Monday, November 24, 2014

24/11/2014: External Debt Maturity Profile: Russia H1 2015-H1 2016

I covered recently Russian capital outflows data (see here: 

Now, lets take a look at the data for External Debt maturity profile for the economy. The reason for why this is of importance is that currently Russian enterprises and banks (even those not covered by the sanctions) have effectively no access to dollar and euro funding in international markets, making it virtually impossible for them to roll maturing debts. 

Chart below shows the quantum of debt maturing over the 18 months between January 2015 and through June 2016. The total amount of maturing external debt to be funded by Russian state, banks and enterprises is USD138.796 billion. 

Of this, just USD4.03 billion is Government debt (or just 2.9% of the total maturing debt). Which pretty much means there is no public debt sustainability issue in sight as the result of the sanctions no matter what debt ratings are issued to the sovereign.

A third of total external debt coming due in H1 2015 through H1 2016 is banks debt (33.6% of the total) amounting to USD46.627 billion. There is a steep curve on banks funding requirements in H1 2015 at USD20.646 billion, scaling down to USD15.19 billion in H2 2015 and to USD10.791 billion in H1 2016. All of these relate to either loans or maturing deposits, with zero exposure to debt securities. Much of it is, therefore, down to interbank lending markets.

Almost two thirds of external debt coming due over the next 18 months is Non-financial Corporate loans (USD65.311 billion or 63.5% of the total). This excludes debt liabilities to direct investors which add additional USD21.245 billion to the above total for the sector and the above total maturing debt. However, as it is written against the equity holders, these debts can be restructured separately from the direct and intermediated debts. Again, H1 2015 represents the highest burden on debt rollover/repayment with USD25.41 billion of loans maturing. This declines to USD21.1 billion in H2 2015 and to USD18.8 billion in H1 2016.

Chart below summarises:

So to summarise, Russia is facing steep repayment schedule on non-Governmental debt in H1 2015, declining in H2 2015, with even more benign demand in H1 2016.  While Russian Central Bank has funds to cover the above volumes of redemptions, even allowing for adjustments to the funds for liquidity risk, the quantum of debt maturing in the next 18 months is high and will require some significant strain on cash flows of the enterprises and possibly significant injections of funding from the state.

The obvious question is: how much equity will migrate from private ownership to state ownership in the latter case.

Sunday, November 23, 2014

23/11/2014: Bruegel on Human Capital Mobility

Couple of interesting charts (and links) via Bruegel relating to the issue of human capital:

First, the flow of higher quality human capital across borders:

And international students participation:

Very strong correlation in the above chart with quality of education system by country:

23/11/2014: Half of Irish Growth Miracle is Accounting Trickery?

Those who read this blog, follow me on twitter or heard me speak recently at the conferences covering Irish economy would know that I have consistently estimated about 1/2 of Irish H1 2014 growth figures to be attributable to something strange that is happening between the official trade statistics we get for goods exports and the national accounts estimate of same exports. The gap is massive and is running now at roughly 7 times the historical average gap.

You can also see some of the same discussion here:

And in print here:

Now we have another economist pointing the same, except this time via the august Irish Times platform that is, of course, off-limits for myself.

Still, good to see someone else, especially from the Officially Approved Economists' list, is putting forward same arguments via the Official Paper of Record... Here is their link:

23/11/2014: Russian economy: Capital Outflows Trends

Russian Capital Outflows have been pretty extreme so far in 2014 - totalling USD85.3 billion in the first nine months of 2014, up on 44.1 billion net outflows in the same period of 2013, USD45.8 billion in 2012 and USD46.9 billion in the same period 2011. At annualised rate, current outflows are running at around USD114 billion, which is the worst year after 2008 outflows of USD133.6 billion.

More than half of these outflows fell on Q1 2014 (USD48.6 billion) with *only* USD36.7 billion in Q2 and Q3. In fact the rate of outflows in Q3 was below the average for 2008-present period (USD18.7 billion per quarter) and over Q2 and Q3 average rate of outflow was below average as well. 

Overall, Net Capital Outflows for Q1-Q3 2014 exceeded average rate of outflows by USD29.3 billion. 

Looking at the composition of outflows, USD16.1 billion of net outflows over the first nine months of 2014 came from the Banking sector - which is worse than the same period 2013 (USD10.9 billion) and 2012 (inflows of USD9.6 billion), but better than the same period of 2011 (outflows of USD17.3 billion). 2008-present quarterly average Banking sector net outflows stand at USD3.72 billion, which suggests that current nine months cumulative outflows exceed average by about USD4.9 billion.

Non-financial sector net outflows for 9 months through September 2014 stood at a massive USD69.2 billion, which is well ahead of same period outflows in 2013 (USD33.3 billion), 2012 (USD55.4 billion) and 2011 (USD29.8 billion). On average, since 2008, net non-financial sector capital outflows are running at USD14.93 billion per quarter. This implies that current running rate of outflows from the non-financial sectors (for Q1-Q3 2014) is some USD24.4 billion ahead of average.

Chart above clearly shows that Q3 2014 non-financial sector outflows have been the worst since Q4 2008, while Q1 2014 outflows in the sector were the 5th worst since the start of 2005.

Overall, the above shows that while some of the media claims may be overstating the extent of the capital outflows deviation from their historical (pre-Ukraine crisis) trends, at the same time, current rates of outflows are of significant concern and cannot be sustained for much longer. The core issue is that non-financial sector outflows can only be stopped or significantly reduced by imposing some sort of capital controls - either in their direct form or via de-offshorization of the domestic investment.

The former will be a very tough pill to swallow for all sectors of the economy and will damage significantly the ruble. The latter is a political sensitive issues as it would involve change in the status quo practices whereby medium-sized and larger enterprises offshore aggressively investment funds to remove these out of the reach of domestic authorities.

Interestingly, if President Putin does follow through on the promise of substantial reforms aimed at reducing state interference in the economy and alleviating pressures arising from corrupt state officials practices, the de-offshorization of the private sector investment can be put in place much less painfully and much more efficiently. See more on this here:

Friday, November 21, 2014

21/11/2014: The Latest Troika Report: Risks, No Buffers, Lots of Hope

The Troika did it bit… flew into Dublin on the 17th and flew out of here today. And left this as a present for all of us to enjoy…

Summary of their statement with my comments (outside quotes).

"Ireland has enjoyed a year beyond all reasonable expectations following the completion of its EU‑IMF supported program. Growth has accelerated to be highest in the euro area, job creation has continued, bond yields are at historic lows, and the fiscal deficit will again be below target. Ireland’s resolute implementation of steady and measured fiscal adjustment has been critical to this success."

Good news all… albeit no mention on the effect of ESA2010 accounting rules on our deficit and debt 'performance', but still, let's bask in some sunshine, for what follows is less sunny.

"Ireland should stick with this proven approach. Why? Growth prospects in coming years are still very uncertain... Current highly favorable international financial conditions may not last as major central banks begin to shift their stance and geopolitical risks can evolve rapidly. A sound fiscal position is a critical buffer in these circumstances."

Hold on there. So there are risks. And these risks included the dreaded prospect of rising interest rates. And our risk buffers are not up to meeting them. Too bad the Government has promised giveaways already for Budget 2016.

IMF goes on: "Ireland’s economic recovery is currently strong, yet major uncertainties remain." Major uncertainties?… "The sharp rebound in 2014 is led by exports and investment and is increasingly supported by consumer spending. …The mission estimates growth at just over 4 percent in 2014, yet there are significant uncertainties owing to the large contribution of offshore manufacturing to exports. Growth is projected to ease to about 3 percent in 2015 but the range of forecasts is wide, in part reflecting risks to growth in Euro Area trading partners and to international financial conditions." Oh dear. What this means is that growth is here, but much of it is based on:

  1. MNCs exports, and
  2. Hoped-for domestic recovery yet to materialise in any substantial form.

And what about those pesky "financial conditions"? Well, they are allegedly "...highly favorable and lending may be picking up from subdued levels. ...yet nonperforming loans (NPLs) remain very high. Lending has been weak, in part reflecting firms’ reliance on retained earnings, but mortgage loans have recently picked up in the context of sharply rising housing prices driven by job gains, declining household uncertainties, and a weak construction supply response."

House prices driven by jobs gains? Presumably in D2/D4/D6 where the 'middle Ireland' is bidding over 500K for 3-beds. Some jobs creation boost. With the "financial conditions" being fine, except in the real economy, where they are bad, we are back in the 'things are so bad, they must improve sometime' growthology.

Key kicker is Fiscal Policy - something that Government directly controls. Here's IMF on that:
"...a budget deficit that may be over 4 percent of GDP in 2014 remains too large to put Ireland’s high debt firmly on a downward path. Moving to a balanced budget over time would also buttress Ireland’s highly open economy against the broad range of shocks to which it is exposed."

Wait, this is straight from the Fiscal Council textbook (and do note - they are going to wade in with their 'views-to-be-ignored' next week). But it is worse than the Fiscal Council 'below 3% target' - this is about balanced budget aka 'zero % target'.

"The mission estimates that Budget 2015 generates an adjustment of about ½ percent of GDP in structural terms. A somewhat faster pace of improvement would have been preferable in view of relatively strong near-term growth prospects. Hence, any revenue over-performance or additional interest savings should be used to lower the deficit in 2015."

But Budget 2015 was billed by the Government as 'sustaining the recovery' effort. Not so much, says the IMF in the above. Rather looks like 'gambling on the continued recovery' effort to me.

"In the medium term, ... the authorities’ strategy to reach balance centers on fiscal restraint as set out in the expenditure ceilings and in the Comprehensive Expenditure report 2015‑2017. The mission estimates that this entails annual structural adjustment of ¾ percent of GDP over 2016–18, which avoids undue drag on growth. Such a steady approach to consolidation will help cushion shocks and result in faster progress to balance if medium-term growth is stronger than expected, and vice versa. Fully utilizing asset disposals, notably of the banks, to hasten debt reduction will reduce interest expenses, thereby containing the cumulative consolidation required."

In other words, you thought austerity is gone? Well, think again:

  1. The above says there is more needed, albeit at marginal levels, and
  2. The above assumes no slippage on 'savings' achieved to-date. Which is going to be very very hard to maintain as public sector agreements of the past come to renegotiations just at the time when political cycle favours giveaways to powerful interests.

Risks to the above also include, as IMF notes "…age-related demands for public services are rising and other expenditure pressures may emerge after prolonged restraint. Further reforms will be needed to generate savings while protecting public services and investment, and progress in containing the wage bill must be preserved." I flagged the rapid rise in retired numbers in recent analysis of the QNHS data. It now looks like the IMF is concerned we are swapping spending on unemployment supports for spending on early retirement schemes for public workers.

Another perennial headache is mortgages arrears. Much of policy expanded on this and the progress is questionable at best. IMF view is:  "Banks report good progress on workouts in relation to the CBI’s targets. The low rate of redefaults to date is welcome [I wonder if the low rates of re-default are 38% rate of actual redefaults reported by the CBofI in whauch case the Troika shows some humour here], yet some cures with smaller debt service reductions may not prove to be lasting, requiring banks to better target solutions. With about half of arrears cases under legal proceedings, it is important that these proceedings, together with active follow-up by the banks, are effective in motivating borrowers to reengage in a timely manner to reach restructuring solutions where feasible. Substantial unfinished mortgage resolution work requires continued supervisory targets for coming years, with due attention to reversing the continued rise of buy-to-let loans in arrears."

So the crisis has not gone away. And the evidence on quality of resolutions is dubious. But the IMF solution is - hammer more the borrowers, even though hammering them today might backfire tomorrow. I wonder if rational expectations form a part of the IMF economics team heads?

Problem number two: arrears in SMEs loans. "Implementation of lasting solutions for distressed commercial loans is also essential. Corporate, SME, and commercial real estate loans comprise the largest share of NPLs. Supervision should ensure that banks are either encouraging appropriate progress by distressed borrowers in the execution of workout plans or are making timely loan disposals."

Basically, this says "We've given up. Nothing seems to work, so just bankrupt the lot or sell the toxic stuff for someone else to bankrupt the lot". Not good. Not good at all.

Patrick Honohan got a ringing endorsement for his efforts to cool off the property lending (that is nowhere to be seen… which is sort of like evading icebergs in the middle of the Gulf of Mexico):
"New residential mortgage lending rules proposed by the CBI are a welcome step… The introduction of loan-to-value and loan-to-income ceilings will increase the resilience of both the banking and household sectors to financial shocks…"

And the last bit - the fabled Structural Reforms. Here, IMF remains true to its previous commitments of not producing any new thinking. Just keep raising the ghosts of the past, that is construction and employment activation.

"A stronger construction supply response is needed to help contain pressures on housing prices and rents. Housing completions remain low despite a 42 percent rise in Dublin house prices from their trough, which is also contributing to rising rents. A range of factors are impeding an adequate supply response by the construction sector, potentially hindering a renewal of migration inflows. Timely implementation of the government’s Construction 2020 initiatives is therefore important. In particular, the introduction of use-it-or-lose-it planning permissions together with vacant site levies could usefully help counter reluctance to develop properties owing to expectations of further price appreciation."

This is, frankly, a loony bin of policy proposals. The market is utterly dysfunctional - funding is hard to get, land is overpriced, supply of land is effectively controlled by Nama and vultures. Construction costs are sky high due to Government own 'reforms' from the past. And the IMF is offering to make things even more costly for development? Are they for real?

On employment activation: "Efforts to strengthen employment and training services should continue.  High levels of youth and long-term unemployment pose downside risks to employment and hence to growth in the medium term. Steady progress on engaging with long-term unemployed persons is being made and the private sector provision of employment services is expected to start in the second half of 2015. The establishment of regional Education and Training Boards that will collaborate with Intreo offices to facilitate referrals of jobseekers to training is welcome. Ensuring that these new frameworks are most effective in helping the unemployed return to work will require ongoing evaluation and adaptation."

In basic terms, there is nothing new in the above. Keep going the way we've been going: more questionable quality training programmes, more forced participation, more exits from the labour force dressing up unemployment figures. Just shove the long-term unemployed under the rug and pretend there is nothing there.

In short, the Troika review is a dud: it found little new, it offered no new policies, save for making things worse for developers and builders. But it, usefully, pointed the hotheads from the Government 'spend and be merry' side in the direction of the cooler winds of risks painting our horizon in unpleasantly steely hues.

21/11/2014: Irish Property Markets: Not in Rude Health, Yet...

Four slides from my ICA presentation today, covering construction sector and property market in Ireland:

Thursday, November 20, 2014

20/11/2014: Oil Prices: Supply and Demand Drivers

An interesting BofE note on links between commodities prices & UK inflation:

A key chart - from global perspective - is this one:

Main points are:

  1. 2014 demand growth is way down, driven primarily by contracting demand in the OECD economies (advanced economies rot) and to a lesser extent relatively flat (compared to 2000-2007) growth in non-OECD economies.
  2. Supply from non-OPEC sources is way up, while OPEC is cutting back. Net effect - growth in supply is way above 2000-2007 average.
This suggests that OPEC will have little room to cut continued growth in supply, while some restoration in demand should take place if the OECD economies post more robust growth in 2015. Still, it is hard to see how the above dynamics can support oil prices in USD100+/b over the next 12-15 months.

Wednesday, November 19, 2014

19/11/2014: Two articles on Russian economy and reforms

Two important articles on Russian economy and policy via Bloomberg:

19/11/2014: Irish Patents Filings: Q3 2014

As a taster for my Friday presentation at the ICA, here's a slide from my deck on Ireland and our challenges and opportunities forward:

Note: data plotted is via @newmorningip .

And here is monthly data:

One major point to be made on the above data: Irish patent filings are still falling below 50% of all filings, while Irish acedemic filings are still running at around 8% of the total. The gap between foreign and domestic filings has fallen to 73:100 in Q3 2014 from 82:100 in Q2 2014.

Tuesday, November 18, 2014

18/11/2014: Commodities-linked Currencies and Ruble

Good chart plotting side by side all commodities-linked currencies relative to USD (via @auaurelija) :

Above suggests that Ruble devaluations from September 1 to-date are somewhere around 3/10th part due to same effects that impact other major commodities producers. Given Russian energy exports exposure to European markets, the effect might be as large as 3/7th.

Monday, November 17, 2014

17/11/2014: Central Bank Strategic Forecasting

"In most of the literature on transparency it has been standard to assume that central banks release truthful information when communicating with the public. However, the monetary policymaker may act strategically and misrepresent private information intending to reduce economic volatility by manipulating inflation expectations. We set up a simple model which includes misrepresentation as a possible action for the central bank and derive some testable implications. The empirical evidence from the analysis of inflation forecasts of six central banks (Brazil, Canada, England, Iceland, New Zealand, and Sweden) is consistent with the existence of strategic forecasting."

Italics are mine. The quote is from Gomez-Barrero, Sebastian and Parra-Polania, Julian A., "Central Bank Strategic Forecasting" (October 2014). Contemporary Economic Policy, Vol. 32, Issue 4, pp. 802-810, 2014.

Nothing else to add, other than that the guardians of data, the supervisors of the financial system, the enforcers of rules and regulations are… crooked when it comes to the forecasts they lavish on the unsuspecting journos and public.

H/T to CeBaSCo @cebastcom

17/11/2014: All the years draining into banking cesspool...

So the tale of European banks deleveraging... record provisions, zero supply of credit for years, scores of devastated borrowers (corporate and personal), record subsidies, record drop in competition, rounds and rounds of 'stress testing' - all passed by virtually all, the Banking Union, the ESM break, forced writedowns in some countries, nationalisations, various LTROs, TLTROs, MROs, ABS, promises, threats, regulatory squeezes ... and the end game 6 years into the crisis?..

Per Bloomberg Brief, the sickest banking system on Planet Earth is... drum roll... Wester European one.

It is only made uglier by all the efforts wasted.

H/T for the chart to Jonathan.