Tag Archives: debt
Unhappy Ending For Indonesia Growth Story
http://www.ft.com/cm…l#ixzz2e0gkByv7 Indonesia’s decision to follow Brazil’s lead by raising interest rates at an extraordinary central bank meeting on Thursday temporarily took the sting out of the recent market slide, with the rupiah appreciating against the dollar and the stock market closing in the black. But the global emerging market turbulence , which has also hit Brazil, India, South Africa and Turkey, is unlikely to abate until the US Federal Reserve clarifies its plans to curb its quantitative easing programme. Over the next three months, many emerging market investors will be focused on how quickly the Fed withdraws liquidity from global markets, says Melvin Boey, southeast Asia strategist for Bank of America Merrill Lynch. On a longer-term view, investors and companies in Indonesia are starting to adjust to the fact that, as and when the dust settles, they are unlikely to see a return to the heady economic growth of the past five years, which was pumped up by the US liquidity surge and high prices for Indonesian commodities such as coal, palm oil and rubber. For companies, this “new normal” will mean lower profit margins and higher borrowing costs. For investors, the key question is: how much will growth slow and at what level will asset prices start to look attractive again? “A year ago, we still had high expectations for Indonesia but not now,” says one trader at a London investment bank. “Companies earnings are topping out and the country is moving into a slower cycle, with an election coming up next year as well. But there is a price level at which we’d come back in.” Until earlier this year, Indonesia was seen as one of the world’s hottest emerging markets, with a decade of robust economic growth, a large and fast-growing middle class and plentiful natural resources. The euphoria surrounding southeast Asia’s biggest economy sent the prices of Indonesian assets soaring to record levels. But since the value of the rupiah started falling rapidly in May, subsequently losing 10 per cent of its value relative to the dollar, the equity and debt markets have suffered a major sell-off. The benchmark Jakarta Composite index of shares has fallen by more than 20 per cent since May, when it hit an all-time high, having increased in value by 4.5 times since its global financial crisis nadir in November 2008. The yield on Indonesia’s rupiah-denominated, 10-year government bonds has jumped to well over 8 per cent from a record low of 5.2 per cent at the start of this year. “The central bank should have started tightening monetary policy earlier but the debt looks interesting at these levels,” says a fixed income fund manager in New York. The bank increased its main benchmark lending rate by 50 basis points to 7 per cent on Thursday. After such an extended boom, a correction is hardly surprising. But most analysts believe the fundamentals in Indonesia and other emerging markets are changing. Regardless of when the Fed starts “tapering” its stimulus programme, the economy is likely to slow in Indonesia, says Taimur Baig, chief southeast Asia and India economist at Deutsche Bank. He predicts annual GDP growth could ease to “around 5 per cent” rather than “around 6 per cent” in the next few years. Some Indonesian companies such as Mitra Adiperkasa , a large retail group that has been popular with foreign investors, have already warned their profit margins are being squeezed and are scaling back their expansion plans, for the first time since the global financial crisis. And valuations are not obviously cheap. The Indonesian stock market’s 12-month forward price/earnings ratio of 11.9 makes it more expensive than China (8.5), South Korea (8.2) and Thailand (10.6), but cheaper than India (12.5), Singapore (13.1) and Malaysia (14.4). However, operating profit margins in Indonesia remain among the highest in the region, averaging about 20 per cent, compared with 15 per cent in India and 10 per cent in China, according to Herald van der Linde, HSBC’s chief equity strategist for Asia. “Across the region, all countries are seeing margin pressure but in Indonesia, the margins are higher than elsewhere and the speed at which they come down will be slower,” he says. In any further sell-off, Indonesia could also be cushioned relative to other Asian markets by the fact that many international fund managers have already turned underweight on the country, says Mr van der Linde. By contrast, many still have an overweight portfolio position on India, which is suffering from a deeper macroeconomic malaise than Indonesia. Mr Boey of BofA believes some investors are waiting for the right time to start buying stocks that have been sold off unfairly. “The telecommunications and media sectors stand out from a short term perspective because they have seen a big sell-down, despite the fact that their fundamentals will be immune to what is happening right now as they are not affected by the fluctuating rupiah,” he says. But while there are some brave stock pickers, most international investors want to see more concrete action from emerging market governments before they pile back in. “For me to pound my fist on the table about Indonesia, I’d like to see a turning point in the data, like the current account deficit starting to narrow,” says Mr Boey. Continue reading
Euro’s Destiny Depends On More Than Merkel’s Mindset
http://www.ft.com/cms/s/0/96c15af4-148c-11e3-a2df-00144feabdc0.html#ixzz2dv27PMGS By Ralph Atkins in London Federal Reserve, not German election, will determine interest rates Since the eurozone debt crisis erupted almost four years ago, national elections have proved cathartic moments – and often buying opportunities for investors. The contest for Germany’s chancellorship between Angela Merkel, the incumbent, and Peer Steinbrück, her Social Democratic challenger, may be short on daily, market-driving dramas (this is a German election). Polls suggest Ms Merkel is sure of re-election. But the September 22 vote will be long on significance for the eurozone and financial markets – even if, depressingly for German politicians, the world’s central banks ultimately prove more important in determining the eurozone’s destiny. Ahead of François Hollande’s election as France’s president in May last year, French stocks were falling sharply but within a few weeks were on a sustained rally. The CAC 40 index is 25 per cent higher than the day Mr Hollande was elected. More remarkably, inconclusive Italian elections earlier this year marked a turning point for southern eurozone sovereign bond markets. Italian yields, which move inversely to prices, fell sharply after February’s poll as the extended political stalemate in Rome failed to become the disaster investors feared. The case for Germany’s election proving an inflection point rests on the idea that a re-elected Ms Merkel will be less hawkish on the eurozone: that she softens her stance on fiscal austerity and becomes more like Helmut Kohl, her Christian Democrat predecessor and erstwhile mentor, in driving forward Europe’s economic integration at German taxpayers’ expense. Ms Merkel wants to govern again with the centre-right Free Democrats, her existing coalition partners. The case for expecting a sea change in German thinking might appear more compelling given that a weak FDP vote could force her into a “grand coalition” with the centre-left SPD, which is keen to express solidarity with weaker eurozone neighbours. On such rosy assumptions, yields on eurozone periphery debt could have further to fall. True, German yields would rise as capital flowed into weaker economies and European growth prospects brightened, inflicting losses on German bond holders. But as a nation of savers, Germans would cheer higher domestic interest rates. Historically, the Dax share index has rallied on Christian Democratic victories; this time equities might surge across Europe. But there are a lot of snags with such conjecturing. For a start, Ms Merkel’s strong personal poll ratings owe a lot to her handling of the euro crisis and insistence on a quid pro quo in terms of deep structural reform from countries benefiting from German munificence. A change of character after September 22 seems unlikely. The risk remains that Alternative für Deutschland – the fledgling eurosceptic movement which wants to dissolve the euro – wins representation in the Bundestag, gaining an important public platform. If the AfD did jump the 5 per cent voting threshold, the parliament’s arithmetic would make a “grand coalition” more likely. But even a grand coalition could disappoint markets; for all its sympathy with weaker eurozone economies, the SPD is as keen as others to reduce Germany’s debt burden. Once the elections are over, a host of eurozone issues on hold during the campaign will resurface, whether the strains in the bailout programmes for Greece, Cyprus, Portugal and Ireland, or the restructuring of Europe’s banks. With an emboldened, freshly re-elected Merkel, the potential for eurozone upsets may simply rise. As crucially, Germany is voting at a time when the US Federal Reserve is turning the tides in capital markets. Until May, French and Italian financial assets were riding the waves created, first, by the European Central Bank’s pledge last year to prevent a eurozone break-up, then by the Fed’s unlimited “quantitative easing”. Since the Fed announced plans to scale back, or “taper” its asset purchases, however, bond yields have risen globally. The risk in Europe is of monetary conditions tightening prematurely – and dangerously in the eurozone periphery. What happens next to borrowing costs will probably depend more on the outcome of the Fed’s two-day policy meeting starting on September 17 than the German elections five days later. All the above does not mean markets are wrong in turning more optimistic on Europe. Bunds have decoupled a little from US Treasuries – the rise in 10-year German yields has not been as steep since May. Mario Draghi, ECB president, is attempting to use “forward guidance” on official interest rates to keep the recovery on track. Strong purchasing managers’ indices this week show growth becoming established. The recent sell-off in emerging markets has increased the attractiveness of European assets. But Ms Merkel’s mindset will be only part of the story. Continue reading
Farm Bill Defeat Shows Agriculture’s Waning Power
Manuel Balce Ceneta/Associated Press Speaker John A. Boehner failed to draw enough Republican support for a bill last month. By RON NIXON Published: July 2, 2013 WASHINGTON — The startling failure of the farm bill last month reflects the declining clout of the farm lobby and the once-powerful committees that have jurisdiction over agriculture policy, economists and political scientists said this week. Although a number of factors contributed to the defeat of the bill — including Speaker John A. Boehner’s failure to rally enough Republican support and Democratic opposition to $20 billion in cuts to the food stamps program — analysts said the 234 to 195 vote also illustrated the shift in the American population and political power to more urban areas. “There are a small number of Congressional districts where farming continues to carry much sway,” said Vincent H. Smith, a professor of agricultural economics at Montana State University. “Especially in the House, the farm lobby has been substantially weakened.” For much of American history, the agriculture sectors wielded tremendous political power. Farm groups were able to get key farm legislation passed by rallying millions of farmers in nearly every Congressional district. Influential farm state legislators like Representative Jamie L. Whitten of Mississippi, a Democrat who was chairman of the Appropriations Committee and its subcommittee on agriculture, brought billions in agriculture financing to their states and fought off attempts to cut subsidy programs despite pressure from both liberals and conservatives. Mr. Whitten died in 1995 after 53 years in Congress. But as Americans have moved to the cities and suburbs, farmers and lawmakers representing districts largely dependent on agriculture have seen their political muscle steadily decline. Just 2.2 million people now work in farming in the United States, or about 2.5 percent of the total work force. Farming now accounts for about 1 percent of gross national product, down from a high of about 9 percent in 1950. Only 40 lawmakers represent largely farming districts, according to research by Mr. Smith in 2006. He said that number was probably smaller today. Nonetheless, agriculture groups said they continue to have influence and blamed increased partisanship for the inability of Congress to pass the farm bill. “Agriculture used to be a nonpartisan issue that both Democrats and Republicans could support,” said Danny Murphy, president of the American Soybean Association. “Now people are lining up to take sides; it’s nutrition or farm programs,” he said. “For us, it’s a nonissue. We’re farmers, how can we be against food?” Barry L. Bequette, dean of the School of Agriculture, Research, Extension and Applied Sciences at Alcorn State University in Lorman, Miss., said the issue was not a lack of power. “Farmers just haven’t learned how to utilize the power they have,” he said. “All the groups are fractured and focused on their own narrow issues.” But agricultural economists like Mr. Smith said the Congressional response to last year’s drought and this year’s debt talks provide more evidence of the waning political influence of agriculture. Last summer, as the worst dry spell in 50 years was causing widespread damage to farmland and livestock, national farm organizations pushed for the passage of a farm bill that would provide relief. But the groups were unable to muster enough support to even get the bill to the floor for a vote. Representative Frank D. Lucas, Republican of Oklahoma and chairman of the House Agriculture Committee, which did pass a farm bill , made several appeals to House leaders to bring the legislation up for a vote, but they declined. When the Obama administration and Republican leaders worked out a compromise to avert automatic tax increases in January, Mr. Lucas and Senator Debbie Stabenow, the Michigan Democrat who is chairwoman of the Senate Agriculture Committee, tried desperately to get the farm bill included in the talks. Both touted the savings they had achieved in both the House and Senate version of the bills. But their pleas were largely unheeded. The Senate instead chose to include in the tax package a slimmed-down farm bill proposal by Senator Mitch McConnell of Kentucky, the Republican minority leader. Mr. McConnell’s proposal extended only portions of the current farm bill, which was passed in 2008. The extension did not provide disaster assistance for livestock owners, who had to kill thousands of cows, pigs and chickens because of rising feed prices and lack of water. It eliminated money for conservation programs and financing for fruit and vegetable growers and organic farmers, and cut a program that pays milk producers when feed prices increase. The proposal did contain provisions to prevent milk prices from rising and left in place direct payments to farmers or farmland owners, whether or not they grow crops. The payments, which total about $5 billion a year, have long been criticized as examples of wasteful government spending. The bill passed the Senate by 89 to 8, with a reluctant Ms. Stabenow voting for it; it passed the House by 257 to 167. Mr. Lucas also voted for the House bill. Farm groups said they felt equally ignored. An exasperated Ms. Stabenow summed up the feeling of both farm state lawmakers and the farm sector in an interview shortly after the deal was announced. “There is absolutely no way to explain this other than agriculture is just not a priority,” she said. Collin C. Peterson, the Minnesota Democrat and ranking member on the House Agriculture Committee, sent a letter to House leaders involved in the debt talks. “I could not believe that you and your leadership team could treat the committee with such disrespect,” he wrote. Continue reading
