On gaining recognition by World Finance magazine as Pension Fund of the year, Brazil, CESP sent CEO Martin Glogowsky to the London Stock Exchange to elaborate on the growth and expansion of the diverse sector.
Month: March 2010
China’s influence silences Asia on yuan peg
China’s increasing regional influence will keep Asian governments from pressuring the world’s fastest growing economy into letting its currency strengthen for fear of economic or political repurcussion.
China has repeatedly said a decision on unshackling the yuan would depend on domestic conditions, after effectively pegging it to the US dollar for the past 20 months, even while it is under threat by Washington of being labled a “currency manipulator” in April.
Policymakers from Bangkok to Tokyo told Reuters they are unwilling to challenge China on its currency, giving Beijing some diplomatic breathing room in the face of pressure from the US, the euro zone, the IMF and others who have said the yuan is undervalued.
The yuan has been flat at 6.83 per U.S. dollar since mid 2008. Since a recovery began in March 2009 though, increasing capital flows have been pushing up other Asian currencies between seven to 27 percent.
That has given Chinese exporters an edge over their competitors and tied the hands of policymakers who have been forced to keep intervening in markets to weaken their currencies.
The Asian officials interviewed separately over the past week were reticent to speak about yuan policy even on the condition of anonymity, keeping to their long-held practice of non-interference in Asia.
They also were worried about straining bilateral trade and diplomatic relations with China which has become strategically important.
“We used to say when the United States sneezes, Japan would catch a cold. Nowadays, when China sneezes, Japan catches a cold. Japan’s economy has become that much more reliant on Chinese growth,” a senior Japanese government official involved with financial diplomacy told reporters.
The official said Japan, which has a third of its overseas production in China and hence is vulnerable to rising costs there, is increasingly worried about signs of rising asset prices in China, though did not want to publicly discuss the issue.
“We don’t see much point telling China what their problem is because they themselves are well aware of it.”
Sympathy with China
Japan’s export growth to China, on a three-month rolling basis, was at the quickest since 1985 at 55 percent in February, more than three times export growth to the US.
This is precisely the dynamic that policymakers do not want to upset.
“Policymakers are likely asking themselves, do we really need to upset China the way the U.S. has and get all sorts of retaliatory actions, at a time when China … is becoming a source of demand for Asian exports,” said Sanjay Mathur, Asia economist with Royal Bank of Scotland in Singapore.
“There is zero gain in upsetting China.”
Japan’s deputy finance minister publicly called on Beijing to hear calls for a more flexible yuan, though said sanctions against China would be wrong. Similarly, the Indian commerce minister said China’s currency policy created problems for domestic exporters, but stopped short of calling for an end to the peg.
David Mulford, a former US Treasury official who was directly involved with a decision in 1988 to label South Korea and Taiwan “currency manipulators,” believes the issue of China’s exchange rate has become too politicised by the US government, and other governments in Asia as a result do not want to get involved.
If emerging markets like China keep growing at a much faster pace than advanced economies such as the United States, then the intensity of disputes in trade and exchange rates will increase.
“If this spread is maintained for just a few years, the impact will become more political,” said Mulford, now vice-chairman international at Credit Suisse.
South Korea actually aligns itself with China’s position on the yuan: fast currency appreciation is economically dangerous.
“Koreans don’t so much have complaints about China’s currency peg but rather feel sympathetic with their concern that a fast appreciation of the yuan could end up shutting down factories, laying off workers and causing social unrest,” a high ranking financial authority said.
Senior officials in India, which is not as dependent on exports like Japan and Korea, said they were not confident pressure they could apply on Beijing would be successful in speeding up currency reform.
“If the US can’t get China to change its stance on the yuan, I don’t see India making much headway either,” an official who deals with currency policy said.
India’s $1.2trn economy is expected to post the second-highest growth in Asia this year, Reuters polling shows.
For now, Asian governments, especially those dependent on exports, have decided to absorb the disadvantage of having strengthening currencies. If capital flows attracted by their rising currencies keep pouring into the region though, the pain will increase.
Manu Bhaskaran, chief executive of Centennial Asia Advisors and former consultant to the Singapore government on economic matters, said until China lets the yuan strengthen, Asian policymakers will have to keep intervening in markets to contain currency strength.
“Everyone is hurt by a weak RMB,”he said, referring to the renminbi, or yuan.
Taiwan using China trade deal to sell foreign FTAs
Taiwan has leveraged its goal of a landmark trade deal with China to open talks with Japan, the US and other powers on free trade deals expected to boost the long-isolated island economy, officials have declared.
Appealing to countries that have been barred by Taiwan’s political rival China from signing FTAs with the island, Taiwan has hinted to wary foreign governments that Beijing is unlikely to protest once the two sides sign their own trade deal.
Taiwan has talked to Japan, the US and Singapore, with Europe and the Association of Southeast Asian Nations also on the list, Hu Chung-ying, deputy minister of the Council for Economic Planning and Development, told reporters.
China, which seeks to limit Taiwan’s international profile, has shown no signs of protesting, officials say. It previously asked other nations to avoid FTAs with the island at the risk of jeopardising their own ties with the massive Chinese market.
Taiwan’s export-reliant $390bn economy has said it lags emerging competitors such as South Korea that enjoy lower trade tariffs because of their FTAs with major world trade partners.
“We’ve approached target economies to let them know we are really interested in doing this and invite their consent to start discussion with us,” said Huang Chih-peng, director general of Taiwan’s Bureau of Foreign Trade, in a separate interview.
Taiwan and China, following two years of detente after six decades of hostilities, are negotiating an economic cooperation framework agreement to drop tariffs in hundreds of sectors.
The deal is expected to boost Taiwan’s economy and let Beijing show the island political goodwill, with hopes of eventual reunification.
“We’re telling the other side that this is not just for you, it’s also to strive for talks with other countries, that we are already door knocking,” Huang said.
The US is Taiwan’s top trading partner, accounting for 17 percent of all imports and exports, according to foreign trade bureau statistics. Japan is second at 16 percent. Hong Kong is third and mainland China next.
Potential FTA partners will see from the China-Taiwan trade deal, expected to be signed by June, that political tensions have eased, Huang said.
Beijing claims sovereignty over the self-ruled island more than 60 years after the Chinese civil war, but China-friendly Taiwan President Ma Ying-jeou has brokered landmark trade agreements with China since taking office in 2008.
Central bank autonomy in spotlight post-crisis
Here and there around the world, governments are urging central banks to ease the pain of belt-tightening – and ward off the risk of an economic relapse – by taking their time to shrink balance sheets that have billowed during the financial crisis.
The risk for markets is clear: if supine central banks are unwilling to stand up to domineering politicians, investors will take fright at the threat of inflation and bid up interest rates, short-circuiting the very recovery that governments crave.
Yet it’s fair to ask in the light of experience whether the conventional wisdom is right that independence is the be-all and end-all for a central bank.
After all, the lax monetary policies long followed by the independent Federal Reserve were a root cause of the US credit bubble, critics contend.
In China, by contrast, major monetary policy decisions are made not by the People’s Bank of China but by the State Council, or cabinet, yet China has largely managed to enjoy low inflation alongside breakneck economic growth.
“I don’t believe in absolute independence at central banks,” said Mario Blejer, a former head of the Argentine central bank.
Cooperation
Blejer said he would put more emphasis on the technical capabilities and political savvy of a central bank rather than its degree of autonomy from the government.
“I don’t think independence for a central bank means that it can have an overall economic policy which is different from the line of the government,” Blejer told reporters in Frankfurt.
The issue is far from academic in the case of Argentina, where President Cristina Fernandez recently sacked her central bank chief for refusing to hand over more than $6bn of foreign exchange reserves to repay government debt.
So what if a government ordered its central bank to raise its inflation target to four percent from two percent, as the IMF’s chief economist, Olivier Blanchard, suggested in a provocative recent paper?
“I think the central bank would have to tolerate that,” said Blejer, currently a member of the monetary policy committee of the Bank of Mauritius. “It cannot be that a central bank would say ‘we’re not in favour of your policy’ and would continue to do whatever they want.”
Stephen Roach, chairman of Morgan Stanley Asia, says there comes a point when central banks have to take steps that might offend politicians: they must be the ultimate police of economies and financial markets.
Roach’s worry is that they have fallen down on the job.
“There are no independent central banks left in the world today despite what they like to say in the West. And I think that is a real tragedy,” Roach said in Beijing recently.
“Politicians don’t have the political will to stop inflation or asset bubbles,” he said. “And nowhere was the failure greater than in my own country, the United States, where the Federal Reserve has been repeatedly compromised by political pressures.”
Necessary but sufficient?
The Fed is in good company. Barely a day goes by without Japan’s finance minister or other senior politicians berating the Bank of Japan for its failure to quell deflation.
Haruhiko Kuroda, a former vice-finance minister who now heads the Asian Development Bank, is among the critics.
“In Japan, even now prices are still declining so price stability is not yet realised. So the central bank in Japan should do more to regain price stability,” he said in an interview during a recent visit to Beijing.
Does that mean the BOJ should do the government’s bidding? A 1997 law granted the central bank greater autonomy, but two government representatives on its monetary policy committee can still request that a vote be postponed. And there is a presumption that government and central bank will be on the same policy page.
Choosing his words carefully, Kuroda said independence is a good thing, but the BOJ cannot be “aloof” from the responsibility a central bank has to keep the price level steady.
“In maintaining price stability, the independence of the central bank is, if not sufficient, probably a necessary condition,” he mused.
Investors certainly prefer the shield of independence.
In Asia, government interference has been less invasive than in Argentina, but New Delhi was leaning for a time on the Reserve Bank of India not to tighten too quickly, before it became clear that inflation was heading for double digits. The central bank raised interest rates by a quarter-point last Friday.
And in Seoul, the government has invoked its right for the past three months to send a vice-finance minister to attend central bank meetings for the first time since 1999. Coincidence or not, the Bank of Korea has kept interest rates unchanged.
Manu Bhaskaran with Centennial Asia Advisors in Singapore described the Bank of Korea as a highly credible central bank and said it would be a pity if that reputation was weakened.
Dubai in $9.5bn debt offer, no new Abu Dhabi aid
The Dubai government unveiled plans to recapitalise its indebted Dubai World flagship and repay Nakheel bonds in full, injecting what it said was $9.5bn in new funding, but without new aid from Abu Dhabi.
In a statement, the government said $5.7bn in remaining funds from a loan made by Abu Dhabi would provide the lion’s share of the overall $9.5bn and would also include what it called “internal Dubai government resources”.
“There is no new money from Abu Dhabi,” said a government official on a conference call. “This proposal is based on amounts remaining from the loans provided previously by the government of Abu Dhabi and from internal resources from the government.”
Dubai World said the total amount of debt held by creditors excluding the Dubai Financial Support Fund was $14.2bn at the end of December. Those creditors would receive 100 percent principal repayment through the issuance of two tranches of new debt with five and eight-year maturities, it said.
The Nakheel bond payback offer came as a surprise, as does the absence of a more visible role by wealthy neighbour Abu Dhabi, which has already pledged $10bn in aid to debt-struck Dubai. The government said the bond repayment depended on creditors accepting the proposal.
Dubai World, the Gulf Arab emirate’s flagship conglomerate, which includes the QE2 ocean liner and Barneys department store among its high-profile assets, said last year it would delay repaying $26 bn in debt linked mainly to property units Nakheel and Limitless World.
The government said it was also offering to recapitalise Dubai World through the equitisation of the government’s $8.9bn claim and a commitment to fund up to $1.5bn in new funds.
Turning to property giant Nakheel, the government said it would inject $8bn in new funds and that it would equitise $1.2bn of the government’s claim.
Bank creditors will be asked to restructure their debt at commercial rates, the government said. Trade creditors would be offered a significant cash payment and a tradable security, the statement said.
“Assuming sufficient support for the proposal, the 2010 and 2011 Nakheel Sukuk will be paid as they fall due,” the statement said.
Core creditors representing 97 banks met recently to finalise months of talks on how Dubai World can restructure the debt, about a quarter of Dubai’s estimated total debt of $101bn.
China official rejects US complaints on currency
Chinese Vice Commerce Minister Zhong Shan, in Washington at a time of heightened US-China trade and political tensions, told business leaders that changing the exchange rate was not the way to fix a huge bilateral trade imbalance.
“Revaluing the renminbi is not a good recipe for solving problems,” he told the US Chamber of Commerce, according to a transcript made available by the US business group.
A growing number of US economists estimate China’s currency is undervalued by up to 40 percent. They say that gives China an unfair price advantage in international trade, takes jobs away from other countries and adds to global financial distortions.
The economists’ views on the currency have been taken up by US lawmakers, who are crafting legislation that would slap import duties on Chinese goods to offset the price advantage China enjoys from suppressing the value of its currency.
Sponsors of the bipartisan bill want President Obama’s administration to formally label China a currency manipulator in a semi-annual Treasury Department report due on April 15.
The Obama administration twice rejected that route in 2009, as his Republican predecessor George W Bush had done. Wary of straining US-China relations, Obama has instead pressed Beijing to move to a “more market-oriented exchange rate”.
“What seems undisputed … is that China has a persistent economic strategy, a policy, key to which is the pegging of its currency to the dollar at an undervalued rate,” said US House Ways and Means Committee Chairman Sander Levin, an influential Democratic Party lawmaker.
“There’s no easy answer to the problem. But the answer is not to deny the problem,” Levin said. “China’s currency policy and export-led growth policy are bad for the rest of the world as well” as the US, he said at the start of a hearing with experts on Chinese exchange rate policies.
But Zhong restated China’s rejection of outside pressure on the currency in his talk with business leaders.
“A dip in the value of dollar will undoubtedly bring great repercussions to the global financial system and the world economy. It is in nobody’s interest, China’s, the US’ or other countries’, to see big ups in the renminbi or big downs in the dollar,” he told the US Chamber of Commerce.
“The right way to reach trade balance between China and the US should be expanding exports from the US to China, rather than limiting China’s exports to the US,” added Zhong.
US exports to China hit about $70bn in 2009 – representing flat growth over 2008 that analysts attribute to the global economic slowdown.
But American business leaders are increasingly complaining they are hitting a protectionist wall in China as a result of government policies favouring domestic industries and that Beijing is increasing state involvement in the economy.
“Regrettably, China is moving in a direction that is inconsistent with international best practice in developing an innovative economy,” said Myron Brilliant, senior vice president of the US Chamber of Commerce.
Brilliant said business leaders who have long defended China from protectionist pressures in the US were being undermined by Beijing’s policies.
“The ongoing policy approaches by China are eroding the support of their long-standing advocates in the United States, diminishing the many good arguments we have used historically in support of this relationship,” he said.
China and the United States have been at odds throughout 2010 — over issues Google Corp’s <GOOG.O> decision to defy Chinese Internet censorship, U.S. weapons sales to Taiwan, Tibet and sanctions against Iran’s nuclear program.
Zhong was also slated to visit the U.S. Treasury Department, Commerce Department and the Trade Representative’s office during his two days in Washington.
Ghana sees $800m annual budget boost from oil
The figures, in a website survey asking Ghanaians how the windfall should be used, underline that proceeds from output at its Jubilee field due to start late this year will only transform the poor West African state if used carefully.
Using a 10-year average price of oil at $65 barrel, the ministry predicted that annual government revenue from oil and gas would average $800m between 2011-2029, rising from $490 million in 2011 to a $2bn peak in 2017.
The projection was based on the assumption that Ghana will produce 500 million barrels of oil over the next 20 years, more modest than an earlier official estimate of 800 million barrels of reserves and well below upbeat expectations of double that.
“Those are very conservative numbers, but we were expecting them to err on the side of caution,” said Ridle Markus, Africa strategist at Johannesburg-based Absa Capital, noting his house based its projections on a higher $80-85 per barrel of oil.
Avoiding the oil curse
Even at its peak, the oil windfall is only a fraction of government spending which this year is due to rise by 40 percent to 12.1 billion cedis ($8.6bn) and push the deficit to 7.5 percent of national output from 4.2 percent in 2009.
“Even with oil, Ghana is going to have to borrow,” noted Sampson Akligoh, economic analyst at Accra-based Databank Financial Services, while acknowledging that oil revenues would help “the fiscal space improve over the medium term”.
The ministry calculated that if oil and gas revenues were distributed directly to individuals, each Ghanaian would receive just $20 next year, rising to $75 in 2017.
The ministry recently announced proposals for its oil wealth to be used to support agriculture, infrastructure, health and education projects, with part of the surplus funds to be put into investment-grade international securities.
“We have been keenly aware of the so-called ‘oil curse’ that has come to be associated with oil-rich, developing countries,” according to the draft of the proposals, a reference to the unrest seen in oil nations such as nearby Nigeria.
Buoyed by oil and its cocoa harvest – the second largest in the world after Ivory Coast – Ghana’s economy is seen growing around 15 percent next year, more than double this year’s rate.
While the IMF believes oil could help Ghana join middle-income countries such as Cameroon within 10 years – meaning it would have to almost double its national income per capita to $1,000 – some advise caution.
“Oil is no panacea,” said Razia Khan, Africa regional head of research for Standard Chartered in a February research note.
“The ability of oil to make a meaningful contribution to the economy depends on the wider policy framework,” she added, urging fiscally conservative policies that supported growth, for example by targeting spending at infrastructure improvements.
UK, Germany to press for global bank risk tax
Months after British Prime Minister Gordon Brown fronted a range of ideas for getting banks to pay for their own rescues, his Finance Minister Alistair Darling said more countries now agree on the need for an international systemic tax on banks.
“This must be brought forward quickly, as I will urge international finance ministers in Washington next month,” Darling told Britain’s parliament.
“I agree with all those who think that such a tax should be internationally co-ordinated.”
If a levy on UK banks is imposed in the same way as a planned US levy of 0.15 percent annually on total assets, it would raise up to £3.6bn a year, reports estimate.
Britain’s opposition Conservative party, which could win the national election expected in May, has said it would press ahead with a levy even if there was no deal at the G20 group of countries.
A draft of the German finance ministry’s bank levy proposal showed that all German banks will have to pay towards a fund for future bailouts, with contributions linked to size and risks posed to the financial system.
German Finance Minister Wolfgang Schaeuble said the levy could raise a billion euros.
The German government wants to agree on the proposal at a cabinet meeting and to work it by mid-year into a draft law to protect taxpayers from bearing alone the cost of future bank rescues and restructuring.
“The resources collected for this fund will be available for the financing of future restructuring and winding down measures at system relevant banks,” the German draft read.
“All German credit institutions will be liable to contribute to this fund.”
It remains unclear how long the German charge will be levied on banks, but according to the draft, the finance ministry would continually check whether the charge was “bearable”.
Legal experts said customers will end up paying the levy.
“The only real solution to this is to make sure that banks which are not subject to this charge are prohibited from competing in the relevant territory – in other words, national protectionism,” said Simon Gleeson of Clifford Chance lawfirm.
Next stop: IMF
A global levy on bank balance sheets is emerging as part of a multi-pronged approach to dealing with “too big to fail” banks which pose such risks that their failure would destabilise the financial system as seen with the collapse of Lehman Brothers.
Governments want to put in place remedies so that such banks cannot assume taxpayer help next time they are in trouble such as Britain experienced with RBS and Lloyds.
Last November G20 finance ministers asked the IMF to come up with proposals in April to pay for past and future bank bailouts.
IMF Managing Director, Dominique Strauss-Kahn, said that a Tobin tax on financial transactions which Britain and Germany had initially wanted, was unworkable.
A Tobin tax is also seen as dead due to opposition from the US and Canada but Strauss-Kahn is expected to propose some form of tax on bank balance sheets.
Banks warn a levy would pile more costs on banks which already face tougher capital and liquidity requirements, making it harder to lend to companies and aid economic recovery.
Japan scales back privatisation of behemoth bank
The Japanese government has scaled back its privatisation plan for Japan Post to hold more than a third of its shares, keeping a grip on the mammoth state-owned financial conglomerate that is the single largest holder of government bonds.
Japan Post is the country’s biggest financial institution, with financial assets of about ¥300trn ($3.3trn) – more than the GDP of France.
It holds about a third of the near ¥700trn Japanese government bond (JGB) market, thus making it potentially pivotal in supporting Japan’s deteriorating public finances.
The six-month old Democratic Party-led government said it plans to roughly double the limit on the company’s deposits and insurance by June, although it may review that around April 2012 depending on the impact the changes have on the banking sector.
Bond dealers said the news supported government bond prices on the view that the increased deposit limit would draw funds from other banks to Japan Post that would then be invested in JGBs.
“The new plan is supportive to longer-dated Japanese government bonds as the duration of bond holdings in Japan Post Bank’s portfolio is said to be longer than other banks. Japan Post Insurance is a life insurer so it is expected to invest more in longer-dated bonds,” said Chotaro Morita, head of Japan fixed-income strategy research at Barclays Capital.
The five-year to 20-year spread tightened 1.5 basis points to 163 basis points, shrinking from a decade high above 167 basis points earlier in March.
However, Vice Banking Minister Kohei Otsuka said he does not expect Japan Post’s assets to grow sharply given that average financial savings of Japanese households is about ¥11.2m, only just above the current ¥10trn deposit limit.
Although Japanese interest rates have been kept near zero for much of the past decade, Japanese savers have been reluctant to take risks in shares and foreign assets, prefering to put most of their savings on deposit in Japan.
Only one percent of total household assets in Japan are held in foreign currency or foreign securities accounts.
Awash with funds, banks in turn have been buying government bonds, helping to keep government bond yields low despite Japan’s dire fiscal condition.
Banking Minister Shizuka Kamei said that the plan is not intend to create a megabank to regularly buy Japanese government bonds.
But most analysts think it is unrealistic for Japan Post to reduce its bond holdings as it could destabilise markets.
Otsuka said it would be up to the management of Japan Post to consider its investment stance but added it would be difficult for Japan Post to reduce the weighting on government bonds in the near term.
Back-pedalling?
Prime Minister Yukio Hatoyama had frozen the previous privatisation plan, seen as the symbol of former prime minister Junichiro Koizumi’s market-friendly reforms, on the grounds that it ignored the needs of consumers.
The previous plan envisioned spinning off the two financial subsidiaries, Japan Post Bank and Japan Post Insurance, and selling two-thirds of the holding company by 2017.
Otsuka said the government will likely reduce its holding of Japan Post’s shares in the future but has not decided whether it would set a deadline to do so.
Japan Post’s financial services are considered the golden goose because the traditional demand for mail services is under pressure from increased use of electronic mail and Japan’s shrinking population.
The government also said it planned to keep over one-third of the shares in the parent company of Japan Post.
It plans to merge deliveries and post office services into the parent company, hoping that profits from the two financial firms will subsidise deliveries and post office services.
As a state-backed bank, Japan Post Bank has long had a deposit limit of ¥10m per person. But the government said it aimed to lift that to ¥20m to support its profitability.
Private banks have said that would give Japan Post an unfair competitive advantage given that Japan Post Bank is larger than any other banks in the country and still enjoys an implicit government guarantee.
Pfizer, Glaxo sign 10-year vaccine deal for poor
The deal, brokered by the Geneva-based GAVI Alliance (Global Alliance for Vaccines and Immunisation), is the first under a new scheme called an Advance Market Commitment (AMC) which guarantees a market for vaccines supplied to poor nations but sets a maximum price drugmakers can expect to receive.
GAVI estimates that the introduction of new vaccines against pneumococcal disease – which causes serious illnesses such as pneumonia and meningitis – could save around 900,000 lives by 2015 and up to seven million lives by 2030.
It was reported on March 11 that several leading drug firms had made long-term commitments in the agreement.
Glaxo and Pfizer each committed to supply 30 million doses of their Synfloriz and Prevnar vaccines to GAVI over 10 years, at $7 per dose for the first 20 percent supplied, dropping to $3.50 for the remaining 80 percent.
By comparison, Glaxo and Pfizer charge between $54 and $108 per shot for their vaccines in rich nations.
“This is a landmark deal. It has been the result of four years of intense work and negotiation, and it means that this year, 2010, we can begin to roll out a better pneumococcal vaccine that can tackle one of the biggest killers of children in the poorest parts of the world,” Julian Lob-Levyt, GAVI’s chief executive, told reporters.
Pneumococcal disease claims the lives of around 800,000 under fives a year. In total the disease kills around 1.6 million people a year and 95 percent of those deaths occur in Africa and Asia.
Glaxo’s Synflorix shot protects against 10 strains of the streptococcus pneumoniae bacteria which cause the disease. It was approved late last year by the World Health Organisation for use in developing countries.
Pfizer’s Prevnar protects against 13 strains and won the approval of US regulators early in March.
GAVI said drug firms can still make offers under the AMC as new calls for supply offers will be issued over time.
Besides Glaxo and Pfizer, Panacea Biotec and the Serum Institute of India are among firms that have registered to the programme and other companies have expressed interest in the pilot, it said. As more companies participate, the long-term vaccine price could drop further.
The pneumococcal deal will be partly funded by Britain, Italy, Canada, Russia, Norway and the Bill & Melinda Gates Foundation, who agreed in June last year to invest a total of $1.5bn in the project.
GAVI said it would need to raise a further $1.5bn over the next five years to ensure the programme is fully funded.
This AMC deal is likely to pave the way for future deals on recently introduced vaccines against rotavirus, which causes severe diarrhoea, and an experimental one against malaria, which combined kill millions in poor countries each year.
S&P raises Morocco’s rating on low debt
The agency said in a statement it had raised Morocco’s long-term foreign currency sovereign credit rating to ‘BBB-‘ from ‘BB+’, and its long-term local currency sovereign credit rating to ‘BBB+’ from ‘BBB’.
Morocco’s combined foreign and domestic debt stock was slashed as a proportion of GDP to 48 percent last year from 68 percent in 1998, according to the government’s figures.
“The upgrade reflects our view of the Moroccan government’s improved economic policy flexibility as a result of its track record in reducing the country’s fiscal and external debt burdens over the past decade,” said Standard & Poor’s credit analyst Veronique Paillat-Chayrigues.
Morocco’s government says that its reforms over the past decade allowed it to deal more easily with the impact of the global slowdown on the country’s economy.
Economic Affairs Minister Nizar Baraka told reporters last month that Morocco would maintain annual economic growth averaging five percent until 2012 on new stimulus plans.
Morocco posted the highest growth rate in the Middle East and North Africa region in 2008 with 5.6 percent expansion. That slipped to 5.1 percent in 2009 as the country’s non-farming gross domestic product slowed due to the global crisis.
Weak social indicators
Standard & Poor’s said the outlook on Morocco’s long-term ratings was stable and any further rating improvements would likely follow a more rapid convergence of living standards with those of other ‘BBB’ rated sovereigns.
“We also factor in the high political stability and the government’s momentum for its reform programme, including large public works, which has raised Morocco’s trend growth prospects, and contributed to improving gradually the country’s still weak social indicators,” said Paillat-Chayrigues.
Morocco’s government has increased spending on basic infrastructure to 400 billion Moroccan dirhams ($48bn) for the 2008-2012 period from 80 billion in the previous period.
That investment aims to upgrade basic infrastructure including the highway network, power grids, ports and airports, the farming sector and telecoms.
Japan debt spells tough choices for government
The Nikkei newspaper said revenues would be ¥7trn ($78bn) short in 2011/12 if the government keeps its campaign promises and tax revenues fall by an estimated ¥5.4trn due to a sluggish economy.
Can the ruling party break its promises?
The main ruling Democratic Party of Japan (DPJ) trounced the long-dominant Liberal Democratic Party (LDP) in a lower house election last year on a platform promising to put more money in the hands of consumers to spur domestic growth.
The party is aiming to firm up by end-May its manifesto for an upper house poll expected in July that the DPJ needs to win to avoid relying on small coalition partners or even a parliamentary deadlock. It has a majority in the lower house, but the upper chamber can delay bills.
With Prime Minister Yukio Hatoyama’s ratings sinking to near 30 percent in some surveys and the gap between the Democrats and the LDP narrowing, some analysts say the DPJ is unlikely to make major changes in its platform ahead of the upper house election.
The government has already dropped a plan to end a decades-old gasoline surcharge, citing lack of funds, and other analysts say voters would accept some changes given their own concerns about Japan’s huge public debt, which is almost twice the size of the economy.
Keeping the manifesto vague to allow room for changes after the election is also possible.
Will cutting wasteful spending help?
The government is preparing for a second round of exercises to cut wasteful spending, this time by targetting government-funded agencies that became symbols of wasted taxes under the LDP.
But Administrative Reform Minister Yukio Edano has already admitted the savings are likely to be slim. The Nikkei said total annual spending on targetted entities averaged around ¥2.6trn, a small amount compared with spending in the 2010/11 budget of ¥92trn.
The government is tapping non-tax revenues stashed in special accounts to help fund the 2010/11 budget but economists say such reserves are drying up.
Can the government raise taxes?
Economists agree Japan needs to raise its five percent sales tax to cope with the swelling social security costs of a fast-ageing population.
But that is unlikely to offer a solution for 2011/12 since Hatoyama has pledged not to raise the tax at least until the next general election, mandated by late 2013.
The government could also broaden the income and corporate tax base, but with the Democratic Party dependent on labour unions for votes, the scope for increasing revenues this way is limited.
Hatoyama and his cabinet ministers have also said they want to consider lowering the corporate tax rate, which at around 40 percent is one of the highest among major economies.
Could it issue yet more government bonds?
Ratings agencies have warned that Japan risks a downgrade if the government fails to draw up convincing plans to reduce its deficit and debt.
Markets have tended to shrug off previous downgrades and the same would likely hold true if new bond issuance above the record ¥44trn for 2010/11 prompted ratings agencies to act.
Recent warnings about Japan’s huge debt have failed to alter domestic institutional investors’ appetite for Japanese government bonds (JGBs) or reluctance to buy foreign assets.
Domestic investors, who hold 95 percent of JGBs, are unlikely to feel an urgent need to diversify, since deflation reduces the allure of other investment tools and helps keep household savings rates high.
Many analysts say that private-sector savings will eventually decline to an amount smaller than the national annual fiscal deficit and this may trigger a sell-off in JGBs. But such an upheaval is unlikely at least for the next few years, they say.
The benchmark 10-year yield stands at 1.350 percent, about half the level of comparable US Treasury yields, having been stuck below two percent for more than a decade due to deflation and near zero short-term rates.
Some analysts say the government may try to cap bond yields by asking the Bank of Japan to increase its JGB purchases from the current ¥21.6trn per year. However, Finance Minister Naoto Kan has repeated that he has no intention of asking the central bank to underwrite government debt.
What’s the real problem?
What Japan really needs is a credible plan to spur growth in the face of an ageing and shrinking population and proposals to convince financial markets it is serious about reining in the considerable amount of public debt.
The government said in December it aimed for annual economic growth of more than two percent over the next decade and will flesh out a strategy for achieving that in June, when it is also expected to unveil how it will rein in its fiscal deficit longer term.
But many economists are sceptical about the likelihood for credible plans, partly because of the government’s reluctance to raise tax and following its election pledges to spend more.
“I think the credibility of the current Japanese government in fiscal and economic policies is very weak,” said Takuji Okubo, chief economist at Societe Generale in Tokyo.
“They don’t have a clear idea of how to soft-land the fiscal problem or rebuild the growth outlook of Japan.”
IMF says Zimbabwe funds subject to arrears clearance
Zimbabwe’s economy has stabilised following a decade-long slump after a unity government formed by rivals President Robert Mugabe and Prime Minister Morgan Tsvangirai last year adopted the use of multiple foreign currencies.
“The economic recovery remains fragile and domestic and external imbalances are building up. Therefore, significant policy challenges need to be addressed without delay,” the IMF said in a statement after a staff visit to Zimbabwe.
Zimbabwe owes the IMF $140m in arrears and its total external debt is about $6bn.
The IMF said economic policies in Zimbabwe have improved significantly following a decade of decline in the economy, including hyperinflation in 2007-2008.
But the government’s wage bill needed to be reduced and budgetary expenditures to be better prioritised.
“The government needs to ensure that sufficient budgetary allocations are made to critically important infrastructure rehabilitation projects and social programmes supporting vulnerable groups while maintaining a fiscal stance consistent with macroeconomic stability,” the IMF statement said.
It said banking sector risks were rising and this should be mitigated by prudential measures.
Central bank governance also needed to be improved, including the appointment of a Reserve Bank of Zimbabwe governing board and a reduced central bank operating budget which should focus on core activities.
California seeks smooth adoption of cap-and-trade
California aims to avoid major economic shocks with its carbon cap-and-trade system slated to start in 2012, the state’s chief climate change regulator said recently, adding that the most populous US state would try to harmonise its system with any federal plan.
California vaulted to the vanguard of US climate change in 2006 with an aggressive law that aimed to cut greenhouse gas emissions to 1990 levels by 2020 and make it the trend-setter in clean energy and technology.
But critics say the law will only raise energy prices and drive away businesses and jobs.
Hoping to settle the matter, the state plans to release a revised economic analysis of the law, after an early version of the report was criticised by all sides. The new results show the law having only a marginal net impact on the economy and is a net creator of jobs, California Air Resources Board Chairman Mary Nichols said in an interview.
“The wind is at our backs. It is not pushing us in the opposite direction,” she said. “Jobs will continue to be created.”
Fine line
Cap-and-trade plans like those in Europe and proposed for the US Northeast aim to cut emissions of carbon dioxide and other greenhouse gases linked to global warming by limiting total emissions and then letting power plants and other polluters buy and trade credits to emit.
Market forces in theory spark positive change as companies that can cut emissions for the least cost do so and sell their credits for a profit.
System designers must walk a fine line between creating prices so high that they shock the system and so low that they have no effect. One key to the cost of the system is whether emitters are given credits or must buy them.
A California economic advisory group earlier this year recommended all credits be auctioned, an approach that economists and environmentalists support, but which businesses tend to say would be too expensive.
“The idea is to make the implementation as seamless and as simple as possible,” said Nichols, who favours a less abrasive approach than auctioning all credits. “That is not a very feasible option, at least for the beginning of the programme,” she said. “Generally my preference would be to do something that increases over time.”
California may also have to contend with a new federal plan, if Massachusetts Senator John Kerry and his allies in Congress are successful with a plan they see as a compromise with previous, more ambitious efforts.
“The programmes can absolutely blend together,” Nichols said. California Governor Arnold Schwarzenegger, a strong proponent of the state’s global warming law, had discussed plans with Kerry, who was supportive of the state’s right to run its programme in parallel with a federal programme, she said.
Other federal proposals could clash with state plans.
California had been considering including transportation fuels in its first round of cap-and-trade in 2012, which may not fit into the plan being formulated by Democrat Kerry, Republican Senator Lindsey Graham and independent Senator Joseph Lieberman.
“In general we are looking at trying to do something that can be phased in successfully with what is being considered at the federal level, which would argue against putting transportation (fuels) in at the very beginning,” Nichols said.
Djibouti sees boom in banking
The financial sector in the tiny Horn of Africa nation is attracting new business as a stable country surrounded by trouble spots.
“The banking sector in Djibouti has seen an explosion. Last year eight new banks, Islamic and conventional, opened their doors and are doing well. More will arrive this year,” central bank Governor Djama Haid told reporters in an interview.
Haid said he expected Iraq-based Warka Bank for Investment and Finance and Egypt’s Shoura Bank to enter Djibouti in 2010.
Indo-Suez Bank, in existence for more than 100 years, and Commercial and Industrial Bank (BCIMR) – operational for more than 50 years, have dominated Djibouti’s banking industry.
The BCIMR, a majority French-owned bank, controls around 60 percent of the market.
“The whole sector relied on these two banks, which maintained a monopoly,” said Michel Torielli, president of the Djibouti Deposit and Credit Bank (BDCD).
The BDCD, part of the Geneva-based Swiss Financial Investments group, opened its doors in 2007 and had more than 4,500 customers in 2009.
“This country is a haven of peace in the midst of storms. For international investors who want to work in this region they should come to Djibouti, for international banks it’s a very attractive, interesting domestic market,” Torielli said.
According to the US State Department, the banking and insurance industry only makes up 12.5 percent of GDP, compared to public services with 22 percent of GDP.
The IMF forecasts real GDP growth of 5.4 percent, and inflation at five percent for 2010.
The country of 800,000 people – a former French colony separating Eritrea from war-torn Somalia – holds limited natural resources and has been plagued by droughts and high unemployment.
It hosts France’s largest military base in Africa and a major US base. Its port is used by foreign navies patrolling busy shipping lanes off the coast of Somalia to fight piracy.
Djibouti is trying to capitalise on its strategic situation and wants to make its port the biggest transhipment hub for the Common Market for Eastern and Southern Africa (COMESA) – a trade bloc grouping around 20 countries.
The currency peg of the Djibouti franc at 177.71 to the US dollar has been favourable, Haid said.
“The peg has allowed us to be successful economically and to play an important role in the development of Djibouti as a financial place,” he said, adding it was too early to talk about a monetary union among COMESA states.
Bank account boost
“Today we have 15 percent of the population which have a bank account. We have not yet reached the African average of 28 percent, but we’ll try to achieve this in 2011,” Haid said.
In the first nine months of 2009, Djibouti banks had recorded a 31 percent jump in customer numbers to 53,332.
However, critics say limited privatisation, burdensome regulations and corruption have hampered the sector’s transformation.
Djibouti ranks 102 of 179 countries in Transparency International’s 2008 Corruption Perceptions Index.
The international money transfer network Dahabshil opened its first bank branch in Djibouti in March, and wants to offer Sharia-compliant products.
“The economy is booming right now. The need is growing. Djibouti is becoming like the small Dubai of Africa,” Mohamed Osman Nur, chief executive of Dahabshil Bank International, said at the bank’s inauguration.
Central bank Governor Haid said the country was hoping to establish a stock exchange within the next couple of years.
