FinancialMirror Issue No. 1127 €1.00 ªarch 25 - 31 , 2015
OREN LAURENT
JEFFREY FRANKEL
Bracing for the third longest Bull Run in history - PAGE 14
Will Fed tightening choke emerging markets? - PAGE 17
East Med energy scene changing fast
CYPRUS - LEBANON - EGYPT - TURKEY CYPRUS GOURMET: In praise of the glorious tomato... By Patrick Skinner PAGE 7
- PAGES 8 - 11
March 25 - 31, 2015
2 | OPINION | financialmirror.com
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Now that public opinion is getting tired of the endless scandals that are coming to light (and will continue to do so for quite some time), politicians have decided to turn their all-too-generous feelings to the plight of small business owners, representing more than 90% of economic activity and employment, but who are suffering the most due to a severe cash flow in the market. TV crews are running around trying to catch up with MPs and party reps making statements and offering warm handshakes all over the place, as is the case of the Tseri Avenue shop owners who are moaning about the (much delayed) road works and how this will have a negative impact on their turnover. In this case, as was the stupid decision by parliament to ban the Minister of Labour from deregulating shop hours, the real interests of consumers and ordinary citizens have been sacrificed in an effort to win a vote or two, just 14 months away from the next elections. To set the record straight, the Tseri project must go ahead, as pedestrians have been mowed down by speeding cars and in poor light conditions, while the potholes and cracked pavements are causing great harm to cars. The problem here is that the Mayor, the competent(?) government services and the locals should have agreed long ago on how the road should be developed, becoming an important thoroughfare for the whole area. On the other hand, the Central Bank soap-opera
has also inflicted immeasurable damage to the economy as recent data has shown that confidence among businesses and consumers alike has fallen, yet again. Enter the Minister of Commerce, Industry, Tourism and Natural Gas who declared over the weekend that 66 mln euros would be provided in funding to SMEs, entrepreneurship, innovation, competitiveness and for exports. All this sounds fine and dandy, but has anyone bothered to find out what the real problem is? Throwing money in the face of struggling entrepreneurs is absolutely no good if the government machine and other stakeholders do not have the means to provide this cash in a fast and efficient way. The Minister ought to push for the one-stop-shop concept, which has been struggling to get off the ground for lack of communication among public departments. On the other hand, the commercial banks have admitted that the money they have received from the European Investment Bank in order to pass it on to business and re-start growth has hardly drawn the necessary interest. And that is because the terms for the EIB funding are no different from any normal borrowing scheme. Handing over large amounts to a handful of large businesses will hardly make a dent in the economy. This will only come if SMEs are given proper advice and services provided to promote exports, boosting growth that will start the cycle of money coming in and businesspeople who are far behind on their taxes to resume payments, earning funds for the state coffers once again.
THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO
CSE bans Suphire, more golf needed The market authorities suspended Suphire Securities from trading on the CSE after a CYP 9.2 mln shortfall in the EAC provident fund the company was managing; while the new manager of the Aphrodite Hills Resort said Cyprus needs more golf courses to boost tourism, according to the Financial Mirror issue 612, on March 16, 2005. Suphire downfall: The Cyprus Stock Exchange and the Securities and Exchange Commission (CySEC) suspended Suphire Securities from the
20 YEARS AGO
Era profits surge, confusion over rights Profits at Era Portfolio Investment surged and the company raised its forecast for 1995, while a decision by two companies to issue rights has raised concern among stock market players, according to the Cyprus Financial Mirror issue 104, on March 29, 1995. Era profits: Era Portfolio Investments reported a massive turnaround in its performance with a record 32% rise in profits to CYP 877,892, beating the market total of 29.6%. Chairman Michael Ioannides
Floor pending investigations into the CYP 9.2 mln shortfall discovered in the EAC Provident Fund that it managed, while a further shortfall of CYP 650,000 in the Cyprus Airways pilots’ provident fund is also being probed. The problems are directly related to the 12% annual guarantees given by Suphire to the provident funds of the EAC, the pilots, the Forest Industries and the doctors’ union. More golf: Jorgen Jorgensen, General Manager of the CYP 150 mln InterContinental Aphrodite Hills Resort that opens this month said that there is a need for more golf courses on the island as this adds value to a tourist destination. Jorgensen said he expected the first ten months of operation to have an
occupancy rate of 50%. Home prices down: Home selling prices continued to stabilize in February, recording a marginal decline of 0.3% from January, according to the BuySell index, bringing the average price to CYP 82,936. Governance boost: Good corporate governance can add 11% to a company’s share price and even 7% to GDP, according to research, with Derek Braddon of the University of the West of England also warning that too rigorous a system could have a detrimental effect on economies. Halloumi exports: A UN expert who had been advising Cypriot farmers on technical matters said that the export potential of halloumi is so big that exports could increase five-fold with more efficient and health systems. Sales in 2013 reached CYP 10.5 mln or 5.1% of all domestic exports.
said the share price shot up 76% in 1994 on the back of a bull market, as the company invests solely on traded stocks. Rights confusion: The decision by two publicly traded companies, CCC Holdings and K&G Complex to issue shares immediately after their EGMs approved a share capital increase, has caused confusion among market players and raised questions over procedures. The issues were conducted too quickly and raised questions about not informing existing shareholders in time, while proper accounts were not published prior to the issue. Cyta sale: The Cyprus Development Bank suggests that Cyta be privatised and floated as a
public stock company, while it should liberalise its telecoms business and licensing of services. This follows an earlier Financial Mirror report Cyta be privatised as it prepares to launch the Global System for Mobile Communications (GSM) on April 5. Arab Bank: Marking its tenth anniversary in Cyprus, Arab Bank said it plans to offer more services for offshore companies and is committed to the Cyprus market, having brought in USD 100 mln in fresh capital which has been lent to local companies, institutions and individuals. The Group’s decision to build its own headquarters in Nicosia at a cost of USD 10 mln is another sign of this commitment, said General Manager Toufic Dajani. Pay rise for MPs: The monthly salaries of MPs are to go up by CYP 450 to CYP 1,700 or CYP 22,000 a year, under an all-party bill.
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March 25 - 31, 2015
financialmirror.com | CYPRUS | 3
Court case against ex-BoC officials to be heard on Friday
APM, DP World keen on Limassol port Two major sea terminal operators are keen to develop the commercial operations of Limassol port, the biggest in Cyprus and part of the government’s privatisation plan that needs to raise about EUR 1.4 bln in four years. Netherlands-based APM Terminals and Dubai’s DP World are said to have shown interest, with the government abandoning earlier plans for privatisations, and now opting between a licensing agreement and concession. Communications and Works Minister Marios Demetriades, who handles the portfolios of both transport and maritime, said that the procedure for privatisation of the commercial services at Limassol Port will get underway by the end of April. He told the Cyprus News Agency that there will also be a review of the port rates to match world prices, adding that all labour rights will be respected. Already, consultants Rothschild have embarked on a market sounding process in a bid to assess market interest. Demetriades said that prominent corporations in port and cargo terminals management have expressed interest for the services at Limassol port. He added that this process also aims to clarify which port activities would be privatised, noting that there is a possibility for the process to include more than one investor. “This has to do with our effort to maximise the benefits for the Republic and to increase the number of possible investors,”
he said. “I believe the investor will be selected by the end of the year and the process will be completed by the first quarter of 2016,” Demetriades said. He said the Ministry’s advisors are currently examining the legal framework for privatisation, noting that the options under consideration are either a license contract or a concession agreement for a period of 25 years. Demetriades said that Ministry officials and their advisors have already briefed the European Commission’s Directorates for Competition and Markets on the process, which will maintain the Cyprus Port Authority as a public organisation with a supervising role. Furthermore, the expansion of Limassol port is under way by incorporating the adjacent Merra, an area under the jurisdiction of the British Sovereign Base. Demetriades also said that the Ministry will revise the charges policy before the privatisation process is completed. “We would like to revise the charges philosophy to comply with competitive ports because the current charging policy is anachronistic,” he said. Meanwhile, according to CPA figures, 2014 saw a rise in commercial activity in Limassol port, as a total of 307,600 containers (TEUs) were transported marking an 11% annual increase, despite several strikes by port workers. In 2013, the volume had seen a 9.8% decrease from 2012.
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The hearing in a case against five former executives of the Bank of Cyprus will take place on Friday when the defence will argue that for a dismissal, following a continuance allowed by a Nicosia court judge two weeks ago. The bank’s former chairmen Theodoros Aristodemou and Andreas Artemi, CEOs Andreas Eliades and Yiannis Kypri, as well as Deputy CEO in charge of Greece, Yiannis Pehlivanides, face charges of market abuse and conspiracy to deceive investors as they failed to notify shareholders that the bank’s capital needs in 2012 had risen significantly more than the EUR 200 mln initially announced. By the time the real picture had been calculated, the shortfall was estimated to have reached about EUR 700 mln, which, when combined with the write-down (haircut) of Greek government bonds imposed by EU leaders in November 2012, sent the bank into a free-fall and unable to sustain itself or even by government help. As a result, when now defunct Laiki Popular Bank failed, also exposed to huge amounts of GGBs (prodded by the then Greek government of George Papandreou), Bank of Cyprus was unable to carry the burden, Cyprus banks were forced to
sacrifice their Greek franchises and BoC was straddled with the EUR 11 bln emergency liquidity assistance (ELA) issued to Laiki. In the ongoing trial, an effort to find a scapegoat for both banks’ failures which a public probe could not pinpoint, defence counsel Polys Polyviou raised an issue deciding on due process prior to any admissible facts being heard first. Polyviou speaking on behalf of the Bank of Cyprus had suggested earlier that the case started by examining whether there had been an abuse of process. If the court rules that this is the case then it will be dismissed or suspended, he said, adding that if it doesn’t then it will continue. He further expressed his readiness to present his arguments. Assize Court judge Lena Demetriadou, who heads the three member panel, granted a postponement until March 27, saying that on the set date the Court will hear the parties’ arguments regardless of whether there is agreement on the admissible facts. Polyviou added that it is his opinion there aren’t many admissible facts referring in particular to a decision by the Cyprus Securities and Exchange Commission, the appeal or appeals before the Supreme Court against that decision and the present indictment.
March 25 - 31, 2015
4 | CYPRUS | financialmirror.com
New study underway for ‘national tourism strategy’ (again) Russia decline of under 25% can be recovered from other markets Energy, Commerce, Industry and Tourism Minister Yiorgos Lakkotrypis said that a study is underway on a national tourism strategy, under the supervision of the Presidency and with the participation of the Ministries of Tourism and Finance. Speaking before the House Commerce Committee, the Minister also said that if the declining tourist arrivals from Russia are contained under 25%, the numbers can be made up from other markets. He said that a study on the reorganisation and restructuring of the Cyprus Tourism Organisation will start being implemented gradually and that another study on the national tourist strategy is under preparation. Lakkotrypis said that in April they will proceed with the modernisation of the regulatory framework in an attempt to reduce administrative costs by 25%. “It’s a matter of re-branding and repositioning our tourism product” he told the Committee. The Minister disagreed with any reduction in prices in the tourist industry, adding that “we must focus on quality rather than on price”. He assured that the CTO will continue to be the state’s advisor on tourism, but “it remains to answer what are its new responsibilities”. The Minister noted that 2014 saw a 1.5% increase in arrivals and that total revenue was up approximately 3%, despite the problems that appeared in the last months of the year with arrivals from Russia. He added that the figures for 2015 are encouraging. Lakkotrypis was optimistic that the drop in the numbers of Russian tourists will be restrained, noting that if it were contained under 25%, it could be made up from other markets, such as the UK which is already up by 1.5% and from Germany, Austria, Israel and The Netherlands, also presenting a slight increase. On his part, CTO President Angelos Loizou said the trend in tourist revenue seems encouraging, noting that following more analysis of the last quarter of 2014 income from tourism increased by 4.5%. Zacharias Ioannides, Director General of the Cyprus Hoteliers Association, said that Russian tour operators are expecting Cyprus to support them, adding that hoteliers already offer significant discounts, especially for April, May and June, if needed.
Tourism up 12% in February, mainly UK and Greece Tourist arrivals were up in February for the third consecutive month, rising 12.1% year-on-year, according to the monthly Passenger Survey of the statistical service Cystat. The total number of arrivals for the month reached 50,709, from 45,227 in February 2014, in tandem with a 3.8% rise for the whole winter period reported a day earlier by the Cyprus Tourism Organisation. February saw an increase of 7.2% in tourist arrivals from the United Kingdom, rising from 16,172 in February 2014 to 17,329 in February 2015, suggesting that holidaymakers from the biggest market to Cyprus picked up in the last month. For the whole winter period, the CTO had recorded a marginal drop of 0.3% from November to February, from 76,763 last year to 76,517 this winter. Despite the economic woes, tourist arrivals from Greece were up 20.1% in February, rising from 6,254 to 7,510 year on year, while for the whole winter period CTO recorded a 2.4% rise to 29,364 from 28,663 last winter. The crisis in Ukraine and the troubled rouble seemed to have impacted tourist arrivals from Russia earlier in the season with the February decline seen at 10.4% dropping to 3,659 in February from 4,084 in February 2014. This is a relatively better number for Cyprus’ second biggest market as the CTO data showed that all-winter arrivals from Russia had declined by 15.7% for the whole period from 26,251 to 22,142, as major travel agents also had to deal with closures.
Finance Minister expects foreclosures vote on April 2 Finance Minister Harris Georgiades said he expects the much-delayed package of bills regulating foreclosures and insolvencies will be debated and hopefully passed by parliament next Thursday, April 2. The House of Representatives had suspended, once again, a law on foreclosures of mortgaged property, a crucial requirement of the island’s 10 bln bailout, to allow time for the debate and approval of the five bills comprising the insolvency framework, believed to provide a safety net to vulnerable borrowers. That was the fourth suspension of the law, due to which the economic adjustment programme with the Troika of international lenders has been frozen since last September and payments to the state coffers delayed. Commenting on allegations by MPs that the delay in passing the insolvency framework is due to the continuous revision on the relevant bills by the government, Gerogiades said he didn’t wish to get into that debate, but that the revisions in the texts were due to changes requested by the MPs, that have been mostly met. “We need a reliable legal and regulatory framework that will facilitate the smooth functioning of the financial system and money circulation in the banking system,” he said. He added that the banking system should be able to attract new deposits based on trust, to lend to businesses and reliable households and that there should also be repayment
of loans and expressed hope that the necessary relevant legal arrangements will be made very soon. He noted at the same time that the recapitalisation and restructuring of the banks during the last two years allows them to begin providing financing to the productive sectors of the economy.
Bank boss says foreclosures will help restart lending Bank of Cyprus CEO John Hourican told employers that the much-delayed law on foreclosures must be put in place as this would be an important step for lending and financing to resume and kick-start the economy. The foreclosures bill was supposed to have been voted on during Thursday’s parliamentary plenum, but a delay by the government to submit a parallel framework on insolvencies irked opposition parties that introduced a counter bill postponing the implementation of the foreclosures, an obligation as part of the bailout programme. As a result, the Troika of international lenders froze payments. This bloated the political parties’ arrogance, claiming that all they want is to protect the primary homes of low-income households from being repossessed by banks amid high unemployment and inability to repay mortgages, pushing the rate of non-performing loans (NPLs) to 50% of the national loanbook. A document leaked last week, allegedly by the Bank of Cyprus, showed that 29 of the 56 members of parliament had NPLs that they had no intention of repaying. Speaking to members of the Employers and Industrialists Federation (OEV) in Nicosia, Hourican said that the bank is reviewing every single troubled loan with the aim to restructuring. “We want to ensure that all businesses have a chance to succeed”, he said, referring to the recent cut in lending rates by one percentage point. Hourican said sentiment in the market is changing and that “people want the economy to perform and we need to change the agenda from always talking about fiscal contraction and austerity to actually getting people’s confidence levels up to invest. So, we have to move the agenda from one of austerity to one of prosperity so that we can create a future for young people of Cyprus and indeed their kids.”
As regards capital levels, Hourican said that the bank has already reduced its emergency liquidity assistance (ELA) from EUR 11.4 bln at the start of the economic crisis in 2013 down to EUR 7 bln, noting that “EUR 4 bln is gone so it is possible … to further reduce the amount” of dependency on ECB funding. “Today we are running very high levels of liquidity in the bank because we are willing to lend, we want to lend and also want to keep ourselves safe given the economic turmoil around us, whether that is in Europe generally, whether it is the shadow cost by Greece, or the shadow cost by events particularly in Russia. We could repay a lot more ELA but we are choosing to have it available to Cyprus’ economy if we can find someone to use it,” he said. Retaining some of the bank’s capital buffers and lending to the local market in order to restart the economy had been a long demand by stakeholders, but the management had insisted on lowering its ELA obligations in order to be able to borrow later at batter rates. However, with the European Central Bank’s quantitative easing (QE) programme underway from this month, the market expects Frankfurt to support Eurozone growth by buying up bonds and injecting fresh capital for growth and development throughout the EU. Cyprus cannot partake in the QE programme until it passes the foreclosures bills and resumes its commitments to the economic adjustment programme as part of the EUR 10 bln bailout. OEV President Christos Michaelides said after the meeting with Hourican that the banking sector in Cyprus is a very crucial and important sector in the efforts to achieve growth and restart the economy. “We invited Mr Hourican here to discuss with him and exchange views on how we could better assist our members, since this will have a positive impact on the bank as well”, he concluded.
Business confidence retreats in March The economic climate was marginally retarded in March, due mainly to a worsening state of the retail sector and a drop of confidence among consumers. The 0.2 point drop in the Economic Sentiment Indicator conducted by the Economics Research Centre of the University of Cyprus, followed a 0.9 point improvement in the February survey. The ERC said that the drop in confidence among businesses was based on the pessimistic projections for the following month, while the sentiment drop among consumers was on a retreat in trust among households.
March 25 - 31, 2015
March 25 - 31, 2015
6 | COMMENT | financialmirror.com
Computers impact teaching both positively and negatively Using computers in the classroom does not lead to an improvement in the average performance of students in math and science, according to a recent study by the Ifo Institute. “But the average result masks the fact that the use of computers has opposing effects in different areas”, said Ludger Woessmann, Director of the Ifo Center for the Economics of Education. “If computers are used to look up ideas and information student outcomes improve; but using computers to practice skills reduces student achievement,” he explained. The Ifo Institute’s study covers the math and science achievement of over 400,000 students in fourth and eighth grade from over 50 countries on the TIMSS international student achievement test. “The overall ‘null effect’ is sobering, but frequently proven”, noted Woessmann. “What is new about our results is that this null effect arises from a combination of positive and negative partial effects,” he explained. If computers were to be used more to search for information and less for practicing skills, computers could be used far more effectively in classrooms and with better results. “Many proponents hope that computer-assisted instruction will constitute a technological breakthrough that will fundamentally revolutionise education,” said Woessmann. “Our findings show that a qualitative improvement in teaching will only occur if we focus on using computers for specific activities where this makes sense and creates real added value.” However, “its potential effects on the ability to use computers are not investigated,” noted Oliver Falck, Director of the Ifo Center for Industrial Organisation and New Technologies. “Our results are based on how student achievement in traditional school subjects is affected.” These results are important because a lot of money is being invested in equipping schools with computers and internet access. Proponents hope that computerassisted teaching methods that replace traditional, lecture-style teaching will lead to significant improvements in student achievement. A possible interpretation of the new findings is that using computers for practicing skills takes up time that could be more effectively spent on traditional teaching methods. By contrast, teaching time appears to be used relatively productively if computers are used to search for information and ideas.
Differences remain as Merkel and Tsipras try to mend fences The visiting Greek Prime Minister and his German host seemed to try and calm the friction created between the two countries when they met ion Berlin on Monday and appealed to both sides to work for a better European future. Despite warm words on Alexis Tsipras’ first official visit to Berlin, it was unclear if he and Chancellor Angela Merkel had narrowed their differences on economic reforms that Athens must implement to earn the urgently needed fresh cash from its creditors. Tsipras insisted he was not in Germany to solve Greece’s pressing liquidity problems, but to find common ground to move forward in the eurozone. He condemned as an “unjust provocation” a German magazine cover depicting Merkel amid Nazi officers by the Acropolis in Athens. And in a rebuke to his own Justice Minister, he said no one in Greece was considering seizing or auctioning off German property for war reparations. “Please, let’s leave these shadows of the past behind us,” Tsipras said, stressing that the European Union was a force for stability in a troubled region. Merkel said Germany considered the issue of reparations for the Nazi occupation in World War Two politically and legally resolved, but she was aware of how Greeks had suffered. She hinted that Berlin may increase a fund created last year for youth exchanges, for which parliament has granted EUR 1 mln a year for three years. She also said Germany considered all European states as equals and wanted good relations with all, including Greece. The Chancellor made clear there could be no breakthrough to provide fresh funds for Greece from their talks, since that was up to the 19-nation Eurogroup of eurozone finance ministers. Berlin wanted Greece to restore growth and overcome high unemployment, Merkel said, adding: “For that, you need structural reforms, a solid budget and a functioning administration.” Tsipras promised eurozone leaders last week he would present a comprehensive list of reform proposals soon to unlock aid, without which EU officials say Greece may run out of money by late April. Greece can choose its own reforms to unblock the flow of loans from international creditors and stave off bankruptcy, but it will have a hard time avoiding privatisations and a pension reform because of their budget impact, European officials said. Tsipras agreed last week that Athens would present within days a list of its own reforms that must achieve similar fiscal results to the measures agreed by the previous conservativeled cabinet. Which reforms to choose is politically sensitive,because
Tsipras’ Syriza party won a general election in January on a platform of ending the policies of its predecessors, including budget austerity and measures it regards as recessionary. If the creditors agree that the substitute plans will achieve an impact equivalent to the previously agreed measures, Greece would get more loans from the eurozone and the IMF, averting bankruptcy and a possible euro exit. The starting point for talks with the IMF, the European Central Bank and the European Commission — “the institutions” — is a long list agreed to by Tsipras’ predecessors. Greece will present its proposed package of reforms to its euro zone partners by next Monday in hopes they will release much needed cash, its government spokesman said on Tuesday. “It will be done at the latest by Monday,” a government spokesman told Mega TV. Privatisation is likely to be one of the major hurdles, officials said, because it was due to contribute EUR 4 bln to the budget this year alone. The Tsipras government does not want to sell state assets, although it has agreed in principle not to stop sales that had been initiated already. A reform of the pension system is another sticking point, where the EU is concerned about early retirement privileges and the need to link benefits to the size of contributions. Under the agreement with the previous government, Greece was due to pass a law merging supplementary pension funds. However, the new government is strongly resisting that because it would entail a further cut in pensions for many Greeks. The creditors also want changes in the VAT system to eliminate a reduced rate charged on Greek islands. They also want to double the VAT for hotels to 13%. Athens says that would hit tourism, its main revenue stream.
A ‘Brexit’ could wipe 2.2% off the UK’s GDP By Mark Briggs EURACTIV.COM
Leaving the EU could damage Britain’s economy, according to a major new report from a leading think tank. The Open Europe report released on Monday said that the worst case scenario for the UK would see the country leave the EU, and then fail to strike a free trade deal. In this scenario, GDP would be 2.2% lower by 2030 than if the UK had remained in the EU. Conservative Prime Minister David Cameron has pledged to hold an in/out referendum on EU membership if he wins the general election on 7 May. The report also lays out a best case scenario for the UK. The signing of a free trade deal with the EU followed by the aggressive pursuit of deregulation and opening up to global free trade could see GDP rise by 1.6%. In the event of a Brexit, all EU laws would remain on the statue books until they were actively repealed. Although Open Europe estimates the cost of regulation to between 0.7 - 1.3% of GDP, current evidence suggests most laws would be kept in place. According to Open Europe, a more likely scenario is
between a 0.8% loss and a 0.6% gain. “Brexit is unlikely to be the cataclysmic event some have claimed,” said Open Europe’s Chairman, Lord Leach of Fairford. “However, transforming Britain into the deregulated, free trading economy it would need to become outside the EU sounds easy in theory, but in practice could come up against some serious political resistance within the UK itself.” Not least in the area of labour market liberalisation. The report claims in order for the UK to remain competitive outside the EU it would need to adopt liberal labour market policies. With much of the Eurosceptic narrative focusing on the issue of immigration, it is unlikely such moves would prove politically popular. Highlighting the difficulty and uncertainty of any exit, the report claims, “If the UK puts as much effort into reforming the EU as it would have to in order to make a success of Brexit, the UK and the EU would both be better off.” The only established method for leaving the EU is under Article 50 of the Lisbon Treaty. The Article gives the EU full control over the timetable of any exit negotiations. It doesn’t provide any opportunity for the leaving member state to be involved in exit negotiations. Instead, two years after triggering the article they are presented with a ‘take it or
leave it’ deal. Speaking to Sky News today, Shadow Chancellor Ed Balls said that any potential referendum on EU membership would be a “disaster”. “We are playing fast and loose with something very important – our standing in Europe,” said Balls. Chancellor George Osborne told the same programme most voters agreed with his fellow Tories on the need for a renegotiation and referendum. Lucy Thomas, of the pro-EU lobby group Business for New Europe said that the report showed the uncertainty surrounding any exit from the EU. “At worst, the UK could lose more each year than we currently spend on defence. At best, there could be some kind of free trade deal, but would still have to apply many EU rules, with no say over what they were.” But Robert Oxley, from Business for Britain said: “This report makes clear that if Britain did ever vote to leave the EU, its economic future would be in its own hands, rather than simply being consumed by economic armageddon, as is too often predicted by the In-at-all-costs brigade. Those cherry picking the facts from the report are showing they are more interested in scaremongering than an actual debate about the facts of Britain’s EU future.”
March 25 - 31, 2015
financialmirror.com | COMMENT | 7
In praise of the glorious tomato... It is possible that there is not a home in Cyprus, or in any other Mediterranean country for that matter, without tomatoes in its pantry. It is also unlikely that there is any taverna worth its salt that doesn’t have a salad or cooked dish with this noble red fruit in it. It wasn’t always like this… The tomato is a Johnny-come-lately to our cuisine. It is a culinis a culinary wonder, too. In the islands and highlands of the ancient civilisations of the central and eastern Mediterranean three thousand years ago, the cuisines were well developed, and we would recognise many of the ingredients served then in the homes of the well-to-do. Lamb, beef, goat, chicken, game, olives, leafy vegetables, figs and other fruits. There is evidence of olive oil, animal fat and fish oil and there was wine, and beer, too. As the centuries unfolded, spices, coffee, tea and herbs – and pasta? – all came from the east, but it was not until four hundred or so years ago that other fruits and vegetables came from the New World, to add further essential ingredients to our cuisine. In the sixteenth century, a Mediterranean market would have lacked not only tomatoes, but corn, peppers, potatoes, coffee, vanilla, chocolate and many other items in use in the kitchens of today. The tomato was brought to Europe from South America, largely as a house-plant with pretty yellow flowers and red fruit, grown in the private gardens of the rich, where it was considered an indigestible curiosity. As a food ingredient it was regarded for several centuries with suspicion and it is chronicled that many considered the fruit poisonous. Old wives’ tales persisted into the 20th century – I remember my grandmother telling me that it had no food value and its seeds caused appendicitis. I am also old enough to remember when tomatoes were “seasonal”; that is to say for a few summer months only. Today, the tomato is not only a ubiquitous, year-round adornment of our salads, sauces and a thousand and one cooked dishes, it is also good for you, especially when it is cooked. A noted English medical man and dietician, Dr Thomas Stuttaford, who writes and lectures widely upon these matters, considers that if a man drinks a small carton of tomato juice a day he has reduced the risk of prostate cancer by more than 40%. He mentions magic words like “flavinoids” and “anti-oxidants” as good things contained aplenty in the jolly old Tommy. Stuttaford is a cheerful fellow, who considers alcohol in reasonable quantities is good for you, along with your tomato-based pasta sauces, tomato-laced pizzas, and, of course, onions and garlic. His final words of an address to a seminar several years back entitled “Wine and Health” are an encouragement to us all... “I can only recommend to you all that you remember your nursery days and eat up your greens and take your carrots nearly raw. But I would also say you should have your tomatoes as purée or sauce – a Bloody Mary doesn’t go amiss – and joyfully quaff your red wine. You will live
longer, you will have less disease en route, and recent work shows that you will also be very much less likely to suffer from Altzheimer’s”. In the eastern Mediterranean, I look with wonder upon people buying canned tomatoes, when fresh round tomatoes of varying sizes can be purchased all year. Fully ripe, their flavour in cooking is rich and sweet-sour. Cypriot/Greek food is mostly written about in places like the US, Britain and Australia, and the recipes generally use the canned variety, but I always advocate catering with fresh if you can. The difference is noticeable. Added to which, if you don’t like seeds getting into your teeth, you may peel and quarter fresh tomatoes and then remove them. The tomato flesh, chopped, is wonderful simply turned in hot cooked pasta along with chopped black olives, some olive oil and grated Kefalotiri cheese.
Patrick Skinner
This week’s Lenten Lamb Recipe Our blessed tomato is a key ingredient in many lamb dishes. I have two beauties for you this week. The first I found in a delightful book by the great (and sorely missed) American food writer, James Beard, one of whose books (pictured) I heartily recommend, reminded me of something virtually the same I have cooked for over 50 years. It’s a recipe you cannot beat!
Braised Shoulder of Lamb, Provencal Style Ingredients: 1 shoulder of young lamb (ask your butcher to remove the bone and roll and tie the joint for you. 2 medium-large onions, peeled and sliced. 1 medium sized aubergine, peeled and diced. 1 small can anchovies. 1 green sweet pepper, de-seeded and cut into strips. 2 cloves of garlic. 4 ripe tomatoes, peeled (and seeded if you don’t like “pips between your teeth”!) 6 tbsps olive oil. 1 medium-sized courgette (about 20 cms long) thinly sliced crossways. 16 – 20 pitted black olives. Salt and Pepper. Method 1. Make several incisions in the lamb and insert slivers of garlic and an anchovy fillet in each incision. 2. Rub the roast with salt and a little rosemary.
New Clubhouse at the Navarino A group of visionary entrepreneurs have teamed up with the owners of the Navarino and have transformed the popular former ‘Wine Lodge’ in Nicosia to a private club concept, where members can relax and enjoy good food and drinks without the hustle and bustle (and often anxiety) attached to other social meeting groups. The Navarino Clubhouse opened its doors on March 4 and will remain open until the end of the month to anyone wanting to drop between 4pm and midnight for drinks, happy-hour or dinner. After that, entry will be strictly limited to membership. Supported by the successful buffet concept developed at the other Navarino properties (Estiadhes, Evokhia, Prosilio), the “Clubhouse” aims to gradually acquire the sense of a private club and special evenings, such as live music on Friday nights, public speakers, debates, etc. For information visit www.clubhouseatnavarino.com or call 22350520 or email clubhouseatnavarino@gmail.com .
3. In a large saucepan, suitable for both hob and oven cooking, brown the lamb on all sides in the olive oil on high heat. 4. Reduce the heat and add the aubergine, the green pepper, the cloves of garlic, and the tomatoes. 5. Put the lid on your pan and put it into a pre-heated oven at t over low heat or place it in your oven pre-heated to 170°C / 325°F oven for 1 hour. 6. Remove the cover and add the sliced courgette, the black olives, and 2 – 3 sprigs of chopped parsley. 7. Taste and correct the seasoning. 8. Put the pan back in the oven for about another 30 minutes or until the lamb is tender and the vegetables have combined into a rich blend. 9. On a large warmed serving dish place the lamb in the centre and surround it with the vegetable mixture. Accompany with rice, or a bulgar-wheat (Pour-Gouri) pilaff.
Baked Lamb with Potatoes and Tomatoes Ingredients for 4 – 6 servings 1 kilo / 2 lb boned leg of lamb 1 medium onion, peeled and sliced 30 g / 1 oz butter 125 ml / 4 fl oz olive oil 2 sprigs rosemary 25 cl / 8 fl oz dry white wine 350 g / 12 oz ripe tomatoes 450 g / 1 lb new potatoes Salt and freshly ground pepper Method 1. Cut the lamb into chunks. In a large flameproof casserole, heat the butter and oil and fry the onion over low heat until soft. 2. As soon as the onion is transparent, add the lamb and chopped rosemary. 3. Brown the meat evenly over moderate heat, then pour in the wine and cook until it evaporates, stirring regularly. 4. Season with salt and add the chopped tomatoes, peeled and seeded if preferred. 5. Cook over high heat for about 30 minutes, uncovered. 6. Scrape and dice the potatoes, sprinkle with salt and pepper to taste and add to the meat in the casserole. 7. Transfer the casserole to a preheated oven (350°F) and bake for about 40min. 8. Turn the lamb from time to time to prevent it sticking to the bottom. Serve as soon as the potatoes are browned and cooked through. Send me your news! To be published in Cyprus Gourmet, here and on-line. Email: editor@eastwardho.com
March 25 - 31, 2015
8 | ENERGY | financialmirror.com
An accident waiting to happen? In June, Seveso III comes into force. However, as Brian Lait argues, the aspiration of a ‘level playing field’ of major hazard safety across the EU remains a pipe dream unless the European Commission creates a credible enforcement regime. He highlights the development in Cyprus in July 2011 that raises concerns over safety.
By Brian Lait In SHP’s June 2014 issue, Terry Woolmer outlined the new EU Major Hazards Directive (also known as Seveso III), which comes into force on 1 June 2015 and applies to all EU member states. Seveso III replaces the Seveso II Directive from 1996. These directives seek to create a ‘level playing field’ whereby all member states comply and deliver a high standard of protection for communities and the environment. In my opinion, however, some member states simply adopt it as ‘window dressing’ with little or no meaningful implementation. Moreover, despite the high-minded principles of Seveso II and III and the obligations placed on various parties, the EU Commission has no supervisory, monitoring, audit or control function over how, or even whether, such directives are implemented in member states. The ‘principle of subsidiarity’ is absolute and it is up to each member state to ensure its implementation, as Thomas Verheye, the head of unit at the European Commission Directorate-General, Environment, confirmed in a letter, dated 15 May 2014. In it, he said: “The commission monitors the transposition and application of European legislation in general terms. The commission is not empowered to carry out detailed evaluations and inspections concerning individual sites covered by the directive. It remains the prerogative of the member states to define in accordance with the local situation the measures to be taken to comply with the directive.” The EU Commission is content so long as a directive has been passed into national legislation and a competent authority is identified. In my opinion, this ‘light touch’ approach enables, if not encourages, irresponsible states to soft peddle. Many factors may influence implementation failure at state level, such as a laissez-faire culture, ignorance, an ‘it can never happen here’ attitude, a lack of resources, and pressure, if not corrupt influence, from vested interests. Site operators may also share some of these factors in addition to wanting to minimise cost and inconvenience of compliance and possibly achieve a risk trade-off i.e. ‘what can we get away with?’ In my opinion, the Vassilikos Energy Complex (VEC), which is under construction in Cyprus, is an example of where there is a gap between what Seveso II/III seeks to achieve in terms of protection and the reality on the ground. Based on the Vassilikos master plan drawn up by a consultant acting for Noble Energy for the Cyprus government, the whole VEC will cover an area of some 25 sq.km. and will include oil, LNG and LPG storage as well as
potential production of ammonia, urea, methanol and other associated petro-chemical outputs. In addition, there are berths for up to four vessels at any one time. The Dutch conglomerate Vitol, through subsidiary VTTV, is a site operator. VEC, which became operational in December 2014, has 28 oil storage tanks with a capacity of 543,000 sq.m. (1.99 times the size of Buncefield in the UK which also had oil and gasoline storage) and the shipping facilities for the four vessels. The facility may be extended by a further 305,000 sq.m. making it three times larger than Buncefield. In addition to the new facilities at VEC, there is the adjacent Vassilikos power station run by the Electricity Authority of Cyprus (EAC), which supplies around 60% of the electricity. The power station was rebuilt following its destruction on 11 July 2011 when poorly stored explosives at the Mari naval base next door blew up, killing 13 people. The power station site was and remains a designated major hazard site under the Seveso directives and Cyprus regulation. Although situated in a rural coastal area, VEC is flanked by a number of villages where property was damaged in the Mari-Vassilikos blast. The official government inquiry led by Polis Polyviou found that there were glaring deficiencies in the EAC’s compliance with Seveso II, including failure to address bi-directional domino effects (Seveso II, article 8) and defects in the statutory safety report (Seveso II, article 9) which materially affected the disaster outcome. Polyviou was scathing in his comments about management failures within EAC. Following the Mari-Vassilikos disaster and then the announcement of the VEC master plan, a great deal of public discontent and cynicism has been expressed in the Cyprus media about whether the government had the capability or even intention of ensuring Seveso compliance. How could the public find out about the implementation of Seveso II/III and related matters, such as the fire services and the environmental study, in relation to VEC? Seveso III article 14 requires ‘upper tier’ sites (i.e. those with higher inventories of dangerous substances) to make available to the public details of the safety measures, a copy of the safety report on
request and a major hazard inventory list. Moreover, article 15 requires operators to ensure public participation in decision-making to ensure accountability and transparency. Despite these Seveso requirements and the Cyprus regulator’s enforcement obligations, VEC operators so far do not appear to have complied with articles 14 and 15. It would appear that the government has relied solely on the advice of Noble or its consultants, who may well have carried out systematic identification and assessment of risks and their mitigation. However, I would ask – what independent assurance is publicly available that such assessments are competent and reflect actual conditions and not an idealised wish? Perhaps an independent safety assessor (ISA) should also be appointed to evaluate and review its work and output so as to avoid conflicts of interest, to the possible detriment of safety. Possibly in conjunction with an ISA, the competent authority as a major hazard regulator should also evaluate the operator’s compliance and take any appropriate action. Public trust and confidence are undermined by a toxic combination of a ‘what can we get away with?’ culture in some member states, non-implementation of EU Seveso Directives, a political and administrative rather than a safety assurance approach to implementation, and what I see as a laissez-faire EU Commission. The aspiration of a ‘level playing field’ of major hazard safety across the EU remains a pipe dream unless and until the European Commission creates a credible enforcement regime. Until then, I strongly believe that major accidents are waiting to happen. Brian Lait is a chartered accountant who is committed to the safety of major hazard sites. Professor Alan Waring CFIOSH and Associate Professor George Boustras at European University Cyprus reviewed this comment piece. Brian Lait has written to Noble Energy, VTTV, the Cyprus Commissioner for the Environment and the Cyprus Minister for Energy and says that he has not received any meaningful responses, with Noble not responding at all. To contact the author to find out more about his investigation, email bandslait@gmail.com
Brent at $55-56, China growth slows, Saudi output at max Brent Crude was trading at shy of $56 on Tuesday as data from China suggested a slowdown in its growth, part of the “go fast, go slow” cycle, while oil output at OPEC-driver Saudi Arabia was still at an all-time high. The HSBC/Markit PMI flash for China was at an 11 month low of 49.2 against a figure of 50.7. The demarcation between expansion and contraction is 50. The IMF recently forecast that China’s growth would slow to 6.9% next year, well off the torrid pace set for over a decade. Even that downward revision is in trouble,
as more signs appear of crack in the Chinese economy, according to 24/7 Wall St.com. Chinese manufacturing may have slowed so much because of trouble with economies in the EU and Japan. The U.S. economy may be large, but cannot carry China on its shoulders. Brent futures for May delivery were 20 cents down at $55.72 in early trading, while U.S. crude dropped 31 cents to $47.14 a barrel, widening its discount to Brent to $8.58 a barrel. Meanwhile, Saudi Arabia is pumping
around 10 mln bpd, close to an all-time high and about 350,000 bpd above its February quota. OPEC’s decision to fight for market share rather than cutting output has contributed to a halving in oil prices since June as the global surplus of oil supplies has grown. The market is expected to be at its weakest in the second quarter as winter fuel demand wanes while peak summer driving activity is yet to kick in, according to Reuters. Energy consultancy FGE forecasts a global surplus of 2 mln bpd
between April and June. U.S. crude stocks, which already stand at their highest in at least 80 years, were forecast to have risen for an 11th recordbreaking week, a preliminary Reuters survey showed. Meanwhile, in another report, Bloomberg suggested that with oil and natural gas prices constantly fluctuating, the biggest gainers will be storage companies in the U.S., as well as the likes of Vitol, whose subsidiary VTT Vassiliko started operating in Cyprus at the end of December.
March 25 - 31, 2015
financialmirror.com | ENERGY | 9
Billions pledged for Egypt’s energy sector Laying the ground for growing Russian involvement?
Energy deals featured high on the Economic Development Conference agenda, with an obvious preference for upstream activity and power generation, according to a report by the Middle East Strategic Perspectives. Reducing the debt it owns foreign companies and cutting down subsidies by about a third (with a view to phasing them out completely within five years) have contributed to restoring confidence in Egypt’s energy sector. The following is a list of agreements and MoUs signed during the three-day conference in Sharm el Sheikh: - BP finalised a $12 bln deal to develop 5 tcf and 55 mln barrels of condensates in the West Nile Delta. Production is expected in 2017 and is supposed to meet a quarter of Egypt’s energy needs. - BG will invest $4 bln in the next two years to develop natural gas fields in the Mediterranean. - ENI signed agreements worth $5 bln to be implemented over 4-5 years, including concessions in the Mediterranean, the Western Desert, the Nile Delta and Sinai. - UAE-based Dana Gas announced plans to invest $350 mln over the next 30 months, including the drilling of dozens of new development wells. - UAE’s Masdar and Saudi Arabia’s Acwa Power signed MoUs to develop up to 4 gigawatts (GW) of renewable and gas power generation projects, valued at $15 bln. - Siemens signed $10.5 bln in deals and MoUs to help expand the electricity network, which include building a 4.4GW combinedcycle power plant and installing 2GW of wind
power. Egypt’s gas production is likely to reach 63 bcm by 2019 (from 52.5 bcm in 2013). Energy self-sufficiency is hoped by 2018, although the deadline is seen as ambitious, the MESP report said. With new discoveries in the Mediterranean and elsewhere, in addition to possible supplies of Israeli and
Cypriot gas, Egypt could have access to approximately 74 bcm of gas by 2019, allowing the country to resume exports. Egypt is counting on the development of BP’s West Nile Delta project, which it perceives as the basis for an early return to energy security. Interestingly, the Russians, who have not
had a major presence in the Egyptian oil and gas sector in the past, traditionally dominated by western companies, have inherited a stake in BP’s West Nile Delta project. A 35% stake previously owned by DEA, the oil and gas unit of Germany’s RWE, will be passed to LetterOne, owned by Russian billionaire Mikhail Fridman and headed by former BP chief executive John Browne. LetterOne bought DEA in March for $5.7 bln and acquired its assets, including those in Egypt. Russian involvement in the Egyptian energy sector is expected to expand. Beside plans to jointly build Egypt’s first nuclear power plant, made following President Vladimir Putin’s visit to Cairo in February, Gazprom was one of the first companies contacted by the Egyptians to provide LNG. Some 35 shipments will be provided in the next five years. The government is also courting Gazprom’s exploration arm. A delegation of executives visited Egypt on February 18-19 and met with officials from the Ministry of Petroleum to explore possible investment in the sector.
Berlin fracking bill criticised ahead of UN climate talks For months, the German government has been working on a bill that would legalise fracking. But environment and health advocates warn that it sends the wrong message ahead of the UN Climate Conference in Paris, according to a report by EurActiv Germany. Sharp criticism has been directed at a government proposal for a law to permit exploitation of crude oil and natural gas using the controversial fracking technique. Not only do the proposed draft regulations neglect the protection of human beings, nature and water, warned environmental organisations such as BUND, NABU and the Allianz der Offentlichen Wasserwirtschaft (AOW) at a meeting in Berlin. On top of that, they said, the intention to boost a conventional method of energy production contradicts Germany’s pledge to focus on expansion of renewable energy sources. “The German government’s proposals for a fracking regulation are nothing more than a placebo,” said Liselotte Unseld, secretary-general of the German League for Nature, Animal Protection and Environment (DNR). In the medium and long-term, fracking cannot be prevented in this way, she warned, adding that the government’s drafts for a legislative bill contradict climate, energy and nature conservation policy goals. German Environment Minister Barbara Hendricks and Economic Affairs Minister Sigmar Gabriel plan to prohibit fracking in so-called sensitive areas, which are vital as sources of drinking water or for conservation purposes. The measure would also not allow fracking, which uses a chemical mix to fracture rock, to be carried out above 3,000 metres. In this way, drinking water pollution is ruled out. Fracking techniques would, however, be allowed for research
purposes exceeding a depth of 3,000 metres – as long as it is permitted by mining and water authorities. A certificate from an independent expert commission confirming trial drillings as successful could then result in commercial use of fracking technology in isolated cases. Germany’s governing coalition, consisting of the centreright Christian Democrats (CDU) and Christian Social Union (CSU) as well as the Social Democratic Party (SPD), emphasised that the legslation places the utmost value on water and health protection. Gudrun Kordecki, from the consortium of environment representatives in Germany’s evangelical church, takes a different view. She said these areas are not the only ones where the German government is taking significant risks. Berlin is also contradicting all efforts made for climate
protection, Kordecki argued. “If unconventional natural gas deposits are exploited using fracking, this will be the wrong kind of message for the UN Climate Conference scheduled to take place in Paris in December,” she pointed out. Germany, Kordecki said, should leave these gas reserves in the ground for future generations and, instead, invest in renewable energy sources and consistently expand strategies for energy efficiency and sufficiency. The centre-right and SPD had agreed in the coalition agreement “to push the shift from an economy primarily based on fossil fuels to one built on renewable resources and efficient, thereby supporting the Energiewende”. A recent study indicated that this path is necessary to reach the country’s climate protection targets. To do this, the majority of fossil fuels still available must be left in the ground, the study’s authors said. Oliver Kalusch from the Network Against Gas Drilling accused the German government of ignoring such findings. “The German government wants to create a fracking law that is tailored to the gas industry,” he criticised. Similar criticism of the fracking bill was heard from within the government’s own ranks. “I assume that the SPD ministers have hurried ahead to draft weak fracking restrictions because they are under pressure from the allied Union for Mining, Chemicals and Energy,” CDU Bundestag MP Andreas Mattfeldt told the Rheinische Post. Mattfeldt called for considerably higher hurdles for the controversial technology. “By no means do the planned restrictions go far enough,” said Mattfeldt. He called for the regulations to be adapted to fit the new level of technology.
March 25 - 31, 2015
10 | ENERGY | financialmirror.com
Lebanon’s bumpy road towards gas production By Karen Ayat Bassam Fattouh, director of the Oxford Institute for Energy Studies and professor at the School of Oriental and African Studies, University of London discusses the challenges facing Lebanon’s hydrocarbon industry and the eventual benefits from the successful development of the resources. In an interview with Natural Gas Europe, Dr Fattouh also explains the conditions for Lebanon’s entry into the export market as a net natural gas producer and the various possible export options.
How will the discovery of offshore gas in Lebanon benefit its economy and improve its energy security? The successful development of Lebanon’s gas resources could bring substantial economic benefits to an ailing economy and strengthen the country’s energy security. The development of its hydrocarbon reserves would enable Lebanon to reduce its dependence on imports of oil products, which in 2012 constituted more than 97% of its total primary energy supplies. In 2013, Lebanon’s imports of oil and its derivatives amounted to $5.11 bln, representing 11.4% of its GDP. It would also allow Lebanon to reduce the state’s debt, estimated at 146% of GDP in 2014. The government is keen to diversify Lebanon’s energy mix away from oil to strengthen its security of supply and to reduce air pollution. But gas production is not likely to begin before the mid- 2020s. What are the main challenges? Lebanon’s hydrocarbon sector and its institutional and regulatory framework are still in their infancy. Deadlock in Lebanon’s sectarian political system has led to long delays in the country’s hydrocarbon development and produced a volatile regulatory environment. The country suffers from weak administration, widespread corruption, and a poor business climate. What is the reason for the repeated delays in launching the country’s first licensing round? The prolonged failure of the Lebanese parliament to elect a new president and the formation in February 2014 of an unstable government made up of rival political groups has paralysed the decision-making process.
As of February 2015, the Lebanese government has failed to pass two decrees that are essential for tendering the offshore acreage. One of the missing decrees would delimit Lebanon’s territorial sea and exclusive economic zone, an awkward matter as some blocks straddle a disputed area between Lebanon and Israel. The other decree would stipulate the provisions of future Exploration and Production Agreements (EPA). The EPA determines the way in which future revenues are to be shared between the state and the investors that provide capital, technology, and expertise. How must Lebanon manage future gas revenues? The government needs, without further delay, to formulate a plan to manage the country’s potential oil and gas wealth, even though it may be many years before exploration, production, and monetisation reach a decisive stage. The Offshore Petroleum Law requires part of these revenues to be placed in a fund for the benefit of future generations. The initial policy priority for Lebanon, when revenues from energy production begin to flow, will be to reduce the state’s debt, estimated at 146% of GDP in 2014, beginning with the most risky liabilities: external debt denominated in foreign currency. Lebanon should avoid distributing future resource revenues as energy subsidies since these distort pricing signals and result in misallocation of resources. Although energy subsidies constitute an important social safety net for the poor, they are regressive in nature because in many instances richer households capture the bulk of subsidies. Energy subsidies also have a negative environmental impact by encouraging wasteful consumption of fossil fuels. There is scope for increasing public investment in infrastructure such as electricity and transport. Infrastructure constraints pose a serious barrier to competitiveness. Investment in public infrastructure would yield a relatively high rate of return and benefit the population. But the quality of public spending is critical. If public investment is directed toward poor quality projects or affected by corruption, there would be few benefits for the economy or the public at large. Will the gas be reserved for domestic use or allocated for exports? Lebanon’s natural gas should be used
initially to meet domestic demand, replacing fuel oil in power generation. If sufficient quantities are discovered to permit exports, these should, in the first instance, be through pipeline sales to countries in the region, such as Syria, Egypt, and Jordan, rather than through LNG. A joint LNG export facility with Cyprus might become feasible in the medium to long term if both countries discover considerable additional quantities of gas. The viability of such a project, or of an LNG facility in Lebanon itself, will depend on the amount of gas available for export, price, demand, developments on international gas markets, and Lebanon’s investment climate. If the recent fall in oil and gas prices is sustained, Lebanon’s competitive position, as a high cost producer that has come late to market, will be adversely affected. Which markets will Lebanon be selling the gas to and will Lebanon export gas via pipeline or in the form of LNG? Lebanon’s location in the eastern Mediterranean, with good coastal and land access, gives it a natural advantage for gas exports. The border with Israel is closed but Lebanon has a number of other regional trading options. Eventual export strategies will depend on the size of reserves, domestic and foreign demand, export targets, the cost of gas production, price, and competition, as well as the availability of finance for pipelines or LNG facilities to bring the gas to market. The timing of the first gas exports is important in view of gas market dynamics. Continued delays could close various market opportunities for the country. The commercial potential of regional exports to Egypt and Jordan is attractive but Israel may
have a first-mover advantage. Because of its flexibility, LNG is probably the most attractive export option, both for the government and for international investors, provided sufficient quantities of gas are available. By the time Lebanese LNG might be available, Lebanon will be competing with new entrants with considerably more market weight. Given likely production costs, Lebanon may also find it difficult to compete on price. Sharing LNG export facilities with Egypt, or potentially Cyprus, would offer significant cost savings if technical, commercial and political obstacles could be overcome. Joint monetisation between Lebanon and Cyprus, with a view to LNG production, might become viable at a much later stage, depending on the size and location of any new discoveries offshore Lebanon and Cyprus. Pipeline-Export Options to Turkey, Jordan, Egypt, Syria, and Iraq Pipeline options might be feasible if Lebanon’s reserves prove sufficient to permit exports but insufficient to attract investment in the necessary infrastructure for LNG. Pipeline exports to Jordan and Egypt could be made through the existing Arab Gas Pipeline (AGP), which previously transported Egyptian gas to Jordan and Lebanon, and could be used for reverse flows to both markets. This would require a relatively inexpensive link to be built between Lebanon and the pipeline. But many uncertainties affect the viability of this option. The route is long and subject to disruptions. Karen Ayat is an analyst and Associate Partner at Natural Gas Europe focused on energy geopolitics. karen@minoils.com
East Med: Substantial acreage left to explore, says Noble exec Despite being spoiled by several large discoveries in the Israeli offshore gasfields, Noble Energy’s Cyprus country manager believes there is still much exploration to be conducted, before the full potential of the eastern Mediterranean is known. Speaking at the Eastern Mediterranean Gas Conference in Nicosia last week, John Tomich said that the company has enjoyed a very good start with the major gas discoveries that have been made offshore Israel and Cyprus. Four years after the initial exploration well in block 12 within Cyprus’ exclusive economic zone, Noble Energy is expected
to submit its commercial plans for the ‘Aphrodite’ gasfield that holds a gross reserve of about 4.50 trillion cubic feet (tcf). The eastern Mediterranean is on the road of becoming a major hydrocarbon producer, Tomich said, with significant oil potential in the Levant basin and the need for more exploration. He said that the deep water Levant basin is very young as a hydrocarbon province, with significant exploration activity taking place only in the last six years, since the gas discovery at Israel’s Tamar field. “Most basins take decades to be explored and there is no expectation that
the Levant will be any different,” he said, adding that “there is substantial acreage left to explore”, referring to current exploration efforts by Italy’s ENI off Cyprus, as well as to new discoveries in Egypt. Cyprus has already engaged in talks in Cairo to consider exporting natural gas by pipeline to satisfy’s Egypt’s thirst for energy as the Al Sisi administration has set ambitious growth targets for the near future. Meanwhile, Cyprus and Total seem to have reached some mutial understanding, despite the French giant’s initial plans to withdraw from the Cyprus EEZ, after
Energy Minister Yiorgos Lakkotrypis and the General Manager of Total E&P Cyprus B.V., Jean-Luc Porcheron, signed an agreement last week on further exploration in order to further assess the prospects for exploration within block 11. In January, the Minister had announced that Total was unable to locate satisfactory drilling target areas within blocks 10 and 11 in the Cyprus EEZ that also echoed the French energy giant’s plans to cut back on exploration plans around the world and reduce costs, especially now that profit margins have narrowed ever since crude prices fell to half their market price since last June.
March 25 - 31, 2015
financialmirror.com | ENERGY | 11
The Turkish route for Europe
New stream strengthens Ankara’s role in energy relations between Asia and Europe
By Nicolo Sartori, ABO.net After dismissing the South Stream project, Russia announced the construction of the new Turkish Stream, which avoids Ukrainian territory and strengthens the role of Ankara in managing energy relations between Asia and Europe Vladimir Putin’s announcement, with which the Russian President, on December 2, announced the closure of the South Stream project and the construction of a new gas pipeline with a landing point in Turkey, is expected to significantly change the European energy map. Through the Turkish Stream pipeline, in fact, Russia aims to strengthen its energy relations with Turkey – in search of new supplies to sustain its economic growth – but without blocking access to western European markets, a key point of Gazprom’s export strategies. Moscow’s decision helps to strengthen Turkey’s role at the centre of the Eurasian energy game. In addition to the transit of gas from Russia, Ankara is, in effect, crucial in the construction of the Southern Corridor, the initiative of the European Commission for transporting gas from the Caspian Sea (and, potentially, from the Middle East) to the European markets. Thanks to this role as an intersection, Turkey can contribute significantly to the development of the balance between Brussels and its energy partners. Based on preliminary details provided by Gazprom, the new pipeline should partly retrace the old South Stream project. Its starting point on Russian territory, in fact, should be the same as the previous project, near Anapa, and its capacity – at least according to official announcements – should also remain at 63 billion cubic meters (bcm) per year, again divided into four lines of 15.75 bcm. For 660 kilometers, the route will remain unchanged, while the last 250 km will be diverted towards the south in order to reach Turkish territory. The first line of the Turkish Stream pipeline should transport volumes for the Turkish market, while the remaining three lines would be destined to western Europe in an attempt to avoid – at least in part – transiting through Ukrainian territory. To this end, the pipes should land near Kiyikoy, in the European part of Turkey and, from there, should reach Ipsala, near to the Turkish-Greek border, to then connect to a possible European transport network. Contrary to South Stream, the new project does not provide for the participation of European energy companies, but shall be constructed exclusively by Gazprom, in collaboration with Turkish Botas. The involvement of Italian Saipem in the laying of offshore pipelines is much more likely: last March, in fact, the subsidiary of Eni was awarded contracts for approximately EUR 2.5 bln to construct the entire first South Stream line (and for activities to support
partnership with Moscow is crucial for Ankara, which imports almost 60% of its gas supplies from Gazprom. Meanwhile, Turkey is Russia’s second largest export market outside of the former Soviet Union, after Germany. In an attempt to reduce its dependence on Russian gas and to support European energy diversification strategies, in past years Turkey has played a central role in the process of defining the Southern Corridor, the gas highway initially conceived by the European Commission to transport gas from the Caspian Sea, Iran and Iraq to Europe. Turkish company Botas should have been among the shareholders of the Nabucco gas pipeline, designed by Brussels to cross the whole of Flags of Turkey , Russia and Italy hang on pipes at the Blue Stream gas pipeline in Turkey and to transport Caspian gas Samsun, northern Turkey to Austria through the eastern Balkans. However, faced with the the installation of the second line), for which it has already growing role of Azerbaijan in the regional energy game, the started operations. government of Ankara has decided to protect its interests by supporting Baku and helping to bury Nabucco for good in INTERSECTING PIPES favour of Tanap. In this context, the construction of Turkish The implementation of Turkish Stream should proceed in Stream helps to reshuffle the cards. On the one hand, Ankara parallel with an increased transport capacity of Blue Stream, strengthens its strategic position, remaining crucial to currently the only gas pipeline directly connecting Russia to Europe for diversifying its supplies and to Azerbaijan for Turkish territory. According to Gazprom’s plans, the finally reaching the European market, while also becoming transport capacity expected for Blue Stream, a joint-venture essential for Russian attempts to diversify export markets between Eni and the Russian giant, should increase by 3 bcm and, above all, for Gazprom’s need to avoid transit through and should reach a total of 19 bcm in order to cope with the the Ukrainian network. growing demand in Turkey and, at the same time, minimize It is highly likely that the Turkish government will use this the risks of transit through Ukraine, through which 14 bcm powerful situation to maximise its advantages against all destined for the European part of Turkey currently transit. energy partners involved in the game. Discounts of over 10% However, in the coming years, Turkey will also be crossed recently applied by Gazprom to gas supplies are an example by the Trans Anatolian pipeline (TANAP), the gas pipeline of the negotiating power currently in the hands of Ankara. managed by the Azerbaijan energy company Socar in On the other hand, however, the new gas pipeline will help collaboration with Botas, which should transport gas from to increase the Turkish market share in the hands of the the Caspian Sea to the Greek-Turkish border and, from there, Russian giant, by partly negating the diversification connect to the Trans Adriatic pipeline (TAP) to land in Italy. strategies outlined by Ankara but consolidating the In Ankara’s plans, Tanap should help to diversify Turkish interdependence between the two countries. supplies, initially thanks to 6 further bcm of gas per year from The European Union and Azerbaijan are those who would the offshore oilfield of Shah Deniz II, which should reach lose as a result of this situation, since, for more than a Turkey in around 2020. decade, they have been trying to create strong energy relations thanks to the role of Turkey. In fact, although TURKISH AMBIVALENCE Russian gas that will reach Turkey through the Turkish The natural gas sector is particularly critical for Turkey, Stream pipeline can safely coexist with Azeri volumes mainly due to its total dependence on imports. Domestic transported through TANAP, there is still the possibility that consumption has more than doubled within a decade, and is a strong energy partnership between Moscow and Ankara expected to grow further due to economic expansion and may (intentionally or not) create a bottleneck along the route attempts to reduce the use of coal to produce electricity. Its of the Southern Corridor.
Forbes: Gazprom says it can compete with U.S. LNG in Europe Russian gas giant Gazprom told Barclays Capital recently that it can compete on price with the U.S. liquefied natural gas market in Europe, whenever it gets there, according to a report by Forbes. The U.S. hopes to eventually make strides into Russia’s natural gas market in Europe, taking away market share from a politically volatile neighbour. Former Soviet state Lithuania signed a non-binding agreement to purchase LNG from the United States this year. No delivery dates are set. Poland is also looking to the U.S. for future natural gas supply in order to reduce their dependence on Russia. Lithuania opened a floating import terminal last year and Poland plans to open one later this year. But Gazprom told Barclays during an analyst visit earlier this month that their piped in gas was still cheaper than U.S.
imports. Many people in Russia believe that one of the reasons the U.S. is sanctioning Russian oil and gas companies is because Washington wants to make way for natural gas exports to Europe in the future. Russian energy companies became the victim of Russian politics in Ukraine last July and again in September when the U.S. and E.U. punished them with sanctions. Gazprom said its market share in Europe was relatively flat last year at 31%, up slightly from 30% in 2013. It expects that export prices to Europe will average $260-270/kcm in 2015, around $100 less than they were in the first half of last year. Gazprom executives told BarCap they expect European demand to pick up by the summer. The company confirmed its reduction in capital expenditures this year, hitting a planned $24 bln as it doesn’t
want to toy around with cash flow. It believes cash flow generation will be positive and will be enough to cover its dividend payout to investors. Their current dividend is 4.93%… in roubles. Gazprom said it will reduce net debt in
2015. It is one of the few borrowers that still has access to international capital markets. “We view its large cash position as a credit strength,” BarCap analyst led by Eldar Vakhitov wrote in a note to clients.
March 25 - 31, 2015
12 | PROPERTY | financialmirror.com
Retirement condos: A new idea for the market µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers
For many years now there has been a successful concept in America and later in Europe, with the construction of retirement housing complexes on an organised basis, while recent developments in Spain show the trend of this new concept which may be of interest to Cypriot businessmen, property developers and investors. When someone talks about retirement homes in Cyprus, there comes to mind the miserable picture of most retirement homes, which are an embarrassment to society (albeit there are exceptions). Even though there are no new units with such high standards, the concept of retirement home is an upscale product that could target both Cypriots and foreign buyers and investors. These projects have their own specifications and maintain a high quality of facilities for tenants. It is a concept between whollyowned and an organised group with a single management. Generally, the residence cycle in Cyprus starts from when the young couple buys an apartment, then jumps to a house of 3-5 bedrooms, with pool, etc. and when they reach the age of 60 odd years and while the couple may remain active, the house turns out to be very big and lonely, while the cost and effort of maintenance and the different levels of our homes, make it difficult to stay and enjoy living. Family ties are no longer what they used to be ; children no longer visit and many generally become detached, caring less for elderly parents, while the number of friends dwindles. Purpose-built retirement housing projects are where active retirees want to feel at home, but the projects also reflect the living conditions and needs of this age. In general, these projects have the following characteristics: • Organised complex with 30-100 units, mainly of one or two bedrooms.
Willow Valley Community is a popular retirement project in Pennsylvania that offers lifetime amenities and is attached to a nearby hotel within the same complex • The units are single level (ground floor) with a garden or if it is on two levels, there should be private elevator unit. • The doors and elevators are wide enough to accomodate wheelchairs. • The units are fully equipped with kitchen furniture, air conditioning, etc. • The facilities include central services at the main building (lounge, cards, billiards, shuttles, etc.), spa facilities with indoor pool, convenient outdoor shallow pool (1.40m), preferably heated, etc. • All units have modern security systems, a direct line to the receptionist, internet and numerous television channels. • Organised visits or partnership with a medical centre for the needs of tenants, private minibus service, etc. • Outdoor activities may include tennis courts, green bowling and other ;aid-back activities and sports which are more suitable for such ages. These units are available in the form of long-term rental or lease, the period of which depends on the age of the tenant and the terms of the project operator. Assuming that the average lifetime is 82 years and the buyer
is 60 years old, then it is reasonable to offer a rent of around 25 years. The buyer prepays the rent and before the expiration of the rental may sell it to a third person, in consultation with the owner or project operator. Thus the original purchaser is not trapped in the project for life. If the purchaser is not a permanent resident, ie. a foreign visitor, he or she may be allowed to rent the unit to third parties during the vacant periods. To explain, let’s consider a hotel complex where each tenant uses the unit as absolute owner, without restriction, but there is the organisation, administration and management provided by a professional operator. So, each buyer can also have his own car and all the amenities of absolute property ownership. The advantages of such projects are: • The presence of mature aged people who may even be working. • The availability of cleaning, maintenance and management of common spaces. • Camaraderie and fellowship. • A private maid use for each tenant with the appropriate room.
• The independence from children and friends where a tenant may also want less contact with the outside world. With this concept, there tenant is not obliged to buy a, say, 2 bedroom apartment for EUR 250,000 for a period beyond his of her lifetime, but may do so for 30 years or less where the cost would be around EUR 180,000 or even 155,000 for 20 years and for 15 years just 130,000 - with the option of renting or selling it. In such organised projects the cost of management or maintenance charges may be high and could exceed 5,000 euros a year per unit. Then again this cost is not very high as it does not have the additional costs we find in other properties, such as the maintenance cost of home ownership, property taxes, etc. Ideal locations for such projects might be 3-5 km away from the coastal towns offering views to the sea, but also near enough to take advantage of facilities near or with villages, such as shops, supermarkets and leisure centres. An ideal project transformation of this kind could be the Kermia hotel in Ayia Napa that meets most of these requirements, except, basically, distance from cities and possibly a dull winter. During this period we see low occupancy levels in hotels, and whereas buying or converting an existing tourist villages could works, it may not be a perfect solution for locals, even though this would be more attractive to foreigners. For a simple comparison, a double room at a quality medical centre or retirement with food charge could be about 1,600 euros per person every month and includes care services, while when sharing a room the cost could drop to 900 euros a month per person. Projects such as these might interest investment funds, insurance companies and provident funds for use of their retired officials, as well as for other tenant, foreign or local. This is an innovative concept and projects such as those popular in Florida or across America may soon make their appearance in Cyprus, with a new classification of Condo Hotels whereby retirement residences and apartments could coexist. www.aloizou.com.cy
Vancouver home price surge raises labour cost There is a worrying trend in Vancouver, where sky-high housing prices are forcing many young professionals out of the city and into long commutes from far-flung suburbs, with some choosing just to leave the region altogether. That has business groups raising the alarm about Vancouver’s ability to attract and retain the talent needed to foster local successes. Vancouver has long boasted Canada’s costliest housing. But low interest rates and strong foreign demand, especially from Chinese buyers, have helped drive the cost of a typical detached home up nearly 30% in the last five years. The average Vancouver-area property - including houses, town homes and condos - sold for C$828,937 ($714,786) in November, compared with C$580,326 in Toronto, according to the Canadian Real Estate Association. In Seattle, on the West Coast of the U.S., with massive employers such as Boeing, Microsoft and Amazon in the area, the median sale price was $436,250 (C$507,184). On Vancouver’s desirable west side, the median selling price for detached homes rose to C$2.6 mln in November. Government data shows the migration of 25 to 44-yearolds out of Vancouver to other provinces has outpaced those migrating in from elsewhere in Canada over the past three years, eroding a key working-age demographic. Vancouver’s expensive housing also makes it tough for companies to bring in new talent from other regions, in particular senior executives. And Vancouver is not alone. New York, London and Singapore have long been popular with foreign investors,
driving up the cost of living for locals. But while those cities are global financial hubs and have many bankers with big compensation, Vancouver’s economy relies more on tourism and a cyclical resources industry. The median family income in Vancouver in 2012, the last data available, was just C$71,140 a year, the lowest of any major city in Canada, putting home ownership far out of reach for most. The median income in Regina, by comparison, was C$91,200, while Toronto families make just a bit more than Vancouver families. Vancouver is working to address the affordability gap, but existing initiatives mainly target lower-income families. Renting is a cheaper option in the city of 1.3 mln, with small 2-bedroom downtown condos listed for about C$2,000 a month and suburban basement units available at C$1,200. Despite the challenges, numerous companies interviewed
by Reuters said most of their staff are willing to make sacrifices - like long commutes or raising kids in shoebox condos - for the benefit of Vancouver’s mild climate and outdoor lifestyle. But those same companies, such as Vancouver-based retailer Mountain Equipment Co-op, also had examples of key hires who ultimately turned down jobs because of the high home prices. It’s an issue Craig Hemer, an executive recruiter with Boyden, has been grappling with for the better part of a decade. Hemer has learned ways to soften the blow - selling older executives on the idea of downsizing to a luxurious downtown condo and convincing those with families that suburban life offers more amenities for kids. Companies too are shifting their policies, with some offering car allowances and transit subsidies. Others are opening small suburban offices or allow staff to telecommute from home. But that isn’t always enough, especially in Vancouver’s start-up scene. Executives say it is easy enough to hire junior staff, but a dearth of experienced engineers and technology workers makes it hard to grow past a certain point. “There’s just not enough high caliber people here. They all leave when they realize they can make more money in other cities and live there for cheaper,” said Simeon Garratt, chief executive of Spark CRM, a property-focused tech start-up. “We debate at least once a month whether we should just move to Toronto.”
March 25 - 31, 2015
financialmirror.com | PROPERTY | 13
Investors pay €25 mln deposit for Ayia Napa marina M.M. Makronisos Marina Ltd., developer and operator of the EUR 220 mln Ayia Napa marina project, has submitted a EUR 25 mln deposit to the Cyprus government and work is expected to get underway with the relevant permits already issued. The 600-berth project, that includes Egyptian investor Naguib Sawiris as one of its strategic partners, is expected to be completed by 2018 and will be able to accommodate mega yachts of up to 60m (180ft). Ayia Napa Mayor Yianis Karousos said he was especially happy as this project will generate jobs at a time when Cyprus is suffering from a 16% unemployment rate, while designating the marina as an official port of entry will mean a major boost to the area’s tourism profile. The Municipality has recently approved the town planning permits that will allow for the sale of residential and commercial plots with the Caramondani Group as the main partner of the project. The permits include holiday homes, apartments, official buildings and infrastructure services, such as roads, facilities, access and pavements.
Lower interest rates, real estate and non-performing loans By George Mouskides
The island’s major financial institutions have lowered their interest rates significantly, by 2 per cent to be exact. So, an existing housing loan has seen a 2% decrease in the rate, i.e. from 4.75% to 2.75%. This is a serious reduction which has not yet received the appropriate attention by many. What will be the repercussions to the real estate market but also the economy in general? - A reduction of interest rates and instalments for existing loans – translating into a lighter burden for clients; - Potential loan seekers will now be encouraged to apply for one due to lower rates; - By lowering rates, banks send the message that the banking sector is now much healthier and can stand on its two own feet. This is also a huge confidence boost for buyers; - The decrease of savings rates by 2% might lead some
investors to invest in real estate instead of being taxed 30% on their savings rates; - It is estimated that lowering interest rates will inject an extra EUR 300 mln in market liquidity; and, - The decrease will aid restructuring of non-performing loans (NPLs) and boost liquidity. Let us present an example to better explain the positive ramifications for buyers: A young couple is buying a new 2-bedroom flat for EUR 125,000. They pay 25,000 up front and get a loan for the remaining 100,000. The instalment for this loan at 2.75% interest rate and a repayment period of 25 years is 465 euros a month. This amount is about the same as the rent they’d pay for the same flat. It is easily understood that with both wife and husband employed, the instalment of 465 a month is not prohibitive. A month ago they would have paid 577 euros for the same loan just because of the higher interest rate.
OPTIMISM I remain optimistic but prefer to be a realist at the same time. The interest rate reduction will be beneficial to market
Aristo promotes properties and Cyprus life at Russia fair Aristo Developers kicked off the 2015 international exhibition season with a successful presence at the Novosibirsk Real Estate Expo in Russia, which took place last month, welcoming 25 companies from seven countries. Aristo’s wide presence with projects across the island was a key attraction for both individual buyers and investors. Further to presenting Aristo’s property portfolio, representatives also utilised the opportunity to promote Cyprus’ attractions and competitive advantages such as its Mediterranean lifestyle and cultural
liquidity, investor psychology and the real estate market, but has to go along with a reduction of the non-performing loans. To reap the benefits of lower rates all the alarmism, populism and overreaction on the issue of the insolvency legislation must stop. We must pay attention to resolving the non-performing loans issue, without banks having to resort to extreme measures and risk causing social unrest. Political parties must allow banks (by voting the relevant legislation) chase the mega borrowers who do not service their loans. We must not allow seven developers, five politicians, three ex-bankers and one union to enforce the island’s monetary and banking policy. Non-performing loans weigh in heavily on the country’s economy and must be prudently managed if the lower interest rates are to achieve their intended purpose.
legacy, as well as its permanent residency and naturalisation schemes, educational facilities and tax and legal system. Pambos Charalambous, Aristo’s representative in Russia, who led the delegation, commented: “The island boasts an exceptional property market and offers a serious prospect for property buyers with its realistic routes for obtaining permanent residency and citizenship, as well as its educational opportunities available to all foreign students through public and private educational institutions.”
George Mouskides is General Manager of FOX Smart Estate Agency, a Licensed Estate Agent, and US Certified Public Accountant
March 25 - 31, 2015
14 | WORLD MARKETS | financialmirror.com
Bracing for the third longest Bull Run in history By Oren Laurent President, Banc De Binary
The US stock market is seemingly oblivious to the tense geopolitics that is casting shadows of doubt over European stability. As American stocks and indices are surging fullsteam ahead, investors are living the dream and delighting in what looks set, if it continues to May, to become the third longest Bull Run in history. When Obama was sworn in, during the heights of the Great Recession, investors were understandably nervous to trade currencies and stocks; only the safe haven assets, like the precious commodity gold, experienced any noteworthy gains. Yet from March 2009 the upswing in stocks has steadily gained momentum. Fast-forward to the present, and the Dow and S&P 500 indices haven’t enjoyed such good returns since the days of President Reagan. Just last week, stocks rallied again when the Federal Reserve suggested that future rate hikes will probably happen gradually. Even its chairwoman Janet Yellen jumped on the bandwagon and noted how stock prices are close to record levels. Leading the current trend are a number of influential tech and biotech companies. The Nasdaq index, home to both these incredibly performing sectors, rose above the 5,000 mark on Friday 20th March, coming close to its all-time high of 5,048.6 back in 2000. That’s a real reflection of the success of its components. Twitter is the talk of the town, up 35% this year, Cisco is outshining Wall Street expectations, Apple is as strong as ever following its recent product launches and earnings figures, and the iShares Nasdaq Biotechnology exchange traded fund (IBB) has soared 20%. The trillion dollar question now is whether or not it can last. Can the market continue its bullish streak and break new records? Or do the current highs mean that a crash is inevitable and imminent? The good news is that many analysts share an optimistic outlook. Wells Fargo, for example, say that because of the great lows of the Recession, this bull market is likely to last
longer than average. The multinational bank anticipates that stocks will return an average of 9% to 12% a year over the course of the next decade. Three key trends certainly seem to justify this market confidence. First of all is the fact that today’s tech-savvy millennial generation will constitute one quarter of the US population in 10 years’ time. In other words, demand for the latest tech goods and services is likely to stay high and grow. Secondly, the stats reveal that the tech world spends a greater percentage of sales on Research and Development than any other industry sector. This focus on innovation will enable companies to stay ahead of trends and to satisfy and fuel the anticipated demand. Last but not least, we must also consider the wider context in which these businesses are operating, namely the strengthening US economy which has recently boasted a series of positive data releases. Personal consumption
expenditures were up in the last quarter of 2014, helped by the long-anticipated growth in wages and the high levels of employment. Public confidence and spending power is set to accelerate in 2015 and will have a positive ripple effect throughout the national economy. The irony of course is that it’s largely thanks to the technical revolution that the world is changing more quickly than we’ve ever experienced. And yet for that very reason today’s tech trends and corporations look like they’re here to stay for a while. Consider making these stocks a part of your trading portfolio.
Should analyst upgrades value Facebook as much as Wal-Mart? By Chris Lange Fresh calls, hot off the press, and Facebook Inc. (NASDAQ: FB) is in the spotlight this time. A couple of investment banks have weighed in on the social media powerhouse. Piper Jaffray and JMP Securities were on the calls for Monday. What is interesting here is that if the higher analyst call is correct, then Facebook would be worth roughly the same as Wal-Mart Stores Inc. (NYSE: WMT) in market value. Should Facebook be valued the same as Wal-Mart? This may not seem like an applesto-apples comparison on the surface. Maybe it isn’t. Still, what are investors supposed to think when major economic fixtures and powerhouses are valued the same as social media? Piper Jaffray maintained a Buy rating and moved its price target up to $92 from $84. JMP Securities maintained a Market Outperform rating and raised its price target to $97 from $94, implying an upside of about 16% from current prices. This call was made due to Facebook taking on more market share in the overall advertising market. If Facebook shares rise to the higher $97 price level, it would put Facebook on the same playing field as Wal-Mart in terms of market cap. Facebook’s current market cap is $234 bln and Wal-Mart’s current market cap is just under $270 bln. Wal-Mart and Facebook may be nearing each other in market cap, and this call
implies that the social media leader could be worth the same or more than the world’s largest retail store — if the analyst from JMP Securities is right on its target of $97. The biggest issue may be just how much each company means to the economy. Facebook is expected to have revenues of $17.1 bln in 2015, while Wal-Mart is expected to have revenue of $492 bln in 2015. Wal-Mart’s net income attributable to holders for the past year was $16.4 bln, versus $2.925 bln for Facebook. Leading up to these calls, Facebook has been making some headlines. This week
Facebook will host its Developer Conference in San Francisco on Wednesday and Thursday. At this event, product experts from Facebook, Instagram, Parse, Oculus, LiveRail and other apps will share what they have learned and built for developers, and this should be an interesting view from the outside looking in. Last week, Facebook added a new feature to its messenger app. Users now can send money digitally through their Facebook network to friends. This feature appears to be a natural progression of social media, as other apps like Venmo have recently been
developed. In the same field, this could also be considered a competitor of Apple Pay, Google Wallet or PayPal. The highest price target that we have seen was made by Pivotal Research in late January, for $106, implying an upside of 26%. The stock has a consensus analyst price target of $91.89, implying an upside of nearly 10%. Shares of Facebook were relatively flat at $83.79 midday Monday. The 52-week trading range is $54.66 to $84.60. (Source: 24/7 Wall St.com)
March 25 - 31, 2015
financialmirror.com | MARKETS | 15
The panicked reach for yield the Dutch (and other) pension funds have to wait for the notoriously slow rating agencies to upgrade the eurozone’s periphery on the back of improved economic conditions and lower bond yields? And where will they invest in the meantime? It is almost certain that the expansion of the reach for yield beyond the very long-end of the core eurozone yield curves has only just begun. In Europe’s current economic and monetary environment, there is little reason why Spanish or even Portuguese bonds should yield significantly more than those of the core countries. The reach for yield will most likely extend further to the corporate bond universe, where spreads remain higher than in 2007. But it will also lead investors to
Marcuard’s Market update by GaveKal Dragonomics Travelling around Europe in recent weeks, we have been struck by how challenging most investors are finding the unprecedented situation created by the launch of the European Central Bank’s quantitative easing program in the context of negative bond yields in the core eurozone countries. These difficulties stem mainly from the contradiction between investors’ urgent need to reach for yield and the reluctance of local regulators and risk managers to let them take on more risk. It appears that European financial institutions find themselves almost as unprepared for the end of the eurozone’s financial market crisis as they were when it started five years ago. The major implication is that over the coming quarters the enormous pools of dormant liquidity accumulated during the euro crisis are going to flow into eurozone and noneurozone markets in successive waves. Europe’s liquidity boom has only just begun. There has always been a huge contradiction between on one hand Basel III plus the EU’s Solvency II provisions— which consider investments in any government bonds in the European Economic Area as good as gold regardless of ratings or other considerations—and on the other hand the absence of a eurozone lender of last resort, which makes government defaults not only possible but even likely. This inconsistency has now been removed, at least for the next couple of years, thanks to ECB’s program of sovereign bond purchases that started this month. But the financial industry finds itself completely wrongfooted, since over recent years risk managers, national regulators and rating agencies have caused investors dramatically to narrow their investible universe. This narrowing has created huge reservoirs of liquidity held in the so-called safe haven bonds of core Europe—bonds which are now in negative yield territory. This is unsustainable, especially for those insurers and pension funds that have guaranteed minimum returns of 2% or 3% to their clients. How will the banks, insurers and pensions funds of Europe react to the shock? Their panicked reach for yield has already led to some interesting activity. For example, French insurers are reported to be bidding aggressively for structured credit products involving loans to SMEs, while Italian pension funds are asking the regulator for authorization to buy more US treasury bonds. It is likely that news of this kind will abound over the next few months. One of the most interesting aspects of the game may be played out in the Netherlands. Dutch pension funds and insurers hold almost ?1.4trn in bonds and equities, more than a third of which is parked in core eurozone government bonds. Investment in peripheral bonds is still stigmatized by the local regulator, and pension funds are highly sensitive to ratings. The downgrades of Spain, Italy and other fragile countries since 2010 means that 40% of eurozone government debt is now rated below AA grade. Will
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the US, the UK, Sweden, Eastern Europe and Turkey. Last but not least, the juicy dividend yields provided by listed equities are now attracting new categories of investors, who are buying dividend only indices. This eurozone liquidity boom has only just started. Along with the ECB’s daily purchase of bonds through September next year, successive waves of liquidity are going to flow into global markets as eurozone financial institutions open their floodgates one after the other. Under these circumstances, it would be unwise to read too much into relative price movements, such as “cyclicals versus defensives”, or “growth versus value”, as liquidity flows and a panicky reach for yield will dominate. It would be misleading, however, to conclude that Europe’s current bull market is only liquidity-driven. Firstly, recent indications suggest that some of this liquidity is now going to boost credit growth. Secondly portfolio rebalancing is expected to revive intra-eurozone velocity, after a six-year decline that went a long way to explain the weakness of investment in Europe. And finally, the economic cycle in Europe now seems to be trending firmly upwards, as indicated once again last week by a report showing that at 0.9% YoY in the fourth quarter of last year, employment growth in the eurozone has reached its highest level since 2008.
Disclaimer: This information may not be construed as advice and in particular not as investment, legal or tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance. Investments in foreign currencies are subject to exchange rate fluctuations. Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission (CySec) under License no. 131/11.
Interest Rates Base Rates
USD GBP EUR JPY CHF
LIBOR rates
0-0.25% 0.50% 0.05% 0-0.10% -0.75%
Swap Rates
CCY/Period
1mth
2mth
3mth
6mth
1yr
USD GBP EUR JPY CHF
0.17 0.50 -0.01 0.07 -0.83
0.22 0.53 0.00 0.09 -0.82
0.27 0.56 0.01 0.10 -0.79
0.39 0.68 0.07 0.14 -0.70
0.69 0.96 0.20 0.26 -0.59
CCY/Period USD GBP EUR JPY CHF
2yr
3yr
4yr
5yr
7yr
10yr
0.83 0.85 0.08 0.15 -0.68
1.13 1.02 0.14 0.16 -0.59
1.36 1.17 0.20 0.19 -0.45
1.53 1.28 0.27 0.23 -0.31
1.78 1.45 0.40 0.34 -0.09
2.00 1.61 0.57 0.51 0.14
Exchange Rates Major Cross Rates
CCY1\CCY2 USD EUR GBP CHF JPY
1 USD
1 GBP
1 CHF
100 JPY
1.0971
1.4900
1.0440
0.8377
0.9115
1.3581
0.6711
0.7363
0.9579
1.0509
1.4273
119.37
130.96
177.86
0.9516
0.7636
0.7006
0.5622 0.8025
124.62
CURRENCY
CODE
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EUROPEAN
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14550 1.4905 1.782 24.9784 6.7996 14.2609 1.0974 2.22 276.85 0.64056 3.147 0.3913 18.5 7.8293 3.7468 4.0118 57.643 8.4707 0.9578 21.52
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0.3770 7.6269 27669.00 3.9319 0.7082 0.2993 1512.00 0.3842 3.6416 3.7504 11.8472 3.6729
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1.0436 185.99 2.5609
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The record corporate high-yield issuance of $30 bln in 2014 from Italy, Spain, Portugal, Greece and Ireland is unlikely to be repeated in 2015 as caution returns to debt capital markets, Moody’s Investors Service said in a report. “With concerns about the creditworthiness of some of the euro area periphery sovereigns re-emerging, as highlighted by our recent decision to review Greece for downgrade, we believe new issuer volumes will be lower in 2015 than in the last year,” said Pieter Rommens, author of the report. Moody’s expects that markets euro area periphery high-yield issuers will remain open in 2015 as search for yield and higher returns increases investors’ appetite for risk, as recently highlighted by the return of Wind and Telecom Italia to the debt capital markets. However, market access will remain more difficult for first-time issuers and smaller, less well-known names with weaker credit ratings. For Greece in particular, unless markets regain confidence in its sovereign risk profile Moody’s does not expect an improvement in new issuer volumes from the country. Moody’s expects that the start of the quantitative easing programme by the European Central Bank will continue to put pressure on yield across the Euro Area’s sovereign and corporate debt markets. This in turn will continue to attract investors looking to reduce exposure to emerging market risks, while trying to maintain some yield pick-up from the euro area periphery. WORLD CURRENCIES PER US DOLLAR
The Financial Markets
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Euro periphery high yield issuance hits $30 bln, same unlikely in 2015
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March 25 - 31, 2015
16 | WORLD | financialmirror.com
Why the taxpayer is on the hook By HansWerner Sinn By Hans-Werner Sinn It has repeatedly been attempted in the media to demonstrate that taxpayers would not have to foot the bill should losses occur from the purchases of government bonds by the European Central Bank (ECB). The ECB balance sheet, it is asserted, is pure fiction. It can conjure up money out of thin air. German populists are stalking fear among the populace because they don’t understand this. Is the German Constitutional Court then wrong to see a liability risk for the taxpayers in the unlimited purchases of government bonds of the crisis-afflicted countries under the SMP and OMT programmes? And did the opponents of the ECB’s QE programme fight in vain for leaving out of joint liability 80% of the purchases? Has the ECB given in to “German irrationality”? Far from it. The Eurosystem is, save for the allocation of voting power, arranged like a joint-stock company belonging to the Eurozone member countries. It is, of course, not really such a company, and its task is not to generate profits, but to carry out monetary policy. Nevertheless, as a by-product of its tasks, the system normally does generate profits, which are then distributed via the national central banks to the respective national treasuries. The profits result from the investment of the Eurosystem’s equity capital as well as from lending self-created money against interest, or from the acquisition of interest-bearing assets with such money. If central banks were traded in the stock exchange, they would have a market or present value that is derived, as it is for every other stock corporation, from
their future dividend distributions. Given the time path of the monetary base, any write-offs of defaulting government bonds lead to a permanent reduction in the dividends distributed to the member countries and to a decrease in the present value of these dividends in the exact amount of the write-offs. This is true regardless of whether or not accounting capital becomes negative in the process. The “shareholder countries” must therefore either raise taxes or reduce expenditures. The assertion that this poses no problem since “merely” the profits sink, as is sometimes maintained, is a euphemism. What would a real shareholder say if merely part of his dividends were taken away? It is correct, however, that the taxpayers are under no obligation to recapitalise the central bank in order to make up for the loss of profit. But this holds for every real stock
company as well, without this meaning that the shareholders would not perceive the drop in dividends as a loss; they will, of course, have to bear the profit drop fully. But could we be talking about peanuts here? Unfortunately not. In static terms, that is, when the monetary base remains constant over time, the present value of the ECB system’s dividends amounts to the sum of the stock of central bank money and the central banks’ equity capital, irrespective of when and how quickly the currently very low interest rates return to normal levels. (After all, the present value of the interest revenue earned by a deposit is always equal to today’s cash value of the deposit if the actual time path of the deposit’s interest rate is used for the calculation of the present value.) By the end of 2014, the monetary base amounted to 1,317 bln euros, while the equity capital including valuation reserves added up to 425
bln euros. The assets to be distributed amounted thus to 1,742 bln euros. One can deduct from this sum the banks’ minimum reserves for which the ECB may, but doesn’t have to, pay interest. This would bring the sum to 1,636 bln euros. This is more or less equivalent to what German reunification has cost in terms of net transfers through the government budget. Assuming a continuous expansion in the monetary base on par with economic growth, one would even come to a present value of about 3.4 trln euros. This sum can whet some appetites. France, for example, is entitled to around one-fifth of this sum, i.e. almost 700 bln euros. It must also bear a fifth of the potential write-off losses resulting from government bond purchases already performed under the SMP programme or promised under the OMT programme, both programmes set up to prop up the Eurozone’s crisis countries. And it would also be liable for potential write off-losses of one-fifth of the 20% portion of the government bond purchases under the new QE programme which are to be pooled among the member countries. Of course, in net terms, such losses would only result from other governments’ bonds purchased under these programmes. If, as is the case for 80 percent of the QE purchases of government bonds, a central bank buys its own government’s bonds, a default is not a net loss, since the disadvantage of the writeoff loss is matched by the advantage of getting rid of a payment obligation of equal size. Thus, much to the chagrin of those claiming otherwise, there is no such thing as a free lunch for the participants of government bond purchase programmes that involve the international mutualisation of interest revenues. Hans-Werner Sinn is Professor of Economics and Public Finance, and President of the Ifo Institute
The Fed versus price stability By Robert Heller There is a big difference between the Federal Reserve’s mandate to maintain “stable prices” – as enunciated in the Federal Reserve Act – and the Fed’s self-selected target of 2% annual inflation. So how is it that policymakers have managed to substitute the latter for the former? The term “stable prices” is self-explanatory: a bundle of goods will cost the same ten, 50, or even 100 years from now. By contrast, if a country experiences 2% inflation over a tenyear period, the same items that $100 can buy today will cost $122 at the end of the decade. After 100 years, the price tag will be a whopping $724. In her recent Congressional testimony, Fed Chair Janet Yellen referred several times to the mandate of maintaining “stable prices”; but she mentioned the Fed’s 2% inflation objective twice as often. “US inflation continues to run below the Committee’s 2% objective,” she said, and the current “high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2% over the medium term.” Does the Fed really want to increase annual inflation to 2%, such that the price level of the country will increase by
more than 700% over the next century? Is that what Congress had in mind when it tasked the Fed with achieving “stable prices”? Former Fed Chairman Alan Greenspan knew that it did not. On July 2, 1996, at a meeting of the Federal Open Market Committee (FOMC), which was devoted to extensive discussion of the appropriate inflation target for the Fed, Greenspan posed a simple question: “Are we talking about price stability or are we talking about zero inflation?” he asked. “As we all know, those are two separate things.” The discussion quickly turned to the difficulty of measuring inflation accurately and the need to build in a “safety cushion” to avoid deflation. According to Greenspan, “Price stability is that state in which expected changes in the general price level do not effectively alter business and household decisions.” Yellen, then a Fed governor, was not satisfied: “Could you please put a number on that?” she asked. Greenspan did: “I would say that number is zero, if inflation is properly measured,” he replied. At the time of that FOMC meeting, the consumer price index was increasing at about 3% per year. Most of the discussion focused on whether the Fed should slow annual price growth to 2% or even lower, thereby consolidating the gains made in the difficult fight against inflation that policymakers had waged for the previous 15 years. Greenspan summarized the consensus: “...we have now all agreed on 2%...” Thus, the Fed’s 2% inflation objective was born. During the ensuing discussion, several FOMC members argued that the inflation rate might be reduced to less than 2%, but nobody argued that inflation should be pushed higher if a
lower, but still positive, rate was achieved. Following the discussion, Greenspan exhorted the FOMC members to keep the discussion of the inflation target secret. “I will tell you that if the 2% inflation figure gets out of this room,” he warned, “it is going to create more problems for us than I think any of you might anticipate.” The official minutes of the meeting make no reference to the entire discussion of the inflation target, which took up several hours, and the FOMC never formally announced its 2% target for annual inflation until Chairman Ben Bernanke, Yellen’s predecessor, finally did so in 2012. The 2% inflation target now is at the forefront of FOMC decision-making. For example, while annual inflation stood at 0.8% in December 2014, the minutes of the January 2015 FOMC meeting refer several times to the Committee’s need to make “progress toward its objectives of maximum employment and 2% inflation” by maintaining a highly accommodative policy stance. Increasing the rate of inflation is now the stated objective of Fed policy. Congress did not give the Fed a mandate to pursue that goal. The Federal Reserve Act is explicit: the Fed should achieve “price stability” for the US currency, along with moderate interest rates and maximum employment. As long as inflation is somewhere between zero and 2%, the Fed should declare victory and leave it at that. Robert Heller is a former member of the US Federal Reserve Board of Governors. © Project Syndicate, 2015. www.project-syndicate.org
March 25 - 31, 2015
financialmirror.com | WORLD | 17
Will Fed tightening choke emerging markets? As the Federal Reserve moves closer to initiating one of the most long-awaited and widely predicted periods of rising short-term interest rates in the United States, many are asking how emerging markets will be affected. Indeed, the question has been asked at least since May 2013, when thenFed Chairman Ben Bernanke famously announced that quantitative easing would be “tapered” later that year, causing long-term US interest rates to rise and prompting a reversal of capital flows to emerging markets. The fear, as IMF Managing Director Christine Lagarde has reminded us, is of a repeat of previous episodes, notably in 1982 and 1994, when the Fed’s policy tightening helped precipitate financial crises in developing countries. If the Fed decides to raise interest rates this year, which emerging markets are most vulnerable to a capital-flow reversal? There is no question that emerging markets are highly sensitive to global market conditions, including not only reformer, but other countries – including Botswana, China, changes in short-term US interest rates, but also other Costa Rica, Malaysia, the Philippines, and South Korea – also financial risks, as measured, for example, by the volatility avoided pro-cyclical fiscal policies. index VIX. Capital-flow bonanzas, often spurred by low US Unfortunately, policy backsliding is jeopardizing this interest rates and calm global financial markets, end abruptly historic “graduation” from pro-cyclicality. Countries like when these conditions reverse. Brazil did not take advantage of the recovery from 2010 to By the end of the currency crises in East Asia and 2014 to strengthen their budgets, and are now in a difficult elsewhere in the late 1990s, emerging-market governments position. Some of these countries used the renewed capital had learned some important lessons. Five reforms were inflows to run large current-account deficits after 2010 as particularly effective: more flexible well. Such deficits, together with high exchange rates, larger foreigninflation rates, earned Brazil, Turkey, currency holdings, less pro-cyclical and South Africa their membership By Jeffrey fiscal policy, stronger current on the Fragile Five list of countries Frankel accounts, and less debt denominated that were hit particularly hard by in dollars or other foreign currencies. Bernanke’s announcement in 2013. Many, but not all, developing and India and Indonesia were on this list emerging-market countries took as well, though they have begun to steps to implement these desirable policies. Their choice was move in the right direction since then (thanks in part to new put to the test during the 2008-2009 global financial crisis. governments). Countries that had adopted such reforms were, on average, Then there are the countries – including Venezuela, less adversely affected. Those that had not, particularly Argentina, and Russia – that never moved in the reform middle-income countries in Central Europe and the direction in the first place. They were temporarily bailed out continent’s periphery, tended to be hit the hardest. by strong world prices for their export commodities, but that In particular, after 2001, many developing countries ended last year. overcame their historic pattern of using periods of capital A less visible threat is the denomination of debt in dollars inflows to finance large fiscal and current-account deficits. As and other foreign currencies. The currency crises of the a result of reduced debt and enhanced reserves, their 1980s and 1990s were particularly devastating because creditworthiness improved during the 2003-2007 boom. By devaluations so often hit countries that had borrowed in 2008, they were in a strong enough position to respond to dollars. This resulted in a “currency mismatch” between the financial crisis by allowing larger budget deficits and thus dollar liabilities and revenues that were often denominated in mitigating the downturn in 2009. Chile was the star local currencies. When the cost of dollars doubled in terms of
pesos or rupiah, otherwise-solvent local banks and manufacturers could no longer service their dollar debts. Owing to this adverse balance-sheet effect, devaluation turned out to be contractionary, leading to severe recessions. Most emerging-market borrowers had learned their lesson by the turn of the century, as exchange-rate volatility had made the risks of currency mismatch more tangible. When international investors came knocking again in 2003, many emerging markets declined to borrow in dollars or other foreign currencies. Instead, they took the inflows in the form of direct investment, equity, or debt denominated in local currency. The relative absence of mismatch was one of the reasons why emerging markets did much better when their currencies depreciated in 2008-2009 than in past crises. Exceptions like Hungary, where homeowners had foolishly borrowed in seemingly cheap euros and Swiss francs, proved the rule. Unfortunately, in the last five years, many emerging markets have reverted to borrowing in foreign currency. Though, for the most part, governments have continued the shift away from dollar debt, the corporate sector, as the Bank for International Settlements has warned, has been tempted by ultra-low interest rates. The Chinese private sector may have the biggest problem. Much of its recent borrowing violates key tenets of hardearned wisdom gained in past crises: it is foreign exchangedenominated, short-term, shadow-bank-intermediated, and housing-backed. Even though the Fed has not yet started raising interest rates, the well-established US economic recovery and the prospect of monetary tightening have, over the last year, caused the dollar to appreciate sharply against most currencies, those of emerging markets and advanced countries alike. If the Fed tightens as early as the middle of this year, further dollar appreciation is likely. Those who have been playing with mismatches may be about to get burned. Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University. © Project Syndicate, 2015. www.project-syndicate.org
Slow growth for US interest rates By Alexander Friedman The US Federal Reserve’s new policy statement will, as usual, be analyzed in excruciating detail in the days ahead, as investors seek guidance on when and how quickly interest rates will be raised. Notably, the word “patient” does not appear, and the Fed has signaled that it may raise its benchmark rate as early as June. But the particular wording is far less telling than the context in which the statement is being released. In fact, uncertainty about monetary policy in the United States has been the leading driver of financial-market volatility this year. After all, the potential effect of interest-rate hikes on the US yield curve has a major impact on the pricing of all global assets. But three factors suggest that investors are over-emphasizing the risk of a curve repricing. First, economic developments will likely lead the Fed to exhibit caution when it comes to the process of raising interest rates. Second, even if the Fed acts quickly, investor appetite for returns will anchor yields. Third,
the technical features of the market will ensure strong demand for US Treasury bills. Let us begin with the relevant economic developments. The consensus nowadays is that the US economy is growing steadily, with the leading indicators pointing toward further expansion, and labor-market data surpassing expectations. Job creation is strong, with total non-farm payroll employment having increased by 295,000 in February and the unemployment rate falling yet again, to just 5.5%. But some indicators still have the Fed concerned. The Personal Consumption Expenditures deflator remains well below the 2% target. The core consumer price index, to be released next week, is expected to show a year-on-year increase of just 1.7% – or even less, if the lower oil price feeds through from headline to core CPI. And real wage growth stands at less than 2%, which is below the level deemed necessary by the Fed to underpin a sustainable acceleration in consumer spending. On top of already modest inflation expectations – characterized by a five-year break-even inflation rate of 1.9% – the dollar has appreciated by around 10% this year, and by almost 25% since the beginning of last year. Given the deflationary impact of a stronger currency – and the Fed’s general intolerance of deflation – there is good
reason to believe that the Fed will exercise caution in raising interest rates. Even if the Fed ignores deflationary pressure and hikes interest rates more quickly, medium- and long-term rates are still likely to be anchored, given how little yield is available elsewhere in the world. Yields on German Bunds are now negative out to eight years. In Europe’s peripheral economies, tenyear yields are edging closer to 1%, as the European Central Bank pursues a EUR 1.1 trillion ($1.3 trillion) quantitative-easing program. And, in Japan, ten-year yields are below 0.4%. Lending to the emerging economies is hardly attractive, either, with even the riskiest economies offering low hardcurrency yields. Indeed, even Russia – whose military intervention in Ukraine has led the West to impose strict economic sanctions – offers annual yield of less than 6% on tenyear bonds. Given such low yields in most of the world, investors will be eager to take advantage of the relative value opportunity offered by rising US interest rates. Add to that America’s safe-haven status, and the fact that any re-pricing of US rates surely would reflect an economic resurgence, and the bid for US Treasuries should be exceptionally strong. In this context, interest rates would
remain capped, mitigating the risk of a disorderly bond-market sell-off. The final, technical reason why interest rates are not likely to rise excessively is that years of central-bank purchases and a shrinking US budget deficit have made US Treasuries scarce. Indeed, so-called “repo” activity – that is, the sale of a US Treasury obligation that the seller promises to buy back later at a slightly higher price – has declined considerably, with the balance of such transactions having fallen from $5 trillion before the crisis to $2.5 trillion today. Both the two-year and five-year US repo rates have been pushed periodically into negative territory, owing to the combined effects of risk-averse behavior, investor deleveraging, and stricter banking regulation. Though US monetary policy undoubtedly exerts significant influence on global markets, fears surrounding the direction of US interest rates may be overdone. Though the Fed may no longer be promising patience, the current financial environment implies that investors should not, for the time being, anticipate a major hike. Alexander Friedman is the Chief Executive Officer of GAM. © Project Syndicate, 2015. www.project-syndicate.org
March 25 - 31, 2015
18 | WORLD | financialmirror.com
Asia’s almighty middle class By Lee Jong-Wha
Despite recent economic uncertainty, Asia’s middle class is growing fast. In the coming decades, this burgeoning demographic segment will serve as a keystone for economic and political development in the region, with significant implications for the rest of the world. The OECD estimates that the global middle class (defined as households with daily expenditures of $10-100 per person, in 2005 purchasing power parity terms) will swell to 4.9 billion people by 2030, from 1.8 billion in 2009. Two-thirds are expected to reside in Asia, up from 28% in 2009, with China home to the largest share. Indeed, if China pursues the structural reforms and technological upgrading needed to maintain rapid economic growth, its middle class should exceed one billion people in 2030, up from 157 million in 2009. The rapid emergence of Asia’s middle class will bring far-reaching economic change, creating new market opportunities for domestic and international companies. Already, demand for consumer durables has increased in the region, with China becoming the world’s largest market for automobiles and mobile phones. But there remains substantial room for more consumption in luxury goods and technological products, as the purchasing power of the developing world’s middle class catches up to that in the advanced countries. This convergence will contribute to more sustainable economic growth, with Asia’s economies rebalancing toward domestic demand, especially household consumption, and thereby becoming less vulnerable to external shocks. Given the decline in export demand since the global economic crisis, this shift could not be timelier. And the benefits will not be confined to Asia; as imports to the region increase, global trade imbalances will decline, improving the sustainability of economic growth worldwide. Indeed, Asia’s growing middle class will transform a region known as a global manufacturing hub into a consumption powerhouse. As demand rises, more and better jobs will be created not only in Asia, but also globally, along supply chains and across production networks.
With rising prosperity comes improved education and health care, which promise to help drive long-term economic growth by improving productivity. In China, this would represent a significant shift from prevailing conditions, in which the children of poor households, especially in rural areas, lag in terms of nutrition and school enrollment, despite significant progress in recent decades on lowering infant mortality and raising educational attainment. Equipped with high-quality education, Asia’s rising middle class will demand higher-quality public services. Increased confidence in their country’s political systems and institutional structures, enhanced by improved perceptions of upward mobility, will help to strengthen the rule of law. And there will be more opportunities for women to learn and work, leading to greater gender equality. Most important, the rise of the middle class is likely to be accompanied by growing demands for political freedom and civil liberties, thereby fostering democratization. Indeed, an examination of a large sample of countries, from the nineteenth to the twenty-first centuries, reveals that a larger population of affluent, educated citizens – especially women – brings about more political participation and greater support for democracy, particularly in less-developed countries. In the West, capitalism and democracy progressed in
tandem, as the development of markets reduced the power of landlords and increased that of the working and middle classes. By participating actively in politics, basing their electoral choices on rational self-interest, and developing the sense of moderation needed to resist dictatorship, the middle class promotes democratic progress. At the same time, the growth of private organizations associated with the rise of the middle class prevents state institutions from monopolizing political resources. In Asia, South Korea experienced a similar progression, with rapid economic growth spurring the rise of a large middle class, which in turn drove democratization in the 1980s. That history may repeat in China before long. Given the benefits of having a large middle class, Asian countries should be nurturing theirs by improving health care, upgrading infrastructure, investing in universities and technical training, and addressing income and educational disparities. Moreover, social safety nets should be created or strengthened, in order to help safeguard the middle class from negative shocks and boost consumption growth (which continues to be hampered by precautionary saving). Finally, public policies – aimed at strengthening the rule of law, promoting trade, and achieving sound macroeconomic management – are essential to sustain growth, thereby ensuring the continuous upward mobility of lower-income families. That upward mobility is the key to keeping in motion a virtuous circle of middle-class expansion and economic growth. Lee Jong-Wha, Professor of Economics and Director of the Asiatic Research Institute at Korea University, was a senior adviser for international economic affairs to former President Lee Myung-bak of South Korea. © Project Syndicate, 2015. www.project-syndicate.org
Making space for China When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States. The White House issued a statement urging the British government to “use its voice to push for adoption of high standards.” And one senior US administration official was quoted accusing the UK of “constant accommodation of China, which is not the best way to engage a rising power.” In fact, it is the US that is advocating the wrong approach. In the UK, the diplomatic spat served as an occasion for the British press to air criticism from those who believe that the government should adopt a stronger stance on China. For example, they say that the government should have spoken out more forcefully in support of last year’s prodemocracy protests in Hong Kong, and that it should not have distanced itself from the Dalai Lama (as it seems to have done) during Prime Minister David Cameron’s visit to China in 2013. The UK does need to stand up for itself, but there is no reason for it to become confrontational about internal Chinese matters – especially in the case of Hong Kong, where it lost its standing when it agreed to return the city to Chinese control
in 1997. The US, too, would be wise to stop resisting the fact that the world is changing. The US Congress has yet to ratify a 2010 agreement providing China and other large emerging economies greater voting power in the World Bank and the International Monetary Fund. In the meantime, the agreement has become obsolete; China’s economy has nearly doubled in size since the deal was struck. America’s reluctance – and that of France, Germany, and Italy – to give the emerging powers an appropriate voice in the established international financial institutions is counterproductive. It drives the creation of new parallel institutions such as the AIIB and the New Development Bank, founded in 2014 by the BRICS countries (Brazil, Russia, India, China, and South Africa). In the coming days, I will be visiting China in my role as Chair of the British government’s Review on Antimicrobial Resistance, and also as a participant in the Boao Forum for Asia, an event similar to the annual gathering of the World Economic Forum in Davos. I hope to encourage Chinese policymakers to make the fight against antimicrobial resistance a priority when China chairs the G-20 in 2016. And though I am not the British ambassador, I will be happy to state my belief that the UK government was wise to join the AIIB, and that the US administration, in voicing its
opposition, was not. China’s $10 trillion economy is bigger than those of France, Germany, and Italy combined. Even if its annual output growth slows to 7%, the country will add some $700 billion to global GDP this year. Japan would have to grow at something like 14% to have that type of impact on the world. For anyone who wants to engage in global trade, it is thus vital to identify what China wants. In the case of the UK, this obviously includes finance (as well as sports, music, fashion, and perhaps health care). The UK is simply being smart when it promotes its own interests by cooperating with China. One of the few positive consequences of the 2008 financial crisis was the elevation of the G-20’s global role; in principle, it is a far more representative forum for international leadership than the G-7 ever was. There is, however, a downside to the G-20’s emergence: the large number of participants can make it difficult to reach agreements and get things done. A new G-7 needs to be created within the G-20, thereby providing China with a degree of influence that reflects its economic weight and requires it to assume a commensurate proportion of global responsibility. Space at the table for China could be obtained if the eurozone countries, signaling their commitment to the common currency, agreed to surrender their individual seats in exchange for one representing the entire monetary union. The US, too, would finally
By Jim O’Neill
have to accept China’s heightened global role. Later this year, the IMF will recalibrate the weights in its unit of account, the so-called Special Drawing Rights, which comprises a basket of currencies that currently includes the US dollar, the euro, the British pound, and the Japanese yen. According to almost every economic and financial criterion, the SDR basket should now include China’s renminbi. The US would be wise to not oppose such a move. Otherwise, it would risk accelerating the decline of the established international financial institutions. Similarly, the US Congress should ratify the agreed changes to the governance of the IMF and the World Bank. By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard. And decisions like that of the UK – and France, Germany, and Italy – show that they are not alone. Jim O’Neill, a former chairman of Goldman Sachs Asset Management, is Chairman of the Review on Antimicrobial Resistance. © Project Syndicate, 2015. www.project-syndicate.org
March 25 - 31, 2015
financialmirror.com | WORLD | 19
China’s trial-and-error economy By Andrew Sheng and Geng Xiao
Chinese Prime Minister Li Keqiang’s work plan for 2015, revealed at this month’s National People’s Congress, highlighted the country’s shift to a “new normal” of 7% economic growth. The shift to slower growth poses serious challenges, but it also creates an important opportunity for China to ensure its long-term economic development. China’s leaders recognize this opportunity, and are taking action to support the shift to more sustainable growth models. The finance ministry has raised the centralgovernment budget deficit from 1.8% of GDP in 2014 to as much as 2.7% in 2015, and will allow highly leveraged local governments to swap CNY 1 trillion ($161.1 billion) of debt maturing this year for bonds with lower interest rates. Likewise, the People’s Bank of China (PBOC) has provided monetary support, gradually lowering interest rates and reserve requirements. Because wages are still rising, the inflation target for 2015 has been set at 3% – higher than the actual 2014 inflation of 2%, even though producer-price inflation has been negative for 36 months. The PBOC also has projected a stable exchange-rate environment for this year – despite the steep depreciation of the Japanese yen, the euro, and emerging-economy currencies against the dollar – thereby promoting global stability. These policies reflect a remarkable determination to continue on the path of structural reform, despite strong headwinds from the deteriorating external environment and domestic structural adjustments. In short, China’s government seems to have a clear long-term vision. But not everyone is optimistic about China’s trajectory. Veteran China watcher David Shambaugh recently went so far as to warn that the challenges facing the political system, led by the Chinese Communist Party (CCP), may be severely compromising the government’s ability to implement the package of ambitious economic reforms that it unveiled in 2013. And yet the claim that China’s economic and political development is in jeopardy seems to ignore the country’s adaptive learning process, which shapes every economic, diplomatic, military, and social policy. This process – characterized by experimentation, assessment, and adjustment – emerged from the CCP’s military experience of the 1930s, was applied by Deng Xiaoping to his reform program in the 1980s, and has been refined by subsequent
Cities with the most billionaires worldwide According to Forbes, New York has more billionaires than any other city in the world 78. With ten fewer than the Big Apple, Moscow comes in second, home to 68 billionaires. Asia’s population of super wealthy individuals has risen sharply in recent years and Hong Kong rounds off the top three with 64. London is home to 46 billionaires, one more than Beijing which has 45. China’s capital is on course to overtake London in the near future.
Chinese leaders. Because no economy had ever experienced such rapid growth on such a large scale, the only way to manage China’s development was, as Deng put it, to “cross the river by feeling the stones.” China’s adaptive policymaking approach has produced both spectacular failures, with entire markets being shut down, and remarkable successes, yielding models that could be applied across the country. Some experiments have had less clear results, making, say, a positive contribution to GDP growth, but also contributing to problems like excess industrial capacity, pollution, corruption, and the creation of ghost towns. In a context of experimentation, such unintended consequences are understandable. The mere fact that they have emerged in no way suggests that China is headed for disaster; that would be the case only if these problems were allowed to persist. Preventing such an outcome requires that efforts to adjust to China’s “new normal” go beyond policies intended to sustain economic growth. Reforms must aim to bolster inclusivity, advance environmental sustainability, promote innovation, and boost competitiveness. And this is precisely the four-pronged approach that China’s leaders seem to be taking. Indeed, from slashing coal consumption to address air pollution to plans for integrating information technologies with modern manufacturing, the government has shown time and again that it recognizes its reform imperatives. And, by remaining dogged in its efforts to root out official graft, it has demonstrated its will to do what is needed to ensure that China succeeds. This is not to say that it is all smooth sailing ahead. The Chinese bureaucracy must adapt radically to cope with the risks – and take advantage of the benefits – of technology and globalization, with the biggest challenge being the shift to a
knowledge-based, environmentally conscious, inclusive, and stable industrial base. And China’s government must take steps to enable market forces to play a greater role in directing economic activity, including by reducing licensing and regulatory requirements in the private sector. Market forces will also benefit from the growth in households’ spending power. Indeed, continued real-wage growth is forcing inefficient industries that relied solely on cheap labor out of the market, while bolstering the competitiveness of producers that appeal to the evolving tastes of China’s increasingly potent consumers. To support this process, China is now implementing deposit insurance, for example. At the same time, China is reforming its inefficient approval-based system of initial public offerings to one based on registrations. A more active and efficient IPO market will allow companies to meet their financing needs without bank intermediation – a step that is vital to helping firms eliminate their debt overhangs. In fact, reducing the role of banks is essential to balancing China’s economy. Despite the recent rebound, China’s stockmarket capitalization amounts to only 40% of GDP, while banking assets total 266% of GDP. Meanwhile, only 10% of total social funding comes from the equity market. But there is one important component missing from the government’s reform agenda for 2015: improved bankruptcy procedures for failed borrowers. Unless failed borrowers and projects exit the system quickly and smoothly, the market will be saddled with bad debt and incomplete projects, undermining its performance. China has repeatedly proved its durability and adaptability. Now, it must do so yet again, by ensuring that its “new normal” is as stable, sustainable, and inclusive as possible. This entails strengthening China’s institutional foundations and establishing clear, transparent rules, in order to encourage experimentation and innovation, ensure the smooth exit of failed projects, and manage the fallout of errors. Failure may be the mother of success – but only if one makes the effort to learn from it. Fortunately, China’s leaders seem intent on doing just that. Andrew Sheng is Distinguished Fellow of the Fung Global Institute and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng is Director of Research at the Fung Global Institute. © Project Syndicate, 2015. www.project-syndicate.org
March 25 - 31, 2015
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Grand bargaining with Iran By Carl Bildt
Slowly but surely, Iran’s talks with the international community about its nuclear program are approaching the make-or-break point. But, more important, the outcome could mark a turning point for the wider – and increasingly volatile – Middle East. The rapprochement between Iran and its negotiating partners on the core nuclear issue is obvious. No one at this point seriously believes that Iran is maintaining an active program to develop nuclear weapons, though not long ago it was almost conventional wisdom that the country was close to having them. Now the focus is on ensuring that Iran would need a year or so to assemble a nuclear device if it ever decided to do so. But the concept of “breakout time” is dubious. If trust were to collapse, and the Iranian regime decided to abrogate all of the relevant international agreements, it is highly likely that it would get its weapon, even if the country itself was bombed repeatedly. The strategic emphasis on “breakout time” is thus misplaced. The key to progress is to help turn Iran from a cause into a country, to paraphrase Henry Kissinger. Iran needs to focus on developing all of its human and material resources to become part of a region moving from confrontation to cooperation. The deal on the core nuclear issues is central to this approach, but so is a credible process for developing the trade and investment links that will facilitate Iran’s move from isolation to integration. As the talks enter the final phase, the issue
of sanctions is likely to be at the forefront. This is because the Joint Plan of Action to which the parties agreed in November 2013, while addressing virtually all of the West’s immediate nuclear concerns, does not map out the necessary pathway to Iran’s normalization. Just as conservative forces in Iran can be expected to try to stop an agreement, forces thriving on confrontation in the United States and elsewhere will do the same. Iran’s hardliners play up doubts that the West will ever agree to lift the sanctions, while their Western counterparts will do whatever they can to support that presumption. A spiral of mutually destructive diplomacy might result. Here, the European Union should clearly signal its readiness to take the lead in easing and lifting restrictions on Iran, though this obviously must be done in close
coordination with Europe’s partners. The EU oil sanctions, for example, could be suspended almost immediately if an agreement were reached. An agreement should also be followed by sustained political engagement on other mutually important issues. Developments in Afghanistan and Iraq are obviously urgent. And, based on close consultation with both Saudi Arabia and other Gulf countries, it may yet be possible to move toward more cooperative arrangements in that strategically vital region. That will require putting the issue of Syria squarely on the table. Four years after the outbreak of the country’s civil war, and despite the horrific humanitarian consequences of the fighting, international diplomacy to stop the violence has achieved nothing. The United Nations Security
Council has been split and ineffective, and even Russia seems to be gradually losing the leverage it once had in Damascus. Iran, the US, and the EU all share an interest in stopping a war that is causing the Syrian state to collapse – with all of the consequences seen in Iraq since 2003 – and strengthening the forces of Sunni jihadism across the region. Whether this is enough common ground for a constructive dialogue with Iran on ending Syria’s civil war remains to be seen, but it is an option that must be pursued. The talks now reaching their endgame in Lausanne are confined to the nuclear issue; but beyond the agreement loom larger possibilities and risks. A breakthrough might compel a phase of intense diplomacy, giving Iran a pathway to diplomatic normalization and opening the door for grand bargains that could begin to restore order and stability to the rest of the region. A breakdown, by contrast, though unlikely to lead immediately to war, could easily foment developments that lead in that direction, and the region as a whole could be pulled even deeper into the current vortex of chaos and violence. With the core nuclear issue more or less settled, it is now imperative to resolve sanctions and normalization issues and grasp the opportunity for regional grand bargains that might then become possible. The nuclear deal must mark the beginning of the international community’s efforts to engage Iran in addressing the Middle East’s toughest challenges. Carl Bildt is a former prime minister and foreign minister of Sweden. © Project Syndicate, 2015. www.project-syndicate.org
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