Harambe: Bloomberg: Kuwait Currency Peg in Spotlight With State Unable to Borrow (2/11/21)
The Kuwaiti dinar’s peg to a basket of currencies is coming under scrutiny as concerns grow that one of the world’s richest nations is running short of cash.
Derivatives are showing signs of pressure after 12-month forward contracts on the Kuwaiti dinar rose to about 305 points in the offshore market Thursday, the highest since the oil rout in March. Most other Gulf currency forwards have declined this year as the recent recovery in crude prices eases the risks to their energy-dependent economies.
While other Gulf Arab states tapped global debt markets to bolster strained finances amid the pandemic, Kuwait has been hamstrung by lawmakers’ resistance to approve a law that would enable the government to borrow. Concern over how Kuwait will cover its budget deficit has become more acute after the government transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash.
Ultimately, analysts and investors say the government will be forced to act to shore up the nation’s finances, whether by breaking the borrowing deadlock or imposing taxes to increase revenue. As a last resort, the dinar could be devalued, but it’s not clear how effective that would be in terms of bolstering the economy, they say.
“ Risks of devaluation are limited,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., which holds Kuwait’s sovereign, corporate and bank debt. The country could tap capital markets some time in the first half of 2021, he said.
“I expect the necessary reforms to be passed as the available options such as monetizing sovereign wealth fund assets are limited.”
Fitch Ratings predicted the government would replenish its General Reserve Fund — the main source of budget financing — even without any new legislation by parliament. At the same time, it cut the outlook on Kuwait’s debt rating to negative from stable last week to reflect “near-term liquidity risk.”
That move contributed to a drop in the nation’s Eurobonds, sending the spread on $3.5 billion of sovereign debt due March 2022 to the widest since November. The country hasn’t tapped global debt markets since 2017 and the bonds’ scarcity value normally keeps prices stable.
In 2007, Kuwait became the first Gulf Arab state to abandon its currency peg to the dollar in favor of a basket, reacting to a decline in the U.S. currency that had pushed up the cost of imports, fueling inflation.
“I’m not aware of anyone speculating or hedging their Kuwaiti dinar exposure, though I wouldn’t be surprised if a hedge fund somewhere thinks it’s a trade,” said Ali Al-Salim, a Gulf-based co-founder of Arkan Partners, a consulting company for alternative investments including hedge funds and private equity.
According to Al-Salim, the central bank’s latest disclosures suggest its foreign-asset position remains stable.
“Kuwait’s economic challenges can’t be resolved via its currency alone,” he said. “It has a very narrow economy dominated by oil revenues, and expenses that are almost entirely imports. A weaker currency would create limited incremental demand for locally produced goods and services.”
Tishwash: Will Kuwait devalue its currency to meet the liquidity shortage
Kuwait suffers from a severe shortage of liquidity, due to the spread of the Corona virus and the decline in global oil prices.
While other Gulf Arab states have resorted to global debt markets to bolster declining financial resources amid the outbreak of the Corona epidemic, Kuwait has faced resistance from representatives of the National Assembly (Parliament) to approve a bill that would enable the government to borrow.
Concern is increasing over how Kuwait will fill the budget deficit, after the government transferred its last productive assets to its sovereign fund in exchange for liquidity.
Ultimately, analysts and investors say, the Kuwaiti government will have to act to shore up the country’s finances, whether by overcoming the borrowing impasse or imposing taxes to increase revenues.
As a last resort, the Kuwaiti government can reduce the value of the dinar, but it is not clear how effective it will be in terms of boosting the economy, according to what was reported by analysts and investors.
“The risks of devaluation (the dinar) are limited,” said Todd Schubert, head of fixed income research at Bank of Singapore Limited, which holds the sovereign debt of Kuwait, companies and banks.
He added that Kuwait could resort to financial markets during the first half of 2021, expecting the necessary reforms to pass, because the available options, such as liquidating the assets of the sovereign fund are limited.
In 2007, Kuwait became the first Arab Gulf state to abandon its peg to the dollar in exchange for a basket of currencies, to counter the depreciation of the US currency, which led to an increase in the cost of imports, thus feeding inflationary pressures. link
Harambe: Reuters Exclusive: Vietnam intervened in currency markets weeks after U.S. censure (2/11/21)
After being branded a “currency manipulator” by the United States in December for trying to keep the dong from rising in value, Vietnam is again intervening in foreign exchange markets and using what traders say is an unusual method to do so, according to six people familiar with the matter and a review of an interbank trading message.
Early in January, the State Bank of Vietnam (SBV) told some local banks it would cease its regular purchase of U.S. dollars in the spot market, where the trade settles within days, according to two senior currency traders and an analyst, who all work at local banks and have direct involvement in the trades.
The central bank offered the local banks an attractive deal instead: It would agree to buy dollars at a favourable rate for delivery in July, and it would allow the local banks to cancel this agreement before mid-June if they wished, according to the three sources and a review of trading instructions sent by the SBV for one such transaction.
The new method of intervention, which has not been previously reported, put downward pressure on the dong but without money changing hands right away, which the sources said could help avoid drawing U.S. attention to the trades and any further consequences for bilateral relations. For a graphic, click tmsnrt.rs/3aT8V0K
The SBV did not respond to requests for comment.
There is no suggestion of any wrongdoing by Vietnam. Many central banks intervene regularly in currency markets. Vietnam has consistently said its currency policies aimed to maintain stability and control inflation, not seek trade advantage.
“We do not have anything public to share at this time,” a Treasury official said in an emailed response to Reuters’ queries about Vietnam’s foreign exchange practices.
Vietnam, which has seen a surge in export-led growth as manufacturing of electronics and other goods, has increasingly shifted to the Southeast Asian nation, especially from China after its trade war with Washington.
A higher value of the dong because of its trade surplus could hurt this growth in the middle of a pandemic.
Nguyen Xuan Binh, who is head of research at KB Securities in Hanoi and familiar with the trades but not directly involved with them, said the delayed delivery of dollars meant Vietnam’s central bank could avoid triggering one of the conditions behind the U.S. label: buying dollars in six of 12 consecutive months.
The Treasury’s semi-annual report to Congress, which examines exchange rate policies of major trading partners, said in December that Vietnam’s currency management was aimed at creating “unfair competitive advantage in international trade.”
It said Vietnam met all the conditions that trigger the currency manipulator designation, including “persistent, one-sided intervention” in the currency market.
The stakes are high for Vietnam since further interventions after the currency manipulator label could trigger a U.S. response, such as new tariffs on its goods. The next U.S. review is slated for April.
Under its January deals, the SBV offered the local banks an above-market rate of 23,125 dong per dollar, according to the three sources and written trading messages sent by the central bank. That rate is a premium of about 0.5% on current spot prices.
If the dong were to rise further between January and June, it would increase the premium over spot prices for the banks. And if the dong were to weaken below 23,125, they could then cancel the deal and sell dollars in the spot market instead.
Reuters could not determine the size of the SBV’s intervention, but the three traders said it was large enough to create demand for dollars in the market, which put downward pressure on the dong.
The currency’s value in the black market, where the dong is often traded in the real economy, has fallen 1.1% as the traders said dollar supply may have dried up.
SBV’s new transactions resemble financial derivatives known as forwards, which bind parties to exchange currencies at a future date at an agreed upon rate, the three sources said.
Forwards contracts offer several advantages to central banks. They do not require cash up-front and can help smooth out sudden shifts in reserves. Indeed, they are popular with other Asian central banks, such as those in India, Taiwan and South Korea.
But four of the people familiar with the transactions said SBV’s agreements were not typical forward contracts, as they gave banks the option to cancel the deal without significant costs.
Two of them said the SBV had offered similar options previously, around 2015, although then it had been selling dollar forwards in order to try and support a sliding value of the dong.
As the SBV previously preferred to use three-month forward contracts, all six sources familiar with the transactions said the shift to a longer time frame suggested a desire to buy time before the intervention drew U.S. attention or pressure.
The SBV did not respond to questions about its approach.
Tishwash: A final round of the dollar and the Iraqi dinar in the budget .. Can the exchange rate be changed?
Since the Iraqi government announced a change in the exchange rate of the dollar against the dinar as a result of the drop in oil prices, and what the Corona pandemic has produced on the Iraqi economy, the citizen, in addition to the merchant with various groups, is living a period of wandering in financial dealings, which resulted in a “good opportunity” for conflict between the exploiters For crises in such circumstances.
The value of the US dollar after the Iraqi government resorted to reducing the dinar, in an attempt to pull the country out of the financial and economic crises, reached 1450 dinars, after it had been stable at the threshold of 1200 dinars over the past years, which led to great losses, close to a quarter of the value of the Iraqi savings of money , As well as a quarter of their monthly salary.
Negative effects despite reassurances
Economic academic Jawad Al-Kaabi comments, in a statement to “Ultra Iraq,” saying that “the decision to reduce the dinar has led to more impoverishment of the poor, bankruptcy and the suspension of small and medium businesses, due to the increase in the prices of food, medicine and imported production requirements by more than 30%, indicating that” and after each The damage that occurred The decision-makers (the prime minister, the minister of finance, and the governor of the central bank) continue to insist on their unfair decision for the right of the poor citizen and productive business owners in the real economy. ”
This comes at a time when the Iraqi government reassured citizens about the decision to reduce the value of the official currency, stressing that it “will not affect the classes that depend on local goods.” Prime Minister Mustafa Al-Kazemi also cited during his speech at the Iraqi Council of Ministers session, in several countries, including “the Emirates.” And South Korea and Singapore when they made difficult decisions in the past to reform the economy.
Will the return attempts succeed?
A number of MPs in Parliament are calling for rallying pressure towards restoring the exchange rate to its previous position or reducing it to 130,000 as a compromise solution, while Deputy Nahida al-Daini, in a televised interview affiliated with Ultra Iraq, did not rule out an agreement between the leaders of political blocs to raise the exchange rate of the dollar. Against the Iraqi dinar, hoping to reduce the deficit in the country’s general budget, noting that “the economic crisis will continue for the coming years with the absence of industry and agriculture,” while parliamentarians say that manipulating the exchange rate is not within the powers of the House of Representatives.
A member of the Parliamentary Finance Committee, Sherwan Mirza, believes that “the exchange rate of the dollar has not been tampered with in the 2021 budget, given that the country’s financial policy has been drawn on the price stated in the draft law, stressing that“ the exchange rate is within the government’s authority and we do not think it intends to change it in The attached copy of the bill. ”
Regarding the inclusion in the budget of a paragraph in the budget for the compensation of contractors in Iraq from the damage of the exchange rate, the expert, economist Ahmed Hathal, criticizes this step, stating that “the greatest harm was on the shoulders of citizens, and the government should compensate citizens in the same way as compensating contractors, especially those covered by care networks.” Social and low-income people. ”
Hathal says to “Ultra Iraq”, “The policy of raising the exchange rate to 1450 can be likened to a shock, and this policy is considered wrong to use because the economic situation did not allow this with the possibility of dispensing with the step and going to fight corruption in the financial pockets and outlets to save money, pointing to “Attempts to return the price to 130 thousand, which is currently being presented, should not be accepted as it would represent a new shock to the market and citizens regarding the debtor-creditor relationship.”
Terms and conditions
In the end, the 2021 budget is approaching the date of approval next week, according to statements by MPs, and it seems that the issue of changing the exchange rate is impossible because the law was built on the basis of 1450 dinars to the dollar, with the price of a barrel of oil at 45 dollars.
And economic analyst Hussein Al-Askari confirms, “The issue of the dollar exchange rate came as a result of conditions imposed by the World Bank on Iraq after discussions that lasted for more than a month before the decision, indicating that” these conditions are in return for allowing an increase in currency exports abroad, and thus this represents another plundering process. After the damage to local goods and materials, whose prices have become very low, this weakens the national product. ”
In his speech to “Ultra Iraq,” Al Askari indicated, “There is some kind of truth in the movements of the representatives in the Iraqi parliament to return the exchange rate to the lowest level to preserve the purchasing power of citizens, as they depend on monthly and perhaps daily salaries and income, pointing to the need for Iraq to leave the issue of the economy. Rent-seeking and the end of dependence on abroad to import goods. Accordingly, the infrastructure must be rebuilt first, including the agricultural and industrial sectors. For example, the existence of the framework agreement between Iraq and China is the key to a solution available for implementation. ”
Meanwhile, the Al-Fateh Alliance came out with a new position, to depend on the vote of its more than 50 deputies on the 2021 budget bill by adopting the dollar exchange rate of 119 thousand dinars, in addition to four other conditions demanding job grades and payment of dues to categories of free lecturers, at a time when MPs are demanding Their number exceeded 40 deputies by proposing a return of the exchange rate to 130 thousand dinars as a compromise solution to end the push and pull and conflict in the markets and stock exchanges.
With the movement of some political blocs in this regard, the Parliamentary Finance Committee confirms that the Iraqi dinar exchange rate against the dollar cannot be changed by the House of Representatives proposal or the signatures of parliamentarians. link