Una nota más sobre la próxima defunción del petrodólar (y van...). Esta vez de Zero Hedge. La versión con todos los gráficos está disponible en: http://www.zerohedge.com/news/2015-08-22/why-it-really-all-comes-down-death-petrodollar
Título: Why It
Really All Comes Down To The Death Of The Petrodollar
Texto: Last week,
in the global currency war’s latest escalation, Kazakhstan instituted a free
float for the tenge. The currency immediately plunged by some 25%.
The rationale
behind the move was clear enough. The plunge in crude prices along with the
relative weakness of the Russian ruble had severely strained Kazakhstan, which
is central Asia’s largest crude exporter. As a quick look at a chart of the
tenge’s effective exchange rate makes clear, the pressure had been mounting for
quite a while and when China devalued the yuan earlier this month, the outlook
for trade competitiveness worsened.
What might not be
as clear (on the surface anyway) is how recent events in developing economy FX
markets following the devaluation of the yuan stem from a seismic shift we
began discussing late last year - namely, the death of the petrodollar system
which has served to underwrite decades of dollar dominance and was, until
recently, a fixture of the post-war global economic order.
In short, the
world seems to have underestimated how structurally important collapsing crude
prices are to global finance. For years, producers funnelled their dollar
proceeds into USD assets providing a perpetual source of liquidity, boosting
the financial strength of the reserve currency, leading to even higher asset
prices and even more USD-denominated purchases, and so forth, in a virtuous
(especially if one held US-denominated assets and printed US currency) loop.
That all came to an abrupt, if quiet end last year when a confluence of
economic (e.g. shale production) and geopolitical (e.g. squeeze the Russians)
factors led the Saudis to, as we put it, Plaxico'd themselves and the US.
The ensuing
plunge in crude meant that suddenly, the flow of petrodollars was set to dry up
and FX reserves across commodity producing countries were poised to come under
increased pressure. For the first time in decades, exported petrodollar capital
turned negative.
That set the
stage for a prolonged downturn in emerging market currencies, and as worries
about China’s economy - the engine of global growth and trade - grew, so did
the pressure.
Thus when Beijing
moved to devalue the yuan, it drove a stake through the heart of the EM world
by simultaneously
(i) validating
concerns about weak Chinese growth, thus guaranteeing further pressure on
commodities,
(ii)
delivering a staggering blow to the export competitiveness of multiple emerging
economies,
(iii)
depressing demand from the mainland by making imports more expensive.
Thanks to the
conditions that resulted from the death of the petrodollar (e.g. falling FX
reserves and growing fiscal headwinds), the world’s emerging markets were in no
position to defend themselves against the fallout from the yuan devaluation.
Complicating matters is a looming Fed hike. Included below is a look at flows
into (or, more appropriately, "out of") EM bonds. As Barclays notes,
the $2.5 billion outflow in the week to August 21 is the highest level since
February of last year.
We are, to put it
mildly, entering a not-so-brave new world and the shift was catalyzed by the
dying petrodollar. Kazakhstan’s move to float the tenge is but the beginning
and indeed Kazakh Prime Minister Karim Massimov told Bloomberg on Saturday that
the world has entered "a new era" and that soon, any and all petro
currency dollar pegs are set to fall like dominoes. Here’s more:
Currency pegs in
crude-producing nations are set to topple as the world enters a “new era” of
low oil prices, according to the prime minister of Kazakhstan, which rattled
markets this week with a surprise decision to abandon control of its exchange
rate.
" At the end
of the day, most of the oil-producing countries will go into the free floating
regime,” including Saudi Arabia and the United Arab Emirates, Karim Massimov
said in an interview on Saturday in the capital, Astana. "I do not think
that for the next three to five, maybe seven years, the price for commodities
will come back to the level that it used to be at in 2014."
Central Asia’s
biggest energy producer cut its currency loose on Thursday, triggering a 22
percent slide in the tenge to a record low versus the dollar. The move followed
China’s shock devaluation of the yuan the week before, which drove down oil
prices on concern global growth will stutter and nudged nations with managed
exchange rates toward competitive devaluations of their own.
More than $3.3
trillion has been erased from the value of global equities after China’s
decision spurred a wave of selling across emerging markets. Brent crude touched
a six year-low of $45.07 per barrel on Friday, while the Dow Jones Industrial
Average entered a correction.
“After I watched
what is happening on the financial market and stock market in the U.S. on
Friday night, I thought that we did it at the right time,” Massimov, 50, said
in his office in the government’s headquarters. The decision avoided “big
speculation and pressure this weekend in Kazakhstan,” he said.
The central bank
spent $28 billion this and last year to support the tenge, including $10
billion in 2015, Kazakh President Nursultan Nazarbayev said this week. After
its slump on Thursday, the currency rallied 7.4 percent to close at 234.99
against the dollar a day later. The country’s dollar bonds due July 2025
climbed after the announcement, lowering the yield nine basis points to 5.74
percent in the last two days of the week.
Before the
currency shift, Kazakhstan was at a competitive disadvantage to Russia, its
neighbor and top trading partner along with China. The tenge had fallen by only
7.6 percent against he dollar in the 12 months up to Aug. 20, compared with a
46 percent depreciation for the ruble, while crude had plummeted 55 percent in
the period.
We discussed this
in great detail on Friday (with quite a bit of color on the fiscal impact for
Saudi Arabia) and we've included a chart from Deutsche Bank which should have
some explanatory and predictive value below, but the big picture takeaway is
that the world is now beginning to feel the impact of the petrodollar's quiet
demise, and because this is only the beginning, we've included below the entire
text of the petrodollar's obituary which we penned last November .
* * *
How The
Petrodollar Quietly Died And Nobody Noticed
Two years ago, in
hushed tones at first, then ever louder, the financial world began discussing
that which shall never be discussed in polite company - the end of the system
that according to many has framed and facilitated the US Dollar's reserve
currency status: the Petrodollar, or the world in which oil export countries
would recycle the dollars they received in exchange for their oil exports, by
purchasing more USD-denominated assets, boosting the financial strength of the
reserve currency, leading to even higher asset prices and even more
USD-denominated purchases, and so forth, in a virtuous (especially if one held
US-denominated assets and printed US currency) loop.
The main thrust
for this shift away from the USD, if primarily in the non-mainstream media, was
that with Russia and China, as well as the rest of the BRIC nations,
increasingly seeking to distance themselves from the US-led, "developed
world" status quo spearheaded by the IMF, global trade would increasingly
take place through bilateral arrangements which bypass the (Petro)dollar
entirely. And sure enough, this has certainly been taking place, as first
Russia and China, together with Iran, and ever more developing nations, have
transacted among each other, bypassing the USD entirely, instead engaging in
bilateral trade arrangements, leading to, among other thing, such discussions
as, in today's FT, why China's Renminbi offshore market has gone from nothing
to billions in a short space of time.
And yet, few
would have believed that the Petrodollar did indeed quietly die, although
ironically, without much input from either Russia or China, and paradoxically,
mostly as a result of the actions of none other than the Fed itself, with its
strong dollar policy, and to a lesser extent Saudi Arabia too, which by
glutting the world with crude, first intended to crush Putin, and subsequently,
to take out the US crude cost-curve, may have Plaxico'ed both itself, and its
closest Petrodollar trading partner, the US of A.
As Reuters
reports, for the first time in almost two decades, energy-exporting countries
are set to pull their "petrodollars" out of world markets this year,
citing a study by BNP Paribas (more details below). Basically, the Petrodollar,
long serving as the US leverage to encourage and facilitate USD recycling, and
a steady reinvestment in US-denominated assets by the Oil exporting nations,
and thus a means to steadily increase the nominal price of all USD-priced assets,
just drove itself into irrelevance.
A consequence of
this year's dramatic drop in oil prices, the shift is likely to cause global
market liquidity to fall, the study showed.
This decline
follows years of windfalls for oil exporters such as Russia, Angola, Saudi
Arabia and Nigeria. Much of that money found its way into financial markets,
helping to boost asset prices and keep the cost of borrowing down, through
so-called petrodollar recycling.
But no more:
"this year the oil producers will effectively import capital amounting to
$7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion
in 2012, according to the following graphic based on BNP Paribas
calculations."
In short, the
Petrodollar may not have died per se, at least not yet since the USD is still
holding on to the reserve currency title if only for just a little longer, but
it has managed to price itself into irrelevance, which from a USD-recycling
standpoint, is essentially the same thing.
According to BNP,
Petrodollar recycling peaked at $511 billion in 2006, or just about the time
crude prices were preparing to go to $200, per Goldman Sachs. It is also the
time when capital markets hit all time highs, only without the artificial
crutches of every single central bank propping up the S&P ponzi house of
cards on a daily basis. What happened after is known to all...
"At its
peak, about $500 billion a year was being recycled back into financial markets.
This will be the first year in a long time that energy exporters will be
sucking capital out," said David Spegel, global head of emerging market
sovereign and corporate Research at BNP.
Spegel
acknowledged that the net withdrawal was small. But he added: "What is
interesting is they are draining rather than providing capital that is moving
global liquidity. If oil prices fall further in coming years, energy producers
will need more capital even if just to repay bonds."
In other words,
oil exporters are now pulling liquidity out of financial markets rather than
putting money in. That could result in higher borrowing costs for governments,
companies, and ultimately, consumers as money becomes scarcer.
Which is hardly
great news: because in a world in which central banks are actively soaking up
high-quality collateral, at a pace that is unprecedented in history, and led to
the world's allegedly most liquid bond market to suffer a 10-sigma move on
October 15, the last thing the market needs is even less liquidity, and even
sharper moves on ever less volume, until finally the next big sell order
crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to
shut down indefinitely until further notice.
So what happens
next, now that the primary USD-recycling mechanism of the past 2 decades is no
longer applicable? Well, nothing good.
Here are the
highlights of David Spegel's note Energy price shock scenarios: Impact on EM
ratings, funding gaps, debt, inflation and fiscal risks.
Whatever the
reason, whether a function of supply, demand or political risks, oil prices
plummeted in Q3 2014 and remain volatile. Theories related to the price plunge
vary widely: some argue it is an additional means for Western allies in the
Middle East to punish Russia. Others state it is the result of a price war between
Opec and new shale oil producers. In the end, it may just reflect the
traditional inverted relationship between the international value of the dollar
and the price of hard-currency-based commodities (Figure 6). In any event, the
impact of the energy price drop will be wide-ranging (if sustained) and will
have implications for debt service costs, inflation, fiscal accounts and GDP
growth.
Have you noticed
a reduction of financial markets liquidity?
Outside from the
domestic economic impact within EMs due to the downward oil price shock, we
believe that the implications for financial market liquidity via the reduced
recycling of petrodollars should not be underestimated. Because energy
exporters do not fully invest their export receipts and effectively ‘save’ a
considerable portion of their income, these surplus funds find their way back
into bank deposits (fuelling the loan market) as well as into financial markets
and other assets. This capital has helped fund debt among importers, helping to
boost overall growth as well as other financial markets liquidity conditions.
Last year,
capital flows from energy exporting countries (see list in Figure 12) amounted
to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio
capital and USD177bn in the form of direct equity investment and USD527bn of
other capital over half of which we estimate made its way into bank deposits
(ie and therefore mostly into loan markets).
The recycling of
petro-dollars has benefited financial markets liquidity conditions. However,
this year, we expect that incremental liquidity typically provided by such
recycled flows will be markedly reduced, estimating that direct and other
capital outflows from energy exporters will have declined by USD253bn YoY. Of
course, these economies also receive inward capital, so on a net basis, the
additional capital provided externally is much lower. This year, we expect that
net capital flows will be negative for EM, representing the first net inflow of
capital (USD8bn) for the first time in eighteen years. This compares with
USD60bn last year, which itself was down from USD248bn in 2012. At its peak,
recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen
since 2006 not only reflect the changed
global environment, but also the propensity of underlying exporters to
begin investing the money domestically rather than save. The implications for
financial markets liquidity - not to mention related downward pressure on US
Treasury yields – is negative.
* * *
Even scarcer
liquidity in US Capital markets aside, this is how BNP sees the inflation and
growth for energy exporters:
Household
consumption benefits: While we recognise that the relationship is not entirely
linear, we use inflation basket weights for ‘transportation’ and ‘household
& utilities’ (shown in the ‘Economic components’ section of Figure 27) as a
means to address the differing demand elasticities prevalent across countries.
These act as our proxy for consumption the consumption basket in order to
determine the economic benefit that would result as lower energy prices improve
household disposable income. This is weighted by the level of domestic
consumption relative to the economy, which we also show in the ‘Economic
components’ section of Figure 27.
Reduced
industrial production costs: Outside the energy industry, manufacturers will
benefit from falling operating costs. Agriculture will not benefit as much and
services will benefit even less.
Trade gains and
losses: Lost trade as a result of lower demand from oil-producing trade
partners will impact both growth and the current account balance. On the other
hand, better consumption from many energy-importing trade partners will provide
some offset. The percentage of each country’s exports to energy producing
partners represents relative to its total exports is used to determine
potential lost growth and CAR due to lower demand from trade partners.
Domestic FX moves
are beyond the scope of our analysis. These will be tied to the level of
openness of the economy and the impact of changed demand conditions among trade
partners as well as dollar effects. Neither do we address non-oil related
political risks (eg sanctions) or any fiscal or monetary policy responses to
oil shocks.
GDP growth
The least
impacted oil producing country, from a GDP perspective, is Brazil followed by
Mexico, Argentina, Tunisia and Trinidad & Tobago. The impact on fiscal
accounts also appears lower for these than most other EMs.
Remarkably, the
impact of lower oil for Russia’s economic growth is not as severe as might be
expected. Sustained oil at USD80/bbl would see growth slow by 1.8pp to 0.6%.
This compares with the worst hit economies of Angola (where growth is nearly
8pp lower at -2%), Iraq (GDP slows to -1.6% from 4.5% growth), Kazakhstan and
Azerbaijan (growth falls to -0.9% from 5.8%).
For a drop to USD
80/bbl, it can be seen (in Figure 27) that, in some cases, such as the UAE,
Qatar and Kuwait, the negative impact on GDP can be comfortably offset by
fiscal stimulus. These economies will probably benefit from such a policy in
which case our ‘model-based’ GDP growth estimate would represent the low end of
the likely outcome (unless a fiscal policy response is not forthcoming).
Global growth in
2015? More like how great will the hit to GDP be if oil prices don't rebound
immediately?
On the whole, we
can say that the fall in oil prices will prove negative, shaving 0.4pp from
2015 EM GDP growth. The collective current account balance will fall 0.58pp to
0.6% of GDP, while the budget deficit will deteriorate by 0.61pp to -2.9%. This
probably has the worst implications for EM as an asset class in the credit
world.
Energy exporters
will fare worst, with growth falling by 1.9pp and their current account
balances suffering negative pressure to the tune of 2.69pp of GDP. Budget
balances will suffer a 1.67pp of GDP fall, despite benefits from lower subsidy
costs. The impact of oil falling USD 25/bbl will be likely to put push the
current account balance into deficit, with our analysis indicating a 0.3% of
GDP deficit from a 2.4% surplus before. Fortunately, the benefit to inflation
will be the best in EM and could help offset some of the political risks from
reduced growth.
As might be
expected, energy importers will benefit by 0.4pp better growth in this
scenario. Their collective current account will improve by 0.6pp to 1.1% of
GDP.
The regions worst
hit are the Middle East, with GDP growth slowing to 0.3%, which is 3.8pp lower
than when oil was averaging USD105/bbl. The regions’ fiscal accounts will also
suffer most in EM, moving from a 1.7% of GDP surplus to a 1.8% deficit.
Meanwhile, the CAB will drop 5.3pp, although remain in surplus at 3.9%. The CIS
is the next-worst hit, from a GDP perspective, with regional growth flat-lined
versus 1.91% previously. The region’s fiscal deficit will worsen from 0.7% of
GDP to -1.8% and CAB shrink to 0.7% from 3% of GDP. Africa’s growth will come
in 1.4pp slower at 2.8% while Latam growth will be 0.4pp slower at 2.2%. For
Africa, the CAB/GDP ratio will fall by 2.4pp pushing it deep into deficit
(-2.9% of GDP).
Some regions
benefit, however, with Asia ex-China growing 0.45bpp faster at 5.5% and EM
Europe (ex-CIS) growing 0.55pp faster at 3.9%, with the region’s CAB/GDP
improving 0.69pp, although remain in deficit to the tune of -2.4% of GDP.
And so on, but to
summarize, here are the key points once more:
- The stronger US
dollar is having an inverse impact on dollar-denominated commodity prices,
including oil. This will affect emerging market (EM) credit quality in various
ways.
- The
implications of reduced recycled petrodollars has significant ramifications for
financial markets, loan markets and Treasury yields. In fact, EM energy
exporters will post their first net drain on global capital (USD8bn) in
eighteen years.
- Oil and gas
exporting EMs account for 26% of total EM GDP and 21% of external bonds. For
these economies, the impact will be on lost fiscal revenue, lost GDP growth and
the contribution to reserves of oil and gas-related export receipts. Together,
these will have a significant effect on sustainability and liquidity ratios and
as a consequence are negative for dollar debt-servicing risks and credit
ratings.
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