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Update on the Global Economy. For the ICTF’s Global Credit Professionals Symposium Chicago, 2014. Hans P. Belcsak President Rundt’s Intelligence. Hot Spots 1 – Russia. Who is Vladimir Putin? What does he want? The greatest geo-political disaster of the 21 st century

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update on the global economy

Update on the GlobalEconomy

For the ICTF’s Global Credit

Professionals Symposium

Chicago, 2014

Hans P. Belcsak

President

Rundt’s Intelligence

hot spots 1 russia
Hot Spots 1 – Russia
  • Who is Vladimir Putin?
  • What does he want?
  • The greatest geo-political disaster of the 21st century
  • Russia was terribly mistreated by the West
  • Crimea – and he is not finished
  • Moldova – Transnistria
  • The critical Baltics
ill prepared west
Ill-Prepared West
  • Since 2008 big countries cut defense spdg. 10%-15%
  • United Kingdom
    • Royal Air Force with ¼ of aircraft vs. 1970s,Royal Navy 19 destroyers and frigates vs. 69, British army smallest since Napoleonic wars
  • France
    • Six submarines vs. 17, problems in Mali, CAR
  • These are the only two countries still taking defense seriously
  • 75% of Belgium’s spending for personnel (pensions, salaries, not equipment)
  • Might not matter much if US were still prepared to step in, but…
us weakness
US Weakness
  • Drastic cuts in defense spending
  • Sequester and then some
  • Three carriers
  • Army smallest since before WWII
  • Drones cannot win wars
  • “Two-war principle” abandoned
  • Red lines that turned green
  • Lack of doctrine (from Libya to Egypt, Palestine, Iran and Syria)
russia
Russia
  • Sanction effects could be significant
  • 4 years $325 bio inflow into stocks and bonds (yield-hungry)
  • $70-bio outflow first quarter (against $63 billion all of 2013)
  • Weak economy (GDP gain 1.3% in 2013; 0% in 2014?)
  • Manufacturing just 15% OF GDP
  • Budget needs oil at $110 a barrel
  • Crimean economy is a mess and burden
  • The cost of appeasement – China, Iran, North Korea
ukraine
Ukraine
  • History, “little Russia,” “not a real country
  • The 1994 Budapest Memorandum on Security Assurances
  • 23 years of mismanagement (since independence)
  • On the verge of bankruptcy – hiked Russian oil & gas prices, $2 bio debt to Gazprom, $3 billion to Kremlin
  • Nearly open access to EU market
  • 20% dive of hryvnia increased debt burden
  • FX reserves down to $15.5 billion
  • Needs $20-25 billion for cacc BoP deficit plus debt coming due
  • IMF-EU-US aid package $15 bio
hot spots 2 iran
Hot Spots 2 – Iran
  • The P5+1 “deal” was a big mistake (UK, US, France, Russia, China & Germany)
  • Rouhani is no moderate (besides, Khamenei runs the shop)
  • Sanctions were biting
  • Inflation 32% (really 50%-60%)
  • Unemployment 28% for youngsters (really higher)
  • Economy contracting
  • Dollar to 24,500 rials from 12,260
  • Now companies falling over one another
  • Nuclear program not even slowed down
what if iran gets the bomb
What If Iran Gets the Bomb??
  • Critical is “breakout point”
  • Existential threat for Israel
  • The Shia crescent
  • Struggle for regional superiority between Iran and Saudi Arabia
  • Arms race in the Middle East
an existential issue for israel
An Existential Issue For Israel
  • Farce of Palestinian centrality
    • No chance for negotiations
    • PA head Mahmoud Abbas found way to reject proposal before they were even made.
hot spots 4 china
Hot Spots 4 – China
  • Extended air control space
  • Hefty investment in the military
  • First aircraft carrier
  • Hong Kong
  • Taiwan
  • Sekoku Islands and the Malacca Straits
china s economy
China’s Economy
  • $3.8 trillion in reserves
  • Making the yuan more volatile (no one-way bet)
  • GDP 2013 +7.7%, 7.5% goal for 2014 (grain of salt)
  • Weak first-quarter results
  • Modest official stimulus (urban infrastructure)
  • First significant default (Shanghai Chaori Solar Energy Science and Technology Co. on 5-year bonds)
  • Pushing foreign aid (mainly Africa and LA, less Asia)
    • To gain resources as well as markets
    • 3% interest. 15years’ repayment, 5 years’ grace
    • Resources, rights, Chinese materials and labor
  • Shadow banking & tightened information restrictions (Including access to corporate records)
hot spots 5 al qaeda
Hot Spots 5 – Al Qaeda
  • The Terror War Has Spread
  • Metastasized
  • Unchanged Goals
    • Drive Infidels out of the Middle East
    • Defeat them globally
    • Establish Caliphate run under Shariah law
  • From Boko Haram to Al-Shabaab and AQAP
  • Home-grown cells
united states
United States
  • Will continue to bump along low range
  • 4th Quarter 2.4% typical
  • Fiscal policy more or less neutral
  • No risk of abrupt end to QE-3
  • No marked rise in Fed Funds till 2015
  • Inflation for 2013 = 1.3% (??)
  • Real disposable income +0.7% in 2013
  • Labor participation 63%
  • CFO’s, CEO’s battle-scarred
  • Public-policy uncertainty (especially SMEs, ever-changing rules, complex laws, 1,000 pages Dodd-Franc five agencies, Affordable Care Act)
venezuela
Venezuela
  • Back to four exchange rates
    • Official = 6.3
    • Sicad 1 = 11.8
    • Sicad 2 = 51.86 = 87.8% devaluation from 6.3, or 79.17 from 11.8
    • Black = 80-90
  • Uncertain amounts, presumably still shortage
  • 57.3% inflation, will go up
  • Importers estimated owing $14 billion
  • Airlines have $3.3 billion frozen
  • Revealing math: 300,000 to pay China, 400,000 sold at subsidized prices, 600,000 subsidized local, leaves 1.7 million bpd for regular exports, yields $58 billion, but imports totaled $77 billion in 2012
  • Reserves = about $20 billion, but debt principal $4.5 billion this year, interest $13 b.
  • Issuing bonds becoming difficult
  • Unrest, Cuban intelligence
argentina
Argentina
  • Problems with inflation reporting
    • Past seven years wages = 24% p.a., inflation 9.4%
  • New index: 3.7% for January
  • Money printing to fund ever-expanding government programs
  • Peso 20% below start of year
  • Dwindling reserves – now $27 billion
  • US court ruling still threatening new default
  • Will reduce gas & water subsidies 20%
brazil
Brazil
  • Slow economy
      • Extended payment terms; consumers tapped out?
      • Barely missed slipping into recession 4Q 2013 (+0.7%)
      • Inflation up to 5.91% in 2013 (above CB target), interest rates up, real down, Selic to 10.5%
  • Contradictory policies:
      • Expanding fiscal spending while raising interest rates
  • Continued lagging growth
      • 1.67% this year, official prediction
  • Presidential elections in October
  • Angry about credit downgrade (S&P’s)
  • This is government risk, not country risk
greece
Greece
  • Deal with troika, $8.3 b payment
  • Difficult conditions (e.g., milk)
  • Primary surplus 2013 = 1.1% of GDP
  • Funds for social purposes
  • Piraeus Bank EUR 500 m borrowing a first, EUR 3 billion in bids
  • Sovereign issue before May
  • Confident no need for another bailout
  • Does not mean troubles are over
    • 27.5% unemployment, strikes
    • All in all, outlook is brightening
turkey
Turkey
  • Financial markets welcomed municipal election results
  • Erdogan will focus on “enemies,” not reforms
  • Fetullah Gulen
  • Twitter and Facebook, news media
  • Surging foreign debt – corporate & consumer +67% last year
  • Nearly 90% of corporate debt by closely held co’s without public disclosure of balance sheets, other basic info
  • Almost half of corporate debt in FX
  • Turkey needs inflows of capital, cannot afford to frighten investors
egypt
Egypt
  • Political situation still unsettled
  • Al-Sisi will run for presidency, face host of difficulties and respond with force
  • Sinai-based rebels
  • Effect on tourism
  • Government can borrow, banks are liquid
  • $12 billion in aid from Gulf states
  • Two stimulus packages ($4.3 billion each)
  • Current fiscal policies are not sustainable
nigeria
Nigeria
  • Presidential & parliamentary elections February 14, 2015
  • Goodluck Jonathan not politically correct
  • Endemic corruption
  • Delta situation better, but
  • Security problems not resolved
  • Oil revenues disappearing (Excess Crude Account, Reserves)
south africa
South Africa
  • Elections May 7
  • ANC troubled (still 60%, it and Zuma continue in office)
  • Sluggish since 2008
  • GDP +2.7, unemployment 24.1%
  • Labor unrest (the mines, especially)
  • Current-account deficit 6.5% of GDP
  • Dependence on short-term inflows
  • Effects of “tapering” by the Fed
india
India
  • Rupee rescue (nadir August 28, then rate hikes)
  • Still vulnerable (foreigners own 22% of $ 1-trillion stock market, nearly half of all shares traded freely)
  • Fundamental reforms needed, but unlikely
  • May 2014 elections (neither Congress nor BJP will gain outright majority, coalition needed)
  • Inflation(2013 wholesale 6.16%, consumer 9.87%
  • Current-account BoP Deficit remains troubling
  • But reserves $ 260 billion
sub saharan africa
Sub-Saharan Africa
  • The Colonial curse
  • Difficult to do business
  • Oil
    • Old
      • Angola, Nigeria, Congo Brazzaville
    • New
      • Ghana, Uganda, South Sudan
  • Mining
    • Mozambique, DR of the Congo, Tanzania, Zambia
  • Agriculture
    • Ethiopia, Kenya, Malawi,