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Analysis – Investors suddenly see rampant risks in eastern Europe

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Analysis - Investors suddenly see rampant risks in eastern Europe
© Reuters. FILE PHOTO: European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium May 5, 2021. REUTERS/Yves Herman

By Marc Jones and Karin Strohecker

LONDON (Reuters) – Eastern and central Europe’s normally predictable financial markets are suddenly alive with the most diverse geopolitical and economic risks the region has faced in decades, and international investors are starting to pay attention.

The list makes worrying reading.

The European Union faces a migrant crisis on its eastern borders the bloc says is being fomented by Belarus, tensions between Ukraine and Russia have flared up again, Brussels is locked in a dispute with the Polish and Hungarian governments over rule of law and democracy, and Romania has no government.

Money managers have long viewed the region as a sort of hybrid – part euro zone satellite bloc with ultra-low interest rates to boot, but also not fully out of Russia’s orbit especially at the fringes.

The latest series of events though, which importantly for market watchers comes against a backdrop of one of the strongest inflation surges since the end of the Cold War and rising COVID-19 cases, has been impossible to compartmentalise.

Hungary’s forint, a 12-year low Polish zloty, Romania’s leu and Russia and Belarus’ roubles are five of the eight worst performing world currencies this month and eastern European stocks are having their worst one in over a year.

Government bonds have been suffering as rising inflation crushes the real-term income they provide. Polish, Hungarian and Romanian bonds now have some of the most negative ‘real yields’ — the interest rate once inflation is factored in — anywhere in the emerging world, even lower than Turkey.

Ukraine’s bonds have slumped 10% as Russian tanks have neared its borders again, while the threat that Western governments might ban banks and funds from owning Russian sovereign debt altogether has hit Moscow’s market.

“Welcome back to emerging markets,” JPMorgan (NYSE:) headlined a report on Wednesday on the growing pressures in the region after the years of relative calm.

This week’s flash points saw the EU toughen sanctions on Belarus for encouraging thousands of people fleeing war-torn countries to try to cross into EU nations like Poland, an accusation Belarusian President Alexander Lukashenko denies.

Meanwhile NATO Secretary-General Jens Stoltenberg warned Russia on Monday the western military alliance was standing by Ukraine amid what he called a “significant” build-up of Russian troops near the border.

Romania is still trying to cobble together a government while calls for separatism in Bosnia have brought warnings of a return to the ethnic conflicts in the Balkans.

“We have seen an effect across most assets,” said Viktor Szabo, a portfolio manager at investment firm abrdn, citing the drops in Ukraine’s hryvnia currency, Russia’s rouble and some of the region’s government bonds.

SHARP DETERIORATION

While the geopolitical tensions have dominated the headlines, UBS’s head of emerging market strategy Manik Narain warns about a sharp deterioration of broader economic fundamentals in CEE.

A rise in imports and supply chain issues in key export sectors like car manufacturing are likely to result in Poland’s first negative trade balance since 2012, Narain said. A long-running row with Brussels about Warsaw overriding parts of EU law could be costly too if it isn’t resolved.

The EU is currently withholding Poland’s 36 billion euro- share ($40.7 billion) of its Covid-19 recovery fund, equivalent to roughly 1% of the country’s GDP. That could jump to 4-4.5% of GDP though if traditional EU development funding, worth more than 120 billion euros over the next six years, is also stopped.

JPMorgan estimates the deterioration in current account positions implies a GDP deficit of 2.3% in Poland, of 1.8% in the Czech Republic and 2.9% in Hungary.

That could see currencies weakening further and together with this year’s 300% surge in gas prices fuel inflation and force central banks to keep raising rates.

“If balance of payments deterioration proves more permanent, we expect higher FX volatility in the region,” JPMorgan said.

Every 1% of GDP current account deterioration requires interest rates to be 50 basis points higher than they otherwise would have been, calculates JPMorgan.

Borrowing costs would have to rise too. Inflation for big three CEE economies – Poland, the Czech Republic and Hungary – currently averages around 6.5%. If it ends up settling between 3-5%, 10-year bond yields in the region would hit 3.9%-5.2% – far higher than in recent years.

Lyubka Dushanova, an emerging market specialist at State Street (NYSE:) Global Advisors, reckons that CEE central banks being behind the curve and losing inflation-fighting credibility causes market weakness.

“It is difficult to distil the geopolitical tensions from the macroeconomic backdrop,” Dushanova said. “We are probably going to see some rocky times in the region.”

($1 = 0.8849 euros)

Economy

World economic news now by the morning of Dec. 6

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economic news around the world

The FT reported on tanker jams in the Turkish straits due to the Russian oil price ceiling, and NATO analysts assessed the Bank of Russia’s foreign currency reserves seized abroad – these and other world economic news now for the morning of Tuesday, December 6, read more.

Economic news around the world 

A tanker jam has formed near the Turkish Bosporus and Dardanelles straits, through which ships carrying Crude Oil from Russian Black Sea ports pass. Turkish authorities demanded insurers fully insure ships passing through the straits, after the G7 countries, the European Union and Australia imposed a ceiling on oil prices from Russia, said the Financial Times. 

The newspaper’s sources claimed that ships with Western insurance coverage were delayed, while ships with documents from Russian insurers were allowed through Turkish waters. 

The U.S. and European Union countries have managed to seize no more than a third of Russia’s foreign currency reserves blocked abroad. According to the Atlantic Council, this is $80-100 billion out of a total of $300 billion in foreign currency reserves.

India is in discussions with Apple (NASDAQ:AAPL) to locate iPad production in the country and is exploring options for shipping components for them from China, CNBC reported, citing two sources close to the Indian government. Plans have no specifics so far, but if negotiations with Indian authorities are successful, Apple will expand its presence in the country.

A federal court in Australia has asked UC Rusal (MCX:RUAL) for documents on alumina supplies to Queensland Alumina (QAL), the aluminum company’s ties with the Russian government and entrepreneurs under sanctions, Kommersant reported, citing court data. The documents were asked by the court on the claim of Alumina and Bauxite Company, an Australian “subsidiary” of UC Rusal: it owned 20% of QAL; the share went to Rio Tinto (LON:RIO), which had the remaining 80% of the company.

Earlier we reported that the average house prices in the UK fell by 1.4% in November.

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Economy

South Korean exports dropped 14% in November, the highest in 2.5 years

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exports South Korea

South Korea’s exports fell 14 percent year-on-year to $51.91 billion in November, preliminary data from the Ministry of Commerce, Industry and Energy showed. The November drop was the biggest in 2.5 years since May 2020 and was caused both by the deteriorating global economy, which even a Google price chart showed, and a truckers’ strike in the country.

South Korea exports 2022 – reasons for the drop

Exports fell for the second month in a row. Analysts on average expected an 11% decline, according to Trading Economics. Respondents to MarketWatch predicted a 10.5% decline.

Shipments of semiconductor products overseas, the country’s top export item, fell 29.8%; petrochemicals fell 26.5% and steel exports fell 10.6%. Meanwhile, exports of automobiles jumped 31% and petroleum products 26%.

Exports to China, South Korea’s largest trading partner, fell by 25.5%, and to Asian countries – by 13.9%. Below, supplies to the USA grew by 8% and to the European Union – by 0.1%.

In January-November exports rose by 7.8% on the same period last year and reached a record $629.1 billion.

South Korean imports rose 2.7% to $59.2 billion in November, marking the 23rd consecutive month of gains, but the current rate of growth is the lowest since November 2020. Experts had predicted an increase of only 0.2%.

South Korea’s trade deficit last month was $7.01 billion, compared with a surplus of $2,973 billion a year earlier.

The negative balance was recorded for the eighth month in a row. As a result, by the end of 2022, the country may record a foreign trade deficit for the first time since the financial crisis in 2008.

Earlier we reported that the UN estimates the cost of humanitarian aid in 2023 at a record $51 billion.

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The UN estimates humanitarian aid costs in 2023 at a record $51 billion because of an impending humanitarian crisis

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a humanitarian crisis

Joint humanitarian operations will require a record $51.5 billion in 2023 to address urgent problems.

The UN Office for the OCHA estimates that 339 million people will need urgent aid in 2023. At the same time, OCHA called on donor countries to provide funds for assistance in 2023 to the 230 million people most in need, living in 68 countries.

Griffiths explained that aid is needed not only for people experiencing conflicts and disease outbreaks. but also for those suffering the effects of climate change, such as people in peninsular Somalia facing drought and those in Pakistan experiencing severe flooding. For the first time, the growing humanitarian crisis has brought the number of displaced people worldwide to the 100 million mark. Also worsening an already bad situation is the worldwide coronavirus pandemic, which affects the poor. Note that the general economic crisis has begun to negatively affect even the Netflix price chart.

Earlier we reported that house prices in the UK fell by 1.4% in November.

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