Emerging stocks have plummeted as political unrest in Ukraine and Russia present new risks to the global economy. In addition, worries about a slowdown in the Chinese economy continue to drive the sharp sell-off in emerging markets. Here are a few things to watch in the key regions along with the implications on markets.
Russia
In order to support the weakening ruble, Russia announced yesterday to resume $100 million of daily forex interventions.
Credit-rating agency, S&P warned that Russian banks will face tougher operating conditions this year due to the slowing economy, forex volatility and declining borrower payment capacity. As a result, funding risk for smaller banks is increasing.
China
Chinese banks will have to increase their liquidity ratio to 100% by 2018. The Banking Regulatory Commission also affirmed a requirement that loan-to-deposit ratio cannot exceed 75%.
China is clearly implementing measures and rules to reduce liquidity and speculation in the system, as cracks in its colossal shadow banking system are now becoming visible. A slowdown in credit formation could have severe implications – the very least of which is a significant slowdown in GDP growth.
Venezuela
In Venezuela, pro-government protesters are clashing with opposition as riots continue to escalate. The anti-government protests are the result of hyper-inflation and shortages of many essential goods and services. Venezuela exports 2.4 million oil barrels per day – 700K of which is delivered to the U.S.
Venezuela dollar bonds (2027) dropped to all-time lows since October 2011, with a yield of nearly 16%.
There is impact on Corporate America; recently, P&G and Colgate preannounced forex losses. Venezuela’s currency rules are causing a 20 cent loss and ongoing 11-14 cents negative impact on EPS.