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Russia, Brazil Mistakes Show How Inflation Can Still Arise
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Casey describes the crucial policy errors in Brazil with over spending and lack of transparency in the years leading to the crisis in 2014-2015. Brazil raised interest rates half a percentage point in May 2015 to 13.25%. Inflation was at 8.13% in Brazil in March 2015. Brazilian companies have large dollar denominated debt accumulated during the boom years which needs to be refinanced as its currency the real declines. With current policies economic growth is likely to continue at 0-1%. Russia made policy errors with the departure of Kudrin as finance minister for Putin's second term as president. Policies to attract foreign investment, controlling military expenditures, and continuing growth were reversed as Russia took positions on Ukraine that led to western sanctions, capital outflows, and a sharp decline in the ruble. By May 2015 the ruble and oil prices had recovered from lows, but the ruble was still 35% below the level in June 2014, and the oil prices were still only two thirds of the peak in 2014. Russia sees the decline in the ruble as a way to reduce imports and increase import substitution for many products. The economy is weakened by high inflation- inflation was 6.9% in March 2014, going up to 16.9% in March 2015. In May 2015 Russia lowered the target repo rate by 1.5 percentage points to 12%. Russia faces stagflation- high unemployment with low GDP growth, and high inflation.
Economic policy errors in Russia and Brazil
05/03/2015
Brazil raises interest rates to over 13%, as it faces critical needs of private companies financing dollar based debt. This is likely to lead to further economic contraction and higher inflation. Inflation is at over 8% in 2015. Russia lowered the high interest rates ratcheted up to 17% to tackle a ruble collapse in 2015. Interest rates were lowered to but this move also aggravates inflation which is now at close to 17%.
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Russia, Brazil Mistakes Show How Inflation Can Still Arise
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Russia's effort to prevent the ruble from collapsing in December 2014
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Russia raises interest rates by 6.5% to 17% on December 15, 2014, as the price of Brent crude drops below $60. Emerging markets see money outflows in anticipation of the the U.S. Federal Reserve raising rates in 2015, adding to pressure on the ruble. Western sanctions imposed after Russian intervention in Ukraine has reduced access to financial markets for Russian businesses that borrowed in U.S. dollars and have large payments due in 2015. The large increase in interest rates pushes Russia into a recession in 2015.
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The current account deficits are high in Thailand and Turkey, and this is coupled wth political uncertainty. Argentina faces high inflation at over 20%. Investors have focussed on Argentina and Turkey. Countries that failed to learn from the 1997 crisis such as Argentina, Turkey and Thailand, are seen in a different light from Mexico and Poland. India faces inflation of about 10%. Other countries affected are Russia, Brazil and South Africa. Most of the countries have flexible exchange rates in 2014 compared to fixed exchange rates in 1997, and higher dollar reserves in 2014 which helps cushion the effects of overseas borrowing. The effects on Europe and the U.S. in 2014 are seen as limited to how this affects the global economy.
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Elvira Nabiullina, head of Russia's central bank, and efforts to use the decline in the ruble to reduce Russia's overdependence on imports
03/12/2013
Nabiullina is one of the liberal economists who see the period following the devaluation of the ruble in 1998 as generating higher economic growth because it lowered the cost for industry and agriculture. She sees the crisis as a way to get Russians to use less imports and promote import substitution for a healthier economy.
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The impact of the declining ruble on the Russian economy by December 2014
12/04/2014
The ruble declines to 52 to the dollar by Dec. 2014, losing about 40% of its value in 2014. Oil prices decline to about $67 for Brent crude by Dec. 2014 accelerating the fall in the ruble.
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The Economist on the Brazilian economy's perilous situation in 2015-2016
04/05/2015
Dollar debts for Brazil went up from $100 billion in 2010 to $250 billion in 2015, according to BIS data. Even more in local currency terms which went up from 210 billion reais to 650 billion reais. BNDES and Caixa Economic Federal, 2 state owned banks made up 35% of bank loans in Brazil in 2009, by 2015 this went up to 55%, making Brazil's banking system a fiscal operation overly dependent on the state. With rates as high as 16%, the state banks provide subsidized loans to firms at 5.5%. Monetary policy is difficult for the central bank as increasing rates to shore up the declining real would hurt the economy, which is expected to contract by 1.5% by official estimates, but higher according to other private estimates. The declining real, drought affecting hydroelectric generated power prices, and lower export revenues, in addition to high debt interest payments exceeding 6% of GDP, are leading to low or no economic growth for 2015-2016. This comes at a time of corruption issues and ratings one notch above junk for state oil company Petrobras, which itself needs government support.
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Russia- interest rates and the ruble
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The economic prospects of emerging market countries have changed significantly since 2013. In Turkey political problems and a high current account deficit led to a slump in the lira and high interest rate policies by early 2014. In India the Congress party government let the economy drift in 2013 with no action taken. The newly elected Modi adminstration in 2014 and now lower oil prices are giving a major boost to economic growth in India. China with huge oil imports is also a beneficiary as it tackles problems from the boom years and growth slows to below 7%.
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Fears expressed by Kudrin and other experts at a Moscow conference about the impact of a recession in the eurozone and Greece's exit from the euro. Kudrin was a key figure in Russia anticipating and setting aside reserves in the sovereign fund to meet the adverse effects of the 2008 global financial crisis. The views expressed were that Russia's economy is shaky and could be seriously affected if European banks reduce their loans. Earlier he strongly opposed increases in military spending in a disagreement with prime minister Medvedev because of concerns about financial stability.
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Consumer price inflation spikes to 4.88% in November, industrial output growth slows
http://www.hindustantimes.com/ 12/12/2017
Brazil's central bank and interest rates
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As currencies in emerging markets, the real in Brazil, the rupee in India, the lira in Turkey depreciate in value, it becomes more difficult for borrowers in these countries to pay back loans denominated in dollars. During the period of quantitative easing policies of U.S. Federal Reserve chairman Bernanke following the financial crisis of 2008-2009, low U.S. interest rates and strong local currencies made it cheaper to borrow in dollar denominated loans than pay the higher interest for local currency loans in reals, rupees or lira.
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