Economy

Analysis-Argentina’s economic crisis whack-a-mole goes into overdrive

Published

1 month ago

June 28, 2022

letizo News

Analysis-Argentina's economic crisis whack-a-mole goes into overdrive

By Walter Bianchi

BUENOS AIRES (Reuters) – Argentina’s economic alarm bells are ringing loudly with fears of a global recession and spiraling inflation stoking investor fears over possible defaults, missed targets with the International Monetary Fund (IMF) and political unrest.

The South American country, an important global supplier of soybeans, corn and wheat, has seen its bonds sink to record lows, pressure on its peso currency is rising and a high energy import bill is stopping it building up vital dollar reserves.

Domestic inflation meanwhile is heading towards 70% by the end of the year, forcing the central bank to tighten monetary policy hard, risking growth. The interest rate has climbed to 52% in a bid to avert investors dumping peso assets.

With grains exports dipping in the second half of the year, this could imperil the country’s ability to meet targets linked to a $44 billion deal agreed with the IMF.

“The government is finding it increasingly hard to renew all maturities and there is a growing fear of it resorting to a reprofiling of its debt,” said Víctor Beker, director of the Center for New Economy Studies at the University of Belgrano.

Argentina’s economy, the third biggest in Latin America, has been hit by crises, defaults and rampant inflation for decades.

The recent volatility has been exacerbated by wider emerging market jitters as the U.S. Federal Reserve has tightened monetary policy and soaring global prices, including high energy costs that have badly hit Argentina’s balance of payments, limiting its ability to build up much-needed foreign reserves.

BONDS IN THE 20S

Argentina’s sovereign bonds, restructured in a huge $110 billion deal in 2020, have tumbled back into distressed territory, with many now worth just 20-30 cents on the dollar, a reflecting of perceived default risk.

“Without access to the capital markets, Argentina is going to have to restructure again and again,” said Gabriel Torres at rating agency Moody’s (NYSE:MCO). The government last week held a massive local debt swap to push back payments for June.

“And the only way for it to have access to the capital market is if the market believes that Argentina is really willing to pay its debt.”

Argentina’s U.S. dollar bonds https://graphics.reuters.com/ARGENTINA-ECONOMY/DEBT/zgpomaegjpd/chart.png

PESO GAP WIDENS

Tight capital controls have created popular alternative currency markets, where dollars trade at prices far removed from the official rate. The gap has recently started to widen again amid concerns over the economy and tight financing.

That gap with the official rate has widened to around 100%, a destabilizing disparity rooted in controls which limit how much each person can buy every month to some $200.

“An FX gap as wide as the current one not only affects the behavior of price setters but also the incentives of exporters and importers, which reinforces expectations for a forced macroeconomic adjustment down the road,” J.P. Morgan said in a note.

Argentina’s double dollar https://graphics.reuters.com/ARGENTINA-ECONOMY/akvezloqqpr/chart.png

INFLATION HEADS FOR 70%

The country, which has long battled rising prices, now has the second highest inflation among major economies behind Turkey. The rate was at 60.7% in May and a central bank poll forecasts it will hit $72.6% by the end of the year.

That’s far above targets agreed with the IMF of 38%-48% and weighs on salaries, savings and investment. Government officials have already hiked the official inflation target to 52%-62%, though most analysts see it well above that range.

“For 2022 we project inflation of 75%, and there are upward risks,” said Isaias Marini at consultancy Econviews.

Argentina: inflation spirals https://graphics.reuters.com/ARGENTINA-ECONOMY/zgpomndbrpd/chart.png

DOLLAR RESERVES

Argentina has been struggling to build up its foreign currency reserves, key to meeting future debt obligations and a central part of its agreement with the IMF. Gross reserves stand at some $41 billion but net reserves are far lower.

According to the IMF, net international reserves stood at $2.3 billion at the end of 2021. The target is to raise that by $4.1 billion by end June and $5.8 billion this year. Net increases to date are $960 million, Reuters calculations show.

The central bank, which does not regularly publish its net reserve levels, declined to comment.

“Everything seems to indicate that the government will not be able to meet the goal agreed with the IMF in terms of reserve accumulation,” said Beker.

Reserves dwindle https://graphics.reuters.com/ARGENTINA-ECONOMY/egpbkoralvq/chart.png

This, however, could get worse before it gets better, pushing the government towards higher taxes and controls.

“We’re likely to see measures that imply a greater outlay from the private sector to the State,” said Gustavo Martin, an analyst at investment platform Balanz.

“That is to say new taxes and higher tariffs, along with policies of greater restrictions on access to foreign currency.”

Argentina’s U.S. dollar bonds (Interactive graphic) https://tmsnrt.rs/3FzHvdH

Argentina’s U.S. dollar bonds https://tmsnrt.rs/3fz89Zs

Argentina: inflation spirals https://tmsnrt.rs/3pWg2Ne

Argentina: inflation spirals (Interactive version) https://tmsnrt.rs/3s8mjZ7

Reserves dwindle https://tmsnrt.rs/33FZ7XQ

Reserves dwindle (Interactive version) https://tmsnrt.rs/30OwTsS

Argentina’s double dollar https://tmsnrt.rs/3zXEJ2y

Argentina’s double dollar (Interactive version) https://tmsnrt.rs/3HFqAsJ

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Economy

World food prices chart: World food prices have plummeted

Published

2 hours ago

August 8, 2022

letizo News

Why are worldwide food prices rising? First, because of the current world situation. But world food prices fell sharply in July, with prices of major grains and vegetable oils dropping more than 10% in a month.

World food prices chart

The Food Price Index was 140.9 points in July, down 8.6% from June. The drop in the index value continues for the fourth consecutive month after it reached an all-time high at the beginning of the year. Compared to July 2021, the index is up 13.1%.

Despite the decline in high food prices, there are still many uncertainties around the world, such as high fertilizer prices, exchange rate volatility and weak global economic forecasts.

Vegetable Oil Price Index fell 19.2% in July from a month earlier, reaching its lowest level in a decade. Global cereal prices fell 11.5% for the month, still 16.6% higher than last year. Wheat prices fell the most (14.5%).

World sugar prices over the month decreased by 3.8%; dairy products — by 2.5%, meat — by 0.5% due to weakened import demand for beef, lamb, and pork. At the same time, chicken meat rose in price due to strong demand and lower production volumes related to bird flu outbreaks.

Economy

Are hedge funds bad? Investors are disappointed in hedge funds

Published

2 hours ago

August 8, 2022

letizo News

Are hedge funds bad? This year is sure to be one of the worst years in hedge fund history. In the first six months of 2022, funds posted losses of 5.6%, according to HFR. In July, though, they rebounded by 0.5%, but nevertheless, writes the Financial Times, the sector is well on its way to its second-lowest year in a third of a century, since 1990, when they started keeping records. The only time the hedge fund market was worse than this was during the financial crisis in 2008.

Are hedge funds losing money?

Most of the problems are accounted for by so-called long-short-term funds, whose assets total about $1.2 trillion. The results of their activity depend directly on the securities market. In the first half of this year, these funds lost an average of 12%, according to HFR data. This category of funds earned only about 1% in July, according to JPMorgan’s John Schlegel calculations, well below the 7% rally in the stock market last month.

Among the hardest hit is the well-known Maverick Capital fund, which has been making double-digit returns to its investors for the past three years but lost 35% in January and June of this year. Similar losses have seen Skye Global, which has pleased investors with high returns over the past six years, but lost 10.4% in June alone. The fund was let down by a large stake in Amazon, which fell 36% in January-June 2022. However, in recent weeks, the retail giant has improved and cut its losses in half, to 19%.

Already the first signs are starting to emerge that the losses are scaring investors. While they invested a total of $13.92 billion in hedge funds last year, only $440 million in the first quarter. There was a strong outflow of funds in March, and in June it exceeded $10.1 billion, according to Citco’s fund administrator. Redemptions are expected to be $7.8 billion in the third quarter and $6.4 billion at the end of the year.

Weak performance in the first half of 2022 and investor dissatisfaction, however, have not affected the sector’s confidence in its ability to raise funds. A survey of 100 hedge funds by technology company SigTech found that nearly one-in-four (23%) expect a sharp increase in investor activity in the next two years; 60% of respondents expect a slight increase in activity and only 4% believe investor activity will decline in 2023-24.

Economy

Chinese economy 2022: China will give up first place in the list of the largest importers of raw materials

Published

2 hours ago

August 8, 2022

letizo News

Chinese economy 2022 news: China’s commodity-buying companies will be adversely affected by government debt and demographic problems.

Over the next ten years, debt problems and slowing population growth may force China to cede the unofficial title of world’s largest buyer of raw materials and minerals to India.

Chinese economy analysis — the current situation

The structural challenges will make it very difficult for Beijing to accept and implement most of the policy initiatives coming from the center. Apart from the Chinese economy, this trend will have a major negative impact on mining companies around the world, many of which are heavily dependent on demand in China. Incidentally, many such companies are located in Australia.

China will likely be replaced in the next few years by India. If UN statistics are to be believed, India could overtake China regarding population as early as this year. This will have not only psychological, but also “material consequences” for the global market of raw materials and minerals.

China has been much criticized for shifting to mindless spending to combat the economic slowdown. Lowy Institute economist Roland Raja is pessimistic about the growth prospects of the Chinese economy. Even though the Indian economy is only a small part of the Chinese economy, he sees no signs of a slowdown soon.

China will try to be more aggressive this year in combating the economic slowdown. Beijing will invest very heavily in the extractive industries.

Moyo also believes that Beijing will no longer be able to regain the high growth rates of past years. According to her forecast, China’s economic growth will be 4% this year. Recall, the Chinese leadership set a higher target of 5.5%. Incidentally, this is the lowest growth in the Chinese economy for the past three decades. In the second quarter of this year, China’s economic growth slowed to 0.4%.