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S&P upgrades Greece to investment grade for first time since 2010 crisis

(Reuters) - S&P Global is the first among the “big three” rating agencies to upgrade Greece to investment grade since the country’s debt crisis in 2010.


It raised late on Friday the country's local and foreign currency long-term issuer ratings to 'BBB-/A-3', with a stable outlook, citing stronger budgetary position.


The other two agencies, Fitch and Moody's (NYSE:MCO), rate the country one notch below investment grade. DBRS Morningstar upgraded Greece's rating to investment grade BBB (low) last month.


S&P said it expects budget surplus target to help in paring the country's government debt, and added that it is cautious about political pressures hindering Greece's ability to sustain large primary budget surpluses.


Greece lost its investment-grade credit rating, which implies a low risk of default, in 2010 when its decade-long debt crisis erupted, forcing it to sign up for international bailouts worth about 260 billion euros ($275.34 billion) to stay afloat.


It emerged from the debt crisis in 2018 and was the only country in the eurozone with a "junk" rating.


S&P expects "additional structural economic and budgetary reforms, coupled with large EU funds, will support robust economic growth in 2023-2026."


Greece expects economic output to rise 3% in 2024 following a 2.3% expansion this year more than twice the eurozone average. It also projects a 2.1% of GDP primary budget surplus next year on higher investment and strong tourism revenue.


The conservative government hopes now that the upgrade will trigger more capital inflows and reduced borrowing cost for the country's businesses.


"In the short and medium term, we expect inflows from index-tracking funds, upgrade of banks assets and more favorable borrowing cost for companies," a senior finance ministry official told Reuters.


Greece's 10-year government bond yield was at 4.38% on Friday, about 58 basis points below Italy's equivalent.


"I think all the ratings specific news is priced in. It’s trading as investment grade anyway,” Rabobank senior rates strategist Lyn Graham-Taylor told Reuters.


($1 = 0.9443 euros)

2023-10-23 11:06:32
Top 5 things to watch in markets in the week ahead

Investing.com -- The risk-off mood dominating markets looks likely to continue in the coming week, while four out of seven megacap companies are due to report earnings. U.S. data will give markets another update on the strength of the economy. Oil prices look set to remain choppy and the European Central Bank will announce its latest rate decision. Here’s what you need to know to start your week.


Risk-off mood

A risk-off mood is dominating markets with investors worried about the prospect of more interest rate hikes and the Israel-Hamas conflict spreading. A weaker-than-expected earnings report for Tesla (NASDAQ:TSLA) last week also darkened the mood.


Wall Street’s most closely watched measure of investor nervousness, the CBOE Volatility Index, closed Friday at its highest in nearly seven months. For the week the Dow was down 1.6%, the S&P 500 fell 2.4% and the Nasdaq slid 3.2%.


The benchmark 10-year Treasury yield eased on Friday, a day after crossing 5% for the first time since July 2007 in the wake of comments by Fed Chair Jerome Powell (see below).


That has left investors piling into other traditional safe-haven assets such as the dollar and gold, as well as short-term Treasuries or money-market funds, which are providing more attractive returns since interest rates began rising early last year.


Megacap earnings

Third quarter earnings season is well underway and results from four megacap companies are due this week, in what will be a key test for a group of stocks whose gains have propelled the S&P 500 higher this year.


Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are due to report on Tuesday, Meta Platforms (NASDAQ:META) is to report on Wednesday and Amazon (NASDAQ:AMZN) reports on Thursday.


Those stocks, together with Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA) and Tesla have accounted for the bulk of the S&P 500's 10% year-to-date gain, so any disappointing results could result in widespread fallout.


Other big names reporting in the coming week include Coca-Cola (NYSE:KO), General Motors (NYSE:GM), Merck (NYSE:MRK) and United Parcel Service (NYSE:UPS). Investors are banking on an overall recovery in U.S. profits after a tepid first half.


U.S. data

Market watchers will get a fresh update on the strength of the U.S. economy this week from data including third-quarter growth and the Fed’s favored measure of inflation, the core personal consumer expenditures price index.


Economists are expecting third quarter gross domestic product to come in at an annualized rate of 4.1%, boosted by strong consumer spending.


The core personal consumption expenditures price index, which excludes volatile food and fuel costs, is forecast to increase 3.7% on a year-over-year basis.


Fed Chair Jerome Powell on Thursday said the stronger-than-expected U.S. economy might warrant tighter policy though rising market interest rates could make action by the central bank itself less necessary.


Oil prices

Oil prices settled lower on Friday after the Islamist group Hamas released two U.S. hostages from Gaza, leading to hopes the Israeli-Palestinian crisis could de-escalate without engulfing the rest of the Middle East region and disrupting oil supplies.


Brent crude futures fell 22 cents, or 0.2%, to settle at $92.16 a barrel.


U.S. crude futures for November delivery, which expired after settlement on Friday, fell 62 cents, or 0.7%, to $88.75 a barrel. The more-active December crude contract closed 29 cents lower at $88.08 a barrel.


For the week, both front-month contracts rose over 1%, a second straight weekly jump.


"The Middle East remains a big focus of the market because of fears of a region-wide conflict that would likely involve a disruption of oil supplies," John Kilduff, a partner at New York-based Again Capital told Reuters.


ECB likely to hold

The ECB is holding its latest policy meeting on meeting on Thursday, with the broad consensus being for interest rates to remain on hold.


After the ECB hiked its deposit rate at each of its last 10 meetings to a current record high, policymakers have indicated it is time to pause as they assess the impact of monetary tightening so far.


Market participants will be on the lookout for any indications of a possible final rate hike for this year in December.


Ahead of Thursday’s meeting, the Eurozone is to release what will be closely watched October PMI data on Tuesday. Recent economic data has raised concerns over the outlook for the bloc’s economy amid weakening consumer spending in the face of still high inflation.


--Reuters contributed to this report

2023-10-23 09:22:30
Analysis-Dollarization, devaluation, debt: potential traps for Argentina investors

By Rodrigo Campos


NEW YORK (Reuters) - Argentines will on Sunday move a step closer to deciding who will run the $600 billion economy engulfed by a deep crisis that involves runaway inflation, a dearth of U.S. dollar reserves and an electorate with little trust in its currency.


Regardless of who wins the race between libertarian populist Javier Milei, center-left economy minister Sergio Massa and center-right ex-minister Patricia Bullrich, the next government will have to deal with a gargantuan pile of debt and a peso so weak that the leading candidate is on a platform to scrap it.


Investors arrive to the election looking at an economy in recession as a crippling drought hit the key agricultural sector. Inflation runs at 138%, local interest rates stand at 133% and the black-market peso has lost over 60% of its value this year. The gap to the official rate is above 150%.


On the line is the survival of the country's $43 billion program with the International Monetary Fund and the possibility that Argentina defaults on its debt for a 10th time.


"The next government will face substantial execution challenges in a context of accelerating inflation (and) lack of meaningful FX reserves," said Alejandro di Bernardo, investment manager for fixed income – EM debt at Jupiter Asset Management.


Recent rising government spending was "being financed by central bank monetization, which had the unintended consequence of fueling inflation expectations even further," added di Bernardo.


Polls show primary vote surprise victor Milei in the lead. Ruling coalition candidate Massa has expanded subsidies and cut taxes as he jockeys with Bullrich for the second spot in an expected November runoff. Polls were widely misleading ahead of primaries, adding to uncertainty.


IN GREEN WE TRUST


Milei has promised to shut the central bank and dollarize the economy to cut inflation at the root, recommending Argentines stay away from the peso which does not even serve as "excrement".


Deputy Economy Minister Gabriel Rubinstein posted on social media site X, formerly known as Twitter, that the dollar would remain at 350 pesos to the dollar after Sunday's vote, turning to a 3% monthly crawling peg starting Nov. 15.


The currency outlook is murky at best. The peso faces three main sources of uncertainty, warns JPMorgan: inflation, the gap between the official and black rates, and the chance each candidate has to win. The bank sees the exchange rate at 750 by the end of the year and 1,400 next September.


Argentina's monetary base is just over $20 billion at the official exchange rate of 350, but drops to $8 billion at the black market rate. Excluding a currency swap line with China announced on Wednesday, forex reserves are negative.


"They don't have enough dollars to convert the monetary base so they would have to issue external debt just to start to dollarize," said Elijah Oliveros-Rosen, chief economist for emerging markets at S&P Global Ratings.


"Dollarization would not cure the main issue in Argentina, which is a really large fiscal problem."


Despite different approaches, all three candidates agree cutting spending is necessary. Argentina is committed to a fiscal deficit of 1.9% of GDP in its IMF program - estimates see it closer to 3%.


Milei and Bullrich have spoken of slashing subsidies, but the government has leaned into them, even informing voters that 59 peso bus tickets would cost 700 pesos without state support.


Financing subsidies is partly behind the increase in government debt, which surpassed $400 billion in the second quarter to hit historic highs, data from the Institute of International Finance shows. The total debt-to-GDP ratio is expected to rise to 89.5% this year from 84.7% in 2022, according to the IMF.


"The reality is sobering in the sense that Argentina has just too much debt," said Zulfi Ali, portfolio manager with a focus on Latin America for PGIM.


Analysts at Oxford Economics see default as "virtually unavoidable" by 2025 but with fair value between 30-35 cents on international bonds, current prices are attractive - if you can stomach the risk.


Unclear FX and capital controls policies compound uncertainty in local bond markets, said JPMorgan, recommending staying on the sidelines of the $125 billion domestic sovereign debt market while remaining market-weight on international notes where uncertainty is already priced in.


With relatively small payments due on commercial debt and expectation that the current IMF program will continue to pay for the previous one, Argentina's debt pile may not be the most urgent issue, said Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management.


"Debt does not need to be an immediate priority," said Khan, who doesn't expect dollarization to top the near-term list either.


"It will be important to exhibit a commitment to orthodox policies through devaluation and fiscal adjustment as well as establishing cooperation with the IMF."


Especially the latter could be hard for Massa, a key figure amid the deteriorating relationship with the Washington lender.


However, having been at the table could also help him, according to Hans Humes, chief investment officer at Greylock Capital Management.


"(Massa) has stepped on the IMF toes and they don't love him, but he's a known quantity," Humes said.

2023-10-20 18:01:46
Bank of Japan intervenes as 10-year JGB yield hits new decade high

By Kevin Buckland and Brigid Riley


TOKYO (Reuters) - The Bank of Japan intervened in the Japanese government bond (JGB) market on Friday for the fifth time this month after the 10-year yield pushed to a fresh decade high, pitting the central bank in a fight against market forces as U.S. yields surge.


The benchmark JGB yield climbed to 0.845% right at the start of the trading day, its highest since July 2013, after revisiting peaks the previous day as well.


But it eased immediately after the BOJ announced a fund-supplying operation, aimed at encouraging financial institutions to snap up cheap loans in order to buy JGBs. However after retreating as low as 0.83%, the benchmark yield had crept back to 0.835% by 0610 GMT, just half a basis point below Thursday's closing level.


The BOJ caps the 10-year yield at 1% under its yield curve control (YCC) policy, after doubling it in a surprise move at the end of July. However the central bank has shown it will not tolerate sharp moves toward the ceiling, stepping in several times to curb the pace of increases.


"The BOJ wants market participants to acknowledge that they're still there with YCC," said Shoki Omori, chief Japan desk strategist at Mizuho Securities.


"The message is simple: Don't sell JGBs too much, and don't challenge the BOJ."


Policymakers have stepped up intervention in recent weeks, with Japanese rates succumbing to the gravitational pull of U.S. yields. The 10-year Treasury yield briefly breached the psychological 5% mark on Friday for the first time in more than 16 years.


The BOJ offered to supply five-year loans against collateral in its latest operation, deploying the tool for the second time this month. Its other go-to option is to make additional bond purchases, which it has conducted three times this month, including earlier this week.


Japan's central bank is walking a tightrope with bond market intervention, which risks tipping the yen to the weaker side of 150 per dollar, a level that many see as a red line for currency intervention.


Yawning interest rate differentials have driven a slump as deep as 7.1% in the yen against the dollar since the BOJ's July 28 policy announcement, as the promise of more flexibility in the conduct of YCC was overwhelmed by the relentless climb of U.S. yields.


However the exchange rate has stabilised below 150 since briefly topping that level at the start of the month, only to violently pull back. Some had speculated that authorities had intervened in the currency market, but BOJ data suggests that was not the case.


The weak yen is a political flashpoint, driving up imported energy and food prices at a time when Prime Minister Fumio Kishida may be pondering a snap election.


"If the yen crosses 150, it would of course be more difficult for the BOJ to intervene in the JGB market. But because the yen is stable, the BOJ is able to try and rein in long-term interest rates, and watch the reaction in the foreign-exchange market also," said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management.


"That's the kind of delicate balancing act facing the BOJ."

2023-10-20 15:46:23
Japan's core inflation slows below 3% for first time in over a year

By Leika Kihara and Takahiko Wada


TOKYO (Reuters) -Japan's core inflation in September slowed below the 3% threshold for the first time in over a year but stayed above the central bank target, keeping alive expectations that policymakers will phase out ultra-easy monetary policy.


The data will be among a host of indicators the Bank of Japan (BOJ) will scrutinise at its two-day policy meeting ending on Oct. 31, when it produces fresh quarterly growth and price forecasts.


"While inflation weakened in September, we think inflation will only fall below the BoJ's 2% target by the end of next year," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.


The core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.8% in September from a year earlier, government data showed on Friday, slightly exceeding a median market forecast for a 2.7% gain but easing from 3.1% in August.


Utility bills fell reflecting the lagged effect of past oil price falls, helping inflation slow below 3% for the first time since August 2022, the data showed.


Prices of food and daily necessities continued to rise but at a slower pace than in August, a sign that cost-push pressures were easing.


The core-core index, which strips away fresh food and fuel costs and is closely watched by the BOJ as a better gauge of trend inflation, rose 4.2% in September from a year earlier, slowing from a 4.3% gain in August.


While inflation will likely moderate in coming months, a renewed spike in oil costs and persistent yen falls could prod firms to raise prices again, said Shinke Yoshiki, chief economist at Dai-ichi Life Research Institute.


"There's strong uncertainty on the expected pace of declines in inflation," he said, adding that core inflation may not fall below 2% until the latter half of 2024.


Markets are rife with speculation the BOJ will soon end negative short-term interest rates and yield curve control, which sets a 0% cap for the 10-year bond yield, in response to broadening inflationary pressure.


The BOJ has played down the near-term chance of phasing out its massive stimulus, arguing the recent cost-driven price rises need to change into demand-driven increases in inflation for the bank to consider hiking interest rates.


An upgrade to its inflation forecasts alone won't prod the BOJ to phase out stimulus as policymakers are focusing more on whether wages will rise enough to underpin consumption, said two sources familiar with its thinking.


There are growing signs consumers are feeling the pinch from rising prices as inflation-adjusted real wages keep falling.


In a quarterly meeting on Thursday, some BOJ regional branch managers said consumers are becoming more sensitive to price hikes and buying less items at supermarkets.


A government survey on taxi drivers, restaurants and other service-sector firms showed their sentiment souring in September, highlighting the fragile nature of consumption.


While firms offered wage increases unseen in three decades this year, the key for policymakers is whether the trend continues next year and spreads to smaller firms across regions, analysts say.


A Reuters poll showed core consumer inflation in Japan's capital Tokyo, seen as a leading indicator of nationwide figures, will likely hit 2.5% in October, steady from the previous month. The Tokyo CPI data is due out Oct. 27.

2023-10-20 15:03:59
China, world's top graphite producer, to curb exports of key battery material

BEIJING (Reuters) -China will require export permits for some graphite products from Dec. 1 to protect national security, the commerce ministry said on Friday, as it faces growing challenges from foreign governments over its manufacturing dominance.


Graphite is used in the batteries for electric vehicles (EV) and China is the world's top producer, providing 67% of global supplies of the natural form, according to the U.S. Geological Survey.


It also refines more than 90% of the world's graphite into material used in virtually all EV battery anodes.


China is enacting the curbs at the same time that foreign governments are increasing their pressure on its companies over their industrial practices.


The European Union is weighing levying tariffs on Chinese-made EVs, arguing they unfairly benefit from subsidies. Also, the U.S. government earlier this week widened curbs on Chinese companies' access to semiconductors, including stopping sales of more advanced artificial intelligence chips made by Nvidia (NASDAQ:NVDA).


Under the new restrictions announced on Friday, China will require exporters of two types graphite to apply for permits, including high-purity, high-hardness and high intensity synthetic graphite material, and natural flake graphite and its products.


Three types of "highly sensitive" graphite items had already been under temporary controls, the commerce ministry said, and are included in the new list.


The curbs are similar to those in place since Aug. 1 for two chip-making metals, gallium and germanium. The restrictions have slashed exports of the metals from China in recent months.


New investments in the United States and Europe are designed to challenge China's stranglehold on graphite but industry experts expect it to be an uphill battle.


Top buyers of graphite from China include Japan, India and South Korea, according to Chinese customs data.

2023-10-20 13:03:54
Falling stocks, climbing mortgage rates: how 5% Treasury yields could roil markets

By Saqib Iqbal Ahmed


NEW YORK (Reuters) - Relentless selling of U.S. government bonds has brought Treasury yields to their highest level in more than a decade and a half, roiling everything from stocks to the real estate market.


The yield on the benchmark 10 year Treasury - which moves inversely to prices - briefly hit 5% late Thursday, a level last seen in 2007. Expectations that the Federal Reserve will keep interest rates elevated and mounting U.S. fiscal concerns are among the factors driving the move.


Because the $25-trillion Treasury market is considered the bedrock of the global financial system, soaring yields on U.S. government bonds have had wide-ranging effects. The S&P 500 is down about 7% from its highs of the year, as the promise of guaranteed yields on U.S. government debt draws investors away from equities. Mortgage rates, meanwhile, stand at more than 20-year highs, weighing on real estate prices.


"Investors have to take a very hard look at risky assets," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York. "The longer we remain at higher interest rates, the more likely something is to break."


Fed Chairman Jerome Powell on Thursday said monetary policy does not feel "too tight," bolstering the case for those who believe interest rates are likely to stay elevated.


Powell also nodded to the "term premium" as a driver for yields. The term premium is the added compensation investors expect for owning longer-term debt and is measured using financial models. Its rise was recently cited by one Fed president as a reason why the Fed may have less need to raise rates.


Here is a look at some of the ways rising yields have reverberated throughout markets.


Higher Treasury yields can curb investors' appetite for stocks and other risky assets by tightening financial conditions as they raise the cost of credit for companies and individuals.


Elon Musk warned that high interest rates could sap electric-vehicle demand, which knocked shares of the sector on Thursday. Tesla’s shares closed the day down 9.3%, as some analysts questioned whether the company can maintain the runaway growth that has for years set it apart from other automakers.


With investors gravitating to Treasuries, where some maturities currently offer far above 5% to investors holding the bonds to term, high-dividend paying stocks in sectors such as utilities and real estate have been among the worst hit.


The U.S. dollar has advanced an average of about 6.4% against its G10 peers since the rise in Treasury yields accelerated in mid-July. The dollar index, which measures the buck’s strength against six major currencies, stands near an 11-month high. A stronger dollar helps tighten financial conditions and can hurt the balance sheets of U.S. exporters and multinationals. Globally, it complicates the efforts of other central banks to tamp down inflation by pushing down their currencies. For weeks, traders have been watching for a possible intervention by Japanese officials to combat a sustained depreciation in the yen, down 12.5% against the dollar this year.


"The correlation of the USD with rates has been positive and strong during the current policy tightening cycle," BofA Global Research strategist Athanasios Vamvakidis said in a note on Thursday.


The interest rate on the 30-year fixed-rate mortgage - the most popular U.S. home loan - has shot to the highest since 2000, hurting homebuilder confidence and pressuring mortgage applications. In an otherwise resilient economy featuring a strong job market and robust consumer spending, the housing market has stood out as the sector most afflicted by the Fed's aggressive actions to cool demand and undercut inflation.


U.S. existing home sales dropped to a 13-year low in September.


As Treasury yields surge, credit market spreads have widened with investors demanding a higher yield on riskier assets such as corporate bonds. Credit spreads blew out after a banking crisis this year, then they narrowed in subsequent months.


The rise in yields, however, has taken the ICE BofA High Yield Index near a four-month high, adding to funding costs for prospective borrowers.


Volatility in U.S. stocks and bonds has bubbled up in recent weeks as expectations have shifted for Fed policy. Anticipation of a surge in U.S. government deficit spending and debt issuance to cover those expenditures has also unnerved investors.


The MOVE index, measuring expected volatility in U.S. Treasuries, is near its highest in more than four months. Volatility in equities has also picked up, taking the Cboe Volatility Index to a five-month peak.


(This story has been refiled to add the dropped word 'briefly' in paragraph 2)

2023-10-20 11:19:16
U.S. 10-year Treasury yields hits 5% for first time since 2007

LONDON (Reuters) - The U.S. 10-year Treasury yield briefly reached 5% for the first time since 2007, marking a fresh milestone in a relentless push higher for government borrowing costs.


Further signs of resilience in the U.S. economy help explain the latest sell off in Treasuries, as traders have unwound bets the U.S. Federal Reserve would soon start to lower interest rates.


Earlier on Thursday, Fed Chair Jerome Powell said the economy's strength and continued tight labor markets could require still tougher borrowing conditions to control inflation, although rising market interest rates could make action by the central bank itself less necessary.


Treasuries have also been hurt by expectations for higher government debt levels and increased bond sales.


COMMENTS:


MICHAEL SCHULMAN, PARTNER & CIO, RUNNING POINT CAPITAL ADVISORS, EL SEGUNDO, CALIFORNIA


"I see the 5% as a psychological threshold but I’ve been telling my clients for over a year that we are in a higher for longer environment, that inflation is going to stay around, higher than it has in the past, and with it interest rates also."


"Some people will look at this number and fear that things might get worse .. simultaneously other people look at these high rates and think that historically this is time to invest."


NOAH WISE, PORTFOLIO MANAGER, ALLSPRING GLOBAL INVESTMENTS, CHARLOTTE, NC


“I do think that (Powell’s) comments today are definitely a big factor behind the move to 5%. He highlighted what everyone has seen with the strong economic growth data and the retail sales figure that came out. He also signaled that he is fine with tightening coming as a result of longer end rates going higher, even if it means that the shorter end rates don’t need to go as high.”


BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN


"The move up has been driven by the Fed leaving the market as a price insensitive buyer. Foreign demand has also waned. Combined with surprisingly large issuance from the deficit, it’s a classic supply and demand effect."


"Some people think it’s because prospective growth is much stronger, but growth has never worked in explaining the level of yields. Growth stories are just that, stories. Just like how the market forced the Fed to stop quantitative tightening in 2019, it might be forcing the Fed to rethink QT today. The big difference is that in 2019 it was repo-madness that pushed the Fed to pivot. Today, it’s the chaos on the long-end of the curve."


QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA


"When we move to a new level it’s always an adjustment psychologically. It’s interesting because Powell made it clear that another rate hike is on the table, but he did not telegraph that it would be for November and that there was an opportunity to remain data dependent and see if there was a rationale for keeping rates where they are. That certainly wasn’t the catalyst."


"But there is a concern that is exclusive from the Fed...and that is concern over the deficit that is clearly now poised to climb higher with the larger defense needs for the administration. Now we’re talking about not just the Ukraine-Russia conflict, that front, but now you have another front, that’s in the Middle East that has to be satisfied. Not to mention the U.S. itself needs to have a larger budget...to replenish the military stockpile. The U.S. is going to need more and more supply in terms of what we auction to pay for all of this."

2023-10-20 09:12:13
Analysis-Russia's optimistic fiscal plans risk budget revenue shortfall

By Darya Korsunskaya and Alexander Marrow


(Reuters) - Russia could miss its 2024 revenue target and be forced to hike business taxes if the rouble proves stronger than expected in the budget and optimistic economic assumptions fall short, analysts warned, as Moscow spends more on its war in Ukraine.


Budget plans published in September envisage Brent crude prices averaging $85 per barrel next year - more pessimistic than a Reuters poll forecast - and a Urals price of $71.3.


But Russia's Accounts Chamber, which oversees budget execution, warned on Monday there were risks the Urals price would fall below $60 in 2024-2026.


Meanwhile, the West is keen to stop Russia from circumventing its $60-per-barrel oil price cap. Washington last week imposed the first sanctions on owners of tankers carrying Russian crude priced above that level.


The government is also relying on the currency remaining weak, which - while fanning inflation and eroding people's savings - raises the rouble value of energy revenues received in dollars.


"Next year's budget is very ambitious," said Expert RA Chief Economist Anton Tabakh.


"The deficit problem has been solved by the weak rouble. If the rouble appreciates strongly then the budget will be in a difficult position."


The rouble leapt off more than 18-month lows to the dollar last week after President Vladimir Putin ordered the mandatory sale of some foreign currency revenues for certain exporters.


It now trades at around 97 per dollar, softer than the budget's average forecast for 2024 of 90.1. The currency is historically weak, however, having rarely traded above 80 before Russia's invasion of Ukraine.


Finance Minister Anton Siluanov on Monday highlighted the risks of any strengthening, saying: "A change in the exchange rate by one rouble will lead to an increase or a decrease in budget revenues (of) around 100 billion roubles."


ARTISTIC APPROACH


Revenues are expected to climb 22.3% year-on-year to 35.1 trillion roubles next year, or 19.5% of gross domestic product.


Promsvyazbank analyst Denis Popov said that was possible but warned there are risks that oil and gas revenues especially could fall short.


Russia's forecast sees economic growth of 2.3% in 2024, well above estimates of 1.1% from the International Monetary Fund and 0.5%-1.5% from the Bank of Russia.


CentroCreditBank economist Yevgeny Suvorov described the budget as an artistic approach to realising strategic goals.


"There was a task to finance military expenditures, but also ... to show a return to the budget rule framework in 2025," Suvorov said.


"For this, it was necessary to depict rapid income growth. The best tool for this is the forecast they've drawn up."


Russia is walking a budget tightrope, and lower-than-expected energy revenues or GDP growth could prove costly.


"The revenue forecast, in our opinion, looks optimistic, both from the point of view of the economic prerequisites in he economy ministry's forecasts, and the preconditions for collection," said Renaissance Capital economists Sofya Donets and Andrei Melaschenko. They predicted an income shortfall of 1 trillion roubles.


Higher non-oil-and-gas revenues have helped narrow the deficit this year, but economist Dmitry Polevoy noted that the budget anticipated them weakening in future years, which could force the central bank to keep interest rates high.


"Risks for the non-oil-and-gas deficit are clearly skewed towards higher values," said Polevoy.


The central bank, which has hiked borrowing costs by 550 basis points since July and expects elevated rates for some time, has itself noted the government's optimism, saying the finance ministry's projections envisage a higher non-oil-and-gas surplus than its own macroeconomic forecast sets out.


CHANGING TUNE


At Russia's flagship economic forum in St Petersburg in June, Siluanov said increasing expenditure was difficult, as budget spending had already increased by 1-1/2 times from 2019 to 2022. Spending in 2024 is set to be double 2019's figure.


A bigger deficit would mean higher inflation and interest rates, the finance minister said, for which the population and business would pay. Taxes could also rise.


"If we want more spending, you have to understand where the money is coming from," Siluanov said. "Money doesn't come out of thin air."


Now, even as the government outlines plans for spending to jump to 36.7 trillion roubles in 2024, he is more relaxed.


"(It's a) fine, healthy budget, the temperature is fine," Siluanov said in September.


Russia has raised taxes on oil and gas firms by around 3.6 trillion roubles ($37 billion) in 2023-2025 and imposed a windfall tax on some company profits. Analysts expect more new taxes to cover any revenue shortfalls.


"Resources are finite. Experience shows that business, rather than citizens, will be actively sheared," said Expert RA's Tabakh.


Renaissance Capital's Donets and Melaschenko said Russia could create temporary taxes, permanently increase rates of VAT, or adjust Russia's budget rule to permit more spending of energy revenues.


Deputy Finance Minister Alexei Sazanov said in September that solutions were needed in response to higher spending.


"Tax tactics are having to become adaptive," Sazanov said. "These are the realities in which we live."


University of Chicago economist Konstantin Sonin said the key unknown for Russia's public finances is how much longer it will have to budget for war.


"They could survive a year or two, maybe five years, but this is setting the whole country, the whole budget, on a very wrong path," he said. "It's certainly not sustainable in the long run."


($1 = 97.3050 roubles)


(Graphic by Sumanta Sen; Additional reporting by Mark Trevelyan; Writing by Alexander Marrow; Editing by Catherine Evans)

2023-10-19 16:18:05
Tesla CEO Musk raises alarm on interest rates, hesitates on Mexico factory

By Hyunjoo Jin, Akash Sriram and Joseph White


(Reuters) -Tesla CEO Elon Musk said on Wednesday that he was concerned about the impact of high interest rates on car buyers, adding the electric vehicle maker was hesitating on its plans for a factory in Mexico as it gauges the economic outlook.


After the company missed Wall Street expectations on third-quarter gross margin, profit and revenue, Musk said he was cautious about going "full tilt" on the Mexico factory.


"If the macroeconomic conditions are stormy, even the best ship is still going to have tough times," he said in a shift in tone from a year ago, when he said Tesla (NASDAQ:TSLA) was "recession resilient."


Shares in the company fell more than 4% in after-hours trading on Wednesday. They had closed down 4.8%.


Tesla has managed to maintain demand with a series of price cuts, but Musk spent much of the call voicing concerns about further expansion, saying that he was afraid rising interest rates would make cars unaffordable.


The price of the popular Model Y SUV was "almost unchanged" for consumers even after Tesla's price cuts, Musk said, accounting for higher financing costs.


The automaker in March announced plans for a new factory in Mexico's northern state of Nuevo Leon that the state government estimated would cost more than $5 billion, though Tesla has yet to share a capital cost forecast.


Pressed for details on the factory, Musk said: "I am scarred by 2009 when General Motors (NYSE:GM) and Chrysler went bankrupt."


He also said there would be "enormous challenges" in reaching volume production for Tesla's long delayed Cybertruck pickup and making it cash flow positive.


PRICE CUTS


Tesla's aggressive price cuts this year have battered its gross margin, particularly in China where it faces stiff competition from local automakers.


The company is trying to survive the price war it started, mopping up any global demand for electric cars even as high interest rates and lower price tags at some rivals mute EV sales. Some analysts have said it may need to cut prices further to achieve its annual production target.


In the third quarter ended September, gross margin fell to a more-than four-year low and the company signaled it would keep cutting production costs to boost profits.


Still, it stuck to its annual production target of 1.8 million cars, a sign that the price cuts were buoying demand to an extent.


"The big question is if this is just a blip, or signs of a bigger shift among consumers as rising interest rates and a weaker economic backdrop discourage consumers from making big-ticket purchases," said Jesse Cohen, senior analyst at Investing.com.


Its stock has more than doubled this year after a slump last year as investors bet the company will fare better than rivals in an uncertain economy and get a long-term margin boost from its self-driving software. But the shares are still about 40% lower than its record high reached in 2021.


MARGIN FALLS


Tesla's gross margin dropped to 17.9% in the quarter ended September, compared with 25.1% a year earlier, when it had yet to start cutting prices. In the second quarter, Tesla had posted a gross margin of 18.2%.


Wall Street had on average expected Tesla to post a margin of 18.02%, according to 21 analysts polled by Visible Alpha. According to LSEG data, an average of 17 analysts polled expected 18.25%.


Automotive gross margin, excluding regulatory credits - a closely-watched figure - fell to 16.3% in the third quarter from 18.1% in the second quarter.


Margins fell despite a roughly $2,000 per vehicle reduction in raw material costs in the past quarter.


Tesla said its margin had taken a hit from the underutilization of new factories and an increase in operating expenses driven by its upcoming Cybertruck model as well as spending on artificial intelligence and other projects.


Revenue in the third quarter rose 9% to $23.35 billion, compared with analysts' estimates of $24.1 billion. That marked the slowest pace of growth in more than three years.


Its average revenue per unit declined by nearly 11% from a year earlier.


On an adjusted basis, Tesla earned 66 cents per share. Analysts had expected a profit of 73 cents per share, according to LSEG data. It was not immediately clear if the numbers were comparable.


Tesla said its energy business, which sells solar panels and batteries, as well as its services business, had become a meaningful contributor to profit with more than $500 million in combined gross profit in the quarter.

2023-10-19 15:04:41