The Second Leg of Demand is Threatened

An article in the Financial Times last week caught my attention:

Asia to cut subsidies as oil hits $135

By Kathrin Hille in Taipei, John Burton in Singapore and Raphael Minder in Hong Kong

Published: May 22 2008

"Asian governments on Thursday moved to cut energy subsidies to protect their finances and those of state-owned energy companies in the face of soaring oil prices. As crude oil pushed through $135 a barrel for the first time, Taiwan, Malaysia and Indonesia announced plans for urgent action to free prices or cut subsidy costs. China denied rumours of an imminent increase in retail prices, but may relax price controls."

I wrote about the beginning of the end of subsidies in my blog post from May 13. As consumers in Asia begin to pay higher or even market prices for gasoline and other refined products, the effect on demand will be staggering. This process will not occur overnight but will eventually filter its way into the overly optimistic demand projections in emerging economies.

Article Highlights

Taiwan

"In Taiwan, the first act of the newly elected administration of President Ma Ying-jeou was to abolish price controls on petrol and diesel from June 1. The new government also said it would raise electricity prices in July."

Malaysia

"Malaysia said it would soon announce a new petroleum subsidy scheme to keep its fuel subsidy bill at around last year’s level of M$40bn ($12.5bn) in spite of rising oil prices....also suggested that the government would take the unpopular step of raising electricity tariffs. “If there is a rise in the price of [natural] gas, we will have to pass that along, since we are not going to see Tenaga [the state power monopoly] lose money,” he said."

Indonesia

"The Indonesian government said it would “soon” go ahead with a plan to raise fuel prices by an average of 28.7 per cent."

China

"The Chinese government said that stock market rumours of an imminent increase in domestic fuel prices were “groundless”. However, analysts forecast that Beijing would eventually endorse subsidy cuts."

Full Article

Other countries not discussed in this article are also ending subsidies:

"Egypt - the most populous Arab state - has raised petrol prices by 40pc, despite protests in Cairo.

"Sri Lanka lifted diesel and petrol prices by 25pc over the weekend."

"India may have to follow soon to prevent its trade and budget deficits climbing to dangerous levels. "The situation is alarming. We need to stem the rot," said India's energy secretary, MS Srinivasan."

They Say It's Your Birthday

"They say it's your birthday
It's my birthday too, yeah
They say it's your birthday
We're gonna have a good time
I'm glad it's your birthday
Happy birthday to you."

- The Beatles

And it is today - I am 46 years old. I used to get a cake at my old job and it was nice to have even though we all kind of took it for granted. Now that I am on my own, I have to buy my own cake. So a thank you to Allison at my old shop who used to get the birthday cakes for the office.

Thrift Industry Quarterly Report

The Office of Thrift Supervision (OTS) released its first quarter report on the 1,276 thrifts that it supervises. The report showed the effects of the deteriorating credit cycle on bank balance sheets. We have written previously on this quarterly report here, and it is important in monitoring the state of the industry.

All data is as of 3/31/2008.

1) Average capital ratios are still strong, some even increased from the end of 2007. There are still outliers on the ratio scale but it is encouraging to see overall strength:

Total Risk Based Capital Ratio - 14.6%
Tier One Risk Based Capital Ratio - 12.5%
Equity Capital Ratio - 9.1%
Tier One Core Capital Ratio - 8.5%

2) The industry has reserved 2.01% of its assets, or $7.6 billion for the coming storm of losses.

3) Troubled assets are now 2.06% of assets. This category includes noncurrent (90 days or more past due), nonaccrual status loans and other real estate owned (OREO). This has not yet peaked and will continue to increase during 2008.

4) The total percent of non current loans continues to rise, reaching 1.78% of assets. The most problems are coming in the category of Construction and Land loans where 6% of all loans are non current. However, this is only 3.5% of all loans held by thrifts. Unfortunately, 1-4 Family loans represent 49.4% of all loans held by thrifts, and delinquencies here are at 2.85% and rising.

5) There are another 1.33 percent of total loans past due by 30 to 89 days. Many of these loans will eventually filter into the non current and OREO categories.

6) Another "bright" spot, if you can use that term, is that the number of banks on the OTS watch list is only at 12. For a bank to qualify for this list it must have a CAMELS rating of 4 or 5. The CAMELS rating is a ratings system that examines capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. In 1992, the number of banks on this watch list was 203, or 11% of all thrifts.

Read the Full Report by clicking below:

Press Release

Chart Package