Thursday, July 09, 2015 08:24am / FSDH Research
Global and Domestic Economic Issues
The analysis of the bond market in the countries that we monitored shows that there was a general decrease in prices in the month of June 2015, compared with the mixed performance recorded in the month of May 2015.
The Argentina Government Bond recorded the highest price decrease of 6.84% to 88.50 in June 2015; followed by the 16.39% January 2022 Nigeria Government Bond which recorded a decrease in price of 3.95% to 106.33. The Argentina Bond and the Russia Bond closed the month at negative real yields.
The real yield on the Kenyan Bond remains the most attractive amongst the countries monitored, followed by the Nigerian Bond. The Nigerian Bond yield recorded the highest yield in June, indicating it is trading at a high yield premium than most of the countries and reflecting the current macroeconomic factors in the country.
The implication of this is that if there is positive news that can change the current negative economic perspective of the country, there may be a rush for the Nigeria Bond.
At the end of its June 2015 meeting, the Federal Open Market Committee (FOMC) of the United States (U.S.) Federal Reserves (Fed) maintained its fund rate at 0.25% in order to support continued progress towards maximum employment and price stability.
The U.S. economy grew by 2.90% in Q1 2015. On a quarter-on-quarter basis the U.S. economy shrank at an annual rate of 0.2% in Q1 2015. The country’s exports decreased less than previously estimated but personal expenditures and imports rose more.
The unemployment rate declined to 5.3% in June, a seven year low, from 5.5% in May 2015. Meanwhile, inflation rate in the US was flat at 0.0% in May, following a 0.2% drop in April 2015. However, the monthly inflation index rose to 0.4%, the biggest increase in more than two years.
Global Economic Outlook
The latest Global Economic Prospect, June 2015 edition of the World Bank titled, “The Global Economy in Transition” forecasts global growth at 2.8% in 2015, lower than the anticipated growth rate in January 2015.
The growth is expected to pick up to 3.2% in 2016. The report added that the developing economies are facing two transitions. First, the widely expected tightening of monetary conditions in the U.S., along with monetary expansion by other major central banks, has contributed to broad-based appreciation in the U.S. Dollar and is exerting downward pressure on capital flows to developing countries.
Many developing-country currencies have weakened against the U.S. Dollar, particularly those of countries with weak growth prospects or elevated vulnerabilities. In some countries, this trend has raised concerns about balance sheet exposures in the presence of sizeable Dollar-denominated liabilities. Second, despite some pickup in Q1 2015, lower oil price is having an increasingly pronounced impact.
In the oil-importing countries, the benefits to activity have so far been limited, although they are helping to reduce vulnerabilities. In oil-exporting countries, lower prices are sharply reducing activity and increasing fiscal, exchange rate, or inflationary pressures. The report added that the risks to the global economy remain tilted to the downside, with some pre-existing risks receding but new ones emerging.
The high-income countries are expected to grow at 2.0% in 2015 (compared with 1.8% in 2014) and 2.3%, on average in 2016–17. The expected growth pickup reflects the recovery in the Euro Area, continued robust activity in the U.S., and increased traction from Japan’s monetary, fiscal, and structural policy efforts. In the U.S., growth is expected to strengthen to 2.7% in 2015 and further to 2.8% in 2016. The U.S. growth would be driven predominantly by private consumption.
The unemployment rate is expected to fall to 5.2% by end-2015, below the level at the start of the previous monetary tightening cycle in 2004. Euro-area growth is now projected to reach 1.5% this year, increasing to average 1.7% in 2016-17. The recovery in the Euro Area has progressed more rapidly than expected since late 2014, supported by a weakening euro, declining oil prices, record low interest rates, and an improvement in banks’ credit supply conditions.
Fiscal policy will be broadly neutral in 2015 and 2016, following several years of significant consolidation efforts. The turmoil in Greece is having wide-ranging repercussions for the Greek economy itself, but had limited knock-on effects on the Euro-area as a whole. However, the risk remains that a further deterioration affects broader Euro-area confidence.
In Japan, growth is forecast to average 1.1% in 2015, before accelerating to 1.7% in 2016, supported by expansionary policies. For emerging market economies, the World Bank stated that as structural adjustments and policy efforts to address financial vulnerabilities continue, growth in China is expected to decelerate modestly to 7.1% in 2015, decelerating to 7% and 6.9% in 2016 and 2017, respectively.
In order to support activity amid tightening regulations on trust and interbank lending, the People’s Bank of China (PBOC) continued to ease monetary policy in early 2015, lowering benchmark deposit and lending rates, making targeted cuts in the required reserve ratio, and announcing plans to accept municipal bonds as collateral for its refinancing and lending operations with commercial banks; leading to a shift towards greater bank lending in the Chinese economy.
Growth in Brazil, Russia, India, China and South Africa (BRICS) countries (except China) is soft and has increasingly diverged. Falling oil prices and geopolitical sanctions have been accompanied by a steep slowdown in 2014 and are expected to result in a contraction in the Russian Federation in 2015. Fragile confidence, increases in administered prices, and low commodity prices are expected to contribute to a recession in Brazil in 2015 with a modest recovery in 2016–17.
In contrast, growth is gradually resuming in South Africa, but is held back by energy shortages, weak investor sentiment amid policy uncertainty, and by the anticipated tightening of monetary and fiscal policies. In India, activity is buoyed by stronger confidence as a reform-minded government implements its agenda and lower oil prices help contain vulnerabilities. Nigeria is expected to grow by 4.5% and 5.1% in 2015 and 2016 respectively.