International Forecaster Weekly

4 Countries to Watch in 2014

James Corbett has four countries you should watch for in 2014. No doubt because you are going to be hearing more about them in the news and elsewhere. Countries that may not be in open revolt right now, but are likely the next up for real settling of accounts for actions, and who will likely be in some turmoil.

James Corbett | February 22, 2014

    When Joyce Riley asked me on my latest appearance on The Power Hour to name the four or five countries that are closest to financial collapse, I found it difficult to articulate a response. Being so used to watching the knock-on effects of one economy on another (like the repatriation of US capital bringing about the emerging currency crisis), it's difficult to see the trees (countries) for the forest (international economy).
    Nonetheless, it's a good question, and one with real relevance to our financial and political landscape. So, in the spirit of a publication with the word “Forecaster” and “International” in the title (not necessarily in that order), let's take a look at four countries that are hovering on the edge of financial crisis this year.
    First, the ground rules for this analysis: I have excluded any countries that are currently undergoing revolution or political crisis (Ukraine, Venezuela, Turkey, Thailand, Syria etc.) since their economic fortunes rest largely on the outcome of these ongoing events and require too much speculation to accurately forecast. It should be assumed that such countries are going to face significant economic and market turmoil as a result of the political events on the ground.
    Having said that, let's take a look at this list, in alphabetical order:

    Oh, how the mighty have fallen. It's hard to believe that Argentina was at one time the world's seventh wealthiest country per capita. It is now 55th. After decades of economic turmoil that have included three debt defaults, a hyperinflationary crisis in the late 1980s that saw monthly inflation reach 197% in March 1990, and a major economic depression that resulted in sweeping demonstrations and riots in 2001, it is perhaps no surprise that Argentina continues to find itself just one or two events away from total economic collapse. Ward Lab's “conflict forecast” software may be predicting the possibility of a domestic crisis in the country in the coming months as a near certainty, but it doesn't take an Einstein (or a Watson) to connect the dots on Argentina's bleak economic and political future.
    In fact, by just about any metric, Argentina is on the brink of yet another default. Its debt has been ranked the riskiest in the world by McGraw Hill Financial, JPMorgan and others for several years in a row. Credit default swaps are indicating an 86% chance of default in the next five years. Foreign reserves have hit a seven-year low of $28.1 billion, meaning that the government has no leverage to stave off the impending crisis. Worse yet, annual inflation is now over 28%, annualized inflation for 2014 is currently trending toward 50%, the country had to devalue the peso yet again on January 23rd by the largest amount since the 2001 crisis, and even at that lower peg the government had to spend $1 billion of its dwindling reserves to maintain that rate in one week alone. To top it all off, the country is still attempting to forestall creditors who are demanding repayment on the last round of debt default.
    As always, there are contrarian voices out there that try to buck the consensus. In this case, that's the voice of famed hedge fund manager Kyle Bass, who believes that the country may yet reach a deal with its creditors, somehow manage to pay them off, and smooth over the current wrangling with Spanish Repsol in a fight over the world's second largest shale oil reserves to help stabilize the economy. To his credit, Bass has been bold enough put his (investors') money where his mouth is, buying Argentinian bonds last year at 55 cents on the dollar. But will the move pay off? The consensus says no.
    Look for Argentina to lose control financially this year. Officially, that is. And when and if it does, watch for 2001-style riots and political destabilization to follow. If Kirchner finishes out her term as President (officially up in 2015) it will be a minor miracle.

    Now the 6th largest economy in the world, Brazil went through a remarkable decade of transformation that saw nearly 40 million Brazilians lifted out of poverty since 2003. The blistering economic growth of recent years culminated in 2010 with an impressive 7.5% GDP growth rate. But just as quickly as the wheels started rolling on Brazil's economic freight train, they seem to have fallen off in recent years. Following 2012's dismal 1% GDP growth rate, last year's data looks little better, with growth struggling to rise above 2%.
    Perhaps more to the point for the average Brazilian, consumer price inflation has run up to 5.8% this year, and even that figure has only been achieved with the help of fuel, electricity and transport price controls. But like a beach ball pressed under water, artificially suppressed prices tend to pop up elsewhere. In this case, government-administered prices rose 1% last year, but non-administered prices rose 7.5%.
    Brazil's economic growth in the past decade has bought it the wiggle room to do this type of manipulation for now, and there is no doubt that President Rouseff will do everything in her power to keep the lid on things until this year's unusually late Carnival (ending this year on March 4th), World Cup (kicking off June 12th), and presidential election (cast on October 5th) are out of the way. But with Brazilians already talking about 2014's holiday-heavy calendar as a write off for businesses (actual work will only be possible for three months this year according to a popular “Brazilian calendar” that made the rounds on Facebook at New Year), there is every chance that this year will mark the real turning point for Brazil from mere recession into outright economic meltdown. Rouseff is probably just hoping that meltdown happens in November.

    In one sense, saying that “Abenomics” is doomed to fail is not a prediction, but a definition. When your “plan” (if you can even call it that) to handle your 25-year long economic stagnation is to just print yen until the cows come home, you better expect that plan is going to fail someone, in some way. Printing money is never a magic fix-all solution (or else why wouldn't every country do it?), and Japan is no different.
    As everyone knows by now, Japan is saddled with the largest public debt in the developed world. Combined with over two decades of no growth, no new technologies, no innovations, and no industry leaders or business trailblazers and the prospects are not great. But to make matters worse, the Abenomics plan calls for exceptionally unrealistic goals with no plan on how to get there. Take the fiscal consolidation “plan.” According to this plan, the Japanese government has to reduce the budget deficit to 3.3% of GDP by FY2015 and eliminate the deficit altogether by 2020. Even to meet the first target will require growth rates of 3.4% per year, and even if that pace could be maintained for the next 6 years, it still wouldn't meet the goal of eliminating the deficit by 2020.
So how did they do last year, the first year of Abenomics? After an explosive 4% growth rate in Q2 2013 at the height of Abemania, economic reality returned quickly to the land of the setting sun. In all, Japan only managed an anemic 1.1% growth rate over the year.
    Now the yen has been devalued by 25% in the first year of monetary expansion alone, as inflation rises without any corresponding rise in wages. In the oldest nation on earth, where adult diapers now outsell baby diapers and much of the population is living on a fixed income, this is not good news. And to top it all off, Japan just posted it's worst trade deficit ever. To put the January 2014 trade deficit in perspective, it was twice as large as the previous worst trade deficit ever (from January 2013). Although the trade deficit is being blamed on higher LNG imports in the wake of the nuclear shutdown, the real culprit isn't the increased exports, it's the devaluation of the yen.
    By any standard, Abenomics is a complete and abject failure, as it was always meant to be. The only question is if and when the corporate talking heads which pumped the Abe baloney for so long will admit this fact, and how quickly the Japanese can usher Abe out the door once the scale of the Abenomics swindle is revealed. Given Abe's recent attempt to turn Japan back to its militaristic imperial past, that ushering out couldn't come soon enough.

    On first glance, things couldn't look better for the Giant of Africa. Befitting of the continent's largest country by population, recent headlines are promising that Nigeria may be poised to surpass South Africa as the continent's largest economy by GDP. Of course, even scrutinizing this factoid makes it apparent that, even if true, it might not be that big a deal anyway.
    As it turns out, Nigeria's National Bureau of Statistics is about to recalculate the country's GDP to bring it in line with current market data and prices. Some esitmate that this could boost the country's official GDP numbers of $263 billion by as much as 50%, catapulting it over South Africa as Africa's largest economy. There are two things to note about this story. Firstly, it's speculative. The new numbers have yet to be released, so analysts are merely assuming that the recalculation (called a “rebasing”) will bring the numbers up significantly from the last time the GDP was rebased in 1990, when agriculture still accounted for 40% of the country's economy. Secondly, even if it does happen, nothing will really have changed. It will simply be a new number released by a statistics board. The only effect this could even theoretically have is to attract more foreign investment.
    Digging deeper, there are signs of strain in the Nigerian economy. In a worrying development, the country's central bank governor, Lamido Sanusi, was suspended earlier this week for “financial recklessness and misconduct.” The charges are political, stemming from Sanusi's refusal to stop talking about the Nigerian National Petroleum Corporation's alleged misappropriation of public funds. Sanusi has variously accused the NNPC of bilking the government out of anywhere between $12 and $50 billion over the past two years, partly on the back of a dubious kerosene subsidy scheme that may or may not have officially ended in 2009. Whatever the case, Sanusi is out, and the bad news for Nigerians is that he is almost universally held up as the reason the Nigerian economy is in as good a shape as its in. He helped to restructure the country's deeply corrupt banking sector in the wake of the 2008 collapse, helping Nigeria protect its currency and attract foreign investment.
    Perhaps it is not surprising that the scandal revolves around the state oil company, however. In a recent speech to a gathering in Lagos, KPMG executive Michael Soeting warned that the shale oil revolution was a serious threat to Nigeria's economy. As more shale oil comes to the market, not only will gas and crude prices drop, but competition for oil patch investment will stiffen across the board. Nigeria is especially threatened as shale oil is almost the same spcification as Nigeria's Bonny Light. Diversification, Soeting advised, is going to be crucial for the Nigerian economy, which has been so heavily dependent on the country's oil resources.
    Perhaps in response to this call, the Nigerian government has finally pushed ahead with a plan for industrialization, the Nigeria Industrial Revolution Plan, and coupled it with the National Enterprise Development Programme, designed “to deliver growth to small and medium enterprises.” While the programs are theoretically exactly what the country needs, at this point and until proven otherwise it's just more hot air from Abuja. “Industrialization,” “diversification” and “growth” make great buzzwords, but until the economy actually does any of those things, Nigeria is in danger of losing the continental first place GDP that it didn't know it had.


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