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Breathing Room for Emerging Markets Watching Money Flee

September 18, 2013 by

JAKARTA, Indonesia — When the Asian financial crisis hit in 1997, sales plummeted 95 percent and stayed down for six months at the IGP Group, Indonesia’s dominant manufacturer of car and truck axles. Four-fifths of the company’s workers lost their jobs.

When the global financial crisis began in 2008, IGP’s sales briefly dropped nearly one-third, and a quarter of the employees were put out of work.

The latest downturn, which began in early August, has been much more modest. IGP’s axle shipments are down 10 percent in the last month from a year ago. The company’s work force has barely shrunk, to 2,000 from 2,077 at the end of July, though IGP plans to reach 1,900 by the end of this year.

“These are challenging times, but I don’t think they will be the same as in 2008 or 1998,” Kusharijono, IGP’s operations director, who uses only one name, yelled over a clanking, cream-colored assembly line here for minivan rear axles.

From Indonesia and India to Turkey and Brazil, capital flight from developing economies to the United States is already causing hardship for millions of businesses and workers. More was expected if the Federal Reserve decided to retreat from its economic stimulus campaign of buying billions of dollars in bonds each month.

That it decided on Wednesday not to stop may relieve some companies, government leaders and economists who worried that rising interest rates in the United States would draw tens of billions of dollars out of emerging markets and cause local currencies to fall further against the dollar.

Investors have been moving money into dollar-based investments that offer higher yields.

But the Fed’s announcement Wednesday afternoon took currency traders by surprise, and the dollar plunged against major currencies. The dollar fell a little more than 1 percent against the euro and the yen after the announcement, giving companies in the developing economies a little more breathing room. On Thursday, currencies in Thailand, Indonesia, the Philippines and Malaysia, which have fallen sharply in recent months, headed higher, with the Indonesian rupiah gaining about 1.5 percent against the dollar by late morning in Asia.

The economic slowdowns in the developing economies seem less severe so far than in other recent downturns. While previous exoduses by investors from volatile emerging markets have caused waves of bank failures, corporate bankruptcies and mass layoffs, the latest retrenchment has been much milder so far. That partly reflects the belief that when the Fed does move, it will scale back its bond purchases very gradually, business leaders and economists around the world said in interviews this week. The effects have also been limited partly because banks, companies and their regulators in many emerging markets have become much more careful about borrowing in dollars over the last two decades, except when they expect dollar revenue with which to repay these debts.

In 1997 and 1998, “the whole problem began with the banking sector. Now I think the banking sector is much better,” said Sofjan Wanandi, a tycoon who is the chairman of the Indonesian Employers’ Association and part owner of IGP.

Trading in currency and stock markets seems to suggest that some of the worst fears over the summer are starting to recede. The Brazilian real has recovered about 8 percent of its value against the dollar since Aug. 21 and a little over a third of its losses since the start of May, when worries began to spread about the vulnerability of emerging markets to a tightening of monetary policy. Stock markets from India to South Africa have rallied from lows in late August, with Johannesburg’s market up 14.7 percent since late June after a swoon earlier than most emerging markets.

“While the Fed hasn’t started the tapering process as yet, there has been a considerable withdrawal of money in the emerging markets and especially in India since May. In my opinion, the major effect has already taken place,” said Sujan Hajra, the chief economist at AnandRathi, an investment bank based in Mumbai.

One lingering question is how much inflation will accelerate in emerging markets. Many of their industries depend heavily on commodities like oil that are priced in dollars.

Keith Bradsher reported from Jakarta, Simon Romero from Rio de Janeiro and Ceylan Yeginsu from Istanbul. Neha Thirani Bagri contributed reporting from Mumbai.

Article source: http://www.nytimes.com/2013/09/19/business/global/emerging-markets-bracing-as-fed-meets.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Italy’s Borrowing Costs Rise Amid Uncertainty About Rescue

October 28, 2011 by Leave a Comment

European Union and International Monetary Fund officials hoped that the deal announced early Thursday would soothe market anxiety by easing the terms of Greece’s debt repayments enough to avoid default, as well as by building a war chest for safeguarding the larger Italian and Spanish economies against possible contagion.

Italy was supposed to help its own case this week by producing concrete evidence that it was streamlining its economy and cutting public debt. But Prime Minister Silvio Berlusconi’s government, weakened by internal strife, delivered only promises, handing officials in Brussels a “letter of intent” describing hoped-for measures.

While Italy has a relatively low fiscal deficit, its debt is equivalent to 120 percent of its gross domestic product, second-highest in the euro zone after that of Greece.

The market’s skepticism showed in the auction results Friday, when the Italian Treasury sold €7.9 billion, or $11.2 billion, of debt of varying maturities. It paid an average yield of 4.93 percent to sell bonds maturing in 2014, the highest since November 2000 and up from 4.68 percent on Sept. 29, according to Bloomberg News.

It had to pay 6.06 percent to sell 10-year bonds,  the highest yield it has paid at auction in the euro era.

Stocks on the Milan bourse fell 1.8 percent and the yield on the Italian 10-year bond rose 5 basis points to 5.91 percent, having reached as high as 5.97 percent, just under the 6 percent level that has signaled danger for other embattled euro-zone countries, including Ireland and Portugal.

Major european stock indexes were slightly lower at midday after rising in early trade.

Fears of contagion to Italy and Spain led the European Central Bank to begin buying the two countries debt on the secondary market in early August, after their 10-year bonds ticked over the 6 percent mark.

The spread, or gap, between the Italian security and the German 10-year bond, a gauge of market confidence, rose by 4 basis points to 3.7 percentage points, suggesting investors were more nervous about holding the Italian debt.

Article source: http://feeds.nytimes.com/click.phdo?i=41cccecd12375a00a5a87dd10a15f7d1

Filed Under: Business News Tagged With: , ,

Dow Nears Positive Territory for Year

October 12, 2011 by Leave a Comment

Some traders say that the market is gaining momentum from its recent gains, and have begun pointing to signs that the market’s extreme volatility may be giving way to a calmer period. But with all eyes on Europe, even optimists acknowledge the fragility of the recent confidence.

The Dow Jones industrial average closed up 102.55 points, or 0.9 percent, to 11,518.85. It spent much of the day in positive territory for the year, before giving up some of its gains in the last hour of trading.

The index had been positive for most of the year before plunging in early August. Since then, stock prices have experienced a series of wrenching ups and downs, closing in positive territory for the year only once.

The index closed 0.5 percent below its level at the beginning of 2011.

The Standard and Poor’s 500-stock index, seen as a more complete barometer of the overall market, was up 11.71 points, or 1 percent, to 1,207.25. It remains down more than 3 percent for the year. The technology-heavy Nasdaq composite index rose 0.8 percent.

Banks continued to make particularly strong gains. Citigroup gained 4.96 percent, while Wells Fargo’s shares were up 3.45 percent.

The European Commission president, José Manuel Barroso, proposed that the Europe’s biggest banks be required to temporarily bolster their protection against losses, as part of a broader plan to restore confidence in the European financial system. He also called on the 17 countries that use the euro to maximize the capacity of their bailout fund, a clear hint that he favors leveraging the fund to increase its power.

Slovakia is expected to approve changes to the rescue fund, known as the European Financial Stability Facility, on Thursday or Friday.

Lawmakers there had initially rejected the bill shortly after United States markets closed on Tuesday. The vote led to the collapse of the country’s coalition government, but the parties in the outgoing government reached an accord with the main opposition party to allow the bill to pass in exchange for early elections.

The other 16 European Union countries that use the euro have already approved the measure, which requires unanimous support.

Analysts said that recent turmoil in the markets had effectively forced European leaders to show real progress in confronting problems related to sovereign debt.

“The market has screamed loud enough to make the European authorities stand up and listen,” said Andrew Wilkinson, chief economic strategist for Miller Tabak Company.

Some traders also pointed to the falling level of the VIX index which measures volatility, as a sign that markets could be stabilizing. The VIX, popularly known as the fear index, was at 31.26, its lowest level since mid-September. In addition to positive signs in Europe, the markets are adjusting to a slightly brighter picture of the domestic economy, said Michael Church, president of Addison Capital. A recent spate of economic data has eased fears among economists that a recession was imminent.

“At some point you had to question that thesis, especially when it had become exceptionally popular,” said Mr. Church.

The minutes from the most recent Federal Open Committee Meeting were also released Wednesday. It showed that several members were in favor of taking more aggressive action to ease the monetary system, essentially putting fears of a further economic slowdown ahead of concern about inflation.

European markets closed higher Wednesday. The benchmark Euro Stoxx 50 index was up 2.43 percent, while the FTSE 100 in London rose 0.85 percent. In Frankfurt, the DAX gained 2.21 percent.

The euro, which has been gaining against the dollar for over a week, rose 1.08 percent to $1.3787.

Yields on United States Treasuries also continue to rise. The yield on a 30-year note was 2.213 percent, up 2.89 percent.

Article source: http://www.nytimes.com/2011/10/13/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Consumers in Many Areas Spent More, Fed Reports

September 8, 2011 by Leave a Comment

The Fed said five of its regions, Dallas, Kansas City, Minneapolis, San Francisco and St. Louis. reported modest or slight growth in late July and August. The seven other regions described growth as subdued, slow or sluggish.

The survey, known as the beige book, offers mostly anecdotal information on economic conditions. Its findings were a slight improvement from the previous survey, which said growth slowed in eight of the 12 regions in June and early July.

Consumer spending increased in most regions from the previous survey. But the gains were mostly a result of stronger auto sales. Demand for other products was flat or fell in several regions during late July and August.

The report offered little guidance about future hiring. It noted that several districts had said the volatile stock market and economic uncertainty had led many businesses to lower expectations for the near future. The Dow Jones industrial average lost 1,962 points, or roughly 15 percent, from July 22 through Aug. 10.

Although far from upbeat, the overall tone from the anecdotal evidence “wasn’t all doom and gloom,” said Jennifer Lee, senior economist at BMO Capital Markets.

The regional outlook will help shape the discussion at the central bank’s next meeting on Sept. 20-21.

The economy barely grew in the first half of the year, and the government said last week that employers stopped adding jobs in August.

Consumers and businesses are feeling less confident after a turbulent summer. Lawmakers fought over raising the federal borrowing limit, Standard Poor’s downgraded long-term United States debt, and stocks have fluctuated wildly after plunging in late-July and early August.

Manufacturing slowed in many parts of the country, including New York, Philadelphia and Richmond, the survey noted. Textile makers in Richmond said that their markets had grown weaker because of declines in consumer confidence.

Home sales slowed in many districts, although Atlanta, Boston, Dallas and Minneapolis said sales had improved slightly compared to last summer’s weak levels.

Some economists say the Fed must act to help the economy avoid another recession.

On Aug. 9, the Federal Reserve said it planned to keep interest rates very low until at least mid-2013, assuming the economy remained weak. Minutes from that meeting showed some Fed officials had pushed for more aggressive steps.

One possibility is the Fed could increase the percentage of long-term Treasury securities it keeps in its mix of holdings. That approach would have the advantage of exerting downward pressure on long-term interest rates without adding to the Fed’s already record-level of securities.

Still, three regional bank presidents dissented from the Aug. 9 decision. They expressed concerns that the Fed’s policies were contributing to higher inflation.

The worsening jobs outlook has also put pressure on President Obama. He is expected on Thursday to introduce a $300 billion jobs package before a joint session of Congress. The plan is likely to include extensions of the payroll tax cut and long-term unemployment benefits, tax incentives for businesses that hire and money for public works projects.

The effort faces strong opposition from Republicans in Congress, who say Mr. Obama’s previous stimulus program failed.

Article source: http://feeds.nytimes.com/click.phdo?i=aed94808b721f4c618ea126dbc77fd56

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Boehner Outlines Demands on Debt Limit Fight

May 10, 2011 by Leave a Comment

In his most specific statement to date on what Republicans will demand in the debt ceiling fight, Mr. Boehner told the Economic Club of New York that the level of spending reductions should exceed the amount of the increase in borrowing power.

“Without significant spending cuts and changes to the way we spend the American people’s money, there will be no debt limit increase,” Mr. Boehner told members of New York’s business and finance community. “And cuts should be greater than the accompanying increase in debt authority the president is given.” Mr. Boehner said those cuts should be in the trillions of dollars, not billions. 

In the speech, delivered ahead of a second round of debt limit negotiations with the White House and Senate Democrats on Tuesday, Mr. Boehner did not provide a timeframe for when the spending reductions would have to be imposed.

His address came after a leading Senate Democrat, Senator Charles E. Schumer of New York, accused Mr. Boehner of “playing with fire” by holding the debt limit increase hostage to a push for spending cuts and budget restrictions.

“The idea of refusing to raise the debt ceiling should be taken off the table,” Mr. Schumer said in a conference call with reporters before the speech. Mr. Schumer also said he believed that the debt limit increase should be approved by mid-July to reassure nervous credit markets, though the administration has said it can push the deadline into early August.

In his remarks, the speaker expressed strong resistance to the effort by some Senate Democrats and President Obama for an alternative to enacting specific spending cuts as the price for increasing the debt limit: “triggers” that prompt automatic spending reductions and perhaps tax increases if Congress and the White House do not meet targets for lowering the deficit in coming years. That idea has emerged as providing the potential for compromise over the debt increase.

Mr. Boehner said the reductions should be “actual cuts and program reforms, not broad deficit or debt targets that punt the tough questions to the future. And with the exception of tax hikes — which will destroy jobs — everything is on the table.”

Acknowledging that many in the financial world are uneasy about the prospect that the government might not be able to make good on its financial obligations, Mr. Boehner said it would be more damaging to the nation if Congress granted the administration’s request without taking steps to curb deficit spending and bring down the federal debt.

“It would send a signal to investors and entrepreneurs everywhere that America still is not serious about dealing with our spending addiction,” Mr. Boehner said. “It would erode confidence in our economy and reduce the certainty for small businesses. And frankly I think it would kill even more American jobs.”

The administration has not specified the amount of the increase it is seeking in the $14.3 trillion debt limit, but the previous increase in 2010 was just under $2 trillion, and estimates are that a similar amount would be required to avoid a second politically charged vote on the debt limit before the 2012 elections.

Mr. Boehner also said the debt talks should include “honest conversations” about how to rein in the costs of the Medicare program, and he advocated fundamental changes. Other senior Republicans acknowledged last week that any changes to the health insurance program for older Americans are unlikely to incorporate the party’s proposal to begin providing private insurance subsidies for future retirees.

The speaker managed his party’s negotiations with the White House and Senate Democrats this year over current spending and pushed his demands for cuts to the final hours, when a last-minute deal for about $38 billion in cuts avoided a federal government shutdown shortly before midnight on April 8. Asked by an audience member whether he would entertain a short-term increase in the debt limit if no deal was reached, Mr. Boehner was noncommittal.

Mr. Schumer and Roger C. Altman, an investment banker and former Clinton administration Treasury official, said the consequences for the nation’s economy could be dire if the government defaulted for the first time in its history or if the debt-ceiling talks were pushed to the brink.

“If America were to default, even for 24 hours, that would have an unprecedented and a catastrophic impact on global financial markets and on American markets,” Mr. Altman said.

But Mr. Boehner said the debt limit fight provided a unique opportunity. “I don’t want to allow this moment that we have in our history to pass without real action to solve our long-term economic problems,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=95ab079ecf3247928cb4cd1892604447

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