52 seconds capital

Month: February 2024

Ukraine was signaling donor fatigue towards the end of last year.

And with good reasons.

The US, after directing more than $75 billion (see image) in aid between Jan 2022 and Oct 2023, wasn’t keen to continue support in what was to be an election year.

With the EU it was a bit more complicated (as you would imagine in a 27-nation bloc, it is never going to be easy!).

There was cohesion around continuing aid but the form of EU aid ─ whether financial, humanitarian or military ─ often saw cross currents; and large gaps remained in commitments vs. allocations, especially on military aids.

And so, late last year, faced with a $43 billion budget deficit in 2024, Ukraine was looking down the proverbial barrel.

Until this month changed that.

On Feb 1, the EU finally announced a $54 billion aid to Ukraine.

It wasn’t all smooth sailing though, with the lead up to the agreement seeing stiff opposition from Hungary (on financial and military aid) and from Slovak (halting military aid).

Now here’s the surprising bit: the $54 billion package will support Ukraine’s economic rebuild ─ Ukraine’s economy contracted by 29% in 2022 ─ by providing predictable funding all through until 2027 and ensures that the country (hopefully) will not need to print local currency to fund its ongoing war.

But it did not provide for any military aid.

That changed when earlier this week, NATO’s Secretary General made a stunning announcement: 18 out of the 31 NATO members will spend at least 2% of their GDP on defense in 2024.

It’s a telling sign that the NATO announcement came a day after the Biden administration, on Feb 13, passed a $95.34 billion military aid (whose chief beneficiary was intended to be Ukraine) in the US Senate.

Will this $95 billion funding bill pass the Republican-controlled House?

It just might? (thinks the Biden administration).

And what if it does not? (thinks the NATO).

Ergo, the NATO’s aggressive dialup of its defence budget is the strongest sign yet ─ of the EU preparing for a Trump administration in the White House by close of this year.

By

Avinash Menon, CFA

Founder and CEO,

52 Seconds Capital Limited

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On January 31, 2024, the New Development Bank (NDB) ─ a lender established by the BRICS nations in 2015 ─ issued a RMB 6 billion ($845 million) 5-year Panda Bond ─ a bond from a non-Chinese issuer sold in Mainland China ─ in the China Interbank Bond Market. With the Jan 2024 debt raise, the total issuance of Panda Bonds by NDB, since its inception, is RMB 47.5 billion ($6.67 billion).

The NDB debt raise comes on the back of a record year for Panda Bond issuance in 2023 ─ Deutsche Bank, the governments of Egypt and Poland, and the National Bank of Canada among other raised RMB 150 billion ($21.1 billion).

Bond issuers know a price arbitrage when they see one.

NDB’s panda bond was priced at 2.66%! (the 5-year UST is at 4.126%)

Ah, but the CNY has weakened you might say?

Indeed, the CNY has weakened by about 14% since March 2022 (which is about when the US Fed started raising rates) but it’s held its own rather well against the twin, tempestuous backdrops of the USD yield differentials and the PBOC’s massive easing measures.

The Chinese regulatory environment is also a lot more benign now.

Since December 2022, the PBOC and the State Administration of Foreign Exchange allows Panda Bond issuers to repatriate proceeds overseas.

There is another factor at play here ─ China’s M2 money supply.

While the US has seen its M2 money supply contracting thanks to the Fed tightening its balance sheet, China’s M2 money supply ─ increase in M2 leads to an increase in demands for bonds ─ has on the other hand been edging up steadily (see graph, China @ M2 of $41.5 trillion Vs. US @ M2 of $20.95 trillion, also China’s M2/GDP is 2x, nearly twice that of the US).

The gap between China’s M1 and M2 money supply remains wide (the PBOC did point out the significant jump in the M1 YoY growth of 5.9% in Jan 2024 Vs. growth rates that largely remained in the 1%-2% range for most of H2 2023 as ‘signs’ that the stimulus is working, but in absolute terms M1 is still only at $9.55 trillion at close of 2023 and trails M2 by a wide margin) and is indicative of liquidity that’s available but held tight-fisted.

Is that a recipe for a deflationary spell in the world’s second largest economy? (That’s perhaps a story for another day and hinges upon what the Chinese playbook for stimulus could eventually look like)

Doesn’t matter, the point here is deflation kindles the interest of bond holders, especially in long duration bonds.

So, if you combine that massive pool of Chinese M2 liquidity with global sovereign and corporate borrowers who ─ balking at multi-decade high USD rates ─ are looking at cheaper ways to raise debt, you will see why Panda Bonds are perhaps at the very beginning of a long runway that’s opening up.

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Avinash Menon, CFA

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