You are an exporter of industrial compressors, based in France. You are contemplating entering Red Country. A
Question:
You are an exporter of industrial compressors, based in France. You are contemplating entering Red Country. A series of shocks slowed economic growth in Red Country sharply to +2.3% from +4.1% in the previous year. A severe drop in tourist arrivals against the backdrop of regional tensions and a travel ban from a large neighbor sent real exports down by -2% in the past fiscal year. Unexpectedly strong rises in private consumption and exports were the main triggers for the surprising Q4 gains. Private consumption was up by +5.1% y/y on the back of accelerating credit expansion and strong wage gains, although the strong increase surprised, given the deepening drop in retail sales, at -2.3% in Q4 (after -1.7% in Q3), and ongoing weak consumer sentiment. Redstart's consumer confidence index averaged 66.8 in Q1, vs. 68.8 in Q4 and an average 73.0 since 2016. Public spending surged by +9.4% y/y in Q1 while fixed investment edged up slightly to +2.2% y/y. The domestic currency’s slide and ramped-up white goods and automobile production sent real exports soaring by +10.6% y/y in Q4, much faster than leading balance-of-payment data had indicated. In contrast, import growth was weak at +0.8% y/y despite booming domestic demand, which has propelled nominal GDP to almost $880Bn. Net exports added +2.1pp to Q1 growth. We have now revised up our full-year growth forecasts to +3% for the coming year. Annual inflation has been volatile over the past ten years, fluctuating markedly around an average 8.2%. The volatility was mostly driven by the ups and downs of food and energy prices as well as bouts of strong exchange rate movements. The currency itself is highly vulnerable to external and political shocks, reflecting the risks associated with continued large current account deficits predominantly financed through short-term capital inflows, which are subject to sudden reversal in the event of economic or political turbulences. The policy responsiveness of the Central Bank of Red Country (CBRC) has not been convincing, and the IMF has asked for an extended Art IV audit. The CBRC has shifted back and forth between orthodox and unorthodox measures; and at times has appeared hesitant or politically restrained to take the appropriate measures to tackle negative price and currency developments in good time. A relatively loose monetary policy stance since 2016 combined with ongoing large current account deficits and rising political uncertainty have sent the currency nose-diving, depreciating against the USD on average by -18% each year since 2015. As a result, inflation has risen to just below 12% y/y and is expected to remain in double-digits for the rest of the year. Overall, currency risk will remain a serious concern in the medium term, especially since short-term foreign capital inflows have remained substantial. Another concern is the re-acceleration of private sector credit growth to +21% y/y in March. Excessive credit growth is a major risk factor. After five years of annual fiscal deficits at 2 to 3% of GDP, strong public spending growth, rising sovereign borrowing costs (downgrade to junk) and the impact of the currency’s depreciation on FX-denominated debt have begun to reverse the previously positive trend in fiscal indicators. The fiscal deficit rose to -2.3% and is expected to increase further. As these rates are low compared to peers, this is not a problem in the short term but perhaps in the medium term. Current account deficit still worrisome and its financing a cause of concern on the back of rising raw materials and machine imports, primarily for building uses. The country has long been demanding that FDI investors enter through JVs, but that is no longer a requirement. Capacity utilization hovers around 55%. Banks, numbering 260, are experiencing NPLs in the region of 3 to 4.6%. Among your competitors, who number 120+, capacity utilization hovers around 50%. The Herfindahl is 350. Suppliers to compressor makers include suppliers of electric motors, who umber 12+ in Red Country. Clients are mostly industries such as construction, chemicals, electronics industries, etc, and clients’ Herfindahl is also around 350. The average DSO in Red country, according to Coface, is approx. 42 days, but only 32 of BtoB sales are made on credit. The sales of compressors in Red Country total about 27,000 units a year, of which about a third are imported, mostly from Italy, Spain, and Hungary. Owing to central bank intervention to stabilize the currency and partial reversals of earlier capital inflows, FX reserves have been on a continuous decline – reflecting Red’s ongoing vulnerability to external and political events. After a temporary recovery reserves have fallen again to a 58-month low of USD 85 bn in April 2019. While the current level of FX reserves still appears comfortable with regard to import cover (4.7 months), they continue to cover just about 60% of the estimated external debt payments falling due in the next 12 months, which is well below an adequate level of at least 100%.
QUESTIONS Which country are we possibly talking about? Please explain your choice.
