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Update on the Global Economy

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

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  1. Update on the GlobalEconomy For the ICTF’s Global Credit Professionals Symposium Chicago, 2014 Hans P. Belcsak President Rundt’s Intelligence

  2. 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

  3. 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…

  4. 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)

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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.

  10. Hot Spots 3 – Syria

  11. 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

  12. 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)

  13. 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

  14. Al-Qaeda In Ascendance

  15. 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)

  16. 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

  17. 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%

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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)

  23. 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

  24. 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

  25. Open Discussion

  26. 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,

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