Friday, October 26, 2012

Polish Government Continues to Privatize State-Owned Businesses to Reduce Budget Deficits and Strengthen Economy

Bloomberg: Poland to Overshoot Deficit Target as Economy Slows 
BNE: Poland Mulls Selling JSW Stake to Hit Privatisation Target
FT: Privatisation: State Takes Strategic Approach to Sell-offs
Warsaw Business Journal: Treasury Reveals Plan to Hit 2012 Privatization Target
Warsaw Business Journal: Treasury Expects zł.5 billion from Privatization in 2013
Warsaw Voice: Privatization Plan for this Year is Feasible - Treasury Minister
WSJ: Poland Steers Small Firms Private
WSJ: Poland to Privatize via Public Offerings, Book Buildings

The Polish government, as part of its 2012-2013 privatization program, is planning to sell over 300 large and small state-owned companies to reduce the federal budget deficit and strengthen its economy. The Polish government owned all of Poland’s means of production when the state was a communist nation between 1945 and 1989. However, Polish government officials have been attempting to privatize the country’s businesses since the country moved from a communist economic system to a market economy. Privatization activity increased in 2007 when the center-right Civic Platform party came to power. The Civic Platform’s last privatization program ran from 2008 to 2011 and raised almost 44 billion zlotys (Poland’s currency) from asset sales. The party instituted its current privatization plan in April 2012 with the goal of raising an additional 10 billion zlotys from sales by the end of the year, and an additional 5 billion zlotys throughout 2013.

The central component of Poland’s privatization program involves selling stakes in large state-owned blue-chip (nationally known and reliable) businesses through stock offerings—sales of fractional ownership shares to private investors. Sales of these companies are driven by the Polish government’s need for revenue to reduce the country’s budget deficit. Poland’s Finance Ministry expects the country’s deficit to total 35 billion zlotys in 2012 and 35.6 billion zlotys in 2013. Although the government would like to maximize the funds from its asset sales to reduce this deficit, it has chosen to sell only partial stakes in many large companies that it views as vital to national interests. For example, Poland was able to raise 5.5 billion zlotys earlier this year by selling a 7% stake in PGE, a power generation company, and a 15.8% stake in PKO, Poland’s largest insurer. This allowed Poland to raise a substantial portion of its 10 billion zloty target for 2012, while retaining control over two companies operating in important industries.

Another part of Poland’s privatization program involves selling 100% ownership stakes in smaller businesses to private investors. While revenue from these sales ultimately helps the government reduce its deficit, the primary motivation behind them is to improve the competiveness of Poland’s small businesses. Many of these small, non-strategic, state-owned companies are unprofitable or poorly managed. The government has hesitated to shut them down outright because they can employ hundreds of Polish workers. Instead, the government sells the companies to new private owners in the hopes that these owners will invest additional capital in the businesses and improve the efficiency of their operations. For example, in August 2011 Poland sold an unprofitable match factory employing 300 workers to a German corporation for approximately 13 million zlotys. Although the German company cut 50 jobs at the factory, it also invested in new technologies and made the factory profitable within one year. Poland’s Prime Minister, Donald Tusk, believes sales like this will make Poland’s businesses more competitive and ultimately keep the Polish economy growing.

As of September 2012, the Polish government had already raised 8 billion zlotys from sales of state-owned companies. Despite recent problems finding investors for large oil refineries and power generators, Poland’s Treasury Minister, Mikolaj Budzanowski, believes the country will meet its privatization target for the year. He expects the remaining 2 billion zlotys in asset sales to primarily come from an IPO (initial public offering of stock) of a 50% ownership stake in ZE PAK, a power complex, and PHN, a portfolio of government owned real estate. Budzanoski also plans to raise several hundred million zlotys from the sale of smaller companies, including an animal-breeding station, some health spas, an animation studio, and a pottery manufacturer. In 2013, the Treasury Ministry hopes to raise an additional 5 billion zlotys through the privatization of state-owned financial and chemical companies. The timely completion of these asset sales will help Poland reduce budget deficits in the short run through increased revenues, and grow its economy in the long run through a more competitive private sector.

Monday, October 15, 2012

Rwandan Government Uses Ecological Diversity to Energize Electricity Production

ContourGlobal: KivuWatt

In 2011, Rwanda enacted a plan to generate more electricity at cheaper prices by diversifying its production methods to include domestic sources of power. Currently, Rwanda produces approximately 85 MW (megawatts) of electricity—40% of which originates from expensive imported diesel fuel and 59% from geothermal sources. As a result of Rwanda’s reliance on imported diesel, the price of electricity in Rwanda is expensive at 22 cents/kwh (kilowatt hour), compared to neighboring countries Burundi and Uganda at 8.19 and 11.22 cents/kwh, respectively.

Rwanda plans to expand its power generation to 1000MW by 2017 by utilizing inexpensive domestic biomass, methane, geothermal, and hydropower sources. Dry peat (biomass composed of an accumulation of partially decayed vegetation) is a valuable natural resource for Rwanda. A Turkish investor, Hakan Mining and Generation Industry and Trade building a 100MW peat power plant. The plant will be built along Rwanda’s southern border in Akanyaru with the goal of producing power in 3-5 years. Rwanda has enough peat to fuel that plant for approximately a hundred years if it maintains a 100MW capacity. Rwanda is also investing in a unique power plant which burns methane gas harvested from the explosive waters of Lake Kivu. The Lake Kivu project is expected to produce 100MW of power by 2014. Also, Rwanda’s nascent geothermal resources on the southern slopes of the Karisimbi volcano could generate up to 700MW of power, once they are developed in December, 2012. Last but not least, Rwanda is partnering with Burundi and Tanzania to build four regional hydro-electric plants that will generate 174MW of electricity for the Rwandan people. These domestic sources of power will produce electricity that is considerably less expensive than the diesel fuel that Rwanda currently uses.

Rwanda’s natural resources present opportunities to reduce the price of electricity by reducing the cost of generating it, but the goal to increase power supply from 100MW to 1000MW will be difficult to achieve in five years.

Friday, October 12, 2012

Mexico’s Labor Reforms Spark Controversy

After about two decades of debate, Mexico’s lower house of Congress passed the first major labor reform since the 1970s. Mexico’s Congress designed these reforms to update Mexico’s labor laws to match the modernization of Mexico’s economy, which has transformed from an agricultural-based economy to a manufacturing and service-based economy. In particular, these reforms make it easier for firms to hire and fire employees, change employee wages from a daily rate to an hourly rate, create new temporary employment plans that require no compensation when they expire, and regulate firms’ outsourcing practices. Despite a clear House majority in favor of these particular reforms (351 votes in favor versus 130 votes against), Mexico’s labor reforms sparked controversy among differing groups.

Proponents—led by two large political parties, the Institutional Revolutionary Party and the National Action Party—argue that the reforms offer a number of benefits. First, Mexico will be more competitive because reforms like hourly wages and ease of hiring/firing will make labor cheaper and more flexible for employers compared to labor in other nations. This will provide incentives for employers to use Mexican labor, thus leading to increased job growth, the second benefit.  Mexican President Felipe Calderón estimated that these reforms would create 400,000 new jobs per year and would lower Mexico’s current 5.4% unemployment rate. President Calderón also commented that the improvement of part-time work opportunities, which would arise because of reforms like the new temporary employment plan, gives those that struggle to break into the labor market—particularly women and the youth—a better opportunity to do so. Third, due to Mexico’s potential increased competitiveness and attractiveness to employers, Organisation for Economic Co-operation and Development (OECD) Secretary Angel Gurria predicts that these reforms would increase Mexico’s annual gross domestic product (GDP) by 1%.

Despite these perceived benefits, opponents of Mexico’s new labor reforms—led by the more liberal Party of Democratic Revolution—argue that these reforms attack workers’ rights, lower their wages, and diminish their job security without improving Mexico’s competitiveness. The thrust of these opponents' argument is that Mexico’s labor laws are not the reason for the country’s lack of competitiveness because Mexico’s labor is already inexpensive and attractive compared to other countries with increasing labor costs—such as China. Rather, Mexico’s lack of competitiveness stems from the country’s other problems, which include drug violence, extortion, and freight robbing. Opponents argue that if Congress wants to increase Mexico’s competitiveness, it should focus its efforts on these problems.

Before these labor reforms become law, Mexico’s Senate must pass them in October. Because many Mexican lawmakers perceive this as a mere formality, the reforms as passed by the lower House likely represent the final changes to Mexico’s out-of-date labor laws. Nonetheless, the controversy will continue as the debate as to the efficacy of these changes is yet to be resolved.

Sunday, October 07, 2012

Europe Attempts to Avoid Negative Long-Term Consequences of High Youth Employment Rates

European Commission: Youth Opportunities Initiative 
Euro Observer: Youth Unemployment Risks 'Social Disaster' 
WP: As Youth Unemployment Soars, France Offers to Let Companies Hire Young People on its Dime
WP: Unemployment Rate Remains Above 11 Percent in Euro Zone
WSJ: In Europe, Signs of a Jobless Generation

Out of concern for the long-term negative consequences related to youth unemployment, the European Union (EU), along with member state governments and a consortium of private businesses have adopted plans to put young people to work in Europe. In July 2012, the unemployment rate in the EU reached 11.3%, signifying 18 million Europeans were out of work. This was the highest level of unemployment in the EU since the euro was adopted in 1999. European companies have hesitated to invest and hire new workers due to weak consumer spending, triggered in part by government payrolls cuts, higher taxes, and volatility in the financial markets. European companies have also hesitated to expand their work forces because strict European labor laws make it difficult to lay off workers during tough economic times.

While the overall unemployment rate in the EU is high, its youth unemployment rate is even higher. In July 2012, the unemployment rate for workers under the age of 24 reached 22.5%, up from an already high 21.3% one year earlier. However, this increase was not uniform across the EU. The youth unemployment rate actually decreased in ten EU member states during July and increased greatly in several countries located in Europe’s economic periphery, including Greece and Spain. During July, the youth unemployment rate reached 53.8% in Greece and 52.9% in Spain, the highest levels in the EU.

A prolonged high youth unemployment rate has many long-term negative consequences for workers and businesses. A person’s job skills and work experience begin to fade rapidly after about six months of unemployment. This means that the longer a person is unemployed, the harder it becomes for that person to find a permanent job at a competitive wage. The EU’s challenging labor markets have already forced many out of work youth to accept part-time and temporary jobs for low wages. However, the International Labor Organization (ILO) believes that if a person accepts such work early in his or her career, that person will have a more difficult time finding permanent employment with proper advancement opportunities later on. The negative impact from working in these low-level positions can hamper a person’s career for up to 15 years according to Ekkehard Ernst, Chief of the ILO Employment Trends Unit. Businesses can also be hurt by sustained youth unemployment in the long run. As unemployed youth move abroad in search of better job opportunities, companies in countries with high youth unemployment rates will eventually be unable to find qualified workers to fill vacancies.

To prevent these long-term negative consequences, the EU, a group of private businesses, and several member states have adopted plans to put people to work. The EU already contributed €3 billion to education and apprenticeship programs designed to reduce youth unemployment in Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovakia, and Spain. The EU also recently proposed a Youth Guarantee program, which would help young people find employment or training opportunities within a few months of losing their jobs. Private businesses are also trying to reduce youth unemployment. A task force at the Business-20 Summit, a gathering of global business leaders, called for companies to increase their apprenticeships and internships by 20% over the next year in order to put young people to work. Several companies have already responded. For example, Starbucks recently launched a twelve-month apprenticeship program in the U.K. Finally, individual governments are trying to reduce youth unemployment within their borders. For instance, the Italian and Spanish governments have proposed tax breaks for businesses that hire young workers. In addition, the French government recently proposed to pay up to 75% of the salaries for young workers hired by private companies during the first three years of their employment. France hopes the plan will put 150,000 new young people to work over the next two years.

Despite the best efforts of the EU, private businesses, and individual member states, youth unemployment is likely to continue to be a problem in Europe going forward. Due to the continuing problems associated with the European financial crisis, the ILO forecasts that over the next five years the youth unemployment rate in the EU will decrease only slightly to 21.4% from 22.4% today. Such a prolonged period of youth unemployment could produce a “lost generation” of young workers who suffer long-term career setbacks. It could also negatively impact long-term business productivity and competitiveness in the countries experiencing the highest rates of youth unemployment today. 

Saturday, October 06, 2012

The U.S. “Fiscal Cliff” and Its Threat to the Domestic Economy

Fiscal deficits have gained recent worldwide attention—mainly due to the struggles in the European Union—and rightly so, as deficits restrict governments’ ability to use spending and tax policies to respond to economic crises, as well as pose challenges to economic growth since deficits raise interest rates and discourage investment. To address the fiscal deficit in the United States—which has run above $1 trillion for the past 4 years, or approximately 8% of annual gross domestic product (GDP)—the White House and Congress plan to cut government spending and increase taxes at the start of 2013. However, this plan—popularly known as the “fiscal cliff”—poses grave concerns for the domestic economy.

The first half of the “fiscal cliff”—spending cuts—originates from an agreement between the White House and Congress to cut $1.2 trillion from the federal deficit between 2013 and 2021. In 2013 alone, the government would cut about $109 billion. About half of the planned spending cuts would come from the U.S. defense operations, such as army expenses and navy aircraft. Other top sources of spending cuts include the National Park Service, salaries to employees of the Securities Exchange Commission, salaries of food-safety workers, rural rental assistance, and health-care exchanges.

The second half of the “fiscal cliff”—tax increases—arises because the Bush-era tax cuts (temporary tax cuts that applied to every tax bracket when President Bush was in office) expire at the end of 2012. If Congress does not extend these tax cuts, tax rates will return to higher pre-Bush-era levels, which are approximately 3% higher for most income levels. Observers are uncertain as to how this issue will be resolved because of the November 2012 presidential election. Democratic candidate President Obama wants to extend tax cuts for Americans making under $250,000, while Republican candidate Mitt Romney wants to extend tax cuts for all Americans. Moreover, since the new president will be sworn into office at the beginning of 2013, the new president will have little to no time to address both the spending cut and the tax rate issues.

The “fiscal cliff” threatens the U.S. economy because it would trigger another significant recession and wipe out approximately 2 million jobs. According to the Congressional Budget Office (CBO), a nonpartisan analyst for the U.S. Congress, the “fiscal cliff” would cut almost four percentage points off the U.S. growth rate in 2013, leading to a 0.5% contraction in the economy, and would also increase the unemployment rate to 9.1%. Moreover, the Federal Reserve—the central banking system of the U.S.—warned that if the “fiscal cliff” throws the U.S. economy into another recession, the Federal Reserve might not have sufficient tools to offset the fiscal shock. Therefore, to avoid the threat of a significant recession, the Federal Reserve recommended that the White House and Congress create an alternative fiscal plan to prohibit spending cuts and maintain the lower tax rates. The CBO predicted that this alternative fiscal plan, unlike the “fiscal cliff,” would allow the U.S. economy to continue to grow—1.7% growth rate in 2013—and to maintain a lower unemployment rate—8.0% in 2013.

The “fiscal cliff” is not only a threat to the U.S. domestic economy, but also one of the top risks to the global economy. Due to the United States’ significant global economic presence, the potential U.S. recession could have a global impact, as it could disrupt other economies and adversely affect investors’ confidence levels in financial markets. This would, in turn, plunge the United States into an even deeper recession.

Tuesday, October 02, 2012

Egypt Approaches America for Aid and Investment Package

CIA Factbook: Egypt

Almost sixteen months after pledging to help Egypt’s faltering economy, the United States (U.S.) is nearing an agreement to forgive $1 billion dollars Egypt owes to the U.S., and to pledge $435 million for investment in Egypt. The Egyptian economy has been in decline since the ouster of long time President Hosni Mubarak in February 2012, and the new President, Mohamed Mursi is working to improve Egypt’s economic outlook by reducing government debt and increasing investment.

If the U.S. forgives $1 billion of the $3 billion Egypt currently owes the U.S., it will support the Egyptian economy in two ways. First, it will reduce the amount of cash that Egypt has to use to pay down government debt, and will allow Egypt to spend more money to stimulate its economy. Second, the Egyptian government is less likely to have to raise taxes on its population to pay down government debt, which leaves more money for taxpayers to spend in the economy. As of 2011, Egypt’s gross domestic product (GDP) per capita  (indicator of standard of living) was 136th in the world, leaving each person with $6,600 to spend per year. The more money that citizens have, the more they are able to spend and stimulate the economy.

The United States has also offered $375 million in financing to American companies that invest in Egypt, and a $60 million investment fund for Egyptians to invest in new businesses. In an effort to entice American companies to utilize the $375 million fund, the U.S. Chamber of Commerce is bringing executives from almost fifty large American companies to Egypt . The United States and Egypt intend the $375 million foreign and $60 million domestic investment funds to help reduce Egypt’s 12.6% unemployment rate, create sources of income for Egyptian citizens, and increase the amount of taxes the government can collect because of the increase in business. Egypt needs an increase in investment to stabilize its economy.

Although the Egyptian stock market showed gains during the week of September 4th, the country still has a long way to go to reach financial stability. The Egyptian stock index (EGX 30) hit a 15-month high on September 4th, showing that the market may be responding to Mursi’s effort, but the EGX 30 still sits 30 percent below its high in 2010.The Egyptian government is mired in debt and lacking investment. With support from foreign governments and internal economic growth, Egypt has a good opportunity to grow a stable economy. America looks to be invested in the recovery process; American Deputy Secretary of State Thomas Nides said that the aid is “not just about assistance,” it is about “growth and business.”