Chicago soybean futures appear to have hit a bottom post the trade war between Washington and Beijing as they had indicated the curbing demand for U.S. supplies of the oilseed in top importer China. Wheat dropped to a low USD 329 MT on the back of the U.S. spring crop boosted expectations of a bumper harvest.
Econsult called the soya price trend accurately in last months edition. The soya markets did correct lower and is currently trading lower at USD 349 MT.
The markets continue gradually edge up despite the selloff, however, we at Econsult feel that the lower price thrill seekers might find the bear market a bit over done and could be caught in bear trap i.e. on the wrong foot if they continue to sell. The market is bound to correct higher we feel that the short term trend could push soya to USD 355 MT as a trade deal between Beijing and Washington is reached at least for the next two or three months. The double bottom lows would confirm this reversal in price action.
In fact the current lows was last seen in November 2015
Econsult Recommendation : Buy 30% of your portfolio at current levels part for the overall trend still is looking soft
Federal 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
Oil 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
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.
Over the recent past, the Sri Lankan general public has shown a great deal of interest in the subject of national debt. This has been due to expressions like the country’s “debt trap” and “debt crisis” used extensively in political debates and propaganda. The government in power as well as the opposition has blamed one another for bringing the country into such a debt trap or a debt crisis. A gripping fear of a possibility of debt default with all its adverse consequences has been widely generated. A generally accepted rule of thumb in measuring the gravity of a country’s debt problem has been to indicate the total outstanding debt as a ratio of the country’s GDP.
In this measure, the level of aggregated debt is related to a concept of total revenue generated during a financial year. Such national debt ratio can be considered equivalent to that of a corporate balance sheet ratio of debt to equity. Figure-1 captures the behavior of Sri Lanka’s Debt/GDP ratio during 2002-18. The data indicates that during key points in time, the debt levels have being significantly higher than what it is now. However, no one spoke of a debt crisis or debt trap at those times of high debt to GDP ratio – e.g. during the early 2000s. In fact, after 2004 the ratio has been generally below 100pct. In most years after 2004, the ratio was indeed below its current debt to GDP ratio of 83pct.
The total debt stock, as at 2018, remains at USD 73.7 billion. Of this the foreign currency debt is USD 36.4 billion – 49pct of total debt or 43.3pct of GDP. The remainder is LKR based debt stock. This is still manageable given that Sri Lanka can always roll over its existing LKR based debt without too much of a problem. The banking sector’s appetite for risk free assets is high and there are the captive sources like EPF and ETF. These indeed have been the natural long term players in debt markets.
Sri Lanka’s Shift to Commercial Borrowings
The portfolio of foreign currency loans is categorized into three sub sections, namely, a) concessional, b) non-concessional and c) commercial loans. Prior to 2013, 85pct of foreign borrowings was on concessional terms (see Figure-2). This has changed in 2009 with Sri Lanka successfully entering the international sovereign bond market in its debut. This also amounted to taking the pressure off domestic financing, which until then was the only source apart from donor funding that was available. The concessional external borrowings from multi-lateral agencies and bi-lateral funding sources have continued to be on a declining trend on a net basis since 2008.
Sri Lanka was pushed into international financial markets mainly due to the fact that concessional funding was not available after the country moved up to a lower ‘Middle Income’ country status from around 2004. In fact, IMF, IDA and the World Bank have taken Sri Lanka out of the “financially vulnerable” country status, on the grounds that the country as a ‘Middle Income Country’ has the ability to access international financial markets. Sri Lanka is not among the group of 37 ‘heavily indebted poor countries’ (HIPC), which are eligible for special assistance from the IMF and the World Bank.
As at 2018, Sri Lanka’s total foreign currency debt portfolio was USD 35.4 billion. Of this only USD 9.1 billion was obtained at commercial rates from financial market sources. The remainder is at concessional and non-concessional development funding rates. In other words 53pct of the foreign loans are commercial/non-concessional.
The foreign currency debt mix is dominated by USD borrowings given that our cash inflows from external revenue sources are also predominantly based in USD. This helps the country to manage any exchange rate volatility, as the matching of cash flows does not impact the debt servicing. In 2017, infact, 61pct of the total foreign debt portfolio comprised of USD, while the next largest was in SDR (20pct) followed by Yen loans (12pct) (Figure-3).
The bilateral debt component in Sri Lanka has contributed to modern infrastructure development much more than multilateral debt (i.e. WB). A closer examination of our foreign debt profile indicates that it has long term maturities. More than 75pct of the loan portfolio is maturing beyond 5 years (Figure-5). Market borrowings comprise only 39pct of the total. Refinancing of debt stock per se is not therefore, an issue. Debt servicing is the main concern.
External Debt Holders
The noise around the China debt trap too has found its resurgence since 2014. Given the investment into capital formation pursued by the then government, these investments were undertaken given the dilapidated and outdated infrastructure Sri Lanka had prior to the war ending. Therefore, such investments were paramount in order to create investor appetite for setting plants beyond the boundaries of the Western Province.
However, the data contradicts the China debt trap rhetoric created by politicians and non-academics as it is unsubstantiated and ill conceived; in fact the largest form of external debt is by way of International Bond issuances, while bilateral borrowings are from the ADB, World Bank, and Japan, while China comes in at 4th place (Figure-6). In this context what is important to understand is that all internal bonds are fungible and hence there is no financing risk but a mere cost of financing the stock of bonds.
Sri Lanka’s export earnings are one important source of cash flow which technically can be used to service the country’s current foreign debt. The higher the potential for foreign currency earnings through exports, the better it is. The country as potential lenders are unlikely then to be over-concerned about the borrower country’s capacity for repayment. International rating agencies would consider it good for Sri Lanka if our export earnings are growing on a year on year basis at a satisfactory rate. This also reduces the foreign exchange exposure attached with rupee based debt servicing.
Sri Lanka’s foreign currency denominated commercial debt as a percentage of exports, continued to show vulnerability as year on year growth of export earnings declined in 2009, 2012 and 2015. The volatility of our merchandise exports continue. The declines in export receipts (i.e. income) have added significant pressure on the ability to service foreign debt. This has made the cash flow conditions for foreign debt management per se challenging. The need is to secure USD cash flows/revenues from revenue generating activities and assets and / or cutting down USD import expenses further. This appears to be the path towards managing our ability to maintain this debt to equity mix.
Foreign Debt Servicing
The ratio of debt service ratio to merchandise exports is the ratio that gives us comfort on the ability to service our external debt payments (i.e. principal + interest). A country’s international finances are deemed healthier when this ratio is low and ranges between 10pct to 20pct. In other words, the lower the ratio the better, as it indicates that the country consumes less of export earnings to pay off its foreign debt. The ratio of total debt service payments to exports is therefore, an important measure of a country’s ability to service foreign currency loans/debt obligations. This ratio had remained well within the stipulated norms of 10pct-20pct from 2011 to 2015. The ratio has deteriorated, moving out of the applicable norm, from 2016reflecting the impact of bunching of repayments on medium term external debt. The decline of this ratio in 2018 reflects the impact of the rise in merchandise export revenues in that year.