BY KEVIN GIKONYO
If you have felt a thin-like chill effect go down your spine by the sheer thought of a crunch, you must have directly or indirectly suffered, been tormented during year 2008-2009 by an economic Tsunami that you never saw coming. Many may have sought answers from heavens to explain what in the world was happening. This Tsunami whirled from North America in the name of un-serviced mortgages that rocked the infamous Lehman Brothers bank among other key lenders.
This ghost descended on September 15, 2008 after Lehman Brothers declared bankruptcy as a result of defaulted mortgages. The mortgages were highly leveraged bets (Through the derivative markets) on assets tied to worthless mortgages. Those assets lost value not because of the Lehman bankruptcy but because the default rate soared to unprecedented proportions of nearly 800 billion dollars. Most economists inclined the residual economic effect to Lehman Brothers Bank declaring bankruptcy, although there were many players to add to this equation. The key indicators before the crunch in 2008 were:
^ Interest rates spike.
^ Defaults on subprime loans had risen to an all-time high.
^ Consumer power of spending was on a downward spiral.
^ Unemployment rates were high.
^ Increase in the inter-bank lending activity.
^ A wide spread between short-term commercial papers and the Treasury rates.
All this economic fundamentals were signs of an imminent collapse of the market and the Federal Reserve in the US was well aware of this looming crisis. However, the brake that they applied in 2007 was far too late and could only afford to buy time, but not enough to avoid the “Crush”.
In case you missed it, the symptoms of this plague called “Economic Crunch” are beginning to show in most markets. The six key symptoms as aforementioned are forming like dark clouds in every key regional market across the globe ready to rain. This time round, the epicentre will not be in America but majorly from China followed by snippets of ripple effects from other major markets.
China, the second largest economy has had a share of issues. Since June 2015 the Shanghai Composite Index (SSEC) has dropped by almost half. (See below Chart SSEC share Index movement from May 2015 to March 2016-Source YCharts).
Traders and analysts have cited a confluence of reasons for the slide in addition to profit-taking appetite in China. There are fears of tight liquidity in the financial system, worries about cooling of the economy and anxiety over looming liberalization of initial public offerings (IPOs), which some investors fear could result in a cash crunch. “Market confidence is still fragile and economic prospects remain gloomy, so investors could be taking profit earlier than in previous years,” said Wu Kan, head of equities trading at Shanghai-based investment firm Shanshan Finance.
A recent rebound has been touted to be thematic and only a tip of the iceberg of what is yet to come, ready to sink the second largest economic ship, reminiscent of the “unsinkable Titanic”. China’s central bank devalued its currency in August 2015, sending major shocks to stock markets in Asia and Europe and sparking fears of additional exchange rate devaluations in other countries. It is the largest devaluation in China’s system in over 20 years – (Source Brookings institution press by Rebecca Campany). Since 2008, China has been on a trend to improve its domestic market by devaluing Yuan to boost its exports in the manufacturing industry. In addition, they have been keen to effect internal policies to ensure industries keep running. This has caused an oversupply of manufactured products globally, despite some of the exporters in China recording losses.
Statistics shows that steel production in China have gone untethered. In the last five years China has produced huge amounts of steel that equal the combined production of the other four largest steel producers in the world namely; Japan, India, US and Russia. More than 60% of the Aluminium industry has had negative cash flows for the past six years, with that of the steel industry following closely on a five year low and recently recording its worst shrink in China’s 35year history.
Cement produced in the last two years equalled that of the US in its entire 20th century as claimed by EUCC president, Joerg Wuttke. Coal production is set to be reduced by 500million MT annually in the next three years due to environmental and dwindling global demand. Human resources and social security minister Yin Weimin told a news conference on Monday 29 February, that there will be job cuts estimated to affect 1.3 million coal jobs, while 500,000 aluminium workers face redundancy and additional millions of steel workers facing unemployment.
(See below chart from 2011 to Sept 2015 to show production output in China-Source YCharts).
“In pursuing its domestic objectives, China risks inadvertently amplifying global financial instability. Markets worry that renminbi (Yuan) devaluation could “steal” growth from other countries, including those that have far more foreign debt and far less robust financial cushions than China, which maintains ample international reserves” writes Mohamed El-erian of the Buisness project syndicate economists.
A detailed synopsis into China’s action or inactions is endless. In the past 6 years, it’s as if they have been holding onto a yoyo and are engaging in economic experiments while trying to steer into a sustainable economic growth model. The recent decision to rescind their one child rule will soon strain China’s basic resources and demand the government dig deeper to meet their basic needs. In addition, the growing international pressure to curtail carbon emissions will not stop, thus meaning a cut in manufacturing to create a rise in unemployment in China.
These intricacies have already started to affect the U.S. money markets where their junk-bond defaults could nearly double by the third quarter of this year, led by energy, metal and mining companies under pressure from depressed commodity prices, according to UBS Group AG. The U.S. corporate sector has recently been strained by appreciation of the dollar causing reduced exports and a growing credit book to finance share buybacks in this hard economic times.
In UK the Royal Bank of Scotland was quoted by the guardian as urging its investors to sell everything ahead of an imminent stock market crash-article dated January 12, 2016 by Larry Elliott. A constant average of 10% unemployment and under employment of 5% in 19 Eurozone countries and a growing crisis from Syrian refugees is not making the situation any better. A third Greece bailout to a tune of 86Billion Euros that could become a choke throat for the Eurozone key lenders like Germany if Greece defaults or is unable to repay the loan is also a space to watch in the once vibrant Euro market.
Then comes the carnival in Brazil, which has been comparatively well managed, but still finds itself staring into an economic abyss. Now, like Venezuela, it had fought persistent poverty by just giving people money, but, unlike Venezuela, it did that in the context of market-friendly policies that kept its economy growing—at least until now. It is facing not only the global commodities bust but also a wider credit bust at home. Investors had poured a lot of money into the country in search of higher returns, especially after the Federal Reserve began buying bonds in 2010, and that had set off a lending boom. And, like most of them, it has turned out badly. That has made Brazil’s economy contract in the past years, its worst performance since the 1930s, at the same time that its currency has plummeted by 50% against the dollar as money is now moving out of the country-Source Washington post.
Middle East is no exception to this reality, due to the reduced crude oil prices in the Brent crude trading that has maintained a southward direction with analyst pitting the prices to plummet to a historical low of 16$ per barrel in 2016. Moreso, the acute effects of terrorism within and without their borders will definitely pan out to only dent further their already oil-strained economies.
Nigeria, among the top Oil producers, cannot miss from the roller coaster of crude price effect. Their government expenditure has always been tilted to rely on the Oil dollar incomes to feed its growing population and fund its infrastructural projects, which will have no option but to halt or maintain lean fiscal policies.
Kenya may not be spared either. We have recently witnessed closure of the only long serving Fluorspar company in Kerio Valley, with investors citing unfavourable global commodity prices. Towards the end of last year the market was treated to a near convulsion due to interest rates spike to nearly 30%, which was temporarily mitigated due to public outcry, as the government seeks to meet its budget deficit through another international bond that may not do as well as the last, for reasons well known to Kenyans.
A recent precautionary loan of Sh152 billion from IMF for the next two years to be accessed in case of unforeseen shocks may also be an indicator that Kenyan and IMF experts have foreseen a turbulent global economy.
South Africa is at its worst Rand performance in history without any clear indicators how the currency will make a comeback. This has factored the recent surprise exit of Barclays Bank Africa and its affiliate ABSA in their share matrix in Africa, a situation that has left many experts in speculation as to what informed Barclays Bank Plc in making such a decision. Could they have foreseen another crunch? Well, the symptoms could not be far from the real diagnosis, prepare for a painful jab. The writing is on the wall, get to a” higher ground” and pray, seek the proverbial “Noah’s Ark” or buy a surfboard that will help you navigate at the top of the Tsunami tide. Much easier, you could dismiss these facts as pessimistic and opt to burry your head in the sand.