Eric Rose comments on economic developments in Romania

The Wall Street Journal , Jan 17, 2018 by:  Dan Keeler

“[Romania] had a very stable economy a year ago, but now they’re going head-first into high government spending, which could easily go out-of-control”

- Eric Rose, lead director at US-based law firm Herzfeld Rubin Meyer and Rose

US President Donald Trump managed to offend the entire continent of Africa—and Haiti—during a meeting on immigration this week. His comments, which he later appeared to deny, were subsequently corroborated by a senator who was present at the meeting. Among many official reactions, the African Union’s spokeswoman said she was “frankly alarmed” by the reports and a UN human-rights spokesman described the comments as “racist,” Joe Parkinson reports.

The Trump administration had surprised many skeptics over the past year by actively engaging with several African nations. US Ambassador to the UN Nikki Haley’s tour through East Africa, USAID Administrator Mark Green’s considerable efforts to engage with African leaders, and a growing effort by the US government’s private-sector development arm OPIC to expand its work in Africa had reassured many on the continent that the US was not turning its back on Africa as they had feared it would. But US president’s outburst threatens to shatter that newfound confidence.

Not surprisingly, Trump’s alleged comments elicited dismay and derision from Africa, Haiti and beyond.

Cotton imports into Ethiopia are heading for an all-time high of 85,000 bales following a slump in local production amid rising demand from the textile and apparel industry, Nicholas Bariyo reports. Unfavorable weather conditions and pest infestations have forced farmers to switch to alternative crops, according to the US Department of Agriculture bureau in Addis Ababa, and output for 2017-18 season is projected to fall by around 15% from the previous year’s 176,000 bales. The slump in output could dim Ethiopia’s appeal as a major sourcing hub for apparel companies, which have been attracted to the country in part by its raw cotton production.

Union representatives in Zambia, Africa’s No.2 copper producer plan to press for higher wages from mining companies for the 2018 labor contracts, amid recovering global prices, says James Chansa, head of Zambia's National Union of Miners and Allied Workers. Talks are due to resume later this month and miners expect at least a 10% pay rise as copper prices sit near four-year highs, buoyed by anticipated higher Chinese demand as global growth rebounds, Chansa told the WSJ. Zambian companies have rehired most of the 10,000 miners laid off in 2016, but are yet to fully recover from years of weak prices, amid electricity shortages, setting the stage for a potential wage standoff.

Pakistan is likely to see further currency devaluation, despite the rupee’s 5% slump against the dollar in December, according to Moody’s. If the rupee depreciates significantly from current levels, the ratings firm said, the country’s monetary authorities could find it difficult to rein in inflation and Pakistan’s debt burden, around one-third of which is denominated in foreign currency, could be more difficult to manage.

Over the longer term, though, the country should benefit from the depreciation. “Allowing the PKR to reflect currency fundamentals would reduce the drain on Pakistan’s foreign exchange reserves and enhance the sovereign’s capacity to absorb shocks to trade and/or capital flows,” Moody’s said.

Investors continued to pour money into the market, helping drive the benchmark KSE 100 index up another 1% this week. Foreign investors led the way, according to local brokerage Elixir Securities. But analysts at research firm BMI said this week that Pakistan’s economic growth rate, which last year hit 5.2% may have peaked. “Real GDP growth…is likely to slow over the coming quarters. Political headwinds are likely to act as a drag on growth, while the success of the China-Pakistan Economic Corridor (CPEC) is far from guaranteed,” the firm said. BMI expects the economy to grow by 5% in the current fiscal year, slowing to 4.4% next year.

Strong foreign direct investment should continue to drive rapid growth in Vietnam’s exports, but the lack of spillover effects into the country’s broader economy could constrain growth in the longer term, Capital Economics said this week. The foreign investment is helping to drive a move up the value chain, the research firm noted. Exports of electronics have surged, reducing the country’s longstanding dependence on lower-value textile products.

But there are few signs that foreign firms are transferring technology or the latest production techniques into Vietnam, which could reduce its competitiveness against rivals that are increasingly using robots in manufacturing, Gareth Leather, CapEc’s senior Asia economist said. “If Vietnam starts to lose its competitive advantage in contract manufacturing, foreign firms…could easily decamp to other parts of Asia with even lower labor costs, notably Bangladesh,” he added.

The latest Global Economic Prospects report from the World Bank suggests that may already be happening. The bank cited higher-than-expected manufacturing outturns as one of the key reasons for its decision to raise its estimate for Bangladesh’s 2017 economic growth rate by 0.4 percentage points to 7.2%. “Robust private consumption [and] strong public investment growth” also contributed. Both the World Bank and ratings firm Fitch expect the South Asian nation’s growth to moderate slightly this year to below 7%, although Fitch noted in its ratings report this week that Bangladesh’s growth rate is more than double that of its similarly rated peers.

One potential cloud on the horizon for Bangladesh is the fact that it is due to hold general elections no later than January next year. “Uncertainty related to general elections…is likely to lead to postponed investment,” Fitch noted.

Romania’s central bank has raised its key interest rate for the first time in nine years, pushing its main policy rate to 2% from 1.75%, Paul Hannon reports. The timing of the move was a surprise to many. “By deciding to hike on the first regular occasion, the central bank is thus sending a firm message that it means business in terms of pursuing its inflation target,” said Horia Braun-Erdei, an economist at Erste Bank.

Romania’s economy is booming, and was the fastest-growing in the 28-member European Union during the three months through September, with its gross domestic product 8.8% higher than in the third quarter of 2016. The annual rate of inflation has picked up over recent months, jumping to 3.2% in November from 2.6% in October. The central bank’s inflation target is 2.5%.

London-based Capital Economics firm expects considerably more monetary tightening, predicting that policy rate will hit 3.5% by the end of this year. “With the economy operating at full employment and GDP continuing to expand at a rapid clip…we agree that inflation is likely to rise further over the coming quarters,” Liam Carson, an Emerging Europe economist at CapEc said.

Eric Rose, lead director at US-based law firm Herzfeld Rubin Meyer & Rose, which operates in Romania, is less enthusiastic, arguing that Romania’s economy is becoming overheated on the back of large payments and tax cuts to government employees. “They had a very stable economy a year ago,” Rose said, “but now they’re going head-first into high government spending, which could easily go out-of-control, while their inflation is spiraling upwards, the exchange rate downwards, and the budget deficit growing beyond the EU-mandated levels.”

Argentina significantly overshot its inflation target in 2017 as prices rose almost 25% from the previous year, Taos Turner writes. Consumer prices surged 3.1% in December from the previous month, pushing the annual inflation rate far beyond the central bank’s target of 17%.

Last month, officials relaxed the inflation targets for the next two years, acknowledging they have been unable to combine stronger economic growth of about 3% last year with a significant decline in the inflation rate. The problem has been compounded by a decision to raise public-utility rates to help cut billions of dollars in budget-busting subsidies.

Many economists say while the country’s inflation rate remains high, it is headed in the right direction. Still, there is significant debate about how quickly the government should be moving to cut spending and slash its budget deficit.

Bond investors are finally acting like they’ve lost hope that Venezuela will make any future debt payments, Julie Wernau reports. Traders debated for weeks about whether to continue pricing the oil-rich country’s sovereign debt with the assumption that it would keep making interest payments. But as the pile of unpaid coupons racked up, the association for emerging market debt traders this week threw in the towel and announced that from now on, the market should assume Venezuela isn’t likely to pay.

The country is behind on several payments, particularly for its sovereign bonds, but it has not said it plans to default on its debt. On Wednesday, S&P Global Ratings issued a default rating on Venezuela’s bond due 2020 after it failed to pay $45 million due to bondholders within a 30-day grace period. The firm said the sovereign is now in overdue for payments on eight different bonds.

Key economic indicators for a significant proportion of frontier markets have improved over recent months, according to the latest report on frontier-emerging markets by ratings firm Fitch. More than two-thirds of the countries covered in the report, which focuses on the second half of 2017, saw improved industrial production and merchandise exports, and over half experienced increases in foreign exchange reserves compared with the previous version of the report from October 2017.

“Economic performance across frontier emerging markets generally remained positive [in the second half of 2017] as the global economy continued to strengthen and hard commodity prices increased,” Fitch said. The report, which covers the 31 countries in JP Morgan’s NEXGEM index, also highlighted accelerating economic growth in a range of frontier markets, including Nigeria, Ghana, Tunisia, Senegal, Mongolia, Vietnam, Belarus, Paraguay, Bolivia and Jamaica, but it noted that growth was slowing in Sri-Lanka, Ecuador, Georgia, Belize, Côte d'Ivoire and Kenya.

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