The elections in Venezuela, Russia and France: What do they bring to the delicate global market?

04-Nov-2012

I like this.

By

Global Investor Spot Emerging markets, ETFs/CEFs, Global market trends, World news







The elections in Venezuela, Russia and France: What do they bring to the delicate global market?

While some specialists predict a return of the growth in many countries, others announce an unprecedented global recession. Apart from the different forecasts, three important elections took place, generating important results for the global economy.

CHAVEZ REELECTED FOR THE THIRD TIME

On October 8th Venezuela witnessed the reelection for a third term of populist left-wing President Hugo Chavez. A 10-point lead victory enabled him to lead his country for six more years. The difficult reelection reflects the polarization between the 21st century democratic socialism that Chavez represents and a pro-free market shared out to centered -left opposition candidate, Capriles Radonski. The stock markets around the world held their breaths during these elections as Venezuela owns the world’s second largest oil reserves after Saudi Arabia and the country’s market is among the most profitable in the world.

Despite the criticism, Chavez achieved exemplary results

After fourteen years, the reelected President is criticized for not eliminating bureaucracy, corruption and street violence. A record number of 53 murders per day were actually registered in 2011, according to the Venezuela Violence Observatory. Internationally, the Venezuelan leader has been criticized for his stand in civil liberties and press freedom, as well as for his partnership with the Iranian and Cuban governments.

In spite of the critical remarks, Chavez achieved exceptional results. On the political level, he successfully implemented democratic elections. On the economical level, he reduced poverty by half, extreme poverty by two- thirds and unemployment by 50 percent.  The president nationalized Venezuela’s oil and invested its revenues to ameliorate education, healthcare and housing. He also addressed the phenomenon of the foreign takeover of vast sectors of the economy by nationalizing them in the 1990s (telecommunications, steel, cement, electricity and the airlines). These social and economical projects helped him alleviate the social inequity that partly resulted from the persistent and structural inflation that reached 27 percent last year. In fact, the Venezuelan rate is ranked first in Latin America and the second in the world after Ethiopia (37 percent).

Hopes for pro-free market orientation vanished

Chavez’s former opponent, Capriles Radonski, started his political life as a part of the extreme right-wing Catholic organization, Tradition Family and Property (TFP). The loss of credibility of the right wing might have been among the reasons the former presidency candidate joined the left wing. Capriles describes himself as a progressive who supports free-market reforms. He promised to combat violence and corruption.

Forty – year old former opposition candidate, Caprillo Radonski, nourished some hopes for change within the world stock market and saw in his election an unprecedented opportunity to effect that change.  Chavez’s former opponent defended an open- door policy toward foreign investments. The two candidates were also far apart on foreign policy. The Guardian noted that Capriles “vowed a dramatic change in foreign policy” including “shifting his country away from China and Russia.”

Barclay’s analysts advised clients previously to load up further by picking up long-tenure 2031 sovereign bonds or 2035 bonds issued by state oil firm PDVSA: “We believe an opposition victory could be a positive surprise for the market that could push Venezuelan assets to levels not seen in the past five years.”

However, the rating agency, Fitch, suggested that it saw a greater risk in an opposition victory. In April, Fitch downgraded Venezuela’s credit rating, warning of the country’s “increased vulnerability to commodity price shocks” and, in particular, to any rapid decline in global energy demand. The rating agency renewed the expression of those concerns in the current events.

The scenario of post-election violence in a country awash with guns, added to the concerns of some investors. They became cautious, especially after three opposition activists have been killed during the elections. Stuart Culverhouse, head of research at brokerage, Exotix, stated, “If there is a challenge to the result and unrest, there will be a downside to bond prices”.

Chavez’s reelection might not be a disaster after all

Washington responded to the Chavez victory by praising the “pacific” character of the vote. Former president Jimmy Carter affirmed that of the 92 elections monitored by his Carter Center “the election process in Venezuela is the best in the world so far.”

In fact, it might be in the best interest of the US administration to have stable and peaceful elections. As the United States is the first Venezuelan oil buyer, dealing with gas prices fluctuation in these critical times of US presidential elections would be an additional burden.

Chavez’s convincing win removed the risk of post-election violence and the continued demand for high-spread assets is noted to the great delight of the investors. Analysts at Morgan Stanley thus advised clients to step back into the market: “The removal of the event risk associated with the election made the market attractive and this will support a better position through to year-end.”

Why is Venezuela such a great debtor?

As long as the Venezuelan President’s Bolivian Revolution requires huge funds to which the President responds by using oil dollars and sovereign bonds, the Venezuelan stock market is going to remain a gold mine. Furthermore, his irreproachable solvability sustained by oil prices well above $100 a barrel makes the Venezuelan credit highly profitable.

According to Greg Saichin, head of emerging debt at Pioneer Investments, two things are important in Venezuela — oil prices and the ability of PDVSA to continue bankrolling the Bolivarian revolution. Those are intact and that’s why we think Venezuela still offers good value for money.

The Venezuelan sovereign bonds yield some 10 percentage points on the average over U.S. Treasuries and 700 basis points more than the EMBIG sovereign emerging bond index. The U.S. Federal Reserve is pumping more in every month and Venezuela is full of expensive oil.

Even way before the presidential election, Venezuela, with all its potential political risks, was the investors’ biggest overweight sovereign position according to the JP Morgan’s monthly client survey. Moreover, Venezuela is one of the top performing credits this year in the EMBIG index, returning over 20 percent in the first nine months of 2012 (The broader index returned a very respectable 15 percent).

THE KREMLIN IS WELCOMING PUTIN FOR ANOTHER TERM

Vladimir Putin has been the elected President of Russia since May 7th 2012. The stock market is following with interest the evolution of the Russian economy, the changes in its stock markets along with the Russian economy’s reaction to global markets fluctuation.

The Russian economy’s health

After the 1998 crisis, Russia built a strong financial system to face the absence of outside investors in the economy. The banking system took a firm position with risk. As a result, Russia surmounted the global crisis of 2007 and is now able to take debt from the country’s banks, which are mostly governmental ones. The debt to GDP is less than 15 percent, public debt remains at just 10 percent of GDP and foreign debt is just 3 percent.  It has $522 billion in cash reserves as of the end of September.

The industry is built on engine construction, space exploration, agriculture and oil production. Russia, the world’s largest country in terms of land, has a rich soil that allows the country to sustain its people and provide other countries like India and China with food and materials. Thus, Russia’s all important grain harvest decrease from 94.2 million tons last year to 70 million metric tons this year might affect wheat future fluctuations in Chicago.

Although the Russian land is full of resources, the economy’s reliance on oil and gas production weakens it. Energy accounts for nearly 35 percent of the Russian economy, exposing it to price fluctuation.

Russian educated population (43 percent are college graduates and 90 percent are high school graduates) provides it with brainpower, an important resource that represents an attraction for investors.

The interest rates and the inflation are in their way to rise

Despite its strong financial system, Russia found itself transferring money from a creditor to pay another. To solve this problem, President Putin announced, as a part of the “road map” for his pension reform, that he is creating infrastructure bonds to be made available next month to allow direct investment in public infrastructure projects.

The increase in the Russian revenues encouraged them to buy more of their governments’ debt, making the interests to observe a boom in Sberbank, Russia’s first lender. The central bank raised all its interest rates by 25 basis points in September, and there is speculation that it may soon raise them again to reinforce its anti-inflationary message.

 

Unfortunately, the domestic consumption that helped Russia go through the global crisis is going through some changes. The increase in household consumption allowed Russia to overcome the impact of a slowing international economy and resulted on a relatively strong economic growth of 4.5 percent in the first half of the year. The consumption boom has, however, stowed over the summer. “I am most disappointed about the retail sales growth,” said Natalia Orlova, chief economist at Alfa Bank. “Higher inflation has resulted in the deterioration in consumers’ expectations, and this was probably one of the factors why retail trade growth was rather modest.”

Furthermore, the annual increase in consumer prices reached 6.6 percent in September, higher than the central bank’s original target range for the year of 5-6 percent. “The economy is clearly losing some momentum compared with its performance in the first half of the year. This clearly tells us that the central bank should not be very aggressive in its tightening of the monetary policy,” said Dmitry Polevoy, Russian economist for ING.

As the ruble might also decline to 38.75 to the dollar from around 32.20 to the dollar currently, according to VTB Capital’s estimates published on Oct. 1, the situation is about to change. The consumers are expected to grow thriftier.

“Our model for growth has changed,” said Andrey Belousov, Minister of Economic Development. “Companies have changed their strategies. Wages have to keep up with productivity now, unlike before when they were not linked at all. We have exhausted our room to just raise wages into the teens again. Russians are getting richer, but they are going to get richer more slowly now,” he told a forum of international investors at Russia.

The investors are still seduced by the Russian opportunities

Capital investment by Russian companies fell by 1.3 percent in September. Alexander Morozov, chief Russian economist at HSBC, explained that the investments’ slowdown can be explained by the key state companies’ decision to delay investments due to the election in the first months of this year. “Overall we can say that private consumption growth remains robust, but the outlook is getting weaker, “he said

The government is introducing a number of reforms and initiatives to attract investors.  It is facilitating the direct access to the Russian security markets by creating a central clearinghouse for foreign investors and by changing tax laws so that foreigners can access that market without paying too much.  That central depository is supposed to be operational next month.

The government is also supporting high tech start-ups at its Skolkovo initiative. The tech know-how is available along with major tech brands, like Kaspersky Lab, the third largest security software firm by retail sales. Moscow is a top 10 derivatives market and a top 20 equities trading market.  The city is also constructing Moscow’s international financial center, which makes it an opportunity for investors.

Therefore, investors are still choosing the Russian market despite the difficult circumstances. General Motors is investing $1 billion and Coca-Cola is investing $3 billion over the next five years. “We are investing more here,” said Klaus Kleinfeld, CEO of Alcoa. “Russia has a great economic foundation.”

Oil and gas powers the Russian government and it has to change

The place of oil and gas production in the Russian economy is weakening it. As Anton Siluanov, Minister of Finance said: “Oil and gas production powers the federal government in Russia and that has not changed. It has to change,”

The declining oil and gas demand in Europe decreased the exports to it. Andrey Belousov, Minister of Economic Development said,  “There is a deteriorating situation in Europe and that impacts natural gas sales for us. In the not so distant future, we see natural gas playing a tiny role in Russia, and maybe even a negative one because of Europe.”

Oreshkin at VTB Capital says that the two percent growth forecast for 2013 is built on oil prices averaging $90 a barrel. Today, its budget is funded by oil and gas to the tune of 35 percent.

“The situation is ‘not perfect’, but it is not bad,”

“For a relatively balanced government, with some limitations, Russia needs to grow at three percent. To keep everybody happy, where there are jobs and you are generating revenues so you don’t have a pension fund deficit, then you need between four and five percent growth.  So next year is going to be a problem for Russia,” said Maxim Oreshkin, VTB Capital’s chief economist on Russia. “The situation is ‘not perfect’, but it is not bad,” Oreshkin defined it.

GDP growth has decelerated despite higher than forecast oil prices of more than $100 a barrel.  Oreshkin said the growth outlook for the next several quarters “remains bleak.”  The main drags on growth remain to be the agricultural sector, fiscal tightening and slower bank lending. There are downside risks to Russia even if it is growing at 3.5 percent this year.

AU REVOIR SARKOZY, WELCOME HOLLANDE

Another election that caught the attention of the markets is the one France held on May the 6th 2012. The 24th President of the Republic of France, François Hollande, has been elected, thus defeating the incumbent Nicolas Sarkozy.

Holland’s ambitions are confronted to the reality

In his presidential campaign, the former First Secretary of the French social party outlined a certain number of proposals to stimulate the economy and interrupt the austerity he described as “not inevitable”. Former president Nicolas Sarkozy strongly criticized his opponent claiming that he would bring about “economic disaster within two days of taking office” if he won. After his election, those ambitious proposals are confronted to the difficult reality of a current economy slowdown in Europe threatening other parts of the world. They are to face the French deficit, heavy public expenses and challenged competitiveness.  Hollande is currently endeavoring to adapt his proposals to the difficult circumstances of his election.

Taking from the wealthiest to finance the economy

A big part of the left wing former candidate’s popularity is due to his promises on the social level such as bringing the official retirement age back down to 60 from 62; building 500,000 state- ruled homes per year, creating subsidized jobs in areas of high unemployment for the young; creating 60,000 jobs in 5 years; offering study allowances and means-tested trainings to support the education sector. Holland had indeed criticized Sarkozy’s policy that encouraged cutting the education sector expenses because it diminished the quality of education services. Moreover, his intention to encourage the activity and limit the austerity is not only in clear disagreement with his predecessor’s policy but also in contradiction with Germany’s drive to enshrine budgetary and debt controls in EU treaties.

Hollande’s plan is to save the economy and finance its development by taking from the wealthiest. He reduced the corporate tax rate from 33,3 percent to 30 percent for medium corporations and raised it to 35 percent for the big corporations stating,  ” This measure is going to allow a 3 billion Euros tax relief for the small and medium enterprises (SME)”

Before his election, the French President supported a temporary merger of income tax and the General Social Contribution (CSG). According to Le Figaro, he intends now to raise VAT and the CSG levy to help fund the France’s social security system. He created a 75 percent top income-tax rate and an additional 45 percent for additional income of 150,000 euros, capping tax loopholes at a maximum of €10,000 per year, and raising the solidarity tax on wealth (ISF, Impôt de Solidarité sur la Fortune), a measure that promises to bring €29 billion in additional revenue.

The deficit and public spending are holding back the French economy

Unfortunately, those efforts are not enough to achieve Mr. Hollande’s ambitious goals considering the economy’s several woes. France’s borrowing costs have fallen into historic lows, pushing credit-rating agency to strip it off its triple-A status before restoring it. The debt accounts actually for almost 90 percent of the GDP which the President intends to bring down to 80,2 percent in 2017. In addition, he is determined to diminish the country’s deficit from 4.5 percent of the GDP estimated for this year to 3 percent in 2013 and 0 percent in 2017.

In Mr. Hollande’s way to achieve these objectives, stands one of the French economy’s major weaknesses: its structural inability to bring down its lavish public spending that accounts for 57 percent of GDP. For this reason, Mr. Hollande and Mr. Pierre Moscovici, his finance minister, delivered on September 28th the toughest budget in 30 years. “Personally, I regret that it wasn’t possible to put more of the burden on spending cuts because they are less harmful to growth than tax increases,” insisted current Governor of the Bank of France, Mr. Christian Noyer, in his interview with 20 Minutes newspaper. The country is heavily taxed which, according to Noyer, may increase the interest rates, drive investors to question the state’s credibility, and bring the contagion to the entire economy. “There is a limit to taxation that would prevent discouraging investment and consumption”. “That said, in the very short term, taxes are the fastest way to efficiently reduce deficits,” Mr. Noyer added.

A challenged competitiveness is partly due to the rigid labor market

Mr. Noyer stresses that “France is losing its competitiveness along with some market shares while some partners like Germany are gaining more.” Indeed, in this last decade, a competitiveness gap between the two countries has widened. It is linked to rigid labor-market rules and payroll charges on employers, which keep labor costs high and deter job creation. To strengthen the economy’s position, the French labor market needs more flexibility in case of a downturn, especially in terms of hours and wages. Thus, Louis Gallois, former chief of aerospace group EADS, was commissioned by Hollande to deliver a report on French competitiveness on November 5.

Sources told the newspaper, Le Figaro, that the report would recommend to diminish labor costs over the next two to three years – with 20 billion euros coming off charges paid by employers and 10 billion off those paid in by employees. The cuts would only apply to wages up to 3.5 times the minimum wage, currently set at 9.4 euros an hour before tax, or 1,425.67 euros a month.

Stimulating the economy it is

In homogeneity with his idea of stimulating the activity, The French President planned several actions he is trying to operate. Mr. Hollande supports giving an aid to small and medium enterprises (SME) and creating a public investment bank. “This tool will follow the innovative and strategic companies’ development,” he explained.

Moreover, the French President announced separating the lending from the riskier investment activities in the banking system so as to “stabilize” and “finance the economy”. To encourage the French companies’ competitiveness, Mr. Holland also introduced a “productive pact” to support the industry, the companies’ relocation and the SME.

In the European level, the French President insisted on bringing some changes. So as to change the austerity, Hollande stated that he would renegotiate the European fiscal pact. Disapproving his statements, Angela Merkel announced, “the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries,” She conceded, though, to discuss new policies to boost economic growth but only if Mr. Holland agrees to ratify the fiscal pact signed by his predecessor, Mr. Sarkozy.  Mr. Hollande had signed an agreement about a German-French joined banking supervision of the European Banks and is very ambitious about its results. Nevertheless, since Merkel stated there will be no bank capitalization until the supervision is effective, it will cause to blow out Spain’s and Ireland’s hopes of saving the banks of both countries until 2013. The European Union has two months of negotiations ahead of it where many important decisions are yet to be made.

The global vulnerability

Those three elections came to add new data to the already complex situation in place. The European Union’s economy went out of a turmoil it experienced in summer but is still burdened by its deficit and debts. Its slowdown is expected to be transmitted to other economies. France, although it is the fifth richest country in the world, is in the eye of the cyclone with its heavy debt and its challenged competitiveness. Russia and Venezuela have many advantages, but these don’t prevent them from being contaminated. Even China is not expected to increase its growth any more for the coming decade.

During a recent interview with Fox Business, Peter Schiff, the CEO of Euro Pacific Capital, stated that the massive financial collapse that we witnessed back in 2008 “wasn’t the real crash” and he boldly declared that the “real crash is coming”.

 


Tags: , , , , , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

Subscribe without commenting