Colombia Central Bank’s Cano Disagreed With Rate Increases

El codirector del Banco de la República, Carlos Cano, anticipa que en la reunión del viernes próximo habrá recorte de medio punto en las tasas overnight y opina (esto es una locura) que la tasa de crecimiento potencial de la economía colombiana es del 6% y que por lo tanto la economía está lejos por debajo del potencial.

 

By Helen Murphy

Dec. 12 (Bloomberg) — Colombian central bank director Carlos Gustavo Cano said he disagreed with the board’s decision to raise interest rates this year as inflation showed signs of slowing and the global economic crisis began to take hold.

Cano, one of seven board members who decide monetary policy, said he had “discussions” with his colleagues over lifting the lending rate in February and July, after maintaining “unanimity” over 14 previous increases beginning April 2006.

“I said let’s wait and see what happens with world inflation, which I thought would begin to decline, and let’s wait to see the effect of the global recession,” Cano said in an interview at his office in Bogota. “I went along with the decision, finally, because it’s the law of the majority.”

Cano, 62, said the board is now in agreement that the next move will be to cut interest rates from a seven-year high of 10 percent. Seven of 11 economists in a Bloomberg survey ahead of next week’s board meeting expect no change in the interest rate.

Since taking office in 2002, Colombian President Alvaro Uribe focused his policies on rooting out drug-funded guerrillas and paramilitaries, which led to a surge in consumer confidence and bank lending, pushing Colombia’s economy to 8 percent growth last year, the fastest pace in three decades.

The increased sense of personal security, investment and consumer spending on big ticket items such as cars and new homes also led to a near doubling of the annual inflation rate in less than three years to 7.94 percent in October.

Policy Delay

Now, as the first simultaneous recession since World War II in the U.S., Europe and Japan looms over Colombia, and consumer confidence begins to wane, inflation at 7.73 percent in November remains almost twice the bank’s target pace for this year.

Still, expectations for inflation over the next 12 months fell to 5.36 percent in the central bank’s December survey of economists, from 5.84 percent in the November reading.

Cano said the board has done what it set out to do, slow inflation and reduce the “euphoria” that supported high consumer spending.

“You have to take into consideration that in monetary policy there is a delay of 18 to 24 months,” he said.

The annual pace in local bank lending has halved to 18 percent since its peak in March 2007, Cano said. Consumer lending has also dropped from annual growth rate of 50 percent to 14 percent.

After reaching a seven-year high in October, inflation did decelerate last month, and Cano expects the bank will be able to meet its 2009 year-end target for consumer prices.

‘No Doubt’

“I have absolutely no doubt we will meet the target” of 4.5 percent to 5.5 percent, said Cano. “It’s time to start to normalize policy and reduce rates to compensate and help prepare the internal market against what’s to come. Next year will be a year of much lower growth.”

At the past two board meetings, at least some board members called for a cut in interest rates of as much as a half point as the economy slows more than expected.

Cano, who declined to say how he voted at the meetings, said growth will slow this year to about 3.5 percent and next year to as low as 2 percent.

“Growth is very low compared to the potential,” said Cano who believes sustainable growth without inflation should be as much as 6 percent annually.

Gross domestic product expanded 3.7 percent in the second quarter, the slowest pace since 2003, and down from 8.4 percent in the same period a year ago.

As the global economic slowdown spreads, Cano said Colombian banks are well consolidated, capitalized, administered, have strong earnings and little exposure to foreign debt, putting them in a good position to weather the crisis.

Indicators

Still, industrial production, retail sales and construction are all falling, he said.

The economic slowdown will effect Colombia in terms of its exports to Venezuela and Ecuador, which accounted for almost a fifth of the country’s exports in 2007, as the price of commodities like oil drop, said Cano.

The composition of the country’s exports is a concern as many of the country’s goods sold overseas are labor intensive, like processed foods, textiles and shoes to Venezuela, said Cano, which may impact employment in Colombia.

The Colombia’s peso appreciated almost 80 percent between late January 2003 and mid-June this year, hurting exports, which account for almost a fifth of Colombia’s $172 billion economy.

The peso was little changed at 2,268.95 per dollar at 11:16 a.m. New York time, from 2,270.50 yesterday, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX.

Unemployment has started to rise, reaching 11 percent in October, up from 10.2 percent a year earlier and salaried, professional jobs with social security are being lost, said Cano.

“In the past months unemployment has started to climb,” said Cano. “But what worries me more is the composition of the job losses. The jobs that are being destroyed are salaried jobs.”

Default de bonos soberanos en Ecuador

El Comercio

El presidente Rafael Correa anunció hoy en Guayaquil que no pagará los intereses por USD 30,6 millones de los bonos Global 2012 que vencen el próximo lunes.

Señaló que asumirá todas las responsabilidades que esa decisión implicaba, como juicios, litigios y cualquier otra acción que los acreedores decidan emprender.

También dijo que presentaría un plan de reestructuración de toda la deuda que sea considerada como legítima.

Fed mulls exceptional monetary measures

The Financial Times Limited, December 11 2008 20:20

By Krishna Guha in Washington

The meeting, which concludes on Tuesday, comes as the Fed has already moved into unorthodox territory – doubling the size of its balance sheet and moving beyond collateralised loans to direct purchases of commercial paper and securities issued by Fannie Mae and Freddie Mac, the mortgage groups now under government control.

But as interest rates approach zero, the debate shifts entirely to the other tools the Fed can use against the economic crisis, presenting the central bank with tough conceptual, governance and communications challenges.

The first decision the Fed has to take is where to end its conventional easing cycle – at zero or a positive interest rate. Zero rates would create problems for money-market funds and the repo market.

However, there are benefits to zero rates as well. Moreover, the Fed may not be able to keep the actual fed funds rate much above zero even if it maintains a higher target rate, while conducting unconventional easing on a grand scale.

The bigger decision is over where the Fed goes next.

The central bank can push forward on either or both of two fronts. It could try to lower longer-term risk-free interest rates. And it can try to use unconventional measures to reduce risk premiums or “spreads” in particular markets.

When Japan was mired in economic stagnation a decade ago, Ben Bernanke, chairman of the Fed, recommended that its central bank should focus on driving down long-term risk-free rates.

He this month reminded the markets that the Fed could also do this, for instance by purchasing long-term Treasury bonds. This would reduce the benchmark rate on to which spreads – for instance, on corporate bonds – are added.

But the long-term risk-free rate on US government bonds has already fallen dramatically. So buying Treasuries may not be the immediate priority for the Fed.

Mr Bernanke believes that the US, with its very low risk-free rates but high actual costs for most borrowers, is in a very different ­situation to Japan a decade ago, when actual borrowing costs were low across the board.

That suggests the Fed will continue for now to emphasise large-scale, targeted interventions that aim to reliquify particular financial markets and hammer down spreads. The top candidate is further huge purchases of ­securities issued by Fannie and Freddie to reduce home loan rates.

Indeed, there is renewed speculation that the US authorities could soon announce a plan in which banks offer home loans at 4.5 per cent, possibly for refinancing as well as new purchases, that would be securitised by Fannie and Freddie. The Fed could purchase such securities. The Fed could also step up its purchases of asset-backed securities and commercial paper, potentially pushing into longer-term corporate debt. But this would require capital support from the Treasury.

The Fed’s unconventional operations bear some resemblance to the “quantitative easing” eventually adopted by Japan – but with differences. Japan set out to increase bank reserves in the hope that this would stimulate lending while committing it to keep rates near zero for a long time.

The Fed’s strategy also increases bank reserves but more as a byproduct of its liquidity operations than an end in itself. Fed policy is driven by the asset side of its balance sheet rather than the liabilities side.

There is “quantitative ­easing” – an increase in reserves – but there is also “qualitative easing” – a shift in the composition of the Fed’s assets. In the US case, the game is not simply about flooding the system with reserves, since a dollar of commercial paper lending, mortgage-backed securities purchases or Treasury purchases are not equivalent.

How to explain all of this in a brief policy statement without completely confusing the markets will be extremely difficult.

The Fed approach does not easily reduce to a numerical target for reserves or the 10-year bond rate.

The US central bank may simply state that it will maintain low rates for as long as needed and will adopt additional measures, including unconventional ones, as required to support growth.

 

So long, super-cycle

By Javier Blas

New York Times: December 9 2008 19:56

Many Asian emerging markets were in recession, along with Japan, while Russia had just devalued the rouble and defaulted on its domestic debt. Although continental Europe was buoyed by the imminent launch of the euro, the US and UK were among many countries where growth was weakening. In its latest World Economic Outlook, the International Monetary Fund had agonised over what should be done to address “the current crisis”.

The oil market knew the answer: sell. Ten years ago this Wednesday, the price of the North Sea’s benchmark Brent crude closed at the lowest level in its history, at $9.64 a barrel.

That era resonates anew, says Mr Laughlin: “People today do not want to buy oil either.” What is different, however, is the speed of the reversal. Just five months ago, Brent stood at an all-time high of $147.50. This week it traded below $40. Other commodities have also fallen rapidly out of favour: the Reuters-Jefferies CRB index, which includes oil and a range of commodities from copper to cotton, is plumbing its lowest level in six years after October brought the largest monthly drop since it started life in 1956.

The severity of the crisis has surprised natural resources companies’ executives, commodity traders and Wall Street bankers alike. After all, the commodities boom of 2003-08 has been the most notable for a century in its magnitude, duration and the number of commodities whose prices it has lifted. The sudden plunge poses a fundamental question: is this just a temporary blip within an upward trend, with prices likely to rebound in the medium term, or is it the conclusion of another commodities cycle of boom and bust, with a period of relatively stable prices coming ahead?

The common belief in the industry itself, and among most Wall Street analysts, is that the market is undergoing a correction but that the boom years have not ended. As many point out, the main drivers of what many have come to see as a commodities super-cycle – such as strong pent-up demand in emerging countries and supply constraints caused by a lack of investment over the past 20 years, along with the rise in resource nationalism – are intact. The current drop is, in the words of one senior mining executive, a “reset” of the boom, not the end of it. Prices will rebound, in this view, and continue rising.

In addition, they argue, the credit crunch that today is depressing prices as economies slow could end up having bullish implications as companies stop investing in new oilfields, mines or farms because of lack of finance and low prices. That points to a shortage of supplies in the future and, potentially, higher prices when demand recovers.

But a growing minority disagrees with this rosy view. With its report released on Tuesday, the World Bank has put itself among the most vocal in warning that the commodities boom has come to an end. Some executives in the natural resources industry agree – in private. Like earlier booms, this one has ended as a period of solid economic growth gives way to a recession in the US, Europe, Japan and a sharp slowdown in emerging countries including China.

“As the rapid decline of commodity prices since mid-2008 attests, the current boom is best understood as yet another cycle in a long history of commodity price cycles,” says the bank, comparing the 2003-08 period to similar booms in the 1973-74 oil shock and in 1950-57 after the second world war. Both of those turned to bust.

Although most proponents of this argument see prices remaining well above the lows of the 1990s, they do not forecast a return to the torrid levels of this summer. That is because a more slowly expanding population and weaker rises in income will ease global economic growth – and commodities demand – in the next two decades.

They dismiss the notion that the credit crunch will trigger shortages in the future as companies cancel investment projects. Any increase in demand will first slowly have to absorb the current build-up in dormant capacity as companies cut their production. “Certainly, it is unlikely that we are going to see any time soon another boom across a wide range of commodities lasting so long and going so high,” says Andrew Burns, an economist at the World Bank in Washington.

For its part, the natural resources industry points out that falling supply in some areas and commodities – such as mature oilfields in the North Sea or old gold mines in South Africa – will support prices even if demand is weak. But pessimists say that the rapid fall in demand will leave the system with plenty of spare capacity.

Both sides have powerful arguments but history says that commodities booms last about a decade – almost exactly the length of time that oil prices were on the rise.

Whatever the disagreements, pessimists and optimists see eye to eye on the next 12-24 months: it looks grim for commodities. The IMF forecasts only 2.2 per cent in global growth next year, with the rich countries suffering a full-year economic contraction for the first time since the second world war while growth in emerging countries slows appreciably.

“The main difference for commodities is that our view for emerging countries’ near-term economic growth is now more pessimistic,” says Thomas Helbling, an IMF economist who specialises in commodities issues. Relatively high-growth emerging countries consume more energy and other basic products than developed nations as they build infrastructure and embrace new forms of consumption, from cars and washing machines to meat and refrigerators.

The paradigm of fast growth and a high propensity to consume commodities is China, which has been the world’s engine of raw materials demand during the past five years. But now the engine has stalled. “It would be an understatement to say that there was not much positive news,” says Jim Lennon, a London-based commodities analyst with Macquarie Bank, who recently hosted a commodities conference in China.

According to the World Bank, Chinese economic growth will slow to 7.5 per cent in 2009, the lowest rate since 1990. But some bankers and mining executives are even more pessimistic, saying that activity in some sectors has already almost stopped. “Demand has really ground to a halt in the past month,” says Mr Lennon.

The early signs were masked by the Olympics, when Beijing ordered heavy industries to shut temporarily in order to reduce pollution. When the sporting events ended, it began to become apparent that Chinese industrial activity was failing to return to its previous heady pace. Commodities prices tumbled as a result.

Kamal Naqvi, who advises institutional and hedge fund clients as a director of commodities at Credit Suisse in London, says big long-term investors remain committed to commodities. “We have not seen a major change in attitude towards commodities as an asset class from large institutional investors,” he says. But Mr Naqvi agrees that for retail clients and hedge funds, the outlook has changed, adding: “Activity has declined and we expect to see further redemptions in the next six months.”

In general, bankers agree that although the sharp price declines of recent months could be a buying opportunity for longer-term investors who missed the boat earlier this decade, the desire to increase exposure to risky assets such as commodities is unlikely to re-emerge until the global financial crisis abates.

That would mark a significant change since investors started to pour serious money into commodities about five years ago. For some it was the lure of strong returns, for others a hedge against inflation. For all, it was the appeal of diversification, amid a notion that commodities prices usually do not move in the same direction as equities or bonds.

By the end of June, investors’ commodities assets under management had risen to $270bn, up from about $10bn in 2000. Not all the increase had come from fresh inflows: a significant portion of the rise derived from the appreciation of the assets themselves. However, assets under management fell in the third quarter for the first time since 2003 to about $211bn, according to Barclays Capital.

Price markdowns rather than outflows accounted for the bulk of the fall, however. Whether investors start pouring money into the asset class again will depend on which view prevails: that the current drop in prices is just a blip or that the boom has ended.

But for investors, executives and bankers alike, the commodities boom and bust cycles teach that extrapolating today’s events into the future may prove the wrong bet. Ten years ago this week, when oil prices bottomed at $9.64 a barrel, the common wisdom was that commodities prices were heading down. Today’s forecasts could prove equally fallible.

PEAK PERIODS OF THE PAST: IN STRENGTH, LENGTH AND SCOPE, IT HAS BEEN THE BOOM OF A CENTURY

The last five years’ commodities price surge has been the most marked of the past century in its magnitude, duration and breadth – with the cost of energy, metals and food all swept upward.

Previous booms included one or two of those segments but never all three. The reconstruction effort that followed the second world war lifted metal prices, while bad harvests pushed up the cost of agricultural products.

In the 1970s, oil prices spiked and agriculture followed. But metals, after a brief jump, collapsed because of waning demand amid lower economic growth. The 1915-17 boom saw metals and agriculture rising, with oil prices playing no role.

The length of the 2003-08 boom has also surprised many. The jumps of the 1950s and 1970s were shorter, although the first world war brought a similarly long period of strength.

Moreover, the latest surge has involved not only conventional commodities such as oil and wheat but also exotic raw materials such as rhenium and cobalt, two metals used as superalloys in jet engines among other applications.

Yet the sheer size of the rises also stands out. “The magnitude of commodity price increases during the current boom is without precedent,” says the World Bank in its latest report.

It notes that prices in real terms – inflation adjusted – have increased by 109 per cent in US dollars since 2003 and 130 per cent since the cyclical low of 1999.

By contrast, increases in earlier booms never exceeded 60 per cent, according to the bank’s estimates.

From trough to peak in the oil market, prices rose – in nominal terms – by 1,415 per cent between December 1998 and last July.