Month: March 2014

Budget 2014: good or bad news?

Posted on by Ashton Wenborn

FOR: A budget for the makers, doers and savers

More savings freedom and income tax reductions, is good news for UK pensioners and workers, writes Sandra Kilhof

UK Chancellor George Osborne wooed pensioners and savers when he announced the budget for 2014 and unveiled the biggest shake-up of the pensions and savings area in a decade. The plans are good for the government, which is looking to gain voters’ confidence ahead of the elections next year. What’s more the increased freedom on savings and changes in tax brackets could give the UK economy a much-needed nudge upwards.

Osborne’s proposals will give people far more freedom to choose what they do with their pension pot. A key part of the plan is cutting the amount of guaranteed income people need in retirement to access their savings, from £20,000 to £12,000; increase the amount of total pension savings that can be taken as a lump sum, from £18,000 to £30,000; increase the capped drawdown withdrawal limit from 120 percent to 150 percent of an equivalent annuity, and raise the maximum size of a small pension pot which can be taken as a lump sum from £2,000 to £10,00, as well as increase the number of personal pots that can be taken under these rules from two to three.

Crucially, savers wanting unrestricted access to their pension pots will be taxed at the average marginal rate of 20 percent, instead of 55 percent under Osborne’s plans.
With the move, Osborne is hoping to encourage savings significantly by removing rules on often-criticized annuity purchases. Essentially, this gives pensioners the opportunity to access their pensions savings whenever and however they wish, from the point of retirement, instead of turning their savings into a guaranteed lifetime income in the form of an annuity.

[T]he increased freedom on savings and changes in tax brackets could give the UK economy a much-needed nudge upwards

What’s more the Conservative/Liberal Democrat government proposed that Individuals Savings Accounts – a long-standing form of tax-advantaged mass-savings products in the UK – be simplified, with an overall tax-free savings limit of £15,000 per year as of 1 July. This is good news for savers who can currently only invest £5,760 a year into a cash ISA or £11,520 in stocks and shares ISAs.

The idea is intended to give savers more flexibility on how they invest and is estimated to benefit more than six million people currently constrained by their cash and equities limits in ISAs.

The budget also signalled good news for the mass affluent, who will now be exempt from income tax, as a result of the decision to increase the personal allowance. Osborne has previously announced that in the 2014 – 2015 tax year, workers will be allowed to earn up to £10,000 before being liable for income tax.

With the newest budgetary changes, workers can earn up to £10,500 before having to pay tax as of April 2015 – giving people more money to spend and thereby boost the recovering UK economy.

The impact will most likely be significant as the Treasury estimates that it could take 288,000 people out of the income tax bracket in 2015-16, and that 25 million taxpayers will benefit as a result of the tax changes, typically saving £100 a year each.

Finally, Osborne made an unpopular, but necessary choice relating to the taxation of non-UK residents. By extending the tax regime on “high-value” residential property worth more than £500,000, instead of the previous limit of £2m, the Chancellor is targeting enveloped dwellings that could bring in an annual tax of £3,500 or £7,000.

Critics suggest that the tax could hurt individuals with little or no wealth, as property valuations in London especially, have risen. However, it is worth keeping in mind that the new tax is targeted at residential properties owned by companies, not individuals, and that said tax is being implemented at a time when the state of UK public finances still leave much to be desired. Alternative cuts could have impacted welfare spending for instance. In this respect, higher tax on residential property is a far less controversial way of generating much-needed income for the state budget.

Against: The problem with the budget

Perks for old Tory faithfuls and scraps for the poor; this was indeed an election year budget, writes Rita Lobo

A lot has already been said about George Osborne’s silver savers budget. Reviews have been – predictably – mixed. There is very little question about what Osborne’s priorities were when it came to hand-outs, though, and no one should be surprised that those getting the best deal will be the most faithful Tory supporter: wealthy older people.

For the wealthier echelons of the population it is an inebriating concoction of tax breaks, and leg-ups

Gideon’s ‘pension revolution’ might have been unexpected, but after some reflection it seemed like an obvious direction for him to take. This is the last budget before election year, the time to woo those Conservative voters who have been flocking to those eager Ukip shores. Coupled with Osborne’s insistence on bringing down the public debt to GDP ratio to pre-crisis levels before the election, and the result is a potentially fatal cocktail. For the wealthier echelons of the population it is an inebriating concoction of tax breaks, and leg-ups.

Osborne said it himself: “If you’re a maker, a doer or a saver: this budget is for you.” If you are unemployed and young, keep walking – there is nothing to see here.

Allowing savers to unlock their pensions and invest the money themselves is not without its merit, but it is also an opportunity for wealthier people to invest their money with no tax liabilities. The policy will clearly benefit wealthier pensioners more than anyone else, and Ed Balls, the Shadow Chancellor was right to question if there would be sufficient and adequate protections and education to prevent less experienced investors from squandering away their life-savings.

For lower income families, the news was not quite as generous, £0.01 off the pint of beer and a reduction on the tax for bingo, were the highlights. No plans were announced on how to boost youth employment, stuck in the doldrums for the past few years.

Analysts at the Institute for Fiscal Studies already suggests that 300,000 more children are living in poverty in the UK now than in 2010, and that number is set to soar by an addition 150,000 before the current parliament winds down. Osborne announced to measures to mitigate this drop in quality of life. In fact, his welfare cap will probably only help spread poverty, than lift people out of it. The welfare cap locks in the cuts for good, and ensures that people will continue to struggle with no jobs and no safety net.

There was good news in the budget. There are strong measures to tackle tax avoidance on an unprecedented scale, and the deficit is coming down- albeit much slower than Osborne would’ve liked. But it is an election year budget through and through: courting voters with nonsensical measures, and leaving the disengaged poor and youthful to fend for themselves.

Unity will not be the church of the banking industry

Posted on by Ashton Wenborn

After much humming and hawing by EU leaders, the much-anticipated banking union is on the cusp of becoming a reality. Only it’s five years too late. Much has been made of this united front behind the region’s banks, but negotiations have been protracted and laborious. However, it remains unclear if the so-called union will be fit for purpose, or even if it is what Europe needs right now, as it takes the first tentative steps towards recovery.

Talk of a banking union has been thrown about a lot since the onset of the crisis, and many – including the media – have tended to oversimplify the issue, stirring up unrealistic expectations of what it could do for the European banking industry.  Though this idea was borne out of the then very real threat of a Greek exit, and threat of a bank-run on Spain’s collapsing banks, it has taken so long to materialise that observers are wondering just how effective it will be, and whether it will do anything to speed up the recovery right now.

The idea behind a Europe-wide banking union is based on a collective bailout fund to cover the costs of bank failures. The blueprint also establishes guidelines for faster decision-making when it comes to determining the future of a troubled bank that would not require interference by politicians. “This would supposedly put European banks on an even keel under the protective umbrella of European supervision, European Capital support and deposit insurance,” explains Sony Kapoor, an advisor on economic and financial reforms, wrote in an FT column. And, in theory at least, the idea of a banking union seems like a sensible proposal.

[O]bservers are wondering just how effective it will be, and whether it will do anything to speed up the recovery right now

The main selling point of the proposal, as it stands today, is that when a shared bailout fund is established, European nations will share the risk that may crop up from the industry in the future. “It communicated that EU politics was not completely deadlocked in the face of the crisis, when the truth was otherwise,” says Kapoor. “But it was the promise made by Mario Draghi, president of the ECB, to ‘do whatever it takes’ to ease the market. Anyone who credits any progress on banking union with restoring confidence is being disingenuous.”

Seeing eye-to-eye
Of course, disputes have plagued the negotiations, and so the banking union is still something of a pipedream five years after the idea was first floated. Germany, in particular, is wary that a banking union would actually function more as a fiscal union of sorts. For bigger, more financially sound countries, there is a school of thought which suggests that a union of this type would only contribute to the spread of problems from periphery banks. So, in many ways, Germany’s early veto of the proposal to share risks and costs derived from enduring problems faced by peripheral banks was the first nail in the coffin of the banking union. Without these provisions, the scope of any future provisions will always be terribly limited.

In fact, much like it did when it vetoed the use of eurobonds, Germany has been putting its foot down a lot throughout the negotiation process. Finance Minister Wolfgang Schäuble has managed to ensure that failing EU banks will face the possibility of liquidation without Germany – or any other country – having to foot the bill.

Germany of course is in a rather unusual position in that it stands alone as an economically healthy country within the core of the EU, which has not endeared many others to its cause, and has generated plenty of acrimony. Though Germany has succeeded in protecting its own interests, to the envy of its peers in the union, it has also potentially fatally crippled the prospect of a strong and healthy union for good.

[Germany] has also potentially fatally crippled the prospect of a strong and healthy union for good

Scrap job
EU leaders have been busy trying to salvage what remains of the proposal. There are many concerns that the union, as it stands today, will simply not be strong enough to be effective, and would therefore do very little to reassure investors that the continent is on the up-and-up once again. “While decisions so far have been focusing on the moral hazards of banks, these measures fail to solve an additional market failure in the euro area caused by the moral hazard of governments competing on funding costs, which puts off a proper management of legacy losses via bank restructuring,” explains Diego Valiante, head of capital markets research at the Centre for European Policy Studies, in a blog on EconoMonitor. “Banking union in a single currency area, whether within a single state or a community of states, face three potential market failures: risk-taking behaviours; depositors’ run on banks; and financial disintegration.”

The reason why the banking union as it stands will never work is that as a ‘community of states’- and as such a community of economies sharing a currency, no single solution could ever purport to share-risks without also sharing problems. The economies linked within the EU are at different stages of development, and as such the euro is a single currency with very different values. A cup of coffee costs up to €5 in Paris and less than €2 in Lisbon. Before the gap can be closed between the economies of the European core and the peripheries, a banking union will only succeed in burdening more stable economies with legacy losses from the periphery.

That is not to say that a strong, healthy and well-supported banking union does not have the potential to make the European banking and financial sectors more robust and safe. But in its current state, this is not it.

US steps up Russia sanctions

Posted on by Ashton Wenborn

Russia’s meddling in what was the Ukrainian state of Crimea already led to some rather tepid preliminary sanctions. However, because of Russian President Putin’s refusal to back down over his efforts to bring Crimea back within Russian territory, the US has decided to step up sanctions against some of his key advisors.

In the initial aftermath of the hastily arranged referendum on Crimean independence, both the US and EU announced a range of travel bans and asset freezes on 11 and 21 key individuals respectively. Met with little more than amusement from many of the targeted individuals, Russia has continued to push ahead with plans to reintegrate Crimea through a series of parliamentary votes.

Now President Obama has decided to toughen his country’s stance on the issue by taking aim at Putin’s inner circle of trusted advisors, many of who play important roles in Russia’s key industries. Obama last night announced that alongside the initial 11 individuals, sanctions would now include an additional 20 people, including presidential chief of staff Sergei Ivanov, Russian Railways chief Vladimir Yakunin, and Gennady Timchenko, the head of key Russian bank Gunvor. In response to the news, Timchenko quickly sold his 43 percent stake in Gunvor, the world’s fourth largest oil trader, to allow it to continue to operate “uninterrupted”.

Announcing the moves, Obama hopes that the moves will put increased pressure on Russia’s economy and force it to take a step back from its antagonistic actions. “We’re imposing sanctions on more senior officials of the Russian government. In addition, we are today sanctioning a number of other individuals with substantial resources and influence who provide material support to the Russian leadership, as well as a bank that provides material support to these individuals.”

While the moves appear tough, much of the response over the last week from Russia’s top brass has been indifferent. In reality, Russia does little business with the US, and so the sanctions seem largely symbolic. Yesterday the country even put its own travel bans on US officials that are similarly meaningless.

While the moves appear tough, much of the response over the last week from Russia’s top brass has
been indifferent

Obama has led the way in being tough on Russia, hoping to see his EU partners follow suit. While European leaders have imposed their own set of sanctions on some in the Russian leadership, they have been somewhat more reticent because of the level of trade that goes on between the two regions.

With Germany largely reliant on Russian oil and gas – around 40 percent of its energy comes from Russian pipelines – Chancellor Angela Merkel has found it difficult to take as tough a stance as Obama. However, yesterday she warned Putin of taking things further, saying that countrywide economic sanctions could be imposed. This could be something that gives Putin pause for thought, with Russia heavily reliant on European trade.

Merkel said: “The European Council will make it clear today and tomorrow that with a further deterioration of the situation we are always prepared to take phase-three measures, and those will without a doubt include economic sanctions.”

In related news, Ukraine’s newly installed leadership signed an agreement for closer ties with the EU, in a show of defiance to Putin. The deal will offer political and economic support to the Ukraine, said European Council President Herman van Rompuy.

“This gesture symbolises the importance that both sides attach to this relationship, and our joint will to take it further. It recognises the aspirations of the people of Ukraine to live in a country governed by values, by democracy and the rule of law, where all citizens have a stake in national prosperity. And the popular yearning for a decent life as a nation, for a European way of life.”

What’s next for global currencies in 2014?

Posted on by Ashton Wenborn

The major themes I expect to be moving the forex market in 2014 are: the Federal Reserve’s tapering and its impact on the global economy; exceptionally low inflation, especially in Europe, but elsewhere as well; the change in European banking regulation; the decision on whether Abenomics is working; less restrictive fiscal policies in the G10, resulting in stronger growth; and the restructuring of the Chinese economy.

There are long-term trends in the forex market that last over a number of years (see Fig. 1). This graph shows the value of the dollar since it began floating, first against the Deutsche Mark, and then against the euro. The big question is whether the dollar is still in the uptrend that started in May of 2008, or whether it began a new downtrend last July. My view is that we’re still in the uptrend and this year we’re likely to see the dollar rally further.

The reason for that goes back to this year’s themes. Only the Reserve Bank of New Zealand is currently expected to tighten in 2014. Every other central bank is expected to keep policy steady. The RBA is expected to go next when it begins tightening in about a year, then the Fed, ECB and BoE are all expected to start around 18 months from now, followed by the Swiss National Bank two years from now.

The Bank of Japan isn’t expected to begin tightening even in three years. With rate differentials expected to remain so stable for so long, investors will be watching the economic data closely to see if any economy starts growing fast enough that the central bank might be able to start changing its stance earlier than expected. So growth rates will be key.

Race to the top
New Zealand and Australia are expected to be the fastest-growing countries in the G10 next year, which is why their central banks are expected to start tightening first. The US and the UK are next. I think that if these forecasts come true and US growth does improve that much, then the market will start to discount an earlier hike in interest rates in the US. That’s what is going to support the dollar, in my view.

Same thing with the pound. Forecasts for Britain’s growth in 2014 are about the same as for the US, although UK growth was lower this year. In other words, Britain should see an even bigger improvement in growth than the US. That’s likely to support the pound, at least against the euro. I think the dollar will still gain against the pound.

This is because I expect Britain’s inflation rate to remain exceptionally low, just like the rest of Europe. The BoE is likely to take advantage of the low inflation to keep rates lower for longer than they would have otherwise. That’s how the government will manage the fiscal retrenchment that they’re planning. The only problem is that British growth is based on borrowing and consuming, not investing and producing. On average, every adult in the country owes £28,489. There’s a limit to how long this can continue. But that’s probably a topic for 2015, not 2014.

While the eurozone is forecast to see a big improvement in growth this year, the absolute level of growth will still be too low to allow the ECB to even think of raising rates. On the contrary, one of the themes for next year is likely to be dangerously low inflation, particularly in the eurozone. This is directly the opposite of what the US is doing, which is why I expect the euro to weaken against the dollar. Also, next year’s restructuring of the eurozone’s banking supervision mechanism is likely to require that the ECB provides more support to the banks by expanding its balance sheet, which should be EUR-negative.

I think though that the most important currency to watch is the yen (see Fig. 2). This graph shows the ranked returns of the G10 currencies against the dollar each year. You can see that the yen is usually extreme. It’s been either the best or worst performing G10 currency for the last six years, and over the last 11 years it’s never been in the middle. It was the worst performing G10 currency in 2012 and 2013, and it might well wind up there again this year. That’s because 2014 is the year when Abenomics has to prove itself.

Predicting fiscal cause and effect
If Abenomics does start to get traction and the Japanese economy does improve, then Japanese investors’ risk appetite will increase and they’re likely to put more money abroad. That may seem like strange logic, but that’s what happens in Japan. A revival in confidence in Japan would probably cause an outflow of funds and a fall in the currency.

On the other hand, if Abenomics doesn’t start to show results, if it’s just causing consumer prices to rise with no increase in salaries or employment, or if the hike in the sales tax once again causes a recession like it did the last time they raised it back in 1997, then Shinzõ Abe has only one card left to play, and that’s to devalue the currency. In that case I’d expect the Bank of Japan to come out with yet another round of quantitative easing and my target of USD/JPY at 130 might well be reached. That’s not my central case, but I think it’s possible.

As for the CHF, I expect the Swiss National Bank to keep EUR/CHF floored at 1.20. So long as that’s the case, the dollar can’t appreciate against the CHF unless it appreciates against the euro too. But as I said before, I do expect the dollar to gain against the euro – and so I expect it will gain against the CHF too.

Finally, there are the commodity currencies. The Reserve Bank of Australia has stated clearly that it wants the Australian dollar to weaken, and if global inflation falls further, as I expect, the RBA could even cut rates to ensure that this happens.

The Australian dollar might also be weakened as China’s economy shifts away from investment and demand for commodities falls. The Bank of Canada too has removed its long-held tightening bias, and with Canadian households’ debt-to-income level now at a record 166 percent, it won’t be able to raise rates any time soon without bankrupting the whole country.

Also, Canadian oil prices are under pressure as US oil production increases. That’s likely to be a long-term factor depressing the CAD. The New Zealand dollar on the other hand is different. New Zealand has good domestic economic fundamentals and the only G10 central bank that’s intent on tightening. The currency may come under pressure occasionally because of Chinese restructuring, but its exports of food are likely to be affected less than Australia’s exports of minerals.

So that’s my view on currencies for next year. A stronger dollar, a somewhat stronger pound, a weaker euro, and potentially a much weaker yen.

Marshall Gittler has been an investment strategist for 25 years at a number of major international securities firms, including UBS, Merrill Lynch, Bank of America and Deutsche Bank as well as serving as Chief Investment Officer at Bank of China (Suisse). He is Currently Head of Global FX Strategy at IronFX Global.

Nancy McKinstry on breaking into China | Video

Posted on by Ashton Wenborn

Nancy McKinstry, CEO and Chairman of the Executive Board for Wolters Kluwer, discusses how her company has accelerated itself in China, how regulating and government mandating in the country is affecting businesses, and what other leaders need to do to break into the market there

World Finance: Why is China important to your company’s long-term business plan?

Nancy McKinstry: China is finally taking off as a market as it relates to serving professionals. What we do at Wolters Kluwer is, we provide information software and services to doctors, lawyers, accountants, other professional groups. And believe it or not, we’ve been in China for 25 years, and up until recently it’s been a relatively small market. But say, in the last five years or so, you’ve gone from no lawyers when we first entered in 1985, to today – there’s about 170,000. But what they predict by 2020 is two million lawyers. And to give you some context, there’s only about 1.8m lawyers in the US. So the market said the same statistic would be true in accounting and health; the professional markets are really starting to accelerate in terms of their growth. So that is why the market is more important to us going forward than maybe it was in the past.

[Y]ou’ve gone from no lawyers when we first entered in 1985, to today – there’s about 170,000

World Finance: What socio-economic factors are driving your business forward in China?

Nancy McKinstry: For us, what really drives the business is regulation and government mandating of certain compliance requirements. Whether it’s around healthcare, or around taxes, and so on. And what you see is that, that drive from the government, from a commercial perspective, is really increasing the number of lawyers, accountants, and so on. And in addition to that, you have the fact that you have a rising middle class. And as you have a rising middle class, you end up with more professionals serving them. So that combination of government and terrain are really driving certain kinds of regulation, combined with the rising middle class; it’s sort of a perfect environment.

World Finance: You’ve had to adapt your products to the digital age; how do you tailor them to the Chinese market versus the European?

Nancy McKinstry: Well in most of the markets, even now in health as well, but it’s certainly in tax and legal – the products are in local language, and very much tailored to the needs of the local customers. So that’s been, you know, the approach that we’ve taken largely in China as well. We do have some global products that would be in English language, and more tailored to a common set of customer needs. But generally we’re very much focused on the local needs.

World Finance: Are you competing with local publishing houses, or are the key players international?

[T]he professional markets are really starting to accelerate in terms of
their growth

Nancy McKinstry: We have these local partners. So for example, in law we deal a lot with China Law Press, the commercial press. And we have longstanding co-publishing arrangements, and that is true again when they’re working with us in the digital world. I would say in the global products, primarily in the health world, we’re clearly competing mostly still with big multinational global players. And I think that will still be the environment for several years.

World Finance: What advice would you give other business leaders looking to break into the Chinese market from any industry?

Nancy McKinstry: It’s a maturing market. My advice would be that they have to have a very specific target segment that they want to go after, and that they have to really understand what are the economics of that, and then see if it fits with their criteria for – not just the growth element – but really, how will they make profit in the country?

Banorte’s contributions strengthen Mexican economy

Posted on by Ashton Wenborn

The promise of emerging market economies has attracted the attention of international investors across the globe. However, their contributions, while significant, are too often characterised by a focus on short-term returns as opposed to sustainable gains. For this reason, those with domestic ties are proving far more effective when it comes to spurring sustainable growth. A prime example is Grupo Financiero Banorte (Banorte) whose contribution to Mexico’s economy in recent years has been considerable to say the least.

Mexico faced headwinds in 2013 and exhibited a lower rate of economic growth than the previous year, in no small part due to a contraction in consumption and retail activity, reduced government spending, waning construction and infrastructure development, and weaker foreign trade. The country’s economic woes, however, were far from exclusive to domestic issues, as continued volatility in international financial markets came as a result of the Federal Reserve’s decision to taper its excessive bond-buying programme.

Even against this backdrop of relative uncertainty, however, Banorte’s performance was overwhelmingly positive last year, and as of September, the group’s profits had grown by 25 percent year-on-year. The institution manages $139bn in assets and is the only financial group of its size controlled by Mexican shareholders; and herein lies the key to Banorte’s success ahead of its international counterparts. The firm’s decisions are taken locally, without the influence of international headquarters, which has proven to be a significant advantage, considering the recent weakness of so many global institutions.

14.3%

Banorte return on equity

$139bn

Banorte total assets

Banorte offers universal banking products and services to those in the Mexican financial system through an integrated model, serving the premium, wholesale and mass retail segments, third party correspondents and 16 small- and medium-size enterprise (SME) centres nationwide.

The firm is currently the third-largest banking institution in Mexico measured by amount of loans and deposits. Aside from increasing its market share, Banorte has consolidated its position as one of Mexico’s most profitable banks and is recognised for its strong fundamentals and sound asset quality, as well as high capitalisation and liquidity levels.

The right balance
With a robust strategy and extensive local knowledge, Banorte has been able to partially offset lower expansion in its loan portfolio and an unfavourable interest rate environment with an improvement in its funding and loan mix, as well as the payment of some high interest paying liabilities, such as a syndicated loan and a perpetual bond.

Core deposits are growing close to 15 percent on a yearly basis, while consumer loans are increasing close to 20 percent, driven by payroll and credit cards increasing 40 percent and 21 percent respectively, year-on-year. As a result, the bank’s net interest margin is currently expanding, which is a positive development, considering that the last time Mexico underwent an easing monetary cycle in 2008, Banorte’s net interest margin contracted by over 300 basis points.

As a result of higher net interest margins and non-interest income, total revenues have expanded by 12 percent over the past 12 months, and expenses by eight percent. Further still, provisioning costs are normalising after having to cover the expected losses of homebuilder exposures during the first half of the year. The group is delivering a significant expansion in earnings on the back of positive operating leverage and the integration of Afore Bancomer’s results. Return on equity (ROE) currently stands at 14.3 percent, despite the dilution of earnings per share and the ROE stemming from a recent equity offering, while return on assets is 1.4 percent, having expanded 16 basis points over the past 12 months.

Banorte’s capitalisation levels are adequate, reaching almost 15 percent, and its leverage ratio is above 12 percent. The firm is entirely Basel III-compliant in terms of capitalisation requirements, which allows it to concentrate more on achieving its growth targets and less on meeting new regulation, as other banks in the world are having to do.

Banorte’s shares trade in the Mexican Stock Exchange with the ticker ‘GFNORTEO’. It is the third most liquid stock in Mexico and has one of the largest floats among publicly traded companies of approximately 90 percent, even before a follow-on share offering carried out in July 2013. The group has more than 3,900 investors, including approximately 400 large global institutional funds, and its various corporate policies meet and even exceed international best practices.

Last year, in particular, was full of changes aimed at increasing shareholder value. Throughout 2013, Banorte implemented a variety of initiatives to consolidate its presence in the Mexican market and strengthen its financial position.

Successful offering
To complement a string of acquisitions in recent years, in July, Banorte’s sound fundamentals and positive outlook were recognised by investors in the global follow-on offering in the local and international ECM markets, which became the most significant transaction in Mexico’s history. The shares were sold through the Mexican Stock Exchange – in which 447,371,781 common shares were subscribed at a price per share of MXN 71.50, equivalent to MXN 31.99bn (approximately $2.5bn). The follow-on offering was so successful that the stock price increased by more than 10 percent the day after the offering, and as of the end of 2013 the price exceeded the offering price by more than 26 percent.

Banorte’s performance was overwhelmingly positive last year, and as of September, the group’s profits had grown by 25 percent year-on-year

As a result of Banorte’s promotional efforts in Mexican and international markets, and in spite of continued volatility, an oversubscription of 3.4 times was achieved, representing a demand of more than $8.5bn (over subscription was 4.7 times in the international offering and 2.8 in the local offering). The share allocation was 63 percent among international investors and 37 percent among local investors. In this offering, 10,126 Mexican retail investors, 22 Mexican institutional funds (including four of the most important Afores) and 160 global institutional funds participated. This primary follow-on offering is the largest in Mexico’s history, the greatest from a locally controlled Mexican financial institution, the second most important public offering in the country’s history and the ninth most important carried out by a Latin American financial institution. Furthermore, it is the most important executed by a Mexican financial institution, measured in terms of the amount placed among local investors.

Banorte’s domestic focus extends to those who are so often neglected by international financial institutions and the firm maintains a commitment in all it does to promote financial inclusion and access to banking products and services for lower income segments. The bank has been supporting SME financing with special guarantees, as well as other priority sectors including agribusiness, low- and middle-income housing and infrastructure financing for some time.

Moreover, Banorte has launched a green platform for MiSMEs (micro-, small- and medium-sized enterprises) within the framework of the Green Businesses Summit 2013, organised by the Global Institute for Sustainability, which aims to achieve a more sustainable production chain to establish SMEs as bank clients and in effect ensure service providers are more competitive.

The bank has also penetrated a sizeable percentage of Mexico’s unbanked population through third party correspondents, and early in 2012 launched MiFon so users could withdraw funds at thousands of ATMs worldwide and transfer money from one account to another via their mobile phones.

Banorte’s corporate social responsibility efforts have seen the bank commit to the United Nations Global Compact – an initiative that aims to integrate 10 principles in the areas of human rights, labour, the environment and anti-corruption into organisational business strategy and operations. The bank has participated for a second year in the carbon disclosure project, and has been selected once again to feature on the Mexican Stock Exchange’s Sustainability Index.

The bank as a whole is very engaged with local communities and environmental protection throughout Mexico, and is committed to exceeding best market practices in corporate governance. Currently, 67 percent of the board members are independent, doubling the percentage required by current stock market legislation in Mexico. The Audit and Corporate Practices’ Committee is fully comprised of independent members, ensuring the utmost transparency in all operations.

What is clear from the example of Banorte is that with a distinctly local focus and close ties to the region’s wider development, institutions can overcome market volatility and boost the long-term prospects of emerging market economies, regardless of shaky circumstances in the international marketplace.

Extreme inequality: a price to a pay for economic growth?

Posted on by Ashton Wenborn

Pope Francis warned last November that “ideologies which defend the absolute autonomy of the marketplace” are driving rapid growth in inequality. Is he right?

In one sense, Francis was clearly wrong: in many cases, inequality between countries is decreasing. The average Chinese household, for example, is now catching up with the average US household (though still with a long way to go).

But such examples do not negate the importance of rising inequality within countries. Both China and the US are dramatically unequal societies – and are becoming more so. In the US, the statistics are striking at both ends of the income distribution. The bottom quarter of US households have received almost no increase in real (inflation-adjusted) income for the last 25 years.

They are no longer sharing the fruits of their country’s growth. The top one percent of Americans, however, have seen their real incomes almost triple during this period, with their share of national income reaching 20 percent, a figure not seen since the 1920s.

Reaching the peak of growth
In many emerging countries, rapid economic growth has raised living standards to at least some degree for almost everyone, but the share of the rich and ultra-rich is increasing dramatically. Once these countries approach the average income levels of developed economies, and their growth slows to typical rich-country rates, their future may look like America today.

In one sense, Francis was clearly wrong: in many cases, inequality between countries is decreasing

Globalisation explains some of the bottom-quarter income stagnation in the US and other developed economies. Competition from lower-paid Chinese workers has driven down US wages. But technological change may be a more fundamental factor – and one with consequences for all countries.

Technological change is the essence of economic growth. We get richer because we figure out how to maintain or increase output with fewer employees, and because innovation creates new products and services. Successful new technologies always cause job losses in some sectors, which are offset by new jobs elsewhere.

Tractors destroyed millions of agricultural jobs, for example, but tractor, truck, and car manufacturers created millions of new ones. But new technologies come in subtly different forms, with inherently different economic consequences. Today’s new technologies may have far more troubling distributional effects than those of the electromechanical age. Imagine that 30 years ago, someone had discovered a set of magic words enabling us to speak to any friend anywhere in the world – ‘abracadabra John’ and you were talking to John, wherever he was. Provided she secured intellectual-property rights, the inventor would have become the richest person in the world; and her lawyers and those who provided her with luxury goods and services would have become pretty rich, too. But, beyond that, no new jobs would have been created.

Information and communication technology is not costless magic; but it is closer to it than were the innovations of the electromechanical age. The cost of computing hardware collapses over time in line with Moore’s law of relentlessly increasing processing power. And once software has been developed, the marginal cost of copying it is effectively zero.

The automated takeover
The consumer benefits of this technology are large relative to its price: the cost of each year’s latest computer, tablet, or smartphone is trivial compared to the cost of a new car in 1950. But the number of jobs created is trivial, too. In 1979, General Motors employed 850,000 workers. Today, Microsoft employs only 100,000 people worldwide, Google employs 50,000, and Facebook employs just 5,000. These are mere drops in the ocean of the global labour market, replacing very few of the jobs that information technology has automated away.

But increased unemployment is not inevitable. There is no limit to the number of service jobs that we can create in retail, restaurants and catering, hotels, and an enormous variety of personal services. Walmart, for example, employs two million people, and the US Bureau of Labor Statistics forecasts that more than one million additional jobs will be created in America’s leisure and hospitality sector in the next decade.

But the wages that the market will set for these jobs may result in yet greater inequality. And there is no reason to believe that politicians’ all-purpose answer to the problem – “increase workforce skills” – will offset this tendency. However many people learn superior IT skills, Facebook will never need more than a few thousand employees. And access to high-paid jobs is likely to be determined not by absolute skill level, but by relative skill in a winner-take-all world.

At least, however, IT products and services are very cheap, so even the relatively poor can afford them. That might make very unequal societies more stable than many fear. In his recent book Average is Over, the economist Tyler Cowen makes the deliberately provocative argument that while new technology will produce extreme inequality, the relative losers, satiated by computer games and internet entertainment, and provided with the basics of a minimally acceptable life, will be too docile to revolt.

Cowen may be right; the poor may not rebel. But extreme inequality should still concern us. Beyond a certain point, unequal outcomes inevitably fuel greater inequality of opportunity; and extreme inequality of either outcomes or opportunity can undermine the idea that we should all be equal as citizens, if not in material standard of living.

So Pope Francis was right: despite capitalism’s undoubted success as a system for generating economic growth, we cannot rely on market forces alone to generate desirable social outcomes. All new technologies create opportunities, but free markets will distribute the fruits of some new technologies in dramatically unequal ways. Offsetting such outcomes will be a greater challenge today than it has been in the past.

(c) Project Syndicate, 2014

A risky future for advanced and emerging economies

Posted on by Ashton Wenborn

The global economy had another difficult year in 2013. The advanced economies’ below-trend growth continued, with output rising at an average annual rate of about one percent, while many emerging markets experienced a slowdown to below-trend 4.8 percent growth. After a year of subpar 2.9 percent global growth, what does 2014 hold in store for the world economy?

The good news is that economic performance will pick up modestly in both advanced economies and emerging markets. The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9 percent.

Moreover, so-called tail risks (low-probability, high-impact shocks) will be less salient in 2014. The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued.

Still, most advanced economies (the US, the eurozone, Japan, the UK, Australia, and Canada) will barely reach potential growth, or will remain below it. Households, banks, and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging. High budget deficits and public-debt burdens will force governments to continue painful fiscal adjustment. And an abundance of policy and regulatory uncertainties will keep private investment spending in check.

[G]rowth will remain anaemic in most advanced economies

The outlook for 2014 is dampened by longer-term constraints as well. Indeed, there is a looming risk of secular stagnation in many advanced economies, owing to the adverse effect on productivity growth of years of underinvestment in human and physical capital. And the structural reforms that these economies need to boost their potential growth will be implemented too slowly.

Same old problems
While the eurozone’s tail risks are lower, its fundamental problems remain unresolved: low potential growth; high unemployment; still-high and rising levels of public debt; loss of competitiveness and slow reduction of unit labour costs (which a strong euro does not help); and extremely tight credit rationing, owing to banks’ ongoing deleveraging. Meanwhile, progress toward a banking union will be slow, while no steps will be taken toward establishing a fiscal union, even as austerity fatigue and political risks in the eurozone’s periphery grow.

In Japan, Prime Minister Shinzo Abe’s government has made significant headway in overcoming almost two decades of deflation, thanks to monetary easing and fiscal expansion. The main uncertainties stem from the coming increase in the consumption tax and slow implementation of the third ‘arrow’ of ‘Abenomics’, namely structural reforms and trade liberalisation.

In the US, economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labour and housing markets, and the ‘reshoring’ of manufacturing. The downside risks result from political gridlock in Congress (particularly given the upcoming midterm election in November), which will continue to limit progress on long-term fiscal consolidation; a lack of clarity about the Federal Reserve’s planned exit from quantitative easing (QE) and zero policy rates; and regulatory uncertainties.

Emerging markets’ difficult year in 2013 reflected several factors, including China’s economic slowdown, the end of the commodity super-cycle, and a fall in potential growth, owing to delays in launching structural reforms. Moreover, several major emerging economies were hit hard in the spring and summer, after the Fed’s signal of a forthcoming exit from QE triggered a capital-flow reversal, exposing vulnerabilities stemming from loose monetary, fiscal, and credit policies in the boom years of cheap money and abundant inflows.

Emerging economies will grow faster in 2014 – closer to five percent year-on-year – for several reasons. Brisker recovery in advanced economies will boost imports from emerging markets. The Fed’s exit from QE will be slow, keeping interest rates low. Policy reforms in China will attenuate the risk of a hard landing. And, with many emerging markets still urbanising and industrialising, their rising middle classes will consume more goods and services.

Ongoing fragility
Still, some emerging markets – like India, Indonesia, Brazil, Turkey and Venezuela – will remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions. Some of these countries – for example, Indonesia – have recently undertaken more policy adjustment and will be subject to lower risks, though their growth and asset markets remain vulnerable to policy and political uncertainties and potential external shocks.

The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses: South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, Rwanda and others in Sub-Saharan Africa; and the Gulf oil-exporting countries.

Finally, China will maintain an annual growth rate above seven percent in 2014. But, despite the reforms set out by the government, the shift in China’s growth model from fixed investment toward private consumption will occur too slowly. Many vested interests, including local governments and state-owned enterprises, are resisting change; a huge volume of private and public debt will go sour; and the country’s leadership is divided on how quickly reforms should be implemented. So, while China will avoid a hard landing in 2014, its medium-term prospects remain worrisome.

The global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anaemic in most advanced economies, and emerging-market fragility – including China’s uncertain efforts at economic rebalancing – could become a drag on global growth in subsequent years.

(c) Project Syndicate, 2014

JPMorgan to sell commodities business for $3.5bn

Posted on by Ashton Wenborn

JPMorgan has announced that its commodities wing will be sold to Geneva-based Mercuria for a cash-only deal of $3.5bn. Traditionally one of the most powerful commodities desks on Wall Street, the acquisition is a coup for Mercuria, who is still somewhat unknown outside its industry. After the sale is completed Mercuria will be able to stand shoulder-to-shoulder with other commodities giants such as Vitol, Glencore Xstrata and Trafigura. JPMorgan was looking to complete a deal under mounting regulations and rising political pressure.

JPMorgan had valued its commodity business at $3.3bn, with an annual income of around $750m. Although exact terms are yet to emerge, it is believed that the deal will be completed in the third quarter. Mercuria had to beat several rivals to complete the deal, including Macquarie Group Ltd, the Australian bank, and private-equity firm Blackstone Group. JPMorgan had created its commodities arm after a flurry of rapid acquisitions around 2009 and 2010.

[T]he acquisition is a coup for Mercuria, who is still somewhat unknown outside its industry

The sale follows several other high profile moves away from the commodities trading industry. Last year Morgan Stanley agreed to sell its oil trading division to growing Russian oil giant OAO Rosneft. Deutsche Bank also announced its intention to withdraw themselves from the market in December. In January the Federal Reserve announced it would consider whether new rules were required to limit financial institutions from participating in commodities trading because of “risks that physical commodity activities could pose to the safety and soundness of financial holding companies and to financial stability more broadly”. Trading houses like Mercuria, who is not subject to the same regulations, have reaped the rewards of this mass retreat from the industry.

Speaking to Reuters, Mercuria co-founder Marco Dunand said that the acquisition would help Mercuria focus on long term goals: “We want to be fast growing in an ever changing world. Our model is very much between a traditional trading company and a bank.” Dunand also said, however, that the company had no plans of following fellow commodities giant Glencore in going public.

Yellen signals interest rates could rise sooner than expected

Posted on by Ashton Wenborn

Following the Fed’s decision to taper its stimulus package by a further $10bn – bringing the monthly total to $55bn – the new chair made what many consider to be her first mistake by signalling a sooner than expected rise in interest rates.

Despite reaching its 2012 target of 6.5 percent unemployment, the Fed looks to continue with its stimulus efforts, having decided to take into account a much broader array of economic indicators. “We know we’re not close to full employment, not close to an employment level consistent with our mandate,” she told reporters in a news conference shortly after. “Unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target,” she said.

[Yellen’s] answer came in stark contrast to the Fed’s vague stance on the issue

Nonetheless, if the Fed continues to reduce its bond-buying programme at quite the same rate it has done these past few months, it should come to an end as soon as this Autumn, leading many to ask the next question of when exactly it will push up its rock bottom interest rates.

Since December 2008, interest rates have ranged from zero to 0.25 percent, with the FOMC stating only that: “It likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase programme ends.”

However, in Yellen’s first news conference since taking charge, she proceeded to put a rough timeframe on the rise and spook financial markets, which expected the hike to come at a much later date. “I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing,” said Yellen. “But, you know, it depends – what the statement is saying is it depends what conditions are like.”

The answer came in stark contrast to the Fed’s vague stance on the issue, leading some to speculate over whether or not her “around six months” prediction was an unintended slip on her part. Yellen did, however, go on to stress that the rate rise would not be immediate, and would come as per a series of measured steps.

Mariana Gheorghe on corporate governance in Romania | OMV Petrom | Video

Posted on by Ashton Wenborn

OMV Petrom is the largest oil and gas group in south eastern Europe, with activities in exploration and production, gas and power, and refining and marketing. CEO Mariana Gheorghe talks about OMV Petrom’s potential for further oil exploration in Romania, and how corporate governance is shaping the country’s private sector.

World Finance: Well Mariana, Romania is of course the largest producer of oil and gas in eastern Europe. But how much potential is there still in this region and how are you capitalising on this?

Mariana Gheorghe: Romania has been producing oil and gas for more than 100 years. It’s a matter of size, but a same nature of the business, specific to the business is that we have quite a large basin, 250 fields, but they are quite small. Our objective is twofold. One is to increase the recovery rate of the existing field, and on the other hand we tried to enter into exploration. And the results are there, i.e. we have already established a production, and in 2013 we actually recorded for the first time in the last 10 years an increase of 1000 barrels per day.

As for the larger potential, we need indeed to see the results of the exploration. In 2012, out of the joint venture with ExxonMobil we have made a first discovery, Domino is the name. We hope there are many more to follow. But, in a nutshell, the potential is there, and we need a lot of investments in order to get out and to capture that potential.

World Finance: Well looking more at the company now, and how is OMV Petrom structured?

Mariana Gheorghe: It’s starting with the two-value chain: oil and gas. On the oil side, 100 percent of the production we produce in Romania. For example, it’s processed in a refinery, Petrobrazi, and then all of this is distributed via our own retail network, which is not only in Romania but also in the neighbouring markets.

World Finance: Well in the last 9 years you’ve invested €10bn in your modernisation and efficiency process. How has this revolutionised OMV Petrom?

Everybody talks about CSR, particularly in a country which has started with
the communists

Mariana Gheorghe: From an old asset base, bureaucracy, political interference, over-staffed organisation, to a modern, flexible and agile organisation which has profitable business, which has succeeded to become very efficient based on it’s €10bn investment. But also it has created a sold foundation for the future. The people who have come from an organisation where there were no investments, so the future was quite unclear, and an organisation in which people were not supported in training to upgrade their skills for what is needed in the marketplace they have entered to, to a community of people who are very motivated, who have skills which make them now very competitive on any European labour market.

And the last pillar of this revolution is the relationship with the stakeholders, and that’s where we talk about a totally different approach to the sustainability concept. We started with CSR. Everybody talks about corporate social sesponsibility, particularly in a country which has started with the communists, where everybody was a producer and owner of the assets in that country, it was a revolution when everything has come now in private hands. And that has created a barrier to the way people are thinking, and sustainability has become now part of our strategy, and sustainability means the way you relate, not only with your own employees, which is one key stakeholder, but with all the other stakeholders, how you relate with clients, with suppliers, with government authorities, on pure commercial principles, with a view to reduce your impact on the environment on the one hand, or to increase positive impact on society.

World Finance: Well let’s focus on corporate governance now, and how developed is this in eastern Europe?

Clearly the corporate world in Romania had to understand and then
adjust to it

Mariana Gheorghe: Clearly the corporate world in Romania had to understand and then adjust to it. Romania’s stock exchange, which has been established in the 2000s, has established certain rules at the beginning, and then has also put a corporate governance code. OMV Petrom is a listed company on Romania’s stock exchange, and as such is the blue chip of the Romanian stock exchange. And therefore, we have been driving this agenda of high corporate standards.

World Finance: So what would you say the major challenges are that OMV Petrom faces when it comes to corporate governance?

Mariana Gheorghe: It’s actually to incorporate all these corporate governance principles, as well as all the issues related to the sustainability, in their own strategy, in their activities, and that’s something which we are working on. For that purpose, the stakeholders are a key part of all this process.

World Finance: And looking to the future now, what’s next with OMV Petrom?

Mariana Gheorghe: We are going to consolidate and maximise the value of our portfolio in the upstream, and moreover, we are going to grow in the Black Sea. That’s one area in the western of the Black Sea, it’s one where together with our partner ExxonMobil, we are looking forward to growth opportunities.

And this growth will be supported by the downstream/midstream where we actually monetise our upstream production, and in that direction, what we are focusing in mid and downstream is optimising, creating value added by working with the markets and the clients we have. Doing that is to stay the leading integrated oil and gas company.

Generating profits is going to be challenging, because we depend a lot on what the market offers, be it international markets, where will be the international oil and gas prices, but also in terms of demand both in the country and in the neighbouring markets which are our targeted markets.

World Finance: Mariana, thank you.

Mariana Gheorghe: Thank you very much.

High frequency trading ‘threat to public confidence’

Posted on by Ashton Wenborn

New York’s Attorney General has announced a crackdown on high-frequency trading, as his office said that it will be taking a closer look at vendors who provide services for high frequency traders.

In a speech given at the New York Law School, Eric T Schneiderman called for reforms that would eliminate “unfair advantages” for high-frequency trading firms.

Often such traders get faster access to data than the public would, through services offered by exchanges and other providers. This includes allowing HFT’s to locate their computer servers within trading venues themselves; providing extra network bandwidth to high-frequency traders; and attaching ultra-fast connection cables and special high-speed switches to their servers, the AG’s office said in a statement.

The practice of co-location has grown in popularity in recent years, but it has also come under scrutiny as concerns about its market influence have grown

“In the hands of predatory high-frequency traders, those services distort our markets,” Schneiderman explained. “Each of these services offers clients a timing advantage – often in milliseconds – that allows high-frequency traders to make rapid and often risk-free trades before the rest of the market can react.”

In high frequency trading, firms create computer platforms to buy and sell stocks in milliseconds. It is common practice for trading firms to place their systems in the same data centres as the exchanges, allowing them to directly plug in their companies’ servers and shave crucial time off transactions. The practice of co-location has grown in popularity in recent years, but it has also come under scrutiny as concerns about its market influence have grown.

“We call it Insider Trading 2.0, and it is one of the greatest threats to public confidence in the markets. Rather than curbing the worst threats posed by high-frequency traders, our markets are becoming too focused on catering to them,” Schneiderman said of the HFTs.

The attorney general will be focusing on practices, which provide traders with information that allows them to take positions in the market at an unfair advantage. The announcement follows a similar probe last year, where Thomson Reuters agreed to discontinue its practice of selling high-frequency traders a two-second sneak peek of consumer survey results that could impact markets.

As of late, regulators have put the spotlight on high frequency trading. In February 2014, the US Commodities Futures Trading Commission said it would also be looking into regulating trading practices at firms, once the findings from a report on the industry have been published in September this year.

US oil boom means trade deficit drops to four-year low

Posted on by Ashton Wenborn

In November 2013 the US trade deficit reached its lowest point in four years. According to the US Commerce Department the November trade gap was the smallest monthly deficit since October 2009, dropping 12.9 percent to $34.3bn. The narrowing deficit was the result of a recent oil boom in conjunction with the increased export of US-made machinery, leading to the country’s increased attractiveness as trading partner.

Exports rose 0.9 percent, reaching an all time high at $194.9bn. This was in large part due to rising petroleum sales – itself a result of new drilling techniques – and an abundance of crude oil production. In the first 11 months of 2013, oil exports saw a 10.8 percent rise, in comparison to the same period in 2012.

Imports fell 1.4 percent from October 2013 to $229.1bn, further shrinking the deficit. These figures are largely attributed to the decreased need for foreign oil imports, which fell 10.6 percent to $21.4bn in November. Total US exports were up three percent to $2.08trn, while imports remained at $2.51trn. Such narrowing of the deficit was not originally anticipated by economists, and consequently estimates for the last quarter of 2013 increased by as much as 3.3 percent.

Surveying 68 economists, Bloomberg calculated the median estimate for the US deficit to be $40bn. Despite an annual growth rate of 4.1 percent in the third quarter of last year, it was posited that businesses’ inventory surplus would slow GDP growth (see Fig. 1). As part of the continuing trend in 2013, total US imports reached $194.9bn in November from $193.1bn in October. Views as to whether this trend will continue vary; some assert that increased imports consequent of consumer spending will widen the deficit, while others believe spending will be offset by declining oil imports.

US-GDP-and-import-figures

Economic Outlook Group’s Chief Global Economist, Bernard Baumohl, believes that the foundations of the US economy have become better, as a whole. “Clearly, the fundamentals that underpin the US economy have improved,” Baumohl wrote in the company’s economic summary outlook for 2014. “Leading the charge will be consumer spending, followed by a rebound in business capital expenditures and finally a marked improvement in net exports.”

Exports and imports
Although the oil industry was the driving force behind narrowing the deficit, the increased export of aircrafts, engines, industrial supplies, chemicals and automotive machinery reflect stronger global demand for US-made products. In November, US food and consumer goods shipments dropped, and despite a three-year low in the import of industrial materials, auto and capital goods imports reached record highs.

This was all offset by the fall in demand for foreign oil, in conjunction with rising oil production and the falling dollar, which have increased the attractiveness of US goods in the global market. The increase in exports has revitalised manufacturing and production in the country, with higher export orders bringing overseas production back to the US (see Fig. 2). This increase in factory output has also created jobs, leading to greater spending.

US manufacturing payrolls increased in the fourth quarter last year and consumer spending could offset a lower inventory growth drag. The accumulation of business stockpiles also demonstrates the economy’s strength. With production being brought back to the US from China, the Chinese government has allowed its currency to appreciate. The deficit with China dropped 6.7 percent to $26.9bn in November 2013, the widest gap of any country.

It is on track to set another record this year. The US deficit with Japan dropped 8.4 percent to $5.8bn, corresponding with an increase in exports. Similarly, with greater exports to Germany, the US deficit with the EU dropped to £10.1bn, nearly 30 percent. This is due to an abrupt reduction in imports from the region. By November, the trade deficits with Saudi Arabia and other OPEC nations totalled $64.1bn.

The lowering of the trade deficit is directly linked to new drilling techniques in Texas and North Dakota. Advances in horizontal drilling and hydraulic fracturing have led to the increased production of shale oil. In one of the last days of 2013, US crude oil production increased to 8.12 million barrels – the highest in 25 years according to the Energy Information Administration (EIA). In its 2015 forecast, the EIA predicted that oil output could reach 9.6 million barrels per day – matching the record high in 1970.

Petroleum shipments rose 5.5 percent to $13.3bn in November, bringing down the petroleum deficit to $15.2bn, the lowest since May 2009. In 2013, crude oil imports dropped to 7.7 million barrels a day, the lowest number in 17 years. Purchases of crude oil fell to $28.5bn, which is the lowest point since November 2010. These prices have been falling, reaching an average of $94.69 per barrel in November from a peak of $102 two months earlier.

Energy independence in sight
This crude oil production brings the country closer to energy independence, which the Paris-based International Energy Agency (IEA) estimates could be in as early as 20 years. The IEA also expects the US to become the world’s top producer of oil producer in 2015, overtaking Russia and Saudi Arabia. “The trend toward more domestic fuel production is on-going and it’s only going to get better,” Chris Low of FTN Financial told Bloomberg.

US-Top-five-export-destinations

However, this new abundance of resources is marred by oil export restrictions that were established in the 1970s. Washington has urged the Obama administration to relax these regulations, which contradict the existing and self-imposed goal to double exports by 2015 (set by the White House in 2010).

At the same time oil and gas representatives have applied pressure on the government, highlighting their industry’s contributions to narrowing the trade deficit. Previously, the ban helped to stabilise domestic oil prices, at the great benefit of those refineries that can trade in the world market. “Some of these prohibitions, or policies, are vestiges of the past,” President of the American Petroleum Institute, Jack Gerard, told the FT. “We need to get our mind set away from scarcity.”

Although the oil boom does not create as many jobs as the manufacturing industry, its benefits still extend past its own parameters. Being one of the top consumers of natural gas, the chemical industry also stands to gain from increased oil production. Atlanta-based Axiall is just one of the companies that intend to harness the success of the oil industry, planning to build an ethylene plant in Louisiana.

These technological developments in crude oil extraction not only help to narrow the deficit, but indirectly fuel various aspects of the country’s economy, helping to reshore production, create jobs and increase the attractiveness of the US as a trading partner.

Could cloud be the silver lining to Oracle’s share slump?

Posted on by Ashton Wenborn

One of the most dominant computing companies for the last 30 years, Oracle’s recent difficulties continued with news that its earnings and revenues were worse than expected.

The company reported revenues of $9.3bn for the third quarter of last year, up four percent on the previous year’s figure, but short of analysts’ predictions of $93.7bn. Net profits were also below expectations, falling to $2.56bn. Shortly after the news, Oracle’s share price slumped by five percent in after-hours trading.

The database management and enterprise software specialist has struggled to keep up with many upstart new Silicon Valley firms in recent years, despite it underpinning many corporate IT departments’ operations.

Oracle has slowly been catching up, investing heavily in a number of cloud based services

Oracle has a rich history dating back to 1977, and has grown to become one of the leading technology companies in the world, with total assets of $81.8bn last year.

In an earnings call to analysts, CEO and founder Larry Ellison said that the company was experiencing a challenging period as a result of many new competitors. “We have a new set of competitors, and we need a specialist sales team that’s used to competing with Amazon. We’re lining up against all our new competitors and making sure we have sales capacity as well as a new set of products.”

However, the company did highlight the success of its new cloud operations. Many of its rivals, such as Amazon, have seen a lot of success from offering similar storage and database services to Oracle’s, but based entirely in the cloud. Oracle has slowly been catching up, investing heavily in a number of cloud based services.

President and CFO Safra Catz said in a statement that cloud subscriptions had grown significantly in recent months. “In constant currency, our Cloud Software Subscriptions revenues grew 25 percent and our Engineered Systems revenue grew more than 30 percent in the quarter.

“Oracle Cloud Applications and Engineered Systems are both rapidly growing, billion dollar run-rate businesses. Those two high-growth businesses helped us deliver record year-to-date operating cash flow, and a record $15bn of operating cash flow over the past twelve months.”

The blues are back: emerging markets take a nosedive

Posted on by Ashton Wenborn

How quickly emerging markets’ fortunes have turned. Not long ago, they were touted as the salvation of the world economy – the dynamic engines of growth that would take over as the economies of the US and Europe sputtered. Economists at Citigroup, McKinsey, PricewaterhouseCoopers, and elsewhere were predicting an era of broad and sustained growth from Asia to Africa.

But now the emerging market blues are back. The beating that these countries’ currencies have taken as the US Federal Reserve begins to tighten monetary policy is just the start; everywhere one looks, it seems, there are deep-seated problems.

Argentina and Venezuela have run out of heterodox policy tricks. Brazil and India need new growth models. Turkey and Thailand are mired in political crises that reflect long-simmering domestic conflicts. In Africa, concern is mounting about the lack of structural change and industrialisation. And the main question concerning China is whether its economic slowdown will take the form of a soft or hard landing.

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago. First, emerging market hype is just that. Economic miracles rarely occur, and for good reason.

Governments that can intervene massively to restructure and diversify the economy, while preventing the state from becoming a mechanism of corruption and rent-seeking, are the exception. China and (in their heyday) South Korea, Taiwan, Japan, and a few others had such governments; but the rapid industrialisation that they engineered has eluded most of Latin America, the Middle East, Africa, and South Asia.

Extenuating circumstances
Instead, emerging markets’ growth over the last two decades was based on a fortuitous (and temporary) set of external circumstances: high commodity prices, low interest rates, and seemingly endless buckets of foreign finance. Improved macroeconomic policy and overall governance helped, too, but these are growth enablers, not growth triggers. Second, financial globalisation has been greatly oversold. Openness to capital flows was supposed to boost domestic investment and reduce macroeconomic volatility. Instead, it has accomplished pretty much the opposite.

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets

We have long known that portfolio and short-term inflows fuel consumption booms and real-estate bubbles, with disastrous consequences when market sentiment inevitably sours and finance dries up. Governments that enjoyed the rollercoaster ride on the way up should not have been surprised by the plunge that inevitably follows.

Third, floating exchange rates are flawed shock absorbers. In theory, market-determined currency values are supposed to isolate the domestic economy from the vagaries of international finance, rising when money floods in and falling when the flows are reversed. In reality, few economies can bear the requisite currency alignments without pain.

Sharp currency revaluations wreak havoc on a country’s international competitiveness. And rapid depreciations are a central bank’s nightmare, given the inflationary consequences. Floating exchange rates may moderate the adjustment difficulties, but they do not eliminate them.

Fourth, faith in global economic-policy coordination is misplaced. America’s fiscal and monetary policies, for example, will always be driven by domestic considerations first (if not second and third as well). European countries can also barely look after their own common interests, let alone the world’s. It is naïve for emerging market governments to expect major financial centres to adjust their policies in response to economic conditions elsewhere. For the most part, that is not a bad thing.

Step-by-step recovery
The Fed’s huge monthly purchases of long-term assets – so-called quantitative easing (QE) – have benefited the world as a whole by propping up demand and economic activity in the US. Without QE, which the Fed is now gradually tapering, world trade would have taken a much bigger hit. Similarly, the rest of the world will benefit when Europeans are able to get their policies right and boost their economies.

The rest is in the hands of officials in the developing world. They must resist the temptation to binge on foreign finance when it is cheap and plentiful. In the midst of a foreign-capital bonanza, stagnant levels of private investment in tradable goods are a particularly powerful danger signal that no amount of government mythmaking should be allowed to override.

Officials face a simple choice: maintain strong prudential controls on capital flows, or be prepared to invest a large share of resources in self-insurance by accumulating large foreign reserves.

The deeper problem lies with the excessive financialisation of the global economy since the 1990s. The policy dilemmas that have resulted – rising inequality and reduced room to manage the real economy – will continue to preoccupy policymakers in the decades ahead. It is true, but unhelpful, to say that governments have only themselves to blame for having recklessly rushed into this wild ride. It is now time to think about how the world can create a saner balance between finance and the real economy.

(c) Project Syndicate, 2014