Wednesday, February 25, 2009

Canada's Banks a Model in Bad Times

Sources:


Amid the epic bank collapses and other woes in the United States during the global financial crisis, Canada's banks have remained largely stable. When US President Barack Obama visited Canada on his first foreign trip last week, he remarked that perhaps the US banks should be taking hints from those across the border. A report by the World Economic Forum named Canada's banks as the most sound globally.

Canadian banks, while not unaffected by the global financial crisis, have been able to weather the crisis' effects much better than their large US counterparts. Canada's bank stability is due in part to more conservative practices - even in boom times, Canadian banks did not lend as aggressively as US banks. Canadian banks also operate in a more highly regulated environment. And Canada's investment banks were brought under that regulatory umbrella when they were bought by traditional banks in the 1980s, something that didn't happen in the US.

Canada's banks are also more centralized than US banks: the six biggest control over 90 percent of Canada's banking assets. And these banks work closely together, in a "clubby" relationship that led one critic to allege Canadian banks are not forced to compete for customers like those in the US.

Nevertheless, it appears that President Obama views Canada's banks as at least a lesson, if not a model, for US banks in the future. While the current financial crisis has seen the failures or sales of US giants such as Wachovia, and with the Citi group now teetering on the edge, Canadian banks have maintained their high credit ratings. The Canadian banks Toronto-Dominion and RBC are two of only seven banks in the world that are still rated AAA by Moody's.  


Discussion:
1. How should the US incorporate the features of Canada's banking industry into a future regulatory or supervisory structure?
2. In boom times, do the Canadian banks' conservative behavior and highly regulated position decrease their global competitiveness?

Bernanke Cautiously Optimistic About the End of the Crisis

Sources: Washington Post, “Bernanke Hopes 2010 ‘Year of Recovery’ for U.S.”; Financial Times, “Bernanke Calms Nationalisation Fears

Chairman of the Federal Reserve Ben Bernanke told Congress that 2010 could be a “year of recovery” if the government’s efforts to prop up the financial industry succeed. If the government can’t stabilize the banking system and financial markets, then the recession could continue into 2010.

The Fed began stress tests on the nation’s major banks this week. Stress tests are intended to measure how much additional capital a bank would need to continue lending through a deeper-than-expected recession. If a particular bank is on the “brink of failure,” then the government will provide capital in the form of securities that convert to shares to shore up common equity as needed—and eventually, if the bank’s situation is dire enough, it would be seized by government regulators and effectively nationalized.

Bernanke also said that offering a more in-depth view of the Fed’s long-term inflation forecasts would help to calm fears and perceptions of long-term inflation expectations and thus keep actual inflation stable.

Bernanke asked Congress to make “fixing” the banking and financial systems its top priority. Congressmen disagreed over whether to give the Fed more regulatory responsibility over the financial system as a whole—or whether giving the Fed “a larger plate” makes it less likely to succeed at what it’s already charged with doing.

Questions for Discussion:

Do you think the economic stimulus, coupled with the Fed’s efforts to adequately explain their own predictions about the future of the economy, will end the recession in 2009? Is it too early to tell?

Sunday, February 22, 2009

Mexico Comes to Reality; News From Across Latin America

Sources:
Acton
Latin America Press
Financial Times
China News

After months of claiming that the global credit crisis would not have a large effect on Mexico, the government acknowledged that its country is heading towards a recession. The acknowledgement came amid reports that the country saw a 1.6% contraction in the last quarter of 2008, the first such quarterly contraction in 6 years. Mexico cites low demand from the United States, its main trading partner, as the main reason for the likely recession.

The International Labor Organization reports that unemployment is set to rise across the entire region, with the Caribbean being hit particularly hard. The recent 5 year trend of lowering rates of unemployment is certain to end this year. The ILO projects unemployment to increase from 7.4 to 8.3 in 2009. The usual culprits in the global financial crisis are again being blamed: falling commodity prices, scarce availability of credit, and reduced remittances.

Countries across Latin America are announcing plans to help reduce the disastrous effects of the credit crisis. Mexico plans to introduce $54 billion recovery package and will freeze gasoline prices. Brazil plans to set aside $45 billion in credit for business and also announced an ambitious plan to build 1 million houses in an effort to shore up its construction industry. Argentina will invest $20 billion in infrastructure and education projects, and Panama is setting up a $1 billion fund for its banks from loans from developmental banks.

Some critics think that in addition to such measures, Latin America must demand that the United States and Europe honor their trade agreements. Many worry that the recent “Buy American” initiative found in the US stimulus bill will have an adverse effect on Latin America.

Questions:
1) What type of political leverage could Latin American countries use to enforce their trade agreements with the US and larger European countries? Should these larger countries continue to honor such agreements for moral reasons?
2) How successful do you think the various recovery packages will be?
3) Do you think a gasoline price freeze will be productive? Isn’t it true that gasoline prices have fallen to record lows? When gasoline, or oil prices finally start to raise again won’t that be a signal that the worst of the financial crisis is over?

Nigerian Banks See Signs of Hope Amid Financial Crisis

Sources:
Reuters
Financial Times
ThisDayOnline

The African Development Bank (“AfDB”) has announced that it will extend $100 million of credit to Nigeria’s Intercontinental Bank. The money is supposed to go towards financing small to medium sized businesses with a priority for projects that are ready to go and that offer great growth potential, particularly those that are export producing. The industries that will receive an influx of credit include construction, manufacturing, tourism, and transportation.

Nigeria’s ability to offer loans has been curbed recently and has seen its foreign credit lines dry up, both due to the global credit crisis. However, Nigeria still has great potential as a profitable frontier market. Nigeria boasts the largest population of any African country at 140 million people. Business consultancy African Rainbow's Star of Africa index ranks 53 African countries and lists Nigeria as the most profitable country based on potential for growth in energy and communication consumption, among other factors. Indeed, Nigeria’s infrastructure and telecommunications industry are listed as offering the most potential.

Nigeria’s potential growth, even during the financial crisis, has not gone unnoticed by private investors. George Soros, who manages a $20 billion dollar hedge fund has sent representatives to Nigeria to find investment opportunities in Nigeria’s financial sector. Many foreign investors removed their capital from Nigeria when they began to feel the pinch of the credit crisis, and this has lead the financial sector to lose some of its value recently. Soros views this as an excellent opportunity to invest in Nigeria at a bargain price. Soros, and other investors, however, warn that Nigeria must improve financial transparency and governance before they will resume investing large sums of money in the country.

1) What is the relationship between the size of Nigeria’s population and its potential for growth?
2) A large portion of Nigeria’s economy is attributed to its oil exports. Is it wise to invest in oil infrastructure at a time when the price of oil continues to decline?
3) Should the AfDB focus its resources on countries like Nigeria that are doing relatively well compared to its African neighbors? Is it more efficient to spend money in a country that can use it right now for economic growth or to spend it on countries that are many years away from seeing large growth in their economies?

Friday, February 20, 2009

Medvedev Criticizes Slow Movement on Russia's Economic Crisis

Sources: International Herald Tribune, Russian President: Government Too Slow in Crisis; AFP, Medvedev Slams Russian Lethargy on Crisis; International Herald Tribune, Numbers Illustrate Russian Economy's Weakness; Reuters, 300,000 Russians Lose Jobs in January

Russian President Medevedev criticized the government for moving too slowly to address the economic crisis in an address today before federal and regional economic officials. Though the criticisms were aimed directly at regional governors, and though Medvedev fired three of these governors early this week, there is also speculation that the indictment of the government's response to the crisis was indirectly aimed at Prime Minister Putin, who is in charge of economic policy.

Putin and Medvedev have worked well together since Medvedev took office last year, but the financial crisis has also exposed some differences in the leaders' response styles. This is the third indirect criticism Medvedev has made of the former President. Specifically, Medvedev complained that implementation of responses has been inadequate, too slow, or non-existent. He stressed the need to diversify away from a singular focus on oil and gas, the need to develop infrastructure, and the need to strengthen the financial system.

One interesting point is that it is Putin whose emphasis on centralization as President gave Medvedev the powers that he has over the regional governors, including the ability to fire them. One major element of Putin's presidential legacy is a return of control to the federal government after Yeltsin's de-centralization, giving the federal government exclusive legal control over more areas and strengthening political control over the regions. Putin's reforms also strengthened the federal government's tax collection abilities, which were dangerously weak in the 1992-1998 period under Yeltsin, leading in part to the 1998 Russian financial crisis.

As Minister for Economic Development Elvira Nabiullina pointed out at the same event where Medvedev spoke, one of Russia's main concerns in the current crisis is predictability. Because financial markets are not predictable, and movements are uncertain, investors have difficulty deciding whether and where to invest. This financial crisis has shown the importance of investor confidence throughout the world, but it is particularly fragile in emerging markets such as Russia where swings in the markets may be more volatile. The government intends to address this issue by prioritizing investment in certain areas in order to influence and stabilize certain markets.

Another major problem is employment, as recently released numbers reveal. Russia recorded around 300,000 job losses in January, bringing the total number of unemployed persons in the country up to 6.1 million. This makes infrastructure projects especially crucial, as they will not only direct public spending into an area that expands Russia's long-term productive capacity, contributing to sustainable growth, but also create new jobs for these unemployed Russians.

Of course, such spending does affect the budget's balance, and a combination of increased social spending and oil prices that continue to fall have increased Russia's deficit to 8% GDP. The newest budget is not only based on an oil price ($41 a barrel) that is higher than the current price, but is significantly larger than the previous one. About $52.3 billion of government money is being spent on efforts related to economic recovery, but the government hopes that this spending will stimulate the economy and pay for itself in the long-run. Capital investment also fell three times more quickly than predicted in 2008, and average wages fell 9.1% in a year, adjusted for inflation. Investors' total withdrawal of capital from Russia since August stands at $300 billion.

Questions:
1) Do you think Medvedev would be wise to separate his approach from Putin's as the crisis continues, looking for new solutions, or should the two leaders make efforts to work together to avoid a schism in a time where cooperation is necessary to weather the economic storm?
2) Is heavy social spending with a view to stimulus wise at this time, or would it be a better idea to keep the budget balanced and avoid an untenable debt situation?

Tuesday, February 17, 2009

German Recovery May Be in Sight Despite Deep Recession

Sources: Reuters, German Economy May Recover by Fall; AFP, German Investor Index Puts Glimmer Into Gloom; Bloomberg, German Stocks Fall for Second Day, Led by Banks, Daimler, BMW; Forbes, German Economy Could Shrink More Than 3 Pct in '09

Despite a recession that is the worst since the Second World War in Germany, there is a light at the end of the tunnel according to two recent forecasts. On Sunday, the German Economy Minister predicted that economic recovery will begin this fall, encouraged by a fifty-billion-euro stimulus package that the German parliament approved on Friday. Then, an investor confidence index released by the research institute ZEW indicated a large increase in confidence for February. Though Germans expect the economy to be worse off in six months than it is now, the expected decrease in conditions is shrinking, indicating that a turnaround may not be far off. Financial experts also suggested that the German economy may reverse course around the midpoint of 2009.

However, despite these positive indications, economic troubles are still expected in the first half of the year, at least. Economic contraction may even be greater in early 2009 than in late 2008, and the ZEW index rated investor confidence in the current economy lower than last month. Analysts are also waiting on other indices to confirm ZEW's numbers. The DIW research institute predicted that GDP contraction for 2009 overall may be greater than three percent, though this is a greater estimate than that made by the German government and other forecasters. At present, German stocks continue to fall as the euro also decreases in value against the dollar.

The contraction of the German economy at the end of last year was driven by a downturn in the manufacturing sector, which in turn meant fewer exports and less investment in the German economy. Consumer spending also decreased slightly as demand fell. Increased inventories in the last quarter also indicated a decrease in demand that was greater than decrease in production. German GDP contracted 2.1% in the last quarter of 2008, and this contraction also creates a drag on the other European economies that share a currency and common market.

Questions:

1) Do you expect that the German economy will recover soon after the midpoint of 2009 as these predictions suggest, or do you think that the recession in Germany is too deep for a turnaround this year?
2) Do you think that the first half of this year will be worse than the end of last year, as suggested by the DIW institute?

Russian Stocks and Currency Rally; Medvedev Cautiously Optimistic

Sources: Reuters, Medvedev Vows New Deal for Russians as Crisis Bites; Ruble Has Biggest Gain Since 1998 as Bank's Defense Deters Bets; Interfax, Russian Stock Market Closes Week on Major Note; Financial Times, Russian Industrial Output Falls 20%; AFP, Russian Industrial Output Plunges 16%

In an address to the Russian public on Sunday, President Medvedev spoke frankly about the effects of the global financial crisis on Russia. He promised a transparent approach to government action, and admitted that tough times are still ahead for the Russian economy, but also expressed hope that the economy will weather the current crisis. He defended devaluation of the ruble and also announced a government job-creation plan to stimulate the economy.

The Russian central bank's approach to exchange rate policy, in fact, seems to be working, as the ruble gained 4.2% against the dollar last week. After a series of gradual devaluations, the central bank pledged to defend the current rate through the month of February, which has discouraged speculators hoping to profit on a future devaluation. This in turn pushes the value of the ruble up against the dollar and the euro.

The Russian stock indexes also saw a gain last week, for the third in a row following a number of poor performing weeks late last year. Encouraged in part by the strengthening ruble, the RTS index went up 2.09% and the MICEX index by 6.07% from the previous week. Bonds also rose this week.

On a more negative note, recently released statistics show that the country's industrial output fell 20% in January from the previous month, and 16% for the year from the January 2008 figure. The drop in the annual number is the worst recorded in the past fifteen years. This may be an indication that the decrease in GDP this year will be larger than originally predicted.

Questions:

1) Do you think that this rally in the stock market and the ruble's value is temporary or a sign that Russia's economic situation may bottom out soon?
2) Is the central bank's policy of defending the exchange rate for a time to curb speculation wise, or would it be smarter to allow the rate to decrease and save the foreign exchange reserves that are now being used to defend it?
3) Do you think Russia can recover from falling industrial output in 2009 and manage slow growth of the economy that will increase again as the global economic situation improves in future years, or is this a sign that sustainable growth is not possible under current Russian policy?

Friday, February 13, 2009

Food Shortages Increase; Mining Revenues Decrease

Sources:
Food Shortages:
Business Daily Africa
Kenya Broadcasting Corporation
Mining:
Reuters
Mining Weekly

A recent study released by the UN states that many African countries are ill equipped to handle the continent’s pending food shortages. Some statistics peg the number of Africans who are chronically hungry at 40%. This news comes as Kenya revealed its 37 billion Kenyan shillings (about 465 million US dollars) international aid request. Kenya is also removing import duties on white maize and fertilizers. The UN, says that such funding will help mitigate hunger in the short term, but that Kenya and other African countries will need to invest in infrastructure projects and provide credit to farmers in order to really effect change.

The UN is not the only organization urging new infrastructure and efficiency. Danish Ambassador to Kenya Bo Jensen says that Denmark is committed helping make up for the shortage in funding for food, but that Kenyans needed to address their current problems with infrastructure that are slowing efforts to provide badly needed food. One particular problem is the Port of Mombasa. The port is unable to handle the large quantity of imports and inefficiencies at its grain terminal severely slows down the importation process. One wonders, however, where such credit and funding will come from in the current economic crisis.

In other news, global leaders in the mining industry recently met at the African mining conference to discuss the perils facing one of Africa’s most important industry. Deputy mines minister Victor Kasongo of the Democratic Republic of the Congo said that production revenue from mining is likely to be half of last year’s revenue. South Africa has been hit particularly hard with an estimated 24,000 jobs on the chopping block. Kasongo said that the Congo will be drastically cutting production taxes on mining in order to stimulate the industry.

All news at the conference wasn’t so gloomy, however. Gold has been performing particularly strong as many investors view gold as a safe way to hedge their investments during this global financial crisis. CEOs from the three largest gold producers are confident that they will have steady cash flow through 2009, banking on an average price of $900-$1000 per ounce of gold. Additionally, Australia, a country that is heavily invested in African mining operations says that it will stay committed to Africa. While Australia is as concerned as other countries about the global financial crisis, it says that this is an opportunity to invest in human resources for Africans until more money is freed up to resume exploration projects.

Questions:
1) It is unlikely that anyone would disagree with the UN and Denmark’s position that Kenya and the rest of Africa should focus on infrastructure projects and other means to improve agricultural production, but where will this money come from, especially given the fact that many countries don’t even have the necessary funds to provide food for their citizens?
2) Besides offering tax cuts to mineral producers, what are some other ways to help stimulate this struggling industry? Will such a stimulation even be possible until global demand for commodities bounces back?

Wednesday, February 11, 2009

Latin American Economies Being Hit From Both East and West

Sources:
Forbes
Bloomberg
Reuters

On Tuesday stock exchanges across Latin America plummeted as concern grows over the Obama Administration’s recently announced bank bailout plan. Stock exchanges in Brazil, Mexico, Chile and Argentina took noticeable hits after Treasury Secretary Timothy Geithner announced the new plan. The fear on Wallstreet that Obama’s trillion dollar bailout plan will not be able to ease the tightened global credit situation. Overall, Latin American economies are being hit hard by tight credit and a drop in demand for commodities.

The drop in demand for commodities largely originates in Asia. Asia is a large importer of raw materials produced in Latin America as many Asian economies use the raw materials to produce goods that they export across the world. The global financial crisis has caused demand for Asian exports to decrease significantly. Taiwan, Singapore and Indonesia’s exports have all dropped anywhere from 20%-40%. As demand for Asian exports drops, the Asian demand for Latin American commodities and raw materials will also drop. Morgan Stanley refers to this drop in demand as “aftershocks” of the Asian slowdown, and said that Brazil is posed to fair the worst given its strong trading ties with Asia.

Amid these problems, some Latin American countries are exploring innovative ways to help stimulate their economies. The Chilean real estate industry, for example, has begun to offer “anit-crisis” discounts for consumers purchasing housing. Real estate companies are offering to pay for flights to Santiago in order to entice potential home-buyers, and are also offering up to 20% discounts during special night and weekend sales. During one such weekend sale, one company sold more units in two days then they had in the entire previous month. One salesperson said that consumers “realize this is a buying opportunity, at highly competitive prices, and the truth is that the sector has picked up." Despite such efforts analysts still predict a worse 2009 showing than previous years, but these strategies may help mitigate the pressures coming from both the East and the West.

Questions:
1) One article said that Mexico will fair better than Brazil in terms of exporting raw materials because Mexico’s main trading partner is the United States and not an Asian country. Why do you think the United States demand for raw materials has not fallen off as steeply as in Asia? Do you think it is because the US economy is not export-driven?
2) How long do you think Chile will be able to offer discounts in its real estate market? Chile has thousands of new units that have not been sold. Will discounts not only help sell these unused units but also help spur new construction?

Tuesday, February 10, 2009

Senate Approval of Stimulus Plan is “a Good Start” But There is Still Plenty of Work Ahead

Sources:
Wall Street Journal
Financial Times

Today, three moderate Republican senators crossed party lines to give the Democrats one more vote than necessary to defeat the filibuster and approve the economic stimulus plan. The final vote was 61-37. The deal accorded between the Republican and Democrat senators is extremely fragile, however, which gives rise to fear that this alliance may break when the House and Senate reconcile their different versions of the bill.

Most Republican senators refrained from approving the bill, contending that it was not the most effective way to stimulate the economy. Instead, they proposed more tax credits and less government spending. The three moderate Republicans approved the plan only after the Democrats cut more than $100 billion. Susan Collins, one of the three Republicans to support the bill stated that she will vote against the final legislation if the spending restrictions in the Senate bill are breached.

While both the House and Senate bills share the goal of stimulating the economy, each favors different methods to achieve the goal. The final Senate bill totaled $838 billion with a large focus on stimulating new car and home purchases as well as $45 billion flagged for transportation infrastructure. This amount is $15 billion more than the transportation infrastructure item in the $819 billion House bill. The House bill also earmarks more funds for state governments’ education budgets and favors medical insurance benefits for citizens who’ve lost their jobs. Another major difference is the source of funds; the House bill contains $100 billion more spending than the Senate bill, but the Senate bill makes up for this in tax cuts.

Congress and President Obama would like to have the final version ready within a week in order to get the funds into the economy as soon as possible. To do this, the House and Senate will have to reconcile the two different bills. House Majority Leader Steny Hoyer expressed concern over the fragile situation in the Senate: "obviously we're confronted with the reality that if you have three people say, ‘look, if you change anything we're jumping ship,’ that's going to affect the tenor of the conference." Despite the tremendous impending task ahead of Congress, President Obama remains hopeful calling the Senate approval “a good start.”

Questions:
1) Do you think that the three moderate Republican senators will have as great an influence on the final version of the bill as they did on the Senate version?
2) Is the goal of reaching an agreement within one week feasible? Will this time crunch lead to hasty decisions that will be regretted in the future?

Ukraine Tries to Secure Release of Second IMF Loan Tranche with Loans from Russia and Others

Sources: Financial Times, Ukraine Pushes for Loans to Meet Shortfall; Kyiv Post, Tymoshenko: Ukraine in Talks with Six Nations for Financial Help with 2009 Deficit; Kyiv Post, Yushchenko: Possible Taking of $5 Billion Credit from Russia Leading to Privatization of Ukrainian Gas Transmission System; International Herald Tribune, Ukranian President Criticizes PM Over Russian Loan; Wall Street Journal, Uncertainty on IMF Loan Sends Ukraine to Moscow; Forbes, Ukraine Govt Seeking New Credits, PM Says

The second tranche of the IMF's $16.4 billion loan to Ukraine is supposed the be released this month, but talks have stalled over Ukraine's failure to meet certain loan conditions. $4.5 billion of the loan was released in November, with the understanding that several conditions, including a balanced budget, would be necessary to move forward with the second tranche. The 2009 budget, however, is expected to have a three-percent deficit that is a sticking point with the IMF mission.

To make up this deficit, Prime Minister Yulia Tymoshenko has reached out to six foreign governments, including the U.S., Russia, China, Japan, and the European Union. The U.S. State Department reports that it is considering the request for a loan, while Russia plans to loan Ukraine $5 billion. However, Ukrainian President Viktor Yushchenko has expressed concern about using Russian money to finance Ukraine's deficit, due to worries about Ukraine's natural gas transmission system.

A dispute over gas prices erupted this winter between Russia, who supplies gas to Europe, and Ukraine, whose transmission system stands between Europe and Russia. Control over this pipeline is necessary for Ukraine to exert some control over prices, but if Ukraine defaults on the $5 billion dollar loan, Russia would be likely to take control of the pipeline. The state gas company, Naftogaz, is already very heavily indebted to Russia, and acquisition of the gas pipeline in Ukraine would not be unprecedented. Russia used a similar strategy in Belarus, Armenia, and Moldova, increasing gas prices greatly and then waiting for debt to accumulate before buying their gas transmission systems as a payment against the debt. Yushchenko noted that there would be not other feasible way to deal with the gas company's enormous debts, and so this loan is particularly dangerous. Tymoschenko, however, has promised that the country will not default and that it will maintain control of the gas transmission system.

Questions:
1) What do you think of the Prime Minister's strategy to ask other countries for a loan to cover Ukraine's deficit? Keep in mind that the economic situation is quite poor due to falling prices of its major exports, so simply re-balancing the budget would entail severe hardship.
2) Do you think that it is worth the risk to Ukraine to accept a loan from Russia, considering its current economic system and the dangers inherent in a default?

Monday, February 09, 2009

Kazakhstan Follows in Footsteps of Other Former Soviet Republics and Devalues Currency

Sources: Bloomberg, Kazakhstan Devalues Tenge 18%, Turns to Russia for Bank Rescue; Reuters, Kazakhstan Tenge Tests New Lows After Bank Bailouts; Moscow Times, Belarus Devalues Currency to Get IMF Loan; Reuters, Russia Downgraded, Kazakhstan Devalues; Bloomberg, Russian Curb on Speculators May Keep Ruble Within Target Range

Kazakhstan decided Wednesday to follow in the footsteps of Russia, Ukraine, and Belarus by devaluing its currency rather than continuing to prop up the exchange rate with shrinking foreign currency reserves. The Kazakhstan central bank devalued the tenge eighteen percent, for the first time since 2007, to a rate of about 150 tenge to the dollar. Kazakhstan has already spent $3.5 billion of its reserves defending the currency, and is likely to continue to gradually devalue as the Russian central bank devalues the ruble.

Like Russia, Kazakhstan's economy has been badly affected by falling oil prices and its banks' foreign debt. Kazakhstan is the second-largest former Soviet oil producer after Russia, with 3.2% of the world's reserves. Growth in Kazakhstan has slowed from ten percent to one percent, and the government has taken over the country's largest banks. Kazakhstan banks are facing $19 billion of foreign debt due this year, which will be more difficult to pay back in light of the devaluation, and Kazakhstan may be forced to turn to the IMF for help.

Belarus is another Eastern European country that sought an IMF loan to blunt the effects of the crisis, and its own devaluation of the Belarussian ruble early this year was a condition of that $2.5 billion loan. The IMF required a twenty percent devaluation, which occurred on the first of January, as well as warning the government not to raise salaries. The IMF also praised Ukraine yesterday for its own currency devaluation in its first review of the Stand-By Arrangement with that country.

Meanwhile, the Russian economy continues to struggle, with Fitch recently downgrading its credit risk to BBB. The Russian central bank devalued the ruble several times in January after spending massive amounts of its foreign reserves in 2008 to defend the currency. It plans to not to devalue again in February, however, using a number of methods to hold the rate at 41 in relation to a dollar/euro basket. Other falling currencies in Central and Eastern Europe include the Hungarian forint, the Polish zloty, and the Czech crown, which in turn are all affected by the fall of the euro.

Questions:

1) Can you think of any way that Central and Eastern European central banks can minimize the damage to their own currencies caused by poor performance of the euro and the ruble?
2) Should central banks try to hold out longer in defending their currencies, or is it wise to allow gradual or even sharp devaluation to avoid spending too much of foreign currency reserves?

Sunday, February 08, 2009

Economic Crisis Catching Up With Migrant Workers

Sources:
Financial Times
BBC

Migrant workers play a critical role in Asia’s rural areas by traveling to big cities and other countries in search of work, and sending their pay back to their families in rural areas in the form of remittances. China alone is home to more than 130 million migrant workers, a number that grows by five to seven million each year. The Philippines is another big source of migrant workers throughout the region. Nepal reports that seventeen percent of its gross domestic product is from migrant workers’ remittances. These numbers may be on the decline, though, because migrant workers tend to engage in unskilled work thereby making them be susceptible to dismissal in hard times.

Despite past reports, the economic crisis appears to be taking its toll on Asia’s migrant workers. In January, the National Bureau of Statistics estimated that five percent of the China’s 130 million migrant workers, more than six million, were out of work. However, Chen Xiwen, the director of the Central Rural Work Leading Group, dwarfed that estimate with an announcement that more than twenty-five million migrant workers are “coming under pressure for employment.” Other surveys put the number of unemployed Chinese migrant workers near twenty million.

Officials worry about the effect of migrant workers’ unemployment on smaller local economies that have come to depend on remittances. In China, rural incomes have been rising for the last five years but there is fear that the economic crisis will stunt this growth and call for more help from the government. Officials in Indonesia are concerned that remittances will drop by ten percent in 2009 and Indian officials expect hundreds of thousands of workers to return from the Middle East this year.

Many authorities remain optimistic though, as remittances have survived past economic downturns. This is reinforced by the World Bank’s prediction of only a one percent loss in global remittance flows. Data from Taiwan indicated that the number of employed migrants actually increased by two percent on 2008. Further, officials in the Philippines expect remittances to grow in 2009.

Questions:
1) Do you think China’s increase in unemployed migrant workers will affect its government’s financial stability?
2) Is the fear expressed by various authorities unfounded since remittances have generally survived economic crises?
Link

Only Fear Brazil has is Fear Itself; Rest of Latin America Struggles

Sources:
Financial Times
BBC News
Marketwatch

According to Francisco Valim, a leading credit-risk analyst in Brazil, says that the biggest problem facing the country is the “fear of recession.” This statement was made amidst new data that industrial output is down 14.5% and that Brazil lost about 200,000 jobs in December. Other data, on the other hand, is more positive. For instance, in comparison to international levels, Brazil’s economy is fueled by a small amount of credit and the global credit crunch hasn’t had much effect on the country. Additionally, although falling commodity prices have adversely effected other emerging and developing economies, Brazil has a robust domestic market for commodities that has helped insulate it from the falling prices.

In addition to Mr. Valim, many experts attribute the slightly faltering economic results to banks and businesses restricting activities out of a fear of global recession. Some place the blame on banks for slowing down how much they lend out, while others say that banks are willing to lend, but that demand for loans is down because companies are relying on their own cash reserves for financing. Regardless of the source of the recent economic set-backs, many Brazilians believe that any economic difficulties will be short-lived. This belief is echoed by president Luiz InĂ¡cio Lula da Silva who has a record level of approval at 84%.

The rest of Latin America wishes it were as lucky as Brazil, and only had fear to blame on their economic situations. According to the United Nations Development Program (UNDP), Latin America could lose up to 2.4 million jobs due to the global economic crisis. Rebeca Grynspan of the UNDP warns that smaller countries are particularly vulnerable right now. Miss Grynspan warns that Latin American countries must find a way to inject cash into their economies or face a potential 10%-15% raise in poverty levels. Oil-exporting countries, such as Venezuela and Ecuador, may find it difficult to fund important social programs as they deal with dropping oil prices.

Questions:
1) Do you think a “fear of recession” is the real cause of Brazil shedding 200,000 jobs? Such a fear could amount for a portion of such loses, but surely there are other reasons for the hike in unemployment.
2) How will smaller countries find the necessary funds to inject money into their economies?

Saturday, February 07, 2009

News from African Union Summit: Leaders Still Lobbying for Vulnerability Fund

Sources:
The Patriotic Vanguard
Reuters Africa
Bloomberg

World Bank’s Vice-President for the Africa Region, Obiageli Ezekwesili, held a video teleconference with leading journalist throughout Africa recently and discussed ways to lessen the effect of the global credit crisis on Africa. At the top of her suggestions was the “vulnerability fund” recently advocated by the World Bank president, Robert Zoellick. World Bank leaders are urging the leading world economies to allot .7% of their economic stimulus plans for the African vulnerability fund.

The fund would go towards mitigating the effects of global drop in demand for commodities and private capital flow out of Africa, and to help fight Africa’s rising unemployment. Obiageli Ezekwesili also laid out plans for a safety net that would go towards providing the continents poorest citizens basic health and education. However, she urged African countries to improve their efficiency and transparency in spending the aid money. This, she claims, was the only way to insure economic growth. She stated that half of the $40 billion needed to close the infrastructure gap could raised by reforming governments and curtailing bureaucracy.

Not all experts believe that Western aid is the answer to Africa’s problems. Dambisa Moyo, a former economist at the World Bank, argues in her recent book that Africa should wean itself from aid. She claims that well-meaning Western aid helps encourage corruption and inefficiency in Africa countries. She views the current global financial crisis as an opportunity for Africa to come up with innovative financing, such as issuing bonds in Asian countries like China. She see trade and development projects with China as a way to mitigate lower levels of Western aid and private capital infusions. Finally, she argues that a drop in Western aid will not have any real effect on Africa’s poor citizens because the vast majority of the aid is pooled by rich public officials who do not spend the money effectively.

Regardless of who is correct, South Africa offers an example of the urgency of the unemployment problem in Africa. President Kgalema Motlanthe says his country is facing 23% unemployment and that the global credit crisis is frustrating attempts to get these workers back in action. It seems that both Obiageli Ezekwesili and Dambisa Moyo agree that African governments need to become more efficient and cut down on corruption and bureaucracy, but they differ on where the development money should come from. Who’s view is better is yet to be seen, but it is clear that Africa needs funds to help its dimming economic prospects.

Questions:
1) Do you agree with Dambisa Moyo’s position on Western aid? Is it possible to combine both innovative financing with aid, or do you think aid needs to be completely cut off before Africa can change its ways?
2) How likely is it that the G20 will support the vulnerability fund at its April meeting in London? The fund only asks for .7% of each countries’ economic stimulus plans, but do you think they will willing to part with even this relatively small amount? Consider all of the criticsm related to the US’s proposed package. How politically popular would it be if Congress gives billions of dollars to Africa while many here in the US are feeling the pinch of recession?

Friday, February 06, 2009

Bank of England Cuts Benchmark Rate as Britain Sinks Deeper into Recession

Sources: Bloomberg, U.K. Will Shrink Until Fourth Quarter, Nieser Says; Bloomberg, Bank of England Cuts Main Rate a Half Point to 1%; Washington Post, British Central Bank Lowers Its Interest Rate to 1 Percent; Bloomberg, U.K. Manufacturing Contracts, Insolvencies Rise in Recession

The Bank of England has lowered the benchmark interest rate to one percent, the lowest since it was founded in 1694, to aid in the fight against recession. According to the IMF's forecasts, the UK's economy will be the fastest shrinking economy in the developed world this year, and the National Institute of Economic and Social Research predicts a 2.7% drop in the UK's gross domestic product. The cut in the benchmark rate is intended to alleviate frozen credit markets, which have been hit hard in the UK and suffer from low investor confidence.

British service industries are in particular trouble, and up to five thousand British companies may file for bankruptcy this year. Manufacturing contracted in January for the tenth month in a row. Banks such as HSBC are planning to pass the rate cut onto their mortgage and small business customers. Even so, many small businesses are unaffected by the rate cut because they cannot access loans.

In addition to rate cuts, the government has given the central bank authority to spend up to $73 billion on bonds and commercial paper. Tax cuts, the falling value of the pound, and falling commodity prices will provide a stimulus to the British economy, but credit conditions are still tight. Inflation is likely to fall below a target of 2%, and house prices are also falling.

Britain is not alone in the rate-cut strategy. The U.S. Federal Reserve has reduced its key rate to a range between zero and a quarter of a percent, and the European Central Bank is holding at two percent but may cut the rate in March. Other countries cutting rates on Thursday include South Africa and the Czech Republic. However, some analysts feel that the strategy is insufficient considering the extent of the UK's recession, and that the government and the central bank should consider other suggestions such as buying up corporate debt.

Questions:
1) Do you think the rate cut strategy is a wise policy, or are other measures needed to slow the recession in Britain?
2) Do you agree that the stimulus provided by factors such as tax cuts and falling commodity prices will be enough to significantly affect the course of the recession?

Thursday, February 05, 2009

Obama Restricts Executive Pay

Sources: Financial Times, Obama Gets Tough on Executive Pay; New York Times, U.S. Plans $500,000 Cap on Executive Pay in Bailouts

Just a few days after Pres. Obama expressed outrage over “shameful” Wall Street bonuses in the middle of the worst economic crisis in decades, he issued new restrictions on executive compensation at companies receiving “exceptional assistance” from the government. Obama’s announcement is a proactive measure to assuage taxpayer anger over “executives being rewarded for failure” with “subsidi[es from] US taxpayers.” Last week, the New York Times reported that Wall Street firms paid over $20 billion dollars in executive bonuses at the end of 2008.

The restrictions cap top-executive compensation at targeted companies at $500,000 per year and ban bonuses above base pay, except in the form of restricted stock, which cannot be sold until the government is repaid. The restrictions exempt companies that received aid through the TARP program if those companies fully disclose executive pay and hold a non-binding shareholder vote. Only about twenty-five of the top jobs in an affected company are affected by the restrictions; other jobs can still pay more.

Administration officials said the restrictions are not retroactive, and officials from banks that have already received emergency capital injections and bad-asset guarantees from the government (like Citigroup, AIG, and Bank of America) indicated they have no intention of changing their executive compensation policies.

Most companies that government funds through TARP were considered “healthy” (rather than on the brink of collapse) and thus won’t be subject to the restrictions. Additionally, the TARP program already imposes some executive-pay restrictions—but Pres. Obama’s are much tougher than those in place now. However, as the recession deepens and firms are still struggling, many companies plan to go back to Congress to ask for more money—and will most likely be subject to the new restrictions. There are concerns that restricting executive pay to such a “minimal” amount will make it hard for those struggling firms to recruit and retain talent—talent that a struggling firm needs during tough times.

Questions for Discussion: Are Pres. Obama’s new rules a long time coming? Do you think they will work? Is there a better way to “rein in Wall Street” and achieve transparency?