Italy: Tackling NPLs will free up new (cheaper) bank credit
On Monday, the government and leading banks reached an agreement on bad debts. With EUR360bn in outstanding non-performing assets and with 60% of this representing non-performing loans (NPLs), bank balance sheets are overburdened. A fund of at least EUR5bn will help banks unload bad loans from their balance sheets and thereby relieve pressure on their capital requirements, reassure investors and resume lending in the country. The fund should function as a vehicle held by private investors and managed by a private entity that will buy junior tranches of bad loans (the most risky) from the most fragile banks as a replacement for raising equity capital in the market. This fund is a further step in reforming the banking sector and supplements recent agreements on bank mergers. However, the fund’s size remains limited and could be increased. The banking system is highly fragmented, preventing full transmission to the real economy of ECB monetary policy measures. As a result, since the end of 2013, interest rates on bank loans to SMEs have disconnected from those in Spain and remain 90bps above their Spanish counterparts (2.8%) and below those in Germany.
China: Stabilising? Or getting stronger?
Exports were up +11.5 y/y in March, following a fall of -25.4% in February, and business confidence improved. Positive official PMI data were followed by an improvement in the Caixin/Markit Services PMI to 52.2, supported by rising new orders. Moreover, a rebound in producer prices (-4.3% y/y in March after -4.9% in February) and improving consumer prices suggest that deflationary forces are receding. In terms of financing, there are signs of stabilisation, with increased foreign reserves (+USD10.3bn in March) and less volatility in both the currency and equity markets. As a result, Q1 GDP will probably indicate some resilience, with growth in the target range of +6.5% to +7%. The authorities will keep their easing stance to reinforce these current trends. Cyclical measures will include further injection of liquidity in domestic markets and increased public spending and, structurally, it is likely that the business tax will be replaced by VAT on construction, real estate and financial and consumer services, which will result in a tax cut of at least RMB500bn. EH expects GDP growth will slow to +6.5% in 2016.
UK: Manufacturing needs more time to bottom out
Manufacturing production fell by -1.1% m/m in February, the largest contraction since May 2014. Business confidence has been soft since November 2015, while capacity utilisation at 79.7% has weakened since mid-2015 and is the lowest since Q3 2013 and below the long-term average. The contraction in manufacturing suggests that GDP growth will slow further; +0.4% q/q in Q1 from +0.6% in Q4 2015 and +0.5% on average last year. The recent depreciation of the GBP will assist company competitiveness in the coming quarters, but soft global demand and fears of a Brexit are likely to remain a drag on the economy in H1. While we expect a Bremain (70% probability) post 23 June, we estimate that, in the event of a Brexit
, the total export loss in the case of a Free Trade Agreement (FTA) with the EU could be around GBP9bn and nearer to GBP30bn if no FTA is signed. The dependency on the European market is significant for exporters (50% of total UK exports compared with 6% of total exports for the EU) notably for sectors including chemicals, machinery & equipment and automotives.
Angola: Take EFFect?
Technical assistance from the IMF (see also WERO 16 March 2016
) may now be supplemented by a financial facility as the Fund announced that it will discuss with Luanda a potential three-year (perhaps USD1.5bn) Extended Fund Facility (EFF). The latter, if agreed, will provide balance of payments support and assist an economic reform strategy designed to combat structural impediments and promote growth. An EFF programme comes with conditionality, the prospect of which probably made Angola initially reluctant to approach the IMF, although a facility of USD1.9bn was granted in 2009 and fully drawn down by March 2012. The EFF should assist debt sustainability in the short term. EH expects GDP growth will be capped at around +3% in 2016 and 2017, compared with an annual average +7% in 2000-2015 (and +12.5% in 2004-2008). The slowdown will reduce commercial prospects, particularly in the private sector, and Angola will remain a challenging business environment. EH also expects other Sub-Saharan African countries will seek IMF support.