9/9/2013: E. European economies assessment by EU Commission

New paper on Eastern European economies from the EU Commission, titled "The EU’s neighbouring economies: managing policies in a challenging global environment" (Occasional Papers 160 | August 2013 : http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp160_en.pdf) provides some in-depth stats and analysis of 16 core neighbouring economies, including in the context of the Arab Spring and Russia partnerships.

Here are some interesting stats relating to Russia.

An interesting perspective on the overall Eastern European and CIS economic realm from the point of view of Russia-EU links: "High dependence on both the EU and Russia, along with still weak institutions, is a major drawback for the Eastern neighbours, particularly since the Russian economy shows a relatively high correlation with the EU economy." This suggests that Eastern 'neighbourhood' is not offering a good hedging potential for real economic activities and financial markets - both propositions that are yet to be formally tested, as far as I am aware.

The main pathways for risk transmission between Russia and EU are: financial markets and real trade.

Two tables to highlight risk transmission pathways between EU and Eastern neighbourhood and Russia in terms of trade and tourism :

Forward conclusion: "The Eastern neighbours as a whole, but also the Maghreb
countries (which also benefit less from the buffering role of the GCC countries) seem more exposed to a prolongation or intensification of the euro area crisis, especially since under such scenario the Russian economy is likely to increase its co-movement with the EU cycle."

Another pathway for risk transmission is remittances flows. Chart below illustrates:

However, in recent years, remittances out of Russia have been performing well:

FDI inflows side: "The exposure of the Eastern neighbours to EU FDI also varies significantly across countries. In the region, Ukraine is clearly the country most exposed to changes in EU FDI. In fact, the largest FDI inflows in Ukraine in 2010 (in terms of equity capital invested, i.e. excluding reinvested earnings and intra-company loans) came from the EU (54%) and from Russia (16%). Exposure of other neighbours (e.g. Belarus) to EU FDI is more limited, notably because of the importance of other regional investors, including Russia."

Extent of output links up between Eastern neighbours and Russia is pretty severe for a number of countries:

"The fact that Russia’s growth is also strongly correlated with that of the EU (the coefficient is 0.9 for the period 2000-13" compounds the problem of risks transmission.

More recent data confirms the same:

Quite an interesting set of pathways when it comes to intra-EM risks transfers.

10/8/2013: EMEA Forward Economic Conditions: BlackRock Institute

The BlackRock Investment Institute Economic Cycle Survey : EMEA Aggregate Results were published recently, so here is the update.

Note: the views expressed in the survey are those of the external panel of economics and finance experts and not of the BlackRock Investment Institute.
The results of the survey must be viewed as being subject to the depth of country-level responses considerations, as these can differ widely.

Per the results: "this month’s EMEA Economic Cycle Survey presented a generally bullish outlook for the region. The consensus of respondents describe Slovenia, the Ukraine, Croatia and Czech Republic currently to be in a recessionary state, with an even split of economists gauging Slovakia to be in a expansion or contraction. Over the next 2 quarters, the consensus shifts for all these countries, except the Ukraine and Slovenia, towards expansion.
At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen, with the exception of Kazakhstan and Turkey."

In comparison, "Globally, respondents remain positive on the global growth cycle, with a net 68% of 62 respondents expecting a strengthening world economy over the next 12 months - this is marginally lower than from a net 70% in last month’s report."

Two charts to map regional economies prospects:

9/8/2013: Euromoney on Russian Economy's Risks

Deteriorating outlook for Russia and CIS is reflected in this Euromoney Country Risk note, citing my views on Russian economy's risks:

http://www.euromoney.com/Article/3230133/SubPage/9449/ChannelPage/0/Region/14091/Russia-and-CIS-satellites-failing-to-impressECR-Q2-2013-results.html

25/7/2013: BlackRock Institute latest survey results for global economic outlook: June 2013

The latest summary of the global growth conditions from the BlackRock Investment Institute. Click on the chart to open larger version. I have highlighted Ireland on the chart.

Blue bars reflect consensus on current phase of economic development (for example, in Ireland's case, current phase is seen as being recessionary by roughly 25% of respondents to the survey). Red dot corresponds to 6mo forward expectation (in Ireland's case, 50% of respondents expect recession in Ireland to either continue or to present itself again in 6 months time).

Note: this is the view of surveyed economists and not the view of the BlackRock II. The chart is based on the "trailing 3 survey reports for the other regions we poll. In our first month of this initiative, we collected the views of over 430 economists from more than 200 institutions, spanning over 50 countries"

12/7/2013: Euromoney Country Risk: Q2 2013 update

Euromoney Country Risk Survey Q2 2013 update is out today, showing continued divergence in risk perceptions about Brics and Europe (rising risks) and North America and Latin America (falling risks):

Largest risk increases are:

One area of interest from my personal perspective: Russia:

"With one or two exceptions, the majority of former Soviet independent states, alongside Russia, have become riskier this year, continuing longer-term trends.

Diminishing economic growth is imparting a negative impact on the region, especially in light of the slowdown in Russia (Russia: Stagnant oil price dampens economic outlook).

However, the risks are also tied to worsening perceptions concerning other indicators, and for a variety of reasons, ranging from Russia’s institutional underpinnings and corruption record, and government stability in Azerbaijan, to currency and information access/transparency concerns in Ukraine and Georgia’s regulatory and policy environment.

The Kyrgyz Republic and Moldova – the latter especially – have seen their political risk profiles downgraded sharply, highlighting the region’s flaws, its failure to capitalize on the eurozone’s worse risk-return opportunities, and why Russia, ranking 62nd globally, is still the only country to score more than 50 out of 100."

I gave a comment on Russian scores changes:

My full view is as follows:

In my view, increased risks associated with the Russian economy relate to the lack of structural drivers for growth, lagging reforms and low returns on reforms already enacted, plus the overall downward revision of the emerging markets and commodities in the environment of highly uncertain and subdued global growth.

Russian Government drive toward modernisation of the economy has dramatically slowed down and is no longer appearing to be a long-term priority for policy development. At the same time, investment in the economy has fallen off the cliff due to a combination of exhaustion of construction investment, Cyprus crisis, continued low FDI and reduced overall economic growth, as well as the perception that tax increases are likely in the near future. Looming ruble devaluation is reducing both FDI and internal investment.

Institutional capital is lagging and remains largely un-effected by reforms rhetoric. If anything, last 24-30 months have seen sustained deterioration in reforms efforts. The comprehensive agenda for modernisation of the economy has been pretty much frozen, if not abandoned.

On the longer-term horizon, emergence of alternative energy supplies and shale gas reserves development worldwide is starting to feed through to the forecasts for future current account and earnings capacity of the Russian economy.

However, there is a negative bias built into markets analysts expectations and assessments of the Russian economy, compared to other BRICS. Brazil and India have largely unsustainable models of longer-term growth driven by internal investment dynamics, instead of institutional capital build up, China is a massive credit bubble ready to blow with current account surpluses acting as the only potential buffer, given already extensive expansion of credit and money supply undertaken, and South Africa is hardly a sustainable, or significant in global terms, economy by any measure. In my opinion, Russia's economic future is highly uncertain. But of all BRICS - Russia has the best potential for stable and sustainable growth based on intrinsic workforce and domestic investment and demand potentials. Whether it will realise these potentials is a different matter.

4/7/2013: Blackrock Institute Surveys: North America, Europe and EMEA: June 2013

Two charts showing most recent consensus expectations on North American, Western European and EMEA economies from the Blackrock Investment Institute panel of economists (note: these do not represent views of Blackrock).

Notice clustering of peripherals and France, as opposed to marginally better clustering of the Netherlands, Sweden, Belgium and Eurozone.

Note Ukraine as the sick man of the region. Also note Slovenia and Croatia - two EU economies that are significantly under-performing the regional grouping.

4/7/2013: Blackrock Institute Surveys: North America, Europe and EMEA: June 2013

Two charts showing most recent consensus expectations on North American, Western European and EMEA economies from the Blackrock Institute panel of economists (note: these do not represent views of Blackrock).

Notice clustering of peripherals and France, as opposed to marginally better clustering of the Netherlands, Sweden, Belgium and Eurozone.

Note Ukraine as the sick man of the region. Also note Slovenia and Croatia - two EU economies that are significantly under-performing the regional grouping.

21/6/2013: Dukascopy TV interview

My interview with Dukascopy TV, Switzerland on Fed's FOMC and monetary policy dilemma, G8 and its implications for Europe and Ireland, and the Russian economy: http://www.dukascopy.com/tv/en#104517 and http://youtu.be/ir9701EHeOU

28/5/2013: Russian GDP and GVA: Composition

Two interesting charts on composition of Russian GDP (and gross value added):

Chart above shows remarkably low share of Mining and Quarrying activities in GVA (11%). Even recognising that some of the manufacturing value added is transfered (via subsidies etc) from the extraction sector, still the chart above is puzzling. And it is especially puzzling given the chart below shows net exports (dominated heavily by extraction sectors outputs) running at 8.6% of the total economic output.

Note that comparatives in the last chart are a bit off due to normal seasonality differences (H1 vs FY), so here's a table showing H1 to H1 comparatives:

7/5/2013: Blackrock Institute: April 2013 Global Economic Conditions - 2

More updates from the Blackrock Investment Institute Economic Cycle surveys for April 2013. Here are core charts for regions not covered in the previous post.

Note of caution: some of the countries coverage in responses is thin, so data should be treated as only indicative. And the surveys are based on opinion of external experts, not Blackrock internal views.



EMEA:
"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a generally bearish outlook for the region. However, there has been a marked improvement in the outlook for Eastern European countries at the 12 month horizon, compared to earlier reports this year.

The majority of respondents for the Czech Republic, Croatia, Egypt, Hungary, Poland, Slovakia, Slovenia, and the Ukraine describe these countries in a recessionary state; however only half of these -- Croatia, Slovakia, Slovenia and the Ukraine -- are expected to remain so by the majority of economists, at the 6 month horizon. 

At a longer horizon of 12 months, the outlook becomes more positive within Eastern Europe, with only the economies of Slovenia and Slovakia expected to continue to weaken."

Asia Pacific:

"...continuing bullish outlook for the region. Out of the 14 countries covered, only Singapore and Vietnam are currently described to be in a recessionary state. Over next 6 months the balance of consensus opinion shifts back to expansion for these countries, while in Australia the proportion of economists expecting recession increases to 50%. Australia stands out as the only country in the region where respondents expect the economy will weaken over the next year."

Latin America: 

"With a caveat on the depth of country-level responses, which differs widely, this month’s Latin America Economic Cycle Survey presented a generally bullish outlook for the region. Brazil, Mexico, Colombia, Peru and Chile are described to be in expansionary phases of the cycle and expected to remain so over the next 2 quarters, while Brazil is expected to mature from early-expansion to mid-cycle expansion and Chile is expected to move from mid-cycle expansion to late-cycle expansion. 

The exceptions to this theme within the region were Venezuela and Argentina. Both are described by the consensus of economists to be in a recessionary state, with growing proportion respondents expecting this to continue at the 6 month horizon." 

14/3/2013: Comment of the Appointment of the New Governor of the Bank of Russia

Surprise nomination of Elvira Nabiullina (economic policy adviser to President Putin) as the incoming Governor of the Bank Rossiyii (Bank of Russia) prompted some speculation as to what this all means for the CB interest rates policy. Ms Nabiullina will take her position in June, subject to the approval by Duma (Lower House of the Russian Parliament). Here are my comments to the Central Banker on the topic:

There is no doubt that Ms. Nabiullina is well suited for the job of the Governor of the Bank of Russia both in terms of her qualifications and her knowledge of the Russian economy, economic policy formation and, in particular, the fiscal aspects of the policies. Ms Nabiullina also brings to the table a longer-term reformist perspective on the Russian economy - a much welcomed development especially given the overall environment of moderating inflationary pressures, slower and more sustainable growth rates, lower reliance in growth on domestic consumption and credit, and relative successes in liberalising foreign exchange rates policies recently delivered by the Bank of Russia. 

Perhaps the only three potential critical points in which Ms Nabiullina's appointment can be considered at this time relate to her close connections to the current Administration and her lack of experience in monetary policy and economics, as well as her predominantly applied and policy-focused knowledge of economics. 

The first criticism, while warranting some caution, in my opinion is over-played at this time. Following the sharp correction in economy in 2009, Russian economic environment has improved significantly along structural trend. This suggests that previously present tensions between fiscal and monetary policies have dissipated, as evidenced by the overall successful (albeit still incomplete) execution of longer-term monetary policies objectives by the Bank of Russia in 2011-2012. I do not expect significant fiscal/monetary policy tensions to arise in 2013, allowing Ms Nabiullina sufficient time to establish her relative independence from the Executive branch of the Russian Government. One critical area of the policies overlap is in the area of increasing foreign investment inflows and here too, the Bank of Russia and the Executive branch are on the same page.

It is also worth noting that Bank of Russia core policy targets: reduced inflation and free float for the ruble are supported by virtually all political parties in the Duma and by the Executive branch of the Government. Lastly, completion of structural correction period in Russian banking sector is also politically popular and is unlikely to cause much of a rift with Ms Nabiullina's Governorship.

The second and third areas of criticisms are more important in my opinion. 

Bank of Russia is engaged in continued process of freeing ruble exchange rate regime while simultaneously pursuing the objective of reducing inflationary pressures in the economy extremely exposed to price volatility in oil and gas markets. It is worth noting that recent inflationary pressures in the economy were driven primarily by tariffs and strong ruble weighing on imports bills, including via household consumption. In the near term, I expect capex uplift to add to these pressures, offsetting moderation in consumption growth. Overall, however, longer-term inflation is abating and the wage inflation is likely to become the core driver of the monetary policy in H2 2013 and thereafter. This means that the job of the Governor in months to come will be technical in nature, rather than broad policy-based. Here, technical monetary skills are required.

Critical issue that Ms Nabiullina is likely to face once she takes over the reigns at the Bank of Russia is the overall tighter monetary policy space. With wage inflation and trade policy (trade balance) driven inflation, Bank of Russia simply lacks tools to reduce significantly inflationary pressures. Despite this, Bank of Russia, in my view, has managed to establish (over 2012) its rates policy as a credible tool for combatting core inflation. As the result, I expect Russian headline inflation to moderate from 6.9-7.1% in H1 2013 to 5.4-5.7% in H2 2013. If this trend is established in the next two-three months, we are likely to see Bank of Russia moving to ease the headline rate, starting with a relatively conservative move in Q2 2013 and possibly accelerating cuts toward the end of the year.

6/3/2013: BlackRock Institute Economic Cycle Survey 03/2013

BlackRock Investment Institute has released the latest results from its Economic Cycle Survey for EMEA and North America & Western Europe.

Before looking at the results, note:

1. The survey represents the summary of the views of a panel of economists polled by the BlackRock Investment Institute, and not the view of the Institute itself
2. In some instances, survey covers small number of responses (see two tables below detailing the depth of coverage), with low coverage corresponding to survey results being indicative, rather than consensus-conclusive.

So core results for North America and Western Europe regions:

In effect, little change from the previous surveys for Ireland, which remains solidly decoupled in terms of economists consensus from the peripheral states (the latter are all clustered in the upper RHS corner, corresponding to both high expectations of continued recession and current indicator of the present recession). In the case of Ireland, it is obviously very hard to tell whether or not Ireland is currently in a recession. Both GDP and GNP changes q/q and y/y do not warrant official designation of a recession, but nonetheless the economy is running at well below its potential capacity.

Per chart above, it is clear that despite the Eurostat projections for 2013 growth, Ireland does not lead the Euro Area in terms of forward expectations for economic growth when it comes to the economists' assessment.

Now on to EMEA results:

Pretty much predictable weakening of Russian growth for 2013 is reflected in the above. Two other interesting points:

1. The weakest performing states in terms of current conditions and expectations are the ones with closest ties to (and membership in) the Euro zone;
2. Weak performance for the Ukraine is reflective of the country continued political mess and the lack of sustainable fundamentals in terms of the country orientation vis-a-vis its main trading partners (the contrasting reality of the private sector closely tied into the CIS and more precisely Russian markets for investment and trade, juxtaposed by the political re-orientation toward Europe).

Note: here are the tables detailing the extent of the survey coverage depth: