IORMA International Newsletter
June 2016

Currency ExchangeGlobal economies and the impact of currency fluctuations
(part II)

As the U.S. economy recovers, the dollar has strengthened, making it one of the best performers over the last year. As explained in our earlier introduction with respect on this issue, currency fluctuations have a huge impact on the economic and social welfare of companies and consumers as global economies are closely connected. Hereunder follows the second part of our series on this issue.

 

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ArgentinaArgentina

Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Although one of the world’s wealthiest countries 100 years ago, Argentina suffered during most of the 20th century from recurring economic crises, persistent fiscal and current account deficits, high inflation, mounting external debt, and capital flight.

 

 

Last December Argentina’s currency fell sharply against the U.S. dollar as the new administration under recentlt elected president Macri lifted deeply unpopular limits on buying foreign currencies, exposing Latin America’s third-largest economy to international market forces in ways not seen in over a decade.The devaluation, widely expected by economists, could exacerbate already soaring prices and spook Argentines, who fear big changes to an economy that has suffered periodic financial meltdown. Half May 2016 the exchange rate of the peso against the USD was around 14.

 

Argentina remains a highly attractive country to watch. The economy of Argentina is a high-income economy, Latin America’s third largest, and the second largest in South America behind Brazil.

The country benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Argentina’s economic performance has historically been very uneven, in which high economic growth alternated with severe recessions, particularly during the late twentieth century, and income maldistribution and poverty increased. Early in the twentieth century Argentina had one of the highest per capita GDP levels in the world and the third largest economy in the developing world. Today a high-income economy, Argentina maintains a relatively high quality of life and GDP per capita.

Argentina is considered an emerging market by the FTSE Global Equity Index, and is one of the G-20 major economies.

 

2013

2014

2015

2016 (e)

Population (thsd)

42,538

42,980

43,417

43,847

   GDP USD M

622,055

544,734

585,623

437,856

Real Growth %

2.9%

0.5%

1.2%

-1.0%

GDP PP p/c USD

22,067

22,299

22,554

22,303

ARS/ USD

5.476

8.125

9.268

15.814

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JapanJapan

Over the past 70 years, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) have helped Japan develop an advanced economy. Two notable characteristics of the post-World War II economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features are now eroding under the dual pressures of global competition and domestic demographic change.

 

Three years ago Prime Minister Shinzo Abe of Japan began a campaign, given the nickname Abenomics, to turn around his country’s economy. He focused on areas as varied as taxes, trade and women in the workplace. The campaign relied heavily on one strategy: weakening the country’s currency. Initially, it worked, but recently things went wrong and Abenomics may be in trouble. Turmoil in global markets is making the yen rise in value again. That has resulted in big hits to the Japanese stock market and has raised worries among economists that Mr. Abe will not be able to deliver the economic growth his country needs to get back on track.

The Japanese economy has now contracted in five of the past 12 quarters, and for all of 2015 it grew a mere 0.4 per cent. Three years after Mr. Abe took office, the yen had fallen against the dollar by about 40 per cent. But growing worries about the global economic outlook have undone some of that weakening. Since last December, the yen’s value has risen about 10 per cent against the dollar.

However, exoperts are gettin worried and doubt the success of Abenomics. It might not be long before the credibility of Abenomics as a sustainable policy package expires. For this the following factors are put forward: 1) Abenomics policies are becoming unsustainable or already withdrawn to some extent 2) Policies are not having their expected economic effects, 3) Policy makers seem to be losing their resolve.

 

2013

2014

2015

2016 (e)

Population (thsd)

126,985

126,795

126,573

126,324

GDP USD bn

4,908,860

4,596,160

4,123,260

4,412,600

Real Growth %

1.4%

0.0%

0.5%

0.5%

GDP PP p/c USD

36,787

37,442

38,054

38,731

JPY/ USD

97.596

105.945

121.044

114.758

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CanadaCanada

As a high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production, and high living standards. Since World War II, the impressive growth of the manufacturing, mining, and service sectors has transformed the nation from a largely rural economy into one primarily industrial and urban. In addition, the country’s petroleum sector is rapidly expanding, because Alberta’s oil sands significantly boosted Canada’s proven oil reserves. Canada now ranks third in the world in proved oil reserves behind Saudi Arabia and Venezuela and is the world’s fifth-largest oil producer.

The International Monetary Fund has grown more pessimistic about Canada’s economic fortunes despite the economy’s fast start to the year. The IMF cut its projection for Canadian real gross domestic product growth to 1.5 per cent in 2016, from 1.7 per cent and trimmed its 2017 growth forecast to 1.9 per cent from 2.1 per cent. For Canada specifically, the agency cited “the drag from the energy sector, offset partially by a more competitive currency and an expected increase in public investment,” as the key factors in its 2016 forecast.

 

Private-sector economists believe the Canadian economy expanded at something close to a 3-per-cent annualized rate in the first quarter, and many now expect growth of close to 2 per cent for all of 2016, well above the new IMF forecast. The bank’s January projection for 2017, at 2.4 per cent, is already considerably brighter than the IMF’s view.

 

2013

2014

2015

2016 (e)

Population (thsd)

35,231

35,588

35,940

36,286

GDP USD bn

1,837,440

1,783,780

1,552,390

1,462,330

Real Growth %

2.2%

2.5%

1.2%

1.5%

GDP PP p/c USD

43,680

44,990

45,553

46,199

CAD/ USD

1.0299

1.1061

1.2791

1.3805

 

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South AfricaSouth Africa

South Africa is a middle-income, emerging market with an abundant supply of natural resources; well-developed financial, legal, communications, energy, and transport sectors; and a stock exchange that is Africa’s largest and among the top 20 in the world.

 

South Africa’s economy decelerated in the final quarter of last year and data from the first months of 2016 paint a bleak picture of the economy. Manufacturing output contracted in March and the PMI remained in contractionary territory in April. Moreover, news from the labor market was disappointing and the unemployment rate hit the highest level in over a decade. The rand has remained volatile in recent weeks and the partial recovery experienced in April proved to be short-lived. The currency depreciated sharply in the first weeks of May amid a weak economic outlook, concerns about a possible credit downgrade as well as heightened political uncertainly. The recent rumors of the arrest of the finance minister have had an adverse impact on the currency.
South Africa’s rand (ZAR) has lost ground against the U.S. dollar in recent weeks. At the end of May 2016, the currency traded at 15.7 per USD. The figure was more than 10% weaker than on the same day in the previous month and over 30% weaker on an annual basis. The currency has been under escalating pressure amid a myriad of economic problems. The rand’s value plummeted against the US dollar broadly due to the weak growth outlook and fears over a possible downgrade of the country’s credit rating.

 

2013

2014

2015

2016 (e)

Population (thsd)

53.417

53.969

54.490

54.979

GDP USD bn

366,236

350,138

312,957

266,213

Real Growth %

2.2%

1.5%

1.3%

0.6%

GDP PP p/c USD

12,980

13,097

13,165

13,166

Avg Rate ZAR/ USD

9.65041

10.84449

12.75240

15.50

 

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IORMA News, June 2016 

Aad WeeningAad Weening
Director International Consumer Trends

 

 

 

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