Sun, 28th May 2017

Anirudh Sethi Report


Archives of “s central” Tag

Emerging Markets-An Update

1) Brazil’s central bank is not tapering its FX intervention plan

2) The Philippine central bank outlined the tools it will use to counter Fed tapering
3) The RBI is taking further steps to improve the liquidity situation and help stabilized capital markets
4) There were some notable trade data surprises out of Asia
5) Israel central bank delivered a dovish surprise rate cut
1) Brazil’s central bank is not tapering its FX intervention plan. Central bank president Tombini assured markets that the $60 bln intervention plan is not about to change. Given the positive performance of the BRL and the Bovespa, many had started to speculate that officials would soon start to get concerned again about excessive currency strength, especially after USD/BRL broke below the 2.20 level. The real should continue to trade on the strong side for now, but we would soon start to look for opportunities to take the other side, especially against the Mexican peso.
2) The Philippine central bank outlined the tools it will use to counter Fed tapering. The bank is sounding very confident about its ability to deal with further volatility in the PHP – and we mostly agree, at least compared with many other EM countries. According to Deputy Governor Guinigundo, “We can ride out any turbulence, as we have policy tools in our hand that we can deploy anytime.” He also said the measures include boosting dollar and peso liquidity, careful surveillance of risk, use of forward guidance, tapping currency swap agreements, and possible tightening of monetary policy. Read More 

MORGAN STANLEY PRESENTS: ‘The Fragile Five’ – The Most Troubled Currencies In Emerging Markets

Ten years ago, Goldman Sachs declared Brazil, Russia, India and China (BRIC) as the emerging markets with the brightest economic growth prospects.

 This year, Morgan Stanley declared the Brazilian real, the Indonesian rupiah, the South African rand, the Indian rupee, and the Turkish lira as the “Fragile Five,” or the troubled emerging market currencies under the most pressure against the U.S. dollar.

“High inflation, weakening growth, large external deficits, and in some cases exposure to the China slowdown, and high dependence on fixed income inflows leave these currencies vulnerable,” wrote Morgan Stanley analysts in an August research note.

We’ve highlighted Morgan Stanley’s greatest concerns for each of the “Fragile Five,” and include their year-to-date performance against the greenback.

The Brazilian real

The Brazilian real

Year-to-date: -7.6% against the USD

GDP growth: 3.28%

Inflation: 6.09%

Current account deficit: -3.23% of GDP

Brazil has a high current account deficit. A rising real effective exchange rate (REER) — the rate used to determine a currency’s value relative to other major currencies — only risks a worsening of the current account deficit. Read More 

EM currency rally repairs half damage done since May

The Federal Reserve’s surprise decision to sustain its stimulus programme has given policy makers in emerging markets a reprieve from market pressures that could allow several countries to scale back support for their currencies.

Emerging markets currencies have now recovered about half the losses they had sustained against the dollar since May in a sell-off sparked by the Fed’s tapering plans. They rallied almost without exception on Thursday as markets absorbed the Fed’s announcement, with the biggest gains seen in those that had been hardest hit.

The dollar slid 2.5 per cent to R61.78 against the Indian rupee, 0.6 per cent to TL1.9628 against the Turkish lira and 2.7 per cent to M$3.1605 against the Malaysian ringgit. All three have recouped more than half their losses, as has the Brazilian real, while the South African rand has almost regained the level it was at in early May.

Turkey’s central bank, which had been reluctant to raise interest rates further or intervene directly to shore up the lira, became the first to scale back its support, reducing the size of its daily forex auction. Analysts said several other central banks might follow suit.

“In India the trade deficit has rapidly shrunk, exports are buoyant, and [Reserve Bank of India] measures have trimmed the external funding gap for now. Further, inflows of foreign currency deposits [from non-residents] should help shore up reserves and reduce the need for RBI to intervene,” wrote Siddharth Mathur, a strategist at Citi. Read More 

India: CPI vs WPI, which to use?

Here’s a growing dilemma for India’s policy makers.

According to the Wholesale Price Index, inflation picked up in the month of August to 6.1 per cent from 5.8 per cent in July. On the other hand, the (newer) Consumer Price Index indicates that inflation slowed in the same month, moderating from 9.6 per cent to 9.5 per cent.

Why the divergence? And which of these disparate measures should policy makers be looking at?

In a statement earlier this month, the former governor of India’s central bank, Duvvuri Subbarao, explained the different between the two estimates:

To some extent, the divergence between WPI and CPI can be attributed to statistical differences stemming from coverage, classification of items and the relative weights of their constituents. However, there could be other reasons for this as well. For example, higher transaction costs, taxes, etc. are reflected in the CPI but not in the WPI.

Food price inflation accounts for much of the gap between the two indices at the moment. In the WPI, food inflation rose from 10.3 per cent year-on-year to 18.2 per cent in the quarter ended in August. For the CPI, the same figure has declined from 11.7 per cent to 10.9 per cent. Read More 

Spain’s state debt still rising; banks borrow less from ECB

SPAIN12Spain is heading for a big debt resaca, or hangover, as its national debt climbed to 92.2 per cent of gross domestic product in the second quarter, data from the country’s central bank show. To put that in context, that is more than double the 40 per cent reading at the end of 2008.

It is also up sharply from a reading of 77.5 per cent a year ago as Madrid still shoulders the burden of sorting out its former regional savings banks, paying for a misguided mid-crisis stimulus programme instigated by the previous government, and sharply reduced tax receipts as a result of its recession.

But there are signs that funding pressures are easing for Spain’s lenders. Total borrowings from the European Central Bank in August fell to €246bn from €248.2bn in July – representing a twelfth consecutive month of reduced borrowing.

Relief comes to those who wait.

Investor outlook subdued, consumer confidence shaky: RBI study

A study by the RBI on India Inc’s investment plans doesn’t paint a pretty picture. Slowing growth, high inflation & limited headroom for further rate cuts has prompted India’s central bank to offer a subdued investment outlook for 2013-14. 

The analysis based on cost of projects for which funds were raised from banks, financial institutions, IPOs & ECBs was published in the RBI’s September 2013 bulletin. 
“Capital expenditure already planned to be spent in 2013-14 aggregated to Rs 1,620 bn. Even if companies adhere to their investment plan, to match the capex envisaged in 2012-13 (i.e., Rs 2,919 billion), the minimum capital expenditure of around Rs 1,299 billion needs to come from new investment intentions by the private corporate sector in 2013-14. Going by the assessment on date, capital expenditure of the above order does not appear to be feasible” the Reserve Bank said in its study. 
With large projects in sectors like power and telecom getting stalled, capital expenditure that is already in the pipeline could also be lower this fiscal says the study.  Read More 

A Housing Slump in India

The Orbit Grand, a block-size complex designed to have at least 26 floors of elegant apartments, an extensive array of ground-floor stores and abundant parking for the chauffeured cars of residents and shoppers, was supposed to be a diadem of India’s real estate market.

Now it is turning into a symbol of the slumping fortunes of property developers and owners in a once-promising emerging economy. Construction of the Orbit Grand has almost completely stalled at the 10th floor, the tower crane at the site seldom moves and the builder has defaulted on its loan.

“There’s no real work going on right now. There’s just a minimum number of workers coming in to do small things,” said Alam Sheikh, an electrician who is one of just 14 builders left at the site.

The real estate market in cities across India is crumbling as the Indian economy slows. The rupee has dropped nearly 20 percent against the dollar since early May, scaring away foreign investors. Read More 

Raghuram Rajan: the challenge facing India’s Ben Bernanke

It used to be, back in the time of dinosaurs and woolly mammoths, that central bankers just had to have a few solid ideas about interest rates and inflation. Those days are long over. Now, you need a crisis manager, even if there’s no imminent economic crisis – because the assumption is that one will be coming, eventually. Economic crises are now the norm rather than the exception.

So it is with Raghuram Rajan, the new governor of India’s central bank. Rajan already has one oracular crisis prediction to his credit: in 2005, he threw a wet blanket on Alan Greenspan’s pro-free enterprise party in Jackson Hole by suggesting that the new generation of sophisticated financial products would hurt the US economy as long as bankers and traders didn’t have to suffer the consequences of their losses.

Now, of course, such a pronouncement is Delphic, but back then, it was grounds for excommunication from the economic priesthood. Rajan was derided as “an antimarket Luddite, wistful for old days of regulation”, according to the Wall Street Journal.

The crisis reaper has methodically come for every major economy in the past five years, and now it is India’s turn. Rajan, the newly named head of India’s central bank, has become the man who has to save the country’s plunging currency, the rupee. The rupee has fallen 17% in the past six months, raising fears about inflation, and more importantly,about economic growth. Read More 

The Russian Communist Party Is Trying To Take Away Obama’s Nobel Prize

As the inheritors of a proud tradition of shameless bombast and propaganda,  the Communist Party of the Russian Federation (KPRF) knows how to get itself talked about. For all of their flaws, the Communists were actually pretty good at creating political slogans (think: “Peace. Land. Bread.”) and while the party today is a pale shadow of its former self it apparently still has a bit of creative energy left because it is starting a campaign to take away Obama’s Nobel Peace Prize.

Speaking at a press conference earlier today in Moscow, Ivan Melnikov, the vice-speaker of the Russian Duma and the vice chairman of the KPRF’s central committee*, said the following:

“We all know perfectly well that the entire world is following the situation in Syria. The Obama administration’s speech, in which they claimed that the situation in Syria is a threat to America’s national security, seemed absurd to me. In reality it is the United States’ actions which present a threat. We think it’s extremely important to initiate a campaign to take away Barack Obama’s Nobel Prize.

Well, there you have it. Obama is threatening to use force in Syria and the Communists are not happy about it. Read More 

Brazil’s central bank hikes interest rate

Brazil is forging ahead with its battle against inflation.

The country’s central bank hiked its benchmark interest rate by 50 basis points to 9 per cent on Wednesday evening, as it continues to tighten its monetary policy in the face of a weakening currency and high prices.

The central bank said in a statement:

The committee considers that this decision will continue to put inflation on a decline and assure that this trend will persist next year.

Brazilians staged mass protests earlier this summer to express their anger at soaring prices. The country’s currency, the real, has been rapidly depreciating against the dollar and investors have become wary that Latin America’s largest economy is stagnating.

Last week Brazil’s central bank launched a $60bn currency intervention programme that promises investors one auction a day of currency swaps and a sale of repurchase contracts every Friday until the end of the year.

The real has weakened by about 20 per cent this year, as investors have shifted their portfolios to more stable currencies.