All posts in Economics

The Global Economy in March 2018

Global markets in March were seen recovering somewhat from the volatility experienced in February. But the fears of a US-China trade war continued to affect markets through the month. President Trump went beyond his earlier tariffs on steel and aluminium, calling for tariffs on certain Chinese exports to the US. These tariffs have been met by retaliatory tariffs by China on US exports. However, analysts see these moves as merely attempts at creating leverage for trade negotiations.

At its March meeting, the Federal Reserve announced its first-rate hike for the year as expected. It also forecast at least 2 more hikes in the year, 3 hikes for 2019 and 2 more for 2020. This highlighted its growing confidence that tax cuts and government spending will lead to higher US growth and inflation, spurring further tightening.

Short-term lending rates measured by the 3-month LIBOR moved up to reach 2.3% in the month, having started the year at 1.7%. This increase in global borrowing costs is partly due to the US Fed’s rate hikes, but is also partly due to the impact of US tax reforms causing repatriation of US dollars held in foreign banks by US firms. These foreign banks have raised deposit rates in order to attract funds to replace the dollars being repatriated, pushing up lending rates as well.

Net portfolio inflows of about $7.6 billion were recorded in the 21 emerging market economies monitored by the Institute of International Finance (IIF) for the month. While this marked a reversal of the outflows in February, the overall inflows were much less than what was seen on a monthly basis in the previous year. This could be a reflection of caution seeping into investors’ decision making in terms of both EM debt and equities, while continuing to find them an attractive asset class.

Brent crude prices returned to the $70 price level by end-March helped up by easing concerns of a US-China trade war and promises by Saudi Arabia to continue to work together with Russia and others on balancing the oil market. In addition, unexpected reductions in US stockpiles and another bout of Saudi-Iran tensions helped prices move up during the month.

The Global Economy in February

Global market performance in February contrasted sharply with the performance in January due to the volatility in markets following the selloff in US equities which spread across to other markets globally. Markets have recovered to an extent from the selloff over the course of the month, but the recovery was thereafter affected by concerns about a trade war and whether the US Federal Reserve will hike rates more than three times this year.

President Trump deciding to move ahead with relatively higher tariffs on imports of steel and aluminum, has raised the possibility of a global trade war if China, the EU and others decide to retaliate with tariffs of their own against US exports. Such a scenario carries the risk of denting the current optimism on global growth in 2018.

Meanwhile, Jerome Powell who took over as the new Fed Chairman during the month delivered his testimony to Congress on the Fed’s policies. He highlighted the requirement to balance between the need to prevent the US economy from overheating and the need to move towards the 2% inflation target. In line with this, markets widely expect the Fed to hike policy rates at its March meeting.

Europe saw the confirmation of a new grand coalition government in Germany and the prospects of a hung parliament in Italy, as anti-establishment parties surged leaving no party with a governing majority. Uncertainty in Italy could weigh in on European markets in the weeks ahead as coalitions talks proceed, although no major risk is seen yet.

Net Portfolio outflows of about $4.5 billion were recorded in the 21 emerging market economies monitored by the Institute of International Finance (IIF). The net outflows were concentrated in equities with net inflows to bonds offsetting it to an extent. While EM equities did fare better than developed market equities during the selloff, analysts have pointed out that the MSCI EM Index has gone through four different trends in the last nine weeks. This makes it hard to ascertain a potential direction for EM equities in 2018.

Brent crude prices eased from the $70 mark in February and moved within the $60-70 range. Prices reached a low of $62.59 on the 12th. This was largely due to concerns about rising crude output, increases in US shale oil rigs and build ups in US stockpiles. In early March, oil prices have been weakened by concerns of a trade war affecting global growth following the US tariff proposals.

Salient Features of the New Forex Act – Interview Transcript

 

Speaker: Travis Gomez

Date: 13th Jan 2018

Video length – 8:40 mins

What is government’s intention with regard to the new Forex Act (0.36 -1.52)

  • This represents a shift in the policy direction from one of restricting foreign exchange movement to one that is facilitating exchange rate movement
  • The change in the name from Exchange Control to Exchange Management emphasizes this point
  • This goes in line with some of the other policy changes the Government has been making such as the new Inland Revenue Act, changes to the immigration and emigration laws.
  • The shift is towards a more rules based approach, which has greater transparency and less political discretion

What are some of the broad features of the new Act (1.52 – 4.00)

  • Greater clarity with regard to some of the definitions.
    • Ex: Who counts as a resident and who is eligible  for opening up the different types  of accounts
  • Reducing the complexity and simplification.
    • The Act clubs 18 different accounts into 5 main accounts.
  • Greater competition and discretion for banks.
    • The banks would have more discretion in the approval of forex transactions.
    • This is done with the intention of streamlining and speeding up the approval process
    • The Act also opens up the market for greater competition as licensed brokers can open up certain accounts as well.

What are the implications of the Act for the broad economy? (4.00- 5:35)

  • The act signals a more open approach to forex which could encourage a greater flow of FDI’s in to the country
  • The Act broadens the type of investment opportunities non-residents can participate in. Apart from the typical stock & bond investments, foreigners can also invest in Unit trusts, Fixed deposits in banks etc.
  • Of particular interest is the fact that the Act states that non-residents can invest in immovable property i.e: Real estate
  • The Act also allows banks to provide loans in LKR or USD terms to non-residents for the purpose of constructing and buying real estate.
  • This would be a positive development for the real estate sector, as given the level of activity ongoing in the sector, foreign investor participation can absorb some of the new capacity that is rapidly coming on line.

At a firm level, what are the implications of the Act? (5:35 – 6:37)

  • The Act extends the limits to which companies can invest. The limit for listed companies has been increased from USD 500,000 per year to USD 2 mn per year.
  • Firms also have the opportunity to invest in sovereign bonds and Unit Trusts abroad
  • The limits for individuals has also been increased from USD 100,000 (life time investment) to USD 200,000.
  • This would be an opportunity for firms in Sri Lanka and individuals to diversify their risk by investing abroad

For an individual, what are the implications of the Act? (6:37 – 8:10)

  • The limits on how much LKR and foreign currency that can be taken in and out of the country has been changed. You can take up to LKR 20,000 or up to USD 15,000 in foreign exchange without having to declare it.
  • With regard to migration transfers, the Act has increased the initial amount as well as the annual amount you can take as forex when migrating. The annual migration allowance has been increased to USD 30,000 per year
  • In addition, any pension payments, dividend income etc. would not be subject to the above limit.
  • Overall, there has been a reduction in the restrictions imposed on individuals.

The Global Economy in January

Global markets started off 2018 on a positive note in January with global stock markets continuing to make gains and emerging market inflows continuing amidst major sovereign debt issuances earlier in the year. However, the month ended giving way to what has been a global equity sell-off in early February, sparked by higher US Treasury yields that have reached multi-year highs. The sell-off started on February 2nd when US yields increased after US payrolls data indicated the highest wage growth since 2009, opening the door for higher inflation and thereby justifying US rate hikes.

On 8th February, the benchmark S&P 500 and the Dow industrials confirmed they were in correction territory, both falling more than 10% from the Jan. 26 record highs. While some analysts have called this sell-off the start of a new era, ending the period of low volatility enjoyed by markets, others see it as closing the gap between elevated asset prices and more sluggish fundamentals.

Emerging markets experienced $4 billion in outflows, mostly from equities, since January 30th according to the Institute for International Finance (IIF) – the largest outflow since the election of President Trump in 2016. South Korea, Indonesia, Thailand have suffered the worst losses so far as of 6th February. However, compared to previous global sell-offs most emerging markets have been faring better, despite the fact that higher US yields make EM risk assets less attractive.

These market movements are in the context of a US Federal Reserve that confirmed its projected rate hike path last week and Jerome Powell being sworn in as the new chairman on the 5th of February. Powell now faces the challenge of ensuring that the economy neither overheats nor goes cold. Moreover, January was also the first full month since the European Central Bank implemented the promise to halve the quantity of its monthly bond purchases to Euros 30 billion.

Brent crude prices were near four-year highs as prices reached $70 a barrel mark early in the year driven by continued optimism that the supply glut was ending this year and due to drops in US stockpiles. However, prices moderated slowly throughout the month, leading to prices reaching $62 a barrel on the 9th of February amidst the ongoing stock market turmoil and a scare about rising global supplies. Iran has announced plans to increase production and US production has surpassed 10 million barrels per day; a level surpassed only by Saudi Arabia and Russia.

The Global Economy in December

December saw the US Federal Reserve carrying out its third rate hike for 2017, as expected, while increasing expectations for US economic growth and forecasting three further rate hikes for 2018. With US inflation remaining low, it appears that the Fed will continue down the current path of gradual monetary policy normalization despite the higher growth expectations, which has been helped by the passing of tax reforms by the Congress.

Looking ahead into 2018, analysts pointed to US tax reforms as possibly causing the US dollar to strengthen in the first quarter helped by US companies repatriating capital held overseas. While the Trump administration appears to see US growth jumping to 4% due to tax reforms, the Fed’s latest minutes show that it sees a much more moderate impact.

As 2017 came to a close the volatility in emerging market stocks seems to have increased, with the 30-day historical volatility on the MSCI EM Index climbing to its highest in almost 12 months. This could have been because investors were caught in a conundrum, stuck between the possibility of global growth driving further EM gains and the risk of tighter monetary policy affecting EM assets, leading some to take profit from the gains of 2017. Nevertheless, the Institute for International Finance noted that 2017 recorded $235bn in portfolio capital inflows to EMs; the highest since 2014.

Pakistan presented an interesting case in December, being able to comfortably raise $2.5bn in dollar debt despite the domestic political uncertainty and balance of payment imbalances, which have prompted foreign investors to move away from Pakistani stocks. Neighboring India has seen the budget deficit for the first eight months of the fiscal year jumping to 112% of the full-year target, prompting increased borrowing and reducing the space for the Modi government to adopt populist policies ahead of the 2019 elections, amidst slower growth.

Brent oil prices stayed above the US$60 mark, with a new two-year high of US$67.02 being reached on the 26th. Prices continued to be held up by hopes of the supply glut ending in 2018, as the OPEC-led group extended the production limitation at their November meeting. Helping prices has been the oil pipeline closures in UK and Libya, a strike by oil workers in Nigeria and promises by Saudi and Russia that any exit from production cuts would be gradual. But gains have been capped by concerns about rising US oil output amidst higher prices.

Up-down-Up 3.0; Our team from the past, talking about the future

We just had our third instalment of Up-Down-Up! 🎊🎉

Now, we know what you’re thinking, “What’s an Up-Down-whatever?”. We’re glad you asked!

Up-Down-Up is Frontier’s very own Forum. It’s a platform for us to share our views and engage with our clients.

But what makes this year so special? Well, this year was the first time that our panel (Yeah, we got one of those 😎) did not consist of just members of our team … sort of. This time our panel also included several of our Alumni – what we like to call, the Frontier Mafia.

Back to the future with our Alumni panel

Chanakya Dissanayake

Our first panellist was also Frontier’s first employee – Chanakya Dissanayake. Chanakya played an instrumental role in Frontier’s early stages, back when frontier was operated out of what is now Amal’s son’s playroom. He worked with Amal on varied “consulting” mandates, completely different to what Frontier does now; in particular, helping a plantation company devise a major long-term business plan.

Following that, Chanakya joined Amba Research (what is now Moody’s Analytics Knowledge Services) and has been with them since the Colombo delivery centre’s inception in 2003. Now, he is the Country Head and a Director at Moody’s. In plain terms, that means he is currently responsible for all aspects of research delivery and client relationship management for engagements serviced out of Colombo and he also leads the investment research practice globally.

Dinike Jayamaha

Dinike returned to Sri Lanka in 2009, soon after the War ended (a year when Frontier nearly doubled in revenues) and led the Economic research of Frontier. Since then, Dinike has co-founded various non-profit micro-ventures in Ghana, Kenya, England, and Sri Lanka.

But he’s always had a passion for 3 things; family, firsts and fitness (kind of similar to Frontier’s own “life-first” philosophy). So, he set out to find a healthy, family friendly and ethically manufactured product that he could develop into an industry game-changer and a global first – and he did! He is currently the Founder/CEO of Ethical Extracts, the world’s first producer of high potency Ceylon Tea liquid extracts utilising a close-to-source supply chain model.

Shiran Fernando

Finally, one of Frontier’s most recent Alumni, Shiran Fernando spent the last 6 years at Frontier working in the Economics Team, again a period of fundamental growth and change at Frontier when revenues nearly tripled. Over the last few years, he led the Economic Research Team, holding the role of Lead Economist and Senior Product Head. Fancy designations aside, this meant that he was responsible for the growth of the team and any product development.

Shiran is now the Chief Economist at the Ceylon Chamber of Commerce and head of the Economic Intelligence Unit, providing policy level support and strategic advice to the Government to shape the national economic agenda.

But why Up-Down-Up?

The reason we decided to call our Forum Up-Down-Up was because of the economic philosophy that we follow at Frontier – something called Up-and-Down economics.

Up-and-Down economics has been described as the economics found on the nightly news or the business pages of newspapers; the economics that is pre-occupied with what latest economic numbers are up and down.

Essentially, we look at a whole host of economic variables and argue debate on where we think they’re going. We use that to try and predict where interest rates and the exchange rate will go in the future.

So, where are they going? Well, we’d love to tell you, but that’s just for our clients to know 😉.

But one thing we can tell you is that this instalment of Up-Down-Up was our best yet and we’ll keep it going for the foreseeable future!

The Global Economy in November

Global markets in November were affected by a number of noteworthy developments. The latest US Federal Reserve meeting minutes reconfirmed the high possibility of a December rate hike, while Deutsche Bank, Goldman Sachs and JPMorgan Chase have altered their forecasts to the possibility of four Fed rate hikes in 2018. In Europe, some political uncertainty has crept in again due to the failure of Germany’s Angela Merkel to form a governing coalition, opening up the possibility of fresh elections in Europe’s largest economy. In Britain, the Bank of England’s first rate hike in a decade has been followed by renewed optimism about Brexit negotiations after last week’s talks with the EU turned out to be fruitful.

Political risk continued to influence Emerging Markets during the month. Dozens of royals and high officials in Saudi Arabia were detained, which was seen as a centralization of power by Crown Prince Mohammed bin Salman, and raised concerns about the Kingdom’s internal stability. It also coincided with increased tensions between Saudi and Iran in the region. In addition, Venezuela finally defaulted on some of its debt repayments bringing into focus the need for investors to be mindful of the risk they take on. During the end November/ early December period, EM equities have sustained some loses, mainly driven by the technology and energy sectors.

In Asia, analysts have pointed to South Korea’s rate hike as the start of what could be a gradual tightening pattern by Asian central banks taking advantage of the healthy growth rates. Meanwhile, the Indian economy received a boost in the month when Moody’s upgraded India’s sovereign credit rating for the first time since 2004.

Brent oil prices stayed above the US$60 mark, with a two-year high of US$64.27 being reached on November 6th. Driving prices up were geopolitical tensions in the Middle East and optimism on an extension to the OPEC-led production limitation agreement. However, prices have moderated since early November, standing at US$61.22 on December 6th. The moderation has been due to the lack of any major market-moving geopolitical events in the Middle East and on concerns about increasing US oil output amidst higher prices.

The Global Economy in October

October was marked by the implementation of a number of steps towards monetary policy normalization by major central banks and speculation on who President Trump would nominate as the Federal Reserve chairman. The month ended with markets pricing in the nomination of current Fed Governor Jerome Powell, which was confirmed on November 2nd ahead of Trump’s tour of Asia. Powell’s nomination is seen as marking the continuity of Yellen’s gradual rate hike policies and the possible relaxation of some US banking and financial regulations. In the meantime, progress on Trump’s promised tax reforms has increased the optimism for tax cuts happening in 2018 and boosting US growth. These factors helped push markets higher following the nomination.

The month saw the start of the Fed’s balance sheet shrinking process and further confirmation of a December rate hike as US economic data painted an optimistic picture even though inflation continued below the 2% target. The European Central Bank (ECB) cut its bond purchases by half to 30 billion euros on the 26th as expected, but its tone in doing so was very dovish. The ECB kept its options open by continuing the purchases till the end of September 2018 and stating that an extension beyond that is possible if needed.

Meanwhile, the Bank of England hiked interest rates by a quarter percentage point for the first time in a decade to 0.5%, despite weak economic growth in the UK. The Bank has a dovish outlook on future rate hikes and has retained its bond purchasing programs.

China’s Communist Party Congress also occurred in the month, where President Xi Jinping laid out his vision for China up to 2050. With the outgoing central bank governor warning about the level of debt, some are concerned, now that the congress is over, authorities will launch a concerted effort at deleveraging that could slow down the Chinese economy.

Emerging markets saw the return of political risk affecting performance during the month. This was mainly on the back of South Africa’s budget woes, Turkey’s diplomatic row with USA and Germany and Brazil’s tenuous politics. However, according to initial estimates, the Institute of International Finance (IIF) has recorded US$13.8bn in overall portfolio inflows to emerging markets in October. The moderation in inflows from previous months could also be due to rising US yields and a strengthening US dollar.

Brent crude oil prices continued to increase in the month passing the US$60 mark at the end of the month for the first time since July 2015. This was driven by continued optimism over the major oil producers seeking an extension to their production limitation beyond March 2018. Also helping the movement were geopolitical tensions, surprise drops in crude stockpiles and Chinese demand.

Regaining GSP+ In Sri Lanka – Interview transcripts

Topic: Sri Lanka Regaining GSP+ – opportunities for firms

Speaker: Travis Gomez, CFA – Product Head

Video length – 9:10 mins

Starting point:

1:20:      How has the loss of GSP+ impacted local companies?

  • Between 2010 to 2017, companies that were traditionally more export oriented, were affected and the extent of this impact depended on their exposure to European Markets
  • A case in point is the HAYL’s group where some of its subsidiaries such as; Dipped Products, Haycarb and Hayley’s Fabric performance was affected due to the global slowdown
  • As a result, HAYL pivoted towards investing in the domestic sector and subsequently the contribution from these traditional export segments to the firm’s performance saw a dip
  • This shift was also facilitated by the ending of the war which opened up more opportunities in the local economy and the company invested heavily in sectors such as construction, power & Energy and Leisure.
  • Now with the regaining of GSP+, we could potentially see some turnaround in the performance of some of these s export segments of HAYL’s.

2:55: How important is GSP+ for Sri Lanka?

  • This is a somewhat controversial issue as we don’t have a lot of empirical evidence to gauge the impact
  • One reason for the difficulty is because we don’t have many listed companies that are exposed to European Markets and one of the few listed companies that have this exposure is Tee Jay Lanka (TJL)
  • Considering their revenue performance and margins over time, the loss of GSP+ seems to have had only a minimal material impact the benefit of GSP+ is in the form of allowing firms in certain sectors to get a leg up in terms of a cost advantage compared to competing countries.
  • This could explain the minimal material impact on TJL’s performance because in the case of Garments, companies like TJL, MAS, Hirdaramani do not attempt to compete in terms of cost with competitors such as Bangladesh (that also enjoys the benefits of GSP+).Instead they compete in terms of quality, use of new technologies as well as better lead times
  • Another reason in the case of large scale garment manufacturers is that they have been investing in manufacturing capacity in countries such as Bangladesh which enjoys the GSP+ benefit.

5:20 What has been the stock market’s reaction to the news of regaining GSP+?

  • Minor reaction from the market
  • The perception is that this has been talked about for a long time hence it’s been factored in
  • At the same time, it will take time for tangible benefits to materialize

6:08 What are the sectors that stand to benefit from the regaining of GSP+?

  • The obvious sector is garments, given the sector’s large exposure to the EU
  • Sri Lanka could benefit from the added cost advantage as well as the need of global garment buyers to diversify risk in terms of their geographical exposure
  • Hence, it is possible that some of the garment operations that were moved to countries like Pakistan to return to Sri Lanka
  • But the focus of garments should remain on the innovation side and competing on quality
  • An important point brought up by the EU delegation is that we need to diversify our exports to other segments. Hence other sectors that can benefit are the Agribusiness and fisheries segment.
  • Products such as Organic fruits and vegetables as well as canned fish and ornamental fish have high growth potential too.

The Global Economy in September

September marked a resurgence in the US Dollar, as reflected in the Bloomberg Dollar Spot Index, after a prolonged weakening during the year so far. This resurgence was helped by the increasing likelihood of a December rate hike by the US Federal Reserve, positive US economic data and renewed optimism on tax cuts to be introduced by the Trump administration.

In addition, the dollar was helped by sudden weakness in a number of major currencies. The Euro weakened following the controversy around the independence referendum in Spain’s Catalonian region. The British pound was affected by renewed political uncertainty in UK over Brexit. The Yen weakened as Japan’s PM announced snap parliamentary elections.

Meanwhile, President Trump is to announce his nomination for the next Federal Reserve Chairperson in October. Analysts and betting markets have speculated on who it could be with Gary Cohn and Kevin Warsh among the names being discussed. Markets are concerned about the possibility of someone as hawkish on interest rates as Kevin Warsh having a fair chance of being nominated.

With both the US Fed and the European Central Bank (ECB) talking about reducing their quantitative easing measures amidst the US Dollar strengthening; emerging markets could see some of their gains chipped away. In fact, some report of caution by investors in emerging markets (EMs), with overall inflows slowing down. The Institute of International Finance (IIF) reported that September saw $14.5bn in overall inflows to EM stocks and bonds, the least since January. But many analysts expect to see the emerging market rally continuing.

Brent crude oil prices increased in the month reaching a two year high of $59.02 a barrel on the 25th. This was caused by increased optimism over the OPEC-led oil producers extending their production limitations beyond March 2018 and optimistic demand outlooks by the International Energy Agency and OPEC. Aiding bullish sentiment was the possible shut down of the Kurdish oil pipeline via Turkey amidst controversy over its independence referendum. However, prices have moderated to the mid-$50s since then, with Kurdish supply continuing and the possibility of increased US shale oil supply amidst higher market prices. In fact, US oil exports have increased as the spread between Brent and US crude futures expanded.