© Reuters. FILE PHOTO: Seref Geyik, a 53-year old seller, waits for customers at his stall at a local market in Fatih district in Istanbul, Turkey January 13, 2021. REUTERS/Murad Sezer
By Karin Strohecker, Ezgi Erkoyun and Sarah El Safty
LONDON/ISTANBUL/CAIRO (Reuters) – Like for millions of people in developing and emerging market countries around the world, shopping for staple foods has turned from a necessity into a luxury for Selcuk Gemici.
The 49-year-old, who works in an auto repair shop in Turkey’s largest city Istanbul and lives with his wife and two children in his father’s house, says fresh produce is often out of reach with his family living on pasta, bulgur and beans.
“Everything became so expensive, we cannot buy and eat what we want – we only buy what we can afford now,” said Gemici. “My children are not properly nourished.”
Global food prices have climbed for two years, fuelled by COVID-19 disruptions and weather woes. Supply shocks to grains and oils from Russia’s invasion of Ukraine saw them hit an all-time record in February, and again in March.
Inflation rates have soared, with energy price rises adding to pressure. Turkey or Argentina with annual inflation of 70% and around 60% might be outliers, but readings are into double-digits in countries from Brazil to Hungary. It makes U.S. inflation at 8.3% look modest in comparison.
Rising food prices are a hot topic in emerging market, raising the risk of civil unrest with echoes of the Arab spring and putting policy makers in a bind between stepping in with fiscal support to ease the pain on their population or preserve government finances.
Food is the single largest category in inflation baskets – the selection of goods used to calculate the cost of living – in many developing nations, accounting for around half in countries like India or Pakistan and on average for some 40% in low-income countries, International Monetary Fund data shows.
Food producers have become more protective: India on the weekend announcing a ban on wheat exports while Indonesia halted exports of palm oil to control soaring prices at home in late April.
Soaring wheat and rising food prices fuel inflation https://fingfx.thomsonreuters.com/gfx/mkt/klvykoeqwvg/Soaring%20wheat%20and%20rising%20food%20prices%20fuel%20inflation.PNG
And with the war in Ukraine not only disrupting food but also fertilizer supplies, food inflation could be more longer-lasting, Marcelo Carvalho, head of global emerging markets research at BNP Paribas (OTC:BNPQY) told Reuters.
“This is here to stay,” said Carvalho. “Food is very salient – when there is a change in food prices, the perception about inflation is magnified – that feeds into inflation expectations that are more easily unanchored.”
For Um Ibrahim, a 60-year-old widow and street vendor selling headscarves in front of a mosque in the middle-class district of Madinet Nasr in Egypt’s capital Cairo, feeding her four children has become much harder.
“All prices rose – clothes, vegetables, poultry, eggs – what am I going do?” she asked, laying out her ware on a cloth.
Egypt, one of the world’s biggest wheat importers, has seen inflation soar more than 13% in April, and is expected to hike interest rates again at a meeting this week after it devalued the currency by 14% in mid-March.
Emerging market policy makers, having jacked up interest rates by hundreds of basis points cumulatively since 2020 to curb price pressures and ensure a bond premium to rising U.S. yields for investors, have to perform a balancing act between taming inflation and keeping fragile growth alive at a time of rising global interest rates.
Emerging economies may expand just 4.6% this year, the World Bank forecasts, compared with an earlier 6.3% prediction.
Emerging market inflation https://fingfx.thomsonreuters.com/gfx/mkt/mopanzmmqva/EM%20inflation%20pressures.PNG
Polina Kurdyavko, head of EM debt at BlueBay Asset Management, says governments have three options: Provide bigger subsidies to consumers or bite the bullet that is to let prices rise and face inflation and social unrest, or do something in between.
“There are no easy solutions,” Kurdyavko said.
A raft of countries have introduced measures: Turkey has raised the minimum wage by 50% in December to address a currency crash and inflation spike. Chile will up minimum pay this year as well.
South Africa’s government is debating whether to increase a social relief grant launched in 2020 and make the scheme permanent.
Economists fear emerging economies are facing a fresh wave of unrest on the back of the latest increases in food prices. North Africa, where food inflation was a contributor to the Arab Spring revolts a decade ago, looked particularly vulnerable, said Beata Javorcic, chief economist at the European Bank for Reconstruction and Development.
“The irony of this war is that while everybody expected Russia to have a crisis, it is actually North African countries that are closer to having an emergency situation due to high food prices,” she said.
But pain is expected to stretch further: Three quarters of nations expected to be at high-risk or extreme risk of civil unrest by the fourth quarter of 2022 were middle-income countries, risk consultancy Verisk (NASDAQ:VRSK) Maplecroft said last week.
Appeasing inflation pressures through spending will come at a fiscal cost that could spell trouble further down the line, said BNP’s Carvalho.
“In emerging markets, fiscal sins are forgiven but not forgotten,” he said. “Over the last couple of years, everybody felt like they have a blank cheque … in part because rates were so low. Now that interest rates are rising, it gets a bit trickier.”
Lira Weakens as Corporates Keep Buying Dollars Despite New Rule
© Bloomberg. An electronic board displays exchange rates information at a currency exchange bureau in Istanbul, Turkey, on Friday, June 24, 2022. Tourism arrivals in May surged 308% year-on-year, boosting hopes that a rebound in the sector can support the weakening Lira. Photographer: Erhan Demirtas/Bloomberg
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The Turkish currency retreated on Tuesday as companies continued to buy dollars for a second day after a new rule imposed restrictions on extending lira loans to foreign-exchange-rich corporates.
The lira fell as much as 0.5% to 16.6376 per dollar after rising more than 2% on Monday. Corporates purchased dollars even as state lenders moved to defend the local currency, according to three traders who asked not to be identified because they’re not authorized to speak publicly.
State lenders sold more than $1 billion in two days to support the currency, they said. One trader said the net impact was limited as some firms’ dollar sales were offset by others.
The country’s banking regulator restricted commercial lira loans to corporate borrowers if they held more than 15 million liras ($902,000) in foreign currencies and if such an amount exceeded 10% of total assets or annual sales. The move is one of the most forceful attempts to date to support the lira.
Instead of raising interest rates to contain soaring inflation and the voracious local appetite for dollars, regulators have put in place a series of other curbs to support the currency since 2018. The central bank has held its key policy rate at 14% over the past six months while consumer prices rose at the fastest pace since 1998. Turkey’s interest rates are now the world’s most negative when inflation is factored in.
The regulator’s chief, Mehmet Ali Akben, said the measure will “ensure loans are properly used” and will “positively contribute to bringing inflation under control,” state-run Anadolu Agency reported.
The Borsa Istanbul 100 Index, Turkey’s equity benchmark, climbed 0.6% as of 1 p.m. in Istanbul. The cost of insuring the nation’s bonds against default for five years rose 13 basis points to 784.
State banks don’t comment on their interventions in the foreign-exchange market. A former central-bank governor said in 2020 that government-owned lenders carry out transactions in line with regulatory limits and may continue to be active in the currency market.
©2022 Bloomberg L.P.
Dollar Up Despite Concerns Over Economic Recession
By Zhang Mengying
Investing.com – The dollar was up on Tuesday morning in Asia despite worries about economic recession. Investors await a speech from the European Central Bank (ECB) President Christine Lagarde.
The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.02% to 103.96 by 11:21 PM ET (3:21 AM GMT).
The USD/JPY pair edged down 0.13% to 135.26.
Governor of the People’s Bank of China Yi Gang said the central bank will keep its policy supportive for China’s economy.
Investors are keeping an eye on signs of weakness in recent economic data, which would possibly moderate interest rate hikes. But they are also concerned that it could be a sign of the onset of a difficult period of stagflation.
“Stay long the dollar until some of the uncertainty has reduced,” Societe Generale) strategist Kit Juckes told Reuters.
“The dollar will fall likely only when the global economy is on a more sustainable growth path … markets are forward-looking, but all we can see ahead today is danger.”
Across the Atlantic, German inflation figures are due on Wednesday, and French data is due on Thursday.
“This set of inflation data will have a significant influence on the ECB‘s monetary policy forward guidance, especially on the trajectory … of its interest rate hike cycle that is expected to kick start in July,” CMC analyst Kelvin Wong told Reuters.
The ECB President Christine Lagarde, U.S. Federal Reserve Chair Jerome Powell, the Bank of England Governor Andrew Bailey, and Cleveland Fed President Loretta Mester are due to speak at the ECB forum in Sintra, Portugal this Wednesday.
The Group of Seven (G7) leaders are about to discuss the means to tackle rising energy prices. They are examining a new package of actions aimed at increasing pressure on Russia over its war in Ukraine.
The ‘Big Package’: How Russia was driven to default
© Reuters. FILE PHOTO: European Commission President Ursula von der Leyen arrives for the European Union leaders summit, as EU’s leaders attempt to agree on Russian oil sanctions in response to Russia’s invasion of Ukraine, in Brussels, Belgium May 30, 2022. REUTERS
By Marc Jones
LONDON (Reuters) – Russia’s first major international debt default in over a century, which Washington said became a fact on Monday, follows months of co-ordinated Western sanctions that left Moscow with cash but no access to the international financial network.
Below is a summary of the key moments that have led up to this point.
THE “BIG PACKAGE”
At around 11.30 p.m. (2230 GMT) on Feb. 25, the day after Russian troops entered Ukraine, European Union’s experts in Brussels said a set of sanctions they had worked on for days, or the “Big Package” as they called it, was ready.
Just before midnight, the European Commission announced https://www.consilium.europa.eu/en/press/press-releases/2022/02/25/russia-s-military-aggression-against-ukraine-eu-imposes-sanctions-against-president-putin-and-foreign-minister-lavrov-and-adopts-wide-ranging-individual-and-economic-sanctions the measures.
While emergency Group of Seven and EU meetings earlier made clear a response was coming, the package named Vladimir Putin and his top diplomat Sergei Lavrov personally, and, as it later became clear, froze some $300 billion of the Russian central bank’s reserves.
“That was really the moment when we said, okay, well we’ve done it,” one European source told Reuters. “That was, I think, a very pivotal moment for a lot of people around a table.”
Graphic: EU’s Von der Leyen lays out Russia sanctions- https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrmloapm/Pasted%20image%201656346091349.png
Days later, on March 2, the EU struck again by banning seven Russian banks from SWIFT, an international financial messaging system crucial for cross-border transactions.
Booting Russian lenders from SWIFT had long been considered a ‘nuclear option,’ but the invasion put it on the table and when the EU decided to activate it, those at SWIFT headquarters just outside Brussels were ready.
The only question was how long they had to implement the move, “five days or five minutes?” another source said. In the end is was 10-12 days.
FIRST CUTS, BUT NOT THE DEEPEST
Credit rating agency, S&P Global (NYSE:SPGI), already stripped Moscow of its coveted investment grade rating on Feb. 26 and Russian bonds were slumping, but a heavier blow followed on March 15, when the EU told top credit agencies to stop rating Russian dept or risk losing their licenses to operate in the bloc.
“We were caught flat-footed, certainly we were not given any advanced warning,” one senior rating agency analyst said. “Basically the question was, does this mean we can’t rate Russia any more?” It turned out the answer was yes.
Graphic: Driven to default Driven to default- https://graphics.reuters.com/UKRAINE-CRISIS/RUSSIA-BONDS/mopanryzgva/chart.png
DEFAULT DEADLINE ONE
With so many hurdles being erected, expectations built that Russia would default on its first post-sanctions’ bond payments either on March 16, or a month later at the end of a 30-day “grace period.”
However, a special “waiver” in the U.S. sanctions granted by the Treasury’s Office of Foreign Assets Control allowed payments to go through.
On April 8, a week before the EU ban on Russian ratings was due to come into force, S&P declared Russia in “selective default” after Moscow said it planned to make upcoming bond payments in roubles rather than dollars, their issue currency.
On May 3 though, shortly before the payment was due, the Kremlin U-turned and paid in dollars.
SHOCK TO THE SYSTEM
Days later, Russia had stumbled, though.
On May 11, sharp-eyed creditors spotted that Moscow had failed to add $1.9 million of extra interest that had built up on bonds that only got paid in their grace periods rather than on time. They contacted the clearing house Euroclear and then bond market equivalent of an insurance payment arbiter – the Credit Derivative Determinations Committee https://www.cdsdeterminationscommittees.org/cds/the-russian-federation which ruled that a “credit event” had happened.
The sum was too small to trigger default clauses in all of Russia’s international bonds, but it did mean some investors expected to receive default insurance payments.
But when the U.S. Treasury clarified on its website that buying Russian bonds on the open, or ‘secondary’ market, was banned, that credit default swap (CDS) insurance process had to be halted as it was no longer clear what to do with the bonds involved.
“It is a bit like if your house burns down and the insurance company turns around and claims it was the wrong kind of fire,” said Joe Delvaux, emerging markets distressed debt portfolio manager at Europe’s largest fund manager Amundi. “The reality is that these sanctions are a shock to the system.”
The step that made Russia’s default unavoidable though was Washington’s May 24 decision to let the waiver that had allowed U.S. bondholders to receive Russia’s payments, expire.
A week later, the EU also sanctioned Russia’s domestic paying agent, its National Settlement Depository (NSD), which it had been using to make the payments.
Moscow has blamed the West for forcing an “artificial default”., with its finance minister Anton Siluanov calling the situation a “farce.”
However, veteran global policymakers involved in the process say they sanctions are unprecedented but fully justified.
“They were very significant actions that responded to the magnitude of the actions that Russia undertook,” Agustin Carstens, the head of the world’s central bank umbrella body, the Bank for International Settlements, said.
Graphic: Biden stresses power of U.S. sanctions- https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkloyovx/Pasted%20image%201656321187075.png
(This story refiles to fixe typo in 1st paragraph).
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