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Update on the Global
Economy
For the ICTF’s Global Credit
Professionals Symposium
Chicago, 2014
Hans P. Belcsak
President
Rundt’s Intelligence
Hot Spots 1 – Russia
• Who is Vladimir Putin?
• What does he want?
• The greatest geo-political disaster of the
21st century
• Russia was terribly mistreated by the
West
• Crimea – and he is not finished
• Moldova – Transnistria
• The critical Baltics
Ill-Prepared West
• Since 2008 big countries cut defense spdg. 10%-15%
• United Kingdom
– Royal Air Force with ¼ of aircraft vs. 1970s,Royal Navy 19
destroyers and frigates vs. 69, British army smallest since
Napoleonic wars
• France
– Six submarines vs. 17, problems in Mali, CAR
• These are the only two countries still taking defense
seriously
• 75% of Belgium’s spending for personnel (pensions,
salaries, not equipment)
• Might not matter much if US were still prepared to step in,
but…
US Weakness
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Drastic cuts in defense spending
Sequester and then some
Three carriers
Army smallest since before WWII
Drones cannot win wars
“Two-war principle” abandoned
Red lines that turned green
Lack of doctrine (from Libya to Egypt,
Palestine, Iran and Syria)
Russia
• Sanction effects could be significant
• 4 years $325 bio inflow into stocks and bonds
(yield-hungry)
• $70-bio outflow first quarter (against $63 billion all of
2013)
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Weak economy (GDP gain 1.3% in 2013; 0% in 2014?)
Manufacturing just 15% OF GDP
Budget needs oil at $110 a barrel
Crimean economy is a mess and burden
The cost of appeasement – China, Iran, North
Korea
Ukraine
• History, “little Russia,” “not a real country
• The 1994 Budapest Memorandum on Security
Assurances
• 23 years of mismanagement (since independence)
• On the verge of bankruptcy – hiked Russian oil & gas prices,
$2 bio debt to Gazprom, $3 billion to Kremlin
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Nearly open access to EU market
20% dive of hryvnia increased debt burden
FX reserves down to $15.5 billion
Needs $20-25 billion for cacc BoP deficit plus debt
coming due
• IMF-EU-US aid package $15 bio
Hot Spots 2 – Iran
• The P5+1 “deal” was a big mistake (UK, US,
France, Russia, China & Germany)
• Rouhani is no moderate (besides, Khamenei runs the
shop)
• Sanctions were biting
• Inflation 32% (really 50%-60%)
• Unemployment 28% for youngsters (really
higher)
• Economy contracting
• Dollar to 24,500 rials from 12,260
• Now companies falling over one another
• Nuclear program not even slowed down
What If Iran Gets the Bomb??
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Critical is “breakout point”
Existential threat for Israel
The Shia crescent
Struggle for regional superiority between
Iran and Saudi Arabia
• Arms race in the Middle East
An Existential Issue For Israel
• Farce of Palestinian
centrality
• No chance for
negotiations
• PA head
Mahmoud Abbas
found way to
reject proposal
before they were
even made.
Hot Spots 3 – Syria
Hot Spots 4 – China
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Extended air control space
Hefty investment in the military
First aircraft carrier
Hong Kong
Taiwan
Sekoku Islands and the Malacca Straits
China’s Economy
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$3.8 trillion in reserves
Making the yuan more volatile (no one-way bet)
GDP 2013 +7.7%, 7.5% goal for 2014 (grain of salt)
Weak first-quarter results
Modest official stimulus (urban infrastructure)
First significant default (Shanghai Chaori Solar Energy
Science and Technology Co. on 5-year bonds)
– Pushing foreign aid (mainly Africa and LA, less Asia)
• To gain resources as well as markets
• 3% interest. 15years’ repayment, 5 years’ grace
• Resources, rights, Chinese materials and labor
– Shadow banking & tightened information
restrictions (Including access to corporate records)
Hot Spots 5 – Al Qaeda
• The Terror War Has Spread
• Metastasized
• Unchanged Goals
– Drive Infidels out of the Middle East
– Defeat them globally
– Establish Caliphate run under Shariah
law
• From Boko Haram to Al-Shabaab and AQAP
• Home-grown cells
Al-Qaeda In Ascendance
United States
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Will continue to bump along low range
4th Quarter 2.4% typical
Fiscal policy more or less neutral
No risk of abrupt end to QE-3
No marked rise in Fed Funds till 2015
Inflation for 2013 = 1.3% (??)
Real disposable income +0.7% in 2013
Labor participation 63%
CFO’s, CEO’s battle-scarred
Public-policy uncertainty (especially SMEs, everchanging rules, complex laws, 1,000 pages Dodd-Franc five
agencies, Affordable Care Act)
Venezuela
• Back to four exchange rates
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Official = 6.3
Sicad 1 = 11.8
Sicad 2 = 51.86 = 87.8% devaluation from 6.3, or 79.17 from 11.8
Black = 80-90
Uncertain amounts, presumably still shortage
57.3% inflation, will go up
Importers estimated owing $14 billion
Airlines have $3.3 billion frozen
Revealing math: 300,000 to pay China, 400,000 sold at subsidized
prices, 600,000 subsidized local, leaves 1.7 million bpd for regular
exports, yields $58 billion, but imports totaled $77 billion in 2012
• Reserves = about $20 billion, but debt principal $4.5 billion this
year, interest $13 b.
• Issuing bonds becoming difficult
• Unrest, Cuban intelligence
Argentina
• Problems with inflation reporting
– Past seven years wages = 24% p.a., inflation 9.4%
• New index: 3.7% for January
• Money printing to fund ever-expanding
government programs
• Peso 20% below start of year
• Dwindling reserves – now $27 billion
• US court ruling still threatening new default
• Will reduce gas & water subsidies 20%
Brazil
– Slow economy
– Extended payment terms; consumers tapped out?
– Barely missed slipping into recession 4Q 2013 (+0.7%)
– Inflation up to 5.91% in 2013 (above CB target), interest
rates up, real down, Selic to 10.5%
– Contradictory policies:
– Expanding fiscal spending while raising interest rates
– Continued lagging growth
– 1.67% this year, official prediction
– Presidential elections in October
– Angry about credit downgrade (S&P’s)
– This is government risk, not country risk
Greece
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Deal with troika, $8.3 b payment
Difficult conditions (e.g., milk)
Primary surplus 2013 = 1.1% of GDP
Funds for social purposes
Piraeus Bank EUR 500 m borrowing a first,
EUR 3 billion in bids
• Sovereign issue before May
• Confident no need for another bailout
• Does not mean troubles are over
– 27.5% unemployment, strikes
– All in all, outlook is brightening
Turkey
• Financial markets welcomed municipal election
results
• Erdogan will focus on “enemies,” not reforms
• Fetullah Gulen
• Twitter and Facebook, news media
• Surging foreign debt – corporate & consumer +67%
last year
• Nearly 90% of corporate debt by closely held co’s
without public disclosure of balance sheets, other
basic info
• Almost half of corporate debt in FX
• Turkey needs inflows of capital, cannot afford to
frighten investors
Egypt
• Political situation still unsettled
• Al-Sisi will run for presidency, face host of
difficulties and respond with force
• Sinai-based rebels
• Effect on tourism
• Government can borrow, banks are liquid
• $12 billion in aid from Gulf states
• Two stimulus packages ($4.3 billion each)
• Current fiscal policies are not sustainable
Nigeria
• Presidential & parliamentary elections
February 14, 2015
• Goodluck Jonathan not politically correct
• Endemic corruption
• Delta situation better, but
• Security problems not resolved
• Oil revenues disappearing (Excess
Crude Account, Reserves)
South Africa
• Elections May 7
• ANC troubled (still 60%, it and Zuma
continue in office)
• Sluggish since 2008
• GDP +2.7, unemployment 24.1%
• Labor unrest (the mines, especially)
• Current-account deficit 6.5% of GDP
• Dependence on short-term inflows
• Effects of “tapering” by the Fed
India
• Rupee rescue (nadir August 28, then rate hikes)
• Still vulnerable (foreigners own 22% of $ 1-trillion stock
market, nearly half of all shares traded freely)
• Fundamental reforms needed, but unlikely
• May 2014 elections (neither Congress nor BJP will gain
outright majority, coalition needed)
• Inflation (2013 wholesale 6.16%, consumer 9.87%
• Current-account BoP Deficit remains troubling
• But reserves $ 260 billion
Open Discussion
Sub-Saharan Africa
• The Colonial curse
• Difficult to do business
• Oil
• Old
• Angola, Nigeria,
Congo Brazzaville
• New
• Ghana, Uganda,
South Sudan
• Mining
• Mozambique, DR of the
Congo, Tanzania,
Zambia
• Agriculture
• Ethiopia, Kenya,
Malawi,