News, events and analyses related to global trade and snippets of changing trade matrix during the month of January 2016
Currency War Competitive Devaluations - War, Peace… And Everything In Between
In August 2015, China stunned the world’s financial markets after the People’s Bank of China (PBoC) devalued the tightly-controlled yuan to its lowest rate against the US dollar – by 1.9% – in nearly three years. The value of the Chinese yuan had been on the gradual rise for over a decade, however, the August 12, 2015 fall was its biggest slide since 1994, and it hit a four-year low slipping further, causing the country’s biggest one-day loss in 20 years. PBoC called the move an ‘one-off depreciation’. The devaluation of yuan for the second running day sent shockwaves through Asian markets and highlighted growing anxieties for the world’s second-largest economy amid fears of a global currency war. The Chinese commerce ministry claimed that a lower rate of the currency would boost exports from China. This was reminiscent of US President Barack Obama’s speech in 2010, where he announced the National Export Initiative, and when the Federal Reserve started quantitative easing (QE) to generate inflation abroad. Morgan Stanley analysts mentioned that China’s move had put pressure on global central banks to depress their countries’ exchange rates as well, leaving many to wonder whether they were officially in the midst of a currency war.
SLOWDOWN
Hoping for a ‘happy’ new year
BRICS leaders: Will they be able to relive the fairy tale?2015 was not a good year for BRICS. First, the yuan was devalued. Then, in September, Brazil’s sovereign rating was cut to junk by Standard & Poor’s (S&P), taking away the prized investment grade enjoyed by the country for seven years. S&P’s Ratings Services downgraded Brazil’s rating one step to BB+, with a negative outlook. According to S&P, Brazil now stands at the same rating level as its BRICS companion Russia. The downgrade was a major blow to President Dilma Rousseff’s government, which was already struggling to shore up the country’s fiscal accounts. Interestingly, the country’s finance ministry rejected S&P’s claim. “Brazil has low external vulnerability because it holds the fifth largest volume of international reserves among G20 nations,” it said in a statement. South Africa, too, is seeing its economy slow down what with labour unrests, lowering commodity prices, and rising costs. Out of all BRICS nations, India is the only one that seems to be faring well, but barely – exports have been falling straight, from $26 billion in October 2014 to $20 billion in November 2015.
TRANS-PACIFIC PARTNERSHIP
12 nations and a landmark deal!
October 5, 2015 will go down in history as the date when one of the largest trade deals was finally sealed. After years of negotiations, a dozen Pacific-rim nations, including the United States and Japan, finally closed in on the largest trade-liberalising deal in history. The sweeping trade pact – signed in Atlanta after marathon talks – includes matters of safety protocols, environmental standards, trade liberalisation, and economic policies. The countries involved in the pact include Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam – 40% of world’s economy. Interestingly, both China and India are not part of the bloc. However, both the Asian countries have been thought of as potential future members of this landmark trade agreement.
WORLD TRADE
A big deal, indeed!
It was predicted that world trade is set to reach a whole new level! In a report released in late October 2015, the World Trade Organisation (WTO) mentioned that if the Trade Facilitation Agreement (TFA) is executed exactly the way it is meant to be, then the Agreement can boost global trade by $1 trillion every year. The TFA is a multilateral trade agreement between member countries of the WTO, and is expected to reduce total cost of doing business by 14.5% in low-income countries and by 13% in upper middle-income countries by standardizing global customs procedures. The increase in exports for developing countries is expected to go up from $170 billion to $730 billion, and at least 20 million jobs will be created, mostly in developing countries. It has been ratified by 51 member countries so far, and will come into execution once two-thirds of the members (i.e., at least 107) ratify it. The latest country to ratify the TFA was Guyana, which gave its assent on November 30, 2015.
FED RATE Hike
The wait ended!
The Federal Reserve’s benchmark rate was near zero since December 2008, when the global financial crisis hit the world economy – a move seen as an attempt to encourage spending and investing. But in mid-December, US central bank announced a hike in interest rates –from 0-0.25% to 0.25-0.50%. As per the policy statement, unemployment had fallen to 5%, there was considerable improvement in the labour market, and domestic spending continued to be up, which meant things were looking up for the American economy – that things were good, and would continue to be so. The Federal Reserve also assured in its policy statement that it would not be very quick to increase rates further, but would increase it nevertheless, observing that “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”. The rate hike had an effect worldwide – not only did stock markets in USA react favourably, stock markets in Australia, Japan, India, and Hong Kong also moved upwards immediately after the rate hike was announced on December 16, 2015.
RENMIBI
When renminbi become one of the big players!
In 2015 China added yet another feather to its hat. The renminbi (RMB) was added to the International Monetary Fund (IMF)’s special drawing rights (SDR) basket of currencies in December; meaning it can be used as an alternate means to settle international transactions amongst IMF’s member countries. The decision came after findings indicated yuan meets the standard of being “freely usable”. The other currencies include US dollar, pound sterling, yen and euro. The weightage of RMB has been set at 10.92%, which is more than the weightage of pound and yen in the new SDR basket. China was finally been accorded the status it deserves, and its inclusion into the SDR was an acknowledgement of its economic development, and its status as the fourth most-used currency for global trade. The last time the SDR basket was changed was a decade and a half ago, when mark and franc were replaced by euro. RMB will be a freely usable currency, effective from October 2016. Now that’s what we would call a big win!
DEBT CRISIS
Desperate times call for desperate measures…
Even though the European debt crisis began in 2009, its effects still remain large. The crisis began in 2009 with Greece, and then spread to Ireland, Portugal, Spain, and Cyprus. By 2012, Greece had the biggest sovereign debt in history, and in June last year, it also became the first developed country to fail to repay the IMF loan of almost $1.8 billion. By June 2015, most of EU was swimming in debt – Greece, Portugal, Ireland and Italy owed more than 100% of their GDP; Spain, France and UK owed more than 50% of their GDP; the countries with the lowest rate of debt were Bulgaria, Norway and Estonia, the owed less than 30% of their national income. The very next month, the people of Greece voted on a referendum and rejected EU’s bailout conditions. However, three days later, Greece got its third bailout in five years. In exchange for 86 billion euros, Greece had to agree to take a number of stringent measures, including the acceptance of oversight by the troika of European Commission (Eurogroup), European Central Bank and International Monetary Fund. Undesirable circumstances can only be resolved by resorting to equally extreme actions.
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