With all the talk of late about negative interest rates and helicopter money, it seems the war on cash is just getting started. Central bankers are increasingly being asked to drive levels of spending – but this is an impossible task, says Oliver Davies. The author of One Month Money discusses the fundamental problems of our monetary system – and suggests the big idea that could fix them.
Come back later for a full transcript of this video.
China’s shift from export-driven growth to a model based on domestic services and household consumption has been much bumpier than some anticipated, with stock-market gyrations and exchange-rate volatility inciting fears about the country’s economic stability. Yet, by historical standards, China’s economy is still performing well – at near seven percent annual GDP growth, some might say very well – but success on the scale that China has seen over the past three decades breeds high expectations.
There is a basic lesson: “Markets with Chinese characteristics” are as volatile and hard to control as markets with American characteristics. Markets invariably take on a life of their own; they cannot be easily ordered around. To the extent that markets can be controlled, it is through setting the rules of the game in a transparent way.
All markets need rules and regulations. Good rules can help stabilise markets. Badly designed rules, no matter how well intentioned, can have the opposite effect.
Cause and effect
For example, since the 1987 stock-market crash in the US, the importance of having circuit breakers has been recognised; but if improperly designed, such reforms can increase volatility. If there are two levels of circuit breaker – a short-term and a long-term suspension of trading – and they are set too close to each other, once the first is triggered, market participants, realising the second is likely to kick in as well, could stampede out of the market.
Moreover, what happens in markets may be only loosely coupled with the real economy. The recent Great Recession illustrates this. While the US stock market has had a robust recovery, the real economy has remained in the doldrums. Still, stock market and exchange rate volatility can have real effects. Uncertainty may lead to lower consumption and investment (which is why governments should aim for rules that buttress stability).
What matters more, though, are the rules governing the real economy. In China today, as in the US 35 years ago, there is a debate about whether supply-side or demand-side measures are most likely to restore growth. The US experience and many other cases provide some answers.
For starters, supply-side measures can best be undertaken when there is full employment. In the absence of sufficient demand, improving supply-side efficiency simply leads to more underutilisation of resources. Moving labour from low-productivity uses to zero-productivity unemployment does not increase output. Today, deficient global aggregate demand requires governments to undertake measures that boost spending.
Such spending can be put to many good uses. China’s critical needs today include reducing inequality, stemming environmental degradation, creating liveable cities, and investments in public health, education, infrastructure, and technology. The authorities also need to strengthen regulatory capacity to ensure the safety of food, buildings, medicines and much else. Social returns from such investments far exceed the costs of capital.
China’s critical needs today include reducing inequality, stemming environmental degradation, creating liveable cities, and investments in public health, education, infrastructure, and technology
China’s mistake in the past has been to rely too heavily on debt financing. But China also has ample room to increase its tax base in ways that would increase overall efficiency and/or equity. Environmental taxes could lead to better air and water quality, even as they raise substantial revenues; congestion taxes would improve quality of life in cities; property and capital gains taxes would encourage higher investment in productive activities, promoting growth. In short, if designed correctly, balanced-budget measures – increasing taxes in tandem with expenditures – could provide a large stimulus to the economy.
Nor should China fall into the trap of emphasising backward-looking supply-side measures. In the US, resources were wasted when shoddy homes were built in the middle of the Nevada desert. But the first priority is not to knock down those homes (in an effort to consolidate the housing market); it is to ensure that resources are allocated efficiently in the future.
Indeed, the basic principle taught in the first weeks of any elementary economics course is to let bygones be bygones – don’t cry over spilt milk. Low-cost steel (provided at prices below the long-term average cost of production but at or above the marginal cost) may be a distinct advantage for other industries.
It would have been a mistake, for example, to destroy America’s excess capacity in fibre optics, from which US firms gained enormously in the 1990s. The ‘option’ value associated with potential future uses should always be contrasted with the minimal cost of maintenance.
Knowing the debate
The challenge facing China as it confronts the problem of excess capacity is that those who would otherwise lose their jobs will require some form of support; firms will argue for a robust bailout to minimise their losses. But if the government accompanied effective demand-side measures with active labour-market policies, at least the employment problem could be effectively addressed, and optimal – or at least reasonable – policies for economic restructuring could be designed.
There is also a macro-deflationary problem. Excess capacity fuels downward pressure on prices, with negative externalities on indebted firms, which experience an increase in their real (inflation-adjusted) leverage. But a far better approach than supply-side consolidation is aggressive demand-side expansion, which would counter deflationary pressures.
The economic principles and political factors are thus well known. But too often the debate about China’s economy has been dominated by naive proposals for supply-side reform – accompanied by criticism of the demand-side measures adopted after the 2008 global financial crisis. Those measures were far from perfect; they had to be formulated on the fly, in the context of an unexpected emergency. But they were far better than nothing.
That is because using resources in suboptimal ways is always better than not using them at all; in the absence of the post-2008 stimulus, China would have suffered substantial unemployment. If the authorities embrace better-designed demand-side reforms, they will have greater scope for more comprehensive supply-side reforms. Moreover, the magnitude of some of the necessary supply-side reforms will be markedly diminished, precisely because the demand-side measures will reduce excess supply.
This is not just an academic debate between Western Keynesian and supply-side economists, now being played out on the other side of the world. The policy approach China adopts will strongly influence economic performance and prospects worldwide.
© Project Syndicate 2016
On March 30, the world’s number one aircraft manufacturer announced plans to slash 4,500 jobs by the mid-point of the year as part of the company’s wide-ranging cost reduction push.
Despite having delivered 65 percent more commercial airplanes in 2015 than in 2010 and 57 percent more military aircraft and satellites, the company has been forced to make job cuts. The hope is that, by doing so, it will be able to satisfy demand for cheaper airliners.
The Seattle Times reported that job cuts this year could total roughly 10 percent of Boeing’s workforce, which otherwise translates to a massive 8,000 jobs. The initial bout of losses will include hundreds of executives and managers, according to a company spokesperson. Approximately 1,600 workers are facing the prospect of voluntary redundancy, and the rest normal attrition.
The company’s targets, according to Vice President of Communications at Boeing Commercial Airplane Sean McCormack, are dollar-based, and the major cost-savings programme, if successful, will reel in the company’s expenditure by billions of dollars.
Broadly speaking, the plan is to reduce supplier costs, increase productivity and cut back on inventory, overtime, contractor expenses and business travel. Additional job losses are very much a possibility if the reduction in non-labour costs stops short of the desired outcome.
The maker of the jumbo jet is betting on the ability of cost reductions to quiet shareholder concerns that falling jet prices could impact the company’s profitability. To compound the issues weighing on Boeing’s bottom line, the company’s European rival, Airbus, recently overtook the world number one in terms of future orders, something that gives shareholders another reason to feel anxious.
Countries across sub-Saharan Africa are grappling with the challenges of sustaining high levels of economic growth, amid a backdrop of plunging commodity prices. Segun Agbaje, Managing Director and CEO of Guaranty Trust Bank, discusses Africa’s major economies, the sectors showing most growth, and how banks are turning away from corporates and towards SMEs.
World Finance: Countries across sub-Saharan Africa are grappling with the challenges of sustaining high levels of economic growth, amid a backdrop of plunging commodity prices. Here to discuss is Segun Agbaje, Managing Director and CEO of Guaranty Trust Bank.
Well Segun, first-off: can you talk me through the major economies in Africa – of course Nigeria is leading the way.
Segun Agbaje: Well yes, there is Nigeria. I mean, I try to think of north Africa away from Nigeria. So there’s Nigeria. There’s east Africa – I look at east Africa basically like one zone, it’s becoming an economic zone. In there you’ve got Kenya, Uganda, Rwanda, Tanzania. There is Ghana, which is smaller. Then of course there is South Africa. And then there is Egypt. I think today those are probably the biggest economies I see in Africa.
Then you have Angola, which is obviously oil driven, and Mozambique, which is a gas play, really.
World Finance: And where would you say are the major growth markets, and how are you approaching them?
Segun Agbaje: First in Africa there’s a lot of people who are financially excluded. So retail: banking individuals is a huge growth segment. And the telecoms companies have taught us that. You have countries where you have 140 million mobile lines, and you have 23 million bank accounts. So there’s still so much to do.
And then you have the small and medium-scale SMEs. There’s plenty to do there. There’s food: food is a big thing. There’s the garment industry. Those are the things I see as high growth. I mean, I’ve started moving away from the corporate-type businesses: manufacturing and oil and gas; and coming down to the SMEs and retail-type businesses.
World Finance: Well oil prices have really hit Nigeria – and indeed Africa – how are they impacting the banking industry?
Segun Agbaje: Oil prices is like seven years of plenty and seven years of deprivation: that’s where we are today.
In the banking industry the way you deal with it – at least, the way we are dealing with it – is you make sure that your loan book doesn’t go belly-up as a result of it. You look at the upstream sector, you look at the downstream sector, you try to safeguard your loans.
Also what it does is, you start to look for other parts of the economies that are doing well. And that’s why I just spoke to you about SMEs, retail, food, garment. So we’ve become a little more cautious with loans in the upstream, in the corporate sector. But we’ve become a lot more bullish about our retail and SME business.
World Finance: Well as you mentioned, SMEs are really driving economies in Africa. Do you think the banking sector’s doing enough to support them?
Segun Agbaje: Well, we didn’t start out by doing that. I think most of us functioned as high-end wholesale banks; we liked all the corporates. Then we started to do retail. And now we’ve seen that you need to do SMEs.
The truth about Africa is that probably one-in-three or one-in-two people is an SME. It’s a huge growth segment.
It has a lot of risk – so traditionally banks have run away from it – but we’re beginning to dimension the risk. We’re attacking it very differently; we’re doing things like market hubs for them, we’re doing payment engines for them, we’re giving them capacity in terms of accounting and understanding finance. I think in the next three to four years, that’s again one of the big growth sectors you’ll see in Africa.
World Finance: Now, mobile banking is becoming the norm in many parts of the world. How is the African banking sector responding?
Segun Agbaje: You know, I actually think the African banking sector’s ahead in terms of mobile banking. The test case everybody refers to is M-Pesa in Kenya, which is one of the most successful mobile engines. In Nigeria as well, mobile’s a really, really big thing. When I look at our mobile technology compared to a lot of developed economies, I think we’re a lot further ahead.
And there is a difference. A lot of it is localised. Because when you go to developed economies, you’re doing a lot of internet-type banking on smartphones. But in Africa there is still a lot of poverty, and most people don’t have smartphones. So we’re using what is called USSD technology, and we’re really doing big things in that mobile space for financial inclusion, and not just building a bricks-and-mortar branch network. I think it’s critical, and I think Africa will remain at the forefront of mobile banking technology.
World Finance: Well finally, what trends do you foresee impacting the sector in the coming 12 months?
Segun Agbaje: I think mobile is going to be very, very big. I think you’re going to see people doing a lot in terms of SME-type business. I think payment hubs, and I think payments is going to be a very, very big thing, all revolving around mobile technology.
And I think African banks are probably embracing disruptive technologies a lot quicker, because we don’t have as many legacies.
In 1973, US Secretary of State Henry Kissinger, following a period of American preoccupation with Vietnam and China, declared a “year of Europe”. More recently, after President Barack Obama announced a US strategic “pivot”, or rebalancing, toward Asia, many Europeans worried about American neglect. Now, with an ongoing refugee crisis, Russia’s occupation of eastern Ukraine and illegal annexation of Crimea, and the threat of British withdrawal from the European Union, 2016 may become, by necessity, another “year of Europe” for American diplomacy.
Regardless of slogans, Europe retains impressive power resources and is a vital interest for the US. Although the US economy is four times larger than that of Germany, the economy of the 28-member EU is equal to that of the US, and its population of 510 million is considerably larger than America’s 320 million.
Going head to head
Yes, American per capita income is higher, but in terms of human capital, technology, and exports, the EU is very much an economic peer. Until the crisis of 2010 – when fiscal problems in Greece and elsewhere created anxiety in financial markets – some economists had speculated that the euro might soon replace the dollar as the world’s primary reserve currency.
In terms of military resources, Europe spends less than half of what the US allocates to defence, but has more men and women under arms. Britain and France possess nuclear arsenals and a limited capacity for overseas intervention in Africa and the Middle East. Both are active partners in the airstrikes against ISIS.
As for soft power, Europe has long had wide appeal, and Europeans have played a central role in international institutions. According to a recent study by the Portland Group, Europe accounted for 14 of the top 20 countries. The sense that Europe was uniting around common institutions made it strongly attractive for the EU’s neighbours, though this eroded somewhat after the financial crisis.
In terms of military resources, Europe spends less than half of what the US allocates to defence, but has more men and women under arms
The key question in assessing Europe’s power resources is whether the EU will retain enough cohesion to speak with a single voice on a wide range of international issues, or remain a limited grouping defined by its members’ different national identities, political cultures, and foreign policies.
The answer varies by issue. On questions of trade, for example, Europe is the equal of the US and able to balance American power. Europe’s role in the IMF is second only to that of the US (although the financial crisis dented confidence in the euro).
On anti-trust issues, the size and attractiveness of the European market has meant that American firms seeking to merge have had to gain approval from the European Commission as well as the US Justice Department. In the cyber world, the EU is setting the global standards for privacy protection, which US and other multinational companies cannot ignore.
But European unity faces significant limits. National identities remain stronger than a common European identity. Right-wing populist parties have included EU institutions among the targets of their xenophobia. Legal integration is increasing within the EU, but the integration of foreign and defence policy remains limited.
And British Prime Minister David Cameron has promised to reduce the powers of EU institutions and to subject the results of his negotiations with the Union’s leaders to a popular referendum by the end of 2017.
If Britain votes no and exits the EU, the impact on European morale will be severe – an outcome that the US has made clear should be avoided, though there is little it could do to prevent it.
Embracing immigration
In the longer term, Europe faces serious demographic problems, owing to low birth rates and unwillingness to accept mass immigration. In 1900, Europe accounted for a quarter of the world’s population. By the middle of this century, it may account for just six percent – and almost a third will be older than 65.
Although the current immigration wave could be the solution to Europe’s long-term demographic problem, it is threatening European unity, despite the exceptional leadership of German Chancellor Angela Merkel.
In most European countries, the political backlash has been sharp, owing to the rapid rate of the inflows (more than a million people in the past year) and the Muslim background of many of the newcomers. Again, an important American diplomatic interest is at stake, but there is not much the US can do about it.
There is little long-term danger that Europe could become a threat to the US, and not only because of its low military expenditure. Europe has the world’s largest market, but it lacks unity. And its cultural industries are impressive, though, in terms of higher education, whereas 27 of its universities are ranked in the global top 100, the US accounts for 52. If Europe overcame its internal differences and tried to become a global challenger to the US, these assets might partly balance American power, but would not equal it.
For US diplomats, however, the danger is not a Europe that becomes too strong, but one that is too weak. When Europe and America remain allied, their resources are mutually reinforcing. Despite inevitable friction, which is slowing the negotiation of the proposed Trans-Atlantic Trade and Investment Partnership, economic separation is unlikely, and Obama will travel to Europe in April to promote the TTIP.
Direct investment in both directions is higher than with Asia and helps knit the economies together. And while Americans and Europeans have sniped at each other for centuries, they share values of democracy and human rights more with each other than with any other regions of the world.
Neither a strong US nor a strong Europe threaten the vital or important interests of the other. But a Europe that weakens in 2016 could damage both sides.
Joseph S Nye is an American political scientist
© Project Syndicate 2016
Verona-based bank Banco Popolare has agreed to buy Banca Popolare di Milano Scarl (BPM), in a merger that will create the third-biggest lender in Italy. The new bank will have an approximate market value of €5.7bn ($7.05bn), around €171bn ($211bn) in assets and over 25,000 employees. It is expected that the all-stock deal will be finalised by the end of this year, following a €1bn ($1.24bn) capital injection from investors.
According to the Wall Street Journal’s source, the combined entity will prompt cost savings of €290m ($359m), while also creating additional revenue that is estimated at €75m ($93m) per annum by 2018.
Banco Popolare’s shareholders are set to own 54 percent of the combined company, which will initially have a board of 19 members and will later see a reduction to 15 members after a three-year period.
The merger is strongly supported by the Matteo Renzi-led Italian Government, which is relying on acquisitions such as these to modernise Italy’s financial sector and accelerate the volume of corporate loans given by lenders.
It is also hoped that news of the deal will spur a surge of consolidation in the industry through similar acquisitions among Italy’s top cooperative lenders. Ultimately, through such measures, the banking industry could well give Europe’s third-largest economy a much-needed boost out of its recession.
Aside from the government’s own intentions, the European Central Bank is also applying greater pressure on the industry to consolidate, reconcile its balance sheets and address around €360bn ($445bn) worth of troubled loans.
With pressure from both the government and external entities, a period of development is greatly anticipated from Italy’s banking sector – and given the news of this major merger, perhaps it has indeed begun.
The banking sector in Jordan is one of the drivers behind the country’s developing economy, but comes with its challenges. World Finance spoke to Musa Shihadeh, CEO and GM of Jordan Islamic Bank. He talks about the growth of Jordan’s banking sector, the central bank’s adoption of international regulations, Jordan Islamic Bank’s adherence to Sharia principles and its social responsibility.
World Finance: The banking sector in Jordan is one of the drivers behind the country’s developing economy, but comes with its challenges. With me to discuss is Mr Musa Shihadeh, CEO and GM of Jordan Islamic Bank.
Well Mr Shihadeh, if we might start with the banking sector in Jordan. How does it stand today, and since its implementation in 1978 how is Islamic finance growing?
Musa Shihadeh: Jordan banking is a stable sector, they are growing. Last year growth was in assets, almost five percent and in investments about seven percent and deposits about four percent. And they are sound, profitable and doing fine and keeping up with the international standards. Islamic banking started in 1978, my bank was the start. Now they have 15 percent of the assets of the Islamic countries banking sector; 22 percent of the investment, facilities and lending and about 16 percent of the deposits. So they are doing fine, all of them are controlled very well according to the Central Bank of Jordan regulations and applications.
World Finance: Well obviously there’s been a lot of unrest in the region, how is this impacting Jordan’s banking sector?
Musa Shihadeh: Of course first of all it’s impacting the industry. We used to export to Iraq, Syria, Libya and Yemen. Now with the unrest there, trade and exports have turned down; and it’s affected the bank’s activities – supporting, helping and lending for these sectors. The banks turned to invest through the individuals, small projects, SMEs, in the country in order to enhance and develop their business. And the banks are still making a profit and doing fine.
World Finance: Well considering the instability nearby, Jordan actually acts as a peaceful hub for foreign investors, so what does the banking sector offer?
Musa Shihadeh: The banking sector is well-equipped, applying international standards. The staff in the banking sector is very educated and they service local and foreign investors. They welcome them, we keep up with all international standards and therefore foreign investors are welcome and will be serviced as if they are in any country outside Jordan.
World Finance: And in terms of regulation, how developed is the banking sector?
Musa Shihadeh: The banking sector is very developed, because Central Bank of Jordan applies international regulations. They keep up with the banking sector in order to make training for all to comply with these international applications.
World Finance: And how have you incorporated corporate social responsibility into your long-term plans?
Musa Shihadeh: Being an Islamic bank we have to apply the Sharia application in order to service the community in using our funds and money and services. The bank offers free loans for people to use in education, medicine, or sometimes any other needs.
There are two committees in the bank for social responsibility. One for the management and the other for the board of directors, to direct our business. And we have a plan to get social responsibility agreements; we were granted that for our ISO2600 applications. And that helps us a lot in our plans in order to further our business, help SMEs, help the unemployment and our investment and so on.
World Finance: And finally, what’s next for the bank; talk me through your future plans?
Musa Shihadeh: We concentrate on our customers. We try always to be trusted by our customer and ask our customer to be loyal to us by the services we give them. We always find new services or financing or tools in order to service them. We try to apply the latest technology in our services to let the banker feel and the customer feel, that we are a bank as if he is in Europe or any place. Because we feel that trust services and loyalty and products that help the customer, make him continue with us.
Australia’s second-largest oil and gas producer, Woodside Petroleum, has shelved a $40bn floating liquefied natural gas project. The development was to be built in the Browse Basin, off the coast of Western Australia. The decision to abandon the scheme was announced in a statement to the Australian Securities Exchange, with the company citing “an extremely challenging external environment” as the reason why the joint venture participants have decided not to progress.
The project has a rocky history, with the original design for an onshore plan dropped after projected costs reached $80bn and received widespread opposition from environmental groups. The revised floating platform plan was approved by partners in 2013 and eventually won the support of the Government of Western Australia. The development was expected to deliver billions in revenue and create 1,000 jobs over the project’s lifetime.
Western Australia’s Premier, Colin Barnett, who had positioned the Browse project as a major economic boost for the state, said he was disappointed but not surprised by the decision. “I think it would have been very difficult for [Woodside] to commit probably north of $50 billion to develop this project when the price of petroleum, including natural gas, is low,” Barnett said in an interview with Macquarie Radio.
The project will likely resurface when commodity prices recover. “Woodside remains committed to the earliest commercial development of the world-class Browse resources and to LNG as the preferred solution, but the economic environment is not supportive of a major LNG investment at this time,” Woodside’s Chief Executive, Peter Coleman, said.
Woodside Petroleum, like many others in the commodities market, has struggled amid falling prices. In February, Woodside announced its net income for 2015 was $26m, a 99 percent drop from the $2.41bn it posted a year earlier.
Portugal’s government has received parliamentary approval for the most ambitious rollback of austerity measures that has been attempted by any bailout EU member state. The left-leaning coalition, which is led by the Socialist Party’s Antonio Costa, hopes to encourage the country’s economic recovery by bolstering demand instead.
The 2016 budget includes provisions to remove spending cuts that were forced on the state as part of its bailout from international lenders, the IMF and the EU. Such measures include increasing the minimum wage, reinstating four public holidays and revoking additional tax fees that were introduced during the height of the country’s economic crisis.
The budget also assumes that the economy will grow by 1.8 percent this year – a figure that various analysts have disputed, particularly given the 1.5 percent growth achieved in 2015.
According to Reuters, the EU has countered by increasing pressure for the coalition government to reduce the budget deficit to 2.2 percent of the GDP – more than was previously planned. As such, European authorities argue that modest growth and increasing purchasing power are not enough to aid recovery without spending cuts also being put in place.
Despite the government’s optimism over its populist plans, which will undoubtedly come as a great relief to the Portuguese population, whether they will actually work is highly debatable. The coalition’s performance so far has raised reason for doubt: since coming to power last November, unemployment increased in the fourth quarter, while business confidence has also fallen.
With growing pressure from the EU and disappointing growth set to continue, Portugal’s ambitious government may have no choice but to depart from its strong anti-austerity stance, as was the case for Greece’s Syriza Party last year.
Statistics released by the US National Association of Realtors (NAR) on March 21 show that existing home sales declined significantly in February. According to the NAR, completed existing home sales “dropped 7.1 percent to a seasonally adjusted annual rate of 5.08 million in February from 5.47 million in January”.
However, it was also noted that despite this relatively large decline in February sales figures, they were still up 2.2 percent on existing home sales from one year ago.
A number of reasons have been cited for the February’s poor showing: Laurence Yun, Chief Economist at the NAR, cited weather factors in some regions, noting how “the lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February’s lack of closings”. At the same time, however, he contended that the main issue was likely due to a lack of supply and affordability. “Finding the right property at an affordable price is burdening many potential buyers.”
The latest data, however, also suggests that the US economy may be facing growing weakness – or at least it is increasingly perceived to be by US consumers and households.
According to the NAR, the slowdown in sales can also be attributed to an increasingly pessimistic outlook for the US economy among Americans, as “there appears to be some uneasiness among households that the economy is losing some steam”.
Recently released results from the Michigan Index of Consumer Sentiment – which tracks consumer confidence – for February 2016 showed an increasingly glum outlook from US consumers, measured against sentiment in the past few months as well as year-on-year figures. Furthermore, the NAR’s quarterly Housing Opportunities and Market Experience (HOME) survey for March 2016 found that households were increasingly wary of how the US economy was performing. In a press release announcing the HOME survey’s results, the NAR noted that “among all households in the survey, less than half believe the economy is improving (48 percent), down from 50 percent in last quarter’s survey”.
No stranger to controversy, Quebec-based drugmaker Valeant Pharmaceuticals has initiated the search for a new chief executive, with current CEO Michael Pearson set to step down once a replacement has been found.
The Canadian company has lost nearly 90 percent of its value since August, owing to criticism of its pricing and distribution methods, along with investigations into improper conduct among the firm’s top finance executives.
Howard Schiller, Valeant’s former CFO, refused a request to step down from the board, despite admissions from the company that he had contributed to the “misstatement” of Valeant’s results.
Schiller responded, stating: “As a result of the fact that I did not engage in any improper conduct regarding this proposed restatement [of results], I have respectfully declined the request from the company’s board to resign from the board”.
The firm is currently facing an investigation by the SEC into its ties with online pharmacy Philidor and an investigation by Congress centring on its drug pricing structure.
Corporate Director Katharine Stevenson, meanwhile, has voluntarily resigned in order to make way for investor, nine percent stakeholder and Chief Executive of Pershing Square Capital Management, Bill Ackman. In a statement, Ackman said that the company’s large scale and dominant franchises in eye care, dermatology, GI and other therapeutic areas, together with its low valuation, make for “a spectacular opportunity for a world-class healthcare executive”.
Pearson noted that it had been a privilege to lead Valeant for the past eight years, although he admitted the business had been adversely impacted by controversies in the last few months. Chairman of the Board Robert Ingram struck a relatively positive note, saying: “While the past few months have been difficult, Valeant has a collection of leading brands, valuable franchises and great people, and I am confident that the company will be able to rebuild its reputation and thrive under new leadership.”
Elmer Funke-Kupper has stepped down from his position as Chief Executive of the Australian Securities Exchange (ASX) while allegations of bribery during his time as CEO of gambling giant Tabcorp are investigated. His resignation is effective immediately, with Chairman Rick Holliday-Smith filling the role until a permanent replacement can be found.
“The board accepted that Elmer wanted to direct his full focus to the investigations which may be made into the Tabcorp matter, and not have them interfere with the important role of leading the ASX,” Holliday-Smith said in a statement.
His resignation comes after it was revealed that the Australian Federal Police is working alongside international authorities to investigate claims that an AUD 200,000 bribe was paid by Tabcorp in 2010.
The payment was allegedly made to a business with links to the family of Cambodian Prime Minister, Hun Sen. Tabcorp considered obtaining an online gambling licence in Cambodia in 2009, when it appeared that regulations might be softened in some Asian countries. The allegations were raised following an investigation by Fairfax Media.
Following the report, Tabcorp released a statement saying that it had explored a Cambodian business opportunity in 2009, but chose not to pursue it. The firm also said that it would willingly cooperate with investigators.
Funke-Kupper has also stepped down from his position as a Non-Executive Director on Tabcorp’s board, a position he has held since 2012. He led Tabcorp from September 2007 to June 2011, and has been Chief of the ASX since October 2011.
In an interview with the Australia Financial Review, Funke-Kupper denied any wrongdoing and said that his decision to resign was aimed at protecting the integrity of the ASX and avoiding a trial by media. He also said he will be cooperating fully with the investigation.
On March 20, US President Barack Obama arrived in Cuba, making him the first sitting US president to do so in almost 100 years. With the removal of sanctions against Cuba progressing positively and the historic trip now underway, it seems that the last chapter of the Cold War is finally coming to an end.
Just days before the president’s plane landed in Havana, further concessions to sanctions were revealed, with the aim of promoting engagement and business between the two neighbouring countries. US citizens can now travel to the Caribbean island as individuals for ‘people-to-people educational travel’, as opposed to under the sponsorship of an organisation, as was previously permissible. Furthermore, Cuban citizens can now earn a salary in the US.
It seems that the last chapter of the Cold War is finally coming to an end
Numerous other amendments were also announced, including one that allows approved cargo to be transported from the US to Cuba. Additionally, Cuban-origin software can now be imported to the US, and “certain dealings in Cuban-origin merchandise” are now permitted.
Promisingly, Cuban Foreign Minister Bruno Rodriguez responded to the US’ decision to ease currency restrictions with a reciprocal resolution: following a trial period of trading in USD, which will involve transfers to financial institutions in third-party countries, Cuba will then be allowed to remove the 10 percent levy it currently has on cash dollars.
Despite these major developments, Rodriguez insists that Obama can do more for US relations with Cuba without congressional approval – namely, he can remove the embargo altogether, a feat that many hope will be achieved during his presidential visit.
While Obama’s trip is of considerable symbolic importance in the thawing of dealings between the two states, a lot more still needs to be done in order for relations to be fully normalised. For example, while travel restrictions for US citizens have been reduced, a formal ban is still in place, and although the exportation of essential goods to Cuba has been approved, trade has not yet started.
Now is a crucial time in the chequered history of the US and Cuba: one false step or one unfulfilled promise could send it hurtling back decades. Issues such as the highly contentious Guantanamo Bay may prove to be the sticking point that causes such a breakdown.
Yet with all that can be achieved through this partnership – in terms of business, trade and, in particular, Cuba’s much-needed economic development – it is reasonable to assume that everything will be done by both sides to ensure the conclusion of this long-overdue transition.
On the evening of December 23 last year, an electricity blackout left half of all homes in the Ivano-Frankivsk region of Ukraine without power. According to reports, 103 cities were completely blacked out and another 187 were plunged into partial darkness. Notable not only for its size, the incident was important as it was the first recorded blackout in history to be triggered by a cyber attack.
As the emphasis among the hacking community shifts onto physical infrastructure, attacks like the one in Ukraine are especially significant – not just for those living in the immediate vicinity, but for society at large. “It’s a milestone because we’ve definitely seen targeted destructive events against energy before – oil firms, for instance – but never the event which causes the blackout,” said John Hultquist, Head of iSIGHT’s Cyber Espionage Intelligence Practice, in an interview with Ars Technica. “It’s the major scenario we’ve all been concerned about for so long.”
Critical threat
Most worrying of all is that the situation has confirmed many people’s fears about critical infrastructure and its susceptibility to cyber attacks. The case in point is proof enough that the threat from cyber attacks does not exist in some far-off future, but here and now. For companies, the fear is that in an already fragile environment, cyber attacks could disrupt business as usual just as easily as, for example, climate change or geopolitical instability. Effectively, what we’re seeing here are security issues that stretch far beyond the realm of finance or privacy, and threaten to disrupt everyday processes, both on a national and international front.
Emerging technologies have revolutionised critical infrastructure, yet they have also introduced the potential for critical vulnerabilities. Matt Devost, Co-Founder and CEO of cyber risk management company FusionX, told World Finance that these technologies are being developed and deployed without a thought for security being included in the design process. For example, the attack surface has increased significantly with the universal adoption of SCADA and ICS systems.
The threat from cyber attacks does not exist in some far-off future, but here and now
“There is no doubt that this hyperconnectivity is a powerful development tool and opportunity for growth for governments, business and individuals alike – a tool that must remain open and accessible despite the inherent risks,” said Adam Blackwell, Secretary for Multidimensional Security for the Organisation of American States, in a recent report. “The challenge lies in our ability to balance and manage these risks for the foreseeable future.”
Defined by the Department of Homeland Security as any one of 16 industries “whose assets, systems and networks, whether physical or virtual, are considered so vital… that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety”, any threat to critical infrastructure is a threat to the population at large.
A growing threat
Fortunately or unfortunately, developments in the modern world are such that critical infrastructure is becoming increasingly connected, and it’s not inconceivable to suggest that a well-orchestrated cyber attack could cripple essential public services. “This perfect storm of current and emerging technology coupled with a wider array of sophisticated attackers has put critical infrastructure at significant risk, and deliberate and thoughtful cyber risk management approaches are needed to shore up our defences and ensure attacks are quickly detected and mitigated”, said Devost.
While this wave of hyper-connectivity has benefitted host communities, it has given rise to new vulnerabilities, and ones that require a new type of defence – that is, if the economy hopes to escape unscathed. According to a recent McAfee report: “In an ever-more networked world, the cyber vulnerabilities of critical infrastructure pose challenges to governments and owners and operators in every sector and across the globe.”
Oil and gas pipelines, water distribution networks and electric power grids are all essential services that today rely on the internet as much as any manual system. And though the advantages number in the many, so do the challenges.
As Tripwire noted recently, 48 percent of US utility providers said they were in need of additional cyber protection, whereas 20.1 percent said they just “didn’t know” – something that is, in itself, cause for concern. These responses align with research to show that the prevalence and sophistication of these attacks is on the up, and as the warnings get all the more severe, organisations are beginning to put in place technologies and procedures to limit the damage.
Improving systems accordingly
Doubters need only look to December 2014, when the German Government released evidence to suggest that hackers had infiltrated the industrial controls of a steel mill, to see that cyber attacks can inflict massive damage on critical infrastructure. Another report, published by ESG, shows that, of a sample of critical infrastructure organisations, 68 percent claimed they had been subject to one or more cyber security incidents over the last two years. On top of that, 36 percent said that the incidents had disrupted critical processes, and 36 percent again claimed they had disrupted critical business applications.
Source: Forbes, 2015
“Typically the biggest challenge to deterring cyber security threats is getting the business to engage the problem from a business and risk management perspective,” said Devost. “To be effective, security efforts need to be closely tied to business objectives and supported at all tiers of the business, from governance to operations.” A recent study by Accenture and the Ponemon Institute, The cyber security leap – from laggard to leader, found that 63 percent of companies that improved their cyber security effectiveness significantly over 24 months aligned their security objectives with business objectives, whereas only 40 percent of those that saw no improvement did so.
“Forward-looking companies also see that traditional endpoint security and perimeter security measures are not enough, and are moving towards proactive risk and intelligence driven approaches to security management, analytics-driven event detection, and machine speed orchestration of response,” Devost added. And although discussions on the topic often point to cyber security as a consideration for the future, there are countless studies to show that it is a hot issue at the moment. For example, National Security Agency (NSA) Director, Navy Admiral Michael Rogers, told the House Permanent Select Committee on Intelligence in November 2014 that foreign governments had already infiltrated energy, water and fuel distribution systems. “This is not theoretical”, he said. “This is something real that is impacting our nation and those of our allies and friends every day.”
The situation is made all the more problematic by the systems themselves. Many of these processes were installed years – if not decades – ago, without a thought for connectivity. This means technological innovations are often patched into existing systems, and the result is a hotchpotch system that is, by design, vulnerable to attack.
Industrial control systems
The systems that allow businesses to collect and control data on a colossal scale are the same systems that allow hackers to access, exploit and ultimately disrupt essential services. While the opinion holds that the best way of combatting these threats is to focus on IT, there is still a human element to these issues that no amount of technology can account for.
Technical training, as much as improved technology, is critically important in boosting cyber security measures and in warding off ever-evolving threats to critical infrastructure. However, there is a serious shortage of professionals who understand both the digital security landscape and the way in which these threats manifest themselves in critical infrastructure. Furthermore, the issue with improved technology as a security measure is that it can be static in a way that hackers are not. Qualified experts can respond to threats as they emerge, which again highlights the importance of people over systems.
“There is certainly a talent gap that exists within the field of cyber security,” according to Devost, “and that chasm is even wider for professionals that can work within the specialised control system space. The dynamic nature of the security environment also means that organisations are not going to ‘solve’ the problem on their own and will utilise trusted partners to identify and adopt best practices, and to efficiently support security functions and operations as needed.”
Should businesses – and perhaps more pertinently, governments – take seriously the cyber threat facing critical infrastructure, it’s fair to say that investment in security solutions and personnel will increase in the coming months and years. Failing that, critical infrastructure could come under siege, and with little in the way of answers, defensively speaking.
It’s time to end the talk of hackers as if they were a distant threat, and concede that cyber security issues number among the biggest threats facing critical infrastructure today. Cyber terrorism is still seen as the stuff of science fiction, and it’s about time to acknowledge that the risks are both immediate and real.
Since the US Federal Reserve chose to lower interest rates in reaction to the economic turmoil that followed the financial crisis, China’s economy has gone from strength to strength, with the country boasting impressive annual GDP growth statistics year-on-year. All this combined to create an extremely favourable environment in Hong Kong for the past decade, but now the city-state looks likely to face some serious challenges.
The influx of cheap money since the US adopted a monetary easing policy in the wake of the 2008 financial crisis has served to increase capital inflows for investment in the city, with depressed rates helping to raise Hong Kong’s aggregate banking balance by more than HKD 300bn ($384bn). At the same time, historically low interest rates led to investors looking for a more profitable haven, Hong Kong being among them. It was no surprise then that the head of the Hong Kong Monetary Authority (HKMA), Norman Chan Tak-Lam, expressed concern over a US rate hike and the impact it would have on the capital outflows and the general economic prosperity of the city-state.
Braced for repercussions
However, prior to the rate hike, bankers in Hong Kong were more concerned about the impact of policy decisions emanating from Beijing, with the CEO of Christfund Securities telling South China Morning Post that investors were prepared for a rise in US interest rates, but that a devaluation of the renminbi is the real worry.
“I do not think it will shock the market even if the Fed will decide to increase the interest rate this week,” Cheung said. “The devaluation of the yuan, as well as whether Beijing has enough measures and policies to rescue the weak stock markets in the mainland, may have a bigger impact to the Hong Kong stock market outlook than the US rate rise.”
Interestingly, when the US finally did raise its base interest rate by 0.25 percentage points in mid-December, Hong Kong’s economy was buffered against the hike by the mainland’s decision to cheapen its currency, but only slightly.
“We had the best of all worlds for years — we had very low US rates and a boom in China,” said Frederic Neumann, Co-Head of Asian economic research at HSBC in an interview with the Financial Times. “Now China is slowing and the Fed is raising rates, so we get a double whammy for Hong Kong.”
The temporary cushion that the renminbi devaluation provided from rising US interest rates is the result of the territory’s currency being pegged to the dollar, while its economic future is becoming increasingly tied to Chinese mainland. As this trend continues, with China choosing to expand its trade links with the special administrative region (SAR), the question of whether or not the Hong Kong dollar should break away from the US and peg itself to the Chinese renminbi will be increasingly raised.
Since the handover of Hong Kong from the UK to China, the city-state has gradually become more and more integrated with the economy of the mainland
Stick or twist
Since the handover of Hong Kong from the UK to China, the city-state has gradually become more and more integrated with the economy of the mainland, with more than half of all exports coming out of Hong Kong finding their way to China.
What is more, the tourism and retail sectors in Hong Kong, which account for roughly a 10th of its GDP, are bolstered by the special relationship it has with the People’s Republic. In fact, just by looking at the substantial increase in the amount of trade and the financial flows between the SAR and the mainland it is clear that China now plays an increasingly dominant role in determining Hong Kong’s economic future.
“Hong Kong is more integrated with China now and so its economy could be dragged by China’s slowdown,” Mole Hau, a Hong Kong-based economist at France’s largest bank, told Bloomberg Business. “On the other hand, Hong Kong’s monetary policy has to follow that of the US – that’s quite a dis-coordination for the city.”
After the Fed raised its base rate for the first time since the financial crisis, the HKMA followed suit – raising its key rate by 0.25 percentage points to 0.75 percent. This decision was taken during a period when emerging markets and advanced economies the world over have to adjust to a slowdown in China. The combination of raised rates and increased levels of volatility emanating from the mainland has put the world, in particular Hong Kong, under renewed pressure at a time when it needs it least.
“Closer integration with mainland China has delivered several benefits to Hong Kong SAR, particularly by way of an appreciable boost to tourism and financial services, and the offshore RMB business in the last five years,”ssssssss the IMF said in a report. “Hong Kong SAR remains well placed to act as the leading platform to intermediate two-way flows in and out of the Mainland as it opens its capital account.
“At the same time, the deepening linkages through tourism, cross-border bank lending, issuance of RMB and USD securities in Hong Kong SAR by Mainland entities, and equity market connect schemes also create more channels for transmitting shocks from the Mainland.”
Dollar allegiance
The Linked Exchange Rate System (LERS), which is the mechanism that forces the HKMA to adjust the city’s monetary policy in line with the Fed, was originally implemented in response to the Black Saturday crisis in 1983 in order to provide greater stability between the HKD and the USD. Since then, and with the recent rise in rates – combined with the increased levels of economic integration between the city and the mainland – some commentators suggest that it is now time for Hong Kong to start considering a new exchange rate regime.
“Over the next decade it would make sense for the Hong Kong dollar if it is pegged to anything, to be pegged to the renminbi,” said Michael Hasenstab, Chief Investment Officer of Templeton Global Macro at Franklin Templeton Investments in an interview with CNBC.
Because the LERS forces the HKMA to adjust its interest rate in line with the Fed, it prevents Hong Kong from being able to adequately deal with inflation and other economic challenges it may face. This has naturally led some to blame the LERS for the overheating of city’s property market, which been rising year-on-year for the last decade, as increased demand has been forced to compete with decreased supply.
This ongoing trend means that Hong Kong homes by square foot are the most expensive in the world. In fact, according to CBRE’s recent Global Living Report: A City by City Guide, homeowners in Hong Kong are paying around $1,416 per square foot, while Londoners come in at a close second, paying $1,025, and New Yorkers a mere $842.
With sky-high property prices and wages stagnating in the city, there is likely to be a renewed debate over whether or not the government should switch to a floating exchange rate regime, or even peg it to the renminibi. But, despite the fact that Hong Kong has been handed back to China and the mainland has embarked on an unprecedented and prolonged period of economic growth, along with the increased acceleration of renminbi internationalisation, the conditions are still not yet right for Hong Kong to peg its currency to the yuan.
“The Hong Kong economy is too small to adapt to a free float,” said Wilson Chan Fung-Cheung, a senior consultant at the Hong Kong Institute of Bankers in an interview with the South China Morning Post. “A currency-basket system lacks transparency. A peg with the yuan will not happen in the near future as the currency is not yet freely convertible.”
Another reason why the peg is unlikely to change anytime soon is that Hong Kong relies on it as a means of providing credibility among western investors. This is due to the relatively smooth manner in which the LERS functions, which is a characteristic that stems from the strong institutional, legal and policy framework that exists in Hong Kong.
Not only that, but there are considerable fiscal reserves to draw upon, which are capable of softening the city’s landing should its economy face any unfavourable shocks from outside. Therefore, for the time being at least, it appears that the LERS is the best option for Hong Kong, as it provides a decent anchor, giving the city-state the stability it requires at a time when global market volatility is high.
