Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Mexicans living in the US sent home a staggering $63.2bn in remittances last year and President Andrés Manuel López Obrador hailed the news as a triumph. “This means that living conditions . . . improve and poverty is reduced,” he crowed in a speech last week.Remittances have almost doubled under the populist left winger’s presidency from $34bn in 2018. Mexicans send more money home each year than any other country except India, whose population is more than 10 times bigger, according to World Bank data. Mexican remittances are now equal to 20 per cent of the federal government’s entire budget.Investors are happy too. The flood of remittances has helped make the Mexican peso one of the developing world’s strongest currencies in recent years, generating handsome returns for those who parked their money in pesos and reaped the additional benefit of a big interest rate differential with the US.But look a little closer at the remittance numbers and cracks emerge in the happy picture of industrious Mexicans helping their compatriots back home in ever greater numbers.The near-doubling of remittances comes at the same time that the total number of Mexican-born migrants living in the US — the group most likely to send money home — has declined slightly, from 11.7mn in 2010 to 10.7mn in 2022, according to the Migration Policy Institute. Earnings in the sectors where they are most active, hospitality and food services, have risen by 32 per cent over the five years from 2018 to 2022. In the same period, the number of remittance transactions increased by more than 50 per cent to 150mn and the total amount sent rose from $33.7bn in 2018 to $58.5bn in 2022. The geographic distribution of remittances also throws up questions. Chiapas, not traditionally a state sending many migrants to the US, showed a rapid recent growth in its share of remittances, rising from 2 per cent in 2018 to 5.4 per cent in 2022.Drill down a level further and it emerges that Ojuelos de Jalisco, a town of just 30,000 people in Jalisco state, received $38mn in remittances in the third quarter of last year, equal to $1,343 per month for every single household. Yet despite the infusion of cash, official government data still showed 47 per cent of the town as below the official poverty line.Indeed, a study last year by the NGO Signos Vitales discovered that there were 227 municipalities in Mexico where the number of transfers was equal to more than one per month for every household in the town.There is, of course, another explanation for the rapid growth in remittances. Mexico’s flourishing drug cartels switched during the pandemic to sending money home disguised as remittances because border closures prevented the traditional method of smuggling back cash in vehicles.The traffickers found the new method convenient, secure and easy enough to stick with it after the border reopened, paying Mexicans back home a small commission for following instructions sent by text message on how to pick up cash wired to them and then where to deposit it.Jalisco, Michoacán and Guanajuato, the three biggest recipient states of remittances, all happen to be home to powerful trafficking cartels, as well as sources of migrants. “You hear more and more voices saying there is something dark in all this,” says Ernesto Revilla, Latin America chief economist at Citibank and a former senior Mexican finance ministry official. “There’s more and more evidence that there could be drug money mixed in the remittances.”Unsurprisingly, López Obrador has fiercely resisted the notion that drug money could be fuelling the growth in remittances. After Reuters published a detailed investigation into the phenomenon last August, the president publicly denounced the news agency as “forgers and liars”. He was similarly dismissive of the Signos Vitales study, which estimated that $4.4bn of Mexico’s 2022 remittances came from drug profits.To be sure, much of the remittance money does come from hard-working Mexicans wiring money home to their families and it is impossible to know what proportion of the total represents narcos repatriating profits. But the issue matters for two reasons: the more illegal money that crosses the border and enters the financial system, the stronger the cartels become. And the more vulnerable Mexico’s peso and current account is to a sudden shock, whether from law enforcement or from shifts in the drug [email protected] More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Governments and companies in emerging markets have sold a record $50bn in debt in the first days of 2024 as they rush to lock in a recent sharp drop in borrowing costs.A $12bn issuance by Saudi Arabia this week helped bring bond sales by developing economies including Mexico and Indonesia to $51bn this year, according to Dealogic data, compared with $42bn in the same period last year. Governments sold $29bn of this year’s total.Saudi Arabia, the world’s biggest oil exporter, has already funded about half of its projected fiscal deficit this year, underlining how uncertainty over the path of US rates is pushing countries to front-load their borrowing as much as possible. Despite a fall in yields, the sale still drew $30bn of demand, indicating healthy investor appetite.Emerging market debt prices rallied strongly towards the end of 2023 as investors raised bets that the Federal Reserve will ease monetary policy faster than previously expected and successfully deliver a so-called soft landing for the economy this year. Lower yields on US Treasuries make the returns on emerging market assets more attractive for investors.With issuers and their advisers unsure how long the rally will last, many countries want to get their deals away early. “You have just had a significant decline in yields and no one is really quite sure if this year will be a hard, soft or no landing,” said David Hauner, head of global emerging markets fixed-income strategy at Bank of America. “Everything now is as good as it gets for an issuer.”After years in which rising rates in advanced economies enticed them away from emerging markets, investors are once again looking at bonds issued by developing countries, both in dollars and in local currencies, as an attractive alternative to the lower yields now on offer from developed market debt. Local currency bonds could outperform if emerging market central banks can cut rates this year, while external debts would be boosted by a weakening dollar.“Emerging markets are coming out of a multiyear period of outflows,” Hauner said. “We’re starting 2024 with investors being structurally and cyclically very underinvested in emerging markets.” But, he added, the reasons to invest largely reflected easing global interest rates rather than prospects for stronger economic growth in many developing countries.“The doors have basically opened and we’re going to see a flood of new issuance until that window is closed again,” Aaron Gifford, sovereign credit analyst at T Rowe Price, said.Mexico is traditionally the first emerging market to issue most years, but this month’s debt sale by the country was its largest ever at $7.5bn. The bonds attracted “pretty chunky” demand of $21bn, which also reflected optimism about alignment with a strong US economy and investment in supply chain “nearshoring”, Gifford said.However, this year’s bond sales appear to show that markets are open only to governments with at least investment-grade credit ratings such as Saudi Arabia and Mexico.Countries with junk ratings, such as single B, may continue to find it almost impossible to access borrowing this year, say investors, leaving them unable to refinance looming maturities except at risky double-digit rates that would rapidly worsen their payment burdens.“The rough cut-off for market access is [an interest rate of] 10 [per cent] to 11 per cent. Anything higher than that just isn’t going to get done,” one bond fund manager said. Kenya’s $2bn bond maturing in June will be seen as a litmus test this year. Nairobi has signalled that it will resort to development bank loans to buy back a portion of the debt rather than seek to refinance in the market.East Africa’s biggest economy issued the bond at rates of 6-7 per cent in 2014, during an era of near-zero US interest rates that pushed investors into a global hunt for high-yielding assets. With investors mostly expecting the benchmark 10-year US Treasury to stay above 4 per cent this year, few expect this environment to return any time soon.As a result investors will also be watching to see whether countries seen most at risk of default, such as Egypt, which is facing about $30bn in external debt repayments this year, can access more IMF loans to tide them over.“It is very hard to see a backdrop where the ‘single Bs’ can regain the market access they used to have over the past decade,” Hauner said. “Most of these credits need significantly below double-digit yields to be sustainable.”Investors are, however, expecting relatively few countries to bite the bullet and choose to stop payments this year. Ethiopia was the only significant sovereign borrower to default last year after a wave of defaults already took place in 2022, including Ghana, Russia, Ukraine and Sri Lanka.Years on, many of these countries and even earlier defaulters such as Zambia, which halted payments in 2020, remain tied up in drawn-out debt restructuring negotiations. Their experience has led other government borrowers to consider default as a last resort. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is co-founder and co-chair of Oaktree Capital Management and author of ‘Mastering the Market Cycle: Getting the Odds on Your Side’Most people want to see low interest rates. But low rates alter investor behaviour, distorting it in ways that can have serious consequences. As the excellent book The Price of Time: The Real Story of Interest by the financial historian Edward Chancellor makes clear, there are many negative aspects of so-called “easy money”. Easy money keeps the economy aloft, at least temporarily. But low interest rates can make the economy grow too fast, bringing on higher inflation and increasing the probability that rates will have to be raised to fight it, discouraging further economic activity. This oscillation of interest rates can cause an economy to see-saw between inflation and recession. No one should want this. Further, low rates reduce the prospective returns on safe investments to levels considered unpalatable, encouraging investors to accept increased risk in pursuit of greater return. Consequently, in low-return times, investments are made that shouldn’t be made; buildings are built that shouldn’t be built; and risks are borne that shouldn’t be borne. Capital moves out of low-return, safe assets and into riskier opportunities, resulting in strong demand for the latter and rising asset prices. This encourages further risk taking and speculation. As the late Charlie Munger wrote to me in 2001, maybe we have a new version of the 19th-century British historian Lord Acton’s adage: “Easy money corrupts, and really easy money corrupts absolutely.” The investment process becomes all about flexibility and aggressiveness, rather than thorough diligence, high standards and appropriate risk aversion. Investors tend to underrate risk, underestimate future financing costs and increase their use of leverage. This typically results in investments that fail when tested in subsequent periods of stringency. In addition, low interest rates subsidise borrowers at the expense of savers and lenders. This can exacerbate wealth inequality.When you consider all the reasons for not keeping rates permanently low, I think the economic merits favour setting rates low only as an emergency measure. When I attended graduate school at the University of Chicago, the leading intellectual light was the economist Milton Friedman, who argued strenuously that the free market is the best allocator of resources. In this same vein, I’m convinced that so-called natural interest rates lead to the best overall allocation of capital. Natural rates reflect supply and demand for money. I believe we haven’t had a free market in money since the late 1990s, when the Federal Reserve became “activist”, eager to head off problems real and imagined by injecting liquidity into the financial system. So, are we likely to see the return of easy money conditions? At present, I believe the consensus is as follows: US inflation is moving in the right direction and will soon reach the Fed’s target of roughly 2 per cent. As a consequence, additional rate increases won’t be necessary. As a further consequence, we’ll have a soft landing marked by a minor recession or no recession at all. Thus, the Fed will be able to take rates back down.To me, this smacks of “Goldilocks thinking”: the economy won’t be hot enough to raise inflation or cold enough to bring on an economic slowdown. Goldilocks thinking has historically tended to create high expectations among investors and thus room for potential disappointment. Of course, that doesn’t mean it’s necessarily wrong this time.I believe we’re not going back to ultra-low rates for many reasons. The Fed may want to avoid remaining in a perpetually stimulative posture, given fears about kindling another bout of high inflation. Additionally, one of the Fed’s most important jobs is to stimulate the economy if it falls into recession, largely by cutting rates; it can’t do that effectively if rates are already near zero. On top of this, we appear to be seeing a decline in globalisation and an increase in the bargaining power of labour, suggesting that inflation may be higher in the near future than it was pre-2021. Thus, I’ll stick with my guess that rates will be around 2-4 per cent, not 0-2 per cent, over the next few years. Of course, these beliefs are rooted in my thoughts on how the Fed should think about the issue. What the Fed will do may be different. But I believe it’s reasonable to assume that the investment environment in the coming years will be quite different from what we saw in the easy money era of 2009-21, meaning different strategies are needed by investors. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Chinese companies are resorting to chips repurposed from standard PC gaming products to develop artificial intelligence tools, after Washington blocked US exports of high-performance processors.Thousands of Nvidia gaming graphics cards are being stripped of their core components in factories and workshops every month, before being installed on new circuit boards, according to two factory managers and two chip buyers familiar with the situation.Industry experts said the repurposing of chips from cards designed to be slotted into consumer PC motherboards to improve gaming graphics amounted to a rough workaround to tackle the lack of high-end processors in China.While Nvidia’s gamer-focused products have raw computing power, they are not as capable in the high-precision calculations needed for training some large language models with bigger data sets. Due to the limits of interconnection speeds between chips, it is also challenging to overcome this by simply grouping more chips in computing clusters.“This is a desperate move by Chinese companies under the export controls. Just like using a kitchen knife to create artwork, it’s doable, but the effect is suboptimal,” said Charlie Chai, an analyst at research group 86Research.The Biden administration tightened export controls for cutting-edge AI chips in October, making it more difficult for chip companies such as Nvidia to sell high-performance semiconductors to China.Demand for the graphics processing units sourced from the gaming cards has surged in the past month, according to people familiar with the situation. One of the factory managers said workers had disassembled more than 4,000 Nvidia gaming cards in December, more than four times the number in November.Customers for the repurposed components have been mainly public enterprises and small AI labs, which had not stockpiled enough Nvidia server chips before the new US export controls took effect, according to the two factory managers.They declined to reveal more details about their clients due to the sensitivity of the issue.However, industry experts and analysts warned that modifications to Nvidia’s products violated the company’s intellectual property rights, while some of the gaming cards could be banned from being sold to China at any time.Nvidia’s most powerful gaming graphics board, the GeForce RTX 4090, was one of the most popular models to be repurposed, but it has now been blocked from being sold to China, the company said.To comply with the latest controls, Nvidia came out with a slower version of the banned cards last month, called the GeForce RTX 4090 D, which is 5 per cent slower than versions sold outside China, according to the company.One of the factory managers said the performance gap between the modified versions of the 4090 D and 4090 would be “more significant”, which could mean the slower version was not powerful enough for large language model training. The manager said a batch had been procured for further verification.Nvidia told the Financial Times that “disassembling gaming cards is not a viable way to create data centre compute clusters for AI”, adding that gaming products were “designed, manufactured, and marketed for individual gamers and consumers”.Nvidia has developed three chips tailored for China that meet the region’s growing demand for AI systems while complying with US export controls, enabling the company to maintain its foothold in one of its most important markets.However, the performance of these chips is substantially weaker than those previously sold in China, and they will not be widely available until March, according to three people familiar with the situation.Chinese customers have also objected to the prices Nvidia hopes to set for these inferior processors, which are close to those of their more powerful banned counterparts, the three people said.However, the options for migrating to China’s alternative chip ecosystem under development are limited, leading some companies to turn to Nvidia’s less expensive gaming chips.“We don’t know whether such a reinvention will be successful, but we hope that these machines will be usable, at least in the short term,” said a buyer.Video: The race for semiconductor supremacy | FT Film More