversial figure in the international media.

Katz provides an unusually balanced picture of Argentina’s administration. He acknowledges the government’s manipulation of official inflation statistics and its intolerance of criticism, but also points out that the economy is roaring. GDP has expanded by an average of over 5% annually since 2007. Meanwhile, unemployment has fallen by half since 2003, and income inequality has narrowed.

EM Muser: Mark Weisbrot of the Center for Economic and Policy Research argues that Argentina is actually a success story that provides important lessons for the weaker euro zone economies given its rapid recovery in output and employment following its 2001 default (See: The Argentine Success Story and Its Implications).

Weisbrot’s view contrasts with the many articles that focus on Argentina’s lack of access to international capital markets and paint a pretty bleak picture of the country’s economic future (see the FT). They note that capital is flowing out of the country and foresee a sharp slowdown in economic growth.

The naysayers chalk the country’s robust economic growth up to good fortune (high commodity prices and the robust performances of the country’s trade partners). Meanwhile, Weisbrot credits the government’s unconventional economic policies. In my view, the jury is still out. Argentina’s resilience in the face of the global downturn will prove telling. While no economy is likely to remain untouched by the downturn, those economies that are healthy and well-run are likely to recover the fastest. Will Argentina be among them?

3. South African Credit Rating Outlook Cut by Moody’s on High Political Risk

Andres R. Martinez, Bloomberg

Moody’s cut the outlook on South Africa’s credit rating to negative in a move that surprised analysts. The rating currently stands at A3, four notches above investment grade. The ratings agency is concerned that factionalism within the ruling ANC party will erode the government’s commitment to responsible fiscal policies.

EM Muser: Shortly after Moody’s announcement on Nov 9th, the ANC expelled Julius Malema, the leader of its youth wing, from the party. He has called for the nationalisation of mines, raising concerns among investors. It’s unclear whether his departure is a done deal and whether this will reduce political risk as Malema may still contest the ruling.

4.  Don’t panic, China’s economy is not on the rocks yet

Michael Pettis, FT op-ed

Amid the recent bearish commentary on China, Pettis provides a reality check. While he acknowledges that there are tough times ahead for China as it attempts to move its economy toward a more consumption-led growth model, he does not see a banking crisis on the horizon.

“Beijing effectively guarantees the profitability and stability of the banking system by socialising credit risk and enforcing a high spread between the lending and deposit rates. As long as the government is credible, the banks will be solvent.”

EM Muser: Pettis’ argument makes a lot of sense to me. Unlike other countries (Iceland and Ireland, for example), the Chinese government has the resources to effectively backstop its banks. In October, the government’s investment fund moved to shore up the shares of four major state-owned banks, showing its commitment to stabilising its banking system (see here).

While China looks set to avert a banking crisis, the economy still looks headed for a slowdown, as Pettis acknowledges. The question is whether it will be a hard or soft landing. (See my post: IMF’s Latest Growth Forecasts for China Look Overly Rosy)

5. Hungary to Get Tighter Grip on Municipal Finances

Gergo Racz, WSJ Real Time Emerging Europe

“Hungary’s government approved a law that would substantially revise the operation of the local government system by reshuffling jurisdictions and keeping a tighter central watch on how much municipalities spend.”

EM Muser: Good economic news out of Hungary is few and far between. While this legislation is a positive step, it’s too little too late. Last week, Fitch slashed the outlook on the country’s sovereign credit rating to negative, while S&P placed Hungary on CreditWatch with negative implications. A downgrade by any of the three would push Hungary’s credit rating to ‘junk’. (See my earlier posts: Hungary: Finally on Investors’ Radar and Fitch Raises Hungary’s Outlook to Positive: Odd Timing)