Update on the Global Economy
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Transcript of Update on the Global Economy
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Update on the GlobalEconomy
For the ICTF’s Global Credit Professionals Symposium
Chicago, 2014
Hans P. BelcsakPresident
Rundt’s Intelligence
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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
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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…
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US Weakness• 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)
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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)
• 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
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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
• 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
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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
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What If Iran Gets the Bomb??
• 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
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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.
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Hot Spots 3 – Syria
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Hot Spots 4 – China
• Extended air control space• Hefty investment in the military• First aircraft carrier• Hong Kong• Taiwan• Sekoku Islands and the Malacca Straits
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China’s Economy– $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)
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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
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Al-Qaeda In Ascendance
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United States• 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, ever-
changing rules, complex laws, 1,000 pages Dodd-Franc five agencies, Affordable Care Act)
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Venezuela• Back to four exchange rates
– 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
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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%
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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
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Greece• 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
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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
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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
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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)
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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
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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
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Open Discussion
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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,