Thursday, 24 October 2013

Tapering, CEE and Russia

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A taste of the would-be portfolio shifts was given some flavour following suggestions in May that the Fed’s de-facto QE programme might be coming to a halt – aka tapering – before the volte-face in September. Yet the flow-of-funds data – particularly for cross-border bank flows – shows that central and Eastern Europe remains below the levels of late 2008 whilst LatAm and Asia are 80% and 40% up over the period.
The strong flow of funds into LatAm and Asia has in turn helped fuel the stellar growth in these regions relative to the rather sedate growth seen in the CEE region since 2008. It also provides a good gauge for the reversal of flows from EM and the likely amplitude of effects across the EM space when the US tapering ends, itself probably now put back following the delayed release of the US Payroll data on October 23rd, and for the eventual rebooting of conventional monetary policy in the mature economies.
The CEE region is less exposed and vulnerable to any outflows related to portfolio adjustments globally on the back of expected and actual adjustment of the direction of US monetary policy. Part of the explanation for the higher country risk has of course been the wider impact of the on-going sovereign/Euro/bank crisis in the Eurozone that has essentially torn up the song-sheet on a Single EU-wide market for capital and banking in particular – worth a separate focus.
With signs of green shoots in Germany and pukka growth in the offing in Britannia, CEE growth is likely to tag along, particularly given the strong supply-chain links with Germany in central Europe – even without a return to the pre EU-accession convergence plays and oodles of capital into these newer economies.
That said, I remain queezy about a couple of the CEE block – I’m not entirely convinced on the 3 not-so-new EU Member States: Hungary, Slovenia or Czech Republic and remain deeply concerned about the situation in the Balkans, particularly Serbia.
Russia’s economic situation is a fascinating case study…not least for anyone following the economy since the fun-days  of the Yeltsin era. The country retains strong fundamentals that make it a good credit risk – ample reserves of a half a trillion dollars, an oil-fuelled fiscal stance with ample goodies in the bag through a wealth and reserve funds each with a touch over $80bn in the kitty each. And yet…and yet…tbc

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