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The Decade of Wasted Opportunity
25% of developing economies may be poorer than pre-pandemic levels
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In this publication:
Oil Jumps as Tankers Warned to Avoid Red Sea
EU and US Inflation Data
Largest Debt Swap in Argentine History
The slowest half-decade of GDP growth in 30 years
UK and US Strike Back in the Middle East
Let’s dissect
Markets Snapshot
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As of 12/01/2024 market close
Debt Securities
EU: As previosuly hinted by ECB president Lagarde, year-on-year December inflation in the Euro Area increased to 2.9%, up from November's 2.4% but falling slightly short of the anticipated 3%. This jump, the first since April, was driven to energy-related base effects. We anticipate that stabilizing commodity prices and the delayed impact of monetary tightening on households and companies will exert additional downward pressure on inflation. On Thursday, Lagarde mentioned that the European Central Bank will initiate interest rate reductions once convinced that inflation is returning to its 2% goal. Markets now predicts six quarter-point cuts this year, pricing in 146 basis points of easing.
USA: In December 2023, US consumer inflation expectations for the upcoming year hit a three-year low at 3%, declining for the third consecutive month. Earnings and spending growth expectations also dipped to their lowest levels since 2021. Consumers' views on credit access and financial situations showed a slight improvement. Nevertheless, the likelihood of a first Fed rate cut in March has decreased to 64%, down from the earlier estimate of nearly 90%. Analysts now consider May as a more likely starting point for the easing cycle, given the ongoing tightness in the US labor market.
China: 10-year government bond yield stabilized above 2.6% after hitting over two-decade lows. December data showed deflationary trends, with consumer and producer prices dropping by 0.3% and 2.7%. low yields are mainly driven by expectations of additional economic support measures and potential cuts to key lending rates and reserve requirement ratios in H1 2024. Investors eagerly await upcoming GDP figures for more insights.
Oil Prices
Brent Crude oil prices soared 4%, reaching $80 per barrel, following US and UK strikes in Yemen in response to Houthi rebel attacks on ships in the Red Sea (read more on this below). However, it later retreated to $77 by the end of Friday's trading day. Despite the regional conflict, market fundamentals show signs of weakening, as Saudi Arabia announced a reduction in the February official selling price (OSP) of its primary Arab Light crude oil for Asia by $2 to $1.50 a barrel above the benchmark, reaching the lowest level in 27 months. The surge in global oil supplies, particularly from OPEC and non-OPEC countries like the US continue contributing to the downward pressure.
Global Finance
Argentina's Largest Debt Rollover, New IMF Program
Argentina’s government proposes a local debt swap exceeding $71 billion. Economy Minister Luis Caputo and Finance Secretary Pablo Quirno presented the plan to local and foreign bank representatives, aiming to issue new peso bonds in February for a swap with the 2024 maturities. According to a report by the GMA brokerage, around 40% of this Argentinian debt is held by the private sector.
If executed, this would mark the largest domestic debt rollover in Argentina's history, surpassing a similar maneuver undertaken last year by Caputo's predecessor, Sergio Massa, who extended $28.5 billion in maturities during his tenure. The $71 billion figure represents the Argentine debt payments due in local currency for the year 2024, currently estimated at 57.5 trillion pesos (or $71 billion at the official rate). This move would result in reducing the financial deficit to zero for this year.
The proposed swap is an additional component of Milei's shock therapy measures that a 54% peso devaluation and substantial spending cuts aimed at addressing a chronic deficit (we already made a detailed breakdown of Milei's economic policies and Argentina's challenges here).
Source: Flickr
Argentina also fulfilled a $1.5 billion interest payment to bondholders on Tuesday, as the interest on the hard-currency bonds became due. The payment aligned with discussions with the IMF to readjust its USD 44 billion aid program, although the government, as per Milei's spokesperson Manuel Adorni, was not seeking new funding or a fresh program.
Nevertheless, on Thursday, the IMF agreed to disburse $4.7 billion to Argentina, even though the country has failed to meet the terms of the $43 billion IMF loan in recent months. The funds encompass a $3.3 billion tranche of the loan originally scheduled for disbursement in November, delayed due to Milei's presidential inauguration in December, and an additional $1.4 billion that the IMF approved for early release.
The ironic dilemma is that the government depends on the IMF's disbursements to repay funds borrowed earlier from the fund with repayments exceeding $2.7 billion due by February 1.
‘Decade of Wasted Opportunity’
The World Bank has reported that the global economy is experiencing the slowest half-decade of GDP growth in 30 years, influenced by factors such as high-interest rates, sluggish trade, and geopolitical tensions. It emphasized that the current economic path may result in a quarter of developing economies being poorer than they were before the pandemic.
The World Bank anticipates global growth to decelerate for a third consecutive year in 2024, reaching 2.4% — a decline from 2.6% last year. Global growth for the period 2020-2024 is projected to reach 2.2%, the slowest five-year period since it was recorded at 2.1% in 1990-1994.
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Source: World Bank
By the end of the year, people in approximately 1 out of every 4 developing countries and around 40% of low-income countries are expected to be economically poorer compared to their pre-Covid-19 status in 2019. To address climate change and achieve key global development goals by 2030, the Bank estimates that developing countries will need to make a "formidable" increase in investment, reaching approximately $2.4 trillion per year.
Our thoughts:
The World Bank's warning of a wasted decade emphasizes the urgent need to tackle economic challenges, particularly impacting low-income countries amid ongoing geopolitical tensions and external shocks since the onset of the COVID-19 pandemic.
After Russia's invasion of Ukraine, global central banks hiked rates, exposing widespread overindebtedness of many countries. The significant rise in borrowing costs had a broad impact on global growth in 2022 and 2023. With market expectations of over 150 basis points rate cuts by the Fed and other central banks, there will be upside growth opportunities in the coming years.
Geopolitics
Iranian-backed Houthis' Problem
In the decisive move, The US and the UK executed military strikes against Iran-backed Houthi rebels from Yemen after the "unprecedented" attacks on Red Sea commercial ships. Australia, Bahrain, Canada, and the Netherlands supported the operation. Iran denounced the attacks as "a blatant violation of Yemen's sovereignty and territorial integrity and a breach of international laws and regulations."
This military action came in the wake of heightened tensions initiated by Iran, which seized the oil tanker St. Nikolas off the coast of Oman on Thursday. The incident added complexity to the already disrupted global crude oil trade route, with ongoing attacks on ships in the Red Sea, orchestrated by above mentioned Iran-backed Houthi militants. The international community now faces an intricate challenge in managing the evolving dynamics of this regional conflict.
Previosuly, The UN Security Council has adopted a resolution urging an immediate halt to Yemen's Houthi rebels' attacks. Despite holding veto power in the Security Council, both Russia and China, alongside Mozambique and Algeria, chose to abstain from the vote. The Houthis, who seized much of Yemen in a civil war, owed to attack ships tied to Israel in solidarity with Hamas. Despite the threat, many targeted ships have no Israeli links.
Since Houthi attacks in the Red Sea, Bab al-Mandeb strait traffic plunged. Second week of December: 70% drop in container vessels compared to the 2023 weekly average, while voyages through the Cape of Good Hope surged by 136%. The significantly longer route around the entire African continent has elevated shipping costs, prompting shipping companies to raise container rates up to 250% in the last few weeks. The Red Sea handles nearly 15 percent of global sea trade.
Source: Bloomberg
Our thoughts:
Despite US efforts to contain the Israel-Hamas conflict regionally, ongoing Houthi militia attacks force the White House to reconsider its approach. Fairly put, securing the crucial trade route between east and west is now beyond the purview of commercial shipping companies. Enhanced coordination between Middle Eastern and Western nations is imperative to deter Houthis and ensure the uninterrupted flow of oil and all tradable goods from Asia.
Russia's abstention from the UN resolution vote aligns with the increasing importance of Iran as a trade partner, as we've already discussed here. It is fair to add that in the post-Ukraine invasion world, only a handful of countries are lining up for the Russian strategy party anyway.
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