World Finance speaks to Phyo Aung and Min Wi-Oo from Ayeyarwady Bank, on the foreign investment a re-opened Myanmar is gathering, and the human resources challenge for the banking sector to continue to grow.
Achieving broad consensus on banking reform has been an issue riddling Myanmar’s political scene. Now here to tell us how banks are growing their capital base in the middle of this concern, Phyo Aung and Min Wi-Oo.
World Finance: First, can you tell me how deeply impacted was your banking sector after the 2008 financial crisis?
Phyo Aung: Myanmar – especially the banking sector – was not affected directly, because the country had actually been isolated for almost three decades and recently opened up after 2010.
But most of the Asian countries, especially Japan, Korea, Singapore, Thailand and China, are trade partners of Myanmar. And all these countries actually were affected hugely, so it would really affect Myanmar indirectly especially the trade sectors of foreign investment and the migrant worker industry. So it wasn’t really affected directly, but affected indirectly.
World Finance: Can you tell about the long-term impact on the retail sector?
Min Wi-Oo: The country just changed, the new government and new financial investment laws now they are new in the international retail sectors, they are trying to come into Myanmar and also starting new businesses. This year we are going to start on the YSE – Yangon Stock Exchange – in Myanmar now.
World Finance: So how important has attracting foreign corporations business to your bank been to your overall growth?
Phyo Aung: Of course we need foreign investment to boost the countries’ economy, as well as the Myanmar banking finance industry. As a private bank in Myanmar we are trying to develop ourselves to serve those multinational corporations, when they are actually interested and intend to invest in Myanmar.
In order to do that there are a lot of technical transfers, and then it will really help to reduce unemployment rate, and of course also boost consumption sectors.
So as a private bank of Myanmar we always try to be ready to serve those international corporations, together with some of the partners’ foreign banks.
World Finance: Obviously a dramatic reconceptualisation is required for the banking sector, where would you begin?
Min Wi-Oo:There are some issues: things that the government need to provide financial institutions, such as legal protection and also human capital. We need a lot of resources, human resources, talented experience, training, those would be the key issues.
World Finance: OK; so we think that foreign lenders of course are going to play a big role, can you tell about some of those big foreign players that we should watch out for?
Phyo Aung: Those foreign banks who’ve got the licence to operate some banking business in Myanmar. They will be playing a very important role to boost the country’s economy, as well as to help to develop the Myanmar entire banking sectors.
And as a private bank in Myanmar, we have also a lot of plans to work together with the foreign players, foreign banks to develop the country’s economy. Like strategic partnerships in some areas, trying to develop human capital, and provide a lot of seminars and training to educate bank users as well. And how the banks are playing an important role to develop the country’s economy.
So I think the foreign banks and foreign corporates role in Myanmar will be definitely important to develop the country’s economy, and of course our banking and finance industry.
World Finance speaks to Ricardo Roa, CEO of Empresa de Energia Bogota, on improving Colombia’s energy subsidies and infrastructure investment needs.
Colombia’s energy industry is flourishing, but still developing. It also offers a lot of untapped future potential. With me now to speak about the electricity sector is Ricardo Roa from Empresa de Energia Bogota, one of the leading electricity companies in the country.
World Finance: Well Ricardo, how is the Colombian energy sector structured and how do you fit in in this?
Ricardo Roa: Since 1991, Colombia’s public utilities system and structure has undergone a structural reform. By 1994, laws 142 and 143 were introduced that formed the basis of the structural reform. Since then, the sector has been articulated at three points.
The first of these is the Ministry of Mines and Energy, which governs the policies and establishes the long-term plans for the whole sector. There is also the Energy and Gas Regulation Commission, which establishes the rules and sets out each of the roles that agents should play while also focusing on quality and price for the end user.
Moreover, there is an inspection, monitoring and surveillance body called the Superintendency of Domestic Public Utilities, which oversees operators and guarantees the supply to the end user.
Consequently, we can say that we now have an infrastructure and regulations that are substantially adequate to provide for the future development of these services in Colombia.
World Finance: Your core business is in transmission and investment in electricity in Colombia, but how well developed is the industry in terms of infrastructure, inclusion and regulation?
Ricardo Roa: There is very good performance in terms of the infrastructure for transporting gas, and transmitting electricity.
The planning is done by the Bioenergy Planning Unit that also invites the three major players in the national transmission system to public tender, to participate in these expansions.
This week and this month, it will be defining the delivery of three very important projects to reinforce the entire national transmission system and ensure the possibility to provide for the country’s future energy supply. These projects amount to around $1.1bn.
Our company has submitted projects to the government amounting to around $2.3bn to guarantee reliability in the supply and transportation of gas. In this respect, we are awaiting some regulatory signals that favour these types of investments associated with providing reliability and guaranteeing a future supply of this energy input for the country.
World Finance: What challenges does the sector face and how are you addressing them?
Ricardo Roa: The most important point at the moment is the discussion about the matter of reliability.
In Colombia, we have two situations because of the availability of hydroelectric power: when there is no water, we have to switch the thermal power plants to gas in the main.
We have to regulate these priorities to fulfil the demand for gas at these critical times. This is a matter that has to be regulated and that we have to make progress on.
It is also important to establish alternatives and other substitutes for gas and hydroelectricity, such as liquefied natural gas for import or export, and other types of services that are still unregulated such as the storage of gas or some ‘peak shaving’ plants that we have defined to fulfil the demand if there is a need to ration gas.
World Finance: The electricity sector uses a system of cross-subsidies. How does that work exactly and why is it important?
Ricardo Roa: In Colombia we follow a system that promotes a constitutional principle of solidarity and distribution of income. It is a way for those who have more to contribute so that those who have less can use these types of electricity, gas, water and sewerage services.
Strata 1 and 2, which are the lowest in the national economy, can receive a grant of up to 60 percent of the cost of the service. Strata 3 and 4 do not receive a grant, they pay the full amount and users at strata 5 and 6, industry and commerce, provide a 20 percent contribution, a surcharge for the services that is used to compensate the need to fulfill the demands of the users that have low resources.
However, we have to raise awareness about the appropriate use of these grants and their focus. A much more efficient and rational State policy is needed. The policy needs to be much more focused on the vast needs still present in large parts of the country, where there are users who still do not even have enough to pay for their own consumption needs.
In other words, consumption for which the user is obliged to pay the full service price.
World Finance: What sort of investment potential is there in the industry?
Ricardo Roa: Well, as I mentioned before, there is still an awful lot to do in terms of the reliability of the provision of the gas transportation service.
There are many, some two or three million, people in the country who still do not have electricity, and much less have natural gas as an efficient, clean and very economical fuel for those living on low resources.
There is great potential here and in the possibilities our country offers as the power hub between Central America and South America, to be able to take the huge gas reserves in Venezuela and Peru and transport them across our electricity grids and gas networks to users in Central America who consume these services in an inefficient and costly manner.
World Finance: How big an issue is fraud an corruption in the Colombian energy industry and how do you deal with this?
Ricardo Roa: Fortunately the electricity sector in Colombia is well regulated; transactions between agents are very transparent.
Agents have been working in the market for many years and have created a culture of transparency, in terms of information, in the market. This has almost entirely prevented any incidents whatsoever relating to corruption or fraud of any nature in this sector.
World Finance: What is your strategy for future growth?
Ricardo Roa: The plan within our strategy is to have shares in companies within four years. These would be businesses that are already operating related to gas transportation and distribution in Mexico, electricity transmission and distribution in countries such as Brazil and Chile.
We also hope to develop our most important project in Peru called Contugas. To this end, we believe that an important element in guaranteeing the commercial operation and feasibility of this network of pipelines that we have developed in Peru could be the installation of a thermal power plant with a capacity of 250-500 megawatts.
This would facilitate the feasibility and operation of this network and consequently, the commercial operation of greater activity that would allow us to offer the service not only to 26,000 customers as we do now, but to at least 50,000.
We have another important goal, which is Cálidda. Cálidda is a company established ten years ago that distributes gas in Lima, and in which we hope to very quickly reach a growth rate of 100,000 customers per year to gain 1.5 million customers by 2024.
World Finance discusses how structural reforms may herald a new dawn for financial services.
The financial services industry is changing, with demands to make it more inclusive. With me is Brett Scott, financial activist and economic hacker.
World Finance: So Brett; lets start with the occupy movement. Now, this give macro-level critique of structural flaws in our economic and social systems; and you say a new world of financial activism is coming. But can the little people really make a difference? And do the big financial institutions care what they think? And more importantly, should they care?
Brett Scott: Large financial intermediaries rely on small people. For example, people support banks with their deposits; people support the investment management industry with their pensions.
So actually a large part of the power dynamic in the financial sector is between a kind of diffuse group of lots of people, who then support these sort of centralised intermediaries who have lots of power.
And the question is ,when you sort of think about financial reform, is how do you mobilise the power of the diffuse, ordinary people in society, to try to balance and contest the power of financial institutions. And I think people are trying to work out ways in which you do that now.
World Finance: Perhaps the crux of the matter is that they don’t understand financial systems; I think you used the phrase “financially illiterate.”
Brett Scott: People on a sort of ground level have quite a good understanding of their day to day finances. I mean, a lot of financial literacy work goes around, how do I balance my personal budget and so on. There is a lot of good stuff around it, and actually people are quite good at that.
What tends to be missing from a lot of financial education – for example you would never find this in schools – is any kind of education around the political dynamics of the financial sector; and actually the philosophy that underpins it. For example, what even is investment supposed to be for?
World Finance: Well I read you said you’d like to see the financial system be more like Wikipedia; how so?
Brett Scott: Well I mean, Wikipedia is an example of an open source platform. You can sort of see a few different features of Wikipedia.
In the one sense, it is open to people participating, so you could actually go in and produce stuff on Wikipedia. So in a sense there is a lot of work to be done in opening up the production of financial services to the average person: for example, through things like peer to peer finance.
On the other hand, Wikipedia is also something that has widespread access, so there is a whole lot of work around financial inclusion: how do you expand access to the financial system? And then there is a third element of this analogy with Wikipedia, which is that it has a transparency process, or an accountability process, where people can contest changes.
World Finance: So in essence you’re talking about a free for all, maybe even getting rid of regulators. Might we not see a Snowden situation?
Brett Scott: The point is, you want to create a more diverse financial system. So right now the system that we have is very, sort of, passive consumers of financial services; then these quite aggressive financial intermediaries; and then regulators that have to try and keep the financial intermediaries under control.
You would actually want to try and create more of a balance between regulators, smaller financial institutions, and more citizen power in the process.
World Finance: Your book talks of zones of finance that feel intuitively wrong to a lot of people, what are we looking at exactly?
Brett Scott: People have a sense that the financial sector is some kind of mysterious thing outside of themselves. And they sort of think of Canary Wharf and these big towers.
And part of that is because of this issue of financial literacy; but also there are a lot of things that the financial industry does that is very large scale and quite opaque and complex; it give a sense of alien-ness to it.
World Finance: But isn’t this true of any industry, I mean the layman doesn’t understand, you know, most industries; so why does it even matter?
Brett Scott: Its true, I mean for example, we don’t understand necessarily how the bridge that goes across a river stays up, because we haven’t studied engineering and so on. But on average it seems to work, and in a way it doesn’t affect our day-to-day lives: the fact that we don’t necessarily understand that.
I would argue, personally, that in the realm of finance people’s day-to-day lives are constantly impacted by this; and they are constantly having to interact with the financial sector in quite a personal way.
So that lack of understanding has a lot more problematic dynamics, especially considering the fact that the financial industry has played such an important part in the overall economy, and it has a lot of political power. Not understanding it continues to help it get that political power in Westminster and other places.
World Finance: You’ve referred to an unspoken class cohesion between financial professionals and politicians who attend the same universities. So are you suggesting a problem with our education system, rather than isolating just one section of society?
Brett Scott: The political power that the financial sector has within the UK economy… there’s a lot of, sort of, class dynamic to that. The same person who is a fund manager also probably is friends with people who are politicians.
So to some extent there is a class analysis that you can do, and that obviously links up to education in this country.
For example Oxbridge. I did a masters degree in Cambridge University, and certainly in Cambridge University there is a very big implicit understanding that what happens there is that some people go to becomes politicians, some people go to become financiers or accountants or lawyers; so the high end. And others go and do other things.
But there is a definite sense that these universities bring together the elite class cohesion.
World Finance: So how do you foresee the landscape of the financial industry in the future?
Brett Scott: It’s very hard to know what will happen, there are so many chaotic different forces in the world.
I think one thing you could definitely say is that there is a generation change occurring over time. So for example, a lot of the management level in banks right now were educated say in the 1970s, 1980s. They had certain attitudes about the world.
The new generations that are now moving up the management ranks of banks have different viewpoints. They tend to be more liberal, they tend to have more understanding of environmental issues. That’s a positive trend.
I think it will be hard to see banks of the future not caring about, say, sustainability. Although you don’t know how long that will take. On the other hand, there’s also the element of technology: huge, big-data technologies to sort of, crunch consumer profiles, and target people and so on. So those are some potential trends.
World Finance speaks to Elizabeth Ebi, CEO of Futureview Group, on the potential for Nigeria’s equities market to successfully spring back from its lacklustre 2014, the economic impact of Boko Haram, and how the regulators’ efforts are preparing a stronger platform for foreign direct investment in Nigeria.
A rebound is expected for Nigeria’s equities market, this after a decline of 16 percent was recorded in 2014. Now here to shed light on these future prospects, Elizabeth Ebi.
World Finance: Elizabeth, thank you so much for joining us today. Tell me about some of the macroeconomic factors that contributed to the drop, and the successive uptake that followed.
Elizabeth Ebi: Our markets started very beautifully in the year 2014. Everything was in equilibrium, the exchange rate was in line, our inflation rate was as expected. We got good news from the National Bureau for Statistics that Nigeria had become the largest economy in Africa. Everybody was excited.
But then comes the third quarter; global markets started slowing down. China’s growth reduced, importation declined. Back home the production also was reduced, and that affected revenue inflow into the economy. The Central Bank of Nigeria (CBN) had to devalue the Naira in order to contain dwindling foreign reserves.
Boko Haram was threatening up north, with the insurgency. You are also aware that we are having elections right now: people are unsure as to what is happening for fear of currency risk. The foreign investors started taking off of the market, so that caused the market to decline.
When fund managers saw the rate of decline, they also saw opportunities. So they swooped on the market and began to pick up quality stocks again. So that saw the rebound towards the end of the year.
World Finance: Tell me about the recapitalisation efforts that have been announced by the Securities and Exchange Commission.
Elizabeth Ebi: As you are aware, our market is regulated by the Nigerian Stock Exchange and the Securities and Exchange Commission.
Since the global downturn, there has been a determination by both regulators to make sure that those organisations operate on world class standards.
For the stock exchange they have already put a robust platform – the X-Gen – to make sure that trades are executed seamlessly, efficiently, and transparently.
They’ve also ensured all their processes, corporate governance, everything is in line. And that’s why they were able to have been admitted into the World Federation of Exchanges.
With all of this in place, with a market as robust as that, it behoves the operators to have the right balance sheet, to have the right man power, to have the right processes in order to execute deals in a world class standard so that we have a perfect market.
World Finance: Everything that you say today Elizabeth, is imbued with this confidence in the ability for the market to really reassert itself and to continue this growth pattern. So investment prospects as a result you must also think are very positive for the country moving forward?
Elizabeth Ebi: We have the platform ready, the market is also in sync with these plans. The benchmark for lending has been set at 13 percent. We have inflation on a steady mode for the past 12 months. So it looks like everything is ripe!
We have Seplat shares selling at a discount of 61 percent, Dangote Cement at a discount of 40 percent, Nestle at a discount of 55 percent. That means that the market is ripe and is ready for investors.
However, I think what’s critical is for us to get this election right and have a proper transition, stabilise our currency; and we’re good to go.
World Finance: The government is going to play a decisive role, the future government that is. Tell me what sort of financial regulatory upgrades would you like to see put in place?
Elizabeth Ebi: The Nigerian Stock Exchange and SEC have really done so much to make sure we have all it takes in order to attract the world into Nigeria. And they already have a 10 year programme on what to do; and that takes off this year up to 2025.
So with all of that in place, I think what needs to be done is to make sure that we continue to stay focused.
I expect the government to provide all the necessary support, provide us with an enabling environment, a stable exchange rate, and a calm stable political environment so that people know that their monies are safe.
World Finance: Finally, what role would you like Futureview to play in the country’s growth in 2015?
Elizabeth Ebi: We’re looking at how we can support the economy. We are focusing on strategic alliances to help to deepen our products offerings, so that we can together support the growth areas in the Nigerian economy.
The oil and gas sector – there are a lot of companies that are struggling to raise finances.
We still have to explore our mining industry, which has a lot of potential to grow the market.
We are also looking at the agricultural sector: we have more than 70 percent of arable land that are yet to be cultivated. And the process, the value chain of agricultural production needs to be supported.
We’re also targeting those – the more than 70 percent of the population – that are the youths under 30, who are struggling to find their feet in the small and medium enterprises in the economy.
This is where we are as the time goes on. Futureview will continue to evolve, and as our name states we’ll always have the future in view.
The Islamic State of Iraq and the Levant, the jihadist group know as ISIL or the IS, will lead Iraq’s oil dependent economy to contract by 0.5 percent this year, according to IMF predictions. World Finance speaks to Baroness Nicholson about the country’s prospects after “40 years or more of massive horror”.
World Finance: Baroness Nicholson, 0.5 percent doesn’t actually sound that bad, and it’s not as high as initially predicted. So why have predictions changed?
Baroness Nicholson: Predictions have really changed because of the fall in the oil prices globally, and naturally Iraq as one of the key oil producers internationally is automatically affected. The massive invasion of what I would prefer to call the Daesh, the Arab term for ISIL, meaning the so-called Islamic State, has naturally had a great impact on the whole region.
The Daesh invasion has had a terrific impact on the poor city of Mosul and its inhabitants. Recall that Mosul was once, pre-Saddam really, the most booming city in the whole of Iraq, bar Basra, for trade and industry because of its unequalled access to the northern region, to Turkey, and of course in that sense to Iran when Iran is open for business again, and right up further with the Caspian Sea. So the loss of Mosul is drastic.
World Finance: What’s the economic situation on the ground today in Iraq in terms of figures?
Baroness Nicholson: Iraq as a whole has a very large income indeed, but the ministries are not yet able to offer the public services to the level of competence that the population has a right to deserve, so this is quite a gap in time and in actuality between the enormity of the funding pouring into the coffers of the federal government and its capacity to actually use it constructively.
If you think that Iraq has more or less been at war for 30 years, that is not surprising. So it’s taking Iraq time to get back on her feet in terms of services for her people. So I suggest that the enormity of the income, Iraq is the second biggest per capita, theoretically, income in the globe, and the government’s own capacity through the ministries to be able to deliver the services that money should allow them to deliver them to the same standard as other countries with developed economies, that is still lacking. That is the same throughout all 18 governorates.
World Finance: Well Al Jazeera reported that Iraq’s financial sector is facing recession. Did it ever actually recover from the US invasion?
Baroness Nicholson: Iraq has been at war for at least 30 years. Before that, the destruction of the head of government, the royal family, and the destruction of the whole system, which Saddam himself engineered, Iraq has been drastically unstable since then, ruled by terror and ruled by dictatorship. You look at the impact that the Daesh ISIL have had, their dictatorship, Saddam wasn’t very far off that in his last decade at least.
If you just look at health, Iraq had a really good health system, which it took off the British National Health Service system, and then that of course collapsed completely with the amount of war, civil war, invasions. No health system could have survived, and it hasn’t.
That’s why it’s very very difficult to pinpoint one single thing. It isn’t a single thing, it’s 40 years or more of massive horror, which has got worse and worse at particular moments.
World Finance: Well let’s look at oil production now. This is of course at the heart of Iraq’s economy, but OPEC has said that it’s not going to limit production, which means the oil prices are falling through the floor. So what sort of impact will this have on Iraq’s economy?
Baroness Nicholson: 80 percent of Iraq’s oil is produced by I think Shell and BP. But you see the enormity of the income that Iraq has already got, and will still be pouring in, and the federal government’s relative inadequacy in terms of expenditure systems, frankly if they earn a small proportion of that, the country would be much better off in terms of service provision and the population would have all the electricity they needed, and so on.
World Finance: And how are other industries faring?
Baroness Nicholson: Very open for bids and contracts is construction and infrastructure. After this four decades of destruction, my goodness, building is needed. This problem with the jihadists is not going to go away tomorrow. This is going to take quite a long time. So housing is needed. Schools are needed. Many of this deserted population is living in schools, and many buildings are needed as fast as possible, but they must be well done.
World Finance: What can be done to attract private investment, and do the rewards actually outweigh the risks?
Baroness Nicholson: The trade industry, professional services are sorely needed, and it is essential to get in there and do it. It makes business sense, it makes commercial sense, and it makes huge sense for the population of Iraq and thus for the shareholders of the companies in question.
World Finance: How does it make business sense?
Baroness Nicholson: Because Iraq has such a huge possibility of business, and industry. Probably one of the biggest unexplored major energy countries of the globe. Risk is a part of life, risk is with us always everywhere. In that sense, I’m sorry to say that most energy countries do now offer quite a significant degree of risk. Perhaps they always did but we just didn’t notice it so clearly. Libya, Nigeria, and so on, sadly there is risk everywhere.
World Finance: Well the World Bank ranks Iraq 156th out of 189 countries in its ease of doing business report. So what can be done to make it better on this scale?
Baroness Nicholson: It is never easy to do business in a country that has come out of dictatorship. Because dictatorship stops people not just taking risks, but actually making decisions. So people are scared stiff to make decisions in a post-dictatorship country.
World Finance: So how do you see Iraq developing in the future?
Baroness Nicholson: Iraq will undoubtedly develop, and I believe that business and industry, particularly form the West, with the standards that we have adopted in the West with the anti-briberies act here and in the USA, with the World Bank standards, I believe we can transform Iraq for both her people and her businesses and her industries.
All the ethics that come in with a good business, those are the things that can ground a population and can assist a government in starting to recognise what it should do, and how it can do those things. So business and industry and professional services are the key to success.
Hard to believe that it was just a few years ago that the US faced economic meltdown. One of thek key decision makers at the time was Randall Kroszner; he speaks to World Finance about the decisions they made, the loss of Lehman Brothers, and the one thing nobody saw coming.
Hard to believe that we were, just a few years ago, facing an economic meltdown in the United States. Now one of the people at the helm, making the big decisions, joins me now – ex-Governor of the Federal Reserve, Randall Kroszner.
Word Finance: Do you think that all of the right decisions were made by Bernanke at the time?
Randall Kroszner: Well, I was one of the fellow Governors, along with the Chairman, making these decisions – so you’re not going to get an unbiased view from me. So we obviously tried to do our best in very difficult circumstances. I think the emergency liquidity policies that we undertook, the various lending programmes, the international swap agreements that helped to prevent meltdown in other countries around the world, that had very strong demand for dollars but didn’t have them – I think those are very helpful in one, fighting off deflation which is something that central banks can do if they’re active about it, but sometimes they’re not as focused on it. And two – avoiding more broadly a kind of repeat of the great depression. The unemployment rate in the US went up by 10 percent during this crisis – during the 1930s it was over 20 percent. So I think we did a lot of things that helped to prevent the crisis from being nearly as bad as it was back in the 1930s.
Word Finance: Now, if you could go back – what would you change?
Randall Kroszner: So one of the things that we didn’t have enough insight into were some of the interconnections in the economy. And so we were focused on regulating banks and focused on banking institutions. Other regulators were focused on other types of institutions. And there wasn’t enough information exchanged between them to see the interconnections, to see those vulnerabilities, those fault lines and weaknesses.
I wish we could have had more foresight to say, well rather than us just look at our institutions and you just look at your institutions, let’s look at the interconnections and relationships between them – and that’s really where the weaknesses were.
Word Finance: Do you think that there was a bit of naivety in terms of impact the housing crisis played towards the toppling effect of the US system?
Randall Kroszner: So one of the things we were doing was international comparisons, to see how the US housing market was doing relative to other countries. Because obviously housing prices were moving up reasonably rapidly. But we, as well as the IMF, did some of these comparisons and the US I think was even in the top five of the countries seeing housing price increases.
That gave us a false sense of confidence that the US was not an outlier. The challenge was that there was a risk factor in housing around the world and it wasn’t just us in the US, but people in Spain, people in many other countries didn’t see that there were these challenges there also.
Word Finance: Should we be mourning the loss of the Lehman brothers or is the US really better off without it?
Randall Kroszner: Well certainly the Federation, as well as other regulators and supervisors, were trying to find a merger partner for Lehman Brothers – and that didn’t work. There were some challenges with the UK Government and being able to implement a takeover by Barclays, and so we were left that weekend dealing with Morgan Stanley, Goldman Sachs, Merrill Lynch and then there was no merger partner for Lehman Brothers.
The key challenge was what would be the consequences for the markets more broadly? And this goes back to the other answer that I gave you – the consequence was in the money market funds, which we didn’t see because we didn’t regulate those funds. People weren’t looking to see if there was a concentration of Lehman Brothers debt obligations in one particular money market fund, that fund got into trouble and then that triggered trouble throughout that industry. And so if we had been able to see those interconnections more clearly earlier, we might have been able to prevent Lehman Brothers demise from causing such problems throughout the system.
Although I think Lehman Brothers was really much more of a symptom rather than a cause. I mean even if something could have been done to put a band-aid on Lehman Brothers – the vulnerabilities were there in the system. They needed to be addressed much more fundamentally and something like the Troubled Asset Repurchase Programme, the TARP Program, which injected capital into the financial system, was crucial – and without that it would have been very difficult to stabilise the system. We might have seen another institution, perhaps a larger institution, get into trouble.
Word Finance: Do you think the right banks were bailed out?
Randall Kroszner: So we were dealing with the challenges as they were coming, and certainly they were coming quite rapidly, and thinking from a system point of view what would be the best to stabilise the system. Because by doing that we could prevent a meltdown, a repeat of the great depression that would have led to a 20 percent unemployment rate, housing prices falling by 60 or 70 percent rather than only 20 or 30 percent. So we were trying our best trying to try and deal with the challenges as they came along.
Word Finance: We’re now a few years out since this crisis happened. Did you ever expect the US economy to be where it is today?
Randall Kroszner: When I left the Federation in early 2009 I don’t think anyone sitting around the Federal Open Market Committee table, making decisions about interest rates, would have thought that in 2014 the debate was – well when in 2015 would interest rates rise – that they would be so long in coming up. We brought rates down to roughly zero at the end of 2008, and that six or seven years later interest rates would still be at zero – I don’t think anyone really foresaw that.
World Finance: So how are you feeling in terms of progress – where do you think the US stands to go a year from now?
Randall Kroszner: So I think it was very important that the Federation did what it did to prevent a repeat of the great depression. But central banks can do the necessary job to prevent the deflation, or in other periods to prevent high inflation – but they aren’t sufficient for getting the economy going.
Fiscal uncertainly is something that weighs heavily on businesses uncertain of what their taxes are going to look like over time, uncertainly on regulation – a lot of uncertainties surrounding the President’s business healthcare program. And so I think that’s been slowing us down. If we can deal with some of these issues, I think that will help to put us on a more solid foundation.
I wish I could say everything’s solved now – but it’s a little bit too early to tell whether the elections are going to solve problems. But we do seem to be making progress in the labour market – we do seem to be making progress more generally with production. But we need to restore confidence in investment to get productivity to grow, to get wages to grow and really come back more strongly.
The power-players have gathered for yet another year at Felaban. With nearly 2,000 representatives from financial institutions from markets around the world present, what are the key themes being explored by developed and developing nations? David Schwartz, CEO of FELABAN’s key partner, the Florida International Banker’s Association, tells all.
The power players have gathered for yet another year at Feleban. Here to tell us about some of the highs and lows of the event – David Schwartz.
World Finance: David, I know thousands of people who are attending this year – bankers from all over the world. Tell me, what were some of the big takeaways for you?
David Schwartz: Well you’re right – what we’ve estimated so far is about 1800 participants from 50 countries around the world. So as you can see this is a central meeting point for bankers from around the globe, to do business in Latin America and I think that’s what underlines the importance of this event.
World Finance: Tell me – how central of a role does this particular event have for the banking sector in Latin America?
David Schwartz: Well for Latin America it’s of the up most importance because what your looking at are banks coming from around the world – Europe, Asia, the US – seeking to advance lines of credit and offer financing here for everything from trade finance to infrastructure projects. And this is what helps boost the economies in these countries, which have been struggling of late.
World Finance: So do you think there was any really big takeaway in terms of what significant steps need to be put in place? For instance from The Finance Minister of Columbia, who was speaking earlier.
David Schwartz: Well I think we heard two common themes. One was of course financial inclusion, which is very important in some of the poorer countries in Latin America, and without that you don’t create a middle-class. I think that was a very important note from the speech of the Minister.
The second was technology, because technology and those advancements will really help bring those people into the financial services industry. Not only to help them bank but also to help them create their own businesses – many of these people have ideas and they want to create them, but they don’t have the means to do it. And this will help them.
World Finance: Next year – Miami. What can we expect?
David Schwartz: Well next year we will be celebrating 50 years of Feleban, so I’m not going to release any secrets or unveil any secrets – but will prepare something very special to celebrate the 50th anniversary.
World Finance: Now reflecting on the Americas in general – as much as emerging markets need some of the developed economies, the developed economies need the emerging markets. Is that going to be a theme that runs through next years conference?
David Schwartz: That will always be a theme in every conference because while we talk about the developed nations, really today it’s only the US and maybe the UK, that have come out of the crisis with any type of future hope, in that the economies will remain stable. We see that Europe is struggling still. Japan today officially announced that they have entered into a recession. So we need trading partners, and Latin America has always been the top-trading partner for the US.
World Finance: Why do you keep going back to Miami – what is it about that community that really reflects the ambitions of the banking sector?
David Schwartz: Well we like to say that Miami is the gateway to Latin America, and in some peoples minds Miami is the capital of Latin America. Don’t say that to the Latin American’s because it could be offensive, but culturally and geographically we are the meeting point.
We are able to have events like Feleban in Miami, speak to them in their own language – people of their own culture are organising these events. In Miami of course it’s sunny all year round – we have the ocean. And most importantly for a lot of them, we have shopping.
World Finance: Ok now one last point – I know FIBA organises quite a few events around the banking sector, the anti-money laundering conference that’s going to be held is personally a lot of interest for me. Can you tell me, what can we expect from it?
David Schwartz: Well this has been a challenging year for the banks when it comes to regulation and compliance. We will be holding the 15th annual anti-money laundering conference on March 5th and 6th.
We have a lot of regulators that have reached out to us, and policy makers, they want to come and discuss the issues at the conference. And that’s always been the most important aspect of it. We have an open, free flowing dialogue between the industry, policy makers and regulators.
And given the current challenges, I think you’ve seen a lot of the rather substantial fines that have been handed out to banks for failures with their money laundering programmes – this is going to be a very important event, a very key event this year. Because we have regulators and policy makers issuing guidance saying banks really need to work better – and you have the banks and the industry of course saying we’re over regulated.
So we’re going to have a very interesting and perhaps controversial discussion on some of the main issues.
World Finance: David Schwartz, thank you so much for joining me today.
The surprising fall into a recession – that’s how Japan’s current economic situation is being described by market watchers. BTGPactual’s Mauricio Gutierrez discusses Japan’s presence in Latin America’s vital infrastructure sector, and the possibilities that may lay in store as banks react to its new economic reality.
The surprising fall into a recession – that is how Japan’s current economic situation is being described by industry watchers. Here to shed light on what that means for foreign lending, Mauricio Gutierrez.
World Finance: The news has just hit, what do you make of it?
Mauricio Gutierrez: Well I think the financial situation in Japan has impressed us for quite some time. In Latin American markets where the Japanese banks compete, we have seen them to act very aggressively, to have cost of funds that are below zero sometimes, so that allows them to lend money to projects still at home, and I imagine other countries as well.
Very aggressively, we have seen them compete with us in our projects, in infrastructure projects, and we’re very impressed. I don’t think this news that we’ve just had of them going into a recession will change that, because if anything we will still see low interest rates in Japan, and very low cost of funds. So if there’s less activity in Japan, the likely scenario is that this aggressiveness outside of Japan will continue.
World Finance: Do you see more opportunities coming out of Japan in light of the current destabilising economic situation that’s happening?
Mauricio Gutierrez: I see them very present in the Latin American markets, very aggressive. I don’t see that aiming down, the opposite. A week ago I just saw a very aggressive proposal from a Japanese bank to a project that we’re also approaching. So I think that will continue.
Maybe I’m being optimistic, maybe some of these banks will have problems at home that will affect their appetite overseas, but I think LatAm is a natural market for them to grow, they’re present in the main market. I think they will continue taking advantage of the growth that is coming out of this region.
World Finance: It sounds like optimism abounds from your perspective. Mauricio Gutierrez, thank you so much for joining me today.
As the US prepares to end its monetary easing programme, what potential financial stresses should the federal government keep an eye on? Former Fed governor Randal Kroszner talks unemployment, manufacturing and the tricky question of whether the US people have confidence to invest again.
As the US prepares to end its quantitative easing program, many question what is going to happen to the economy in the days, months, years to come. Former governor of the fed reserve Randall Kroszner joins me now. Thank you so much for joining me today.
World Finance: So as I said, what is going to happen, do you think the US is really ready to end this program?
Randall Kroszner: Well I think the fed felt that there had been enough progress in the labour market. The US economy was sturdy enough to stop the additional asset purchases. We have to remember that the fed’s balance sheet is now $4.5tn. It had been $800bn, so it’s dramatically larger. Even though they’re not purchasing more asset, they’re still providing a lot of support for the economy.
World Finance: Absolutely. Now you were in charge when the 2008 financial crisis hit. Bernanke, many say, was quick to respond. Do you think that he put in the measures that needed to be taken at that time?
Randall Kroszner: We tried to act very quickly. One of the things that really haunted us was what happened in the 1930s when the shocks came and the fed did nothing. Milton Friedman, one of the great University of Chicago economists, had said that the depression became the Great Depression because the fed didn’t act, and so we were certainly not going to make that mistake. We undertook a lot of programs to avoid a deflation, avoid a repeat of the Great Depression. Was everything perfect? Certainly not. But did we avoid the worst outcomes? I think we did a reasonably good job.
World Finance: Do you think the labour market was hit too hard by the measures that were put in place?
Randall Kroszner: We were trying to provide support for the economy and for the labour markets. The shocks hit very hard across large and small financial institutions, people who owned homes, and in the US the main savings vehicle for people are their homes and they fell dramatically in value, so consumption was down, and it was a challenge overall. So we’ve had a slow recovery, but we’ve had a steady one. It hasn’t been as robust as we would like, but fortunately it’s been a bit stronger than many other major countries around the world.
World Finance: So do you think that the US labour market is now poised to continue the slow but steady growth that we have been seeing?
Randall Kroszner: So I think that’s likely. There could be so many shocks that come in, there are so many geo-political uncertainties, whether it’s the Middle East or the Ukraine. We see what happened Vladimir Putin storming out of the G20. That doesn’t suggest that everyone’s working perfectly together. So there are lot of risks out there, but if there’s no major shock that comes in, it’s likely that the labour market will continue to recover, but we’ve still got a long way to go. There are a lot of people who are not in the labour force who would like a job, there are a lot of people working part time that would prefer to be full time.
World Finance: The precarious balance that we face right now, a lot of focus has been on what is it going to do to the wider economy? But as you and I know, a lot of American money that comes in is fuelled by a stable currency, but the currency rising, what is that going to do to manufacturers who rely very heavily on exports?
Randall Kroszner: We’ve had a lot of productivity growth in manufacturing in the US over time, and I think the manufacturing sector in the US will be reasonably robust to these changes in the exchange rate. The main challenge is going to be weak demand in much of the rest of the world.
World Finance: How do you think the US can stave off the impact of that in addition to the end of the monetary stimulus programs?
Randall Kroszner: So it’s challenging times, and as I mentioned, there could be a lot of geo-political shocks that come in. But it seems that there’s a gradual restoration of confidence, a gradual willingness to hire and hire full-time rather than part-time, although we still haven’t made as much progress there as we would like, and as those trends continue we should be on a reasonable path, not an incredibly robust path. The US is much less of a manufacturing economy than it once was, so we’re not as dependent upon manufacturing in our core growth, but it’s still an important contributor.
World Finance: Do you think we’re looking at a different USA, different qualitatively in terms of the mood, the willingness, risk projections. Do you think that people are really ready to take that next step to invest, to buy homes, that sort of thing?
Randall Kroszner: I think that’s a very important point, because there’s a lot of uncertainty, particularly on the fiscal side. People are not quite sure what taxes are going to look like, they’re not quite sure what the level of government expenditures are going to be, and we haven’t really lifted that cloud of fiscal uncertainty either in the short run or the long run, and that’s something that’s really been holding back investment, particularly by firms.
If firms aren’t investing, they’re not going to be hiring as much, and if they’re not hiring as much and they’re not giving the capital goods for the workers to work with, we’re not going to see wage growth to be that strong, so I think that’s the major gap in US policy right now, is that fiscal uncertainty both in the short and long run.
World Finance: And what impact is political divisions going to play in the future of the US economic system?
Randall Kroszner: If we’re optimists, we could say well this is what happens in the last few years of the Clinton administration, a Democratic president, Republican congress, and they actually got a lot of things done.
I’m not as optimistic now to be able to restore that kind of working together relationship, but I think both the Republicans as well as President Obama want to get some things done, and I think we’ll be able to make at least some progress on some small things. I don’t think the big issues related to fiscal uncertainty, the long term unsustainability of our spending trajectory, that’s not going to be resolved before the next presidential election, but I’m hopeful that we can make some contributions. We’ll see.
Basically, if we can get a few small things done that will be a good sign, but if by the end of the year we can’t get anything done, then unfortunately it’s going to be business as usual.
