Exports at-risk, slow-down in emerging markets

29 October 2013 Off By Pastaria

The announcement of a change in US monetary policy has weakened the currencies of a number of countries. Most vulnerable are Russia, India, Brazil and Indonesia. Causing braking in the pasta sector and food products in general.

by Carlo Pisani

The global macroeconomic scenario is changing. But the biggest change is in the orientation of the Federal Reserve (Fed), the US central bank, which for the moment has limited itself to announcing a potential change-of-course in monetary policy which, until now, has been highly expansive.

The economic recovery underway across the Atlantic could lead the Fed (initially) to limit and (in a second phase) completely halt buying up of American government securities, better known among those in the sector as “quantitative easing”. A decision that could basically interrupt, or noticeably reduce, the significant injection of liquidity into financial circuits guaranteed until now by a massive and regular influx of dollars.

As could be expected, the announcement has had a deflationary impact on markets. Since the summer, significant unrest has been seen in capital flows and in the exchange rates of a number of currencies.

For example, in just over a three-month period, the currencies of emerging countries, those which more than any others are steering recovery on a worldwide scale, have experienced a major devaluation of the exchange rate of their currencies in comparison with the dollar. And, crucially, the same has occurred in terms of Europe’s single currency, given that the euro has not experienced any significant fluctuation in the exchange rate with the US greenback.

In other words, the context has changed (and could continue to change even more), especially for export-oriented companies, like pasta manufacturers. And not just Italian and European, but also in other countries. Considering that aside from Italy, other countries that are exporters of pasta (although at significantly lower volumes) include the US, Turkey, Canada and Belgium, to mention only a few.

In short, those who were looking to emerging markets with special interest, might now have second thoughts. For example, the major impact a major devaluation of the rouble alone would have on Italian exports (including pasta). Bearing in mind that in 2012 Italian pasta manufacturers shipped just under 2 million tons of pasta to Russia, and in the first five months of this year, 820,000 tons, an increase in sales of a healthy 6%.

The change announced by the Fed could represent a real threat for those countries and sectors counting on exports to make it through the extended tide of the 2008-2009 crisis.

It must be remembered that Italian pasta manufacturers send more abroad than is currently destined for the domestic market. Figures show about 54% of their total product volume, with the role of emerging countries becoming strategic for all exporting countries.

Now, the effect of the announced change could create problems. For example, if at the beginning of the year, a dollar was worth 30.2 roubles, now it would take more than 33, figures which, over just a few months, amount to a nearly 10% devaluation of the Russian currency.

The same result is seen in the exchange rate with the euro which, like the dollar, has risen significantly, even in comparison with Brazil’s real (currently facing a nearly 20% devaluation compared with the euro and 17% with the dollar).

It has been confirmed, in short, that in just a few short months (from May to the present), just the expectation of a change in US monetary policy has lit a fuse that could trigger a real currency storm affecting primarily emerging countries, while simultaneously upsetting many financial markets, offering once again (in the worst cases) scenarios similar to those in 1997-98 during the Asian crisis.

For pasta, which continues to enjoy success abroad (the most recent figures in Italy show an annual rise of 6.3% in volume for the first five months of 2013), excessive devaluation of Asian and other currencies, such as the rouble or Brazilian real, could slow or even halt sales, at least in emerging markets. Without considering that in the meantime the Chinese economy has slowed its pace, disappointing expectations (and if China does not grow at a significant rate, it is as if it were going backwards), and that in Thailand the macroeconomic situation is in recession.

The risk, therefore, is a repeat of the Asian financial crisis analogous to the one that already occurred in the late 1990s.

The action to counter this by central banks, which to discourage outflows of capital are increasing interest rates in emerging countries, could prove insufficient. But, above all, it could put a further brake on economic growth, slowing investment.

Analysts are urging caution. Although a change—and a fairly evident one—in global financial equilibriums is underway, it could be too soon to talk about scenarios of major upheaval.

However, there is other evidence to suggest there should be at least close monitoring to prevent impacts.

One of these is the risk of a protectionist drift, including from an anti-inflationary standpoint, by emerging countries as stressed in a recent European Commission report. Between May 2012 and this past May, Brussels recorded over 150 new trade restrictions and just 18 instances of lifting of customs barriers.

Heavy increases in tariffs and greater protectionism, predominantly in the form of customs duties, have been seen in Russia, Brazil and Argentina, all on the list of major pasta consumers.

In general, emerging economies are the ones raising barriers: in addition to the countries cited above, massive use of trade restrictions and other forms of protectionism by India, Indonesia, China and, more recently, South Africa and the Ukraine have been seen.

To summarize, the new Fed policy, currency upheavals and potential worsening of protectionist measures would indicate a scenario of uncertainty within the new global economic equilibriums.

On the other hand, a potential move towards a restrictive American monetary policy (increase in interest rates and lower liquidity pressure) could help businesses from the standpoint of costs.

Raw material prices, including food commodities (despite some exceptions) should keep trends on international markets calm, both as a result of lower demand, especially from Asian countries, as well as a financial component deflated by the probable monetary squeeze in the US.

So, the perspectives for pasta manufacturers in terms of costs for raw materials, grains and flours in particular are good, while the energy sector in general would seem more uncertain and even exposed to external shocks. For wheat, in addition to greater availability thanks to this year’s good crops confirmed by a number of authoritative forecasting bodies, lower speculative demand is also expected.

The Prometeia index of prices in euros of manufacturing commodities reports, as of July 2013, a 5% decrease in the food sector. Decisive the lower trend in grains (-9.5%), although offset by modest increases in materials used in the packaging supply chain.

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