Ukraine prepares for the biggest reconstruction project since WWII

It has been exactly a year now since Russia initially invaded Ukraine, where they were met with destruction and violence. Ukraine's economy is in shambles due to the destruction of many buildings, homes, schools, and hospitals. 

In 2022, the World Bank estimated that Ukraine's GDP fell an enormous 35% and that the population share of income that is below the national poverty line would likely take a large hike to 60%. This is up 40% since the most recent data in 2021. With these numbers in mind, the World Bank had taken the initiative in 2022 to help finance Ukraine during their efforts in a war they did not want. The emergency fund was roughly $13 billion dollars and was paid through grants, guarantees, and linked parallel financing. For reference, parallel financing is where multiple banks finance the same project and expenditures. 

The International Monetary Fund (IMF) calculated that inflation in Ukraine ended at 26.6% in 2022. Given what we know about wars, it is very typical for inflation to sore during times of high government spending. Managing Director at IMF, Kristalina Georgieva, visited Ukraine last week and mentioned that she saw "an economy that is functioning, despite the tremendous challenges". She noticed that businesses were open and people were walking around; the economy was recovering slowly but surely. Georgieva restated her commitment towards Ukraine's war efforts and has streamed together $2.7 billion in emergency loans. At a G-20 meeting on Thursday of last week, the IMF is looking to move towards an even larger emergency fund of $10 billion in hopes to see a more "swift" recovery in Ukraine.

The United States is also committed to the recovery of Ukraine and has provided $76.8 billion in military and economic aid. Around $46.6 billion of it are grants, loans, and weapons and security assistance.  The United Kingdom has given $5.1 billion in emergency loans and the European Union gave $3.3 billion in loans. But how much loan help is too much? When should Ukraine stop accepting these contributions from other countries? This answer will come down to a political decision within Ukraine.

Overall, we can expect Ukraine to slowly start its journey to a full economic recovery but it will not be easy. Ukraine is in a condition in which they will accept all the help they can get, and surrounding countries are showing their working efforts through loans and grants. We can expect GDP to grow in Ukraine within this upcoming year along with a decrease in inflation from a large 26.6%. 

https://www.cnbc.com/2023/02/24/ukraine-prepares-for-the-biggest-reconstruction-since-world-war-ii.html 

Russian budget deficit rising, but Moscow won't drain the war chest anytime soon.

Source: https://www.cnbc.com/2023/02/15/ukraine-economists-say-moscow-and-putin-wont-drain-war-chest-any-time-soon.html

 Russian fiscal deficit has hit a record 1.8 trillion rubles ($24.4 million) in January of 2023, with spending growing by 58% compared to the previous year, amidst revenues falling by more than a third. 

All of this comes amidst World Bank, IMF and OECD reports stating that the Russian GDP dropped by at least 2.2%, and at most 3.9% in 2022, with further contractions expected in 2023. Industrial production and retail sales in December fell to their worst year-on-year contractions since the pandemic, with retail consumption falling by 10.5%, and industrial production dropping by 4.3% on a year-on-year basis. 

The Russian finance ministry and central banks, however, state this all of this is within their models, and that several unique circumstances and accounting technicalities could explain the scale of the January deficit, according the Chris Weafer, CEO of a Macro Advisory based in Moscow.

The drops in tax revenue were accounted for by changes in the tax regime since the beginning of January, according to the Russian finance ministry, which stated that the previous bi-monthly tax system for companies has been changed to a single, consolidated payment plan once a month, on the 28th. The finance ministry then went on to suggest that a large portion of January tax payments had not yet been accounted for by January 31, and will instead be reflected later, in February or March.

Another point that was highlighted was the fact that a change in Russian oil tax maneuvers that came into force in January needs some kinks ironed out, and that due to the nature of Russian public spending, most of it is heavily concentrated at the very end of a year, increasing the fiscal deficit. 

Some other factors that may have distorted the deficit figure would be the fact that this was the first report since the Russian crude oil embargoes, which went into force on December 5, which led to Russia buying up tankers and gaining access to more ships in their fleet to re-route the seaborne export trade overnight, after Europe stopped purchasing Ural crude, which also caused a fall in the Ural crude pride, averaging a measly $46.8 per barrel from mid-December to mid-January, according to the Russian finance ministry. Pre-payment from the public sector to the military industrial complex for the war in Ukraine also contributed to the deficit.

However, as of now, with Ural crude prices rising back up to $50 a barrel, and the ramping up of Russian sales of Chinese yuan as energy revenues decline, which is expected to amount to roughly 160.2 billion rubles' worth of FX between Feb 7 and Mar 6, Russia seems to have "plenty left in the tank", according to Christopher Granville, MD of global political research at TS Lombard, and that the Kremlin would not let its yuan reserves to be fully exhausted before  it resorts to other methods of fund procurements. 

Several reports suggest that Moscow is set to invest in another wave of yuan and other "friendly" currency reserves, in the event of acceptable oil and gas revenues, and that it has plans to issue debt domestically, allowing banks to buy government debt. 

The unique nature of the Russian economy, in which a substantial portion of its GDP is generated by state-owned enterprises, allows Russian domestic life and war effort appear to be relatively unaffected by sanctions, at least at face value. The private sector, however, faces fat greater volatility, as seen by the woes of the Russian automotive production sector. The Russian economy is not set to collapse under the weight of sanctions, as some may suggest.

These sanctions, however, are going to lead to diminished technology access, and according to Demarais, author of a book on the global impact of U.S. sanctions, the most significant long-term damage to the Russian economy will stem from its exclusion from the international technology sharing sphere, as it faces further ostracization from the international community, leading to a large gap between western and Russian technological capabilities in the coming years.

AI Reshaping the Economy

    The increasing development of AI has provided many implications for every corner of the economy. AI is changing the game across a wave of different industries, from retail to transportation. Some of the most prominent industries effected by this include farming, manufacturing, financial services, retail, and transportation. 

    The most intriguing technology in my eyes is the transformation of the farming industry. With technologies that collect and analyze data used to improve the health of crops and increasing yields will improve productivity and profitability within the market. Not to mention the ease of which AI products can analyze the data. 

    Another advancement falls within the retail industry. As the article mentions, a third of retail jobs are projected to be displaced by 2030. With automated tills, warehouse robotics, and AI-based planning tools affecting companies already in the UK. We have already seen retail jobs decrease with the onset of the Covid-19 pandemic and the use of self-checkout technologies, but analysts believe there is more to come. The checkout free store has already been tested with Amazon Fresh and we might soon see this technology across many stores worldwide. 

    As ChatGPT takes over the market, AI technologies are something everyone needs to invest knowledge in because it will soon take over many industries. With both positive and negative effects on our economy, the world is changing very fast. 

https://www.theguardian.com/technology/2023/feb/18/from-retail-to-transport-how-ai-is-changing-every-corner-of-the-economy

Consumer debt hits record $16.9 trillion as delinquencies also rise

Article: https://www.cnbc.com/2023/02/16/consumer-debt-hits-record-16point9-trillion-as-delinquencies-rise-as-well.html

Consumer debt reached an all-time high of $16.9 trillion at the end of 2022, a 1.3 trillion dollar increase from 2021. Delinquency rates were also seen to be rising for many loan categories, according to the NY Federal Reserve.

Mortgage originations for new home loans and refinancings fell to $498 billion, a drop of $145 billion from Q3 of 2021, and an almost 50% drop from Q4 of 2021. Despite this, however, mortgage balances rose to $11.9 trillion, an almost $250 billion increase from Q3 of 2021, and an almost $1 trillion increase from a year ago. 

Mortgages that are considered to be in serious delinquency (delinquency of 90 days or more) rose to a rate of 0.57%, nearly double compared to the rates at the same time last year. Automotive loan debt delinquencies rose by 0.6% to reach 2.2%, and credit card debt rose to 4%, a 0.8% increase. Student loan debt also increased for this month, after staying at a constant rate throughout most of the pandemic, with student loan balances hitting $1.6 trillion in Q4 of 2022. 

This news comes in the wake of rising inflation and climbing interest rates, even as employment level remain robust, with the Federal Reserve following an aggressive rate-hiking campaign to combat 41-year high inflation rates, with the Federal Reserve increasing target rates seven times during 2022. 

This increase in consumer debt arrives during this ongoing Federal government borrowing situation, with US Government debt standing at $31.5 trillion, up from 29.6 trillion at the end of 2022, according to data from the Treasury Department.

With eye on Russia, Greece and Bulgaria expand gas deal

    Since the country I picked for my final term project is Greece, I decided to focus my newsletter on big news coming out of the country. In an effort to reduce ties and reliance on Russian supplies, Greece completed a deal Bulgaria to use their gas storage facilities in trade for their own gasoline supply. This deal was made four months after the two countries connected a natural gas pipeline, allowing for easy distribution between the countries. This will also eventually be made available to the other Baltic countries, reducing the regions reliance on the natural gas powerhouse of Russia. 

    Russia cut their deliveries of gas to Bulgaria two months after the country invaded Ukraine, and Greece has also been buying less gas from Russia since they invaded Ukraine. Many Baltic countries have done this, so by Bulgaria and Greece starting to grow their own distribution greatly helps the region. The EU and America support this project as well, because of the negative impact it would have to Russia's income and influence in the area. The Baltic region has historically relied on other for help or because they were under the USSR empire. This new move by Greece and Bulgaria decreases the dependency on other countries and will bring valuable income to the region.

https://apnews.com/article/europe-greece-bulgaria-athens-business-4e5636c5b850393440df6b61086c80a8

Dollar bounces back as US economy defies doubters

The US dollar has gained 3% against a basket of other currencies since the start of February as economic data suggests that the US economy remains strong, as the US dollar has recovered from a 10-month low as investors increase their projections for US interest rates after seeing signs of stubborn inflation and strong economic activity. This comes after the currency had fallen more than 11% since October. Investors have raised their forecasts for US interest rates after seeing signs of stubborn inflation and strong economic activity. The US economy added more than half a million jobs in January, and inflation fell to 6.4%, a smaller decrease than expected. While some investors doubt the dollar's rally has much longer to run, the currency is expected to continue to rise this quarter. This increase in the dollar is due to a flurry of economic data that suggested the US economy is still healthy.

https://www.ft.com/content/8f94ecfc-a2f9-4f24-aabf-d700cee981fb

Consumer Debt and Delinquencies rise

 Consumer debt increased across all categories to a total of $16.9 trillion, which is $1.3 trillion greater than a year ago.  Mortgage balances alone increased by $1 trillion from last year despite the drop off in originations.  The mortgage loans in "serious delinquency" almost doubled from a year ago.  While auto loan delinquencies increased by 0.6 percent and credit card delinquencies rose by 0.8 percent, to a total of 4 percent.  According to an economic research advisor for the New York Fed, credit card balances are growing more heavily than mortgages and auto loans, which reflects the pre-pandemic levels.  Although low unemployment rates usually mean a strong financial situation for consumers the high prices and interest rates have been making it difficult for people to repay their debts.

PPI Increases (impact on inflation)

    The producer price index rose 0.7% in January which is slightly higher than the predicted 0.4%. This means that the prices suppliers charge firms for raw materials went up by 0.7%. If production costs increase, this will eventually be reflected in the prices firms charge consumers. The CPI (prices consumers pay for goods) also increased by 0.5%. . Both of these numbers are higher than predicted. One explanation the article gives for the in crease of these economic indicators is that it’s a relatively warm winter which leads to high energy costs which affects production and consumer spending. These increases indicate that inflation is still a problem in our economy. This is significant because the Fed is still trying to combat inflation. The Fed is still expected to continue to increase interest rates in the following month. 

https://www.cnbc.com/2023/02/16/producer-price-index-january-2023-.html

Inflation Persists

 Despite the Federal Reserve's unyielding attempts to slow inflation down by increasing interest rates, inflation still remains unusually high. Inflation was +6.4% in January, which is a decrease of .1% from December but inflation is still around 3 times as high as what it was before the pandemic hit. The issue is as simple as this: the economy won't cool off. The job markets are still booming with extremely low unemployment rates and the economy just keeps growing. The purpose of the Fed increasing the interest rates is to cool off the economy, slowing it down so that inflation will settle. Prices continue to rise at a rate we haven't seen since the 90's and inflation is to blame. We can only anticipate that the Fed will continue their harsh attempts to raise interest rates in order to get a hold on inflation in the near future.

Source: https://www.nytimes.com/2023/02/14/business/economy/january-cpi-inflation-report.html