Washington Insider -- Monday

Emerging Markets Rattled

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

White House Fact Sheet on E15 Still Offers Little Detail on Potential Plan

The White House on Thursday unveiled a fact sheet regarding the announcement this week on allowing sales of E15 year-round and proposing other changes to the Renewable Fuel Standard (RFS) relative to renewable identification numbers (RINs). However, the fact sheet offers few additional details than the components that a senior White House official briefing reporters on prior to the announcement.

"President Donald J. Trump is directing the Environmental Protection Agency (EPA) to initiate a rulemaking to consider expanding Reid Vapor Pressure waivers for fuel blends containing gasoline and up to 15 percent ethanol," the fact sheet said. "Under the proposed expansion, E15 would be allowed to be sold year round rather than just eight months of the year."

"President Trump continues to uphold his commitment to ethanol and the Renewable Fuel Standard program to give consumers more choice," the fact sheet stated. "The proposed expansion will strengthen America’s domestic energy production and provide a boost to America’s famers."

As for the RIN market, the fact sheet said the administration will "consider reforms to increase transparency and prevent price manipulation in the RIN market."

"President Trump and his Administration held meetings with various stakeholders, including Members of Congress and state leaders, to hear a range of views while evaluating this decision," the fact sheet noted. "These proposals will go through the formal notice and public comment process."

Biodiesel Tax Incentive Still Eyed for Lame-Duck Action

Among issues that could see action in the post-election lame-duck activity in Washington is a likely move from some lawmakers to extend the lapsed biodiesel tax incentive program, retroactively, as part of a possible deal on other tax incentives and a technical corrections measure relative to the tax reform legislation that previously cleared Congress and signed into law.

Senate Republican Conference Chairman John Thune, R-S.D., said there is strong desire among GOP lawmakers to pass a package of so-called tax extenders and to make some corrections to the $1.5 trillion tax reform legislation Congress passed last year.

“There will be an attempt to try and get as much done as we can before the end of this calendar year,” Thune said. “We could get something done on finishing up the tax reform stuff of last year, technical corrections.”

Washington Insider: Emerging Markets Rattled

Amid U.S. trade policy fights and growing political angst, the urban media is paying increasing attention to problems in emerging markets. For example, Bloomberg says that “already rattled by an exodus of capital and tumbling currencies, emerging markets are bracing for a protracted struggle.” The cause is the twin blows from rising U.S. interest rates and a deepening trade war between the world’s two biggest economies.

The report says that finance officials from Colombia and Mexico meeting in Bali for the International Monetary Fund (IMF) and World Bank’s annual meetings pointed to rough times ahead, and even the risk of a full-blown crisis for the unprepared. Indonesia’s central bank vowed to stay "ahead of the curve" on monetary policy as the U.S. Federal Reserve continues on its tightening path.

The prospect of a deepening rout in emerging markets was underscored this week by an IMF cut in its outlook for global growth for the first time since 2016. Meantime, Pakistan requested yet another bailout from the fund, following Argentina in requesting assistance.

“Headwinds from higher oil prices, Fed interest rate increases and a stronger dollar, and the possibility of an escalation of trade tensions don’t seem to be issues that will be resolved in three to five months,” Changyong Rhee, director of the Asia and Pacific department at the IMF, told Bloomberg. "Policy makers need to save ammunition,” he said, citing reserves, fiscal space and monetary space.

The IMF communique issued last weekend noted that while the global economic expansion remains strong, risks are "increasingly skewed to the downside amid heightened trade tensions and ongoing geopolitical concerns, with tighter financial conditions particularly affecting many emerging market and developing countries."

The scale of the fallout from rising U.S. interest rates and a stronger dollar has been varied, as has the scope of the responses across emerging markets, Bloomberg says. But it’s not just policy makers in the developing world who are grumbling: President Donald Trump launched a fresh attack on the U.S. central bank this week, decrying the Fed’s policy path as "going loco."

Mexico’s Finance Minister Jose Antonio Gonzalez Anaya urged counterparts to heed the lessons of the past. Whereas the three main challenges for Mexico’s economy a year ago were elections, renegotiation of NAFTA and monetary policy normalization, only the latter now remains.

Emerging economies are keeping an eye on rising interest rates as they consider plans to sell international debt to finance infrastructure and other spending priorities, Kenyan Treasury Secretary Henry Rotich told reporters in Bali on Saturday.

Paraguay’s central bank is in the process of implementing a framework to supervise risks in individual banks and insurance companies, with support from the IMF, akin to "a doctor that prescribes medicine for a sickness before it comes,” said Governor Jose Cantero.

Hikes to U.S. interest rates, trade protectionism, higher oil prices and China’s slowing growth are among the many headwinds facing Asia. Wobbles in stock markets have added to jitters. Higher U.S. borrowing costs have been draining capital from Asia and putting governments and central banks under pressure; in turn many have tightened their own monetary policies, cut spending and strengthened lines of defense.

Even before most major nations in Latin America start raising borrowing costs, the IMF forecasts the region in 2018 will have the weakest growth of any emerging-market group. While rising oil prices since last year have been a boon to producers, agricultural commodities like soy and corn have fallen markedly, weighing on tax receipts. There’s concern oil may falter, too, if global growth slows.

Argentina may provide an idea of worst-case reversals in store: higher U.S. rates combined with the nation’s fiscal weakness prompted investors to dump its assets and, with the peso in free-fall, the central bank raised the benchmark rate to the highest in the world. The IMF now forecasts back-to-back recessions in 2018 and 2019.

There’s no “magic bullet” for how emerging economies can respond to the volatility that’s shaking them, Hyun Song Shin, economic adviser and head of research at the Monetary and Economic Department of the Bank for International Settlements, told Bloomberg.

Instead, governments need to do the basics right like build buffers and bolster underlying fundamentals, he said. "The lesson is you shouldn’t drink too much from the fountain of global liquidity.”

With the trade war between the U.S. and China showing little signs of abating, the IMF’s Rhee has warned the issues facing emerging markets may persist for another 18 months or more. Indonesia’s investment chief Tom Lembong, a former trade minister, has urged vigilance for all emerging markets.

"There’s really only one discussion that’s happening here, in earnest," said Robin Brooks, the Institute of International Finance’s chief economist. "And that is basically the intensity of the trade dispute between the U.S. and China and how bad that will get--how prolonged and how pernicious."

So, we will see. The recent U.S. stock market flutter may be over but it seems to have attracted attention from policymakers and U.S. officials and may lead to some efforts to reconsider recent tough trade policy positions. However, both sides appear to be deeply dug in in spite of the recent cautionary signals. These are trends that producers should watch closely as they intensify, Washington Insider believes.

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