September: expecting a fall in autumn

HomeNewsSeptember: expecting a fall in autumn

US debt exceeds 20 trillion first time in history

The US Congress recently passed a law on the temporary increase of the national debt threshold. The new limit will allow public institutions to work only until December 8, while the Congress is working on the federal budget for 2018.

In September, for the first time in history, the US public debt crossed the mark of USD 20 trillion. According to some reports, the debt was frozen in mid-March at USD 19.84 trillion. The Ministry of Finance had to undertake great efforts to make sure that the federal government functions without any further borrowing. This allowed for the White House to conduct consultations with the Congress, which has recently passed a law on the temporary increase of the national debt threshold.

Once the US President Donald Trump signed the bill, this allowed anew to borrow funds. Meanwhile, the new debt limit should allow the public institutions to work only until December 8, while the Congress is working on the federal budget for the financial year 2018.

According to a monitoring portal that traces the US sovereign debt, the latter stands today at USD 20.16 trillion, or 100% above the national GDP.

BRICS countries to drop USD in the future

BRICS countries set sights on giving up the US dollar. The BRICS states seek to minimize the FX risks, and eventually abandon the use of the US dollar. According to Nikolai Tsekhomsky, VneshEconomBank’s first deputy chairman, expansion of lending practices in the national currencies of the BRICS countries (Brazil, Russia, India, China and South Africa) will allow these countries to reduce trade risks by stimulating business activity in their markets.

«We need to expose the existing trade opportunities for the BRICS members,» BRICS analysts believe. «We have stable long-standing relations with the BRICS banks. This platform allows us to review the general agenda, two major treaties were signed, one of them stipulating lending in local currencies of the BRICS countries», the expert explains. «We expect to increase the trade volume with the member states, the BRICS development banks need to do some work in this direction. They have a potential to guide the local businesses in the BRICS countries, reducing potential risks for them.»

Previously, Russian companies had not considered other currency options, comments the analyst: for a long time, the Rouble remained stable and even grew stronger. However, following its devaluation, many Russian companies found themselves in an uncomfortable position: those with the sales in Roubles faced the issue of re-investment in hard currency.

«Now is the time to think about minimizing the currency risks. This is why we must offer our clients good hedging methods.» VneshEconomBank (VEB) deputy chairman affirmed. «We will offer loans in Roubles to our clients, while our external debt will be in Yuan, for instance.»

At first, according to the market analysts, the mutual lending will not have a significant impact on the behaviour of the US dollar and other currencies. Volumes will be small initially, and BRICS members will resort to cross-crediting only when the traditional loans appear unproductive due to fluctuations in the exchange rate. But in the medium-term (5 to 10 years) this financial instrument may become quite productive.

This transition to a less risky lending pattern is a positive development for the BRICS countries, as it removes a volatile link from the financial chain, which cannot be anticipated with a 100% certainty.

In general, in any financial field (whether it is a choice of assets in an investment portfolio or a diversification between currencies), such a development is logical and accurate, affirms financial analyst Viktor Makeev. It is an alternative to the existing obsession by the forceful shift away from US dollar, which will help reduce the real currency risks, always present. The expert admits, that at the moment, the US economy with its financial engineering is far more advanced than that of any other country. However, clearly, there are lots of speculative bubbles that may burst at any moment, which in turn would affect the US dollar.

Therefore, not only it is necessary to spread currency risks, but also to build the trade capacity in equal shares between the East and the West. In the meantime, everything depends on demand and, under any circumstances, the switch to lending in BRICS currencies will be gradual. For the dollar and the euro it will not have any significant effect, affirms the expert, since the lion’s share of transactions will remain in these currencies.

Finance in general is one of the most potentially significant fields for cooperation among the BRICS countries, reckons the Eurasian Development Bank chief economist Yaroslav Lissovolik. Priority areas are cooperation in the creation of regional and global financial centres, an increased share of national currencies in settlements between the BRICS countries and their partners (including the shift away from settlements in US dollars), joint action in building and strengthening of the BRICS currencies as reserve ones (including the establishment of Yuan/renminbi as a reserve world currency), creation of a system of national payment centres and payment cards, and a set up of the BRICS countries rating agency.

While a high level of the transactions in US dollars is preserved among the BRICS regional partners, there is a considerable potential for wider use of national currencies for transactions between the BRICS members in their respective regions. Members of the Eurasian Economic Union, for instance, already increased the use of the Russian Rouble for trade by 75% in 2016 (from only 56% in 2010), while the US dollar share fell from 35% in 2010 to 19% in 2016. The shift towards lending in national currencies may well bring a number of dividends, affirms Yaroslav Lissovolik.

These include a shift away from using the US dollar by the BRICS economies in payments with their regional partners, reducing the costs associated with the currency conversion from national currencies to dollars or euros, as well as mitigating the currency risks and imbalance associated with the difference in currency denomination of assets and liabilities of BRICS companies. For both the euro and the dollar, a shift away from the USD payments means less dependence of the BRICS members on these currencies and a likely decrease of their share in the reserves of BRICS members in the medium- and long term. At the same time, the BRICS countries will acquire new reserve currencies.

The shift from the US dollar will also be important for the central banks of BRICS members, due to a greater control over their monetary policy, greater autonomy and transparency.

Such measures should be accompanied by greater coordination of macroeconomic policies and measures to reduce the vulnerability of economies to the external shocks, including through the creation of additional security buffers, for example, through cooperation of the regional financial institutions.

Banking sector in Russia: decline and change

The memory is still fresh of the Russian banking sector and its officials living through a real boom. Today, both are found in an undesirable condition, perhaps at their worst point in the entire post-Soviet period. The reasons are not only in the financial crisis, but also in the technological revolution: very soon the banking sector might evolve beyond recognition.

«Should one try to choose an investment niche today, the last opportunity that comes to mind is investing in banks. I do not know more volatile and complex business under current conditions,» the president of the Russian Sberbank German Gref declared in his speech at the International Financial Congress. The grounds for such assessment reflect the blows by the recent economic crisis and the operation for a mass recall of banking licenses in Russia. At the same time, the very structure of the financial market lives through a global transformation, with traditional banks challenged by the new high-tech competitors.

The «Yugra» symptom

«People will simply have to retrain and leave to other industries. The popularity of banker’s profession has fallen dramatically.»

One of the biggest financial scandals that occurred recently is the situation around the Yugra bank, a typical example revealing how the Russian banking sector evolved in just a few years.
Only five years ago, Yugra was a small regional bank, known mainly in its home region, the Tyumen. Back in 2013, its founders opted for an aggressive growth strategy by developing the retail banking services.
One of the main incentives for this process was the private loan boom, although the private borrowing also showed a rapid growth. The latter became the centre post of Yugra’s strategy. From the beginning of 2013 and up until 1 June 2017 the volume of individual accounts grew by almost 32 times, from 5.7 bln to 181.3 bln Roubles (some EUR 3 bln). Yugra suddenly rose from a modest regional bank ranked nationally (by total assets) at the tail of the third hundred, to the 30th position country-wise.

Under the classical banking model, such a rapid growth caused by an aggressive private banking policy can only be compensated in one way: through an active growth of the loan portfolio, i. e. loaning at a higher interest than the rate of borrowing from the population. Meanwhile, Yugra was not active in the private loan sector, with most of its loans issued to companies. However, following the economic crisis in Russia, quite soon there were not enough businesses with a required profitability levels that could fruitfully exploit such a large amount of loans, and then pay off on time. Thus, at the end of last year already, Yugra was forced to admit that 28% of its loan portfolio (or 77 billion Roubles in absolute terms — EUR 1.3 bln) were ’problematic’ or ’bad’ loans, becoming a leader by losses among Russian banks.

The further development of events was predictable: in April the Central Bank banned Yugra from working with private funds, and on July 10, a temporary administration was introduced in the bank. Today, the sector analysts say that this may be the largest insurance case in the modern history of the Russian banking sector.

How will the story end is a secondary issue. In any case, the very story of Yugra may serve as an excellent illustration of the statement by Sberbank’s G. Gref quoted above. Whatever the true intentions of the bank’s owners are, its arrival at the federal level took place at a time when the market was booming. Today, we observe an entirely different phase of the cycle, shrinking and concentration of assets.

The banking sector net profit in the first half of 2017, quoted by the CBR head Elvira Nabiullina should not be misleading: the earnings more than doubled reaching 770 billion Roubles. However, the lion’s share of this profit belongs to a few largest banks, primarily with state as a shareholder. Meanwhile, the bulk of the Russian banks have to fight for their survival.

«Almost all parameters, that determine profitability of the banking sector, do not demonstrate a sufficient performance. Therefore, competition will grow, there will be fewer banks who will have to compete with the extra-sectoral companies in different aspects of their traditional offer,» experts predict. «Sberbank’s German Gref is absolutely right: banking sector is not particularly attractive for the investors right now. But we can not claim unequivocally that in a few years from now new reasons won’t appear for the banking sector (or at least some of its segments) to turn profitable once again. From the experience, we know that sooner or later such segments of fast growth and high margin appear necessarily. Although not all banks will live to that time.»

Capital flight from Russia may intensify by the end of 2017

Expert’s verdict: should the US intensify sanctions against Kremlin, capital flight from Russia would increase by manifold.

The capital flight from Russia is increasing despite the seemingly favourable environment both economically and geopolitically, macro-economic analyst Anna Bodrova believes.

According to the latest data from the Bank of Russia, net capital outflow in January-August 2017 amounted to USD 12.1 billion, which is 1.7 times higher than the outflow for the same period of 2016, when the capital flight was estimated at USD 7.2 billion. Overall, throughout the entire year 2015, the cash drain went up to USD 57.5 billion, and for the entire 2016 USD 15.4 billion, quotes Bodrova.

The Russian regulator commented by saying that in 2017 the Russian banking sector acts as a capital exporter, actively working with the external debt. According to the CBR, the latter explains the observed trend.

«The weighted average forecast of the Bank of Russia on the capital flight in 2017 is USD 37 billion. This means that the IV trimester promises to be very aggressive in terms of cash withdrawal from the system, among other factors, due to a decrease in the near future of the CBR-set base rate,» the expert observes.

A relatively high level of the base rate currently attracts non-residents to the Russian bonds. As yields fall, the agents of ’quick money’ will start looking for profit elsewhere.

In 2018, the Bank of Russia expects a capital flight of USD 14 billion. According to the CBR head Elvira Nabiullina, one should distinguish between a regular capital outflow, as it happens in German or Canadian economies, and a shady outflow. In her opinion, it may well be, that the outflow of capital is, in fact, linked to a more proactive and productive position of Russian banks in servicing the county’s foreign debt.

Playing the role of a capital exporter, the banking sector exceptionally withdraws funds.

«However, at the same time, cash is drained from the funds that invest in the Russian assets. This is due to the geopolitical forces, which were never completely removed from the picture, albeit temporarily lost their significance. Should the US intensify sanctions against Kremlin, the capital flight from Russia would increase by manifold,» the expert believes.

UAE economy to reboot after 2017

The economy of the UAE will start recovery in 2017 due to development of the non-oil sector. It is expected to become one of the strongest Gulf economies in the near future, according to a forecast by the International Monetary Fund. The recovery and growth are possible due to further diversification and the development of the non-oil sector: in spite of low energy prices, in 2015 the country’s GDP was 3.8% against 3.1% in 2014.

As the report by Capital Economics ’Q2 2016 Middle East Outlook’ observes, the average growth of the Gulf economies at the end of the year will be at 1.3%. The IMF believes, however, that the UAE will advance with the economy that will grow up to 3%. In the medium term, due to a pick up in oil prices and the investments caused by the prospects of EXPO-2020, the growth of at least 4% is expected. Due to these factors, the Midland group decided to open an office in the UAE a year ago. Today, our representation in Adjman is up and running.

Hong Kong economy ranked the most competitive in the world

For the second year in a row, Hong Kong ranks first in the list of the most competitive economies in the world.

The second and third places went to Switzerland and Singapore. The USA dropped to the fourth position, the country’s worst result in five years. The mainland China improved its standing by seven steps, taking the 18th place. It is therefore the most competitive among countries with the per capita GDP under USD 20,000. Russia occupies the 46th position out of 63 countries assessed.

«It is good news that Hong Kong was determined as the most competitive economy in the world in 2017. This ranking portrays the efforts of the authorities of Hong Kong Special Administrative Region in observing financial discipline, opening up for the new markets and investing in new sectors,» Hong Kong’s Financial Secretary Paul Chan commented.

When compiling the ranking, countries were evaluated against 20 parameters, divided into four areas: the economy, the efficiency of government, the business efficiency and the infrastructure. These parameters are composed out of 260 coefficients.