Tag Archives: Emerging Markets

Five Countries Being Squeezed by Currency Pegs

Bloomberg, Feb 14, 2016

* Street currency rates in Nigeria, Egypt are near records
* Uzbekistan, Tajikistan hurt by trading partner devaluations

Only on the streets of cities like Cairo, Abuja or Tashkent can you gauge just how much pressure developing countries are under to ease controls on their currencies.

Individuals and businesses in five nations across central Asia, the Middle East and Africa are paying anywhere from 4 percent to 136 percent more than official exchange rates to get their hands on dollars, according to a Bloomberg survey. So-called black markets flourish at times when there’s a shortage of greenbacks and are one indicator of how much a currency should be allowed to depreciate to reach its fair value.

Central banks that uphold pegs have been under strain after tumbling commodity prices and slowing global growth weakened currencies from Brazil to Russia by at least 19 percent in the past year. In the four months that followed China’s shock devaluation of the yuan in August, Kazakhstan, Argentina and Azerbaijan abandoned control of their exchange rates to boost competitiveness and avoid draining reserves.

“There is enormous pressure on some of the pegs in emerging markets, with the unofficial rate diverging significantly from the official one,” said Bernd Berg, an emerging-markets strategist at Societe Generale SA in London. “Countries like Nigeria are maintaining fixed exchange rates that are unsustainable. Once the pegs break, investors in the local currency face significant losses.”

In Argentina’s case, the move to a free float in December eliminated the 4.2-peso gap between the official and black market rates. In the months prior to the move, it cost as much as 50 percent more to buy the currency on the street than at the central bank rate.

That premium is similar to what currency vendors in Nigeria’s capital Abuja are charging for dollars now, while hawkers in Tashkent are demanding more than double to convert the Uzbeki soum. The cost to buy the U.S. currency in unregulated trading in Egypt keeps rising even after the central bank devalued the pound three times last year.

The street rate “is a better reflection of where a market-based rate should be,” said Simon Quijano-Evans, the chief emerging-markets strategist at Commerzbank AG in London. It shows “how domestic participants and individuals really feel about their currencies,” he said.

The existence of a black market isn’t the only indicator that a country may be on the verge of changing currency policy. There wasn’t a parallel rate in Kazakhstan when the country relinquished control of the tenge to boost competitiveness for its goods in neighboring China and Russia.

Below is a selection of countries where thriving unregulated trading may be forcing central banks to reassess currency policy as oil prices trade near 12-year lows, unrest in the Middle East chokes revenue from tourism and devaluations in key export markets hurt trade. To see the countries on a map, click here.


Currency: naira

Since Africa’s biggest crude producer started managing the naira at 197-199 per dollar in March 2015, oil prices tumbled more than 40 percent. Under these pressures, central bank reserves fell to $28 billion this month, the lowest in at least five years, while an executive director at the nation’s biggest company, Dangote Group, said last week the currency policy has created an “extremely tight” supply of foreign exchange. Non-deliverable forwards predict the naira will drop another 30 percent from the official rate to 288 in 12 months, approaching the black market level that exceeds 300 per dollar.


Currency: kwanza

The stress may be even greater further south in the continent’s second-largest oil producer. Angola has been reducing the amount of foreign exchange it makes available to banks and businesses over the past two years to stem the drain on reserves that fell to the lowest levels since 2011 last year. The central bank let the kwanza depreciate 24 percent in 2015 and another 15 percent last month. But that may not be enough, with hawkers selling the currency at a premium of 136 percent to the official rate at 161 on Friday.


Currency: pound

Egypt’s ability to defend the currency with reserves has been crippled since the so-called Arab Spring uprising five years ago triggered political instability, drove out foreign investors and curbed tourism, one of the country’s biggest sources of hard currency. The pound, which has fallen 26 percent since the end of 2010, is still under pressure as street vendors in Cairo charge 8.75 to buy dollars, compared with an official rate of 7.83. Since taking over as central bank governor in November, Tarek Amer has sought to shore up confidence in the pound in part by paying foreign stock and bond investors the money owed to them that had been trapped in the country and by limiting some imports.


Currency: soum

A slowdown in China and a plunge in the currencies of Russia and Kazakhstan, Uzbekistan’s biggest export markets, are weighing on the central Asian economy. While low external debt and “large” international reserves provide a cushion, Uzbekistan is likely to allow the soum to weaken at least 15 percent this year to restore competitiveness, according to Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm. The black market rate of 5,950 in soum is more than double the official level at a record-low 2,837, according to data compiled by Bloomberg and the American Chamber of Commerce in the country. The central bank let the exchange rate slide 13 percent in 2015, compared with drops of 20 percent for the ruble and 46 percent for the tenge.


Currency: somoni

This country of 8 million people borders Uzbekistan, Kyrgyzstan, China and Afghanistan in the heart of Central Asia. It relies on remittances from workers abroad, notably in Russia, for about half of its gross domestic product, according to SEB’s Hammarlund, who predicted the somoni will depreciate by about 30 percent against the ruble in the coming months. The Tajik currency dropped 25 percent last year and trades at 7.84 per dollar, compared with an unofficial rate of 8.15, according to data compiled by Bloomberg and figures from the American Chamber of Commerce in the capital Dushanbe.


World Bank Cuts Global Growth Forecasts

Bloomberg, Jan 6, 2016


* Forecasts world economy to grow 2.9%, down from 3.3% in June
* Policy makers need to adapt to modest emerging-market growth

The global economy will sputter along this year as China’s slowdown prolongs a commodity slump and contractions endure in Brazil and Russia, the World Bank said.

The Washington-based development bank lowered its forecast for 2016 growth to 2.9 percent, from a 3.3 percent projection in June, according to its bi-annual Global Economic Prospects report released Wednesday. The world economy advanced 2.4 percent last year, less than a forecast of 2.8 percent in June and slower than the 2.6 percent expansion in 2014, the bank said.

The deteriorating picture in emerging markets is a big reason for a fifth straight year of global growth below 3 percent. The World Bank cut its outlook for China’s growth in 2016 to 6.7 percent, from 7 percent in June, and a 6.5 percent increase is estimated for next year. Brazil’s economy will shrink 2.5 percent this year, while Russia’s will contract 0.7 percent, the lender said.

“The global economy will need to adapt to a new period of more modest growth in large emerging markets, characterized by lower commodity prices and diminished flows of trade and capital,” World Bank Senior Vice President and Chief Economist Kaushik Basu said in the report.

Jitters about China were evident this week, as the government stepped in to prop up equity prices following a 7 percent rout to open the new year.

China’s high debt levels are the nation’s main short-term risk, the World Bank said, noting that debt to output ratios are larger than in most developing countries. Still, the government has ample room to use public spending to stimulate growth in the “low-probability scenario” of a faster-than-anticipated slowdown, the bank said.

The bank also trimmed its projection for U.S. growth to 2.7 percent this year, down from 2.8 percent from June, citing the dampening effect on exports of the surging U.S. dollar.

Loose monetary policy should continue to sustain “fragile” recoveries in Japan and the euro area, the bank said.

“This outlook is expected to be buttressed by recovery in major high-income economies, stabilizing commodity prices, and a continuation of low interest rates,” Basu said. “All this does not rule out the fact that there is a low-probability risk of disorderly slowdown in major emerging markets, as U.S. interest rates rise after a long break and the U.S. dollar strengthens, and as a result of geopolitical concerns.”

Under the bank’s base case, global growth will see a “modest upturn” as China steers its economy to a model driven by consumption and services, and the U.S. Federal Reserve raises interest rates without “undue turbulence,” Basu said. The bank forecasts global growth will accelerate to 3.1 percent next year.

The report noted that the benefits to consumers and business from lower oil prices have been “surprisingly muted.” However, a stabilization of prices at low levels could “release pent-up demand,” causing the global economy to grow faster than expected.

Still, global risks are tilted to the downside, according to the bank. A slowdown in China, coupled with widespread weakness in other major emerging markets, “could have substantial spillovers on other emerging and developing economies,” the bank warns.

“The simultaneous slowing of four of the largest emerging markets — Brazil, Russia, China, and South Africa — poses the risk of spillover effects for the rest of the world economy,” Basu said.


John Rubino: Junk Bond Crisis Starts To Metastasize

By John Rubino, Dec 14, 2015

With junk bonds finally reverting to their intrinsic value, the question on everyone’s mind is “what blows up next?” Here’s the first in what might be a long, painful list:

CLOs Hammered as Energy Rout Plays Havoc With Other Markets

(Bloomberg) – The bust in commodities that’s roiling junk bonds is also taking its toll on funds that bundle corporate loans used to finance buyouts.The riskiest slices of collateralized loan obligations raised after the financial crisis plunged 9 cents on the dollar since September to about 58 cents at the end of last month, down from 84 cents a year ago, according to JPMorgan Chase & Co. Intensifying price declines in recent months have led to one of the “more challenging years in recent memory,” JPMorgan analysts Rishad Ahluwalia and Jacob Kurosaki wrote in a Dec. 11 note to clients.

CLOs Dec 15

CLOs purchase high-yield, high-risk loans and bundle them into securities of varying risk and return. Investors in the lowest-ranked CLO slices, also called the equity tranche, are first in line to absorb any potential losses. The sell-off comes amid concern about the creditworthiness of speculative-grade borrowers as volatility spreads beyond the energy sector.

“The price declines are alarming and worrying,” Ahluwalia, JPMorgan’s head of global CLO research, said in a telephone interview.

While CLO equity holders have continued to receive cash flow payments, the price drop signals investors are worried that their returns are imperiled by “stress” in the corporate credit markets, according to London-based Ahluwalia.

A retreat by CLO equity investors, who typically include hedge funds, will make it more difficult for managers to raise new investments, Ahluwalia said.

CLOs, being packages of crappy loans, are kissing cousins of junk bonds (which are individual crappy loans). So trouble in the latter would be expected to coincide with trouble in the former, which means the crisis hasn’t yet moved far afield. But that’s how these things work. For a localized bust to become systemic, it has to blow up the similar stuff before it can progress to instruments that aren’t directly related.

What’s next in line? Emerging market anything certainly, since there’s still that $9 trillion of dollar carry trade debt waiting to implode. And mid-range bonds — better than junk but worse than Treasuries — are certainly due for a revaluation. The question is where the dividing line will form between bonds that attract worried capital and bonds that repel it.

And then, inevitably, are the broad equity indexes. The dirty little secret of both junk bonds and equities is that they tend to behave in similar ways. One can, in fact, think of junk bonds as the equity of high-yield borrowers because when borrowers get into trouble their debt is frequently converted to equity.

A more complex question is what happens to the other holdings of hedge funds that are now being burned by junk and CLOs. Presumably they’ll have to raise cash by selling things that still have markets, which means they might end up dumping their higher-quality assets. Think about it: If you own some Google stock near its all-time high and some junk bonds worth maybe 20 cents on the dollar — assuming anyone will buy them at any price — which is a better source of ready cash?

In short, if junk is imploding, stocks can’t be far behind.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


John Rubino: Can You Imagine The Fed Raising Rates In This World? Everything Going Wrong At Once Edition

By John Rubino, Oct 2, 2015

After the markets failed to embrace its most recent interest rate dither, the Fed dispatched pretty much its entire PR team to make sure we understood that rates would rise Next Month For Sure.

Then everything kind of fell apart. Emerging market capital flight accelerated…

Is this the mother of all warnings on EMs?

(CNBC) – The last time emerging markets had it nearly this bad, Ronald Reagan was the U.S. President, KKR purchased RJR Nabisco, and a future popstar named Rihanna was born.Net capital flows for global emerging markets will be negative in 2015, the first time that has happened since 1988, the Institute of International Finance (IIF) said in its latest report. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China, it added.

In other words, investors will pull out more money out of emerging markets than they will pump in.

The data come on the heels of a separate IIF report this week that showed portfolio capital outflows in EMs amounted to $40 billion during the third quarter, the worst performance since 2008.

Indeed, relief from the Federal Reserve’s decision to delay its first interest rate hike in a decade has proved to be short-lived for EMs amid fresh evidence of a slowing Chinese economy, precipitous currency declines, a sustained slide in commodity prices, and political uncertainty in countries such as Brazil and Turkey.

The US trade balance deteriorated, causing projected GDP to plunge…

GDPNow Forecast Plunges to 0.9% Following Advance Report on US Balance of Goods

(Mike Shedlock) – The past few days have seen significant swings in the Atlanta Fed GDPNow Forecast. We are right back to the initial forecast in August.GDP Now Oct 2015

What Happened?
1. On September 28 following the Personal Income and Outlays Report, the forecast rose 0.4 percentage points to 1.8%.
2. On September 29, following the Census Bureau Advance Trade Report the forecast fell 0.7 percentage points to 1.1%.
3. On October 1, following the Manufacturing ISM report, the forecast fell another 0.2 percentage points to 0.9%.

And last but definitely not least, Russia, Iran, Saudi Arabia, China and the US suddenly started bombing each other’s surrogates…

Iran troops to join Syria war, Russia bombs group trained by CIA

(Reuters) – Hundreds of Iranian troops have arrived in Syria to join a major ground offensive in support of President Bashar al-Assad’s government, Lebanese sources said on Thursday, a sign the civil war is turning still more regional and global in scope.Russian warplanes, in a second day of strikes, bombed a camp run by rebels trained by the U.S. Central Intelligence Agency, the group’s commander said, putting Moscow and Washington on opposing sides in a Middle East conflict for the first time since the Cold War.

Senior U.S. and Russian officials spoke for just over an hour by secure video conference on Thursday, focusing on ways to keep air crews safe, the Pentagon said, as the two militaries carry out parallel campaigns with competing objectives.

And that’s just a sampling of the political and economic chaos that broke out in September. Also shaking things up was the sudden resignation of the speaker of the US House of Representatives, the landslide election of a separatist party in Catalonia, and Volkswagen’s emission-gate scandal.

Under normal circumstances the US response would be to paper everything over with newly-created dollars. But these obviously aren’t normal circumstances, which leaves the Fed with a serious case of cognitive dissonance and no idea what to do about it.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


Lagarde Says Fed Hike, Slower China to Test Global Economy

Bloomberg, Sep 30, 2015


* World growth will only modestly accelerate next year
* China faces ‘delicate’ task of moving to new growth model

Global growth will only modestly accelerate next year as the world grapples with the twin prospects of rising U.S. interest rates and slowing expansion in China, International Monetary Fund Managing DirectorChristine Lagarde said.

The likelihood that the Federal Reserve will tighten monetary policy, coupled with China’s slowdown, “are contributing to uncertainty and higher market volatility” in the global economy, Lagarde said in a speech in Washington on Wednesday. The IMF will host its semi-annual meetings next week in Peru.

The fund’s World Economic Outlook, to be released Oct. 6, will confirm that the global growth rate is expected to be weaker this year than in 2014, she said. In July, the Washington-based IMF projected world growth of 3.3 percent this year, down from 3.4 percent in 2014, and accelerating to 3.8 percent next year.

The IMF now expects only a “modest acceleration” in 2016, Lagarde said on Wednesday. She didn’t provide a specific forecast.

Disappointing and Uneven

“We see global growth that is disappointing and uneven,” Lagarde said. “The ‘new mediocre’ of which I warned exactly a year ago — the risk of low growth for a long time — looms closer.”

Fed ChairJanet Yellen said Sept. 24 that the central bank, which has held rates near zero since late 2008, was likely to begin tightening policy later this year if the economy stays on track. Lagarde has previously urged the Fed to delay liftoff until 2016.

While emerging markets are generally better prepared for higher U.S. rates than in the past, rising borrowing costs and a stronger dollar “could reveal currency mismatches, leading to corporate defaults — and a vicious cycle between corporates, banks and sovereigns,” Lagarde said.

More broadly, most advanced economies should continue to keep monetary policy loose, while incorporating “spillover” risks into their decision making. Emerging economies need to improve their monitoring of the foreign exchange exposures of majorcompanies, while countries with room to raise public spending should try to boost growth by increasing investment, especially in infrastructure, she said.

The growth potential of the world economy is being held back by low productivity, aging populations, and legacies of the financial crisis, such as high debt, she said.

Modest Pickup

The fund’s latest World Economic Outlook will show evidence of a “modest pickup” in advanced economies, with the euro-area recovery strengthening andJapan returning to growth, she said. However, expansion in emerging economies will likely decline for the fifth straight year.

While India remains a “bright spot,” countries such as Russia and Brazil are facing “serious economic difficulties,” said Lagarde. Growth in Latin America continues to “slow sharply.”

In addition, reforms in China to lift incomes will lead to “slower, safer and more sustainable” growth, she said, adding thatChinese policymakers “are facing a delicate balancing act: they need to implement these difficult reforms while preserving demand and financial stability.”