Commodity producers face a difficult year

One of the key features of the global economy – and particularly of the “Pacific Rim economies” – that has most concerned us over recent months has been the immensely weak investment spending trends that are starting to appear across Asia. We firmly believe that this weakness in capital spending, which has stretched from China to Indonesia, has been brought about by a pressing need for companies in many of the emerging markets to raise cash to fund what have become, in the matter of only a few quarters, an almost chronically high level of debt repayments.

Apparently still unbeknown to many, beginning in 2004 there was an intense and probably entirely unprecedented increase in global credit flows that ran for almost ten years and which paused only momentarily during the GFC. With the US central bank now promising to raise interest rates, though, and relative yields collapsing within the debtor countries, many of these often short-term credit flows are beginning to reverse and this has created a massive drain on the available cashflow of many corporates within the emerging markets, with the result that companies in these countries have been forced to curtail many of their former investment activities and adopt austerity measures of their own.

Crucially, one of the most obvious results of the ensuing drop in Asia’s capital spending has been a reduction in Asian import demand and a consequent “ballooning” in the region’s combined trade surpluses. We must admit that when we first drew this chart, even we were shocked by the rise in the surpluses but having checked and re-checked the numbers, it does seem that to all intents and purposes Asia’s trade surpluses are exploding upwards – although equally shockingly we find that even these trade surpluses have not been sufficient to halt the loss of foreign currency reserves within the region. Even these mammoth trade surpluses have not been enough to fully finance all of the required level of debt repayments and hence Asia’s central banks have had to step in and provide additional funding by running down their foreign exchange reserves.

Over recent weeks and days the world has been almost exclusively focussed on events in Greece and the prospects for GREXIT and this is quite understandable – we do believe that once again the Euro is facing one of its existential crises (in fact, the Euro project may well fail if Greece defaults on the “wrong parts” of its existing debts – that is, those to the ECB) – but at the same time we should note that the increase in the Asian trade surpluses over the last 9-12 months has been the equivalent of Greece’s annual GDP while Asia’s net capital outflows (that have been caused by its enforced need to retire previously incurred debts) have been larger over the last two quarters alone than Greece’s entire existing debt burden.