Aurelia Butler

The writer is former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’The Pakistani rupee’s 14 per cent precipitous fall since last Thursday has raised fears that Pakistan may be the next emerging market to default. The currency hit this all-time low after authorities abandoned controls on its exchange rate, in an attempt to secure the conditions for an IMF bailout. A mission from the IMF is scheduled to arrive tomorrow. Earlier this month, a nationwide power outage in Pakistan left nearly 220mn people without electricity. Successive days without regular electricity threatened to cause havoc in a country on the brink of default, with inflation at a high of 25 per cent. While some have made the questionable claim that the reasons for the power breakdown may have been technical, Pakistan could soon run out of the fuel that powers its electricity plants. The state raised gasoline prices by about 16 per cent on Sunday. The country has been struggling to pay for oil imports and to meet energy demand, as its foreign exchange reserves have dwindled to just $3.7bn, equivalent to barely three weeks of imports. Former prime minister Shahid Khaqan Abbasi, a senior leader of the ruling coalition, has warned that Pakistan will have to default if it does not resume its adherence to the IMF programme that called for containing current spending and mobilising tax revenues. Pakistan grew its electricity generation capacity through the China-Pakistan Economic Corridor programme that began in 2015 but the expansion came at a cost, both in terms of high returns guaranteed to Chinese independent power producers (IPPs) and expensive foreign currency debt. Pakistan has been unable to make capacity payments to the IPPs under its long-term power purchase agreements. The country’s electricity sector debt has risen to approximately $9bn. China is Pakistan’s largest bilateral creditor with about $30bn in total debt, which represents around 30 per cent of the developing country’s total external official debt. In addition, Pakistan owes $1.1bn to Chinese IPPs for electricity purchases. Last December, the Pakistani government agreed to repay this debt in instalments. But this is likely to have displeased the IMF, which in August 2022 expected the government to renegotiate its power purchase agreements. Pakistan tried to renegotiate but China refused.Pakistan is squeezed between IMF demands and Chinese interests. Rescheduling debts will provide some relief, but who will bite the bullet first? China or the international financial institutions that are owed $41bn? If Pakistan doesn’t reach an agreement with the IMF within the next few weeks, its reserves could fall to a point where it can no longer buy oil. Pakistan’s central bank governor admitted last week that the country needed $3bn to meet its external debt obligations and approximately another $5bn to meet its current account deficit. In total, somewhere between $9bn and $10bn is required to stabilise the rupee. The IMF programme has essentially been in suspension since last November, mainly because of finance minister Ishaq Dar’s reported refusal to meet the organisation’s demands that Pakistan stick to a market-determined exchange rate and take measures to reduce its growing fiscal deficit. But a few days ago, the government finally agreed to accept the demands, and wrote to the IMF, asking it to send a mission.Even if the IMF programme is revived soon, the next tranche of about $1.1bn may not be sufficient in shoring up Pakistan’s foreign exchange reserves. The Saudi Fund for Development recently agreed to fund $1bn worth of oil imports on deferred payment, which is not enough to finance even one month of Pakistan’s oil needs. Only an immediate and large bailout can save Pakistan from default. Otherwise, the country may suffer the same fate as Sri Lanka last year. More

The writer is an FT contributing editor and writes the Chartbook newsletterAs 2023 unfolds, the world of economic analysis and commentary is marked by a disjuncture between discourse and data. On the one hand, you have feverish talk of deglobalisation and decoupling. While on the other, the statistics show an inertial continuity in trade and investment patterns.There are at least three ways to reconcile this tension.Option one: you can cleave to the old religion that economics always wins. In which case you dismiss the talk of deglobalisation as journalistic hype. This debunking posture has the air of empiricism and common sense about it. But to hold this view you have, in fact, to believe many things, chief among them being that the Biden administration does not mean what it says.If you take Washington seriously it is hard to avoid the conclusion that whatever the statistics tell us about the current state of affairs, the US is bent on revising the world economic system. It intends to reprioritise domestic production and to face up to the historic challenge posed by China’s rise. If there is one thing that America’s divided polity can agree on, it is the necessity to confront China.Adopting this view leads you to option two: rather than business as usual, we are on the cusp of a new historical epoch, a new cold war. And this is not the cold war of the detente era. In Washington these days even coexistence with CCP-led China is up for debate.Taken at face value this is a scenario of high-stakes confrontation that overshadows every other priority. In recent weeks there have been efforts to de-escalate — first the G20 meeting between Xi Jinping and Joe Biden, then China’s dovish appearance at Davos. But these moves do not presage a return to business as usual. Rather than reconciliation and reconvergence, the Biden team holds out something far weirder. They do not want to stop China’s economic development, they insist, just to put a ceiling on every area of technology that might challenge American pre-eminence.How that is supposed to work is anyone’s guess. But in its sheer otherworldliness it points to interpretive option number three. We are witnessing not a reversal of globalisation or full-scale decoupling, but a continuation of some aspects of familiar pattern, just on fundamentally different premises. A future world economy might be made up of a patchwork of antagonistic coalitions divided by more or less visible data curtains. States that have the resources will launch national policies such as the US Inflation Reduction Act, which blends green industrialisation and “buy American”, with an anti-China stance and a push for friendly supply chains. That the IRA has caused a ruckus with Europe and South Korea is not a bug. It is a feature.Perhaps a harbinger of the future is the crazy quilt of Covid vaccines: the US driving Operation Warp Speed; the Europeans trying to broker a complex bargain that includes exports to the rest of the world; India as a manufacturing hub; China pursuing an inadequate national solution; and a third of the world’s population excluded altogether.You might shrug and ask whether this mélange of geopolitics, economic nationalism and the occasional pandemic is really new. Is it not just “history” as we have always known it — unpredictable and red in tooth and claw? But, in saying that you give the game away. The promise of globalisation, as it was understood from the 1990s onwards, was precisely that it would usher in a new era. So to admit not only that a slew of unexpected and diverse shocks is disrupting the world economy, but that they are multiplying and becoming more intense is, in fact, to admit a fundamental disappointment of expectations.Whereas the advocates of business as usual declare that it is still “the economy, stupid” and the new cold warriors rally around the banner of “democracy versus autocracy”, the third position faces the reality of confusion, the kind of confusion registered by a term like “polycrisis”.Polycrisis has its critics, and at Davos 2023 it risked becoming something of a cliché. But as a catchword it serves three purposes. It registers the unfamiliar diversity of the shocks that are assailing what had previously seemed a settled trajectory of global development. It insists that this coincidence of shocks is not accidental but cumulative and endogenous. And, by its currency, it marks the moment at which bullish self-confidence about our ability to decipher either the future or recent history has begun to seem at the same time facile and passé. More

European stocks and US futures slipped on Monday with central banks on either side of the Atlantic poised to lift interest rates to their highest levels since the global financial crisis.The region-wide Stoxx Europe 600 traded 0.5 per cent lower after fresh data showed a surprise 0.2 per cent drop in fourth-quarter German gross domestic product, just as Spain’s inflation rate rose by 5.8 per cent in the year to January, up from 5.5 per cent in December. The euro gained 0.3 per cent against the dollar and the yield on 10-year German Bunds rose 0.06 percentage points to 2.3 per cent. Bond yields move inversely to prices.Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 0.9 per cent and 1.2 per cent respectively ahead of the New York open. The UK’s FTSE 100 was trading flat at the middle of the session. The moves come ahead of policy meetings at the Federal Reserve, European Central Bank and Bank of England this week. Investors expect the Fed to slow the pace of its monetary tightening to 0.25 percentage points, raising rates to the highest level since September 2007, while the BoE and the ECB are widely expected to lift rates by half a percentage point to their highest levels since autumn 2008.Slowing inflation in Europe and the US has nevertheless boosted hopes that rates are close to peaking, with some investors forecasting cuts later this year. Central bank officials, however, are set to resist such calls when fielding questions later this week.Investors are likely to “keep looking through the Fed’s more hawkish policy guidance”, said Lee Hardman, currency analyst at MUFG. “We are not convinced that the Fed will be able to trigger significant hawkish repricing in markets.”Equity markets have rallied so far this year on growing optimism that global growth will be less anaemic than previously feared, helped by falling energy prices in Europe and China’s abrupt reversal of zero-Covid measures in place since early 2020. Yet higher equity prices are thought to raise consumer spending — exactly what central banks, determined to drag down inflation, are attempting to prevent.Financial conditions have been further loosened by a weaker dollar, declining Treasury yields and tighter credit spreads, according to analysts at ING, “and it may feel that any further loosening, fuelled by talk of potential policy easing in the second half of the year, could undermine [the Fed’s] current actions in fighting inflation”.The key question for the BoE, meanwhile, is whether it acknowledges its work is nearly complete. “We suspect it’s more likely to keep its options open,” the analysts said, adding that market expectations of ECB rate cuts in 2024 were “premature”.In Asia, Hong Kong’s Hang Seng index fell 2.7 per cent, dragged lower by a 6 per cent decline for Alibaba. China’s CSI 300 gained roughly 0.5 per cent. More

Welcome to Trade Secrets. Sometimes it feels like I need a weekly “Manchinations” section dedicated to the senator for West Virginia and the intricate manoeuvrings around the electric vehicle tax credits in the US Inflation Reduction Act. Last week, senator Joe introduced a bill to delay the handouts to try to stop the Europeans and Japanese getting their hands on them. Related to this, Treasury secretary Janet Yellen appeared to accept that the EU and Japan would need to sign an actual “Free Trade Agreement” (as opposed to having a “free trade agreement”) with the US to benefit from the critical minerals bit of it. Given the US isn’t signing trade deals with anyone right now, that’s a touch disingenuous, like asking someone to jump through a hoop you refuse to hold up for them. Today’s newsletter touches on another tense US-EU-Japan issue, Washington’s demand for export controls on semiconductors, but first I consider the Zambia test case for sovereign debt restructuring. Charted waters looks at how China’s reopening is fuelling a rise in base metal prices.Going bust in styleLast summer I wrote about the wave of sovereign bankruptcies breaking among middle- and low-income countries, and how the world hadn’t created a system to restructure debt smoothly and constructively. It still hasn’t. In particular, it’s proven as hard as we all feared to incorporate China, now frequently low-income countries’ biggest official creditor (see this chart from JPMorgan), into the system.

The G20 came up with the “Common Framework” for restructuring debt after the Covid-19 pandemic hit, which was supposed to enshrine principles of openness and burden-sharing. Zambia, where China was heavily involved in the copper mining sector and elsewhere, emerged as a test case. It’s not going brilliantly. Last week the US took the unusual step of going public and saying China was a barrier to the negotiations on restructuring Zambia’s debt. See also this thread by former US Treasury debt guru Brad Setser and his piece for Alphaville last October, whence comes this handy chart of who owes what.

Some of the problems with getting China to participate in a debt restructuring are cultural and organisational, others more fundamental. To be fair to China, it’s not exactly practised at this game, being outside the Paris Club of creditor nations and not having decades of practice at restructuring. It also lends via a mish-mash of state-owned or state-influenced agencies with different rates, terms and conditions, which makes negotiating burden-sharing particularly difficult.But there are reportedly some serious differences of principle, notably China’s insistence that debt owed to multilateral development lenders such as the World Bank be included in the restructuring. With the exception of one-off separately funded exercises such as the heavily indebted poor countries (HIPC) debt relief schemes of the 2000s, MDBs (and the IMF) rightly don’t participate in writedowns. They are the closest things the international financial system has to lenders of last resort, and writing down their debt would destroy support for them among shareholder countries, especially the US.There’s a fundamental clash of principles there. China insists on seeing itself as a developing country helping low-income economies with development-focused infrastructure finance, not a rich-world creditor. (For the same reason China also always shrunk from taking a leadership role in the IMF, actually lobbying to keep its voting share on the board below the US and Japan.) By that token it makes perfect sense for China to resist writedowns unless the MDBs are also involved. But it’s not compatible with seeing the world the way the other official creditors do. Something quite substantial is going to have to give.A block of the old chipsA big victory for the US, on the face of it. The Netherlands and Japan, the former after huffing and puffing in line with the EU’s famous commitment to strategic autonomy, have reportedly acceded to American demands further to restrict exports of semiconductors and semiconductor equipment to China. You’ll recall this is something the US has been pressing European and Japanese companies to do for a while. The Dutch are particularly important because of ASML, the world’s leading maker of photolithography machines. It’s no longer enough for the US to keep China a generation or two behind with tech — it wants to establish as much of a lead as possible.So, score one for US high-pressure securocratic diplomacy, Biden with chips succeeding where Trump (and Biden) didn’t quite succeed with Huawei and 5G? Well, let’s be a bit careful on this one, and wait for the exact details of the deal to be released. As I’ve written before, the Netherlands and Japan already co-operate closely with the US on export controls. They’re also healthily suspicious of some of the motives for these measures, which have blocked their sales to China while allowing in US competitors. Japan in particular, whose companies are at a lower-value-added part of the supply chain, will lose a lot of sales to China they will struggle to make up elsewhere.Agreeing to make a tripartite announcement, assuming it comes, will be a symbolic gain for the US, and for the Biden administration’s continual attempts to build coalitions against China. In substance, I suspect the Dutch and the Japanese will be scrutinising the legal commitments of any deal very closely and working out exactly how it will affect their companies. The principle of co-operation is established: the practice of what gets blocked will, however, be a continual process.As well as this newsletter, I write a Trade Secrets column for FT.com every Thursday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersThe reopening of China after its pandemic lockdown has been possibly the best pieces of news for the global economy — as well as the Chinese population — of the year to date. It is also likely to be good news for miners, as the chart below illustrates.A group of “base metals” led by tin, zinc and copper have surged more than 20 per cent since November on bets that China’s reopening will boost demand for raw materials. We do not just have the Chinese Communist party to thank for this, as my colleagues Harry Dempsey and George Steer explain. The bullish sentiment driving up prices is also supported by the US Federal Reserve signalling a slowdown in the pace of interest rate rises and a softening in the US dollar, which importers use to buy commodities. (Jonathan Moules)Trade linksThe list of strategic assets in the US expands by the day, in some lawmakers’ eyes extending towards farmland, which they want to keep out of the hands of Chinese investors. FT colleague Martin Sandbu argues that the EU should welcome a green subsidy race. A nice summary FT Q&A explainer on the Inflation Reduction Act and what all the fuss is about.A fun NPR piece on tracking the prices in one Walmart store for years and what they said about the US economy, trade and globalisation.The Trade Talks podcast explains the recent history of export controls, and how they were shaped by cold war scandals about supplying sensitive technology to the Soviet Union.Trade Secrets is edited by Jonathan Moules More

The German economy unexpectedly contracted by 0.2 per cent in the final quarter of 2022, as high gas prices squeezed demand and placed the eurozone’s manufacturing powerhouse on the brink of recession. The German figures, which come ahead of publication of the latest growth data for the eurozone on Tuesday, raise the prospect of the region’s largest economy recording two quarters of negative growth — meeting the technical definition of recession. Fears of a recession had eased earlier this month, when officials said the economy was likely to have stagnated, rather than shrunk, in the fourth quarter. “High rates of inflation have driven the German economy into a winter recession,” said Timo Wollmershäuser of the Ifo Institute, a think-tank. Economists downgraded their expectations for the eurozone growth figure to a 0.1 per cent fall, down from the no-change forecast before the release of the German figures. The gross domestic product drop “pours cold water on the recent optimism about the prospects for the eurozone and suggests that a technical recession in both Germany and the eurozone as a whole is more likely than not after all,” said Franziska Palmas, senior Europe economist at Capital Economics.However, the scale of the downturn in Germany and elsewhere in Europe is far better than economists had anticipated during much of the latter half of 2022, when soaring gas prices stoked concerns of a severe recession. “We’re looking at a technical recession,” said Stefan Schneider of Deutsche Bank. “Not the setback to growth that many had recently feared.”Economists polled by Reuters had anticipated a flat reading for the fourth quarter, though officials upgraded the economy’s expansion in the previous three-month period to 0.5 from 0.4 per cent. “After the German economy held up well in the first three quarters despite difficult conditions, economic output decreased slightly in the fourth quarter,” Destatis, the federal statistics office, said on Monday.Destatis said private consumer spending was a key driver of the contraction, suggesting that the fall in real household incomes due to the energy crisis is now starting to bite. Energy costs for German consumers rose by 34.7 per cent over the course of 2022. The German economy is now only 0.2 per cent larger than before the pandemic — a slower recovery than in the rest of the currency union — with the eurozone economy about 2.3 per cent above its pre-pandemic level based on growth figures for the third quarter. Leading economists polled by Consensus Economics expect the German economy to contract by 0.5 per cent in 2023, while the eurozone economy is forecast to expand marginally. However, the German government last week forecast growth of 0.2 per cent this year. That is an upgrade from October, when it was predicting a contraction of 0.4 per cent. Germany has been hit harder than other European countries by soaring gas prices because of its large manufacturing base. However, the government has stepped in with generous support to cushion the blow. Timo Klein, economist at S&P Global Market Intelligence, said Germany’s outlook had “brightened” in recent weeks, thanks to benign winter weather, which had reduced gas demand, the end of China’s zero-Covid policy and the boost that will give to German exports, and the downward correction of wholesale gas and power prices, which would ease headline inflation. However, others believe that the return to growth is threatened by the ECB’s aggressive hiking cycle and the risk of sustained high energy prices.Markets expect the ECB to raise rates by half a percentage point later this week, and by another half point in March. Sweden’s economy shrank 0.6 per cent in the last quarter of 2022, separate figures published on Monday showed. More

Investing.com — The dollar drifts and bond yields move higher at the start of a big week for central banks. A drop in German GDP in the fourth quarter makes the ECB’s job harder. Stocks are opening the week lower on recession and interest rate fears. The rout in the stocks and bonds issued by Adani Group companies continues, Nissan and Renault rebalance their alliance, oil is rising despite signs of speculative demand, and U.S. supply slowing. Here’s what you need to know in financial markets on Monday, 30th January.1. Curtain-up on Central Bank weekU.S. bond yields rose but the dollar still weakened at the start of a week in which the Federal Reserve, the European Central Bank, and the Bank of England are all set to raise interest rates again.Markets expect a 25 basis point hike from the Federal Reserve on Wednesday and 50 basis points each from the ECB and BOE on Thursday. While all of those moves appear relatively certain, there is more uncertainty over the rate paths for the three over the rest of the year – with markets currently predicting a more dovish policy course for all three than their own guidance suggests.The ECB’s task of balancing the risks of recession and inflation was made harder earlier, as German GDP for the fourth quarter was announced to have fallen 0.2%, compared to the stagnation that was expected. However, a re-weighting of Spain’s consumer price basket saw headline inflation there accelerate. The euro rose 0.3% to $1.0899.2. Adani fails to reassureThe rout in stocks and bonds tied to the empire of Gautam Adani gathered pace, as a 400-page rebuttal of the accusations made last week by short-seller Hindenburg Research failed to convince a growing band of skeptics.Shares in Adani Transmission (NS:ADAI), Adani Total Gas (NS:ADAG), and Adani Green Energy (NS:ADNA) were all suspended and limited down, in Mumbai, bringing the cumulative decline in Adani’s portfolio companies to around $70 billion in less than a week. That was despite a modest recovery in the flagship Adani Enterprises (NS:ADEL) holding company, which rose 4.8% after falling over 20% last week.Adani Enterprises is currently trying to raise $2.4B in new stock, through the sale of 45M new shares. The group is plowing on with the deal, despite having firm bids for fewer than 1M shares as of the close in Mumbai. Abu Dhabi’s IHC (ADX:IHC) indicated it would invest in the capital raise as planned.3. Stocks set to open lower on recession fears, rate cautionU.S. stock markets are set to open lower later, weighed down by recession fears and by the awareness that the market may be taking too positive a view of rate expectations into the Fed meeting.JPMorgan analysts told clients in a weekend note that they expect chair Jerome Powell’s tone to be “hawkish, stressing that a downshifting to a 25bp hike doesn’t mean a pause is coming.”By 06:30 ET (11:30 GMT), Dow Jones futures were down 267 points or 0.8%, while S&P 500 futures were down 1.1%, and Nasdaq 100 futures were down 1.5%, largely unwinding the gains that they made last week after a mixed bag of fourth quarter results.Stocks likely to be in focus later GE HealthCare (NASDAQ:GEHC), which reported earnings early, and ADRs of Philips (NYSE:PHG), which signaled a light at the end of the tunnel for the problems with its sleep apnea products.4. Nissan, Renault rebalance their allianceAlso likely to be in focus are Nissan ADRs (OTC:NSANY), after the Japanese carmaker announced a rebalancing of its alliance with Renault (EPA:RENA), the result of a years-long power struggle between the two that featured the arrest and flight of former Renault CEO Carlos Ghosn.Under the deal hammered out by the two, Renault will cut its stake in Nissan to 15% from 43%, bringing it in line with Nissan’s stake in Renault, and signaling a more even partnership between the two.Renault will transfer the other 28.4% of its holding to a trust which will not enjoy voting rights in a broad range of issues. The companies hope the deal will allow them to focus on meeting the challenge from Tesla (NASDAQ:TSLA) and Chinese electric car makers.5. Oil flat as U.S. rig count dropsCrude oil prices started the week in muted fashion, having sunk back below $80 a barrel over the weekend in line with other risk assets.By 06:45 ET, U.S. crude futures were flat at $79.69 a barrel, while Brent crude was up 0.1% at $86.47 a barrel.Data out of the U.S. on Friday painted a relatively bullish picture, with speculative long interest in crude futures hitting its highest since late November, while Baker Hughes’ rig count showed the pace of U.S. drilling slowing down in response to the drop in prices at the end of last year. The number of active rigs fell to 609 from as high as 627 in November. More

“There are Danish families with children and pensioners who are under severe financial pressure and clearly feel the high inflation,” Finance Minister Nicolai Wammen said in a statement. As part of the proposal, the government suggests giving a tax-free cash handout of 5,000 Danish crowns to elderly with a limited income, mirroring a similar move by the previous government in June last year. The majority government has invited opposition parties to negotiate the proposal and aims to land a deal within two weeks. ($1 = 6.8287 Danish crowns) More