Week in Review

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6 key numbers that reveal the staggering impact of Russia's war in Ukraine. Over the course of six months, the war has captured the world's attention, disrupted the global distribution of food and fuel and left the country reeling. To understand some of the war's impact on Ukraine, here are six key numbers. (NPR)

Government revision shows economy shrank 0.6% last quarter. The U.S. economy shrank at a 0.6% annual rate from April through June, the government said Thursday in an upgrade from its initial estimate. It marked a second straight quarter of economic contraction, which meets one informal sign of a recession. (AP)

Zaporizhzhia: Occupied nuclear plant disconnected from grid, Ukraine. The final pair of working reactors at the Zaporizhzhia nuclear plant have been disconnected from Ukraine's power grid, the state nuclear agency says. Nearby fires apparently interfered with overhead power lines, disconnecting the now Russian-controlled site from the national grid for the first time ever. (BBC)

Dockworker strikes at Northern European ports add to supply chain disruption. European supply chains are set for further disruption as transport unions step up industrial action in response to soaring inflation. (HSN)

Taiwan plans defense spending hike as China flexes muscles. Taiwan is set to boost spending on defense, including the purchase of advanced new fighter jets. The increase comes as China stages large-scale war games around the island. (DW)

German economy grew in 2Q, beating expectations. The German economy grew modestly in the second quarter, beating expectations of stagnation amid high inflation and uncertainty stemming from Russia's invasion of Ukraine. (MarketWatch)

Bangladesh is being ‘killed by economic conditions elsewhere in the world’. The country of 160mn people is being rocked by soaring prices of energy and food following the Covid-19 pandemic and Russia’s invasion of Ukraine. These have led to energy shortages and rising import bills that are, in some cases, straining their ability to keep up with debt payments. (Financial Times)

S Korea signs $2.25 billion deal with Russia nuclear company. South Korea has signed a 3 trillion won ($2.25 billion) contract with a Russian state-run nuclear energy company to provide components and construct turbine buildings for Egypt’s first nuclear power plant, officials said Thursday. (AP)

Behind in polls, Brazil's Bolsonaro hopes evangelicals will carry him to reelection. With the president seeking another four-year term in the Oct. 2 election, Ferreira predicts: “I am sure that evangelicals will vote massively for Bolsonaro.” (NPR)

China factories ration power as heatwave sends demand soaring. Chinese lithium hub Sichuan province will ration electricity supply to factories until Saturday, state media reported, as a heatwave sends power demands soaring and dries up reservoirs. (IndustryWeek)

Shipping industry to remove the Indian Ocean High Risk Area. After more than a decade of effective threat-reducing counter-piracy operations the shipping industry has removed the ‘Indian Ocean High Risk Area’ (HRA). (HSN)

Why euro falling below dollar parity is a big deal. A sinking euro is threatening to inflict further pain on an economy that's already having to contend with a surge in inflation. And the bad news is that the common currency's slide may not stop here. (DW)


Emerging Market Currency Reserves Running Low on US Dollars

Annacaroline Caruso, editorial associate

Emerging markets are running through U.S. dollars at the fastest rate since 2008, per The Wall Street Journal (WSJ). Foreign exchange reserves of emerging and developing nations shrunk by $379 billion this year through June, according to the International Monetary Fund.

“There’s an immediate risk in a couple of fairly significant countries,” Brad Setser, a senior fellow at the Council on Foreign Relations and former adviser to the U.S. Trade Representative in the Biden administration, told the WSJ. “These are countries which didn’t have enough reserves to begin with. They are drawing on their reserves because they’ve lost access to financing and they have to pay for food and energy imports, and are fairly obviously at risk of currency or debt crisis if this continues much longer.”

Countries at high risk of a currency crisis in Egypt, Turkey, Ghana, Sri Lanka, Hungary, Turkey and Nigeria. “Countries most at risk are going to be those who cannot produce oil or energy themselves,” said Fred Dons, director and head of CTF Flow at Deutsche Bank (Netherlands). “Those are the countries that are burning through U.S. dollars rapidly.”

Dons said he is already starting to see the effects of shrinking currency reserves. “Some countries are limiting their imports to essential goods, like food and energy. Goods traded on letters of credit are still being paid, but we are seeing the payments of goods traded on an open account basis being delayed as much as two months.”

This comes as the U.S. dollar has soared to a 20-year high, “forcing central banks to drain reserves in an attempt to stem depreciation of their currencies. Emerging-market central banks have also been raising interest rates aggressively over the past year, but that hasn’t stopped the exodus of foreign cash and pressure on their currencies,” per the WSJ.


Climate Change Mitigation Will Cause Large Adjustments in Current Account Balances

Rudolfs Bems and Luciana Juvenal, IMF

A climate mitigation policy mix of carbon taxes, green subsidies and infrastructure investment could reduce global balances by a quarter by 2027. But only if countries coordinate their response. Our latest Chart of the Week, drawn from the IMF’s External Sector Report, shows the impact a globally coordinated mitigation policy package could have on current account balances.

According to our model-based scenario analysis, the carbon tax has the biggest effect. By discouraging energy usage, economic activity will likely shift toward more labor-intensive, low-carbon sectors as a result. Global interest rates are also likely to fall in the longer term because of the decline in investment in fossil fuels, following an initial infrastructure investment-induced rise.

The precise effects will be different for every country, however. Unlike greener economies, current account balances in more fossil-fuel-dependent economies may increase because of the sharp fall in investment in carbon-intensive sectors. This would likely cause global capital flows to shift toward greener advanced economies, putting a disproportionate burden of economic adjustment on lower-income fossil-fuel-exporting developing countries, which historically have contributed little to carbon emissions.

Increased burden sharing in climate change mitigation efforts could help limit the shift in capital flows. This would mean higher carbon taxes and emission cuts for advanced economies. Accelerating investment in green energy and renewables in developing countries could also contribute, including through increased financing and technology transfers from advanced countries.

Clearly, both advanced and developing countries will need to play their part in reducing emissions. To succeed, policy coordination and burden-sharing arrangements will be key.

Reprinted with permission by IMF Blog.

Philippines: Mostly Pro-Business Policies

PRS Group

The presidential election held on May 9 resulted in a landslide victory for Ferdinand “Bongbong” Marcos, Jr., the candidate of the Federal Party of the Philippines (PFP). The onetime senator and former governor of Ilocos Norte province is the son of former dictator Ferdinand Marcos, who ruled mostly under martial law from 1965 until being forced from power by a popular uprising in 1986.

The new president, popularly known as BBM, succeeds Rodrigo Duterte, and was widely seen as the “continuity candidate,” a status cemented by his endorsement (albeit belatedly) by Duterte’s party, PDP-Laban. Taking into account as well the new president’s years-long effort to whitewash his father’s legacy, it is reasonable to assume that BBM’s governing style will bear some resemblance of that exhibited by both former leaders. At the broadest level, that means wrapping himself in the mantle of populism and, to the extent that his popularity permits him to do so, acting without much regard for the letter of the constitution when it comes to limits on his authority.

Duterte’s own tenure suggests that the Filipino population will tolerate departures from liberal democracy in exchange for prosperity. Marcos recognizes that achieving a longer-term improvement in living conditions will require him to reassure foreign investors. The Philippine Chamber of Commerce and Industry (PCCI) has greeted the revival of the Marcos dynasty with guarded optimism, noting the appointment of technocrats to handle key Cabinet portfolios, including Labor, Finance, and Trade, and as the heads of the Central Bank of the Philippines (BSP) and the National Economic and Development Authority (NEDA).

The PCCI has drawn up a wish list of reforms that it claims are consistent with those objectives. Among the items are several bits of unfinished business from the Duterte administration, including planned tax reforms related to property valuation and passive income that were put on hold amid the economic emergency created by the COVID-19 health crisis.

The medium-term fiscal framework unveiled by the new government prioritizes reduction of the deficit and the creation of a strong foundation for long-term fiscal stability, which will provide policy makers with room to implement a businessfriendly agenda that facilitates the consistent robust economic growth required to ensure an adequate supply of quality jobs and reduce poverty.

As was the case with Duterte following his decisive victory in 2016, many of the main power brokers have fallen in line behind the new president, who at the start of his presidency has at least tacit support from most of the powerful political dynasties. That said, no public relations campaign will fully erase the memories of his family’s crimes, and his less committed allies may turn on him if global development result in a damaging surge of inflation or a deceleration of growth that stokes economic insecurity. The president will likewise need to take care to avoid overreaching as he tests the limits of his authority, with a premature push for self-serving changes to the constitution arguably posing the greatest risk of provoking a backlash.

The analysis above is taken from the July 2022 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.


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Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate