Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Tuesday, August 26, 2014
Argentina , Ukraine and Venezuela Updates ( August 26 , 2014 ) - Woes in these economies and with their currencies reflect troubled waters ahead .... Argentina and Ukraine in particular show huge strains with their respective currencies !
After spending time in Argentina, BofA's Marcos Buscaglia is concerned... The perception of many locals is that the risks of an economic/currency crisis before year-end have increased significantly. This compares to a view they had before of a muddle-through till the 2015 presidential elections. Policy decision-making is ever more concentrated, and the administration has radicalized, but the severe economic downturn will change political incentives in 2015, in BofA's view. With the official peso rate at record lows once again, the black-market Dolar-Blue tumbled to over 14/USD - a record low indicating dramatic devaluation ahead (which of course, sends ARS-denominated stocks surge to record highs).
Imagine the headlines on CNBC Argentina... think of the wealth effect...
as markets price in massive devaluation... 14.04 Black-market Peso...
A more recent snapshot of the "Dolar Blue" collapse:
Not pretty, and as BofA warns, Argentina: on a slippery slope?
We spent three days in Buenos Aires last week, meeting government officials, economists, political analysts, market participants, corporates and members of the opposition parties. Below are our main takeaways.
A presidential election that seems too far away
The most striking change compared with our previous visits is that now many of the locals we spoke to think it likely Argentina will undergo an economic/currency crisis before the transfer of power to a new administration in December 2015. Previously, the consensus seemed to be of a muddling through or a small contraction at the worst. In this sense, the presidential elections seem farther away now in economic terms.
What do we mean by economic/currency crisis? We expect the demand for pesos to fall and the demand for dollars to increase. The default will likely increase external restrictions as well as the fiscal deficit and monetary financing. This would mean higher inflation and pressure on the peso and on reserves. Deteriorating sentiment and a wider gap between the official and the parallel FX rates would dent investment, spending and hiring decisions even more. This will likely further hurt fiscal revenues, which will require more peso issuance, and so forth.
What would be the catalysts to trigger a downward fall? We think there are several potential negative news items in coming weeks, while the only potential positive – but surprising – news would be an unexpected remedy to the default.
The local media report a dispute between central bank (BCRA) President Fabrega and Finance Minister Kicillof. Fabrega’s resignation would spur demand for USD, in our view. In addition, unions are pushing for a reopening of wage negotiations. Wages are increasing slower than inflation, so a new round of wage hikes would not be surprising. It is reported a general strike will be called for this Thursday by dissident Peronists unions. In addition, events that cement the view that the absence from voluntary debt markets will be more protracted may destabilize demand for pesos.
In our view, the social situation seems precarious, and the many we spoke to did not rule out additional social conflicts toward year-end. December has been turbulent in recent years. In 2013, amid widespread electricity cuts and a police strike, there were lootings in many provinces. The social situation has not improved since then:employment has dropped and disposable income is probably falling at low double digits yoy at this point.
External conditions tightened
External conditions have not only tightened due to lower expected financing from abroad in coming months, but also because export prices have dropped sharply and because farmers are restricting grain exports. By our estimates, farmers exported about $520mn less in the four weeks after the default compared to before the default.
On top of this, grain exports are likely to drop next year. Since May/June, soybean, wheat and corn prices have dropped by 20%.At the current international prices and the current exchange rate, planting wheat and corn is not profitable in many areas, according to some locals we met. If there is no sufficient weakening of the peso in coming weeks, the harvest may contract in 2015 compared to in 2014.[ZH: Which would be devastating for Gartman's short Grains trade]
Central bank started moving, where will it end?
BCRA started allowing the peso to weaken, sending it from 8.28 to 8.40 per USD last week, not surprisingly during the first week in which it showed a decline in reserves. In a country where locals compare their ex-ante expected return from peso term deposits with the expected weakening of the peso, the move made clear that returns from term deposits were negative once measured in dollars. In sum, we think the small moves made by the BCRA increase the demand for USD rather than reduce it. This happened in December 2013/January 2014. As a result, pressure for a larger devaluation likely will increase after this move. We think that BCRA will resist a larger FX move as much as possible, but it may have difficulty avoiding a larger devaluation if reserves keep falling.
It takes only two to tango
Local political analysts characterize the current government’s decision process as highly centralized in Cristina Kirchner, with an increased access to her by Kicillof over other members of the administration. Moreover, they believe the government actions in the pari passu case should be understood in political rather than economic terms. According to this view, Cristina Kirchner does not have a candidate for the 2015 presidential elections, so they believe she is more concerned about her legacy than about the elections. Right or wrong, their view is that by fighting the holdouts, she thinks she gains more for her future political career than by giving up to holdouts.
Negotiations with holdouts in 2015 are still feasible
The many we we met expect the government will be able to pass the bill to implement local payment of Exchange Bonds (EB) and to offer a voluntary swap into local law. Most opposition members said they will not vote in favor of the bill, so the real question is whether the government can keep its rank and file united. Although there seem to be some cracks in the government coalition, the combination of electoral rules and fiscal distribution rules makes representatives dependent on the national government, so are unlikely to block this bill.
There is some disagreement among local economists and political analysts over whether the government will be ready to negotiate with holdouts in January once the Right Upon Future Offers (RUFO) clause expires. The RUFO is not the only impediment to negotiations. It seems local laws and the will to negotiate with all holdouts simultaneously – and not just with the plaintiffs of the pari passu case – also weigh on the government’s decisions. We are in the group that believes that the pressure from slumping activity will make the chances of some negotiations with holdouts more feasible in 2015, but these may take the form of a new offer to all holdouts rather than staying with the plaintiffs of the pari passu case.
Massa and Macri on the rise
Many locals believe that Argentina’s economic difficulties will be negative for Daniel Scioli’s chances of carrying the presidential elections. This is in stark contrast with our April 2014 visit amid the adjustments and negotiations with creditors, when Scioli was the favorite. Some recent polls show Mauricio Macri and Sergio Massa may have gained ground against Scioli.
Switching over to EU trade standards and nixing duty-free trade with Russia will cost Ukraine €165 billion over the next 10 years, President Putin warned at a meeting with President Petro Poroshenko in Minsk on Tuesday.
Russia will be forced to cancel all preferential trade agreements for Ukraine’s imports and switch to a standard regime when it ratifies its EU trade association agreement in September, the President said.
“In full accordance with the terms of agreement with the CIS free trade zone and WTO standards, we will be forced to cancel preferential imports from Ukraine,” Putin said.
Russia will cancel its duty-free relationship with Ukraine, which will lead to import tariffs of up to 8 percent affecting 98 percent of commodities.
Russia insists it needs to protect domestic markets from the flood of European goods on the Ukrainian market, which will in turn make Ukrainian goods less competitive. If the trade corridor of Ukraine is left wide open, Russian, Belarusian, and Kazakh products are at risk.
In response, Ukrainian President Petro Poroshenko said that he would like to establish a monitoring group to assess the actual damage of Ukraine’s association with the EU.
“Today we can agree to set up a monitoring group that will assess real and not hypothetical potential damage,” said Poroshenko. “After this damage is calculated we can put in protection mechanisms.”
Moscow has warned Kiev that signing the Association Agreement (AA) with the EU would beeconomic suicide, and Moscow is also poised to suffer a €2 billion blow, according to Putin.
“Entire sectors of industry and agriculture business will be hugely impacted, and there will be negative implications on the pace of economic growth and employment,” the Russian President said.
Losses will not only be absorbed by Russia, but also by Customs Union members Belarus and Kazakhstan, he added.
The Minsk talks are the first meeting between Putin and Poroshenko since early June when the two informally met on the sidelines of the World War II commemoration ceremony in Normandy.
Controversy over Association Agreement
The AA sits at the heart of the Ukrainian conflict, as people first began protesting in Maidan Square in Kiev after the then–President Viktor Yanukovich decided against signing the deal.
Rally by supporters of Ukraine's European integration on Independence Square in Kiev.(RIA Novosti / Andrey Stenin)
However, in June the new Kiev government signed the economic part of the Association Agreement, about a month after Russia, Belarus, and Kazakhstan sealed their Eurasian Economic Union on May 29 in Minsk. President Poroshenko said the EU association document will be ratified in September.
Ukraine has strong economic ties with both the EU and Russia, which is why it wants to forge trade relations with both the European Union and the Russian-led Eurasian Union. It is Europe’s second largest country by landmass, has a $176 billion economy, and a population of 45 million.
The perceived threat is that EU goods will illegally make their way to Russia via Ukraine. Russia has an agreement with Belarus to deter such smuggling, but not with Ukraine.
“Even within the Customs Union, EU goods banned from entering the Russian Federation are now being delivered to us, in this case, unfortunately through Belarus,” Putin said.
“We are looking at the country of origin – Belarus. A sticker torn away saying Poland.”
Russia-Ukraine economic standoff
Russia suspended alcohol imports from Ukraine shortly after it imposed the import ban on agricultural products from the EU, US, Canada, Norway, and Australia.
Ukraine's Parliament has also moved closer towards sanctions, adopting a law that would allow sanctions against Russia, and most importantly, halt Russian energy imports through Ukraine.
Energy is a large wedge between Moscow-Kiev relations. In June, Gazprom Russia’s national gas company said it was stopping deliveries to Ukraine after chronic late payment and an unpaid bill of over $5 billion . Ukraine imports nearly 50 percent of its gas from Russia, which in 2013 amounted to 27.7 billion cubic meters. If Ukraine cut off Russian gas transit, it would hit Europe, which sources 15 percent of its energy from Russia.
Hryvnia Exchange Rate Down 50 Kopecks To 14.00 UAH/USD In Interbank Market(16:43, Tuesday, August 26, 2014)
The hryvnia exchange rate in the interbank currency market fell by 50 kopecks to 14.00 UAH/USD on Tuesday, after falling by 15 kopecks on Friday, currency exchange market players told Ukrainian News.
According to them, the hryvnia rate fluctuated in the range of 13.50-13.70 UAH/USD at the start of trading, the quotations rose to 13.54-13.84 UAH/USD by 11:50, then keep growing and made up 13.92-14.18 UAH/USD by the end of trading.
According to participants in the currency market, most of the transactions were concluded at an exchange rate close to 14.00 UAH/USD.
The National Bank of Ukraine did not enter the market.
Under the NBU data, as at 16:00 a total of 102 deals were concluded for USD 138.71 million at the average weighted exchange rate of 13.6985 UAH/USD in the interbank.
Since the beginning of 2014, the hryvnia rate has decreased by 69.23% from 8.2730 UAH/USD to 14.00 UAH/USD in the interbank currency market.
As Ukrainian News earlier reported, in 2013 the hryvnia rate fell by 2.77% from 8.0500 UAH/USD to 8.2730 UAH/USD in the interbank currency market.
The hryvnia rate fell by 0.12% from 8.0400 UAH/USD to 8.0500 UAH/USD in the interbank currency market in 2012, and by 0.94% from 7.9650 UAH/USD to 8.0400 UAH/USD in 2011.
Ukraine’s conflict with separatist rebels is draining the economy by the day and hampering efforts to implement reforms as required by an IMF bailout programme, Prime Minister Arseny Yatseniuk said on Wednesday.
According to the terms of a $17 billion International Monetary Fund loan package, Ukraine must implement set reforms, but the country, which is virtually bankrupt and running wide external deficits, has had to divert substantial funds in its fight to contain the pro-Russia insurgency.
The economy contracted by 4.7 percent in the second quarter compared with the same period last year. With industrial output plummeting 12 percent in July, the economic outlook for the third quarter is not promising.
In June, Yatseniuk asked the IMF, which decides on the disbursement of the second tranche of $1.4 billion on Aug 29., to take into account the extra financial burden of fighting the insurgency.
Military Spending Math
Ukraine wants to spend $3 billion out of a $1.4 billion tranche. How exactly does that work?
While pondering that question, please note that Ukraine’s currency plunged to a fresh new low today.
Caracas and CONVIASA command Venezuelan market; Airlines cutting services due to currency crisis
Caracas compadres. Luis Suarez will always be welcome in Caracas, as Venezuelan President Nicolás Maduro was one of the few people outside of Uruguay to come out in support of the disgraced Uruguayan football star and now Barcelona player. Maybe they could hook-up with Chinese President Xi Jinping, who is expected to meet Maduro during his South American tour this month.
Venezuela has an estimated population close to 30 million and considerable wealth thanks to its status as one of the world’s key oil producing nations. However, the country’s inbound seat capacity is being slashed in the wake of a biting foreign currency crunch currently affecting Venezuela. The country’s main airport, Simón Bolívar International Airport, is located around 20 kilometres from Caracas and currently handles around 12 million passengers per year (15% up from 2012), making it Latin America’s eighth busiest airport, and number 127 in the world.
According to Innovata Schedule data, Venezuela has 26 airports with scheduled services — a huge jump from the 14 we reported back in 2011 — with Caracas accounting for 46% of all scheduled flights and almost 50% of scheduled seat capacity. Backing up the regional service explosion across the country, Caracas’ share of these figures has fallen sharply since our last review. After Caracas, the country’s next biggest airports are still Porlamar (12% of weekly flights; 12% of weekly seats), Maracaibo (7.2%; 7.7%) and Barcelona (6.7%; 7.1%), however these last two have switched positions over the last three years.
Source: Innovata / Diio Mi w/c 14 July 2014.
CONVIASA now #1, replaces Aserca
Venezuela has several locally-based airlines, the biggest of which is now CONVIASA, which began flying in 2003 as a replacement for Viasa (the national flag carrier that collapsed in 1997). It has a varied fleet of around 30 aircraft, with its fleet mainstay being the E190, of which it operates 14 of the type. Around 90% of its weekly seats operate to and from Venezuelan destinations, and its only long-haul operation is a twice-weekly, 259-seat 767-200 service to Madrid (which is operated by US charter carrier Vision Airlines).
CONVIASA has replaced Aserca Airlines as the #1 carrier in Venezuela since we last reviewed the market in 2011. Aserca operates a fleet of over 20 MD-80s and DC-9s, mostly on domestic routes. Currently its only international service is its six times weekly MD-80 route to Aruba.
Currency crisis begins to bite
TAP Portugal is the country’s biggest European carrier (#15 overall), marginally ahead of Air Europa (#16). Lufthansa, which was in the top 12 airlines last time round, has now dropped to 21st place, with over 1,300 weekly seats less than the 2,415 it posted in our last analysis. It currently flies five times weekly A330-300 services from its Frankfurt hub to Caracas, however in a recently announced schedule change, from 1 August 2014 the airline will cut this service to thrice-weekly, as the Venezuelan currency crisis takes its toll on air services. Similarly, Iberia has fallen out of the top 12 and now resides in the 18th spot. It also flies five times weekly A330-300s to Caracas, but obviously from its Madrid hub.
All three US majors — American Airlines, Delta Air Lines and United Airlines — operate to Venezuela, although the oneworld carrier’s 10 weekly 737-800 flights from Miami (eight weekly to Caracas, twice-weekly Maracaibo), makes its almost double the size of United in the market place, which offers a daily Houston Intercontinental to Caracas service with its 737-700s (however in another recent schedule announcement, from mid-September this will be reduced to four times weekly). Delta too offers a connection to a single hub, with daily 737-700 flights to the capital from Atlanta, but from August 1 this will be reduced to just weekly.
It appears Venezuelan President Nicolas Maduro has run out of other people's money. Just 8 months after his exuberant 60% approval rating at the end of last year after local elections (appealing to the ever-more-impoverished ultra-poor who remain entirely dependent on his 'fairness'), the socialist leader's popularity has plunged. As Bloomberg reports, Hinterlaces polling shows only a 39% approval rating (oddly similar to President Obama's). There are numerous reasons of course, but we suspect the news that Maduro has announced a mandatory grocery fingerprinting system to combat food shortages, will not exactly endear him to his 'followers'.
Hope and Change, it appears, fades after socialists win elections...
Maduro Approval Rating Falls to 39% in Venezuela: Hinterlaces
The President’s rating has fallen from abt 60% after Dec. 8 local elections, director of Hinterlaces polling company, Oscar Schemel, comments by phone.
Venezuelans soon may need to have their fingerprints scanned before they can buy bread.
President Nicolas Maduro has announced a mandatory grocery fingerprinting system to combat food shortages.
He said late Wednesday the program will stop people from buying too much of a single item, but did not say when it would take effect.
The move was met with skepticism. Critics say the new system is tantamount to rationing and constitutes a breach of privacy.
The socialist South American country has been grappling with shortages of basics like cooking oil and flour for more than a year. The administration blames the shortages on companies speculating and people smuggling subsidized staples out of the country.
In the spring, Venezuela tried a similar system in government-run supermarkets on a voluntary basis.