Update on the GlobalEconomy

For the ICTF’s Global Credit Professionals Symposium

Chicago, 2014

Hans P. BelcsakPresident

Rundt’s Intelligence

Hot Spots 1 – Russia

• Who is Vladimir Putin?• What does he want?• The greatest geo-political disaster of the

21st century• Russia was terribly mistreated by the

West• Crimea – and he is not finished• Moldova – Transnistria• The critical Baltics

Ill-Prepared West

• Since 2008 big countries cut defense spdg. 10%-15%• United Kingdom

– Royal Air Force with ¼ of aircraft vs. 1970s,Royal Navy 19 destroyers and frigates vs. 69, British army smallest since Napoleonic wars

• France– Six submarines vs. 17, problems in Mali, CAR

• These are the only two countries still taking defense seriously

• 75% of Belgium’s spending for personnel (pensions, salaries, not equipment)

• Might not matter much if US were still prepared to step in, but…

US Weakness• Drastic cuts in defense spending• Sequester and then some• Three carriers• Army smallest since before WWII• Drones cannot win wars• “Two-war principle” abandoned• Red lines that turned green• Lack of doctrine (from Libya to Egypt,

Palestine, Iran and Syria)

Russia• Sanction effects could be significant• 4 years $325 bio inflow into stocks and bonds

(yield-hungry)

• $70-bio outflow first quarter (against $63 billion all of 2013)

• Weak economy (GDP gain 1.3% in 2013; 0% in 2014?)

• Manufacturing just 15% OF GDP• Budget needs oil at $110 a barrel• Crimean economy is a mess and burden• The cost of appeasement – China, Iran, North

Korea

Ukraine

• History, “little Russia,” “not a real country• The 1994 Budapest Memorandum on Security

Assurances• 23 years of mismanagement (since independence)

• On the verge of bankruptcy – hiked Russian oil & gas prices, $2 bio debt to Gazprom, $3 billion to Kremlin

• Nearly open access to EU market• 20% dive of hryvnia increased debt burden• FX reserves down to $15.5 billion• Needs $20-25 billion for cacc BoP deficit plus debt

coming due• IMF-EU-US aid package $15 bio

Hot Spots 2 – Iran• The P5+1 “deal” was a big mistake (UK, US,

France, Russia, China & Germany)

• Rouhani is no moderate (besides, Khamenei runs the shop)

• Sanctions were biting• Inflation 32% (really 50%-60%)• Unemployment 28% for youngsters (really

higher)• Economy contracting• Dollar to 24,500 rials from 12,260• Now companies falling over one another• Nuclear program not even slowed down

What If Iran Gets the Bomb??

• Critical is “breakout point”• Existential threat for Israel• The Shia crescent• Struggle for regional superiority between

Iran and Saudi Arabia• Arms race in the Middle East

An Existential Issue For Israel

• Farce of Palestinian centrality

• No chance for negotiations

• PA head Mahmoud Abbas found way to reject proposal before they were even made.

Hot Spots 3 – Syria

Hot Spots 4 – China

• Extended air control space• Hefty investment in the military• First aircraft carrier• Hong Kong• Taiwan• Sekoku Islands and the Malacca Straits

China’s Economy– $3.8 trillion in reserves– Making the yuan more volatile (no one-way bet)– GDP 2013 +7.7%, 7.5% goal for 2014 (grain of salt)

– Weak first-quarter results– Modest official stimulus (urban infrastructure)– First significant default (Shanghai Chaori Solar Energy

Science and Technology Co. on 5-year bonds)– Pushing foreign aid (mainly Africa and LA, less Asia)

• To gain resources as well as markets• 3% interest. 15years’ repayment, 5 years’ grace• Resources, rights, Chinese materials and labor

– Shadow banking & tightened information restrictions (Including access to corporate records)

Hot Spots 5 – Al Qaeda

• The Terror War Has Spread• Metastasized• Unchanged Goals

–Drive Infidels out of the Middle East–Defeat them globally–Establish Caliphate run under Shariah

law• From Boko Haram to Al-Shabaab and AQAP• Home-grown cells

Al-Qaeda In Ascendance

United States• Will continue to bump along low range• 4th Quarter 2.4% typical• Fiscal policy more or less neutral• No risk of abrupt end to QE-3• No marked rise in Fed Funds till 2015• Inflation for 2013 = 1.3% (??)• Real disposable income +0.7% in 2013• Labor participation 63%• CFO’s, CEO’s battle-scarred• Public-policy uncertainty (especially SMEs, ever-

changing rules, complex laws, 1,000 pages Dodd-Franc five agencies, Affordable Care Act)

Venezuela• Back to four exchange rates

– Official = 6.3– Sicad 1 = 11.8– Sicad 2 = 51.86 = 87.8% devaluation from 6.3, or 79.17 from 11.8– Black = 80-90

• Uncertain amounts, presumably still shortage• 57.3% inflation, will go up• Importers estimated owing $14 billion• Airlines have $3.3 billion frozen• Revealing math: 300,000 to pay China, 400,000 sold at subsidized

prices, 600,000 subsidized local, leaves 1.7 million bpd for regular exports, yields $58 billion, but imports totaled $77 billion in 2012

• Reserves = about $20 billion, but debt principal $4.5 billion this year, interest $13 b.

• Issuing bonds becoming difficult• Unrest, Cuban intelligence

Argentina

• Problems with inflation reporting– Past seven years wages = 24% p.a., inflation 9.4%

• New index: 3.7% for January• Money printing to fund ever-expanding

government programs• Peso 20% below start of year• Dwindling reserves – now $27 billion• US court ruling still threatening new default• Will reduce gas & water subsidies 20%

Brazil

– Slow economy– Extended payment terms; consumers tapped out?– Barely missed slipping into recession 4Q 2013 (+0.7%)– Inflation up to 5.91% in 2013 (above CB target), interest

rates up, real down, Selic to 10.5%– Contradictory policies:

– Expanding fiscal spending while raising interest rates– Continued lagging growth

– 1.67% this year, official prediction– Presidential elections in October– Angry about credit downgrade (S&P’s)– This is government risk, not country risk

Greece• Deal with troika, $8.3 b payment• Difficult conditions (e.g., milk)• Primary surplus 2013 = 1.1% of GDP• Funds for social purposes• Piraeus Bank EUR 500 m borrowing a first,

EUR 3 billion in bids• Sovereign issue before May• Confident no need for another bailout• Does not mean troubles are over

– 27.5% unemployment, strikes– All in all, outlook is brightening

Turkey• Financial markets welcomed municipal election

results• Erdogan will focus on “enemies,” not reforms• Fetullah Gulen• Twitter and Facebook, news media• Surging foreign debt – corporate & consumer +67%

last year• Nearly 90% of corporate debt by closely held co’s

without public disclosure of balance sheets, other basic info

• Almost half of corporate debt in FX• Turkey needs inflows of capital, cannot afford to

frighten investors

Egypt

• Political situation still unsettled• Al-Sisi will run for presidency, face host of

difficulties and respond with force• Sinai-based rebels• Effect on tourism• Government can borrow, banks are liquid• $12 billion in aid from Gulf states• Two stimulus packages ($4.3 billion each)• Current fiscal policies are not sustainable

Nigeria

• Presidential & parliamentary elections February 14, 2015

• Goodluck Jonathan not politically correct• Endemic corruption• Delta situation better, but• Security problems not resolved• Oil revenues disappearing (Excess

Crude Account, Reserves)

South Africa• Elections May 7• ANC troubled (still 60%, it and Zuma

continue in office)• Sluggish since 2008• GDP +2.7, unemployment 24.1%• Labor unrest (the mines, especially)• Current-account deficit 6.5% of GDP• Dependence on short-term inflows• Effects of “tapering” by the Fed

India

• Rupee rescue (nadir August 28, then rate hikes)

• Still vulnerable (foreigners own 22% of $ 1-trillion stock market, nearly half of all shares traded freely)

• Fundamental reforms needed, but unlikely• May 2014 elections (neither Congress nor BJP will gain

outright majority, coalition needed)

• Inflation (2013 wholesale 6.16%, consumer 9.87%

• Current-account BoP Deficit remains troubling

• But reserves $ 260 billion

Open Discussion

Sub-Saharan Africa

• The Colonial curse• Difficult to do business• Oil

• Old• Angola, Nigeria,

Congo Brazzaville• New

• Ghana, Uganda, South Sudan

• Mining• Mozambique, DR of the

Congo, Tanzania, Zambia

• Agriculture• Ethiopia, Kenya,

Malawi,