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India Continues to Adjust to Currency Change

The demonetization of 500 and 1,000 rupee notes has led to chaos in India as citizens stand for hours in long lines to exchange their old currency for new, according to news reports around the world.

As noted in last week’s Week in Review, holders of the notes can no longer use them as tender and must exchange them for notes of smaller denomination by the end of the year. They also can deposit them into bank accounts and then use a debit card or electronic transfer for purchases. The change, however, has brought the country, which runs mainly on cash, to a standstill, and merchants have reportedly lost sales because people can’t pay.

“Weekly limits on withdrawals of new notes and a lack of newly equipped ATMs and money printing capacities are hitting hard consumer demand and cash-driven sectors such as agriculture, construction, retail trade and luxury goods, which weigh for up to one-third of the GDP,” according to new Credendo Group report, India: Short-term Economic Growth Sharply Affected by Cash Shortage. “It has resulted in a cash crunch and significant economic disruption as the measure was not properly prepared in a cash-based country where banned notes account for 85% of the value of currency in circulation.”

In response to the change, gold sales have spiked “to the point that the government may restrict gold ownership, too,” a Forbes article notes. According to a Wall Street Journal article, people are purchasing gold, smuggling it out of the country and reselling it for hard currency.

Some economists are projecting that fallout from the sudden contraction in cash could negatively affect GDP growth into 2018. According to a Bloomberg article, brokerage house Ambit Capital cut its GDP growth estimate by 330 basis points to 3.5% for fiscal year 2017.

Several credit professionals have shared their perspectives about what’s happening in India. “From my point of view, there is less risk as the people exchange the money 1:1,” one credit professional said. “The money is not depreciating, but it [creates more work] for all India banks.” For the foreseeable future, outgoing payments may be delayed due to the volume of currency being exchanged, he added.

Another credit manager who does business in India noted a slowdown in business that’s unrelated to the demonetization of the currency. “Our major concern, at this time, is the lack of sales in this region,” she said.

“It’s been fascinating to watch as it’s a very abrupt change that would typically take place over a year or more with phasing in,” pointed out another credit professional. Regardless, “relations remain strong,” he said. He noted that customers have shared their concerns about the situation and that his department is “continuing to monitor the situation closely.” Currently, the company is “holding off on shipping further orders until the balance past due is brought current,” he added.

For more information, read “Exports from India Likely to Be Impaired by Government’s Demonetization” in NACM’s eNews.

OPEC Reaches a Deal: Does Anybody Care?

Chris Kuehl, Ph.D.

Members of OPEC met and cobbled together a deal. Nothing indicates how far the organization has fallen than the global reaction to the outcome. In its heyday, the decision to cut production would have sent reverberations through the entire global economy. The oil market itself would have surged by $10 or even $20 a barrel, and the rest of the investment community would have reacted strongly.

This time, however, the price per barrel of oil increased by 0.1% as Brent crude gained to $51.87. The price of West Texas Intermediate actually went down by 0.1%. It is not that it doesn’t matter that OPEC states will be producing 1.2 million barrels less; it is that much of the world doubts that OPEC members will really make these cuts. There is also an expectation that other states will fill any gaps that develop if prices start to rise even a little bit.

After more than two years of oil prices ranging from $30 to $50, it is hard to remember that prices were routinely more than $100 a barrel and that everyone talked of the arrival of peak oil development. Now the discussion centers on the arrival of peak demand and the emergence of a near constant oversupply. The decision by the OPEC states to cut output in order to drain the oil glut is a very high risk move for Saudi Arabia and to some extent Iran. These were the two key states as far as this decision was concerned. The problems faced by OPEC will be on full display now.

First, there is very little discipline within the ranks of the OPEC states at this point, and the cartel has no means of enforcing this decision. In the old days, the Saudi oil minister had a weapon and was not averse to using it. If OPEC members did not comply with the decisions made by OPEC, the Saudi oil sector would flood the market with cheap oil and drive the price down. The fact that Saudi Arabia could produce so inexpensively meant it could make money at these low prices and others couldn’t. Just the threat of creating an oil glut was enough to bring members back in line. There is considerable doubt that the OPEC members will adhere to these restrictions as many of them simply have no ability to turn their backs on the cash flow they get even if they know that in the long run they would benefit from the higher prices.

The bigger issue is that OPEC no longer controls the majority of global oil output. The biggest oil producers are now the U.S., Canada, Russia and, to some degree, Mexico. None of them are OPEC members or subject to the restrictions. Even if the OPEC states can pull production down by their stated goal, there is nothing to stop these nations from ramping up to offset the cuts. The fact that oil prices might raise a little will be all the incentive needed for additional production from the oil shale and tar sand regions. This additional output will likely serve to depress prices again, and that would be the worst outcome OPEC could imagine. Members would have to cut their output in order to see prices rise, but their competitors will produce more to fill the gap, and that would mean a lower price for oil. OPEC’s outcome would be producing less oil and at a lower price.

The bottom line for those that are sensitive to the price per barrel of oil is that there is not all that much to worry about. The expectation is for oil to stay in the $50 range, and that means prices at the pump remaining in the $2 range in most of the country. If there is a hike in the costs of fuel, it will be due to the decisions made by the refineries or somewhere along the distribution system.

Emerging Markets 2017 Outlook Down Slightly

Overall, the economic picture for emerging markets has improved this year, according to Fitch Ratings’ 2017 global economic outlook.

“Recessions in Russia and Brazil have started to bottom out and commodity prices have recovered,” it notes, and “China’s efforts to stabilize the economy following the slowdown last year have been more successful than anticipated.” Weaker outlooks for Mexico and India, however, more than offset Fitch’s upgrade for China, analysts said.

The ratings agency drove down its projection for emerging market growth next year by 0.1 percentage points to 4.8%—still better than the 4% recorded in the last couple of years. “Our overall emerging market growth forecast has been revised down only marginally since September, but the possibility of U.S.-China trade tensions, renewed dollar strength and higher U.S. interest rates have increased downside risks,” the report states.

Emerging markets also were a topic of discussion at FCIB’s annual International Credit and Risk Management Summit, held Nov. 13-15 in Amsterdam. An attendee wanted to know when an emerging country is no longer considered as emerging. Keynote speaker Bert Bruning, managing director of Atradius Dutch State Business N.V., explained that such a question is difficult to answer because the decision is based on more than economic factors. Considerations also include geopolitical and political factors. “For all kinds of different reasons, countries have not emerged to the extent expected,” Bruning said. For example, a Dec. 1 commentary from Simon Baptist, chief economist for The Economist, notes that “despite having high levels of GDP per capita, comparable with Italy, [South Korea] has long been considered as still an emerging market. One of the reasons has been the clientelism that pervades both business and politics.”

The presentation material from the session, and the other sessions held at the summit, is available to FCIB members in the presentation archive.

Global Roundup

Foreign companies face new clampdown for getting money out of China. Multinational companies are suddenly finding themselves in the crosshairs as China dials back its effort to turn the yuan into a global currency, alarmed that it has accelerated the flight of capital from its shores. In recent days, according to bankers and officials familiar with the situation, China’s foreign exchange regulator has instructed banks to sharply limit how much companies move out of the country, reducing the cap by 1,000%, and into their other operations around the world. (Wall Street Journal)

Why Italy’s referendum carries risks for the entire EU. After shock results in Britain and America, attention is turning to Italy’s constitutional referendum, where Renzi has said he will resign if he loses the vote. Many fear that the prevailing anti-establishment mood will defeat the government. (Global Risk Insights)

President François Hollande of France won’t seek re-election. Battered by months of dismal approval ratings and a stubbornly high unemployment rate, President François Hollande of France announced Thursday night that he would not compete in next year’s election. The unprecedented decision opened up and energized France’s presidential race even as it added further turmoil to the country’s unsettled politics. It also injected new uncertainty into the political dynamic of Europe as far-right and populist forces are gaining strength across the Continent, as well as in the United States. (NY Times)

OPEC confounds skeptics, agrees to first oil cuts in eight years. OPEC confounded its doubters and sent crude oil prices soaring by agreeing to its first production cuts in eight years. The deal, designed to drain record global oil inventories, overcame disagreements between the group’s three largest producers—Saudi Arabia, Iran and Iraq—and ended a flirtation with free markets that started in 2014. It was also broader than many had expected, extending beyond OPEC. Most strikingly, Russia agreed to unprecedented cuts to its own output. (Bloomberg)

Egypt: Tariffs for 364 commodities to increase. Egyptian President Abdel Fattah al-Sisi has issued a presidential decree amending some of the customs tariffs previously in force. Under the new decree, which was issued yesterday and published in the Official Gazette today, the tariffs on 364 commodities have been increased by up to 60%. The list of goods includes consumer goods that are described as "provocative" or "unnecessary," like plantains, pineapples, apricots, chewing gum and cocoa powder that contains sugar. (Egypt Independent)

Brazil Senate boss Calheiros indicted for embezzlement. Brazil's Supreme Court indicted the president of the Senate, Renan Calheiros, on Thursday for embezzlement, a ruling that is expected to fan growing tensions between the judiciary and Congress over corruption cases. Renan, a key ally for President Michel Temer's drive to restore fiscal discipline and pull Brazil from recession, faces 11 investigations for corruption, eight of them for what prosecutors describe as kickbacks in a massive graft scandal centered on state-run oil company Petróleo Brasileiro S.A., known as Petrobras. (Reuters)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations