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4/5/08

Peruvian babushkas and investment grades

The Babushka effect. This term was coined by a smart guy I know in New York, and refers to the amount of dollars stashed away in cubby holes, under mattresses, in shoe boxes etc etc. The name comes from the fact that Russia is one of the greatest depositories of physical dollar bills, but very few get left inside the four walls of banks. The babushkas (grandmothers) have them.

This is also true of LatAm, of course, as people's savings here are often both in dollars and hidden from the financial system. So what with the sudden rise in the Nuevo Sol (PEN) dollars stashed in Peru are coming out of hiding, and I've even got some anecdotal evidence to back that up. I'm told by those in the profession that money exchange houses are handling more and more old style dollar bills, and I'm also reliably told (reliably, else I wouldn't be passing it on here) that people who regularly change U$200 or U$300 a month have been changing four or five grand at a time*.

This also ties in with a report in Peru's El Comercio yesterday, which was bemoaning the low level of savings registered in Peru compared with other countries.

This looks pretty woeful at first sight, but this doesn't mean there aren't many people saving money in Peru (a point missed by the article). It means there aren't many people formally saving in Peru...a BIG difference, Señora Babushka.

Now, how does this tie in with investment grade? Well, according to the English version of the Peru gov't website on the matter (which needs to be updated, Alan..get to it man!), Fitch, S&P and Moody's all had one comment in common when referring to Peru's institutional weaknesses (i.e the thing holding the country back from getting a better credit rating).

Fitch sez: "High dollarization level albeit decreasing"
Moody's sez: "High foreign debt ratios.....High debt rate in foreign currency.....Presence of a highly dollarized banking system"
S&P sez: "Foreign vulnerability, although decreasing, due to high dollarization and foreign public debt."

If you spotted the concept of "dollar" as being in common there, you spotted the same thing as me. But what with the dollar tumbling against the PEN recently, the benefit has been to squeeze out the dollars from the system, both the formal and the informal ones, and get people to convert to PENs for more transactions. According to latest govt' figures, the "dollarization of the economy" (whatever that really means, but I'm pretty sure you're with me) has fallen from 60% to 40%. Meanwhile, the hidden savings dollars have come out from under those mattresses and added to the downward pressure on the greenback.
Now, how much of this downward pressure is external (from banks recommending buying the PEN and local bonds) and how much is internal is up for debate. I would, however, propose that blaming it all on hot money (typical reaction from indignant local economists) entering the country is not the whole story. There is also a lot of cold money leaving the country (in the form of saved dollar bills) that creates internal demand for the PEN.

This has played into the govt's hands on the quest for investment grade. The rise in the Sol vs the dollar has certainly helped the partial de-dollarization of the local economy. And the more the PEN gets love, the more loveable it is, so the more love it gets etc etc virtuous circle style*. The central bank has intervened on the way down, but has done so to make the drop as orderly as possible and has at no point used an agressive intervention policy such as in Argentina. It comes as little surprise, therefore, to note that the gov't has basically ignored the squeals of pain from the non-commodity export community about profits draining away.

The population that has lost purchasing power by saving in dollars has not been so vociferous, (perhaps because they don't quite understand what has happened as yet) but there are plenty of grumbles going around about how ordinary people's savings have been reduced by the PEN appreciation. All in the name of making the country wealthier, ya knowz.........



Semi OT (but only semi): The economist Franklin Fisher once said (and forgive me if I don't get the quote dead on...this is from memory), "It's difficult to be an expert in a discipline that everybody understands. It must be even more difficult to be an expert in a discipline that everybody thinks they understand. This is why I don't envy football managers, because being an economist is similar."

That ditty that has stayed with me over the years, cos it reminds me that I'm not an economist. This is also why equities analysts enter the ring with economists at their own peril, cos those dudes can scrunch your pet theory up into a little ball in about 14 seconds flat, and ladle the science on in such a way that comebacks just get them guffawing at your naivete. Bless 'em all. Just beats me how they can all have such different views and all be so totally correct at the same time.


* It cost me three beers to get that info...click an Ad for me, will you?
** I will bow to correction, but I believe the term "virtuous circle" was coined by the spiritual guru "Osho" in the 1970s...economics stole it from metaphysics, it seems