On Asia's growth momentum...
And on recovery in advanced economies.
See also IMFs WEO for global growth prospects.
Saturday, November 21, 2009
IMF on economic recovery
Free Exchange points attention to IMF's updated economic outlook for Asia and the Pacific (full paper here) which forecasts output in the area to grow by 2.8% in 2009, up from 1.2%, and by 5.8% in 2010, up from 4.3%, and credits this rebound to trade normalization. India's gorwth for 2009 and 2010 are also revised upwards to 5.4% and 6.4% respectively. Interesting set of "heat maps" on global growth momentum...
On Asia's growth momentum...
And on recovery in advanced economies.
See also IMFs WEO for global growth prospects.
On Asia's growth momentum...
And on recovery in advanced economies.
See also IMFs WEO for global growth prospects.
Friday, November 20, 2009
Collapsing bank credit growth
One of the biggest concerns for India's immediate economic prospects is the precipitous and continuing collapse in credit growth, which fell to a 12-year low of 9.7% year-on-year as of October 23, 2009, down from close to 30% for the same period last year. As Chetan Ahya of Margan Stanley points out in an ET op-ed, the bank credit to GDP ratio (12 month trailing) has dropped to below 4% in November 2009, from a peak of 11.6% of GDP in October 2008.
The bank balance sheets are almost back to normalcy and the banking system is flush with liquidity as evidenced by the larger than required investments in government securities (it is above 27% against the SLR requirement of 25%) and the low yielding reverse repo and T-Bill transactions. Even liquid mututal funds have been attracting bank reserve investments. The 19% year-on-year growth in deposits against the 9.7% growth in credit for the same period, is only adding to the excess liquidity. The incremental credit-deposit ratio at 38% is currently close to 2001 lows.
An indication of the rebound of demand and expectations has been the surge in commercial paper issuance by businesses and the revival of the IPOs in the equity markets. External commercial borrowings too have been on the rise. In fact, the bigger firms have been raising capital at much lower cost than the prevailing commercial bank lending rates through their Commercial Paper (CP) offerings. As I have blogged earlier, the fact that banks too have been lending to their favored clients at large discounts on the BPLR also means that the BPLR may have lost its effectiveness as an interest rate signalling mechanism.
In many respects, this ability of businesses to raise capital despite bank credit ruling at historic lows is also a measure of the increasing depth and breadth of India's hitherto bank-dependent credit markets. Further, the price signals conveyed by the debt markets - commercial paper and other medium and long term debt offerings - have been more reflective of the monetary policy signals conveyed by the Central Bank's repo rate changes.
In a banking system flush with so much liquidity and demand being comfortably met from alternative sources of credit, even if the RBI were to raise rates, we may not see any immediate rise in the lending rates. The same inertia that we saw with monetary policy transmission when repo rates were on their way down will be witnessed when the rates are now hiked.
On an optimistic note, Chetan Ahya feels that the sequential figures on credit growth and the rebound in industrial production (credit growth lags behind IIP figures) means that credit growth will start "recovering from December 2009 to reach 16% by March 2010 and further to 22% by end-2010". He writes about the expectations that,
The bank balance sheets are almost back to normalcy and the banking system is flush with liquidity as evidenced by the larger than required investments in government securities (it is above 27% against the SLR requirement of 25%) and the low yielding reverse repo and T-Bill transactions. Even liquid mututal funds have been attracting bank reserve investments. The 19% year-on-year growth in deposits against the 9.7% growth in credit for the same period, is only adding to the excess liquidity. The incremental credit-deposit ratio at 38% is currently close to 2001 lows.
An indication of the rebound of demand and expectations has been the surge in commercial paper issuance by businesses and the revival of the IPOs in the equity markets. External commercial borrowings too have been on the rise. In fact, the bigger firms have been raising capital at much lower cost than the prevailing commercial bank lending rates through their Commercial Paper (CP) offerings. As I have blogged earlier, the fact that banks too have been lending to their favored clients at large discounts on the BPLR also means that the BPLR may have lost its effectiveness as an interest rate signalling mechanism.
In many respects, this ability of businesses to raise capital despite bank credit ruling at historic lows is also a measure of the increasing depth and breadth of India's hitherto bank-dependent credit markets. Further, the price signals conveyed by the debt markets - commercial paper and other medium and long term debt offerings - have been more reflective of the monetary policy signals conveyed by the Central Bank's repo rate changes.
In a banking system flush with so much liquidity and demand being comfortably met from alternative sources of credit, even if the RBI were to raise rates, we may not see any immediate rise in the lending rates. The same inertia that we saw with monetary policy transmission when repo rates were on their way down will be witnessed when the rates are now hiked.
On an optimistic note, Chetan Ahya feels that the sequential figures on credit growth and the rebound in industrial production (credit growth lags behind IIP figures) means that credit growth will start "recovering from December 2009 to reach 16% by March 2010 and further to 22% by end-2010". He writes about the expectations that,
"The WPI non-food inflation rate to rise sharply to 4.7% year-on-year by March 31, 2010, compared with –2.9% year-on year during the week ended October 17, 2009. Moreover, with rising oil prices, the working capital demand of oil companies is also likely to pick up to the extent the government refrains from increasing domestic fuel prices. Recovery in corporate capital expenditure will also support the credit demand over the next 12 months. Early signs from fund-raising activity of the corporate sector indicate that capital expenditure is about the bottom. With industrial production growth likely to remain, increased capacity utilisation will mean higher investments by the corporate sector supporting the recovery in credit growth."
Thursday, November 19, 2009
Commodity prices - role of speculative activity?
James Hamilton points attention to the sharp, across the board rise in global commodity prices and questions the popular perception that weakening dollar has been the main contributing factor. He argues that the magnitude of movements in commodity prices greatly exceeds the size of changes in the exchange rate - since the start of this year oil prices have increased five times as much as the dollar price of a euro. He attributes three reasons for the
1. The resurgence in real economic growth among the emerging economies, whose contribution to global economic growth have been growing, has increased demand for commodity prices and thereby driven up their prices and also put strengthened their currencies against the dollar.
2. Investors are making increasing use of commodities as an investment class to hedge against risks in equities and a depreciating dollar. Further, the low interest rates have also provided an incentive to hoard physical commodities as an investment vehicle.
He points to a paper by Ke Tang and Wei Xiong, which finds that contrary to the unrelated movements in oil and other commodity prices a decade ago, there is an increasing tendency for commodity prices to move together over the last few years. They attribute this to co-relation to "the increased use of commodities as a financial investment".
In this context, I had blogged earlier that the speculators driving up commodity (mainly oil) prices was not borne out by the inevitable increase in storage and inventories (since speculators are not end-users of the commodity, atleast a share of the commodities under speculation has to find its way into some form of rolling storage).
However, Jim Hamilton now points to the graphic below which shows considerable increase in oil inventories and also reports of speculation in commodities from different parts of the world. This appears to point to the growing influence of speculative activity on global commodity prices.
Update 1
Moneywatch explains the reasons for oil price volatility.
1. The resurgence in real economic growth among the emerging economies, whose contribution to global economic growth have been growing, has increased demand for commodity prices and thereby driven up their prices and also put strengthened their currencies against the dollar.
2. Investors are making increasing use of commodities as an investment class to hedge against risks in equities and a depreciating dollar. Further, the low interest rates have also provided an incentive to hoard physical commodities as an investment vehicle.
He points to a paper by Ke Tang and Wei Xiong, which finds that contrary to the unrelated movements in oil and other commodity prices a decade ago, there is an increasing tendency for commodity prices to move together over the last few years. They attribute this to co-relation to "the increased use of commodities as a financial investment".
Correlation (using a rolling sample beginning one year before indicated date) between returns on oil and specified commodity. Source: Tang and Xiong (2009).
In this context, I had blogged earlier that the speculators driving up commodity (mainly oil) prices was not borne out by the inevitable increase in storage and inventories (since speculators are not end-users of the commodity, atleast a share of the commodities under speculation has to find its way into some form of rolling storage).
However, Jim Hamilton now points to the graphic below which shows considerable increase in oil inventories and also reports of speculation in commodities from different parts of the world. This appears to point to the growing influence of speculative activity on global commodity prices.
Weekly U.S. crude oil ending stocks, excluding SPR, in thousands of barrels, from EIA. Black line: average over 1990-2007. Red: 2008. Green: 2009.
Update 1
Moneywatch explains the reasons for oil price volatility.
Wednesday, November 18, 2009
Chimerica and China's weak currency policy
In the backdrop of a global economic recession and a world economy plagued with fundamental macroeconomic imbalances, as President Obama embarks on his maiden visit to China, the elephant in the room is clearly China's weak currency policy. China's obstinacy to use it massive forex reserves to keep the renminbi pegged (at 6.83 to a dollar since mid-2008) to a declining dollar so as to artificially boost its export competitiveness, would not only be tantamount to a beggar-thy-neighbour policy affecting its own developing country counterparts, but would also postpone any re-calibration of the global macroeconomic imbalances that are fundamental to sustainable global economic growth prospects.
As Paul Krugman writes, the Chinese currency market policy is "siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters". The IMF too have called for a stronger yuan and more Chinese consumer spending to help ease global economic imbalances and assure healthy growth. While the current recession and slump in global trade has slightly narrowed the global imbalances, there is increasing concern that this may be "mostly illusory – the transitory side-effect of the greatest trade collapse the world has ever seen" - and as the economies recover, the US, Germany, China and others will return to their old paths.
However, the more salient feature of the visit will be the fast closing gap (see graphic below) between China and the US on various economic and political parameters, and the US efforts to reassure its primary banker about its burgeoning deficit that threatens to drag the dollar on a downward spiral!
Interestingly, China's weak renminbi policy has played a major role in most of the changes in the aforementioned graphic. Niall Ferguson and Moritz Schularick have this excellent chronicle of the Chimerica relationship between the US and China in this decade and explores the challenges ahead.
Interestingly, China's massive long position on dollar assets will be one of America's most important bargaining points in its relationship with Beijing. As the saying goes, "when you owe a bank $1000 you have a problem, but when you owe $10 million then the bank has a problem"!
As Paul Krugman writes, the Chinese currency market policy is "siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters". The IMF too have called for a stronger yuan and more Chinese consumer spending to help ease global economic imbalances and assure healthy growth. While the current recession and slump in global trade has slightly narrowed the global imbalances, there is increasing concern that this may be "mostly illusory – the transitory side-effect of the greatest trade collapse the world has ever seen" - and as the economies recover, the US, Germany, China and others will return to their old paths.
However, the more salient feature of the visit will be the fast closing gap (see graphic below) between China and the US on various economic and political parameters, and the US efforts to reassure its primary banker about its burgeoning deficit that threatens to drag the dollar on a downward spiral!
Interestingly, China's weak renminbi policy has played a major role in most of the changes in the aforementioned graphic. Niall Ferguson and Moritz Schularick have this excellent chronicle of the Chimerica relationship between the US and China in this decade and explores the challenges ahead.
Interestingly, China's massive long position on dollar assets will be one of America's most important bargaining points in its relationship with Beijing. As the saying goes, "when you owe a bank $1000 you have a problem, but when you owe $10 million then the bank has a problem"!
Instruments to optimize on private vehicle use
A few days back, I had blogged about California's plans to implement pay-as-you-drive insurance policies that allow motorists to buy insurance based on the miles they drive.
Now the Dutch government has announced plans to introduce a miles driven based "green" road tax from 2012 by equipping each vehicle with a GPS device that would track how many kilometres are driven and when and where and use it to calculate the net tax payable. The proposal, aimed at cutting the carbon dioxide emissions by 10%, seeks to scrap ownership and sales taxes, about a quarter of the cost of a new car, and replace them with the "price per kilometre" system. The tax for a standard family saloon would start at 3 euro cents per kilometre (seven US cents per mile) in 2012 and would increase to 6.7 cents (16 US cents per mile) in 2018.
Per-mile pricing of auto insurance and road tax are aimed at optimizing on private vehicle use and more effectively internalizing externalities. It is hoped that such marginal pricing will increase the efficiency in private vehicle usage, relieve traffic congestion and increase road safety, besides reduction in carbon emissions.
(HT: Greg Mankiw)
Now the Dutch government has announced plans to introduce a miles driven based "green" road tax from 2012 by equipping each vehicle with a GPS device that would track how many kilometres are driven and when and where and use it to calculate the net tax payable. The proposal, aimed at cutting the carbon dioxide emissions by 10%, seeks to scrap ownership and sales taxes, about a quarter of the cost of a new car, and replace them with the "price per kilometre" system. The tax for a standard family saloon would start at 3 euro cents per kilometre (seven US cents per mile) in 2012 and would increase to 6.7 cents (16 US cents per mile) in 2018.
Per-mile pricing of auto insurance and road tax are aimed at optimizing on private vehicle use and more effectively internalizing externalities. It is hoped that such marginal pricing will increase the efficiency in private vehicle usage, relieve traffic congestion and increase road safety, besides reduction in carbon emissions.
(HT: Greg Mankiw)
Tuesday, November 17, 2009
Regulating TBTF banks - Cocos and ABRR
In the aftermath of the sub-prime mortgage induced financial market meltdown, there have been numerous suggestions to prevent the build-up of sytemic risks, in particular those posed by the "too big to fail" (TBTF) financial institutions. The latest prescription to the TBTF problem among banks comes in the form of "contingent convertible bonds" (CoCos).
James Kwak has describes CoCos as, "a contingent convertible bond is a bond that a bank sells during ordinary times, but that converts into equity when things turn bad, with 'bad' defined by some trigger conditions, such as capital falling below a predetermined level." This will enable banks to assume more leverage and increase their profits, while leaving open the possibility of converting this debt into equity if things went bad.
However, opponents have rejected CoCos on grounds of difficulty in defining the trigger point, uncertainty about the extent of a crisis and the amount of capital conversion required to avert a bank-killing panic, finding people willing to buy these things, and the impact on the market of triggering a conversion.
Another suggestion is to deploy automatic stabilizers like asset based reserve requirements (ABRR) which would extend differential margin requirements to a wide array of assets held by financial institutions and thereby directly target financial market excesses and the build-up of systemic risks. The regulator (often the Central Bank) would set adjustable reserve requirements (to be held as non-interest-bearing deposits with the central bank) for each asset class, based on its concerns with inherent riskiness, blowing up of an asset price bubble, unsustainable expansion in the asset outstanding, and so on.
James Kwak has describes CoCos as, "a contingent convertible bond is a bond that a bank sells during ordinary times, but that converts into equity when things turn bad, with 'bad' defined by some trigger conditions, such as capital falling below a predetermined level." This will enable banks to assume more leverage and increase their profits, while leaving open the possibility of converting this debt into equity if things went bad.
However, opponents have rejected CoCos on grounds of difficulty in defining the trigger point, uncertainty about the extent of a crisis and the amount of capital conversion required to avert a bank-killing panic, finding people willing to buy these things, and the impact on the market of triggering a conversion.
Another suggestion is to deploy automatic stabilizers like asset based reserve requirements (ABRR) which would extend differential margin requirements to a wide array of assets held by financial institutions and thereby directly target financial market excesses and the build-up of systemic risks. The regulator (often the Central Bank) would set adjustable reserve requirements (to be held as non-interest-bearing deposits with the central bank) for each asset class, based on its concerns with inherent riskiness, blowing up of an asset price bubble, unsustainable expansion in the asset outstanding, and so on.
Europe's sub-prime mortgage loans - shipping loans?
The over $350 bn in loans advanced by European banks to the shipping industry threatens to become the Europe's version of America's sub-prime mortgage loans. The collapse of global trade in the current recession and the resultant plummeting charter rates (45% plunge in freight rates for container ships) have devastated the values of shipping assets and rocked banks with shipping industry exposure. This coupled with a glut of previously ordered ships have left many banks clutching negative equity on their shipping industry investments.
While ship owners continue to service their debt, there is growing fears that as the competition for business drives cargo revenue well below what it costs to send a ship across the ocean, ship owners may soon be the next group of borrowers unable to manage their debts. The anxiety generated by the recent collpase of Eastwind Maritime, a medium-size carrier company, underscores the dangers lurking in the shadows, especially if global trade does not recover soon.
While ship owners continue to service their debt, there is growing fears that as the competition for business drives cargo revenue well below what it costs to send a ship across the ocean, ship owners may soon be the next group of borrowers unable to manage their debts. The anxiety generated by the recent collpase of Eastwind Maritime, a medium-size carrier company, underscores the dangers lurking in the shadows, especially if global trade does not recover soon.
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