Article By: BiZnomics Research Team

USA Monetary Policy-Fed Dilemma

BiZnomics-Global-Out-front-03Federal Reserve Chair Jerome Powell mentioned that  US Monetary policy is “well positioned” to support the strong labor market, which is just now starting to benefit workers on the margins. He added that “the benefits of the long expansion are only now reaching many communities, and there is plenty of room to build on the impressive gains achieved so far,” a close look at the adjustments to employment data suggested the labor market may not have been as strong last year as previously thought, and thus we could once again witness a shift for lower interest rates. The September data released by the Bureau of Labor Statistics indicated a downward revision of the estimated job creation numbers. The agency said the economy added 170,000 jobs a month in the 12 months through March 2019, half a million fewer jobs than previously estimated. Powell in fact commenting on the job data numbers mentioned that “While this news did not dramatically alter our outlook, it pointed to an economy with somewhat less momentum than we had thought,”.

Germany Consumer Demand Shines

The mood among German consumers rose unexpectedly  heading into December, a survey showed this week that household spending will continue to prop up growth in Europe’s biggest economy at the end of the year. Record-high employment, inflation-busting pay hikes and historically low borrowing costs have turned household spending into a steady and reliable driver of growth in Germany, helping to cushion its export-dependent economy from trade problems. The consumer sentiment indicator, published by the Nuremberg-based GfK Institute and based on a survey of around 2,000 Germans, improved to 9.7 from 9.6 in November. A Reuter’s poll of analysts had predicted a stable reading. GfK said a subindex measuring economic expectations jumped as Germans became more optimistic about the growth outlook due to “tentative signs of easing” 

 

Australian economy continues to struggle

Wage growth in Australia looks to be stuck in the slow lane and it will take a sustained fall in unemployment to lift it to more economically desirable levels, a top central banker said on Tuesday. In a speech on employment and wages, Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said there was growing evidence that wage growth had become entrenched in a 2-3% range, down from the former 3-4% norm. This trend has been weighing on household incomes and spending, as well as dragging on the economy more broadly. “A gradual lift in wages growth would be a welcome development for the workforce and the economy,” said Debelle. “It is also needed for inflation to be sustainably within the 2–3% target range”. However, he held out little hope for acceleration any time soon, noting the bank’s liaison with firms showed 80% of companies expected steady wages growth and only 10% anticipated anything faster.” The more wages growth is entrenched in the 2s (2-3% range), the more likely it is that a sustained period of labour market tightness will be necessary to move away from that,” said Debelle. The central bank has cut interest rates three times since June, taking them to a record low of 0.75%, in part to try and drive unemployment down toward its goal of 4.5%.

China looks fragile

BiZnomics-Global-Out-frontOil prices slipped on Tuesday on concerns about economic growth and fuel demand as uncertainty remains about the ability of the United States and China, the world’s biggest oil users, to agree a preliminary deal to end their trade war. Brent crude futures were down 5 cents at $63.60, after rising 0.4% in the previous session. West Texas Intermediate crude futures fell 9 cents to $57.92, having risen 0.4% on Monday. Top trade negotiators from China and the United States held a phone call on Tuesday morning, China’s Commerce Ministry said, as the two sides try to hammer out a preliminary “phase one” deal in a trade war that has dragged on for 16 months.  “Oil traders remain hopeful a trade deal will get signed,” said Stephen Innes, chief Asia market strategist at AxiTrader. “Still, the lack of clarity around the tariff rollbacks, which is the key to economic growth and bullish for oil, continues to somewhat cloud sentiment. “China and the United States are “moving closer to agreeing” on a “phase one” trade deal, the Global Times – a tabloid run by the Chinese Communist Party’s official People’s Daily – reported earlier.

India Cuts Monetary Policy Rates for the six time

BiZnomics-Global-Out-front-01

The Reserve Bank of India will cut interest rates in December for the sixth time this year, and again before July, according to economists in a Reuters poll which forecast those reductions would either marginally boost the economy or have no impact. Currently the most aggressive major central bank in the world, the RBI has cut rates by 135 basis points this year to 5.15%, but inflation has remained low by historical standards and policymakers have barely moved the needle on growth. The Indian economy expanded 5.0% in the April-June quarter on a year earlier, its slowest annual pace since 2013, and was expected to grow 4.7% last quarter, according to the latest Reuters poll, taken Nov. 20-25.That was significantly lower than the 5.6% rate predicted in the last poll, and would mark six consecutive quarters of slowing growth, a first since 2012.

It also comes despite a recent series of fiscal stimulus from Prime Minister Narendra Modi’s government, which was re-elected in a landslide in May. “Further rate cuts are likely to have a limited impact on the economy as cost of borrowing is not the pressing issue. The lack of risk appetite and fragile sentiment are holding back fresh investment in the economy,” said Sakshi Gupta, senior India economist at HDFC Bank. “While further interest rate cuts would support growth at the margin, we need to see a turnaround in sentiment to restart the investment cycle.

Cont..

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Global non – inclusive growth; Extract from article by Christean Lagarde 0 610

IMF Chief Christean Lagarde in her message in the IMF Annual Report 2018 says that countries should promote an open and rule basis multilateral trading system, and should strive to make new technologies work for all – boosting rather than undermining inclusive growth and financial stability.

According to her, the growth momentum of the global economy is under pressure from a slow erosion / weakening of trust in institution due to, a) the lingering effects of the global financial crisis. b) perception that the rewards of economic growth and globalization are not being shared fairly and equitably. c) anxiety over future of jobs and economic opportunity. d) weak governance frameworks that often facilitate corruption. She further emphasizes that population ageing and over-funding of pension schemes are holding back economic momentum. Income disparities are widening and if unaddressed the climate change is likely to severely disrupt economic wellbeing in the decades ahead.

Lagarde urged that European Union (EU) leaders need to redouble their efforts to lift living standards across the continent as populist movements question the merits of integration. The poorer southern countries in the EU have not caught up with their richer northern peers – a gap that has worsened since the global financial crisis. Between 2008 and 2017, the average annual growth in real income per person, was negative in the five southern members of the euro zone, hit hardest by the crisis.

She urged EU countries to reform their labor markets so that firms have greater flexibility in hiring and firing workers and their business climate becoming more welcoming to investment. These developments it is hoped, would increase spending on research and development.

Lagarde’s remarks come amid a turbulent debate over Britain’s exit from the EU, as well as amidst signs of spluttering growth in the world’s biggest economic bloc. The IMF partly blamed softening demand across Europe for having to cut its 2019 forecast for global growth, for the second time in three months.

South Asia to remain fastest growing region in world

The World Bank Global Economic Prospects Report released on 05th February 2019, expects South Asian regional growth to accelerate to 7.1 percent in 2019, under pinned by strengthening investment and robust consumption. India is forecast to grow by 7.3 percent as consumption remains robust and investment growth continues. Bangladesh is expected to grow by 7.0 percent supported by strong construction and infrastructure investments. Nepal growth forecast to moderate to 5.9 percent. Sri Lanka is anticipated to grow by 4.0 percent supported by domestic demand and infrastructure projects. Pakistan is projected to decelerate by 3.3 percent with financial conditions tightening.

By: Econsult

Moody’s Credit Rating 0 1784

By : Kenneth De Zilwa

Moody’s Credit Rating Agency on the 23rd of November 2018 announced that they have downgraded Sri Lanka’s sovereign credit by one notch from B1 to B2. Many political statements have been made of this downgrade.Let us examine what it really means to Sri Lanka.

Table-1-Credit rating range From Aaa to Ca

Moodys Credit Rating - 01

Source: Econsult & moody’s

Each country is rated based on their governments likelihood to default on their external borrowing obligations.  The credit rating therefore looks at the default probability  of the state. In doing so Credit rating agencies take into account GDP growth, per capita growth, monetary conditions, fiscal deficits, external debt burden and a host of other quantitative and qualitative data in arriving at the credit rating political risk is also one such variable.

Moody’s have an established rating score which is Aaa which indicated the highest quality of credit  with a  probability of default of 0.03 percent while speculative grading’s are from Ba1- Ba3 with a probability of default 2.60 percent.  The lowest credit score is classified as High risk or Highly  Speculative obligations which are rated by Moody’s as B1, B2 and B3 (probability of default 9.58 percent).  With the lowest and most riskiest being Carated sovereign credits (two year default probability of 35.9 percent).

Sri Lanka Credit Rating B1 to B2

In this regard Sri Lanka was already rated as a high speculative country B1 (stable) since July 2013 and later the rating  outlook downgraded from stable to negative rating reaffirmed in 2016, 2017 and 2018 . Therefore Sri Lanka  a B1 credit was below investment grade to begin with the outlook changing from ‘stable’ in 2013 to ‘negative’ from June 2016. (Source: countryeconomy.com).  The corrective action plan could have reversed this outcome; however, the trajectory was unadjusted.

Moody’s appears to place a higher weight on GDP growth, inflation, growth in per capita income in order to achieve a higher grade rating, while lower inflation and lower external debt also consistently relate to higher ratings.

Therefore the overall credit rating of Sri Lanka in terms of its high risk rating has become more pronounced as the external debt and external foreign reserves situation has decreased since 2014 with warnings not heeded by persons responsible for managing the external debt. Added to this our external Foreign exchange reserves too has continued to decline and has declined by 30pct from USD 9.9 billion in April  2018 to 7.0 billion as at November 2018

Chart-1-External Debt Maturities

Source: Econsult & moody’s

Putting the Impact into perspective

The credit rating impact thus must be seen as a testimony of the shift in the economic model which has seen a shift to consumption demand which is supplied by external sources, thus this has lead to the trade deficit widen to USD 14 billion. Non-consumer import  demand during the past three year have witnessed an increase by 47pct growing from  USD 1,700 million to  USD 2,500 million over the period 2012-2014, 2015-2017 With the rupee depreciation rapidly to stem the imbalance in the overall current account.

Therefore the reason for the downgrade is three fold a) Sri Lanka’s growing debt to GDP ratio which had increased from 71% of GDP in 2014 to 85% of GDP as at 2018 June and b) its deteriorating external finances and c) the deterioration in GDP growth from 9% in 2012 to 3.1% in 2017 and also a stagnant per capital growth over the past 3 years.

Internal

Chart-2-All Share Index and USD/LKR price behavior


Source: Reuters

In fact the financial markets had already factored the credit downgrade of Sri Lanka since June this year  (Chart-3) as depicted in the Colombo Stock Exchange All Share Index breaking the 6000 mark (Yellow line) and the flight of foreign bond holders from the government debt securities market which resulted in the Rupee depreciating by 15% on year to date basis  (Purple line) therefore it is not professionally correct to underpin the downgrade to the last two weeks of political swings

External

Chart-3- Sri Lanka Sovereign Bond secondary market behavior

Source: Econsult & moody’s

The deterioration in the country’s external finances also had a significant bearing the ability raise finance as the 2025 USD Bond with a coupon of 6.875pct witnessed a sell off in the secondary market. The sell off of the Sovereign bond (ISIN 85227SAQ9) was witnessed since January 2018 but exacerbated during the past one month, reaching a yield of 9.04pct

This negative sentiment has thus prevented Sri Lanka tapping the Euro bond markets for refinancing its external maturities. This can pose a short term stress condition.

While it also provides Sri Lankan risk takers with the opportunity to buy the Sri Lanka credit at a discounted value, and factor in high yields as part of their investment portfolios