Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Friday, January 31, 2014
From PetroDollar To PetroYuan – The Coming Proxy Wars ..... Why War between China and the US is not as far fetched as you might imagine ! While the FX Wars have yet to get underway in earnest , some news of the day from the daily emerging markets turmoil .....
Why would the central bank of Nigeria decide to sell dollars and buy Yuan?
At first glance it might not seem the most interesting or pressing question for you to consider. But I think it is one of those little loose threads that if pulled upon carefully begins to unravel the hints and traces of a much larger story. But please be warned this is speculative.
Two days ago the Nigerian Central Bank announced it was going to increase the share of its foreign currency reserves held in Yuan from 2% at present, to up to 7%. To do this it was going to sell US Dollars. Now a 5% swing in anything financial is big. In our debt drunk times it’s difficult sometimes to remember that 2.15 billion dollars (which is what 5% comes to) is actually a great deal of money, even if it is less than a drop in America’s multi trillion dollar debt ocean. On the other hand even a 5% increase in Yuan would still leave 80% of Nigeria’s $43 billion worth of reserves in dollars.
BUT while it is small in raw financial terms I think it is significant in geopolitical terms.
Nigeria is Africa’s second largest oil and gas exporter. It holds as many dollars as it does because oil is sold in dollars. Nigeria gets paid in dollars which it then needs to recycle. This is the famous petrodollar in action. It is also a major reason the dollar is still the world’s major reserve currency and that in turn is why America can have such a monumental pile of debt and still (for now) be the risk-off haven that institutional investors run to when other currencies and markets become too risky and unstable.
What interest me is that prior to this announcement from Nigeria’s central bank, China has, for some years now, been working hard and successfully to buy exploitation rights in Nigeria’s oil fields. In 2009 The Wall Street Journal reported,
Chinese companies have proposed investing $50 billion to buy 6 billion barrels of oil reserves in Nigeria, the African nation’s presidential adviser on energy said Tuesday.
Nigeria and China have signed a tentative deal to build three oil refineries in the West African state at a cost of $23 billion, in a move to boost badly needed gasoline supply in Nigeria and to position China for more access to the country’s coveted high-quality oil reserves.
And just last year China extended a $1.1 billion loan in return for a reported agreement that oil exports to China would increase from around 20 000 barrels a day to 200 000 per day by 2015. This loan was on top of a range of development agreements between the two countries for various infra-structure projects such a telecoms and railways.
Nigeria had, as of 2011, over 37 billion barrels of proven oil reserves. China is now one of its major trading partners. China wants Nigerian oil and my guess is that if it isn’t doing so already it is going to trade it entirely in Yuan. Such a move would mean Nigeria would need fewer dollars and more Yuan and the Petro-Yuan would begin to rise at the expense of the Petrodollar.
For some years now China has been making the Yuan a settlement currency. I have written about this a lot over the years. In 2012 I wrote a piece called “A new reserve currency to challenge the dollar – What’s really going on in the Straits of Hormuz.” China has created a series of bilateral settlement agreements with, among others, the EU, South Korea, Iran, India and Russia. All of these agreements by-pass the US dollar. If China now trades its oil in Yuan where will that leave the dollar? Of course Saudi would never agree to such a thing, would it?
Now Its a long way from Nigeria’s 200 000 barrels a day to overthrowing the dollar as the premiere oil currency. But let’s face it the US has gone to war on more than one occasion recently in part because the country involved had been going to sell its oil in Euros. And the US is Europe’s friend, isn’t it?
The US hawks have always been afflicted with dominophobia – fear of falling dominoes. Somewhere in a room in the Pentagon or Langley, there is a huddle of spooks, military types, oil men and State department advisors all wondering how to prevent this new creeping menace. Because you cannot afford to be complacent you know. It starts in one country and if you don’t do something other’s will follow and before you know it the rich Western Africa oil bonanza is flowing into Yuan, to be followed by all those North African and Middle Eastern Arab Spring countries where the clean-cut boys are already having to ‘advise’ on the need to take a firm line with potentially anti-American Muslim Brotherhood types by locking them up, shooting them and generally branding them as terrorists.
What would happen, someone will mention almost in a whisper, if Qatar were to triumph over Saudi and then cut a multi-lateral deal to sell its gas in Euros to Europe and in Yuan to China?
But to return from the overheated imaginations of the Virginia Hawks to some sort of reality, Nigeria is increasing its Yuan reserve at the expense of the dollar and is developing far closer ties to China than to the US. Which is why I think you will soon find the US dramatically increasing its involvement, both financial and military, in Angola.
Angola is going to be America’s answer to China’s Nigeria. And I think the signs are already there.
Angola itself is busy selling off new concessions. 10 new blocks containing an estimated 7 billion barrels of oil, which is over half of all Angola’s proven reserves are to be auctioned this year. Angola has recently edged ahead of Nigeria to be Africa’s largest oil exporter. If I’m correct I expect the Western nations/companies, led by the US and new best war-buddy, France to make sure the Chinese do not get a large share of the spoils. One to watch.
As part of this new Western push, I expect to see China also restricted in any new oil fields around Sao Tome and Principe. The big players to date are Chevron, Exxon-Mobil and Nigeria. The latter suggesting a way in for the Chinese that I think the Westerners will want to push shut. To which end what I found interesting about recent events in Soa Tome and Principe is the visit there of Isabel dos Santos, the daughter of Angola’s President for life. I have written about her and her banking empire in The Eurofiscal Corruption Contest – The Portuguese entry. Isobel is most often referred to as Africa’s or Angola’s most famous business woman or Africa’s richest woman (She’s a billionaire). Rarely does anyone from the press raise the question of how she became so vastly wealthy.
She made a visit to the islands and both she and Angola’s state companies have begun to invest heavily. Angolan companies now have a very commanding position in the island’s economy and Angola, even though its own people live in poverty, found the money to loan Sao Tome and Principe $180 million which is half of the island’s GDP. Top that Beijing! The Islands are Portuguese speaking, the largest bank is Portuguese, and the islands also house a broadcast station for Voice of America.
I think taken together the signs are that the West, led by America, has in mind to try to contain or perhaps even confront Chinese expansion particularly as it concerns access to oil and gas in West and North Africa, and to rare earth minerals – but that’s another story. I don’t think there can be any doubt that America and Europe are looking at Chinese expansion and its hunger for resources and see a threat. The question is what will they do? America is accustomed to being the hegemonic power and its hawks have proved over and over that they are are quite prepared for military confrontation. The question for them would be how? Invading countries who have – in reality – very little military or economic might is one thing, but directly confronting another superpower is another. I think all sides would see direct and open military confrontation to be out of the question. Not just for military reasons but for global economic ones as well. They need to find ways of fighting that do not sink the world economy - neither its flows of goods and trade , nor its flows of captail and debt. Which is why I wonder about the possibility of seeing an era of new proxy wars being faught out in tit-for-tat destabilization escalating up to protracted gorilla/civil wars.
In West Africa the front line seems to run between Angola and Nigeria. So who would like to play a game of destabilize your neighbor? There is already unrest about Chinese goods flooding Nigeria. How tempting might it be to think about fanning flames of unrest in already unstable Nigeria especially in the delta?
In return what would you have to do to re-ignite the lines of mistrust and division which blighted Angola through decades of civil war? Dos Santos and the MPLA may have been the Soviet proxy but he’s a capitalist now. So, how about a nice cold-war style proxy war? I cannot bring myself to believe that no one at the Pentagon has dusted off the old plans for such conflict and set some analysts to working up some new ones with China scribbled in, in place of Russia.
Something is, I suspect, already afoot. One last pull on that little thread, one last detail that makes me wonder. Just last April (2013) the Israeli billionaire, Dan Gertler sold back to the government of the Democratic Republic of Congo, one of the oil companies/exploration blocks he had bought from it, but for 300% more than he paid. Anti-corruption campaigners have been up in arms.
Two facts interest me . One, that the purchase was actually financed by Sanangol, the Angolan state oil company (the company from which $32 billion had gone missing. Missing billions: billionaire dos Santos… No connection obviously). The DRC is to pay Sanangol back from oil revenue. Until that time, of course, Sanangol calls the tune. Two, that this oil block lies between the DRC and Angola in what was contested territory but has since been decreed a zone of cooperation.
Now this sale by Gertler could just be a bog standard pillage-Africa deal. And I might well be seeing things that just aren’t there, but why now? This sort of big money, that is connected to the top of the DRC government (how do you think Gertler was able to buy the concession at the price he did? And who do you think might be the, so far, hidden second beneficiary of Gertler’s oil company? The government minister who sold the concession to him in the first place, maybe?) moves when its contacts suggest this is a better time to lock in profit than times to come.
All in all, if I were a religious man, I would be saying a prayer for the children of Nigeria and Angola.
A note on all this speculation and non-financial stuff. I don’t usually write this much speculation but recently I have become more convinced that we are in a watershed in which everything around us, all the rules we are used to, all the lines on the map, are up for grabs and are changing around us. For me, finance is not separate from politics so we have to understand how they rub against one another. I hope you will bear with me.
Today's EM turmoil.......
A Not So Subtle Hint That Argentina May Be Un-Fixed
Submitted by Tyler Durden on 01/31/2014 13:46 -0500
This is the worst in emerging market bonds and the price/yield is back at the lows/highs since October 2012. With the peso's dramatic 15% devaluation last week stabilized in the official rate around 8/USD, the blue-dollar rate is back at its worst around 12.80 implying more pain to come.
Argentina is losing foreign currency reserves at the fastest pace in more than a decade as estimated 28 percent inflation and currency controls spur capital flight. The funds, which the country relies on to pay debt and finance energy imports, dropped to a seven-year low of $28.3 billion. The government devalued the peso 15 percent last week and raised benchmark interest rates as much as 6 percentage points. The moves, coupled with less risk appetite for emerging market assets, haven’t settled investor concerns.
“There is fear and panic about the emerging markets and the news has not been good out of Argentina with reserves dropping $250 million yesterday,” said Russell Dallen, the head trader at Caracas Capital.
Charts: Bloomberg
Turks hoard dollars fearing lira rout will continue
ISTANBUL - Reuters
Turkish citizens and companies, who want to benefit from relative recovery of lira, rush to buy US dollar, fearing the rout of lira may continue. The indiviuals’ forex stockpiling that is estimated to reach billions also add to the pressure on Turkish currency.
Customers wait for their turn at a currency exchange office in Istanbul. As the lira looks like it will not go back to its strong days any time soon, citizens who want to raise their savings’ value hoard billions of dollar. AFP photo
Turkish households and firms are hoarding dollars, suggesting they have little faith the lira will be spared a further emerging markets sell-off despite a massive rate hike this week.
The Central Bank raised interest rates by around 500 basis points at an emergency meeting on Jan. 28 despite Prime Minister Tayyip Erdoğan’s vocal opposition, stunning markets and causing a spike in the battered currency. But the lira has since erased much of those gains, returning to where it was just before the rate hike. It is still some way from Jan. 27’s record low of 2.39, however, trading at around between 2.24 to 2.27 to the dollar.
Locals’ forex holdings rose 2 percent to $122 billion in the week to Jan. 24, jumping 13 percent year-on-year, according to data from the Central Bank released on Jan. 30, suggesting they are not selling dollars as they did in the past in currency crises to benefit from a cheaper lira.
“Corporates have started buying forex for hedging purposes as they think the lira will not appreciate,” said a senior forex manager at an Istanbul bank.
“Moreover, individual investors and households - who used to sell as much as $10-15 billion whenever the lira depreciated - are hoarding dollars and even increasing their holdings, piling extra pressure on the lira,” he said.
“Locals continue to accumulate FX,” said Istanbul-based TEB-BNP Paribas strategist Erkin Işık, estimating Turks’ total forex holdings had risen some $5 billion in the past three weeks.
“It will be more difficult for the Central Bank to reverse this mood of local investors, if global risk sentiment remains weak,” he said.
Companies’ debt stress
The lira fell 17 percent in 2013 and extended its slide this year as a graft scandal hit the government, heightening investor concern about political stability just as a gradual end to U.S. monetary stimulus dampened appetite for emerging market assets.
The slump means Turks now need more than twice as many lira to buy dollars as they did at the currency’s peak six years ago, hitting their pockets as they prepare to vote in a cycle of local, presidential and general elections beginning in March.
The lira’s slide has also left Turkish firms with foreign debts badly exposed, forcing them to scrap some investments at a critical time as the government battles the corruption scandal and tries to revive economic growth.
Turkey’s leading business group TÜSİAD estimates that within just one month Turkish firms’ foreign debt has risen 25-30 percent due to the currency weakness and higher risk premiums which push up borrowing costs.
The higher borrowing costs have also raised concerns about banking sector profits. All this bodes ill for an economy which has seen growth rates of 9.2 percent in 2010 and 8.8 percent in 2011 shrink to just 2.2 percent in 2012 and a projected 3.6 percent last year.
Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record, as China’s slowing growth and cuts to central-bank stimulus sink currencies from Turkey to Brazil.
More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show. The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005. The WisdomTree Emerging Markets LocalDebt Fund is on track for an eighth straight month of withdrawals.
Investors accelerated redemptions after data showed Chinese manufacturing contracted and Argentina’s unexpected devaluation of its peso dented confidence in Latin America. Surprise rate increases by central banks in Turkey and South Africa failed to boost their currencies, while the U.S. Federal Reserve opted to press on with reductions to its monetary stimulus.
“A lot of speculative money has been circulating in the emerging markets and the party seems to be over, at least for now,” said Howard Ward, the chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., which oversees about $40 billion. “There is a growing lack of confidence in the economic policies of many emerging markets at a time when growth is slowing and inflation is a real problem.”
Photographer: Kerim Okten/Bloomberg
An employee counts out 50 Turkish lira banknotes at a currency exchange office in...Read More
Cheap Money
Emerging economies have benefited from cheap money as three rounds of Fed bond buying pushed capital into their borders in search of higher returns. The central bank began paring the purchases by $10 billion to $75 billion this month and announced yesterday plans to reduce the amount by another $10 billion.
The MSCI Emerging Markets Index of equities is off to the worst start to a year since 2008, with almost $500 billion erased from stocks this year. Turkey and South Africa followed counterparts from Brazil to India in tightening monetary policy as exchange rates for the lira and the ruble tumbled to records.
Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show. About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.
Photographer: Kerim Okten/Bloomberg
Pedestrians stop and look at foreign currency exchange rates on an electronic board at...Read More
Crisis ‘Shock’
“Obviously that is a shock, and people are panicking much more than we thought,” Julian Rimmer, a broker at London-based CF Global Trading U.K., said in an interview. “And then you realize, maybe this is a crisis.”
The selloff in developing-nation ETFs picked up after a Jan. 23 report from HSBC Holdings Plc and Markit Economics Ltd. said Chinese manufacturing may contract in January, raising concern about the growth outlook for a country that buys everything from Chile’s copper to Brazil’s iron ore.
Hours later, Argentina’s peso started sliding as the central bank pared dollar sales to preserve international reserves that have fallen to a seven-year low. The central bank said the next day it would ease currency controls, capping a 15 percent weekly loss.
A Bloomberg customized gauge tracking 20 emerging-market currencies was at 89.64 at 12:01 p.m. New York time after reaching 89.63 yesterday, the lowest level on a closing-market basis since April 2009. The index has tumbled 10 percent over the past 12 months, bigger than any annual decline since it slid 15 percent in 2008.
Currency Declines
The Argentine peso has fallen the most since the emerging-market rout began, dropping 13 percent against the dollar since Jan. 23. Russia’s ruble tumbled 2.6 percent against the dollar and sunk to a record versus a euro-dollar basket monitored by the central bank. Bank Rossii reiterated in a statement on its website today its policy of taking unlimited action in currency markets if the ruble slips beyond its target corridor.
South Africa’s rand touched a five-year low today and Hungary’s forint weakened 2.1 percent since Jan. 23.
The Turkish lira touched a record-low of 2.39 per dollar on Jan. 27 before recovering after policy makers called an emergency meeting and raised benchmark lending rates.
The flight from emerging markets started last May when Fed Chairman Ben S. Bernanke first suggested the central bank may scale back its stimulus before the end of the year. Almost $9 billion was pulled out of ETFs that track developing markets in 2013, the first annual outflow since the securities were created. The funds attracted more than $110 billion in the previous decade as a booming Chinese economy and low interest rates in the U.S. spurred demand for risky assets.
Flowing Back
Mark Mobius, the chairman of Templeton Emerging Markets Group, said inflows into developing nations will resume later this year.
“People are enjoying what they see as a bull market in the U.S.,” he said in an interview in Johannesburg yesterday. “As we go forward, we’re going to see a lot of overweight positions in the U.S. So, given the fact that emerging markets are still growing fast, given that they have low debt-to-gross domestic product ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”
John-Paul Smith, a global emerging-market equity strategist at Deutsche Bank AG, disagrees. Withdrawals may accelerate among retail investors and pension funds, at least until growth in China stabilizes, he said.
Credit Boom
“They haven’t started reducing yet, compared with how much money has come in over the last 10 years,” Smith said in a phone interview from London. Deutsche Bank is the world’s biggest currency trader. “I suspect retail investors are in the process of selling now and it will increase through the year.”
The Fed’s asset purchases had helped fuel a credit boom in developing nations from Turkey to Brazil. Accumulated capital inflows to developing-country’s debt markets since 2008 reached $1.1 trillion, or $470 billion more than their long-term trend, according to a study by the International Monetary Fund in October.
The inflows encouraged borrowing, pushing Turkey’s current-account deficits to more than 7 percent of its gross domestic product and making the nation more reliant on foreign capital. The lending growth also fueled inflation, with Brazil’s consumer prices staying above the central bank’s target since August 2010, eroding the competitiveness of the economy.
“It’s quite a challenging outlook,” David Simmonds, the head of currency and emerging-markets strategy at Royal Bank of Scotland Group Plc, said in a phone interview from London. “Turkey and a number of other countries during the years of global liquidity injection have over-consumed and over-imported. We are only in the early stage of the adjustment.”
Submitted by Tyler Durden on 01/31/2014 19:59 -0500
Turkish households and firms are hoarding dollars, suggesting they have little faith the lira will be spared a further emerging markets sell-off despite a massive rate hike this week.
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