FinancialMirror OREN LAURENT
JEFFREY SACHS
South Africa rand has plenty of gas in the tank PAGE 14
The Japan Syndrome comes PAGE 16 to China
Issue No. 1154 â‚Ź1.00 October 21 - 27, 2015
Is the jobs market opening up? FOREX AND SERVICES STILL DRIVING NEW EMPLOYMENT - SEE PAGES 10 - 11
Management of NPLs - what do financiers know? By Antonis Loizou - SEE PAGE 13
October 21 - 27, 2015
2 | OPINION | financialmirror.com
FinancialMirror Another opportunity (not to be missed) Published every Wednesday by Financial Mirror Ltd.
EDITORIAL
www.financialmirror.com Tel. 22 678 666 Fax. 22 678 664 P.O. Box 16077, CY2085 Nicosia Publisher/Managing Editor Masis der Parthogh masis@financialmirror.com Editorial submissions: info@financialmirror.com Advertising inquiries: marketing@financialmirror.com Subscriptions: http://www.financialmirror.com/signup/index.html
COPYRIGHT
©
No part of the Financial Mirror newspaper, the Greeklanguage XÚ‹Ì· & AÁÔÚ¿, the daily XpressOIKONOMIKH electronic PDF edition or any of the contents of the website www.financialmirror.com, may be reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical photocopying, recording or otherwise) without prior permission of the publishers. Any person or company found in violation will be prosecuted and financial damages will be sought as this implies theft of the intellectual property rights of the publishers, their associates and contributing services or agencies.
After a week-long diet of the usual self-pampering announcements and speeches, the Cyprus delegation has returned from China, where President Anastasiades declared on several occasions the ‘warm relations’ and ‘cooperation prospects’ between the two countries. What is now clear is that Cyprus is no longer seen a pariah state with a fragile economy, but one that is/has come out of recession and wants to be regarded as a potential emerging market with investment opportunities. The President gave speeches and visited various enterprises, the most important of which should be Huawei, the telco giant squeezing into a market dominated by Apple and Samsung. Let’s hope that it wasn’t a courtesy visit to try out the latest version of the company’s mobile phone and that the President had the vision to ask “What do you need to set up a major presence in Cyprus?” Anastasiades was also the keynote speaker at a property promotion event, where Cypriot developers have seen a relevant slowdown in investments, primarily because of a handful of crooked property companies that have purposely inflated prices and have caused us much harm. The President must also have heard complaints about crooked forex firms, many of whom have duped investors (a.k.a. ‘gamblers’) giving the Cyprus investments sector a bad reputation. But right at the start of his visit, Anastasiades took part in the New Silk Road conference, a concept that has two basic avenues aimed at reviving global
trade routes – the overland route that crosses through central Asia, Russia, the Caucusus and from the Balkans into eastern Europe; and, the sea route around the Indian Ocean, the Red Sea and into the Mediterranean. However, both routes have an implied significance, as it is not only the thoroughfare that China wants revived, but it also wants to build up the means to conquer these two routes – land transport and shipping. The Transport Minister has already announced that China’s colossal Cosco is one of the frontrunners in the bid for the commercialisation of Limassol port, a fact that suggests the high-calibre of interested investors. Regardless of the outcome of the bidding process, Cyprus should not haste to disqualify any cooperation with China. Quite the contrary, Chinese investors should be given the red-carpet treatment, unlike potential investors in the Old Larnaca Airport terminal, the Pentakomo science-tech park, and other ventures that have been shunned due to red tape and trade union influence. The minister in charge of the ports should be able to have the courage just seven months before parliamentary elections to tell the noise-makers at Limassol port that any further sabotage of the commercialisation (ex-privatisation) process is tantamount to national treason and using the pretext of ‘essential services’ should ban strikes once and for all. Thus, a clear message will also be sent to the other services pending privatisation. The Chinese may not be major players in the oil and gas industry, but they are undoubtedly the biggest consumers of commodities of the future. Sending them away because of a bunch of union-led hooligans will be our biggest mistake.
THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO
BOC roars to new record, Carrefour in Nicosia Bank of Cyprus shares roared to a new on the Cyprus and Athens bourses, boosted by a 3Q positive profit warning, while in the retail sector Carrefour is talking to Nicosia property owners for new stores, according to the Financial Mirror issue 641, on October 19, 2005. BOC record: Bank of Cyprus shares closed at a record high of CYP 2.55 on the Cyprus stock exchange and EUR 4.60 (CYP 2.64) in Athens, with traded volume reaching CYP 1.6 mln at home and EUR 16.45 mln on the ASE, accounting for 8.8% of all
20 YEARS AGO
Rules relaxed for OBUs, CSE to open 1Q 1996 The Central Bank said it is relaxing rules that will allow “offshore” OBUs to trade with Cypriot repatriates, just as Barclays launched a share-dealing service and the official Cyprus stock exchange was billed for a first quarter 1996 launch, according to the Cyprus Financial Mirror issue 132, on October 18, 1995. OBU trades: New Central Bank of Cyprus rules will allow offshore banking units to accept deposits from
trades in Greece. Both markets were anticipating another strong improvement in first nine month results, with Morgan Stanley expected to issue a new stock report. Carrefour takeovers: The French retail giant and its Greek venture-partner, Carrefour Marinopoulos, have already concluded a deal for the six-store chain of Chris Cash and Carry and are looking for prime properties in Nicosia, which accounts for 40% of the retail sector. Rumours suggest talks with the Shacolas Group for a 5,000 sq.m. store in the new Shacolas Park mall where IKEA (via Greek Fourlis) has already expressed an interest to open up shop. Telecom wars: Telecom newcomer Cablenet is
expanding from its cable TV business and launches its broadband Internet service with speeds up to 4Mbps, while very soon it said it will venture into the telephony market. On the other hand, Cytamobile has launched the Vodafone Live! service to lure subscribers to new features such as news, sports and entertainment. HB roadshow: Major investors are keen to attract new buyers for Hellenic Bank shares where the Church still controls some 16%, while BOC and Laiki have 8.5% and 8%, respectively, and Universal Life a further 5.5%. New investors will also help raise capital and remove the stranglehold by the rival banks, according to investors. Transparency: Cyprus was ranked mid-way among European states in the latest Transparency International corruption perceptions index (CPI), ranked 37th, stuck between Slovenia and Hungary.
repatriating Cypriots in an effort to deregulate and move towards a gradual liberalised policy. CSE launch: The official Cyprus Stock Exchange is slated for a first quarter 1996 launch, according to Council president Dinos Papadopoulos, with indications that Cyprus has already fallen behind other emerging markets such as Poland, Hungary, Czech Republic, Slovakia and
Slovenia. Barclays brokers: Barclays Bank OBU has launched a share dealing service through its Londonbased Barclays Stockbrokers unit, which is the discount brokerage used by Barclays UK branches. Local Manager John Connell said Cyprus-resident customers were demanded a personal service and a local contact person. Life insurance prospects: The recently announced tax incentives for lower and medium income earners will not affect the life insurance business, and prospects for Cyprialife, the latest entrant in the insurance sector are very promising, according to its General Manager Andreas Aloneftis. The company’s aim is to capture a 20% market share in the next 3-4 years.
Like us on Facebook
Follow us on Twitter
October 21 - 27, 2015
October 21 - 27, 2015
4 | CYPRUS | financialmirror.com
No tax breaks before next elections ∆he House Committee on Financial and Budgetary Affairs began the discussion on the 2016 state budget on Monday with Finance Minister Haris Georgiades analysing the state revenues, the situation of the public finances and the fiscal index, adding that there will be no tax breaks before the parliamentary elections in May 2016. The budget provides for revenues, excluding financial flows, amounting to EUR 5.94 bln, compared with revised revenues of EUR 5.86 bln in 2015, an increase of 1.3%. The discussion on the state budget will cover the budgets of all ministries and public sector services and will be concluded on November 30 with the participation of the Central Bank Governor Chrystalla Yiorkadji. Meanwhile, the Finance Ministry said that medium term prospects for the economy are more optimistic than had been anticipated, forecasting that public debt will shrink to
below 100% in 2018. According to the Ministry’s forecast, the growth rate for 2015 will range between 1% and 1.5%, contrary to the Troika’s lower predictions of just 0.5%. For 2016, the report says GDP change rate will range close to 1.8% compared to 1.4%, while it agrees with the international lenders’ forecast for growth of 2-2.2% in 2017 and 2018. Referring to the labour market, the Finance Ministry estimates that from 2016 onward unemployment will follow a downward trend at close to 15%, 13.7% in 2017 and in 2018 to 12.4%. At the same time inflation is expected to increase to 0.9% in 2016 due to an expected increase in private demand. For 2017 and 2018 inflation is expected to reach 1.3% and 1.5%, respectively. Fiscal balance in 2017 is estimated to be in surplus and
reach 0.5% as a percentage of GDP, the report said, while the primary balance (excluding expenditure to service the debt) is forecast to also be well out of the red and reach 2.8% of GDP. In 2018 fiscal balance is expected to reach 1.1% of GDP while primary balance is expected to be at least 3.3% of GDP. “The better than expected development of the economy, in combination with the gradual restructuring of the banking sector, has contributed to improved confidence,” the report pointed out. On the banking sector, the Ministry stressed that the most significant challenge continues to be “the very high percentage of non performing loans (NPLs).” It added that a drop in NPLs will be achieved gradually as positive prospects for the Cypriot economy will continue to improve expectations.
Net demand for loans continues to rise Net demand for loans continued to rise for all loan categories during the second quarter of the year, according to the Bank Lending Survey for July published by the Central Bank of Cyprus. According to the survey, credit standards for loans to enterprises and households remained unchanged, while in the eurozone they were eased. Banks participating in the survey expect that in the third quarter of 2015 credit standards for loans to all categories in Cyprus will remain unchanged, while in the eurozone, standards for loans to enterprises, households for consumer credit and other lending are expected to ease, while credit standards for housing will tighten. The survey notes the increase of net demand for loans during the second quarter of 2015 in the eurozone including Cyprus from all loan categories. Specifically, the increase in the net demand for loans from enterprises in Cyprus, which was recorded in the first quarter of the year, (for the first time since the first quarter of 2011), continued during the second quarter of 2015, and was at the same level as the previous quarter. At the same time, net demand for loans for housing rose for the first time since the second quarter of 2010. Since the first survey in 2008, an increase was recorded for the first time in the net demand for loans for consumer credit and other lending.
Tourism income up in July A 6.5% rise in tourism income of EUR 20.9 mln was recorded in July, according to data by the Statistical Service of Cyprus. Based on a passengers’ survey, income from tourism was EUR 342.1 mln compared to EUR 321.2 mln in July 2014. In the January – July period income from tourism decreased to EUR 1.073 bln compared to EUR 1.099,9 bln in the corresponding period in 2014, a decrease of 2,4%. Tourist arrivals in July rose by 8.5%, compared to July last year.
Cyprus as an investment funds hub By Kevin Mudd As Cyprus announces plans to reinvent itself as a financial centre we brought across possibly some of the most cynical industry experts we know , the board of the European Federation of Financial Advisers and Financial Intermediaries (FECIF), to get their impressions. FECIF board members juggle their lives between lobbying the EU Commission, Parliament, Council and their own national regulators, for better, workable regulation. They also look after the interests of the 300,000 EU intermediaries that they represent. These guys know the industry inside out. We co-ordinated a couple of seminars to enable FECIF to engage with the Cyprus financial industry. The first seminar titled “An Audience with FECIF” offered FECIF the opportunity to share experiences with members of the local intermediary organisation CIFSA and the Regulator. The Chairman of the Cyprus Securities and Exchange Commission (CySEC) Demetra Kalogerou opened the session reaffirming the main objectives of her office, to ensure the Cyprus securities market as one of the safest, most reliable and attractive destinations for investment, whilst meeting a commitment of effective supervision and highest levels of investor protection. The Chairman believes that Cyprus regulated firms can compete with the best firms within Europe. Following the financial crisis the Chairman and her staff, with the support of the government, has ensured that Cyprus continues to grow as a European financial centre. FECIF Chairman, Johannes Muschik provided an overview of the work FECIF do both at the EU commission and with EU politicians on behalf of their members; lobbying for practical regulations that protect
the investor and the industry, with work often started five years or so before most industry practitioners are aware of the threat. In particular he emphasised the need for CySEC to be pragmatic in how EU regulation cascaded down to Cyprus is implemented and for the need to avoid “gold plating”. The following day FECIF participated in the first Cyprus Funds Summit – “Cyprus as an Investment Funds Hub”. President Nicos Anastasiades opened the event confirming his government’s commitment to see Cyprus as one of the safest, most reliable and attractive destinations for investment. The President was keen to impress on delegates the importance of the development of a wellregulated and profitable funds industry to attract capital back to Cyprus. A FECIF panel discussion, Chaired by myself, was held to discuss the challenges of cross-border fund distribution – a matter where the EU has not quite levelled the playing field. The FECIF members shared their knowledge and expertise of the EU rules and of how these apply in reality. The picture painted was not encouraging; however, the FECIF members offered some practical suggestions and their support to any Cyprus firm that may require it. The 380 local and international delegates were then updated by experts from both Cyprus and abroad on developments within the industry and the opportunities as well as challenges which lie ahead in the road to Cyprus becoming an Investment Hub. The key strengths of Cyprus were identified as: an EU member state; a common law jurisdiction with extensive double taxation treaties; strong low cost service industry; close proximity to Asia, Africa and the Middle East; commitment to establishing a funds industry backed by government and regulator. The summit recommended that Cyprus plays to its strengths, adopting an initial focus on closed ended funds such as private equity, real estate, infrastructure and other illiquid assets; targeting institutional
investors. It identified real potential for a jurisdiction which understands and focusses on these asset classes and structures. Our sceptical experts were impressed. Johannes Muschik, Chairman of FECIF, stated: “Cyprus has a relatively young investment industry but if the industry, the regulator and the government continue to work together on the appropriate regulatory and structural changes, Cyprus could become a new hub for fund business.” Vincent Derudder, Honorary Chairman of FECIF stated: “These were two well organised events, easily on a par with others I have attended in the major European centres. We were able to meet and engage with the Cyprus financial services industry at all levels. I am impressed with the way they are working together and their commitment to a common goal, they know what they need to do and have no doubts that they will achieve it.” As a board director/ member of FECIF, CIFSA , CIFA and as CEO of KMG Capital Markets I was already sold on Cyprus, we moved our AIFM business, managing 18 funds comprising EUR 500 million under management, here from Luxembourg at the beginning of this year, we use the AIFM passport to structure and manage funds anywhere in Europe; I would like others to see and share the advantages Cyprus has to offer. The Cyprus Funds Summit, was organised by CIFA, endorsed by EFAMA and took place under the auspices of the Ministry of Finance and the Cyprus Investment Promotion Agency (CIPA). Kevin Mudd has over 35 years of financial services experience. He is a member of FECIF and former chairman of the Cyprus International Financial Services Association (CIFSA) and member of CIFA (Cyprus Investment Funds Association). Kevin is the founder and CEO of KMG Capital Markets, and Alternative Investment Fund Manager. kmudd@kmgcapitalmarkets.com www.kmgcapitalmarkets.com -
October 21 - 27, 2015
October 21 - 27, 2015
6 | CYPRUS | financialmirror.com
Ways to boost competitiveness in Europe: analysing the Engino case By Olga Kandinskaia There has been evidence in the last four years suggesting that many U.S. companies are bringing manufacturing back to the U.S. This growing trend is expected to boost the competitiveness of the U.S. economy and help it grow out of its debt. As Europe is currently looking for ways to boost its competitiveness as the best remedy to solve its financial problems, there is clearly a need for extensive research to investigate if similar trends take place in European companies and the extent to which such strategic moves are financially justified. Being able effectively identify financially viable capital projects will allow to channel government funding for supporting innovative SMEs with high growth potential, and thus will put the European economy on the path of recovery. Being an academic at CIIM, a business school which is actively involved with the business sector in Cyprus, I have come across an interesting local example of a small company which in times of crisis made a very unorthodox decision of moving its manufacturing to Cyprus. The company’s name is Engino. It is an export-oriented SME producing construction toys of its own unique design. The company has been investing heavily in R&D to develop a high-quality innovative product. During 2007-2011 the company outsourced the manufacturing to China. At the end of 2011, the owner Costas Sisamos made a strategic decision of start his own manufacturing in Cyprus. The case of Engino has been noted and appreciated at international level: the case was recently published by the Business Case Journal of the Society For Case Research in the U.S.
BCG : China No Longer a Default Manufacturing Destination In August 2011, the Boston Consulting Group published
its first “Made in America” report, in which it concluded that China’s overwhelming manufacturing cost advantage over the U.S. is shrinking fast. Within five years, as the report said, “rising Chinese wages, higher U.S. productivity, a weaker dollar, and other factors will virtually close the cost gap between the U.S. and China for many goods consumed in North America.” The BCG recommendation was that companies should undertake a rigorous, product-by-product analysis of their global supply networks in order to carefully assess their total costs. They went on to say that for many products sold in North America, the U.S. will become a more attractive manufacturing option. The second BCG “Made in America” report came out in March 2012. Its main conclusions were that “seven groups of industries are nearing the point at which rising costs in China could prompt more companies to shift the manufacture of many goods consumed in the U.S. back to the U.S.” This shift could create 2 to 3 million jobs, lower unemployment by 1.5 to 2 percentage points, and add around $100 bln in annual output to the U.S. economy. Most of the evidence of the “shift” has come so far from U.S. companies, with only a few examples from companies in Europe. The BCG analysts have cautiously concluded that Europe is a different story from the U.S. – yet the Engino case demonstrates the opposite. It seems that similar trends are beginning among European companies, even among SMEs, and these trends need to be noticed and supported in appropriate ways by the European governments.
Government Support for SMEs The government’s role should be of strong support to capital projects of SMEs which have potential to create value in the economy. Unlike large companies, SMEs need such support, and there should be a clear framework how to identify such projects and a defined policy for appropriate support. Engino moved out of China three years ago for reasons very similar to the ones listed in the BCG reports for U.S. companies. It was a remarkably brave strategic move.
Against many odds, the decision has already brought positive results proving that innovation and manufacturing have a place in Cyprus. Engino’s case is an illustration of a type of SME which is a worthy recipient of government funds. Such investments will generate high returns in the future and will create value for European firms, thus helping the European economy to recover from the crisis. The problem of the massive debt load, which caused the current European financial crisis, is best solved via the economy growth rather than by austerity measures, which have had a limited effect so far.
Call for Cases CIIM is looking to gather and investigate other similar cases. In times of crisis, we should not focus only on criticising the bad practices, but should bring to attention the good practices. Engino case is the first case of a positive story of a company from Cyprus published in a prestigious international academic journal. Is it time to re-think how we project the image of Cyprus? Dr Olga Kandinskaia is Assistant Professor of Finance and Director of MSc Management at Cyprus International Institute of Management (CIIM) olga@ciim.ac.cy
WISTA Cyprus President elected to international board WISTA Cyprus President, Despina Panayiotou Theodosiou, was elected as the new Secretary of WISTA International during the 35th WISTA International annual general meeting (AGM) and conference held in Istanbul and attended by 250 delegates from 34 countries. Following the elections, the new Executive Committee of the Women’s International Shipping and Trading Association is as follows: President: Karin Orsel, Netherlands; Secretary: Despina Pan. Theodosiou, Cyprus;
Treasurer: Rachel Lawton, UK; Member: Jeanne Grasso, USA; Member: Katerina Stathopoulou, Greece; Member: Sanjam Gupta ,India; Member: Naa Densua Aryeetey ,Ghana. During the AGM, the collective Personalities of WISTA Hellas won the Personality of the Year Award. Panayiotou Theodosiou is the Chief Financial and Operating Officer of the Tototheo Group and a member of the board of the Cyprus Shipping Chamber.
WISTA is an international organisation for women in management positions involved in shipping, trading and related professional services worldwide. It is growing and currently accounts for over 2,300 individual members in 33 National WISTA Associations (NWAs). WISTA Cyprus was established in October 2011 and has over 90 members from various maritime sectors such as ship owning and ship managing companies, trading, shipping related services, insurance, oil and gas, consulting, legal and auditing services, etc. A seven-member Executive Committee leads WISTA Cyprus: Despina Panayiotou Theodosiou:
President; Victoria Kostic-Nola: Vice President (General Manager, Frontica Global Employment Ltd); Liudmila Bozhedomova: Secretary General (Deputy Director General, ITERA); Tassoula Tsakania: Treasurer (Financial Controller, Mastro Shipmanagement Ltd); Elise Croonen: Press Officer (Director, MTI Network Cyprus); Stella Kazamias: ExCo Member (HR Manager, Interorient); Christina Tsanos: ExCo Member (Chief Operations Officer, Lavar Shipping Co. Ltd.) For information www.wista.net or contact WISTA Cyprus info@wista.com.cy
Moody’s warns of ‘moral hazard’ in forced conversion of CHF loans Moody’s has warned of a moral hazard in case the Cypriot parliament forces a conversion of housing loans issued in Swiss francs (CHF), noting that such a conversion would make restructuring of the banking system’s high stock of non-performing loans more challenging. Last week, the House Financial and Budget Affairs Committee gave the Central Bank of Cyprus a two-week deadline to formulate options that will reduce the debt burden of borrowers who received mortgages in Swiss francs, warning that otherwise the committee would propose to retroactively fix the exchange rate to the prevailing rate when the loans were granted, mainly between 2008-10. The CBC warned that forced
conversion would cost Cypriot banks EUR 250 mln. “But the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages,” Moody’s noted, adding “the proposal makes the banks’ restructuring of their high stock of nonperforming loans (NPLs) more challenging. It would also delay the recovery of Cypriot banks’ profitability since they would likely continue to be loss-making for a fifth consecutive year.” According to Moody’s, “the plan encourages all mortgage borrowers to delay loan restructuring in hope of more debt relief.” Cypriot banks face a large stock of problem loans, with
the ratio of NPLs to gross loans as of June 2015 at 52.7% for Bank of Cyprus and 54.9% for Hellenic Bank. “Given the relatively high median net wealth of individuals, which was EUR 266,900 in 2010 (the latest data available), according to the European Central Bank, and the high savings rate in the country averaging 19.7% before the financial crisis, we believe 10%-20% of delinquent small and midsize enterprise and retail borrowers are strategic defaulters that have the capacity to repay but opt not to do so” Moody’s adds. Bank of Cyprus, with a EUR 1 bln portfolio of Swiss franc loans, has the highest exposure among banks and would face losses of around EUR 147 mln and Hellenic Bank around EUR 11 mln.
October 21 - 27, 2015
COMMENT | 7
Russia and Iran, two dynamic players in the Syrian scene By Dr Andrestinos Papadopoulos Ambassador a.h. Upon the request of the Syrian leadership, Russia’s President Putin decided to use his air force against “terrorist organisations” in Syria, and in particular against the Islamic State. A rough calculation of their strength would be that 35% belong to Islamic State, 35% to Al-Nusra, 20% to Ahrar al-Sham, whereas the Free Syrian Army and some prodemocracy groups represent the remaining 10%. In order to understand the dynamic involvement of Russia in Syria and the bombardment of terrorist targets, we should take into account the following: the military successes of ISIS against the only ally of Moscow in the region increased the fear that terrorism might be exported to Russia, since 2,000 jihadists come from Russia. On the other hand, the reduced interest of the U.S. in the region and the vacuum it generates constitute challenges for Russia. Analysts explain this development as resulting from being petrol selfsufficient, shift of interest to Asia with a view to containing China’s influence and the existence of American bases in the countries of the Gulf. One might even venture to think that Russia’s involvement in Syria is the response to the involvement of the West in Ukraine, the embargo against Moscow and the presence of NATO in Poland and the Baltic states. As stated, Russia’s intention is not to offer direct support to Assad, since now Moscow accepts his participation in a transitory government, but first to fight terrorism and create the prerequisites for a peaceful resolution of the conflict. For this purpose, Moscow proposed to the international
community the establishment of an anti-terror front and expects a positive reaction from the West. In this connection, mention should be made that the Russian military established contacts with their U.S. counterparts, with a view to selecting jihadist targets to be bombed. As was expected, when a Russian warplane briefly violated Turkish air space, NATO reacted, urging Russia to “cease and desist” and Turkey not only protested, but also threatened Russia with reprisals. President Tayyip Erdogan warned Russia there are other places Turkey could get natural gas from and other countries that could build the Akkuyu nuclear plant. One understands that Russia’s air strikes dealt a blow to Erdogan’s aspirations of seeing Assad removed
from power, and that beyond the protests and threats, there is little Turkey can do. Shifting from one supplier or contractor to another is not straightforward. Concerning these threats, Moscow’s position is that Turkey is a neighbour with whom it wants to have good relations, believing that she will not do something to harm them. Iran, a strong player in the region, is against terrorism, hence the despatch of military advisers to Syria and the support of Russia’s bombardments. In order to better organise the military operations, a headquarters was established in Iran in which the participants are Iran, Russia and Iraq. Concerning the resolution of the conflict, Tehran expects Assad to take into account the lawful demands of the opposition and accept an honourable compromise, while endeavouring to facilitate Syrian-Syrian negotiations. In this respect, President Rouhani stated that his government is ready to hold talks with the U.S. on how to resolve the conflict in Syria, where the two countries back opposing sides. Concluding, the climate is not yet ripe for negotiations and even if the Islamic State is defeated in Syria, the problem will remain in Iraq.
October 21 - 27, 2015
8 | COMMENT | financialmirror.com
AS EASY AS PIE… without the pastry
FOOD, DRINK and OTHER MATTERS with Patrick Skinner
As a child in World War II, I was aware of the many ships sunk by German submarines whilst crossing the Atlantic carrying essential food for beleaguered Britain, with the loss of thousands of sailors’ lives. I thought it terrible and tried to grow as many vegetables as possible in the small garden behind our house. It became very patriotic to “Dig for Britain” and produce our own food. In these tough days for Cyprus, it is good economic sense to eat locally produced food if we can. My four recipes this week are all easy prepared from produce “made in Cyprus”. Make sure your wine is, too!
Tricolore I remember having this simple starter or lunch dish for the first time in an Italian restaurant just off London’s Piccadilly Circus and how much I enjoyed it, before a fine plate of Spaghetti. The colours of the avocado, cheese and tomato are, of course, those of the Italian flag.
Method 1. Put a smear of oil in a non-stick frying pan and cook the bacon on both sides. 2. Set pan aside. 3. In a saucepan, boil the sprouts for about five minutes, then add the leeks and cook for about four more minutes, when both should be cooked through. 4. Chop bacon into small pieces and add to the vegetables. 5. Stir and serve – or leave to cool and then add a little oil and lemon and have as a salad item.
Green Beans and Tomatoes
Ingredients Half or one avocado per person (according to size, or appetite) Sliced tomato (skins removed) 2 or 3 slices of Mozzarella cheese (preferably Buffalo Mozzarella, as in my picture, BUT Cyprus Halloumi is also very good indeed in this dish) A dribble of olive oil over all, and a squeeze or two of lemon over the avocado Salt and pepper
Sausage Salad Ingredients per serving 1-2 cooked, cooled, SNACK brand pork sausages, sliced. 1 generous cup of chopped salad (e.g. tomato, cucumber, cooked potato, onion, red or green pepper, broad beans) – all tossed in a little olive oil and a few drops of lemon or vinegar.
Warm bacon, sprout and leek salad Ingredients per serving 4-5 Brussels sprouts, cooked al dente (quite firm) 2-3 rashers of SNACK bacon 4-5 chunks of leek Salt and pepper Oil and lemon for dressing
Ingredients for 4 servings 200 g of fresh green beans 2 medium onions, peeled and sliced thinly 2-3 medium/large tomatoes, skins removed and chopped 1 clove garlic, peeled and finely chopped 2 tbsp olive oil Salt and pepper Method 1. In a non-stick frying pan, put the oil and fry the onions until they are cooked through and slightly brown at the edges. 2. Add tomatoes and fry until cooked, stirring regularly. Set aside. 3. Top and tail the green beans and cut them into pieces about 2.5 cms (1”) in length. 4. Briefly boil them for a few minutes until almost cooked through. 5. Add beans to tomato/onion mixture, stir, season and gently simmer for a couple of minutes. Add a little water if mix starts to go dry. 6. Serve with grilled chicken fillet, steak or fish fillet. 7. Pour a nice glass of red if you’ve added meat, or white if you’ve picked fish. Go to www.eastward-ho for more recipes, food and wine news and notes.
Lunch break at Debenhams Venue Cafés Venue Café, the chain of eateries located within all eight Debenhams stores in Cyprus, is offering a revised menu of 14 Cypriot and international dishes to enjoy freshly-prepared food catering for all tastes, ideal for a quiet lunch break, coffee, snacks, sweets, and more at reasonable prices. Options include fish, meat, vegetables, pasta, rice, potatoes and pulses, as well as a wide selection of fresh ingredients to
create your own salad. And you can also take advantage of monthly special offers on specific dishes. All Venue Café dishes are made with fresh and quality ingredients under the supervision of veteran chef Stavros Christou. Venue Cafés are self-service eateries, with friendly and approachable staff who can also suggest combinations and offer information about cooking methods and ingredients.
October 21 - 27, 2015
financialmirror.com | COMPANY NEWS | 9
PwC HQ in new hi-tech building in Nicosia PwC Cyprus, the leading audit and advisory firm in terms of staff, has moved most of its Nicosia workforce to a new headquarters building on Demostheni Severi Ave., near the Presidential Palace and adjacent to the landmark Wargaming tower. The firm recently announced a 3% rise in revenues to EUR 79.5 mln, trailing the 6% growth rate in central and eastern Europe, 8% in western Europe and 10% worldwide for the fiscal year 2015. The new building is owned by developers Cyfield and PwC has secured a long-term lease. Cyfield’s architects designed the shell while PwC’s architects Alexis Vafeades and George Stamatiou designed the interior in accordance with work-area concepts developed by PwC UK. The new building accommodates about 600 of the 700 people working in Nicosia, with a further 200 staff in PwC offices in other towns. The move started on September 21 and was completed on October 5. All other buildings housing PwC offices in Nicosia will be vacated except for two floors in Julia House on Them. Dervis Street. The company said in an announcement that “the building is designed in a way to support and promote team-work, collaboration and alternative methods of work in high level working conditions. For this reason, we have utilised the international experience of PwC applying ideas and best practices from offices of our network in various European countries like the United Kingdom.” “Thanks to the interior design system, employees are able to choose different workplaces, depending on the need that arises. This is an international effective and efficient approach to managing space that allows organisations to contain their operating costs, reduce their carbon footprint and provide their employees with the flexibility they need.” In an effort to promote alternative methods of commuting to work, there is a special parking area for bicycles as well as other facilities for employees. The new PwC HQ building also includes the sixth Caffe Nero outlet in Cyprus, operated by franchise experts PHC Group that said “more openings” are expected by the end of 2015, while it’s affiliate company is already recruiting staff for the first Burger King restaurant to re-open in Nicosia after five years.
The cities with the highest and lowest taxi fares If you’re visiting Oslo on a budget, definitely think twice before you take a cab. The Norwegian capital has the most expensive taxi fares in the world with a typical three-mile (5km) ride during the daytime costing $32. That’s over three times as high as London, according to the UBS Prices and Earnings report. For the same amount of money, you could actually travel for 41 miles in a cab in Cairo. Kiev and New Delhi are even cheaper, coming to just $1.59 and $1.54, respectively, for a 5km trip. Taking a cab over the same distance in New York City would cost $11.67. (Source: Statista)
Eurofast Global moves to new premises in Bulgaria The Sofia office of the Eurofast network has relocating to a new and bigger space from October 1, conveniently situated in the centre of the city on the busy Slivnitsa Blvd. and headed by Ivan Pishmanov, Chief Accountant/Acting Manager. The move is linked with the rapid development of the company, the implementation of an even wider range of professional services for clients, as well as creating a comfortable working environment for its employees. Eurofast now has 21 offices in the Middle East, the Balkans and eastern Europe. The company started operations in 1987 as Eurofast Services operating within Euroglobal SEE Audit Limited, formerly known as BKR Damianou and Partners in Nicosia. In 2002 Eurofast assumed the tax and consulting divisions of BKR Damianou and via a spin-off became fully independent from the audit firm. Since 2006 Eurofast has undertaken the representation of Taxand Cyprus. Eurofast is presently a regional business advisory organisation employing over 200 people.
October 21 - 27, 2015
10 | COMMENT | financialmirror.com
Is the jobs market opening up? Forex, services sectors still driving employment opportunities With the September unemployment figures showing the first real drop since March 2013, recruitment experts say that interest is growing in all areas, albeit slowly in some, but the forex trading and financial services sectors seemingly driving the new momentum. The government statistics office Cystat said that the number of registered unemployed fell to 38,365 in September, recording a monthly drop of 6.4% and -11% yearon-year, while the seasonally adjusted figure for unemployed fell 1.5% and an annual 10%. The lion’s share of jobless figures is still in the construction sector, followed by the retail and commercial sector, manufacturing, financial services and education. However, analysts suggest these figures may be skewed as the retail sector has the highest turnover rate of layoffs and re-hirings, spurred by the government’s incentives for unemployed graduates eager to gain work experience. On the other hand, seasonal jobs, such as in the hotel and catering sectors, are affected as tourism figures go down, while the education sector will smooth out once final placements are made in public and private schools that re-opened in September. On the other hand, the chief executives of two major recruitment firms suggest that despite the news of forex companies collapsing under the burden of losses from the Chinese and Russian markets, others are hiring. “The environment and infrastructure of Cyprus for these brokers remains positive even if the view is that regulator CySEC is getting stricter, while the binary sector, too, is booming. Many of the licensed binary companies have built call centres in Cyprus,” said Donna Stephenson, co-founder of Limassol-based Global Recruitment Solutions (GRS Group) www.grsrecruitment.com . She suggests that new areas, primarily in the services sectors are compensating for the lack of significant movement in the energy sector, that will only kick off once the major oil and gas finds in Egyptian shores have been evaluated and exploration companies determine their next moves in Cyprus waters. “We have seen an increase in the demand for hires from clients and intermediaries as a result of the de-authorisation legislation that requires companies to build substance in their structures by having an office with employees operating in Cyprus rather than a name plate and no substance. The job
creation is very welcome as these clients are hiring professionally qualified candidates in accounting, legal and finance as well as administrative support staff. These companies are also renting office space, purchasing or renting houses and apartments for their employees and directors, which is also good for the economy,” said Stephenson. She gave the example that GRS recently assisted a Russian company hire a team of 15 accounting employees for their new office in Cyprus. “Of course the legislation would have forced some to rethink their structures and look at alternative jurisdictions, but for those that are here there are many advantages for companies to create substance in Cyprus. These international developments and legislative changes have, therefore, created opportunity for job creation in Cyprus.” Stephenson said that despite the Securities and Exchange Commission (CySEC) getting stricter with forex and
investment companies, “various regulations also created employment opportunities for hires in compliance, knowyour-customer (KYC) and anti-money laundering (AML). The sector associations are improving access to learning and developing skills for the talent available in Cyprus, as was seen recently with the Cyrus Investment Funds Association (CIFA) running a one-day seminar www.cyprusfundssummit.com aimed at the investment fund industry.” As regards other qualifications, Donna Stephenson said that the CySEC examinations have been popular, but it is still a difficult task for the owners of approved investment companies (CIFs) to source the right fit an applicant who holds the compulsory CySEC certifications/qualifications to meet with the regulator’s conditions for the operating license. “Essentially, this is creating a demand and supply problem.” As regards forex companies, the Chinese economy
Pay gap between men and women: MEPs call for binding measures to close it Despite the EU’s 2006 Directive on equality between men and women in the labour market, differences in their pay persist and are even growing say MEPs in a non-legislative resolution voted last week. As member states did not take the opportunity to update their laws on equal opportunities and treatment, MEPs urged the EU Commission to table fresh legislation “providing for more effective means of supervising the implementation and enforcement in member states.” The resolution was approved by 344 votes to 156, with 68 abstentions. “Equal pay for equal work is a fair principle that must be valued by all employers. Today, this is not the case, which is why we need better legislation. However, the overuse of the legally ambiguous term “gender” in the final text as approved today made it impossible for me to vote in favour
of my own report”, said rapporteur Anna Zaborska (EPP-SK), who abstained. EU member states are often slow to apply and enforce the equal pay principle and the gender pay and pension gaps still average 16.4% and 38.5%, respectively, across the EU, according to Eurostat’s 2013 figures 2013, with significant differences between countries. Only in the Netherlands and France does the Directive’s transposition into national law appear to be “sufficiently clear and correct”, according to an EU Commission report on the application of the 2006 Directive. The gender pay gap is widest in Estonia, Austria, Germany, the Czech Republic and Slovakia and narrowest in Poland, Italy, Malta and Slovenia. In view of the lack of progress in closing the gender pay gap, MEPs propose mandatory pay audits for large stock exchange listed companies and possible
sanctions at EU level in cases of noncompliance, such as excluding companies from EU budget-funded public procurement of goods and services or financial penalties for employers who do not respect wage equality. Furthermore, the resolution calls for: • harmonised neutral job classification and evaluation; • objective criteria for comparing work of “equal value”; • wage transparency (to reveal bias against women and pay discrimination); • free legal aid for victims of discrimination; • the prohibition of any discrimination based on sexual orientation and gender identity or gender reassignment; • the reconciliation of work and private life (preventing unfair dismissal during pregnancy; and,
• positive measures to step up the involvement of women in decision making. The European Parliament has called for further action to make equal pay rules more effective in resolutions voted in 2008, 2012 and 2013. The gender pay gap (GPG) exists even though women do better at school and universities than men, as women make up 60% of university graduates in the EU, according to Eurostat. In all, 34.9% of women work part time, but only 8.6% of men, while women in the EU receive on average 38.5% less in pensions than men, because in addition to the GPG, a higher proportion of women work part-time, earn lower hourly wages, and spend fewer years in employment. Finally, the employment rate for women in the EU is 58.8%, compared to 69.4% for men.
October 21 - 27, 2015
financialmirror.com | COMMENT | 11 volumes are down as many lost funds on Chinese stocks, yet China is still booming with FX, as can be seen by the demand from most forex companies that want to hire Chinese speakers. “We are able to secure a high number of interviews for a Chinese speaking candidate with forex companies as soon as we receive an application from a Chinese speaker with the right credentials. “Yet, whilst the demand is high for this calibre of candidate the supply is extremely low. The fall-out from some forex companies also created new opportunities and a strong transfer of talent for the sector to hire experienced and trained candidates and especially those speaking another language such as Chinese.” Many of the licensed binary companies have built call centres in Cyprus to manage their sales, conversion and retention functions and GRS offices in Limassol and Nicosia are working with a new binary firm that is in the process of hiring 70-80 people for their new Limassol office. There are also binary platform companies that are also growing due to the increase in volume of binary sales. Forex and binary companies continue to create jobs across all functions including compliance, sales, back office, finance and accounting,” Stephenson added. The head of the online recruitment agency StaffMatters said that although there is still a lot of concern regarding the unprecedented high unemployment rate in Cyprus of around 15.3%, the overall picture is more positive compared to this time last year when unemployment was at 16.6%. “Overall we have seen some promising signs of the stable, albeit slow, recovery of the economy by looking at the increase in the number of total job vacancies available within the market in January-September, compared to the numbers for the same period last year. The total number of vacancies that we have received and have actively recruited for on behalf of our clients has risen by 28% this year compared to 2014 and by 39% for the same period in 2013,” said Tony Papadopoulos of StaffMatters Recruitment Specialists www.smstaffmatters.com . “Even more promising is that the increase in the number of available vacancies within the market for this year is spread across numerous sectors and industries as opposed to previous years where the majority of open positions were restricted to the financial services. Although the forex and binary trading industries still enjoy the lion’s share of the vacancies (about 45% of all vacancies registered with us) this is followed by accounting (13.09%), IT (11.25%), legal/corporate services (11.12%), with more vacancies coming in from shipping, telecoms, online media/marketing/gaming,” he said. Papadopoulos said the Limassol-based office has received a number of enquiries from major shipping companies in Greece that are looking at potentially moving some of their operations to Cyprus due to the instability and uncertainty in their country, which could further increase the overall
The countries with the most unemployed graduates Which countries have the most out of work college graduates? According to a recent OECD report, the unemployment rate for people with a third level education in Greece is just under 20%. Indeed, many of the countries with the highest rates of graduate unemployment across the world have been badly affected by the global financial crisis. Spain also has a significant amount of unemployed graduates. The most recent figure places it directly behind Greece with an unemployment rate of 14.9%. Turkey rounds off the top three with 7.7% while Italy and Ireland come fourth and fifth with 7 and 6.7%, respectively. At the opposite end of the scale, 4.1% of US college graduates are out of work, slightly ahead of Japan’s rate of 3.2%. Norway has the lowest graduate unemployment rate of all OECD nations with just 1.8% of its third level educated population unemployed. (Source: Statista)
number of vacancies within the shipping sector and market as a whole. “As far as the forex and binary options industries go in Cyprus, the regulator CySEC has indeed tightened its grip on licensed and regulated investment firms. Although this has meant that some brokers have had their licenses revoked or have received administrative fines for breaches, in our opinion this has further enhanced CySEC’s reputation locally and for potential investors internationally, which has resulted in an ever constant and increased number of FX and binary options brokers choosing Cyprus as their preferred location,” Papadopoulos explained. Although the Russian crisis and slowdown of the Chinese economy has impacted the markets, this volatility has not seen a major impact on the brokers in Cyprus, as far as their hiring patterns go and in fact his office has seen some of the larger brokers looking to further expand within the Chinese market over the last few months. “In the energy sector, we have definitely seen far less discussions within the market this year as to the potential
growth within this sector in Cyprus. Even though we have completed some recruitment projects for service providers in the oil and gas industry that have established or grown their operations here over the last 12 months, we don’t expect to see any more exciting news from this sector for the remainder of the year and into next year,” Papadopoulos said. Looking ahead, Papadopoulos added that “although we may only fully recover from the 2013 financial/banking crisis in the years to come, the positive steps that the economy and the country in general has made in the last 30 months have been very encouraging.” His optimism was also shared by boutique recruiters HCS Human Capital Solutions Ltd (EMEA) www.hcs4.eu with its executive director, Margaret Pitiris, saying that they have been hired by major and “serious” companies wishing to head-hunt for specific posts, mostly managerial. “There is a lot of talent in Cyprus or Cypriots who have sought other opportunities abroad, and we are constantly tapping into that pool of human resources for jobs here or elsewhere,” she said.
October 21 - 27, 2015
12 | PROPERTY | financialmirror.com
Developers expect boom in sales to Chinese buyers Anastasiades tells Shanghai forum: 15 visa offices by the end of 2016 Cyprus is expected to hire a private company to help with the process of visa applications in China, with President Nicos Anastasiades revealing during the Cyprus Real Estate Forum in Shanghai on Sunday that a network of 15 visa offices will be set up by the end of 2016. In his address to the forum, attended by 70 major developers from Cyprus and investor and buyers’ groups from China, Anastasiades issued an “open invitation” to all investors to visit Cyprus and see for themselves that the island is an ideal place to invest, live and work in. He also said that the economy is on a path to full recovery and enjoying a steady growth rate, with investment opportunities in all sectors, such as real estate, large public and private development projects, energy and privatisations. He also referred to the favourable tax system and other related issues, such as the quality of life, security and modern infrastructure. Anastasiades said that his government is determined to provide every possible assistance to Chinese investors. Pantelis Leptos, Chairman of the Cyprus Land and Building Developers’ Association elaborated on the advantages and incentives offered to foreign property buyers and later said that the forum was “a major success and the President’s speech contributed tremendously.” “We are sure that that the great interest shown during the forum will soon be realised, thus contributing to the recovery of the property and construction industries, but primarily with added revenues to the state coffers,” Leptos said.
Carolina Park showhouse opens in Nicosia The first showhouse of the Carolina Park project on the south eastern outskirts of Nicosia is ready with the developing company, Photos Photiades Developers, announcing that it will now proceed to build commercial units to be dotted around the 400-unit estate. The development consists of custom made villas in large plots, centered around a manicured green park, with over 30,000sq.m. of public green areas have been landscaped with walkways and squares
and have been planted with ornamental trees, bushes and grass. The first showhouse, designed by architect Haris Fereos, is a 3-bedroom villa, 525sq.m. with study, six bathrooms, large playroom, underfloor heating, climate control, service room, covered parking for two cars, large verandahs and garden. The entire project also boasts a security system. For visits call 22452000 or go to www.carolinapark.com.cy .
Surging UK rents will prop up buy-to-let landlords against interest rate rises While the prospect of increasing interest rates has many re-examining their mortgage affordability, UK buyto-let (BTL) landlords will benefit from substantial affordability buffers through rising rental income, according to a Moody’s Investors Service special report. “With a 0.5% interest rate hike, the percentage of BTL landlords with insufficient rental income will increase to 0.4% from the current level of 0.2%, and those facing tight affordability will rise to 2.2% from 0.9%. However if we take rental price appreciation since loan origination into account, the proportion of landlords with insufficient rental income and tight affordability in a 0.5% rate increase scenario actually falls to 0.2% and 1.5%, respectively,” said Emily Rombeau, analyst at Moody’s. “Voids are at a record low, so strong occupancy levels will further support the BTL market’s resilience to moderate interest rate increases,” said Francesco Di Costanzo, associate analyst at Moody’s.
Without accounting for rent increases, Moody’s analysis indicates that the proportion of BTL landlords with tight affordability buffers would rise to 2.2% from 0.9% currently, if interest rates rise by 0.5%. The rating agency forecasts that the Bank of England base rate will start to rise progressively at the end of Q1 2016 to about 1.0% by the end of Q3 2016, from 0.5% currently. Low interest rates have prompted a gradual decline in arrears in UK residential mortgage-backed securities (RMBS) backed by BTL loans since 2009. The rating agency’s research shows that landlords’ ability to pay their BTL mortgages is fairly even across different regions in the UK, despite a stronger rental market in the South of England. However, BTL borrowers located in the South of England will be slightly better positioned when rates start rising. Taking into account rental price appreciation, the proportion of BTL loans with insufficient rental cover is 5.5 times higher in Wales and Scotland combined than in the South of
England. Similarly, the proportion of mortgages with rental shortfalls is 2.5 times higher in the North of England versus the South of England, albeit at negligible levels— at 0.12% versus 0.05%. Moody’s calculations determine the interest coverage ratio (ICR) for each BTL loan, or the gross rental income as a share of mortgage payments. They indicate that a cumulative interest rate rise of 0.5% would cause only a total of 0.4% of UK BTL borrowers to earn insufficient rental income to cover their mortgage installments, which is a very marginal proportion. Moody’s calculations estimate the distribution of ICRs of the UK BTL RMBS sector for various increases in the bank base rate, based on either rental income at loan origination or indexed in line with rental price appreciation (as reported by the Office of National Statistics).
October 21 - 27, 2015
financialmirror.com | PROPERTY | 13
Management of NPLs – what do financiers know? µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers
The administration of non-performing loans (NPLs) is a technique that should not be taken lightly and, thus, is not a job for any employee of the financial services sector to perform as part of his or her wider duties. Referring to loans for housing and real estate development or having mortgaged such a property, it is sad to see that few in the financial sector realise that it will be to their benefit to help provide a solution to the borrower, as, at the end of the day this helps them as well. No one is alone in this crisis and everyone – the borrower, lender, buyer – is in the same boat. Anyone who thinks he has the upper hand is simply out of place and has not yet gotten wind of what is going on. • The first act should be a review or assessment of the borrower. The key question is what is the quality of the property and whether it can be regarded as such, the clear statement of the lender’s charges (there is a huge issue with overcharging), verification of existence of any outstanding debts to privateers, local municipalities, Inland Revenue, etc. • The second operation is to evaluate the mortgaged property and estimation for the purpose of disposal, with particular emphasis on the availability in the medium term, now that the demand and the rate of supply are very limited. Low demand is particularly seen in the case of plots and farmland, while other land for coastal units, sports facilities, luxury villas and holiday homes or apartments have an increasing demand. Office complexes employing modern technology and rented to serious tenants are enjoying a steady demand from foreign investors with an expected return of 5% -6% of the purchase price. • The third stage is the verification of the legal aspect of the units that are mortgaged. Have they obtained a permit, at what stage of the issue of title deeds is it at, are there are insurmountable problems or not? These questions are directly related to the prospect of disposal, even at a future date, and should include specific timeframes regarding the anticipated date of issue of a title deed. • Another element is to review buildings are half-finished or abandoned. It is in the interest of all parties involved that these properties are protected or safeguarded as too often they are subject vandalism. On some projects, bathroom ware and kitchens have been removed while in others even cables have been removed, especially copper used by electricians. As a result, the value of the mortgaged collateral is reduced, while the exposure of the building over time to weather conditions
probably also risk the structural status of these buildings. To be more specific, despite our office’s intense efforts to have a housing project of 60 units in Paphos fenced off in order to protect it, this was not done and the next year almost all that remained were the columns and shells of buildings, with visible signs of moisture and exposure of the iron frames. In another case, a supermarket in Nicosia came close to losing its escalators. Therefore, the protection of the mortgaged property would at least retain a certain value, by protecting the property against time, weather and vandals. • Similarly, the building maintenance costs should be treated as a priority during an extended period of offer and lack of buyers. With the new laws for the issue of title deeds to the buyer’s name, it is obvious that lenders are now worse off, prompting them to speed up the administration of assets held as collateral. At the same time, some have not yet realised that the supercharges of 8% -13% may seem positive on the lenders’ balance sheets, but in reality it is quite the opposite as they are causing the rapid sell-off or disposal of the mortgage of the borrowing customer. The whole argument lies in the quality, status and honesty of the borrower and lender and the common understanding by all to reach the ultimate goal, that is to reduce the loan even if at the end all sides may lose out. We are now in a period where a national economic
COMMERCIAL BUILDING PLOT FOR SALE IN NICOSIA Suitable for retail/office construction. Located in a very desirable location, opposite Marks & Spencer and within 50 mtrs of Acropolis Park. Plot Area: 556 sq.m. Max. Building Cover: 50% Max. Building Height: 24 meters Max. No. of Floors: 6 Road Frontage: Approx. 24 meters Price: €650,000 For more info please contact us at: 99317468
recovery, of some rate, is expected from the year 2016/2017, while for some properties it seems that the recovery has already started, or at least the rate of fall has stopped. Some financiers have resorted to an exchange of property for debts held, but this does not solve the problem on its own. If there is a condition in the contract of exchange for a grace period of at least 1-1 1/2 years, for there to be no interest charge and that the repayment will start after the 2016 to 2017 when the anticipated recovery is expected, this should enable the borrower to sell or dispose of the property. Otherwise it is unthinkable how the interest can exceed 4.5% when the normal the deposit interest is now 1.8% (or below). It seems that there is no common understanding of the whole issue and how debt should be reduced for everybody. Arguing all of the above is pointless if there is no strategy or plan, while the involvement of the Central Bank is essential in order to ascertain the implementation of the roadmap for loans, and whether these are implemented within the spirit in which they were submitted. Finally it would be wrong not to give credit to the incentives offered by the present government, both in terms of visas/passports to third-country investors, as well as the elimination or reduction of transfer fees and capital gains taxes, as well as other incentives which altogether constitute a firefly of hope for a way out from the prevailing darkness. www.aloizou.com.cy - ala-HQ@aloizou.com.cy
October 21 - 27, 2015
14 | MARKETS | financialmirror.com
South Africa rand has plenty of gas in the tank By Oren Laurent President, Banc De Binary
The South African Rand (ZAR) has been performing poorly in recent years, particularly during 2015 where it depreciated sharply against the USD. However, the tide is turning and the ZAR has appreciated sharply over the past week. There are several reasons for the sudden turnaround in the fortunes of the currency, namely a mega-deal between SABMiller and AB InBev, weak US economic data, and the Fed’s decision to maintain interest rates at their current levels. However, a myriad of other factors need to be taken into consideration when examining the performance of the ZAR. Overall, BRICS countries (Brazil, Russia, India, China and South Africa) have suffered since the China equities rout and its domino effect on the global markets.
Plunging EM currencies Currency depreciations for emerging market economies have featured across the board, with only the occasional mini-rally being experienced in recent times. In fact, the MSCI EM index confirms the sub-optimal performance of these economies since the bearish turnaround commenced towards the end of 2012. The annual performance in percentage terms of MSCI emerging markets was -53.33% at the height of the global financial crisis in 2008, followed by a solid recovery to the tune of 78.51% a year later. EMs then flip-flopped between 18.88% gains in 2010 and 18.42% losses in 2011. A reversal took place again in 2012 when the annual performance of EM economies increased by 18.22%. The trend became apparent after quantitative easing (QE policies) by the Fed stopped, and it was then that contractions in annual performance became the norm. In 2013, MSCI emerging markets turned in a -2.60% contraction, and in 2014 the figure was recorded at -2.19%. In 2015, it appears as if the MSCI EM index figure will move back towards 2011 levels. For the year to date, the MSCI EM index has posted returns of -15.4%. Not surprisingly, during September, the returns have been less negative owing to dollar weakness, the Fed’s decision not to raise interest rates above the 0.00% – 0.25% range, and the subsequent effect that has had on EM currencies. During the past three months from July-September, the cumulative net return is -17.90%
in emerging markets.
Factors driving ZAR appreciation The second week of October saw strong gains for EM currencies, notably the ZAR. It comes as no surprise that the outcome of the Fed FOMC meeting on September 16/17 was good news for EM currencies, including the South African rand. The decision by the Federal Reserve not to raise interest rates above the current 0.25% level has been a boon to developing economies the world over. With immense pressure weighing on the demand for mining, energy and related commodities from EM countries, a strong dollar would be the death knell for these economies. The likelihood of a Fed rate hike in 2015 has dropped below 30%, from over 41% a month ago. This means that currency traders and speculators are going long on EM currencies like the ZAR. A short-term rally to December is likely to take place, with many market analysts already calling for the rand to trade below the key 13:1 resistance level. The rand has already been pushed down from over 14.07 to the USD in September to its current rate of 13.09 to the greenback. This marks a dramatic appreciation of the currency, and a strong reversal from the trend. On Thursday, October 15, US economic data was released that cooled investor sentiment. For starters, retail sales figures did little to inspire confidence in the ‘booming’ economy. Neither did the jobs report. Typically, bad news does not bode well for global markets, but for emerging markets any negatives emanating from the US economy tend to bring currencies like the ZAR into favour. The reasoning is simple: a move away from the dollar is by definition a move
towards other economies such as the more volatile, higher risk EMs. Precisely the opposite would happen if the Fed were to raise interest rates in 2016: the dollar would appreciate relative to other currencies and there would be an acceleration of capital flight from countries like South Africa which is considered volatile to the relatively stable US economy. Structurally, the South African economy has problems. These include a power grid that is unstable and in the process of being revamped, rebuilt and expanded with Russian assistance. There are tremendous labour concerns in manufacturing and mining, with widespread strikes and wage disputes. Other issues include corruption, crime and the feeling that government is encroaching more onto the assets of the private sector. However, short-term the ZAR is gaining ground against the greenback.
The Big Push for the ZAR The most significant short-term development for the ZAR is the current merger between AB InBev and SABMiller. This deal is pegged to be the biggest corporate merger in the history of the world – valued at an incredible $106 bln. It dwarfs all other mergers that have taken place since 1988, including KKR & company/RJR Nabisco, Heinz/Kraft Foods in 2015, Procter & Gamble/Gillette in 2005, and InBev/Anheuser-Busch in 2008. Talks are still ongoing between these global titans of the beer industry, but stakeholders are said to be very interested in proceedings. If this comes to pass, it certainly bodes well for the ZAR. Speculators will be taking bullish positions on the rand ahead of this deal, and it could easily strengthen back to levels of between 10 and 11 to USD if a Fed rate hike is kept at bay, Chinese import demand increases and commodities prices begin to stabilise at higher equilibrium levels. These are all big ‘if’s and unlikely to come to pass, but stranger things have happened. Note that this column does not constitute financial advice.
Subdued market reaction to China GDP Markets Report By Jameel Ahmad, Chief Market Analyst at FXTM
After weeks of intense speculation, the markets commenced the trading week with confirmation that China GDP growth had slipped below the government target of 7%. The economy expanded at 6.9% over the previous quarter and while this is not horrendously below target, this is the first time since 2009 that economic growth has printed below 7% and reinforces continual concerns about slowing growth throughout the global economy. Suspicions are high that the China economy will suffer from further declining economic momentum next year and I continue to expect the People’s Bank of China (PBoC) to defend government targets and prevent growth from slipping even lower. While we are regularly waking up to ongoing concerns over the health of the China economy, this will not be a huge concern domestically until it begins to negatively impact local employment prospects. I continue to repeat that it will always be those economies that are heavily reliant on trade with China that will have to cushion slowing growth in the economic powerhouse, mainly because they will also have to suffer from the fallout from a decline in China demand for its products.
Where does this leave the Fed? Although the GDP data from China had a subdued impact on the currency markets, traders should not
underestimate that this is an enormous piece of data for the Federal Reserve when it comes to raising U.S. interest rates in 2015. Bearing in mind that the U.S. central bank citied global economic weakness as a primary reason to delay raising interest rates, further signs of growth slowing in an economic powerhouse, alongside the reoccurring concerns over the pace of growth in both Europe and Japan should further suspicions that the Fed will not be raising interest rates this year.
Keeping an eye on Gold After jumping around $90 since the beginning of the month to trade at a near four-month high above $1190, Gold has slipped to trade towards $1170 as traders take profit on the metal. Although Gold has made strong gains throughout October, I still think that the metal has potential to continue trading higher before the end of the year. US interest rate expectations for 2015 are not only diminishing as each trading week passes, but also being pushed further back into 2016 with this providing encouragement for investors in Gold. Not only has the pushed-back US interest rate expectation provided positive momentum for Gold, but also increased safe-haven appeal as a result from confusion on central bank intentions. The markets are lacking clarity on central bank intentions from the US, as well as the ECB and possibly the Bank of Japan (BoJ) on whether both could ease monetary policy further. The threat of central banks acting to reinvigorate growth might result in a lack of trust from traders to invest in currencies and encourage demand for
alternatives and safe-haven assets such as Gold.
Can GBPUSD finally surpass 1.55? The GBPUSD is currently teasing the prospect of moving past 1.55, which is seen as significant resistance, having had limited gains in the pair for nearly a month. This move is threatening to happen as three members of the Bank of England (BoE), including Governor Mark Carney, are set to testify at the treasury committee. For the GBPUSD to finally advance to 1.55 and to tease a larger gain for the GBP, optimistic comments around the possibility of future UK interest rate rises will be required. It is clear from several BoE members that the central bank would prefer to begin normalising monetary policy, but persistent weakness in inflation has repeatedly pushed back UK interest rate expectations over the past year. We are now seeing significant improvements in UK wage growth, which should filter through other areas of the UK economy and improve inflation prospects as we enter the beginning of 2016. With that being said and despite the BoE clearly being keen to start raising UK interest rates, I can’t see a rate rise until June 2016. For information, disclaimer and risk warning note visit: www.ForexTime.com FXTM is an international forex broker, ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), and FT Global Limited is regulated by the International Financial Services Commission (IFSC)
October 21 - 27, 2015
financialmirror.com | MARKETS | 15
Will the ECB opt for QE-plus? Marcuard’s Market update by GaveKal Dragonomics When the governing council of the European Central Bank convenes this Thursday in the Maltese capital Valetta, the assembled policymakers will be forced to contemplate a track record of quantitative easing that at best can be described as “mixed”. True, since the ECB announced its EUR 60 bln a month programme of asset purchases in March this year, eurozone activity has staged a modest comeback, with growth expected to rise to 1.6% in the third quarter, compared with 1.2% in
1Q. Yet the declared aim of QE was not to stimulate growth, but to avert deflation, and on that front the ECB has been rather less successful, prompting speculation that the governing council could deploy even bigger weaponry at its Valetta meeting in a renewed attempt to hit its inflation target. Since it began its asset purchases, the central bank has watched the euro gain 8% against the US dollar, and roughly 5% against a trade-weighted basket of currencies. Although the ECB insists it does not target the exchange rate, currency appreciation has exerted deflationary pressure on the eurozone, helping to tip headline inflation back below zero to -0.1% in September, and dragging core inflation down to 0.9%, well below the ECB’s target rate for headline inflation
www.marcuardheritage.com
of “below but close to 2%”. After the euro last week tested $1.15, participants expect the market to push the single currency still higher unless the ECB acts this week to cap the exchange rate. Whether the central bank would find it simple to limit the euro’s gains is questionable, however. Typically, the euro-US dollar exchange rate tends to move in line with interest rate differentials, with the two-year interest rate swap rates a useful guide to past fluctuations. If the euro’s strength over the last six months had been the result of steepening at the short end of the euro yield curve, the ECB would find it relatively straightforward to flatten the curve again and weaken the euro. But as the chart shows, the main driver of the euro’s recent appreciation has been the downgrading of US interest rate expectations. Although the euro’s two year swap rate has sunk to just 0.03%, over the last two months the equivalent US dollar rate has fallen more steeply, as diminishing expectations of an early Federal Reserve rate hike have led to a repricing of the US yield curve. As a result, the spread between US and European two year swap rates has narrowed to 69bp from just short of 100bp in August. If disappointing data further erodes US rate hike expectations, it is likely the ECB would find itself forced to take drastic action to prevent the euro from appreciating above $1.15. What could it do? - Increase the monthly volume of its asset purchases to force short rates lower, which would drag longer maturities back towards their April lows. However, this might not be enough to counter another Fed delay. - Signal an extension of QE beyond next September, flattening the yield curve by lowering the two to five-year tenors. - Reduce its deposit rate below -0.20%. Although ECB president Mario Draghi has said that -0.20% marks the lower bound, the Swiss central bank has cut its deposit rate -0.75%,
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.
flattening the swap curve so much that the two-year rate is now -0.7% and the five-year -0.42%. However, while any, or all, of these measures could succeed in capping the euro for now, the extent to which the longer term effectiveness of Europe’s QE programme depends on evolving Fed policy is likely to persuade the ECB to hold its fire at Thursday’s meeting in the hope that the next month or two will deliver greater clarity on the impact of China’s slowdown on the eurozone and US economies, and on how inflation will move once last year’s drop in oil prices falls out of the calculation. If the ECB does decide to wait before wheeling out even bigger guns, the euro’s risk will remain to the upside, despite the dampening influence of Draghi’s dovish talk.
WORLD CURRENCIES PER US DOLLAR CURRENCY
RATE
EUROPEAN
Belarussian Ruble British Pound * Bulgarian Lev Czech Koruna Danish Krone Estonian Kroon Euro * Georgian Lari Hungarian Forint Latvian Lats Lithuanian Litas Maltese Pound * Moldavan Leu Norwegian Krone Polish Zloty Romanian Leu Russian Rouble Swedish Krona Swiss Franc Ukrainian Hryvnia
BYR GBP BGN CZK DKK EEK EUR GEL HUF LVL LTL MTL MDL NOK PLN RON RUB SEK CHF UAH
17215 1.5477 1.7229 23.853 6.5717 13.7852 1.135 2.33 273.35 0.61919 3.042 0.3782 19.668 8.1134 3.7445 3.896 62.2 8.2724 0.9534 21.8
AUD CAD HKD INR JPY KRW NZD SGD
0.7285 1.3006 7.75 64.8825 119.63 1130.5 1.4646 1.3883
BHD EGP IRR ILS JOD KWD LBP OMR QAR SAR ZAR AED
0.3772 8.0041 29956.00 3.8597 0.7084 0.3016 1512.50 0.3850 3.6399 3.7500 13.2394 3.6729
AZN KZT TRY
1.042 277.08 2.9014
AMERICAS & PACIFIC
Australian Dollar * Canadian Dollar Hong Kong Dollar Indian Rupee Japanese Yen Korean Won New Zeland Dollar * Singapore Dollar MIDDLE EAST & AFRICA
Bahrain Dinar Egyptian Pound Iranian Rial Israeli Shekel Jordanian Dinar Kuwait Dinar Lebanese Pound Omani Rial Qatar Rial Saudi Arabian Riyal South African Rand U.A.E. Dirham ASIA
Azerbaijanian Manat Kazakhstan Tenge Turkish Lira
Note:
The Financial Markets
CODE
* USD per National Currency
Interest Rates Base Rates
LIBOR rates
Swap Rates
CCY
CCY/Period
1mth
2mth
3mth
6mth
1yr
USD GBP EUR JPY CHF
USD GBP EUR JPY CHF
0.20 0.51 -0.13 0.04 -0.78
0.25 0.54 -0.09 0.06 -0.76
0.32 0.58 -0.06 0.08 -0.72
0.52 0.75 0.02 0.13 -0.67
0.83 1.03 0.12 0.24 -0.56
0-0.25% 0.50% 0.05% 0-0.10% -0.75%
CCY/Period USD GBP EUR JPY CHF
2yr
3yr
4yr
5yr
7yr
10yr
0.72 0.92 0.03 0.11 -0.72
0.96 1.10 0.10 0.11 -0.66
1.18 1.26 0.21 0.14 -0.58
1.37 1.41 0.33 0.18 -0.44
1.69 1.64 0.59 0.29 -0.18
1.99 1.86 0.95 0.48 0.13
Exchange Rates Major Cross Rates
CCY1\CCY2 USD EUR GBP CHF JPY
Opening Rates
1 USD 1 EUR 1 GBP 1 CHF 1.1350 0.8811
100 JPY
1.5477
1.0489
0.8359
1.3636
0.9241
0.7365
0.6777
0.5401
0.6461
0.7333
0.9534
1.0821
1.4756
119.63
135.78
185.15
0.7970 125.48
Weekly movement of USD
CCY\Date
22.09
29.09
06.10
13.10
20.10
CCY
Today
USD GBP JPY CHF
1.1142
1.1209
1.1123
1.1310
1.1278
0.7180
0.7390
0.7335
0.7384
0.7286
134.07
133.82
133.86
135.41
134.63
GBP EUR JPY
1.0817
1.0882
1.0844
1.0880
1.0770
CHF
1.5477 1.1350 119.63 0.9534
Last Week %Change 1.5164 1.1123 120.35 0.9749
-2.06 -2.04 -0.59 -2.21
October 21 - 27, 2015
16 | WORLD | financialmirror.com
The Japan Syndrome comes to China China is now experiencing what Japan went through a generation ago: a marked slowdown in economic growth after demands By Jeffrey by the United States that it restrict its exports. In the late 1980s and early 1990s, Japan was D. Sachs criticised by the US as an “unfair trader” by virtue of its soaring manufacturing exports. The US issued stern, and apparently credible, threats to restrict Japanese imports, and succeeded in pushing Japan to overvalue the yen, which helped to bring Japanese growth to a screeching halt. That may be happening again, with China’s growth slowing markedly under the weight of an overvalued currency urged by the US. Figure 1 shows the yen’s real (inflation-adjusted) exchange rate from 1964 (when the yen became convertible on the current account) until today. A rise in the index signifies real appreciation, meaning that the yen became more expensive relative to other currencies after correcting for relative price-level changes.
Figure 1: Japanese Yen Real Exchange Rate (2007=100)
the yen’s real depreciation since 2012 has merely reversed the preceding growth-killing real appreciation. China now confronts the risk of the same sequence of events. Its booming exports in the mid-2000s led US officials to threaten trade retaliation unless the Chinese authorities took steps to restrict exports, cause the renminbi to appreciate, and shift to “consumption-led growth.” This is the same message once given to Japan. The US insistence on renminbi appreciation intensified after the onset of the 2008 financial crisis. The results to date can be seen in Figure 3, which maps China’s real exchange rate from the start of renminbi currentaccount convertibility (1996) until today. The currency began appreciating sharply in 2007. As in Japan, the appreciation sparked destabilising capital flows into China on the assumption that the renminbi, like the yen before it, had nowhere to go but up.
Figure 3: Renminbi Real Exchange Rate (2007 = 100) Source: Darvas (2015), Bruegel, http://bruegel.org/2012/03/realeffective-exchange-rates-for178-countries-a-new-database/
As in Japan, a financial bubble accompanied the currency appreciation. Yet, as Figure 4 shows, the real appreciation led to a rapid collapse of China’s annual export growth, from above 15% (smoothed over three-year intervals) to below 10%, and now to a financial slump as well.
Figure 4: China’s Annualised Export Growth (3-Year Moving Average)
Source: Darvas (2015), Bruegel, http://bruegel.org/2012/03/real-effective-exchange-rates-for178-countries-a-new-database/
As one can see, the yen appreciated gradually in the 1960s and 1970s, as one would expect, given Japan’s rapid catch-up growth of those decades. Then came the trade pressures from the US, and Japan agreed to a major realignment of currencies in the mid-1980s, starting with the so-called Plaza Accord in 1985. The yen appreciated substantially as part of that multi-country intervention, with the real appreciation reaching roughly 50% from 1984 to 1988. And, as Figure 2 shows, Japan’s export growth plummeted.
Figure 2: Japan’s Annualised Export Growth (3-Year Moving Average)
Source: IMF, calculated as (X/Xt-3)^(1/3) – 1, where X is an index of Japan’s goods exports
For a brief period, a domestic investment boom offset the export slowdown. With the yen seeming to have no place to go but up, foreign money flooded into Japan. A financial bubble developed. By 1990, the investment boom had become a bust, the asset bubble had burst, and Japan began two decades of stagnation. Despite the Japanese economy’s chronic underperformance, the US continued to press Japan to maintain an overvalued yen throughout this period. During the 1990s and 2000s, I repeatedly asked senior Japanese finance ministry officials why they allowed the yen’s real appreciation to persist, thereby shutting down export growth. The answer was always the same: Japan was afraid of US trade retaliation if the yen weakened. It is only with the Bank of Japan’s quantitative easing since the launch of “Abenomics” in 2012 that the yen’s real appreciation has been reversed somewhat. Predictably, some US industrial lobbies are again complaining that Japan is manipulating its currency, even though
Source: IMF, calculated as (X/Xt-3)^(1/3) – 1, where X is an index of China’s goods exports
From 2007 to 2014, the renminbi appreciated by 32% in real, trade-weighted terms; by May 2015 (the most recent month of the reported index), its total appreciation had reached 40%. This partly reflected nominal appreciation against the US dollar, together with effective appreciation against the euro, yen, Korean won, and other currencies as the US dollar strengthened relative to them. The renminbi remains highly overvalued, despite August’s modest 3% nominal depreciation against the soaring US dollar. The renminbi’s real appreciation should be compared with the recent movements of the yen and won. As of May 2015, the yen had depreciated in real terms by around 7% since January 2007, and the won by around 3%, thereby exacerbating the cost pressures on China’s exporters relative to their Asian competitors. Further depreciation of the renminbi seems necessary if China is to bolster its flagging economic growth and avoid a long-term “Japan trap.” It is important to note that many of China’s increased exports would find their way not to the US and Europe but to Africa and Asia, especially in the form of infrastructure equipment and other machinery. Nonetheless, political pressures from the US and Europe, manifested as charges of currency manipulation and unfair trade practices, as well as misguided ideas in China about the renminbi’s “prestige,” might lead China to resist any meaningful exchange-rate correction. A month after the renminbi’s 3% depreciation, Chinese President Xi Jinping commented that, “Given the current economic and financial conditions at home and abroad, there is no basis for sustained depreciation of the RMB.” In recent weeks, the People’s Bank of China has been defending the currency’s valuation through foreign-exchange sales. Earlier this year, The Economist offered the conventional Western thinking. Don’t let the renminbi depreciate, it wrote, for four reasons: depreciation might provoke a currency war in Asia; China’s companies are awash in dollar-denominated debt; depreciation might lead to renewed US charges of currency manipulation; and depreciation might reverse China’s progress in making the renminbi an international reserve currency. Such misguided reasoning is precisely what led to a generation of unnecessarily slow growth in Japan. It could happen again in China. Jeffrey D. Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals. © Project Syndicate, 2015 - www.project-syndicate.org
October 21 - 27, 2015
financialmirror.com | WORLD | 17
Governments’ self-disruption challenge By Mohamed A. El-Erian Αuthor of When Markets Collide
One of the most difficult challenges facing Western governments today is to enable and channel the transformative – and, for individuals and companies, selfempowering – forces of technological innovation. They will not succeed unless they become more open to creative destruction, allowing not only tools and procedures, but also mindsets, to be revamped and upgraded. The longer it takes them to meet this challenge, the bigger the lost opportunities for current and future generations. Self-empowering technological innovation is all around us, affecting a growing number of people, sectors, and activities worldwide. Through an ever-increasing number of platforms, it is now easier than ever for households and corporations to access and engage in an expanding range of activities – from urban transportation to accommodation, entertainment, and media. Even the regulation-reinforced, fortress-like walls that have traditionally surrounded finance and medicine are being eroded. This historic transformation will continue to gain momentum as it expands in both scale and scope. But its benefits will not be fully realised unless governments take steps to empower the forces of change, ensure that the massive positive externalities are internalised, and minimise the negative impacts. Unfortunately, this is proving extremely difficult for many advanced-country governments, partly because the failure to recover fully from the recent crisis and recession has undermined their credibility and functioning. The emergence of anti-establishment and non-traditional political parties and candidates on both sides of the Atlantic is complicating even the most basic elements of economic governance, such as enactment of an active budget in the
United States. In this context, taking the steps needed to upgrade economic systems, including infrastructure in the US and the incomplete union in Europe, or to meet historical challenges like the refugee crisis, seems all but impossible. In fact, Western political and economic structures are, in some ways, specifically designed to resist deep and rapid change, if only to prevent temporary and reversible fluctuations from having an undue influence on underlying systems. This works well when politics and economies are operating in cyclical mode, as they usually have been in the West. But when major structural and secular challenges arise, as is the case today, the advanced countries’ institutional architecture acts as a major obstacle to effective action. The political influence of financial donors and lobby groups add to the challenge. Rather than promoting actions aimed at improving the long-term wellbeing of the system as a whole, these actors tend to push micro objectives, some of which help the traditional, often wealthy elements of the establishment maintain their grip on the system. In doing so, they block the small and emerging players that are so vital to upgrading and transformation. All of this serves to complicate an imperative that is relevant not just to governments, but also to companies and individuals that must adapt to changing circumstances by upgrading their structures, procedures, skills, and mindsets. Few are eager to self-disrupt, a process that takes us out of our comfort zone, forcing us to confront our long-standing blind spots and unconscious biases and adopt a new mindset. But those who wait until the disruptions are unavoidable – easy to do when governments do not mount a timely response – will miss out on the huge advantages that technology offers. Even when governments decide to implement policies that enable economic upgrading and adaptation, they cannot do so in isolation. With technology enabling unprecedented mobility and connectivity, the jurisdictional power of nation-states is being eroded, meaning that a truly effective response – one that unleashes the full benefits of disruptive technologies – is impossible without multilateral cooperation and
coordination. But multilateralism is undergoing a transformation of its own, driven by doubts about the legitimacy of existing structures. With reforms of the traditionally Westerndominated institutions having stalled, there have been moves to create alternatives; China’s Asian Infrastructure Investment Bank, for example, competes directly with the World Bank and the Asian Development Bank in some areas. All of this makes global-level responses more difficult. Against this background, a rapid and comprehensive transformation is clearly not feasible. (In fact, it may not even be desirable, given the possibility of collateral damage and unintended consequences.) The best option for Western governments is thus to pursue gradual change, propelled by a variety of adaptive instruments, which would reach a critical mass over time. Such tools include well-designed public-private partnerships, especially when it comes to modernising infrastructure; disruptive outside advisers – selected not for what they think, but for how they think – in the government decision-making process; mechanisms to strengthen interagency coordination so that it enhances, rather than retards, policy responsiveness; and broader cross-border privatesector linkages to enhance multilateral coordination. How economies function is changing, as relative power shifts from established, centralised forces toward those that respond to the unprecedented empowerment of individuals. If governments are to overcome the challenges they face and maximise the benefits of this shift for their societies, they need to be a lot more open to self-disruption. Otherwise, the transformative forces will leave them and their citizens behind. Mohamed A. El-Erian, Chief Economic Adviser at Allianz and a member of its International Executive Committee, is Chairman of US President Barack Obama’s Global Development Council and the author, most recently, of When Markets Collide. © Project Syndicate, 2015 - www.project-syndicate.org
The path towards carbon pricing By Jim Yong Kim and Christine Lagarde
In just six weeks, world leaders will meet in Paris to negotiate a new global climate-change agreement. To date, 150 countries have submitted plans detailing how they will move their economies along a more resilient low-carbon trajectory. These plans represent the first generation of investments to be made in order to build a competitive future without the dangerous levels of carbon-dioxide emissions that are now driving global warming. The transition to a cleaner future will require both government action and the right incentives for the private sector. At the center should be a strong public policy that puts a price on carbon pollution. Placing a higher price on carbon-based fuels, electricity, and industrial activities will create incentives for the use of cleaner fuels, save energy, and promote a shift to greener investments. Measures such as carbon taxes and fees, emissions-trading programmes and other pricing mechanisms, and removal of inefficient subsidies can give businesses and households the certainty and predictability they need to make long-term investments in climate-smart development. At the International Monetary Fund, the focus is on reforming its member countries’ fiscal systems in order to raise more revenue from taxes on carbon-intensive fuels and less revenue from other taxes that are detrimental to economic performance, such as taxes on labour and capital. Pricing carbon can be about smarter, more efficient tax systems, rather than higher taxes. Carbon taxes should be applied comprehensively to
emissions from fossil fuels. The price must be high enough to achieve ambitious environmental goals, in alignment with national circumstances, and it must be stable, in order to encourage businesses and households to invest in clean technologies. Administering carbon taxes is straightforward and can build on existing road fuel taxes, which are well established in most countries. Carbon pricing will be in many countries’ best interests, owing to the many domestic environmental benefits. For example, burning cleaner fuels helps to reduce outdoor air pollution, which, according to the World Health Organisation, currently causes about 3.7 million premature deaths a year. It is vitally important to address the impact of energyprice reforms on vulnerable groups in every society. So these reforms will need to be accompanied by adjustments to fiscal systems and safety nets, among other things, to ensure that the poor are not harmed. The World Bank Group is supporting countries and businesses as they develop climate-friendly public policies, invest in carbon markets, and explore financial innovations to ease into low-carbon transitions. The Group is leveraging its experience and global reach for learning and knowledge exchange through programs like the Partnership for Market Readiness. From that experience, we have developed, alongside the OECD, initial principles to help guide and inspire future carbon-pricing schemes. By drawing on these principles, countries, regions, states, and businesses can move faster to tackle the climate challenge confronting us all. The principles are based on fairness; alignment of policies and objectives; stability and predictability; transparency; efficiency and costeffectiveness; and reliability and environmental integrity. To help achieve our climate objectives, we need to promote dialogue about the necessary policy measures before and beyond the climate-change conference in Paris. That is why we are announcing a “Carbon Pricing Panel,” which will
bring together heads of state, city and state leaders, and representatives of top companies to urge countries and businesses around the world to put a price on carbon. These leaders have taken steps to price carbon pollution and catalyse greener investment in their own countries and regions. They include German Chancellor Angela Merkel, Chilean President Michelle Bachelet, French President François Hollande, Ethiopian Prime Minister Hailemariam Desalegn, Philippines President Benigno Aquino III, Mexican President Enrique Peña Nieto, Governor Jerry Brown of California, and Mayor Eduardo Paes of Rio de Janeiro. Carbon pricing policies are already being implemented by some 40 national governments, including that of China, the world’s largest emitter, and 23 cities, states, and regions that are putting a price on carbon. Many other governments also are reforming energy prices, and more than 400 companies report using a voluntary, internal carbon price. That makes sense. Top companies must effectively manage exposure to climate risk in order to generate higher profits and ensure more stable earnings. All of these actions are welcome; but we view them as being only initial steps. Together with the leaders of the Carbon Pricing Panel, we call on governments to seize the moment – for the sake of the planet and future generations – to put a price on carbon pollution that reflects the environmental damage it causes. We stand ready to support governments that act. The longer we wait, the costlier and more difficult it will be for us – and our children and grandchildren – to protect the planet. Jim Yong Kim is President of the World Bank Group. Christine Lagarde is Managing Director of the International Monetary Fund. © Project Syndicate, 2015. www.project-syndicate.org
October 21 - 27, 2015
18 | WORLD | financialmirror.com
The African breadbasket By Paul Kagame and KY Amoako
On the first World Food Day in 1945, people around the world celebrated the creation of the United Nations Food and Agriculture Organisation and the launch of the first coordinated global action to combat hunger. This year, on the 70th World Food Day, countries are mobilising behind the Sustainable Development Goals – one of which calls for the elimination of hunger and malnutrition by 2030, together with the creation of a more resilient and sustainable food system. Can it be done? With the world population growing rapidly (to an estimated 8.5 billion by 2030), the impact of climate change becoming increasingly apparent, and the amount of arable land dwindling, there can be no denying that achieving this goal will be a daunting challenge. But for Africa, which boasts 60% of the world’s arable land and climates conducive to a tremendous diversity of crops, striving to do so represents a remarkable opportunity to ensure food security for Africans (one in four is undernourished) and boost its economy by becoming a major food exporter. Though many African economies have experienced rapid growth in recent years, the agricultural sector has remained stagnant. Indeed, African agriculture is still dominated by small-scale farmers who lack access to productivity-boosting technology, focus mainly on a narrow range of products, and remain poorly linked to markets, manufacturing, and the broader economy. Beyond undermining food security – Africa remains a major food importer – low agricultural productivity contributes to the persistence of rural poverty, even as a middle class emerges in many of Africa’s cities. Africa can and should be the world’s breadbasket. But to realise this vision – and to do it in an environmentally sustainable way – its agricultural sector must undergo a genuine transformation that entails higher capital investment, significant crop diversification, and improved linkages to burgeoning urban consumer markets. Moreover, Africa must start manufacturing more value-added food products for both internal consumption and export, especially to countries like India and China, where demand is
The United States has the world’s biggest millionaire club by a huge distance. No other country comes even close to matching it. According to the Credit Suisse Global Wealth Report, the U.S. was home to 41% of the world’s millionaires in 2014, and its share grew to 46% in 2015. Wealth has risen in the U.S. for the seventh year in succession and the U.S. millionaire population now stands at 15.7 million, according to the report. The United Kingdom comes a distant second with 2.4 million, while Japan rounds off the top three countries with a millionaire population of 2.1 million. (Source: Statista.com)
“Beyond undermining food security low agricultural productivity contributes to the persistence of rural poverty, even as a middle class emerges in many of Africa’s cities” growing. From Europe and North America to East Asia and Latin America, agricultural advances have proved to be key precursors of industrial development and gains in living standards. Africa has the added benefit of technologies that other regions lacked at this stage of their agricultural development, from cost-competitive off-grid solar power to mechanisms for mapping soil characteristics, regulating water use, and ensuring farmers’ access to accurate price information. And innovation is already happening. Rwanda, for example, is working to link agriculture support with broader services like electricity and education. And the country’s farming communities are pioneering participatory decisionmaking structures for agricultural planning and conflictresolution mechanisms to settle disputes among growers. To bolster agricultural innovation and modernisation, governments must ensure that farmers have secure titles to their land, and thus an incentive to make the needed investments. The challenge lies in the fact that, in many parts of Africa, land is communally owned, with almost everyone in a village having traditional rights to some farming land – a system that has helped to prevent landlessness and destitution in rural areas. Given this, reforms to make land tenure more compatible with modern commercial agriculture must be sensitive to local traditions and respect the ownership rights of communities and traditional smallholders. Of course, agricultural development can have serious economy-wide pitfalls, which must be navigated carefully. For example, as technology-driven productivity gains reduce the number of workers needed on farms, strategies to boost
employment in other parts of the value chain and to manage migration to cities become even more essential. With Africa’s rural population already largely underemployed, there is no time to waste in implementing such strategies. Fortunately, Africa’s large population of increasingly well-educated young people, who are largely uninterested in the backbreaking work of subsistence farming, is well suited to fill the higher value-added jobs that emerge in the agricultural sector and beyond. Another potential pitfall of agricultural development is environmental damage, including land degradation, soil nutrient mining, excessive water use, and water pollution. Here, again, Africa can benefit from experience and knowhow that other regions could not access at a similar stage in their agricultural development. By drawing on other countries’ best practices – and avoiding their mistakes – Africa can develop an environmentally sustainable agricultural system that fits African conditions. Such a system must place a high priority on protecting biodiversity and prevent the emergence of monocultures across the continent, which is home to some of the world’s richest ecosystems. Climate-change considerations – including the expected costs of mitigation and adaptation – must be central to the process of upgrading agriculture, including the relevant infrastructure. Ultimately, each country must chart its own course toward agricultural development. But cooperation – even just to exchange ideas and emulate best practices – can help the process considerably. That is why, next March, the African Transformation Forum in Kigali will convene leading figures from African governments, business, academia, and civil society to discuss practical next steps toward agricultural transformation in Africa, and the broader push to build globally competitive economies. Africa’s agricultural transformation will be a long and complex process. But it has the potential to ensure regional food security, promote broader economic development, and ultimately help to feed the world. We are confident that African leaders will rise to the challenge. Paul Kagame is President of the Republic of Rwanda. K.Y. Amoako is the founder of the African Center for Economic Transformation, a Ghana-based think tank. © Project Syndicate, 2015. www.project-syndicate.org
October 21 - 27, 2015
financialmirror.com | WORLD | 19
The Volkswagen revolution By Lucy P. Marcus When Michael Horn, the president and CEO of Volkswagen Group of America, recently testified before a committee of the US Congress about the software that Volkswagen installed on its diesel-powered cars to defeat emissions tests, he expressed his own incredulity that the blame lay with a couple of engineers. “I did not think that something like this was possible at the Volkswagen Group,” Horn said. Horn and the members of Congress are not the only ones who feel betrayed by Volkswagen’s purposeful malfeasance. So do the consumers who bought into the company’s “clean diesel” marketing and purchased one of the 11 million affected Volkswagen, Audi, Skoda, and Seat cars. And the dealers, suppliers, workers, regulators, and legislators in every country who now have to deal with the aftermath feel betrayed as well. When a high-profile consumer company, one built on confidence and specialised skill, breaches the public’s trust, the damage is enormous. The US hearings have been followed by parliamentary hearings in the United Kingdom, and more official inquiries are being launched elsewhere. In Italy and Germany, the police have searched offices and private homes to secure relevant documents. There is talk of consumer class-action suits around the world, from the US to Australia. And the European Investment Bank plans to investigate whether any of the loans extended to the company – which were linked to fulfilling climate targets – were used to rig emissions tests. If so, it could demand the money back. With Volkswagen announcing the recall of 8.5 million cars in Europe, the company may not survive – at least not in its current form. The financial damage is set to be enormous: Volkswagen now says that it will set aside EUR 6.5 bln to cover the costs of the scandal. That may not be enough, and the company’s stock is reflecting the market’s concerns, as is its Standard & Poor’s credit rating. The entire auto industry is now under scrutiny, as are regulators, whose testing procedures proved so easy to game and whose complex relationships with governments and auto manufacturers may not serve the public interest. And Volkswagen is so closely aligned with the German engineering “brand” that, unfair as it may be, the scandal is bound to affect the perception of other German carmakers and industries. Here, after all, was a much-celebrated company that put its environmental credentials front and center, and then, where the rubber hits the road (so to speak), proactively
How Premier League ticket prices compare to Europe’s elite Watching football in the UK has become an expensive undertaking for fans. British supporters have to fork out more for an afternoon in the stadium than fans of the continent’s biggest names. Take Chelsea for example. If you want to watch the Premier League champions play at Stanford Bridge, you’ll have to pay GBP 52 (EUR 71.04), according to BBC Sport’s “Price of Football” study. An afternoon watching Real Madrid will cost just over half that. Barcelona’s cheapest match day ticket is just GBP 17.16 (EUR 23.44) while a trip to the Signal Iduna Park in Dortmund will set you back GBP 12.46 (EUR 17.02). (Source: Statista)
cheated. Covering up a mistake, à la GM and its faulty ignition switches, is bad enough; creating and installing a piece of software designed for the sole purpose of defrauding the public is a symptom of something much worse. A fish rots from the head. Volkswagen is well known for having a particularly poorly run and structured board: insular, inward-looking, and plagued with infighting and family rivalries. Matters came to a head last April, when thenChairman Ferdinand Piech resigned following a power struggle with the company’s (now former) CEO, Martin Winterkorn. Piech’s wife, Ursula, a former kindergarten teacher who was also a supervisory board member, resigned as well. If these people can say with a straight face that they didn’t know what was going on, they are either not being completely forthcoming, or they failed to carry out one of a board’s fundamental duties – asking hard questions and holding the executive team to account, especially when things seem too good to be true. Unfortunately, in the wake of the revelations, Volkswagen has squandered what could have been a watershed moment for the company – a perfect opportunity to overhaul its broken corporate governance and bring in truly independent board members and fresh new thinking at the top. Instead, Hans Dieter Potsch, Volkswagen’s chief financial officer since 2003, a true insider, has been appointed chairman of the supervisory board, and the new CEO is another insider, Matthias Muller, the former head of Volkswagen’s Porsche brand. Who will trust such a leadership’s internal inquiries and promises of transparency? All of this comes at a time when traditional carmakers face
strong challenges from outside the industry. The behaviour of companies like Volkswagen may end up encouraging consumers to shift from the industry’s incumbent manufacturers to newcomers such as Google’s forthcoming self-driving cars and Tesla’s electric models, which challenge the very premise of emissions tests. But there is more to the story. The fact that lines of code, not a piece of plastic or metal, was used to dupe the emissions tests highlights the power and promise of sophisticated, high-tech cars that can do more than ever before. But it also exposes the pernicious possibilities of cars that have become so complex that almost no drivers know what is under the hood, what data are being collected about them, and what that means for the future. What Volkswagen claims was the work of a couple of rogue engineers could turn out to be a catalyst for new thinking and approaches in the car industry, particularly given the possibility of new legislation to combat climate change. People would be pushed that much more quickly toward adopting cars that do not depend on fossil fuels. And the rise of new challengers would accelerate as consumers let companies know that business as usual – poor corporate governance and empty promises – will no longer be tolerated. We are only at the beginning of what could be a long process of investigation and accountability for Volkswagen. If that process fuels wider disruption of the industry, it could hasten the dawn of a genuinely new era for human mobility. Lucy P. Marcus is CEO of Marcus Venture Consulting. © Project Syndicate, 2015 - www.project-syndicate.org
October 21 - 27, 2015
20 | BACK PAGE | financialmirror.com
A Papal education By Daniel A. Wagner Few public figures have captivated America’s attention quite as much as Pope Francis did when he visited the United States in September. During his six-day tour, he challenged Americans to contemplate the issues of poverty, social justice, and climate change in the context of a shared but increasingly inharmonious planet. Speaking on the White House’s South Lawn, with US President Barack Obama at his side, Francis called for ìa serious and responsible recognition not only of the kind of world we may be leaving to our children, but also to the millions of people living under a system which has overlooked them.î Francis’s words highlight the fact that it is no longer enough to think of global development as a discrete set of concepts, such as per capita income growth or the number of university graduates. Instead, development must be seen broadly and in relation to the costs of inaction, particularly for those most in need. This is important in the context of another historic event that took place during the pope’s visit: the adoption at the United Nations of the Sustainable Development Goals, which will set the development agenda for the next 15 years. Achieving the SDGs – and heeding Francis’s call – will require the international community to fight poverty, boost food security, preserve the environment, and promote gender equality. And, at the center of these efforts will be education – particularly one goal on which
we are still falling short: literacy. In many places, literacy is still a rarity. In Zambia and Mali, for example, only two children in ten can read after two years in school; in Afghanistan and South Sudan, only three adult women in ten can read. The immediate consequences of this deficit are tremendously painful, and so are the long-term outcomes. Literacy is a necessary precondition for advanced education and critical thinking, which are at the core of our ability to respond to the economic, social, and environmental upheavals many regions are experiencing. The way people around the world, especially younger generations, think and act about such changes will be central to our collective future. The UN reports that awareness of climate change in wealthy and highly literate countries is nearly twice that in impoverished, less literate countries. Awareness does not always lead to action, but literacy is the limiting factor when it comes to the world’s ability to address its most urgent challenges. The importance of literacy for sustainable development is nowhere more apparent than in agriculture and health. Research conducted in a variety of countries has shown that literate rural farmers manage systems and technologies (including water conservation and risk evaluation) more efficiently than their illiterate peers. This results in significant increases in agricultural productivity and higher profits. In the realm of health, research in India has found that literacy leads to significantly better health outcomes – independent of household income. Studies in other countries have shown than literate mothers have a better understanding of health-related behaviors for themselves and their children. In the US, a comprehensive review of more
than 3,000 studies found that low adult reading skills were directly related to higher rates of morbidity and worse health. Fortunately, new technologies can bring about large improvements in literacy among the very poor. The Limpopo Province of South Africa, for example, has one of the lowest reading and school achievement scores. The International Literacy Institute, which I direct, has partnered with the Molteno Institute for Language and Literacy, a local NGO, to introduce into school computer labs software that supports children’s reading through multilingual content designed around everyday situations involving family, community, and health. Education – and most of all literacy – will be central to the challenges we face in the future. As we begin to use education as a means to achieve the SDGs, we will have to go beyond raising awareness about
globalisation, climate change, and sustainability. Our education efforts must include the promotion of innovative ways to address these challenges and overcome them. As Pope Francis put it in his encyclical on the environment, overcoming our challenges will require a ìrenewal of humanity.î But there can be no renewal unless we fulfill our promise of providing education for all – starting by working toward universal literacy. Daniel A. Wagner is UNESCO Chair in Learning and Literacy, Professor of Education at the University of Pennsylvania, and Director of the International Literacy Institute. © Project Syndicate, 2015.
Sapienta Country Analysis Cyprus - In March 2013 Cyprus suffered its worst economic shock since 1974, leaving the economy with high corporate, household and government debt and an illiquid banking system. There are many uncertainties going forward but also potential new prospects, including exploitation of gas and a possible solution of the Cyprus problem.
fiscal and structural policy, and macroeconomic and sectoral trends; tables and charts of quarterly recent economic trends and medium-term forecast. €9950 ex VAT per year for up to 5 users within a single organization if paid in advance; €1,100 ex VAT if paid in instalments.
- Premium subscription (monthly analysis and critical updates): Analyst will alert you by email of critical - Sapienta Country Analysis Cyprus is an unrivalled monthly service that not only keeps you abreast of these developments developments as they occur and include two to three lines of comment. €11,250 ex VAT per year for up to 5 users within a but helps you anticipate and plan for what is coming next. single organization if paid in advance; €1,400 ex VAT if paid Written in a concise, easy-to-read format, Sapienta Country in instalments. Analysis Cyprus provides you with comprehensive monthly analysis and forecasts of domestic and international politics, - Bespoke service: Aimed at institutional investors, premium budget and debt performance, the banking sector, sectoral subscribers enjoy a 20% discount and standard subscribers a policies including oil and gas, and macro-economic trends. 10% discount on bespoke services such as personal and - The reports are written by Fiona Mullen, a renowned Cyprus telephone briefings. Check our website for further details. analyst with 20 years’ experience producing clear, reliable and independent analysis for an international audience. Contact Check our website for sample issues. research@sapientaeconomics.com, Tel +357 99 338 224, - Standard subscription (monthly analysis and forecast): Analysis and outlook for domestic and international politics, www.sapientaeconomics.com
Comprehensive monthly analysis of politics, economic policy and the economy