Medium Grade Economies - Key Indicators

CEIC Gallery/World Trend Database - January 13, 2016 Summary Medium risk economies, countries with "investment" credit rating, but not graded as "high" or "prime", would be among the most affected by the Fed's monetary policy tightening. Over the past few years these countries have benefited from the near-zero interest rates in the Unites States and other developed economies as they have attracted considerable investors' attention due to their high yield on investment with relatively low risk. Now, as Fed's monetary policy tightening has strengthen the US dollar and turned capital flows back to the US financial market, medium risk economies are struggling substantial capital outflow and in most cases sharp currency depreciation. In order to protect their currencies and prevent deeper capital flight, the central banks have no other choice than to raise interest rates, which on the other hand put pressure on economic growth and makes them potential risky places to invest. Due to weak economic growth, uncontrolled currency devaluation and soaring inflation, countries like Kazakhstan, Uruguay and Colombia are threatened to lose their investment ratings and get downgraded to “junk” status. The charts below provide insights for 32 medium risk countries according to their credit rating status, i.e. graded with upper medium and lower medium credit ratings by the top three agencies – Standard & Poors’, Moody’s and Fitch. The following countries are included: Asia: China, Philippines, Malaysia, Thailand, Japan Europe & Central Asia: Ireland, Malta, Czech Republic, Poland, Romania, Slovakia, Slovenia, Spain, Latvia, Bulgaria, Iceland, Lithuania, Italy, Azerbaijan Middle East and Africa: Israel, Bahrain, Botswana, Morocco, Oman, Mauritius North and South America: Panama, Colombia, Peru, Mexico, Chile, Uruguay Economy √ China and Ireland have the highest real GDP growth in Q3 2015, despite China's slowdown in 2015 and deflationary pressure in the Euro Area √ Philippines' economy growth has improved since the beginning of 2015 and unemployment rate dropped to 5.7% in October, which was the lowest in the record √ Panama's economy has increased consistently during the first three quarters of 2015 with average real GDP growth of 5.8%, while the growth for the same period in 2014 was 4.8% Despite the unemployment in the eurozone countries remain extremely high, there have been slight improvement in 2015. Spain's unemployment rate has declined from 23.7% in Dec 2014 to 21.8%, while the rates in Italy, Slovakia and Latvia have decreased to 11.6%, 11.3% and 9.7% √ Botswana's economy has contracted by 3.5% in Q3 2015 due to sustainable decrease in demand for diamonds and unemployment is expected to remain high in 2015 - in 2014 the unemployment rate was 18.2% Trade balances of Central Asia's countries have been hit by falling energy prices in 2015. In October Kazakhstan's trade surplus has decreased by 60.5% (USD 1.7 bn) compared to the same month of the previous years, while the trade surplus of Azerbaijan has contracted by 86.7% (USD 865.4 mn) In October Chile has recorded trade deficit for a fourth consecutive month due to falling cooper prices triggered by decrease in the demand from China. Inflation remains close to zero (or negative) not only in the European countries, but also in Middle East and Africa (MENA) and Asia. In MENA Oman and Israel have recorded higher annual inflation rates for the past 8 months, while in Asia Thailand's annual inflation has remained below zero since the beginning of 2015 Falling commodity prices and weak currencies have led to soaring inflation in Kazakhstan, Uruguay and Colombia. In October Kazakhstan's annual inflation jumped from 9.4% to 12.8%, while inflation rates in Uruguay and Colombia have increased to 9.5% and 6.4% respectively Currency and Foreign Reserves √ Kazakhstan’s currency has lost more than 66% of its value against USD compared since the beginning of 2015 as in November tenge’s exchange rate dropped to 302.27 per USD In 2015 international reserves of Azerbaijan have dropped by 49.4% due to falling oil prices and central bank’s interventions in order to protect the national currency. Azerbaijani manat has depreciated by 34% since December 2014 √ Malaysia’s ringgit remains under pressure as in November the exchange rate against USD has fallen by 28.9% compared to the same month of the previous year to 4.3 units per dollar – lowest level since 1998. Malaysia’s international reserves have fallen by 25.4% on annual basis √ Thailand's bat have depreciated by 8.8% in 2015 and exchange rate against USD dropped in November to 35.8 per USD, which was the lowest level since 2003 √ South America’s currencies have been among the worst affected from falling commodity prices in 2015. Colombia’s currency has lost more than 40% of its value against the USD, while the currencies of Uruguay, Mexico and Chile have depreciated by 23%, 22.2% and 18.8% respectively Currencies in Central and Eastern Europe have also depreciated against the US dollar, following the poor performance of the euro. In 2015 Polish zloty has dropped by 15.4% against USD, while Romanian leu has depreciated by 14.3%. While Poland's foreign reserves remain stable, in November international reserves of Romania has declined by 12.3% compared to the same month of the previous year Exchange Rate against USD Exchange rate against USD reflects the average monthly market rate at which the local currency is exchanged for one US dollar, i.e. increase in exchange rate indicates local currency depreciation. In order to extend data history as far back as possible, we have spliced exchange rate series from different sources such as International Monetary Fund and national central banks. Foreign Exchange Reserves Foreign exchange reserves reflect securities and currency and deposits. Foreign exchange reserves do not include: - IMF reserve position - SDRs - Gold - Financial derivatives - Loans to non bank non residents Interest Rates √ Chile and Colombia have raised benchmark interest rates in 2015 in order to protect their national currencies from sharp depreciation due to falling commodity prices, while other countries in the region, Uruguay, Peru, Mexico, have kept policy rates unchanged In order to react on deflationary pressure in Europe Romania and Poland have decreased their main policy rates in 2015. While Poland’s central bank reduced its benchmark rate once, from 2% to 1.5%, Romania’s central bank has decreased policy rate four times in 2015 – from 2.75 in December 2014 to 1.75 in November 2015 In 2015 Botswana’s central bank has continued to its monetary policy easing by decreasing the main interest rate by 1.5 percentage points – from 7.5% to 6% 10-year long term interest rate in Iceland has turned to downward trend since the peak in May 2015 and is now lower than the 3-month REIBOR, which has increased to the highest level since 2010 due to monetary policy tightening Yield curve, the spread of 10-year long term interest rates and 3-month short term interest rates, in Kazakhstan and Uruguay remained negative (inverted) due to low investor confidence in both economies. In October 2015 Kazakhstan’s spread of short term interest rate with the US benchmark has increased to 13.42 percentage points, which is the highest spread since 2008 √ Malaysia’s long term interest rate has slightly declined since the peak in August 2015, when the 10-year bond yield reached 4.4% for the first time since 2008 Long Term and Short Term Interest Rates Long term interest rate reflects yield on 10-year government bonds. Data reflects yield on secondary market. For EU members a harmonized long term interest rate sourced from the Europan Central Bank is selected. Short term interest rate reflects yield on money market instruments with maturity up to 3 months. To allow cross country comparison, we use the 3-month interbank offered rate as a proxy for all countries. If the 3-month interbank rate is not available, other types of instruments are used (e.g. 3-month treasury bill rate). Yield Spreads Yield spread (yield curve) is derived as 10-year long term interest rate less 3-month short term interest rate. Yield spread, short term is derived as 3-month short term interest rate less the yield on 3-month US treasury bills. Yield spread, long term is derived as 10-year long term interest rate less the yield on 10-year US treasury bonds. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
15th January 2016 Medium Grade Economies - Key Indicators