EMTA FORUM IN VIENNA
Tuesday, May 5, 2015
3:15 p.m. Registration
3:30 p.m. Panel Discussion
Erik F. Nielsen (UniCredit Bank AG) – Moderator
Turalay Kenc (Deputy Central Bank Governor, Central Bank of the Republic of Turkey)
Gyula Pleschinger (Monetary Council, Central Bank of Hungary)
David Hauner (Bank of America Merrill Lynch)
John Carlson (Fidelity)
Walter Reihsner (Uniqa)
5:00 p.m. Cocktail Reception
Additional support provided by Bank of America Merrill Lynch.
Registration fee for EMTA Members US$75 / US$695 for non-members.
Turkey’s Central Bank Deputy Governor Kenc and Hungarian Monetary Council Member Pleschinger Speak at EMTA’s Forum in Vienna
Deputy Central Bank Governor Turalay Kenc and Gyula Pleschinger, member of the Hungarian Monetary Council, participated in EMTA’s first Forum in Vienna. The event, which was hosted by Unicredit on Tuesday, May 5, 2015, drew a capacity crowd of 80 EM investors and other market participants.
Erik Nielsen (Unicredit) led the event’s panel session, and provided global context for the ensuing discussion. He noted that global growth was entering a “normalization story” with growth of 2 ½ to 4%. US monetary tightening continued to overhang the market, while in Europe there was “no chance” QE would end before September 2016. Finally, global investors were forced to navigate a more complex world in the aftermath of Russia’s annexation of Crimea.
Deputy Central Bank Governor Kenc concurred that, while “surprises were always possible, things are generally getting better.” Kenc stressed the importance of price stability, and highlighted Turkish Central Bank clarity about its intentions. He also noted that Turkey was preparing for the anticipated divergence between US and EU monetary policy. In his view, the current 10.75% overnight lending rate in Turkey was “the right interest rate for our price stability objective.”
Pleschinger noted that Hungary was “a small open economy, so we have to accommodate to what is going on in international markets.” He added that “our takeaway from the [recent] crisis was that, after a certain level, the market will solve problems, but in certain special cases the Governments/Central Banks should step in primarily as regulators, or even with intervention.” Pleschinger recalled that the Hungarian Central Bank had been quite active in reducing rates between 2012 and 2014 and present market conditions provide the Central Bank with room for further easing; he expected inflation to hit target range in two years.
Fidelity’s John Carlson reminded attendees that the US Fed has not raised rates in over a decade. He expected lower growth and lower rates “for longer,” citing factors such as lack of consumer demand, and poor demographics (especially in Japan). While bullish on EM sovereigns, Carlson expressed concern that EM corporate Eurobonds could face an uptick in default rates, and cautioned that “too many EM corporate issuances have been with ‘covenant-lite’ clauses.”
Walter Reihsner of Uniqa Capital Management, acknowledged he also was in the “longer for lower” rates camp, at least for EU rates. Bank of America Merrill Lynch’s David Hauner concurred that below-target inflation would result in European QE extending beyond 2016; he forecast two rate hikes in the US in 2015.
On oil pricing, Carlson repeated his comments at EMTA’s Dubai Forum that high prices benefited the global economy, as petrodollars were likely to be recycled. In contrast, Nielsen viewed high oil prices as leading to “monopolistic money in a small amount of hands.” Kenc noted that Turkey’s current account deficit had declined in recent years, and was poised to improve further as lower oil prices fed into the country’s accounts (explaining that oil contracts were usually longer-term).
The panel debated investment in Russia. Reihsner worried that President Putin’s ambitions could include other Russian enclaves in Europe, and he did not see a near-term political solution. He advised investors to use rallies to reduce Russian debt holdings, and predicted the ruble would trade in a range of 55 to 70 per dollar. Finally, he viewed the current Ukraine IMF proposal as insufficient to solve the country’s debt problems.
Carlson took an opposite view, noting his small overweight in Russian sovereign paper (though not corporate debt). He praised the decision to let the ruble depreciate to offset the collapse of oil pricing, and hoped that German Chancellor Merkel could “show leadership [in reducing sanctions].” He concluded that either the US or Russia would “have to back down, and I don’t have a clue how this will go.”
Hauner did not expect an immediate rebound in oil pricing, and thus assumed Russian FX reserves would decline. In addition, external confrontation would likely be used to maintain domestic political support. Pleschinger recalled that a drop in food prices last year that contributed to negative inflation could be attributed to the sanctions took effect. He however, did not expect Russia to have further effect on Hungarian monetary policy, except that a worsening of the crisis may cause an increase in the risk premium in the whole region. Kenc seconded comments that the flexible ruble exchange rate had “really averted a more serious situation in Russia.”
The panel concluded with a discussion of the spillover effects of a Grexit. Hauner feared the precedent of any country leaving the eurozone, while deeming it to be a tail risk. Nielsen agreed a Grexit was unlikely, and drew attention to linkages to Balkan countries; he imagined “the need for credit lines from the ECB, to avoid ripples, even to non-EU countries.” In Carlson’s view, the market was too complacent about Greece (“they have too much debt and no fiscal policy”), but Pleschinger noted that, nonetheless, Hungary would still one day join the eurozone.