Posted on Monday, December 18th, 2006
By bsetser
A deficit of $225b in a quarter/ $900b is big by any standard — and bigger (in nominal terms) than the previous record in q4 2005. Those convinced that the US current account deficit has already stabilized might want to take notice.
That said, the q3 deficit is a tiny bit smaller than I expected. The deterioration in the income balance wasn't quite as big as I expected. More on that later.
The q1 and q2 deficits look to have been revised up a bit — so the deficit in the first half of the year now stands at $430b. The q4 deficit will likely fall a bit from its q3 levels. The October trade defict was better than expected. The US oil import bill may be $15b smaller in q4 than q3. Say the q4 deficit comes in at $210b. The deficit for the year will still be $865. That is, I suspect, a bit conservative — the q3 deficit could easily be revised upwards, the deterioration in income balance could be larger in q4 and so on.
The pace of deterioration in the current account deficit seems to have slowed. But it hasn't, in my judgement, yet stabilized — in nominal or real terms.
A few other quick points.
The q3 deterioration in the income balance wasn't as bad as expected larger because the increase in q3 "other private income receipts" — $3.8b — was higher than the increase in US non-FDI interest payments (about $3.1b). In other words, interest income on US lending abroad increased faster than interest payments on US borrowing from the world. That won't continue. I had expected income from US lending abroad (which is usually short-term lending) to stabilize in q3 — that didn't happen, but with the Fed on hold, it should happen soon.
US government transfers (foreign aid) are look to be about $20b in 2006, v. $30b last year. I think that reflects the end of the big aid package to Iraq.
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Posted in U.S. trade deficit and external debt | 31 Comments »
Posted on Sunday, December 17th, 2006
By bsetser
Venezuela has, according to Bloomberg, reduced the dollar share of its reserves from 95% to 80%, and increased the euro share from 5 to 15%. Bloomberg:
“The U.S. dollar has suffered a long process of deterioration,'' Domingo Maza Zavala, one of seven board members at the central bank of Venezuela, said in a Dec. 14 interview. “The diversification strategy started this year.''
Banco Central de Venezuela has slashed the percentage of its $35.9 billion worth of reserves invested in dollars and gold to 80 percent from 95 percent a year ago, said Maza Zavala. The country, the world's fifth-largest oil supplier, has boosted its euro holdings to 15 percent, from less than 5 percent in the same period.
The US banking data has shown a consistent reduction in short-term Venezuelan claims on US banks over the course of 2006, so this isn't a total surprise. The data on Venezuela includes some private deposits in US banks. But there are a couple of lines — notably the fall in US bank obligations to banks and official institutions in Venezuela – that likely reflect not just a shift out of dollars, but also a shift out of dollars held on deposit in US financial institutions.
However, 80% is still a pretty high dollar share. It isn't quite as high as the UAE's 98% dollar share — assuming that the UAE is still studying how to bring that share down to 90%. But up it is up there.
Of the big Asian central banks I would bet that only Taiwan — and perhaps Japan — has a substantially higher dollar share. Even Hong Kong — if memory serves – doesn't have more than 80% of its reserves in dollars. I suspect that both Korea and China are under 80%. Singapore, Malaysia and Thailand are well under.
Indeed, when hard information about the dollar share of oil exporters reserves has come out, I generally have been surprised by how high it is. 98% for the UAE is the best case in point. A big part of me still wonders if the real secret that the Saudis are trying to hide is how high the dollar fraction of their reserves really is.
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Posted in central bank reserves | 13 Comments »
Posted on Friday, December 15th, 2006
By bsetser
Bernanke’s speech at the Chinese Academy of Social Sciences is well worth reading. He quite accurately notes – at least in the written text, if not in the actual speech – that China’s extensive intervention to maintain its dollar peg acts as a de facto subsidy to its export sector:
Greater scope for market forces to determine the value of the RMB would also reduce an important distortion in the Chinese economy, namely, the effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market. A decrease in this effective subsidy would induce more firms to gear production toward the home market, benefiting domestic consumers and firms. Reducing the implicit subsidy to exports could increase long-term financial stability as well: If China invests too heavily in export industries whose economic viability depends on undervaluation of the exchange rate, a future appreciation of the RMB could lead to excess capacity in those industries, resulting in low returns and an increase in nonperforming loans.
The subsidy isn't equal to China's total reserve growth, but it is roughly equal to the capital loss the PBoC will eventually incur on its dollars and euros when the RMB eventually appreciates. And those losses are potentially large — maybe $300b.
Bernanke also notes that China’s exports have grown at an annual pace of around 30% ever since China joined the WTO – far faster than the 12.5% average rate in the preceding five years:
“Since joining the WTO in 2001, China has seen the dollar value of its exports grow at an average rate of about 30 percent per year, compared with annual growth of about 12-1/2 percent over the five years before gaining WTO membership.”
Later in the speech, he also notes that China’s real effective exchange rate has depreciated by 10% since 2001.
As the Chinese trade surplus has continued to widen, many analysts have concluded that the RMB is undervalued. Indeed, the situation has likely worsened recently; because of the RMB's link to the dollar, its trade-weighted effective real exchange rate has fallen about 10 percent over the past five years.
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Posted in China | 93 Comments »
Posted on Friday, December 15th, 2006
By bsetser
They all shifted funds out of short-term accounts (despoits, short-term securities, other short-term liabilities) and into long-term bonds — a move that makes sense if you think the US economy is slowing and bond yields should fall.
- Norway reduced its short-term holdings by $16.1b (mostly from a fall in selected other liabilities held by official institutions and banks — whatever that is) and bought $16.7b of long-term securities (mostly Treasuries).
- China reduced its short-term holdings by $8b, and bought $6.1 of long-term securities (about 1/2 treasuries).
- Russia reduced its short-term holdings by $3.2b (but not by reducing other liabilities — Russia reduced its holdings of negotiatable CDs and other short-term securities), while increasing its long-term holdings by $2b.
- Asian oil exporters (Saudi Arabia and the Gulf), though, didn't side with the bond bulls (the bears on the the US economy). They didn't bet on bonds. Their short-term holdings increased by $2.7b, while their long-term holdings fell by $2b.
All in all, though, the October TIC data still leaves me rather confused about the financing of the US external deficit.
Why? There aren't big net flows from the places in the world with lots of surplus savings. China wasn't a net financier of the US — despite running a $20b plus trade surplus/ $25-30b current account surplus. Japan bought $5.4b of long-term debt, but that flow is actually small relative to Japan's current account surplus.
The oil exporters have about $40b a month to invest in markets around the world — markets globally, not just the US. One might expect at least $20b of that to go the US, a 50/50 split. But the oil exporters holdings of claims on the US look to be about flat — they shifted in aggregate from holding short-term debt to holding long-term debt, but didn't add to their total holdings.
Flows through the UK remain big … so that is part of the answer. But they don't seem quite big enough to be the entire answer either.
Equity inflows to the US — no doubt largely private flows — increased in October. But a net inflow of portfolio equity of around $10b still leaves the US needing to place about $60b of debt to cover its current account deficit.
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Posted in U.S. trade deficit and external debt | 15 Comments »
Posted on Thursday, December 14th, 2006
By bsetser
That is what William Hess argues in Newsweek International. China cannot give Paulson what he wants without jeopardizing its domestic goals. Hess writes:
"Secretary Paulson will likely return home empty-handed, or nearly so, if only because the Chinese don't have much they can give. Domestic priorities and stability will prove to be as important to them as they were to the winners in last month's U.S. congressional elections."
Tis true that domestic priorities usually trump international pressure — in the US just as in China. Mike Mussa is right: Paulson needs to show that his approach to China delivers results in the next 6-9 months or the intiative in the US will shift to the Congress.
China clearly doesn't like the hardening of Paulson's tone on the RMB. And it isn't clear if Wu Yi is in a position to deliver much — or even if she wants to. See the Yu Yongding quotes in this Stephen Weisman article.
But I wasn't convinced by the broader argment in the Hess article, namely that the United States' demands are really at odds with China's domestic goals. Right now, China is worried about too much growth and an overheated economy, not too little growth. A stronger RMB could substitute for administrative controls on investment. Rather than leading to slower growth, a stronger RMB might help to rebalance the basis of Chinese growth.
In the past few months, China has used a host of measures — limits on bank lending, delays approving big projects and the like — to slow investment. With strong exports and a rapidly rising trade surplus contributing strongly to China's current growth (see Nick Lardy), China in sense has been forced to take steps to curb domestic demand growth to keep China's economy from overheating.
This is a point Martin Wolf has made better than anyone.
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Posted in China | 75 Comments »
Posted on Wednesday, December 13th, 2006
By bsetser
Most participants in US financial markets — I suspect — tend to think of the US market as a key global hub, with US financial markets serving helping to match the world's savings with the world's most profitable investments.
And obviously, there is some truth to the image of US markets as a key node in the global financial system. New York hedge funds have big positions in say Brazil, and many other emerging economies. Goldman is making a ton of money — and not just because their London office is doing well.
But, US doesn't really host the world's leading financial hub right now — at least not in the sense of an airline hub where folks gather to catch a flight to their final destination. The big hubs are in Europe. The US is the biggest user of the world's funds — but not the biggest intermediary. I have made this point before, but it is laid out most elegantly in a set of charts prepared by Patrick McGuire and Nikola Tarashev in the latest BIS quarterly (See p. 9 of this .pdf/ p. 35 of the overall BIS quarterly, or look below the fold).
The US is to the world's banking system what …. drum roll please … emerging Asia was to the world's banking system in mid-1990s. Actually, the US was a net user of funds in the 1990s as well. Now, though, it is the only big net user of funds!
There are obviously a lot of different flows that show up in the BIS's analysis of global bank flows. Flows into the US, and flows out of the US (notably to the Caribbean).
Source: McGuire, Tarashev in the BIS Quarterly; Hat tip, Emmanuel.
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Posted in General | 26 Comments »
Posted on Tuesday, December 12th, 2006
By bsetser
I don’t think the deficit stabilized just because of the headline fall in the trade deficit. The deficit is down $9.6b from its August peak largely because the US oil import bill has fallen by $7.6b since August. The US imported $21.8b in October, down from $29.3b in August as the average price of a barrel of imported crude fell from $66 to $55.5. Oil import volume also aren’t increasing at the same pace as they have in the past – for the year to date, the US is importing about 1% less crude than in 2005.
Oil matters. But so does the non-oil deficit. And the October data suggests that the rise in non-oil imports in the third quarter seem to have ended, if not reversed itself – on the back, one assumes, of a slowing US economy. And a slowdown in the pace of non-oil import growth is essential to the eventual stabilization of the US trade deficit. The charts are below the break.
Let’s look at a couple of charts. The first shows US exports and US non-oil imports.
A couple of things are worth highlighting. First, export shave growth quite strongly since early 2004. They did particularly well between say the end of 2004 and mid-2006. However, more recently, the pace of export growth has leveled off. That worried me – and for that matter, it still worries me. Total exports have been stuck below $125b for several months now.
Second – non-oil imports have also been growing. I was particularly concerned by the increase between May 2006 and August 2006 – an increase, that, if sustained, was strong enough to push the overall trade deficit up. However, as the chart shows, non-oil imports have trended down since August.
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Posted in U.S. trade deficit and external debt | 32 Comments »
Posted on Monday, December 11th, 2006
By bsetser
China will have a current account surplus of over $200b this year. China has about 1.3 billion people. The GCC countries (Saudi Arabia and the small states on the Gulf) will also have a current account surplus of around $200b this year, and they only have something like 50 million people …
There are no shortage of critics – and defenders — of China’s (de facto) dollar peg.
The GCC’s peg to the dollar – which is now even tighter than China’s peg to the dollar – has attracted a lot less attention. It has far fewer critics, and fewer defenders. I can immediately think of only four real critics of the GCC peg: yours truly, Jeff Frankel of Harvard, Steve Brice of Standard Chartered, and one of the Economists’ writers (Pam Woodall?) on the global economy.
But it certainly helps to have the Economist on your side.
I cannot quite figure out where the IMF stands on this: the spring regional outlook was quite critical of the GCC’s exchange rate peg (and the resulting real depreciation but the fall regional outlook didn’t say much. The Article IV reports on specific countries tend to be silent on the issue – if they don’t outright endorse the GCC countries plans to keep a tight peg to the dollar in advance of the GCC’s planned monetary union. The UAE Article IV, for example, indicated that IMF staff “concurred with the authorities” in thinking that “the present exchange rate regime has served the UAE economy well” (despite the acceleration in inflation) even as it welcomed the UAE’s willingness to consider alternatives to dollar peg after the 2010 monetary union.
I am not sure that China’s 6% appreciation against the dollar since 2002 deserves as much praise as the Economist: the 6% appreciation has been too small to prevent massive RMB depreciation against the euro, or a huge surge in China’s trade surplus. But I fully share the Economist’s critique of the GCC’s peg.
Particularly with oil once again above $60 and the dollar once again sliding against the euro. The US has a big current account deficit – one that likely will increase without a fall in the trade deficit. It needs a weak currency for structural reasons. And with faltering residential investment, it also likely needs a weak currency for cyclical reasons.
The GCC countries now all have huge current account surpluses. Structurally, the GCC countries need a stronger currency. And the oil boom towns on the Gulf also need a stronger currency (and higher interest rates) for cyclical reasons.
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Posted in oil | 22 Comments »
Posted on Monday, December 11th, 2006
By bsetser
The maestro (former maestro?) probably didn't intent to talk the dollar down … so much as state an obvious reality. Bloomberg:
“The dollar will continue to drift downward until there is a change in the U.S.current-account balance,'' Greenspan said today by satellite fromWashington to a business conference in Tel Aviv. “It's imprudent to hold everything in one currency.''
Those who read the Fed’s technical papers know that the Fed has long argued that dollar adjustment will be a part of the process of external adjustment; the only real question is what interest rate path will accompany the dollar’s fall. Greenspan’s argument all your (financial) eggs shouldn't be in one currency basket also doesn’t seem all that different from something he said in late 2004.
In November, 2004, Greenspan caused a small tremor in the dollar when he said:
“Continued financing even of today's current account deficits as a percentage of GDP doubtless will, at some future point, increase shares of dollar claims in investor portfolios to levels that imply an unacceptable amount of concentration risk. This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the U.S. current account deficit and rendering it increasingly less tenable. If a net importing country finds financing for its net deficit too expensive, that country will, of necessity, import less. … It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point."
On the other hand, Greenspan also often argued that financial globalization allows more persistent divergence between savings and investment than was possible in the past. He always liked to frame the debate over the current account as a tug of war between rising concentration of foreign portfolios in dollar assets and the greater dispersion between national savings and investment made possible by financial globalization.
What Greenspan never seemed to recognize, at least in my view, is that central banks and oil funds in the emerging world – not private investors – provide the bulk of the financing that has allowed the US to invest far more than it saves.
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Posted in Exchange Rate | 27 Comments »
Posted on Sunday, December 10th, 2006
By bsetser
The FT says so, drawing on work that from the Bank of International Settlements.
I like a good petrodollar story — and a good central bank diversification story — as much as the next guy. A lot more than the next guy actually.
I would be somewhat cautious though. Russia tends to drive the BIS data on oil exporters, as it now accounts for the majority of the growth in oil state deposits in the international banking system. It turns out that only $5b of the $16b increase in international bank deposits by Russian residents (including Russia's central bank) in q2 were in dollars. But we already more or less know Russia diversified its (now very large) reserves in q2.
There are a few intriguing hints that other OPEC countries may be diversifying in the BIS data as well. Iran moved a decent chunk ($4b) of dollars out of BIS banks domiciled in europe — but apparently didn't shift those dollars into euro. Libya added to its offshore dollar holdings, offsetting the Iranian outflow. And the Saudis (whose reserves didn't go up much in q2) shifted $3b from dollars on deposit in London to yen on deposit in London (all data comes from p. 3 of this chapter in the BIS quarterly). The Saudi shift into yen is a small surprise … I guess the Saudis front-ran the Russians and the Swiss.
But the bigger story is that, setting Russia aside, the BIS data just isn't picking up a big net inflow from the oil exporters — particularly oil exporters in the Gulf.
Oil exporters in the emerging world are increasing their foreign assets by about $125b a quarter, with $25-30b coming from Russia and $50-60b coming from the Gulf. Somewhere between 1/2 and 2/3s ($16b of $25-30b) of the increase in Russia's foreign assets showed up in the q2 BIS data, but nothing like a comparable share of the increase in the Gulf's foreign assets.
The data on Russia's shift into euros and pounds isn't a surprise. Regular readers of RGE's Russian reserve watch (Warning: RGE premium subscription required) know that Russia started running down its holdings of US securities (mostly short-term Agencies) at the end of 2005 — and that is has continued to reduce its US holdings throughout 2006. The counterpart to the fall in Russia's US holdings has been a surge in Russia's deposits in the international banking system.
We now know that Russia shifted the currency composition of its reserves when it moved its reserves "offshore." The BIS data basically confirms what the Russians told us in June, namely that they had reduced the dollar's share of their reserves to around 50%.
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