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International Economies Weekly, 4/2/23

Updated: Dec 4, 2023

Good morning and welcome back to International Economics, a roundup and review of the key stories moving global markets. We would love to hear any feedback, news ideas, or thoughts for improvement as we start out.

Global Macro

Central banks come under fire for large losses and lost growth: After several years of an elevated public role in many economies, central bankers' near-heroic image has sourced with political consequences across the world. Central bank independence, itself a relatively recent reality in much of the world, is coming under political fire as tight interest rates, slow economies and balance sheet losses raise difficult questions around recapitalization.

Without sufficient fiscal space for ambitious spending programs in Brazil, President Lula and his lieutenants have taken to sharply criticizing the newly independent central bank’s 13.75% interest rate as sabotaging growth. The central bank of Brazil, which has only had decision making autonomy since 2021, views addressing +14% inflation as the primary goal for monetary policy. The bank has been one of the most hawkish, starting its tightening cycle a year and half before the Fed. Such policies prevented destabilizing capital outflows and prevented runaway inflation but at the cost of loan creation and domestic economic activity.

Meanwhile in Hungary, Prime Minister Viktor Orban has escalated a standoff with the country’s central bank with a decree constraining its ability to tighten monetary policy. The move bars big local investors and retail banks from putting cash in central bank credit facilities carrying 18% interest and extends a ceiling on the interest rates that commercial banks can pay on deposits. For similar reasons to Lula, Orban has fought with the monetary policy committee over growth concerns, effectively loosening monetary conditions via executive action amid a recession and despite persistently high inflation.

Finally, various EU central banks including the ECB have had to contend with growing political backlash over the possibility of requiring recapitalizations as balance sheets swollen by asset purchase programs wipe out trillions in equity. Not all countries face the same degree of political backlash though, with Uruguayan President Lacalle Pou providing political and financial cover for the central bank’s losses.

Such major divergences in financial and political fortunes for central banks risk creating another divergence in the world economy, creating more “local stories” which have been increasingly driving flows and economic performance across all non-reserve- currency-issuing economies. In both Hungary and Brazil, investors have sharply condemned the moves while independent central banks have pushed forward with rate hikes nevertheless.

Even if central bank independence does not come under threat itself, the attack between economic policy institutions guarantees more volatility and complexity for policymakers and investors alike.

Belt and Road losses force China into billions of bailouts: China has granted $104bn worth of rescue loans to developing countries as countries along its Belt and Road Initiatives have faltered between 2019 and 2021, the FT reports. The recent study of data by several prominent think tanks found that Beijing has given more assistance for the past three years than over the previous two decades combined.

The structure of the bailouts has led observers to conclude that China is undertaking the bailouts mostly to protect its fragile banking system from losses generated through BRI loans. With over $838 billion lent between 2013 and the end of 2021, according to American Enterprise Institute data, Beijing has racked up significant exposure to dozens of vulnerable borrowers.

Chinese banks hit by bad property debts, lending margin squeeze. (Nikkei)

Chinese rescue loans are also expensive, with an average interest rate of 5%, compared with 2% for a typical rescue loan from the IMF. Emergency support comes from "swap lines," where renminbi is disbursed by the central bank in return for domestic currency and direct balance of payments support, mostly from state-owned Chinese banks. With poor project performance across the BRI, recalcitrant Chinese debt restructuring tactics can be seen as a way to avoid losses in countries like Zambia and Sri Lanka, suggesting difficulty ahead for exposed creditors like Pakistan and Ghana, which owe Beijing large sums and both desperately need debt write-downs.

China has declined to participate in multilateral debt resolution programs even though it is an IMF member. Several countries that owe large amounts to China, such as Ghana, Pakistan, and Sri Lanka, are closely watching Sri Lanka's example as it calls on China and other creditors to quickly reach a compromise on debt restructuring after the IMF approved a $3bn four-year lending program for the nation.


CEE economies borrow strongly despite tough rate environment: The combination of global interest rate rises and recent banking sector stress has effectively locked a quarter of all emerging markets out of bond markets. However, analysis from Dutch bank ING shows that Central and Eastern Europe has dominated bond issuance in 2023 so far.

Hungary, Romania, Bulgaria, Serbia, Poland and North Macedonia have already issued bonds with relatively attractive terms as the region has issued $30.4 billion year-to-date, compared to $18.5 billion in all of 2019. The bank expects the non-eurozone countries to borrow primarily in euros or dollars—bucking recent trends toward local currency issuance—as the region faces continued funding needs for energy and military spending.

Beyond the region, rollover risk still haunts other emerging markets with issuance being forcibly high as dozens of countries face large walls of maturities in 2024 through the end of the decade.

Emerging Economies

Russia changes tax policies to counter drop in oil revenue: Moscow has moved to change its process for taxing oil companies as steep discounts between various price levels have eroded key hydrocarbons revenues for the now-deficit-running government, the FT reports. The change from using the Urals standard to a Brent crude-based calculation system will reportedly capture a larger share of sales in data and generate an extra $8 billion of annual revenue for the state.

While the price fragmentation has enabled Russian oil companies to increase their untaxed profits, the Kremlin has flagged an impending crackdown, with Putin directing officials to close the loophole. Under the new system, the maximum Urals discount to Brent under the new tax system will be $34 a barrel, a number that will shrink to $25 in July.

Such reforms highlight growing complexity in Russian oil markets and increasing tensions between the government and oil companies over excess profits.

Drought threatens Argentina’s relative post-IMF stability: The relative stability that access to IMF funds provided Argentina’s economy is crumbling in the face of a record drought and continued borrowing. Lower rainfall has substantially reduced agricultural outputs in the cash-crop-dependent economy, which has forced the giant soybean producer to rely on costly agricultural imports to feed its dominant grain processing industry.

As Frontier Markets News reported in November, reduced hard currency revenues from exports and a larger budget deficit from imports and subsidies threaten IMF support and the macroeconomic status quo underpinned by fund disbursements. This week ‘supereconomy’ minister Sergio Massa visited the IMF during a trip to Washington to negotiate looser debt and spending requirements.

While the IMF has agreed to relax requirements for continued disbursements, there are concerns that the country is heading to another debt default. Ratings firm Fitch, which downgraded Argentina's sovereign rating from CCC- to C last week, suggested another default and painful negotiation with the IMF is “imminent.”

Ukraine clinches IMF package to protect its battered economy: The IMF finalized a $15.6b loan, pending board approval, providing a financial lifeline for the battered Ukrainian economy. The program is intended to build “fiscal, external, price and financial stability” by raising additional funds, increasing tax collection, and eliminating monetary financing of the debt.

The lifeline is especially critical as the war’s economic toll has been immense with a 30% economic contraction, interest rates over 25%, and non-performing loans averaging 38% across the financial sector. While business sentiment has stabilized after Russia’s winter offensive, the private sector has struggled as multinationals relocated to elsewhere in the region and an estimated three-quarters of companies are scaling back production.

End Note: Caribbean corruption, fun until it's not. Venezuela’s powerful oil minister Tareck El Aissami resigned after along with several dozen arrests of high level executives and state employees in the orbit of state oil giant PDVSA for corruption. El Assimai was a critical ally of President Nicolas Maduro and effectively orchestrated the regime’s sanctions avoidance strategy and partnerships with Middle East countries such as Syria and Iran.

In a speech, Maduro called out corruption in the country and said that “very important business people, top officials at state entities and lawmakers” had been arrested in what would be the first phase of a crackdown on corruption. Ironically Maduro’s crackdown takes aim at the militias and prolific state corruption that eroded Venezuelan society and helped him cling to power

A broader purge reflects how Maduro’s grip on power has stabilized along with the economy as graft was a large part of how the regime had managed to keep control against both international and internal pressures. Now though, corruption is draining billions of badly needed revenue for the defaulted and depressed economy, preventing Caracus from fully profiting from the global hunt for additional oil production amid tight supplies.

In Other News

US Favors Raising World Bank's Risk Tolerance for More Aggressive Lending. (Bloomberg)

The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies. (IMF)

IMF: Central Banks must enhance transparency to build trust. (Mercopress)

300 million jobs could be affected by latest wave of AI, says Goldman Sachs. (CNN Business)

CPTPP trade bloc to give U.K. and U.S. green light to join. (Nikkei)

Top economist Mohamed El-Erian warns that ‘erosion in trust’ caused by banking crisis will lead to ‘economic contagion’. (Fortune)

More focused, less interventionist central banks would likely deliver better outcomes. (IMF)

IMF chief warned of increased uncertainty and risks to global financial stability (FT) while the World Bank warned the global economy at risk of lost decade of growth. (FT)

Inflation targets have left central banks in a bind. (FT Opinion)

Central bankers warn companies on fatter profit margins. (FT)

There’s another looming cliff — the end of the student-loan repayment moratorium. (MarketWatch)

How Bank Oversight Failed: The Economy Changed, Regulators Didn’t. (WSJ)

A Rapid-Finance World Must Ready for a Slow-Motion Banking Crisis. (WSJ)

Fed’s Emergency Loans to Banks Fall in Sign of Easing Turmoil. (Bloomberg)

Wild Quarter for Markets Might Foretell Further Turbulence. (WSJ)

As Interest Rates Rose, Banks Did a Balance-Sheet Switcheroo. (WSJ)

The US Is Paying the Price for Being Overbanked. (Bloomberg)

The World’s Most Important Oil Price Is About to Change for Good. (Bloomberg)

JPMorgan, Goldman Plan to Start Trading Private Credit Loans. (Yahoo Finance)

Chinese regulation seen boosting AT1 bond prices during crisis. (Nikkei)

Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks. (BNN Bloomberg)

Beware of Greek lessons for AT1 bondholders: All creditors are always and everywhere junior to political expediency. (FT Alphaville)

Tax loss harvesting: an investment tactic that has gone too far. (FT)

Top ECB official claims CDS market ‘contaminates’ bank stocks and deposit flows. (FT)

A difficult pivot looms for venture capital: Deglobalisation, geopolitical competition and demise of cheap money require industry playbook to change. (FT)

Kazakhstan tightens controls over trade with Russia. (Reuters)

Burkina Faso to revive ties with North Korea, seek ‘exemplary’ weapons trade. (NKNews)

Analysis: Which will grow faster: India or Indonesia? (The Economist)

Philippines President Marcos aims to merge two state banks into country’s biggest lender amid global turmoil. (Nikkei)

The Fed and SVB Won’t Sink Emerging Asia. (WSJ)

Crippling dollar shortage underscores vulnerability of Iraq’s oil-based economy. (FT)

Middle East on ‘radar’ of global investors as it enjoys IPO boom. (FT)

Russia’s Economy Is Starting to Come Undone. (WSJ)

How Latin American tech rebuilds after SVB. (Rest of World)

Turkish elections see Erdogan slash bills in a bid to buy support (FT) while the opposition promise to reverse the president’s disaster economic policies (Nikkei) and investors watch with muted optimism about the prospect of a return to economic orthodoxy. (Nikkei)

China’s Consumers Extend Economic Rebound From Pandemic. (WSJ)

China only bright spot as World Bank cuts ASEAN growth outlook. (Nikkei)

US lawmakers spar over ‘fiscal state of the union’ amid debt limit stalemate. (The Hill)

Sputtering UK economy raises concerns over credit quality but shortfalls provide investment opportunities. (FT)

Low government investment has made Britain poorer, says report. (FT)

London loses sole lead as world’s top financial centre. (FT)

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