Financial Mirror 2016 01 13

FinancialMirror JOSEPH STIGLITZ

KENNETH ROGOFF

The new geo-economics

Extreme weather and global growth PAGE 18

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Issue No. 1168 €1.00 January 13 - 19, 2016

EU: From ‘coal and steel’ to ‘sun and wind’ SEVCOVIC ON ‘ENERGY UNION TOUR’ OF CYPRUS

US Powerball hits record $1.4 bln - 12 things Lotto winners should not do SEE PAGES 14-15

PAGE 5

January 13 - 19, 2016

2 | OPINION | financialmirror.com

FinancialMirror Why can’t the government stand up to the union hooliganism?

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It is ironic that the out-dated trade unions at the state-owned electricity producer chose to plan their strikes to coincide with the visit to the island of the EU’s Energy Commissioner, as if Maros Sefcovic would set aside his plans for improving Europe’s energy market just to accommodate the whims of a bunch of overpaid workers.

To his credit, on his visit to Vassiliko, the Commission Vice President had praise for the engineers who rebuilt the power station, decimated from the July 2011 blast nearby, but also spoke of the need for energy security, which includes the concept of a free flow of electricity throughout the continent’s power grids.

Little do unionists realise that their personal agendas to keep their jobs at all cost is harming the potential of transforming Cyprus from an energy island to an equal member of the wider European network.

Already, the government and now the Troika have backtracked on plans to privatise the EAC and are talking about unbundling the utility into two state-own entities – the power producer and

the grid operator/reseller. This, however, mans that all employees at the EAC would maintain their jobs and generous benefits, paid for by the tax payer and ripped off consumer.

With reform thrown out of the window, labour costs at the EAC will remain high and inefficiencies will continue to rule, at the same time keeping the nation’s electricity supply at the mercy of trade union officials, who will now have two organisations to use in order to exert influence on the politicians. With two parallel entities, the privileged few at the EAC will have double opportunities for promotion, and hence bigger payouts and pensions, all at the expense of the consumers, many of whom are below the poverty line and have seen their home power cut off.

It’s a shame that the government failed to stand up to the unions, fearing the backlash from the parliamentary elections in May, while ordinary EAC customers continue to suffer. After all, this is a ‘prior action’ privatisation commitment that should have been completed a year ago, if not earlier, with the whole storm having settled by now, and not left the last minute, on the eve of elections.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

Tax rise ahead, Straw ponders cancelling visit The tax burden is expected to rise and then fall, according to the EC convergence plan, but the government has dumped some measures that could cost votes in an election year, according to the Financial Mirror issue 653, on January 11, 2006.

Tax rise: The government’s annual convergence programme, submitted to the European Commission, calls for abandoning some contentious measures that will be hard to introduce in an election year, while it also provides for a slight

20 YEARS AGO

T-bills auction launched, casino plans delayed The first primary treasury bills auction is set to take place for CYP 8 mln, paving the way for liberalisation of the financial sector, while the government held back on plans to introduce casino and marina licenses as political parties were using the plans as pawns in an election year, according to the Cyprus Financial Mirror issue 144, on January 10, 1996.

T-bill auction: The first primary T-bill auctions will take place for CYP 8 mln and will follow twice a

fall in the tax burden over the medium term, having risen in the short term. Some of the measures include not cancelling the 6-month unemployment bonus that civil servants receive when claiming retirement benefits, while raising the retirement age to 65 is deemed as unrealistic.

No Straw: Britain’s Foreign Secretary Jack Straw could pull out of his planned visit to Cyprus over a row with the government about where he plans to meet Turkish Cypriot leader Mehmet Ali

Talat. However, he may be prepared to insist that flags and emblems be removed during any visit.

IMF plans: The five supervisory bodies overlooking the financial services sector could be merged into just one or two authorities over the next few years, according to IMF Executive Director Joroen Kremers. The five supervisory bodies cover the commercial banks, the Co-operatives, insurance companies, the stock exchange and financial services.

Jobless up: The unemployment rate rose to 3.9% of the labour force in December, mainly because of layoffs in the hotels and restaurants sector, as well as public administration, while the average for the year was 3.7%, up from 3.6% in 2004.

No bird flu: Agriculture Minister Efthymios Efthymiou said that the case of bird flu in Turkey are no cause for concern in Cyprus, as all precautionary measures have been taken.

month for 13-week and 90day paper, in addition to the regular repo auction by the banks, on the way to steady liberalisation of the monetary system, as during the year the interest ceiling law will also be lifted.

No casinos: The longdelayed decisions on the licensing of new casinos and marinas are being used as pawns by leading political groupings and are prolonging the death of the flourishing tourism industry, say local businessmen.

Any decision will not be announced until after the

parliamentary elections, as all towns want to have a casino and a marina each. Favoured to win the casino license is the Cyprus Tourism Dev. Co., majority owned by the state that operates the Cyprus Hilton, while Limassol officials say they want the right to build a marina for at least 1,000 berths.

PW merger: The recent wave of mergers and acquisitions spilled over from the stock market to the private sector, with the accountancy firms of Price Waterhouse and Costouris Michaelides announcing their merger has been finalised. The new firm will be the third largest with 140 staff and partners, after Coopers & Lybrand and KPMG. CAIR pofits: Cyprus Airways Chairman Vassilis Rologis announced CYP 5 mln in profits and a reduction in debts as he unveiled the airline’s future plans based on the blueprint called “Towards the 21st century”.

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January 13 - 19, 2016

financialmirror.com | CYPRUS | 3

Government to unbundle EAC Succumbs to union pressure and etracts privatisation plan for electricity utility The government decided on Monday to go ahead and unbundle the heavily union-controlled Electricity Authority of Cyprus (EAC) by splitting it into two state-owned entities, but retracted previous plans for its privatisation.

The about-turn, under pressure because of the May 22 parliamentary elections, will see the EAC split into a power producer on the one hand and a grid owner and retail supplier on the other.

Ironically, the change of heart comes with the full blessing of the Troika of international lenders (IMF, ECB, European Commission), who accepted the government’s request to exclude the EAC from the list of public entities and stateowned assets that need to be privatised by 2018 and raise some 1.4 bln euros.

Over the past weeks, EAC trade unions, strongly represented within all political parties, threatened strike action to defeat the administration’s efforts to change the EAC’s status, with latest workers’ meeting on Monday forcing the closure of all public service centres until 12 noon.

Deputy government spokesman Victor Papadopoulos said after the Cabinet meeting on Monday that EAC employees will retain their privileges and rights under the new structure.

He added that the EAC will also be able to take part in future energy plans, including the development and direct purchase of natural gas.

Papadopoulos said that the unbundling decision was in line with the EU’s Third Energy Package, aiming to enhance

competition and this practise was adopted in two out of three EU member states.

However, continuing their criticism of Energy and Trade Minister Yiorgos Lakkotrypis, trade union officials said that the ownership unbundling was not necessary and that the aim was to weaken EAC, while misleading public opinion.

The employers federation OEV criticised the unions’ irresponsible behaviour and strike threats, saying that this was hurting the sacrifices and efforts of the small and medium-sized enterprises of the private sector. It added that the government should speed up efforts to regulate strikes in essential services so that consumers and SMEs no longer suffer from the whims of trade unions that hold the island’s struggling economy hostage.

Trade deficit narrows by €353 mln y-o-y, as exports up in Jan-Oct

New record at Cyprus airports Larnaca and Paphos airports operator Hermes Airports announced a new record for passenger traffic despite the negative start to the year, the closure of Cyprus Airways and the collapse of primary Russian carrier Transaero.

According to Hermes, throughout 2015, a total of 7,608,655 passengers passed through the two airports, an increase of 3.6% from the previous year’s 7,345,214 passengers.

Approximately 5.3 mln passengers passed through Larnaca, up 1.6%, while an increase of 8.6% in passenger traffic was recorded at Paphos airport with about 2.2 mln passengers.

Hermes said that in 2015 Cyprus airports had to overcome two major challenges, namely the closure of Cyprus Airways and a reduction of the expected arrivals from Russia, both taking out of the market 1.5 mln seats. The recovery on both fronts has been exceptional through the replacement of

Cyprus Airways routes by other airlines, as well as significant growth in markets such as the UK (+5%), Greece (+16%), Israel (+36.1%), Germany (+16.2%), Austria (+15.6%), Ukraine (+30.8%) and Poland (+34.2%). In addition, new airlines and routes have been introduced, enriching the Cyprus airports’ network.

“Applying an effective strategy, Hermes has managed to surpass the initial adverse conditions. We are happy with these results, however we believe that the potential is much higher particularly with regards the tourism arrivals on the island and the further increase of the passenger traffic,” Wes Porter, CEO of Hermes Airports, said.

Currently over 70 airlines operate to Larnaca and Paphos airports to more than 110 destinations in 40 countries. Hermes said it is introducing services like electronic boarding pass readers, express lane and online parking through its website.

PDMO issues 7-year bonds of €222 mln The Public Debt Management Office of the Ministry of Finance announced that it has issued 7-year government bonds amounting to EUR 221.9 mln with a yield of 3.23%. The issue was oversubscribed by 151%, as the announced amount was 150 million.

The PDMO said it received tenders for a total amount of EUR 226.7 mln and accepted tenders of nominal value amounting to EUR 221.9 mln. The accepted yields ranged between 3.04% and 3.25%.

This follows Monday’s auction where the

PDMO raised EUR 75 mln from a 2-year bond, with a yield of 1.83%. The Treasury Bills were oversubscribed almost twice, with tenders submitted for EUR 134.9 mln and yields that ranged 1.60-1.95%.

On Friday, the PDMO had successfully auctioned EUR 50 mln of 30-day paper, for which EUR 83 mln were submitted with a weighted average yield of 0.31%. The accepted yields ranged 0.17-0.42%.

Last week, the PDMO kicked off the new year with a successful auction of EUR 120 mln in 13-week T-Bills with a yield of 0.48%.

Cyprus’ foreign trade deficit was reduced by a provisional EUR 353 mln in the January to November period compared to the same 11-month period in 2014, and remained at similar level with the first ten months of 2015, according to the national statistical service Cystat.

From January to November 2015, the trade deficit dropped to EUR 3.07 bln from EUR 3.42 bln in the same period of 2014, while in November alone, the deficit reached EUR 290.87 mln, compared to EUR 291.22 mln in November 2014.

Total imports and arrivals were worth EUR 421.9 mln, of which EUR 311.2 mln originated from EU member states and the rest, EUR 110.7 mln, came from third countries.

Total exports and dispatches were EUR 131 mln, of which EUR 58.4 mln were dispatches to other member states and EUR 72.6 mln exports to third countries.

Final data for January-October 2015 showed that the trade deficit narrowed to

EUR 2.77 bln from EUR 3.13 bln in the same period of 2014.

Total imports and arrivals from third countries and EU member states amounted to EUR 4,238.7 mln, compared to EUR 4,362.3 mln in January-October 2014.

Total exports and dispatches to third countries and to other member states were EUR 1,459.5 mln compared to EUR 1,230.1 mln in January-October 2014.

The trade deficit in October 2015 was EUR 311.42 mln, down from EUR 333.09 mln in October 2014.

During the same month, total imports and arrivals from third countries and from other member states were worth EUR 429.3 mln. Total exports and dispatches, including stores and provisions, in October 2015 amounted to EUR 117.9 mln.

Eports and dispatches of domestically produced goods, including stores and provisions, were EUR 60.9 mln, whilst exports and dispatches of foreign goods, including stores and provisions, were EUR 57 mln.

January 13 - 19, 2016

4 | COMMENT | financialmirror.com

How long can Cyprus remain an energy island?

The introduction of natural gas to the island’s energy system is of equal if not greater importance than the extra money that gas exports will in the long term bring to government coffers

By Costis Stambolis It is now more than three years that Cyprus discovered a significant gas deposit in offshore Block 12, better known as “Aphrodite”. At the time of its discovery, enormous expectations were raised by politicians and industry alike of the pivotal role that natural gas could play in propelling Cyprus into a brave new era of economic growth and super prosperity. Alas, the subsequent detailed appraisal of the Aphrodite gas find revealed substantially less gas volumes than had originally been anticipated, currently estimated in the region of 4.0-5.0 tcf. If that was not enough of a setback for the country’s expectations, the unprecedented economic crisis which followed the collapse of the island’s banking sector in March 2013 dashed all hopes for an economic revival based on hydrocarbon wealth.

Following the discovery of a major new gas field offshore in Egypt in August 2015 fresh hopes have been raised as to the east Meditrranean’s importance in becoming a net gas exporter over the next decade. Egypt’s Zohr field, located some 180km from mainland Egypt, and holding some 30tcf of gas, is neighbouring Cyprus’ Aphrodite. Hence, the renewed interest by ENI-Kogas and Total, which hold offshore concessions next to Zohr but within Cyprus’ Economic Exclusion Zone (EEZ), in accelerating their exploration plans to search for oil and gas. Whatever the case may turn out to be, the discovery of Zohr by ENI has given Egypt a massive boost and has turned East Med plans and thinking upside down.

As well known energy commentator Dr. Charles Ellinas recently noted in his presentation at IENE/FMW’s 4th Cyprus Energy Symposium in Nicosia, last December: “Given the favourable prices it has secured for its gas, ENI will proceed with development of Zohr as a matter of priority and, together with BP’s North Alexandria and Atoll and Shell’s shale gas finds, there is enough gas to supply Egypt’s additional domestic needs, and replace LNG imports, but could also free gas to supply the two idle LNG plants in Damietta and Idku. In any case, Egypt plans to resume LNG exports by 2022. On the positive side, the discovery of Zohr reconfirms that the East Med is prolific in gas and is attracting new interest to the region. It is an opportunity for Cyprus and Israel to refocus their attention and exploration to coincide with the start of oil price recovery”.

Zohr’s find apart, Cyprus is now pressing ahead with the development of the Aphrodite Block 12 field which was declared commercially viable last June by the Cyprus Hydrocarbon Company (CHC), the Republic of Cyprus state entity in charge of coordinating and supervising oil and gas upstream activities. According to the Field Development Plan, submitted to the Ministry of Energy, Commerce, Tourism and Industry in June 2015, by the US Noble Corporation-led consortium, gas supply from the Aphrodite reserve will largely exceed domestic demand and therefore CHC and Block 12 partners are now exploring export opportunities to the Egyptian market.

Latest information suggests that Aphrodite excess gas will be directed to feed one of the two largely idle LNG liquefaction plants in Egypt, thus providing a viable solution in monetising its gas volume. Such a fortuitous outcome could be made possible in view of Zohr’s huge potential output which will be used to satisfy Egypt’s fast growing domestic demand and given Israel’s apparent inability at this stage to supply the Egyptian market given the legal complications that have arisen in its trade relationship with Egypt (see ICC pending arbitration settlement of $1.76 bln in favour of Israel Electric Corporation with the Egyptian government).

Although a lot of noise is being made about the export potential of Aphrodite and that from other potential finds in the various exploration blocks (2, 3, 9 operated by ENI and Kogas, and 10 and 11 operated by Total) not enough attention is being paid to the very real prospects of utilising natural gas onshore in Cyprus.

In line with the present strategic planning, gas will become available in Aphrodite following the installation and operation of an EPSO facility with two export pipelines – one to Cyprus and one in Egypt. According to the current development plan, gas is expected to reach mainland Cyprus in 2020, and to be mainly used to substitute fuel for power generation, during the first phase of gas introduction to the island’s energy system. But gas will also be utilised to cover a much wider range of domestic and commercial applications including space heating and cooling, cooking, small scale cogeneration, etc., not to mention its potential use in the transport sector.

In short, the introduction of natural gas to the island’s energy system is considered by many to be of equal if not of greater importance than the extra money that gas exports will in the long term bring to government coffers. The reason being that the introduction of gas will help completely transform the island’s energy system while at the same time

will contribute to job creation and the adoption of new skills.

Today Cyprus is characterised as an energy island, truly isolated from the EU’s energy links and networks, as it remains one of the most energy dependent countries in the European Union relying 94% for its energy needs from refined oil imports, with only 6% of its primary energy generated from indigenous energy sources, i.e solar and wind energy. With the introduction of natural gas, this dependency will be sharply curtailed from the substitution of fuel oil with gas for power generation.

It is estimated that by 2030, the island’s oil import dependency will be less than 40% as oil use will be strictly limited to cover the needs of the transport sector which gradually may also switch to gas given the right incentives.

Finally, if we were to consider the introduction of natural gas in tandem with the growing use of power and heat generated from renewable energy sources, mainly solar and wind, it is fair to say that by the early 2030s, Cyprus could actually become one of the most energy independent countries in the European Union. A far cry from its present overdependency status!

Costis Stambolis is a Financial Mirror correspondent, based in Athens.

January 13 - 19, 2016

financialmirror.com | CYPRUS | 5

From ‘coal and steel’ to ‘sun and wind’ Cyprus has great prospects to export LNG to rest of EU The European Union is transforming itself from the ‘coal and steel’ alliance it was at its founding to one of ‘sun and wind’, with the ‘energy union’ focusing on five pillars of reforms, most of which will be implemented this year, according to European Commission Vice President Maros Sevcovic.

Concluding his Energy Union Tour to Cyprus during a two-day visit, the Slovak Commissioner in charge of the Energy portfolio said that the Juncker Commission’s priorities have five dimensions: better energy security, completing the internal market reform, decarbonisation, energy efficiency and focus on research and innovation.

He said that for the Energy Union priorities, this will be a year of delivery of about 90% of what has been promised.

During his visit, Sevcovic said he discussed “the new and important role of Cyprus in the eastern Mediterranean with the new discoveries of natural gas,” but that he was also very encouraged with what he saw on the island, especially as regards the attention paid to renewables.

He said that there is a change in the geo-economic and even in the geopolitical scenery and that Cyprus can very soon remove itself from being an energy island.

Sevcovic mentioned the five Projects of Common Interest (PCIs) approved for Cyprus, two of which relate to the 2,000 MW EuroAsia Interconnector cable and another two for gas interconnection.

He added that the recent discoveries in the Cyprus, Egyptian and Israeli offshore fields could boost natural gas exports to Europe, which is a “very good customer, we pay

high prices, on time and in hard currency.”

Sevcovic said that having realised that Cyprus has a priority to use some of the liquid natural gas (LNG) output for domestic use, that there is still room for exports, as European demands are currently estimated at about 400-500 billion cubic metres a year (14.1 trillion cubic feet to 17.6 tcf). He said that the recent discovery at the Egyptian Zohr gasfield alone would satisfy all of Europe’s needs for eight years.

Cyprus Aphrodite gasfield, operated by US Noble Energy and partners Delek/Avner and recently BG, has a reserve of about 4-5 tcf, with the Italian ENI and Korean Kogas venture planning more explorations in their own gasfields.

On the Cyprus problem, Sevcovic said he was encouraged by the positive climate, which he also confirmed from his meetings with the two negotiators, Andreas Mavroyiannis and Ozdil Nami.

“I see a lot of positive developments in Cyprus,” he told a press briefing at the EU House, noting that the economy of Cyprus is picking up and that unemployment is gradually going down. He also said that he was very encouraged by his meetings with political leaders and that he “got the clear impression that there is strong effort being put on looking for the best possible outcome for the Cyprus issue”.

“It was clear that both sites understand each other very well and are ready to look for the creative solutions which would bring the positive conclusion of the Cyprus settlement talks,” he noted.

Vice-President Sevcovic said that thanks to Cyprus and

the good partnership it has developed over the years with Egypt, Israel and Jordan, “we are now looking at the possibilities of a joint approach for the development of this newly found natural wealth in this part of the Mediterranean”.

“We want to open Europe to more suppliers of gas to make sure that we will have security and more competition to get better prices for the consumers. In this respect developments in the eastern Mediterranean are very positive” he said.

Europe, he said, “is going to develop its own LNG strategy and we see the Mediterranean as a gateway for possible new supply routes to come from this region to Europe. What we can offer is that we are very transparent” he noted.

The Commission officials also highlighted Cyprus’ enormous potential in renewable energy.

As he said, Cyprus is on track when it comes to the targets for 2020, adding that he was assured by the Cypriot Energy Minister that in the field of renewables, energy efficiency and reduction of greenhouse gas emissions all the targets for 2020 will be met.

He stressed the need to adopt good decisions locally but that “we also need to adjust the European systems to be able to integrate the renewables better, because the same challenges Cyprus is facing are faced by many European member states and therefore we want to present by the end of the next year a landmark legislation and this will be the proposal on how to redesign the European electricity market”.

Sevcovic on energy tour, discusses natgas and EU-Israel cable European Commission Vice President Maros Sevcovic arrived in Cyprus on Monday as part of his Energy Union Tour and discussed recent natgas finds in the region, as well as the EU-Israel subsea electric cable, with President Nicos Anastasiades and other public officials.

Sefcovic said after the meeting that the “latest energy developments in the eastern Mediterranean and of course the new natural gas discoveries [in Egypt] change the geodynamics of the region.”

“I hope that these new discoveries will act as an additional bridging ingredient because evidently these new discoveries must work to the benefit of the whole region, all of Cyprus.

And I am sure that it could also have a very positive impact on the energy security of the EU.” The Commissioner responsible for Energy Union said that they also discussed the Cyprus problem with Anastasiades. “First, the reunification prospects and how the EU and the Commission can assist to create the best possible favourable atmosphere for the good prospects of the negotiations [between the two community leaders].”

“And I am happy to see that these negotiations are proceeding well. Naturally, there is still a lot of work to be done, but what is very important is that there is a good atmosphere, good intention.”

He said that they also discussed matters of common interest and projects that are very important for Cyprus, such as the studies for the creation of the 2,000 MW EuroAsia Interconnector electricity cable that will connect Cyprus with Israel, and then Cyprus with Crete.

After an earlier meeting with Energy Minister Giorgos Lakkotrypis, Sefcovic said the eastern Mediterranean, if properly developed, could become a key player in the energy supply of Europe, with Cyprus and the region contributing to the EU energy security.

“We see the East Mediterranean as very important territory from the point of view of the energy security of Europe,” he said,

adding, “I think we need to work very closely with Cyprus to do everything possible to develop it in the most intelligent and smart way to the benefit of the region but also for the improvement of the energy security of Europe.”

Asked whether he sees the natural gas deposits discovered in the eastern Mediterranean exported to Europe in the future, Sefcovic said that a lot would depend on the future work in the gas fields. So far, “as we have seen the first results are very promising.”

“We are not talking about hundreds, but thousands of billions of cubic metres,” and that Europe’s annual natural gas consumption ranges between 400-500 mln cubic metres.

“So this just shows how important these gas fields in the eastern Mediterranean are.”

Sefcovic also said that in February the Commission will present the new LNG strategy for Europe, “where we see the Mediterranean of very important gateways for the new supplies for Europe.”

Lakkotrypis thanked the support Sefcovic

has shown in the inclusion of three Cypriot projects in the EU list of Projects of Common Interest (PCIs), that would receive EU funding.

These projects are the EuroAsia Interconnector cable, the EastMed pipeline linking the eastern Mediterranean natural gasfields with Cyprus and Greece, and the removal of internal barriers with a view to ending Cyprus’ energy isolation.

The EuroAsia Interconnector, the 1,518 km subsea power cable connecting the Israeli, Greek and Cypriot power grids to continental Europe, entered its final stage last month with the project promoter awarding three studies that will pave the way for the pre-works phase, leading to its implementation and commissioning. The studies are for the technical design, the reconnaissance study for the optimum route and an environmental impact study, all of which are expected to be complete during 2016.

Speaking after a meeting with the members of the parliamentary Energy Committee, Sefcovic said that he spent most

of the time discussing the Cyprus PCI projects that are very important for the island, as well as the importance of energy efficiency in buildings and the better use of solar and wind power.

He said that the final part of the discussion involved financing, ways to combine support from structural funds, which have been allocated to Cyprus by the Juncker investment fund, with the loans coming from European Investment Bank or the European Bank for Reconstruction and Development.

“It is very clear that these funds will focus on energy efficiency and transport infrastructure, so I am sure that in Cyprus there will be quite a few projects that will be eligible for the financing from these funds,” he said.

The Commissioner also visited the Vassilikos power station, the 1200MW plant that was decimated by a nearby military munitions blast in July 2011 and brought the island’s economy to its knees. It has since been rebuilt and operates on crude oil, with an option to accept liquid natural gas by the end of 2016.

After the visit, he tweeted: “Visiting Vasilikos Electricity Power Station, discussing their Master Plan. Crucial transition to low carbon economy,” while later in the evening he was the keynote speaker at the University of Cyprus, where he discussed with students the subject of energy transition, underlining Cyprus’ “enormous potential for renewables.”

On Tuesday, Sefcovic will meet with stakeholders from the energy sector such as energy producers, network operators, academia and think-tanks.

“My Energy Union Tour in Cyprus will provide an excellent opportunity to present and discuss EU funding possibilities and its contribution to the economic recovery of Cyprus and to achieve the Europe 2020 strategy targets for growth and jobs, in particular as regards renewable energy and energy efficiency. Cyprus might be an island, but it doesn’t have to be an energy island”.

January 13 - 19, 2016

6 | COMMENT | financialmirror.com

Cyprus in a time warp Our new economic model

By Dr. Jim Leontiades Cyprus International Institute of Management The Euro group “rescue” of Cyprus was an economic catastrophe with few equals. In the space of a few days the economy of this country was demolished and put on life support. Since then, the country has made significant progress, surpassing the expectations of many, including the IMF. That still leaves the Cyprus economy a long way from anything which might be considered economic prosperity.

Unemployment is unacceptably high. Much remains to be done.

In the context of the necessary rebuilding, there has been much talk of a new economic model. Indeed there was every reason to believe that along with the pain of the financial crisis, there was also an opportunity to start afresh. To develop new industries. To abandon much of the outmoded and arteriosclerotic customs and regulations of the pre-2013 model.

But, with the appearance of even the modest recovery the island now enjoys, many of the dinosaurs of the past are raising their heads, rushing to reassert destructive and outmoded practices. Consider the issue of shop opening hours. The current debate in parliament turns about the interests of large shop keepers versus small retailers. The interests of the general public do not even figure into the debate.

Apparently, it does not occur to the majority of our parliamentarians that society has changed. The typical married couple is now one where both husband and wife are employed. During weekdays, most wives are at work.

Allowing the stores to stay open on Sundays provides an enormous convenience for such families. But this gets little attention compared to organised self interest groups which can swing a few votes.

The world’s most optimistic countries These days, people in China are the world’s most optimistic by far. In fact, someone in China is more than twice as likely as someone from another country (out of 17 surveyed) to say that the world is improving. The research, conducted by YouGov, found that Indonesia was the next most optimistic country with 23% of respondents saying the world is getting better. People in the United States and Britain were far more pessimistic with only 6 and 4%, respectively, feeling that the world is improving. (Source: Statista)

Adding to this trend to re-establish the past is the prospect that the Troika may soon depart. Of course, it is not pleasant to have the country’s elected legislators subject to colonial style subservience. But it is increasingly obvious that whatever progress has been made toward a new economic model owes much to oversight and pressure from the Troika.

Privatisation of our national industries, bringing them into line with such measures taken many years ago by most of our European peer groups was to be part of a new Cypriot economy. This has been fiercely opposed by the unions that have benefitted vastly from nationally owned industries. In an attempt to disguise their obvious self-interest they refer to such companies as our “national wealth”.

subject to the “haircut”.

Let’s not forget that the government is now in the banking business. The Co-operative Central Bank is the latest addition to our national wealth. Parliament has recently approved a donation by the taxpayer to that bank of 175 mln euros to make up a recently discovered shortfall.

These three nationalised industries alone require the taxpayer to pay 580 mln euros. This does not include the 1.4 bln that the government has agreed to pay as the purchase price for the Co-op bank. This bank already has more nonperforming loans (relative to its size) than the large private banks. Now that the Co-op bank is in government ownership steady losses are almost guaranteed.

Reaping the Returns of our National Wealth

Cyprus Airways

Even though the government had agreed to the privatisation of most of the country’s nationalised industries, there are now significant signs of backtracking. Under enormous pressure the government has buckled. It has announced that the Electricity Authority (EAC) will not be privatised as previously agreed. Similarly, the denationalisation of Cyta has met with the same strong opposition. The government is vacillating. Its attempts to abide by its agreement to privatise have met with cries of outrage from the usual sources. Here again we hear the “national wealth” argument. What will happen to the profits which these industries contribute to the country?

Examining the performance of this national wealth and its contributions to government is instructive. In 2014, the EAC generated 42 million euros of profit. This was accompanied by a bill to the government of 244.3 mln euros to cover the shortfall in that company’s pension fund.

Cyta is not far behind. According to reports, there is a 161.5 mln euro deficiency in that company’s pension fund which, here again, the law requires the government to guarantee. It goes without saying that no such guarantee applies to the hundreds of pension funds which have been

It was only a short while ago that the public was also told of the desperate need to save the country’s national air carrier, Cyprus Airways. Without a government controlled airline how would tourists reach the island?

The government’s attempt to save the airline from bankruptcy by injecting 103 mln euros was rejected by the European Union as a violation of its rules. Bankruptcy of the airline followed.

Naturally the government is still on the hook for the shortfall plus generous pension and other benefits. Cyprus Airways is no more but tourist arrivals have actually increased as have the number of destinations served. Increased competition has lowered many air fares.

With the anticipated departure of the Troika, the rise of the special interest groups which have hampered the country’s development in the past, undermining the effectiveness of the island’s schools, health programmes and industries are preparing for a return to business as usual.

Their success indicates that much needed change will be hampered and even reversed. These groups will fight to maintain their privileges and outmoded practices. More often than not, they have succeeded. The danger is that Cyprus will eventually find itself in a time warp, a country in the 21st century with a 20th century economic model. www.ciim.ac.cy

January 13 - 19, 2016

COMMENT | 7

Challenges for the economy in 2016

By George Theocharides Cyprus International Institute of Management

Assessing the current state of the Cypriot economy, one could say that 2015 was undoubtedly another difficult year with several problems still remaining unresolved.

One could also add a positive note, that it was the year during which the economy finally returned to growth after several years of recession.

The latest figures have shown that, as compared to 2014, growth for the third quarter of 2015 was at 2.2%, which is the highest rate of growth recorded since the fourth quarter of 2010. Also, the fiscal data show high primary surpluses. The forecasts for the period beyond 2015 are that there will be primary fiscal surpluses, with the target being 3% to 4% in the medium term, which is enough to place public debt on a path of sustainability. These results were helpful in the credit rating agencies’ upgrading of the Cypriot economy, and contributed to a successful exit to the international markets in late October with the issuance of a 10-year bond at an

interest rate of 4.25%. Currently, we are at the last evaluation of the economic adjustment programme by the Troika lenders and, unless something unexpected occurs, as of April 2016 Cyprus will be successfully getting out of the Memorandum of Understanding.

However, there are still many difficulties and challenges to be tackled.

First, there is the huge problem of unemployment, especially among the young people. A large number of young Cypriots opt to follow the path of migration as there are no satisfactory new employment opportunities on the island.

Furthermore, a large proportion of the economically active population remains unemployed for long periods of time. It could be said that, at the least, unemployment has been stabilised, but it still remains at very high levels, close to 16%.

The government, but the private sector as well, must invest much more in development projects if unemployment is to be reduced to acceptable and affordable levels.

There is also the big problem with the alarming rate of increase of the non - performing loans (NPLs) in the system.

The latest figures from the Central Bank of Cyprus (CBC) show that they now make up nearly 50% of the total domestic loan portfolio, a figure of around EUR 27 bln.

Therefore, the data show that there is a serious problem which banks must address and indeed they will have to find credible solutions to. Of course the question is what these solutions would be and cited below are the proposed solutions to this grave problem of NPLs: - Firstly, the enactment and adoption of the foreclosure legislation and of the insolvency bill framework will eventually force strategic defaulters to approach the banks

and start cooperating.

- Secondly, the banks need to increase the speed and effectiveness in the process of restructuring the loans.

- Thirdly, the amount of non-performing loans will start to decline significantly when the real economy recovers and more jobs are created.

- Finally, the establishment of an asset management company similar to the National Asset Management Agency NAMA of Ireland, or a “bad” bank, that would undertake all the problematic loans and take them out of the banking sector, thus allowing the banks to clean up their balance sheets, could be another radical solution to this problem.

Another significant challenge faced by the economy are the structural reforms included in the Memorandum of Understanding, among which are the privatisation of state owned organisations, the National Health System (GESY), and the reform of the civil service sector.

Unfortunately, we are far behind as regards this part of our commitments and the much needed structural reforms are not being implemented. We had a golden opportunity to implement these changes through the Memorandum of Understanding, but this opportunity seems to have been lost.

I am very much afraid that this may cost us dearly in the future.

George Theocharides is an Associate Professor of Finance at the Cyprus International Institute of Management (CIIM) and Director of the MSc in Financial Services. This article first appeared in the InFocus magazine. www.ciim.ac.cy

Why are business ethics a necessity?

By Kyriakos Parpounas Recently, I wrote about the difference between corporate philanthropy and corporate social responsibility (CSR). I specifically mentioned that all corporate philanthropy actions are beautiful social activities that are welcome, but certainly are not core CSR actions.

A concrete example of the difference between the two, we can draw from the latest court case against executive members of the former Cyprus Popular Bank. Without disputing the criterion of innocence of these executives and their right to a fair trial, there is no doubt that certain bank executives and the organisation overall, violated in a number of cases the business ethics and the principles of responsible entrepreneurship.

This case and its tragic impact of violated business ethics, highlight the extended responsibilities of executives working in large organisations, or in organisations important to society (such as banks).

Why do I suggest that the example of the former Popular Bank serves to better understand the differences between corporate philanthropy and CSR? I use this example because the bank had been perhaps the pioneer of corporate philanthropy in the years of its boom. They engaged in a series of actions, offered contributions to various social groups, embraced and expanded the radio-marathon, the largest charity action in Cyprus and made their name largely synonymous with organised charity.

I am sure if we go back to the media communications of the bank at the time, we will find series of reports that these actions were in the framework of the bank’s CSR. This demonstrates that the executives of the bank had a completely wrong understanding

The executive leadership at Laiki Bank had lost track of the true meaning of corporate social responsibility (CSR)

of their obligations to the community. They considered these as an obligation to return something to society in the form of charity, but did not appreciate that their foremost obligation was to protect the community from poor and irresponsible business practices.

The CSR concept has been in the last few years an issue of standardisation by various organisations around the world. In 2004, after discussions for two years, the International Standards Organisation, the well-known ISO, decided to proceed with the publication of an international standard for CSR. The consultation was the longest and the most populous from any previous standard and lasted until November 2010, when the ISO 26000 standard was issued. The

standard was labeled “Guide on Social Responsibility” and has a substantial difference from previous standards issued by the ISO. The ISO 26000 is an advisory and not mandatory standard. It is a guiding framework and not a management system that can be certified. This standard, attempts to clarify what constitutes CSR and how it can become part (integration) of everyday business practice, what defines the stakeholders of the organisation and what is the relationship of CSR to sustainable development. It results in the resolution of seven core principles for the effective assumption of social responsibility by organisations. These principles are: 1. Accountability 2. Transparency

3. Ethical behaviour 4. Respect for stakeholder interests 5. Respect for the rule of law 6. Respect for international norms of behaviour 7. Respect for human rights.

As part of defining the limits of its social responsibility, each undertaking is required to conjure on the following key issues: a. Organisational governance b. Human rights c. Labour practices d. The environment e. Fair operating practices f. Consumer issues, and g. Community involvement and development It is clear that the standard is broad and touches in a coherent manner upon the need to respect both the financial results of firms, the interests of people (employees, partners, customers, consumers, local communities and society at large) and those of the planet (environment impact from the operation of the business, etc.).

If businesses do not manage to incorporate the basic principles of CSR in their daily operation, we will continue to have examples similar to that of the former Popular Bank, where the showcase will be stunning, but the content will be insufficient, socially analgesic and depending on the extent of the social impact of a business failure, potentially dangerous.

The use of the guidance standard ISO 26000, as the basis for identifying the responsibilities of a business, but especially for the design of a coherent strategy to undertake such responsibilities, is a good starting point on the way to improve business ethics and develop more sustainable entrepreneurship.

Kyriakos Parpounas is Director General of Green Dot (Cyprus) Public Co Ltd www.greendot.com.cy

January 13 - 19, 2016

8 | COMMENT | financialmirror.com

QUESTION TIME… I have been writing this stuff for many years, so I feel I must be forgiven for repeating myself now and then. The questions I am asked are similar, too – for example, I am often asked how (and sometimes why?) I “took to the drink”.

Q. Did you learn about wine drinking from your parents?

A. No, absolutely not. They hardly ever touched alcohol. It was a French film that started me off. It was a comedy about a bibulous (fictitious) village in the Beaujolais region. Full of jolly scenes of wine enjoyment and friendly contact between the sexes, “Clochemerle” made a considerable impact on me in the early 1950s when I saw it at the London Pavilion in Piccadilly Circus. Shortly afterwards, I went to London to work in a film company which took me frequently into the Soho area, full of good food, wine and (then) “good times”. One day, I was looking in a continental grocer’s window and spied bottles labelled “Beaujolais”. I bought one and with my then wife dispatched it that night. I went back next day for some more. My lifelong love affair with wine had begun.

Based on the 1934 novel by Gabriel Chevallier, “Clochemerle” told of the confusions in a French wine-country town when the radical citizens in the community had a public convenience erected in the town square, close to the church. Dignified citizens were outraged, the local clergy were considerably embarrassed, the whole thing escalated and a national political crisis seemed inevitable.

Finally, the crisis was averted by an order from the President of France, supporting republicanism and the continuation of the local “monument.” Sounds quite serious – but hilarious is a better word.

The cover of the French paper-back book and the film poster give excellent clues as to the story line. Amazon have some Clochmerliana – including the book in English and French and the DVD of a nine-part BBC-TV series, made in 1972 with an all-star cast and scripts by the famous comedy-writing duo Alan Simpson and Ray Galton. Sadly, the 1948 black-and-white film seems to have been lost. Its quite raw humour and bawdiness are sadly missed (by me at least). Quite probably, some of the scenes in it, if enacted today in real life, would result in arrests for sexual harassment. Such is progress.

ALCOHOL IN COOKING Q: If I add wine when cooking a stew, sauce or sautéed dish, does the alcohol “disappear”?

A: When wine is used in cooking, the alcohol vaporises at a relatively low temperature, leaving only the flavour of the wine to enhance and blend the other food flavours. For instance, if wine is added to a sauce or some other mixture to be cooked over direct heat, the alcohol will be vaporised at 78C (172.4F), considerably before the boiling point of water 100C (212F) is reached.

In fact, it is cooked out at just the simmering stage. If wine is added to a casserole dish or used as a baste for roasting meat, the heat of the oven will have the same effect. As an example, a cup of wine in a large shallow pan put in a 150C (300F) oven for 10 minutes would lose all of its alcohol.

This loss in alcohol has an effect upon the calorie count, too. A dinner wine such as Burgundy or dry Sauternes will lose 85% of its original calories when subjected to a sufficient amount of heat to cause it to lose all its alcohol. The remaining 15% of the calories are from non-alcohol substances in the wine, such as sugar.

Dessert wines such as port and sherry contain more alcohol and sugar than the dinner wines, and hence are higher in caloric value. Used in cooking, they will evaporate and lose calories just as the dinner wines do. If they are cooked for a longer period—more than an hour in a 150C (300F) oven (as in the case where ham or roast meat is being cooked in the oven), most of the sugars become caramelised.

FOOD, DRINK and OTHER MATTERS with Patrick Skinner COMPLIMENTS TO THE CHEF Sometimes, the chef comes out of his kitchen, generally when last orders for main courses have been completed, to say “Hello” to his customers. A custom I like, because it bespeaks confidence on his part. Sometimes his tour of the restaurant is cursory, his simple comment being “Everything alright?” “Why, shouldn’t it be?” we want to reply, instead “Yes”, is generally our reply, often adding: “Wonderful”. On other occasions he stops with ‘regulars’ who tell him what a good fellow he is. The best chefs talk to ALL the customers, and listen to any comments including bullshit (or genuine) praise, and criticisms.

All too often customers are so besotted at the mere fact that the man who has cooked the meal for which they are paying 50 Pounds a head has deigned to come out of his den to hold court with them, so all they can mutter is how great it was. When they get home, of course, the wife says: “HUH! And you said how tough the steak was and what crap the sauce was!”

Mind you, there’s one restaurant not far from where I’m writing this where, IF the chef stops by your table he’ll chin-wag for ages – a case of where he talks as well as he cooks.

I recall recently when staying at a 3-star tourist hotel in Scotland, we enjoyed our dinner main course of Braised Beef in Red Wine and when the chef did his rounds we told him so. He then described the six hours it had taken from trimming and cutting the meat to bringing it slow-cooked out of the oven. The next morning, outside the hotel I encountered a large van with a famous catering firm’s name on the side. The delivery man told me his firm provided ALL the food served in the hotel, including the braised steak.

I don’t mind ready-cooked meals now and then. And you find them all over the place, especially when travelling.

I remember one day when I looked at the dish before me. It was baked macaroni, known to Greeks and Cypriots as Macaronia Pasticcio. The sauce was fluffy, the pasta properly cooked and the minced meat very tasty. Now, this is a dish I often avoid. At its best it’s wonderful. But in the hands of 50% of taverna cooks it’s a heavy, dry, indigestion-creating disaster.

Where was I? I was 10,000 metres in the air, sky or whatever.

Up there, on a Cyprus Airways Airbus 320 bound for Stansted. By the side of my tray was a little bottle of Island Vines red (I had at least two) I was content.

I am not a snob about flying or eating airlines’ food. 95% of my air journeys have been in economy class (I figure the back of the aeroplane with peasants like me in it, with luck, lands at much the same time as the front), and of the other few times, up-front with the alcoholics, eating roast New Zealand lamb washed down by Chateau Margaux at midnight wasn’t worth paying six times the economy class fare.

I have maybe pushed a tray away untouched three times in several thousand flights and the grub at the back has nearly always been OK. We once flew to Stockholm from London in the front row of Economy. I got a cold lunch.

The chap in front, back row of Business Class, got a hot meal.

“My word”, I said to Mary, “that smells good”.

“Yes”, came a voice from the seat in front, “But it’s not worth a hundred and fifty pounds”.

Go to www.eastward-ho for recipes, food and wine news and notes.

January 13 - 19, 2016

financialmirror.com | COMMENT | 9

Mitsotakis victory puts Greek politics to the test The rise of liberal Kyriakos Mitsotakis to the New Democracy leadership has shaken Greece’s fragile political landscape, according to a report by EurActiv Greece.

On Sunday, Mitsotakis won the intraparty elections, receiving 52.43% of the vote, as the former ruling party had been without an elected leader since July, when Antonis Samaras resigned after the “No” vote in the Greek referendum.

In an interview with EurActiv before the party elections, Mitsotakis noted that Greece was being treated [by its EU partners] more like a Balkan country, and less as an equal.

“Our country needs to regain its lost credibility with our European partners.

Unfortunately, they do not trust us,” Mitsotakis said, mainly blaming ex-Finance Minister Yanis Varoufakis for the situation.

“European cohesion has been shaken as Europe grew in width wide but not in depth.

The institutions need to be strengthened.

Solidarity should be stimulated,” he stressed.

New Democracy consists of three different ideological factions, he explained.

One is a “popular right” tendency traditionally represented by former premier Kostas Karamanlis, a liberal one promoted by Kyriakos Mitsotakis, and a right-wing faction, which helped the new leader get elected.

Mitsotakis was the only New Democracy lawmaker who didn’t vote for Prokopis Pavlopoulos as the President of Greece in

February 2015. Pavlopoulos, who is also a party member, and belongs to the Karamanlis camp, was proposed as a candidate by the Syriza-led government, a move that triggered reactions over the “special” relationship between Alexis Tsipras and Kostas Karamanlis.

But since he was defeated in snap general elections in 2009, Kostas Karamanlis has kept his distance from politics, and avoided making public statements, despite still being a lawmaker for the party.

“He has been absent for years […] he cannot only intervene to urge Greeks to vote yes in the referendum and to support Meimarakis [the rival of Mitsotakis] in the party elections,” a New Democracy official, who asked not to be named, told EurActiv.

The centre-right European People’s Party hailed the change in New Democracy’s leadership.

“I believe that Mitsotakis will be able to maintain the Greek centre-right united and build on New Democracy’s past achievements,” Joseph Daul, the President of the European People’s Party (EPP), told EurActiv.

Daul continued saying that “the new leader will enhance ND’s role as a strong proEuropean alternative force in the country”, and will lead the party to victory in the next parliamentary elections.

“But more importantly, I hope that the party will be able to unite the people of

Greece behind a common reform agenda,” he noted, adding that the EPP counts on ND

as a stable and credible partner that can promote a pro-European agenda.

January 13 - 19, 2016

10 | MARKETS | financialmirror.com

Oil & Gas: More financial stress for an industry already under duress

By Victor Vallance and Stephen Bernard, DBRS DBRS sees no meaningful relief for the oil and gas sector in 2016 Several factors are contributing to low prices, including oversupply and near-term prospect of additional Iranian oil exports once Western sanctions are lifted In the absence of OPEC as a stabilising influence, oil markets have turned increasingly more volatile.

DBRS foresees no meaningful relief for the oil and gas sector in 2016. Global oil prices and North American natural gas prices have tumbled in recent weeks, reaching lows that have not been seen since the last decade.

Several factors have added more pressure to already weak oil and gas markets, including OPEC’s display of discord at its recent gathering, a continued oversupply of global oil markets, the near-term prospect of additional Iranian oil exports once Western sanctions are lifted, and a mild start to winter in the Northern Hemisphere.

For industry participants, WTI oil priced near USD 35/barrel (bbl), U.S. natural gas at Henry Hub priced below USD 2/million British Thermal Units (mmbtu) and Canadian gas at AECO priced around CAD 2.25/thousand cubic feet (mcf) is causing more stress on balance sheets.

With the considerable level of oversupply in oil markets, DBRS believes there is risk that the price of WTI could breach USD 30/bbl in the short term. However, DBRS does not believe the current price or an even lower price is sustainable for any length of time, although the rebalancing of the market and a material recovery in prices is unlikely to materialise in 2016.

Longer-dated contract prices for both crude oil and natural gas have slid almost in tandem with near-term price contracts. The forward strip contract for WTI oil has dropped to around USD 39/bbl for 2016 and USD 45/bbl for 2017 (as of late December), and the current forward price does not top USD 50/bbl until the latter part of 2018.

However, the picture is somewhat better for natural gas.

The strip contract for gas at Henry Hub is around USD 2.20/mmbtu for 2016 and USD 2.70/mmbtu for 2017. The forward price does not reach USD 3/mmbtu until January 2018, and that is for gas delivered during the peak of the seasonal pricing cycle (i.e., the fourth and first quarters).

In the absence of OPEC as a stabilising influence, oil markets have turned increasingly more volatile. The degree of volatility has been amplified as global oil markets and North American natural gas markets remain oversupplied.

Continued oversupply will apply additional pressure on pricing until sufficient supply is removed to rebalance the market.

The forward curve points to a period of sub-USD 50/bbl WTI oil through late 2018.

Structurally, the massive development of shale oil in the United States has lowered the global supply cost curve in addition to making OPEC largely irrelevant as a cartel.

Nevertheless, the economic returns for developing even the better shale opportunities, as gauged by industry participants, does not justify investing capital at current price levels.

In the absence of OPEC as a stabilising influence, oil markets have turned increasingly more volatile ...

As a best estimate, DBRS anticipates that it will take at least a year before global oil markets rebalance Capex declines and the significant decline in drilling activity in the U.S. shale oil regions, Canada and internationally will inevitably have a meaningful enough impact that supply and demand will balance, supporting a stronger price profile. However, markets will remain volatile, and projecting the timing of a sustainable recovery is difficult given that any near-term price recovery will invite producers to restart marginally economic production.

As a best estimate, DBRS anticipates that it will take at least a year before global oil markets rebalance. To differing degrees, companies have counteracted the pressures on balance sheets with cost-cutting initiatives, capex reductions, improving capital efficiencies and asset sales.

However, DBRS notes that improvements to be realised from future cost-cutting efforts and efficiency gains are unlikely to be nearly as extensive as previously achieved gains. Moreover, the ability for companies to sell assets and employ hedging in a weaker pricing environment is fading.

Coupled with diminished access to capital markets, particularly for non-investment-grade credits, the ability for companies to refinance maturing debt and conserve liquidity is becoming increasingly more difficult.

DBRS expects that further capex cuts, even considering additional drilling and capital efficiency gains, will make it even more difficult for companies to offset declines from

their base oil and gas reserves and sustain production levels.

DBRS anticipates that a mounting number of companies will produce lower volumes in 2016, adding more stress to cash flows and credit metrics.

However, integrated oil companies that have downstream businesses and have benefited from higher margins on the back of falling prices are significantly better positioned to withstand the pressure.

For non-investment-grade issuers, the next round of borrowing base reviews in the new year are likely to result in further impairments to bank facilities, adding to liquidity pressures. Lower prices are liable to have an even greater impact in the coming round, as more reserves (particularly proven undeveloped reserves and proven and undeveloped heavy oil reserves) are at a higher risk of downward revisions and are excluded in the assessment if they fall below the economic threshold needed to be considered proved.

As a result of the change in outlook, DBRS is in the process of undertaking a full review of its oil and gas portfolio. As part of the review, DBRS will extensively stress test the portfolio using a number of oil and gas scenarios, including the current forward oil and gas futures curve as a yardstick. Stress tests will focus on the effect of prices on (1) internally generated cash flow, (2) discretionary versus committed capital expenditures, (3) dividend flexibility, (4) planned asset dispositions, (5) covenant tests, (6) available liquidity, (7) key credit metrics and (8) a recovery rate analysis for high yield credits.

In its review, DBRS intends to underscore the balance sheet strength, size, diversity and cost of a company’s production base, the company’s overall cost structure, quality of assets, integration (i.e., downstream) and liquidity.

Just as critical will be assessing management’s willingness to exercise capital discipline in the current environment to maintain balance sheet strength.

DBRS will also consider that it is carrying out its portfolio review at a lower point in the commodity price cycle. As a result of the expected further erosion in oil and gas company fundamentals, DBRS anticipates the possibility of more widespread rating actions with this review.

Victor Vallance is Senior Vice President, Energy, Global Corporates Group and Stephen Bernard is Vice President, Research & Communications at DBRS www.dbrs.com

January 13 - 19, 2016

financialmirror.com | MARKETS | 11

WTI Oil: Further depression in the oil markets Markets Report by Forextime Ltd

WTI Daily Chart

By Jameel Ahmad, Chief Market Analyst, FXTM

The early trading weeks of 2016 have seen the return of brutal punishment in the oil markets with WTI oil being repeatedly crushed and having found itself falling to its lowest level in over a decade below $30.50. The value of the commodity has already extended its decline by around a further 20% this year and although this is another astonishing drop following continual selling throughout last year, which has ultimately led to prices falling nearly 80% from its peaks just 18 months ago, the dismal outlook is still favoured towards additional declines.

The overwhelming supply and demand equation that has encouraged dramatic selling is going nowhere anytime soon, with a persistent aggressive oversupply in the markets consistently haunting investor attraction, while weaker forecasts around global growth weighs on demand, and it is likely that more global economic downgrades from major institutions are to follow early this year.

It has not only become incredibly difficult to argue for a case to buy oil, but also to simply structure a viewpoint from where prices can rebound and maintain themselves without entering yet another round of selling. The economic conditions are quite simply so overwhelmingly and aggressively against the commodity that there is still no visible floor for oil weakness.

Another reason why it is difficult to find a floor despite further aggressive declines which are putting us within touching distance of entering the $20 range is because Iran has not yet began to unleash its own production potential, which would even further squash the already aggressive supply and demand equation towards the momentum of sellers. Both equity markets and central banks have still not digested such prolonged weakness in the oil markets, and it wouldn’t surprise me in the slightest if central banks or other policymakers resume to change policy taking into account the prolonged weakness in commodities that are vital to their exports.

Many are wondering how producers can handle such depressed prices and were eagerly awaiting to see if this impacts the United States, but traders are now losing patience with no correlation yet to be seen between declining US oil rigs and the weekly inventory reports released from the United States. Comments late last year from Saudi Arabia that it would be willing to collaborate with others to achieve stability in the markets provided some promise to those hoping for a rebound in sentiment, but there are concerns

that the recent escalation in political tensions between Saudi Arabia and Iran will make any combined production cut from major producers difficult. It should also be taken into account how difficult it would be to bring leaders from so many different economies around the globe together to collectively agree on production levels.

Although the situations are entirely different, it was only a few months ago that the headlines were focused on the Greece situation and these were collective discussions between very senior figures in the same European Union.

You would just have to imagine how difficult it would be to find an agreement on a production ceiling for members of the OPEC committee group, let alone finding producers outside of OPEC to join and cut production also.

In regards to the technicals, all of the charts paint a depressing picture and showcase how sellers are clearly in control of this market. Starting with the daily timeframe, prices are clearly trading inside a steep bearish channel with $30 acting as a major support level. Bears are clearly in control and as long as prices can continue to trade below $35, a breakdown below $30 invites a further potential selloff towards $25.

WTI Weekly Chart

The monthly timeframe also suggests that $35 is now a heavy resistance level and was previously seen as major support. Previous support at $35 is now going to be seen as major resistance, and any failure to close above this level will likely invite opportunities for investors to enter another sellon rally opportunity.

The weekly timeframe also shows that prices are compressing heavily to the downside. Last week’s bearish engulfment combined with the fact that prices are below the weekly 50,100 and 200 SMA should encourage a further selloff towards $30. A weekly close below $30 may suggest another buildup in bearish momentum which can invite sellers to attack prices now seen since April 2003 at $25.

For information, disclaimer and risk warning note visit: www.ForexTime.com FXTM is an international forex broker regulated by the Cyprus Securities and Exchange Commission (CySEC), and FT Global Limited is regulated by the International Financial Services Commission (IFSC)

WTI Monthly Chart

January 13 - 19, 2016

12 | MARKETS | financialmirror.com

It’s all about oil – that’s the sweet crude truth!

By Oren Laurent President, Banc De Binary

The recent declines in the price of crude oil have thrown everyone for a loop. That oil plummeted to $32 per barrel in the first week of January is a grim reminder that we’re not out of the woods just yet. The commodity price rout that hit hard in 2015 is back with a vengeance and this time it’s taking no prisoners.

China has endured two massive stock market shutdowns – one on Monday, January 4, and another on Thursday, January 7. These are reminders that the primary stress factors remain in place and that a Chinese recovery is nowhere to be seen. Oil prices recently bounced back from 12-year lows, settling a sliver above $34 per barrel. A big part of the reason for the ongoing weakness in oil prices is the resilience of WTI crude oil producers in the US. Even as prices continue to slide, shale oil producers are maintaining output capacity – feeding the supply glut that is dragging prices lower. The current price of crude oil is unsustainable for US producers and many OPEC countries too. However, neither side is prepared to cede market share to the other. The recent rebound in the oil price is not something that analysts should read too much into however.

The technical correction is a once-off event that does not make the case for a compelling argument in favour of oil price increases. The fundamentals of the market are structurally imbalanced. As long as China weakness persists, global demand remains weak, oversupply continues, and the USD remains strong we are going to see persistent weakness in crude oil prices.

IRAN AT THE CENTRE OF A BREWING STORM One of the biggest drivers of recent low prices is the feud between arch-rivals Iran and Saudi Arabia. Both countries are members of OPEC and both are high-powered global players.

What typically happens when geopolitical turmoil comes into play is that oil prices spike.

This is what happened initially when news broke of Iran’s condemnation of Saudi Arabia’s execution of a Shiite cleric.

However, the longer term effect of the feud is that neither country is prepared to abide by production decreases. And that is precisely what is driving the price of oil so much lower in recent days.

Without crucial production cuts, there is no way that OPEC can work towards increasing the price of Brent crude.

The demand/supply conundrum requires one of two things

to happen: Either production is curtailed so that demand can clear output at a higher price, or a shift in demand takes place and that raises prices. The latter scenario could only occur if China suddenly had a remarkable recovery and started buying energy commodities like crude oil en masse. With sanctions on Iran about to lifted, the country will be able to export up to 500,000 barrels per day to international markets.

With oversupply standing at some 2 million BPD, this seems disingenuous to the embattled energy sector.

Iran has a list of customers ready and willing to purchase its oil and this does not bode well for the price of WTI and Brent crude oil. There are even reports circulating that Saudi

oversupply is having on the price of crude.

In 2015, US shale oil and natural gas producers and investors endured a torrid time. Rapid and unprecedented declines took place and some 250,000 jobs were sacrificed in the process. The tense standoff between OPEC and shale oil producers has resulted in nothing but oversupply and declining revenues for everyone. The fact of the matter is that OPEC will simply not allow oil prices to rise to $100 per barrel ever again. There is simply too much at stake because prices like that would empower WTI crude producers and drive up their profits accordingly. So, instead of everyone getting a slice of the cake, OPEC wants to starve out US oil producers with historically low prices. If prices rise to $100 or thereabouts, we will see some interesting realities taking shape: - Domestic imports of OPEC oil will decrease; - Domestic production of crude oil will increase; - Domestic consumption of crude oil will decline at those prices.

WHY IS OPEC ALLOWING OIL TO REMAIN AT $35 PER BARREL?

Arabia is lining up buyers across Europe to purchase its crude oil instead of Iran’s crude oil as simmering tensions between these two countries continues. Owing to the inclusion of Iran in global oil, it is possible that oil prices could drop further.

Analysts are convinced that given these realities, prices could drop below the critical $30 per barrel level and head into the mid-to-low $20 range.

WILL WE EVER SEE $100 PER BARREL OIL AGAIN?

This is a question that continues to plague casual observers in this unfolding saga. The fact of the matter is that OPEC is the most significant marginal oil producer.

What it does in terms of its 33% share of production is tip the scales one way or the other. If OPEC allows prices to drop, it is squeezing out high cost producers (like the US) and causing rig counts to diminish.

When OPEC believes that enough higher cost producers have been squeezed out and global production of oil is substantially less prices will naturally begin rising – even without a cut in output for OPEC. That is what the war of attrition is all about; OPEC is trying to literally squeeze out other producers so that prices can rise and it can claim a larger slice of the global market. So how long is OPEC prepared to play the waiting game? This is the million dollar question but it could be anywhere up to five years or more. By that stage, tremendous progress will have been made on electricpowered vehicles and that will put a big dent in the demand for crude oil!

Please note that this column does not constitute financial advice.

The thought of oil prices rising towards $100 per barrel seems highly improbable to say the least. Given the tumultuous activity in oil markets of late most everyone is likely to agree that $100 per barrel oil is anything more than a pipe dream for producers. For consumers the prospect of oil at that price is enough to send shudders down their spines. Gasoline prices at the pump have been hovering around the $1.90 range for quite some time and motorists are rightly satisfied with the disinflationary effect that

The Financial Markets Interest Rates Base Rates

LIBOR rates

CCY USD GBP EUR JPY CHF

0-0.25% 0.50% 0.05% 0-0.10% -0.75%

Swap Rates

CCY/Period

1mth

2mth

3mth

6mth

1yr

USD GBP EUR JPY CHF

0.42 0.51 -0.22 0.05 -0.79

0.51 0.55 -0.17 0.07 -0.77

0.62 0.59 -0.14 0.08 -0.75

0.85 0.75 -0.06 0.11 -0.68

1.15 1.04 0.05 0.22 -0.60

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

1.03 0.92 -0.08 0.10 -0.72

1.22 1.09 0.00 0.10 -0.65

1.38 1.24 0.12 0.12 -0.54

1.53 1.37 0.26 0.15 -0.41

1.77 1.59 0.54 0.23 -0.16

2.02 1.82 0.91 0.39 0.14

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP 1 CHF 1.0858 0.9210

100 JPY

1.4500

0.9999

0.8496

1.3354

0.9209

0.7825

0.6896

0.5859

0.6897

0.7488

1.0001

1.0859

1.4501

117.70

127.80

170.67

0.8497 117.69

Weekly movement of USD

CCY\Date

15.12

22.12

28.12

05.01

12.01

CCY

Today

USD GBP JPY CHF

1.0971

1.0860

1.0918

1.0778

1.0824

0.7232

0.7296

0.7316

0.7322

0.7451

132.43

131.56

131.40

128.55

127.07

GBP EUR JPY

1.0768

1.0773

1.0756

1.0776

1.0811

CHF

1.4500 1.0858 117.70 1.0001

Last Week %Change 1.4720 1.0778 119.27 0.9998

+1.49 -0.74 -1.32 +0.03

January 13 - 19, 2016

financialmirror.com | MARKETS | 13

Stronger macro, sinking stocks Marcuard’s Market update

by GaveKal Dragonomics

By Francois-Xavier Chauchat The latest macro indicators leave little doubt about the general direction of the eurozone economy. Both hard and soft data suggest that growth re-accelerated from a meagre 0.3% QoQ (1.2% annualised) in 3Q15, probably to 0.4%-0.5% (1.6%-2.0% annualized) at the turn of the year. Eurozone unemployment declined to a four-year low in December, and the economic sentiment indicator compiled by the European Commission from business and consumer surveys rose to its highest point since mid-2011. The German export sector has so far proved relatively resistant to slower growth in the emerging markets and to the Volkswagen shock, while domestic growth in Southern Europe continues to improve on the back of the European Central Bank’s quantitative easing, cheap oil, and less restrictive fiscal policies.

Moreover, while investors have good reasons to be concerned about the impact of falling oil and commodity prices on US and EM debt markets, they seem to be ignoring the positive impact that cheaper energy and resources will have on financial risks in Europe, especially in Southern Europe. Thanks to lower commodity prices, Italy and Spain can spend more without a deterioration in their current account balances. Even with growth of more than 3% in consumer demand, Spain is likely to maintain a comfortable current account surplus of almost 2% of GDP. Similarly, it is now almost certain that Italy will keep its net lending position of 2.5% of GDP intact, even while its domestic economy accelerates substantially.

By continuing to support economic growth in Southern Europe, cheaper oil also helps to reduce the financial risk posed by non-performing loans. This is especially important for Italy, where EUR 350 bln of NPLs (18% of total loans) are a sword of Damocles over the banking sector. With lower unemployment, lower interest rates and higher incomes, one can be confident that this number will soon begin to decline, as it now has done in Spain for two consecutive years.

As a result, it is surprising that Europe’s equity markets have not performed better in relative terms. Since early December, European indexes have declined by -10% to -15%,

while the S&P 500 has lost -8.6%. One theory is that where markets lead, the economy follows. This is hard to believe, since last summer’s market tantrum failed to foreshadow any significant weakening in Europe’s economy. Another is that heightened political risk—uncertainty in Spain and Portugal, talk of Brexit, fear of terrorism and the refugee crisis—is to blame. This is not convincing either, since sovereign yield spreads have barely widened.

As in 1997-1998, when European markets saw huge volatility against a backdrop of solid economic recovery, the most convincing explanations are beta and composition. The beta of European equities relative to US equities has almost always risen above one at times of heightened perceived global risk. This reflects a lack of confidence in the capacity of the European economy to resist external shocks, and in the ability of European policymakers to react effectively to those shocks. In this respect, the ECB disappointment of last month cannot have helped.

The other reason—equity market composition— reinforces the beta effect. The most liquid and utilised equity indexes, such as the Euro Stoxx 50, the Dax or the CAC (not to mention the FTSE 100), are heavily overweight in big multinationals exposed to EMs and commodities. This effect has been very pronounced in recent months, as shown by the sharp divergence in performance between small and large capitalisation stocks, and by the sustained outperformance of our pan-European equity group.

The divergence in performance between those European

assets that are most sensitive to global risks and more regional assets is likely to remain pronounced. The risk exists, however, that even the latter defensive stocks could eventually become contaminated by the fear factor. This risk requires a hedge. Thus I reiterate my early December call: maintain exposure to equities exposed to Europe’s domestic demand, and buy 30-year US treasuries as a hedge until the perception of global risks calms down.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

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

19220 1.45 1.8009 24.881 6.8709 14.4097 1.0858 2.4 292.87 0.64724 3.1798 0.3953 20.32 8.9048 4.0142 4.1734 76.3155 8.5233 1.0001 23.25

AUD CAD HKD INR JPY KRW NZD SGD

0.6989 1.4228 7.758 66.9025 117.7 1210 1.526 1.4372

BHD EGP IRR ILS JOD KWD LBP OMR QAR SAR ZAR AED

0.3770 7.8059 30117.00 3.9354 0.7091 0.3038 1513.00 0.3850 3.6413 3.7523 16.6623 3.6729

AZN KZT TRY

1.5803 364.79 3.0274

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

www.marcuardheritage.com

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.

Azerbaijanian Manat Kazakhstan Tenge Turkish Lira

Note:

* USD per National Currency

January 13 - 19, 2016

14 | WORLD | financialmirror.com

Powerball lottery hits record $1.4 bln 12 things Lotto winners should not do! discounted amount in order to do so. Other lottery winners choose to receive the annual annuity payments. Getting tens of millions of dollars at once probably sounds better than getting a paycheck for the next 30 years or so.

Now consider that close to 70% of lottery winners end up broke, many within a couple or few years. Let’s say that you can choose to get $172 mln up front, or you can choose to receive a payout of $300 mln slowly over the course of a lifetime. Most people choose the lump sum rather than the annuity payment, as it is instant empire-making money. Go see a reputable and visible tax professional and a reputable investment advisor at a top money management firm with a widely recognised company name and a long corporate history.

This theme of “reputable and visible” will echo throughout. Do this before you make the decision about a lump-sum or annuity option.

It’s official: the lottery has become the new American Dream! You can work hard all of your life, and anyone can become a millionaire with a lot of hard work and luck mixed in. But what about getting tens of millions of dollars, or hundreds of millions of dollars without very much risk? That’s a lot harder, but don’t tell that to the lucky winner who wins a $1.4 bln Powerball By Jon C. Ogg 24/7 WallSt.com lottery drawing.

The Powerball lottery has now reached a whopping $1.4 bln. After the $900 mln lottery yielded no formal winners at the start of January, the Powerball jackpot rolled up to $1.3 bln on Sunday. The volume of tickets being purchased has reached levels so high that the jackpot is now a record $1.4 bln. What a winner needs to consider is what to do and, more importantly, what not to do! Lotto dreamers also need to consider what they would do if they won. Coming into hundreds of millions of dollars all at once brings pitfalls and dangers. Coming into such a sum is nothing short of empirebuilding money. Now consider that all empires have or can crumble — and many lottery winners end up broke in just a few years.

To avoid being the laughing-stock of every family joke for many years, 24/7 Wall St. has shared 12 things not to do if you ever win the lottery. Even if you don’t play the lottery, this applies to many people who rapidly come into vast sums of money. That would be artists or celebrities who become sensations overnight or in short order, lawsuit and judgment winners, or people who unexpectedly inherit millions of dollars.

Lottery winners need to be extremely careful. They can become marked targets, by enemies or by friends and family.

There have been at least two murders tied to lottery winners in recent years. It is also far easier to blow through vast sums of this size than you might think. Yes, you can blow hundreds of millions of dollars.

National Public Radio (NPR) has now featured this segment on its All Things Considered radio show. Buying jets, luxury yachts or islands, having an entourage, and becoming the business and finance backer for your entire cadre of family, friends and acquaintances can make you go broke without a proper financial plan and without certain protections in place.

How would you like to win tens of millions or hundreds of millions of dollars and then go broke in a few years? This 1.4 bln annuity value comes with an $868 mln cash value for those who opt for a lump-sum payment. Most people are

Don’t think that you are the smartest person about money and finance going to take the lump-sum rather than a payout, so please don’t go broke!

Here are the 12 things not to do if you win the lottery:

Don’t forget to sign a ticket, or report it to the state It is sad, but a modicum of research shows that not signing a ticket or failing to report to the state are the simplest and most common errors to make. Can you imagine losing a lottery ticket? Then imagine what can happen if someone else snags your ticket and shows up to collect the prize. Fighting over true ownership of a lottery ticket is not a simple task, and many disputes have arisen over who owns what ticket. In a way, lottery tickets are almost like the last form of bearer bonds that anyone can collect on if they show up with the coupons and bonds in hand. Lottery tickets expire at different times from state to state, but they generally expire in 90 days to one year.

Don’t tell everyone you know If you suddenly win millions of dollars, chances are pretty high that you will to want to brag about it. How could you not? The problem is that announcing to the public that you won before you collect your winnings can put you in grave danger. Literally, grave danger.

Everyone who has ever done anything for you now may come with their hands out asking for something, or worse. You probably have heard of kidnap and ransom insurance before.

One lottery winner was even murdered. If you can manage it, and if your state allows it, try to remain anonymous for as long as humanly possible. How you became vastly wealthy will be found out in time anyway, but there is no need to alert everyone.

Don’t automatically decide to take the up-front cash Some lottery winners want all the cash up front, and they take a

Just because you become wealthy overnight, chances are extremely high that you are not the best person to manage your money and financial interests. If you go from living paycheck to paycheck, does it sound right that you will know the best things to invest in and the best tax and asset protection strategies? There are many ways to invest and protect that fortune, and that might not include just buying some stocks and bonds and letting it ride. Your drinking buddy might also not be the best choice as an advisor and expert. Having a solid and respectable team of advisors and managers in place will act as your buffer that protects your assets now and in the future. Also, don’t think that this money is a tax-free payment, as you probably will have to pay the top tax bracket to the IRS and the highest state and local income taxes. Do you know how to protect your assets against all threats and know exactly how to protect your estate in case you die or become incapacitated? Here is a hint: If you answered yes, you probably did not bother playing the lottery.

Don’t let your debts remain in place If you get the “I’m rich and don’t have to pay anymore” bug, you might be dooming yourself. One lottery winner in California was strapped with debt from property purchases and what seemed to be excessive insurance policies. Whether you take the lump-sum or the annuity option, if you have a single penny of debt in the immediate future and distant future, then something is seriously wrong. For that matter, you should not have a single debt ever again. If you manage to go broke down the road and still have a mortgage, car payments, student loans, credit card debt and personal bills, you will have lost the right to be mad when all of your friends and family members ridicule you every day for the rest of your life.

Don’t be a high-roller or live large If you go from living a simple life to instantly being able to spend hundreds of thousands of dollars (or more) per week, what do you think happens to your expectations in life ahead? Chances are high that you will want more of the same. If you start gambling in Las Vegas and are not happy until you are gambling with hundreds of thousands of dollars (or more) per play, you are dooming yourself. Wait until the real con men find you. Taking you and your favourite 50

January 13 - 19, 2016

financialmirror.com | WORLD | 15

people on a luxury cruise around the world can become very expensive, very fast. Having an entourage generally only works for people who keep making more money, and entourages have bankrupted many musicians and athletes.

Don’t go out and buy everything for everyone and for yourself

person do better because a lottery winner who lucked into vast wealth provided money to start it? If your answer is yes, you seriously need to protect yourself (from yourself). Now think about whether most lottery winners had the understanding of how to run a business the day before they won the lottery.

Don’t just give the whole thing away

There has to be a huge temptation for lottery winners to go out and buy all the millionaire toys they can think of. The answer here is simple to say and hard to follow, but you likely will regret the decision if you go out and buy dozens of cars, houses and whatever else you can think of for you and your friends and family members. This will start you on a bad path, and you could easily become the next friends and family personal welfare department. If you start buying everything for everyone, chances are high that they might expect that to last forever. The other end of the story is that you do not have to be a cheapskate either. Now consider a personal lottery story that was told in which a lucky winner bought more than 30 cars and multiple houses in three months for himself and friends and family.

Some lottery winners might feel so lucky that they want to give away just about all their money to a charity or to a religious institution. This sounds great, but even the truly wealthy who earn their money the hard way do not do this.

You can be more than generous without doing the unthinkable.

Imagine what you will feel like down the road if or when a serious crisis arises in your life or your family’s lives and you no longer have the finances to help. Should you be charitable? Absolutely! Should you give it all away just because a church or a charitable group does good things?

Absolutely not. If you insist on giving away your newfound fortune, do it the way the wealthy do it — structure your will and estate to give away your fortune upon your death.

Don’t say to hell with a budget

Don’t get celebrity and athlete envy

Do millionaires have budgets? The smart ones do. Maybe it sounds crazy that you have to live within means when you get instant empire-making money. After all, most lottery winners instantly become wealthier than everyone they know combined. This also goes back to having advisors and being prudent, but at the end of the day you do still have a finite sum of money. Chances are very high that you will make some serious purchases and your lifestyle will be changed forever. Without setting limits for yourself and for what you do with others is a recipe for disaster. Again, many lottery winners go broke. If they went broke in a very short period, what do you think the reflection about wishing for a proper budget would be?

Don’t become the business backer for all your friends and family Leave being a venture capitalist up to the venture capitalists. One common theme that has come up with lottery winners with instant vast sums of cash is that friends and family start pitching them on endless business ideas.

Sure, some will sound great and some will sound crazy. If someone has no knowledge of a particular business and does not know what it takes to actually run a business, will that

Being a high-roller is one thing, but you can go incredibly broke trying to keep up with celebrities. Keeping up with the Joneses is bad enough, but do not try to keep up with the

Kardashians or other celebrities. It may seem cool to own a 200-foot yacht or private jet or to have your own entourage.

It may also seem cool to own castles in Europe or Picasso paintings. These can easily drain your financial statement to zero.

Trying to dodge taxes might even sound appealing to misguided people. Now go add up the price tags of these things, plus the cool cars and houses and the rest of it. You can go broke real quick. Just ask people like Nicolas Cage, Wesley Snipes, M.C. Hammer, Evander Holyfield and many other famous people who had it all and ended up broke or close to it, how they feel about things. And dodging your taxes may come with a greater price than just mere penalties.

Don’t think that laws and decency no longer apply It is true that the wealthier you get, the better attorneys and legal defense you can afford. Still, you will have to live under the “good citizen” laws, and you still likely will have to pay taxes just like Warren Buffett’s secretary. Living a reckless life without concerns about the laws of the land will not keep you from going to prison (or worse). Most good sports coaches will tell their star athletes upfront that chances are high they will have to be human for far longer than they are going to be stars. Movies can glamorise scoundrels, but what good does it do you if you are incredibly wealthy and such a pariah that no one will associate with you? Remember, you don’t get to take any of your wealth with you when you die. And how fun will it be to be paying out all of your winnings to attorneys fighting to keep you out of jail or fighting civil suits looking to take your new wealth away?

Don’t forget about a 13th runner-up issue Can you imagine that you need to think about the solvency or financial position of the state you are playing a lottery in? The State of Illinois did not have a budget resolution for much of 2015.

The state’s finances have been challenged for years, and the state sadly did not have the money legally in place to pay out the winnings to its top lottery winners. Imagine getting the winning numbers, only to receive a state voucher. Can you change your life in a meaningful manner on a state voucher that is nothing more than an IOU? Again, 24/7 Wall St. would not want anyone who wins the lottery to end up without a penny to their name (or worse). Following a list of things to do or not do sounds easy enough. Unfortunately, life’s temptations can get in the way of logic. (Source: 24/7 Wall St.com)

January 13 - 19, 2016

16 | WORLD | financialmirror.com

Greece’s two currencies

By Yanis Varoufakis

Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union.

Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives.

The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.

Consider a Greek depositor keen to convert a large sum of BE into FE (say, to pay for medical expenses abroad, or to repay a company debt to a non-Greek entity). Assuming such depositors find FE holders willing to purchase their BE, a substantial BE-FE exchange rate emerges, varying with the size of the transaction, BE holders’ relative impatience, and the expected duration of capital controls.

On August 18, 2015, a few weeks after pulling the plug from Greece’s banks (thus making capital controls inevitable), the European Central Bank and its Greek branch, the Bank of Greece, actually formalised a dual-currency

Netflix’s global expansion After having entered a few European markets in 2015, Netflix made a surprise announcement last Wednesday saying that the streaming service is now available in 130 additional countries. Looking at the map illustrates that Netflix is now available almost everywhere in the world, with the most notable blind spots being China, Syria and Crimea.

Netflix had first expanded outside the United States in 2010, when its streaming offering became available in Canada. In the past few years, the company’s international push had picked up pace, but no one really predicted the service to reach almost universal coverage so soon. Discussing the omission of China, CEO Reed Hastings stated that his company is still working on bringing its services to the largest market in the world but warned that it could take some time to gain approval by the Chinese government.

As of September 2015, Netflix had 43 mln domestic and 26 mln international streaming subscribers. Given last week’s announcement, it’ll be interesting to observe how quickly the latter number will increase. (Source: Statista)

currency regime. A government decree stated that “Transfer of the early, partial, or total prepayment of a loan in a credit institution is prohibited, excluding repayment by cash or remittance from abroad.”

The eurozone authorities thus permitted Greek banks to deny their customers the right to repay loans or mortgages in BE, thereby boosting the effective BE-FE exchange rate.

And, by continuing to allow payments of tax arrears to be made in BE, while prescribing FE as a separate, harder currency uniquely able to extinguish commercial bank debt, Europe’s authorities acknowledged that Greece now has two euros.

The real effects of the dual-currency regime on Greece’s economy and society can be gleaned only from the pernicious interaction between the capital controls and the “reforms” (essentially tax hikes, pension reductions, and other contractionary measures) imposed on the country by the eurozone authorities. Consider the following beguiling example.

Greece’s companies fall roughly into two categories. In one category are a large number of small firms asphyxiating under the tax office’s demand that they pay in advance, and immediately, 100% of next year’s corporate tax (as estimated by the tax authorities).

The second group comprises listed companies whose depressed turnover jeopardises their already diminished share value and their standing with banks, suppliers, and potential customers (all of which are reluctant to sign longterm contracts with an underperforming company).

The coexistence, in the same depressed economy, of these two types of businesses gives rise to unexpected opportunities for shadowy trades without which countless businesses might close their doors permanently. One widespread practice involves two such firms, say, Micro (a small family firm facing a large advance tax payment) and Macro (a publicly traded limited liability company that needs to demonstrate higher turnover than it has).

Macro agrees to issue invoices for (non-existent) goods or services rendered to Micro, up to, say, EUR 20,000 ($22,000).

Micro agrees to pay EUR 24,600 into Macro’s bank account (the price plus 23% value-added tax) on the understanding that Macro will reimburse the EUR 20,000 to Micro. This way, at a cost of 4,600 euros, Micro reduces its taxable revenue by EUR 24,600, while Macro boosts its turnover

figure by EUR 20,000.

Alas, due to capital controls, Macro cannot reimburse Micro in FE, nor can it wire EUR 20,000 to Micro’s BE bank account (lest they be found out by the authorities). So, to seal the deal, Micro and Macro approach a cash-rich vendor.

This is usually a gas-station owner who is flush with cash at the end of each day and who, for security reasons and in order to pay for his fuel supplies, is obliged to deposit his cash daily at his bank, turning valuable FEs into less valuable BEs. The mutually beneficial deal is completed when Macro wires EUR 20,000 in BE to the gas-station owner, who then hands over a smaller sum of FE (cash) to Micro’s owner, pocketing the difference.

The fact that this informal deal benefits all sides exposes the terrible inefficiency of current fiscal policy (namely, punitive business taxes) and how capital controls magnify it.

The state collects additional VAT from Micro (at a loss of corporate taxes that Micro cannot pay anyway); Macro enjoys the benefits of seemingly higher turnover; and the gasstation owner reduces his losses from converting FE into BE. The downside is that economic activity is overstated and, more important, that reform becomes even harder as entrepreneurs internalise the necessity to find new, creative ways of bending the rules.

The sole purpose of the capital controls imposed on Greece last summer was to force the country’s rebellious government to capitulate to the eurozone’s failed policies.

But an unintended consequence was the formalisation of two parallel (euro-denominated) currencies. Combined with the punitive taxation caused by Europe’s refusal to recognise the unsustainability of Greek public debt, the dual-currency regime produces unforeseen incentives for informal transactions in a country that desperately needs to defeat informality.

The reality of Greece’s two currencies is the most vivid demonstration yet of the fragmentation of Europe’s monetary “union.” In comparison, Arizona has never looked so good.

Yanis Varoufakis, a former finance minister of Greece, is Professor of Economics at the University of Athens. © Project Syndicate, 2016 - www.project-syndicate.org

January 13 - 19, 2016

financialmirror.com | WORLD | 17

The new geo-economics

By Joseph E. Stiglitz Last year was a memorable one for the global economy.

Not only was overall performance disappointing, but profound changes – both for better and for worse – occurred in the global economic system.

Most notable was the Paris climate agreement reached last month. By itself, the agreement is far from enough to limit the increase in global warming to the target of 2 Celsius above the pre-industrial level. But it did put everyone on notice: The world is moving, inexorably, toward a green economy. One day not too far off, fossil fuels will be largely a thing of the past. So anyone who invests in coal now does so at his or her peril. With more green investments coming to the fore, those financing them will, we should hope, counterbalance powerful lobbying by the coal industry, which is willing to put the world at risk to advance its shortsighted interests.

Indeed, the move away from a high-carbon economy, where coal, gas, and oil interests often dominate, is just one of several major changes in the global geo-economic order.

Many others are inevitable, given China’s soaring share of global output and demand. The New Development Bank, established by the BRICS (Brazil, Russia, India, China, and South Africa), was launched during the year, becoming the first major international financial institution led by emerging countries. And, despite US President Barack Obama’s resistance, the China-led Asian Infrastructure Investment Bank was established as well, and is to start operation this month.

The US did act with greater wisdom where China’s currency was concerned. It did not obstruct the renminbi’s admission to the basket of currencies that constitute the International Monetary Fund’s reserve asset, Special Drawing Rights (SDRs). In addition, a half-decade after the Obama administration agreed to modest changes in the voting rights of China and other emerging markets at the IMF – a small nod to the new economic realities – the US Congress finally approved the reforms.

The most controversial geo-economic decisions last year concerned trade. Almost unnoticed after years of desultory talks, the World Trade Organisation’s Doha Development Round – initiated to redress imbalances in previous trade agreements that favored developed countries – was given a quiet burial. America’s hypocrisy – advocating free trade but

The world’s most generous nations When it comes to the sheer number of people donating money to charity, India and the United States are the world’s top two nations with 184 and 164 mln people making monthly donations respectively in 2014.

However, in percentage terms, the people of Myanmar are the world’s most generous, according to CAF’s World Giving Index.

When interviewed in 2014, 92% of respondents in Myanmar said that they donated money to charity over the previous month, adding up to a grand total of 37 mln people. Thailand comes second with 87% of respondents making a donation during the month prior to the survey. A high proportion of Theravada Buddhists practising Sangha Dana in both countries is one of the primary reasons for the generous donation rate.

(Source: Statista)

“The move away from a high-carbon economy, where coal, gas, and oil interests often dominate, is just one of several major changes in the global geo-economic order” refusing to abandon subsidies on cotton and other agricultural commodities – had posed an insurmountable obstacle to the Doha negotiations. In place of global trade talks, the US and Europe have mounted a divide-andconquer strategy, based on overlapping trade blocs and agreements.

As a result, what was intended to be a global free-trade regime has given way to a discordant managed-trade regime.

Trade for much of the Pacific and Atlantic regions will be governed by agreements, thousands of pages in length and replete with complex rules of origin that contradict basic principles of efficiency and the free flow of goods.

The US concluded secret negotiations on what may turn out to be the worst trade agreement in decades, the so-called Trans-Pacific Partnership (TPP), and now faces an uphill battle for ratification, as all the leading Democratic presidential candidates and many of the Republicans have weighed in against it. The problem is not so much with the agreement’s trade provisions, but with the “investment” chapter, which severely constrains environmental, health, and safety regulation, and even financial regulations with significant macroeconomic impacts.

In particular, the chapter gives foreign investors the right to sue governments in private international tribunals when

they believe government regulations contravene the TPP’s terms (inscribed on more than 6,000 pages). In the past, such tribunals have interpreted the requirement that foreign investors receive “fair and equitable treatment” as grounds for striking down new government regulations – even if they are non-discriminatory and are adopted simply to protect citizens from newly discovered egregious harms.

While the language is complex – inviting costly lawsuits pitting powerful corporations against poorly financed governments – even regulations protecting the planet from greenhouse-gas emissions are vulnerable. The only regulations that appear safe are those involving cigarettes (lawsuits filed against Uruguay and Australia for requiring modest labeling about health hazards had drawn too much negative attention). But there remain a host of questions about the possibility of lawsuits in myriad other areas.

Furthermore, a “most favored nation” provision ensures that corporations can claim the best treatment offered in any of a host country’s treaties. That sets up a race to the bottom – exactly the opposite of what US President Barack Obama promised.

Even the way Obama argued for the new trade agreement showed how out of touch with the emerging global economy his administration is. He repeatedly said that the TPP would determine who – America or China – would write the twentyfirst century’s trade rules. The correct approach is to arrive at such rules collectively, with all voices heard, and in a transparent way. Obama has sought to perpetuate business as usual, whereby the rules governing global trade and investment are written by US corporations for US corporations. This should be unacceptable to anyone committed to democratic principles.

Those seeking closer economic integration have a special responsibility to be strong advocates of global governance reforms: If authority over domestic policies is ceded to supranational bodies, then the drafting, implementation, and enforcement of the rules and regulations has to be particularly sensitive to democratic concerns. Unfortunately, that was not always the case in 2015.

In 2016, we should hope for the TPP’s defeat and the beginning of a new era of trade agreements that don’t reward the powerful and punish the weak. The Paris climate agreement may be a harbinger of the spirit and mindset needed to sustain genuine global cooperation.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. © Project Syndicate, 2016 - www.project-syndicate.org

January 13 - 19, 2016

18 | WORLD | financialmirror.com

Extreme weather and global growth

By Kenneth Rogoff Until recently, the usual thinking among macroeconomists has been that short-term weather fluctuations don’t matter much for economic activity.

Construction hiring may be stronger than usual in a March when the weather is unseasonably mild, but there will be payback in April and May. If heavy rains discourage people from shopping in August, they will just spend more in September.

But recent economic research, bolstered by an exceptionally strong El Niño – a complex global climactic event marked by exceptionally warm Pacific Ocean water off the coast of Ecuador and Peru – has prompted a rethink of this view.

Extreme weather certainly throws a ringer into key shortterm macroeconomic statistics. It can add or subtract 100,000 jobs to monthly US employment, the single mostwatched economic statistic in the world, and generally thought to be one of the most accurate. The impact of El Niño-related weather events like the one this year (known more precisely as “El Niño Southern Oscillation” events) can be especially large because of their global reach.

Recent research from the International Monetary Fund suggests that countries such as Australia, India, Indonesia, Japan, and South Africa suffer adversely in El Niño years (often due to droughts), whereas some regions, including the United States, Canada, and Europe, can benefit. California, for example, which has been experiencing years of severe drought, is finally getting rain. Generally, but not always, El Niño events tend to be inflationary, in part because low crop yields lead to higher prices.

After two crazy winters in Boston, where I live, it would be hard to convince people that weather doesn’t matter. Last year, the city experienced the largest snow accumulation on record. Eventually, there was no longer any place to put it: four-lane highways narrowed to two lanes, and two-lane roads to one. Roofs collapsed and “ice dams” building up from gutters caused severe flooding. Public transport closed, and many people couldn’t get to their jobs. It was a slow-

“Generally, but not always, El Nino events tend to be inflationary, in part because low crop yields lead to higher prices” motion natural catastrophe that lasted for months.

The US as a whole did not have a winter as extreme as New England’s in the first part of 2015, and the effects of the weather on the country’s overall economy were subdued.

True, New York City had some significant snowfalls; but no one would have paid much attention had the mayor been more competent in getting the streets plowed. Eastern Canada suffered much more, with severe winter weather playing a role (along with lower commodity prices) in the country’s mini-recession in the first half of the year.

This year’s winter is the polar opposite of last year’s. It was 68 degrees Fahrenheit (20 degrees Celsius) at Boston’s Logan Airport the day before Christmas, and the first speck of snow didn’t come until just before New Year’s Day. Trees and plants, sensing spring, started to blossom; birds were just as confused.

Last winter, Boston was something of an anomaly. This year, thanks in part to El Niño, weird weather is the new normal. From Russia to Switzerland, temperatures have been elevated by 4-5C, and the weather patterns look set to remain highly unusual in 2016.

The effect on developing countries is of particular concern, because many are already reeling from the negative impact of China’s slowdown on commodity prices, and because drought conditions could lead to severe crop

shortfalls. The last severe El Niño, in 1997-1998, which some called the “El Niño of the Century,” represented a huge setback for many developing countries.

The economic effects of El Niño events are almost as complex as the underlying weather phenomenon itself and therefore are difficult to predict. When we look back on 2016, however, it is quite possible that El Niño will be regarded as one of the major drivers of economic performance in many key countries, with Zimbabwe and South Africa facing drought and food crises, and Indonesia struggling with forest fires. In the American Midwest, there has lately been massive flooding.

There is a long history of weather having a profound impact on civil strife as well. Economist Emily Oster has argued that the biggest spikes in witch burnings in the Middle Ages, in which hundreds of thousands (mostly women) were killed, came during periods of economic deprivation and apparently weather-related food shortages.

Some have traced the roots of the civil war in Syria to droughts that led to severe crop failure and forced a mass inflow of farmers to the cities.

On a more mundane level (but highly consequential economically), the warm weather in the US may very well cloud the job numbers the Federal Reserve uses in deciding when to raise interest rates. It is true that employment data are already seasonally adjusted to allow for normal weather differences in temperate zones; construction is always higher during spring than winter. But standard seasonal adjustments do not account for major weather deviations.

Overall, the evidence from past El Niños suggests that the current massive one is likely to leave a significant footprint on global growth, helping support economic recovery in the US and Europe, while putting even more pressure on already weak emerging markets. It is not yet global warming, but it is already a very significant event economically – and perhaps just a taste of what is to come.

Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University. © Project Syndicate, 2016 - www.project-syndicate.org

Merrill Lynch: Apple slowdown should not effect these top chip stocks

By Lee Jackson, 24/7 WallSt.com The market has started the year off bad enough without tossing in concerns of a drastic production slowdown at some suppliers of technology giant Apple Inc. One of the stocks getting hit the hardest is Apple itself, which is down an astonishing 28% from highs in April of last year. The meltdown in the stock and the overall market sentiment has hit some top chip stocks hard, and now may be the time to be looking at the casualties.

A new Merrill Lynch research note makes the case that, based on meeting with top corporate executives at the huge Consumer Electronics Show recently, the gloom and doom mentality running rampant may be way overdone. In fact, for many of the top companies, it’s really more of “business as usual”.

Three top stocks remain high on the charts at Merrill Lynch and are all rated Buy. Avago Technologies Ltd. made big headlines with a blockbuster buyout of chip giant Broadcom, but it is down 10% far this year. Avago was originally a part of HewlettPackard and gets a huge chunk of its business from Apple and Samsung. It’s a big provider in the cloud/hyperscale data centre and networking sector.

The company recently announced it will

demonstrate its latest optical transceiver technologies for next generation data centre and enterprise storage applications. As data centre networks transition to 100G speeds to support higher bandwidth demands, technical challenges emerge across various levels of the network from storage endpoints to servers to top-of-rack and core switches.

The company produces radio frequency front-end for LTE-enabled Apple products.

Wall Street estimates that the company does 15% of its total business with Apple.

Estimates are that Avago has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10%+ quarter over quarter for the third quarter. The analysts note that customer diversity and content for Samsung could be more than enough to offset slower Apple business.

Merrill Lynch sees a cyclical rebound in industrial and communications demand but does caution that the integration and financial risk of the Broadcom acquisition could weigh on the stock.

Avago investors receive a 1.37% dividend.

Merrill Lynch has a big $180 price target on the stock. The Thomson/First Call consensus target is $171.33. Shares closed on Friday at $128.20.

NXP Semiconductors N.V. is a top play for investors looking for a chip stock with Internet of Things (IoT) exposure, though it is down a stunning 34% from highs printed in June of 2015. The NXP Semiconductors merger with Freescale Semiconductor was

widely applauded on Wall Street, and many analyst believe the merger can transform the company into a powerhouse.

The Freescale merger made NXP the fourth largest semiconductor company in the industry, while the combined company would be the number one supplier in auto semiconductors, number one supplier in global microcontrollers and a dominant supplier in mobile payments.

NXP is getting its chips into high-growth areas such as contactless mobile payments, the IoT, mobile-phone charging, increased cellular data consumption and LED lighting.

The two business segments that cover these products grew 39% and 29% year over year, very impressive numbers.

Some Wall Street analysts feel that if management can successfully convince investors that its long-term growth targets, which are 10% sales growth and 20% earnings-per-share growth, are still viable and intact, the huge sell-off could wind up looking like an outstanding buying opportunity. Merrill Lynch notes that the company sees limited China impact.

Merrill Lynch has a $105 price target, but the consensus is higher at $106.29. The stock closed Friday at $75.18.

NVIDIA Corp. is the non-consensus top pick at Merrill Lynch and one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles. It is also moving into visual computing chips for cars,

mobile devices and supercomputers. It also has a technology partnership with electric car maker Tesla.

NVIDIA has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, currently estimated to be $1 bln.

The company most recently posted earnings that were way ahead of estimates, and the first-quarter outlook implies earnings per share well ahead of current consensus. With gaming revenues up 44% year over year, analysts believe there remains high overall Wall Street skepticism around the company, as most are unaware of the positive dynamics in the PC gaming and esports markets.

Some Wall Street analysts feel that virtual reality could see 10 million in annual shipments in three to five years, and NVIDIA will be a huge player. In fact, it’s possible that those shipments could represent as much as $750 million per year for the company and competitor AMD. Investors receive a 1.4% dividend. The Merrill Lynch price objective is $35. The consensus target is $31.58, and the stock closed Friday at $29.63.

While the Apple fallout is by no means inconsequential, combined with the recent market panic and selling, it has knocked these top companies way down, and fast.

Aggressive investors looking to add alpha for 2016 should consider positions.

January 13 - 19, 2016

financialmirror.com | WORLD | 19

Leave no refugee behind

By Helen Clark and Filippo Grandi The world has entered an era in which people are being displaced at an unprecedented rate.

In 2014, conflict and persecution forced 42,500 people a day to flee their homes, nearly quadruple the number from 2010.

Almost 60 million people are now forcibly displaced – a crisis unmatched since World War II. This is unacceptable, but it is not inevitable. In 1945, the world responded to the deadliest conflict in human history by establishing the United Nations. Today, as heads of UN refugee and development agencies, we call for the world to respond to this monumental upheaval by giving people the tools they need to rebuild their lives. We believe that the path forward begins with the 2030 Sustainable Development Goals, which the UN, affirming a pledge to “leave no one behind” in the fight against poverty and inequality, adopted unanimously last September.

The international community’s current approach to displacement relies mainly on humanitarian aid, which provides rapid, lifesaving relief while the search for a permanent solution is underway. But solutions are proving more elusive than ever. Just 1% of refugees were able to return home in 2014. The vast majority of those displaced spend not days or months in exile, but years or decades, even entire lifetimes. They risk being left behind.

Consider Somaya, a third-generation refugee in Kenya.

Decades ago, her grandmother fled to the Hagadera refugee camp to escape the brutal conflict in Somalia. Her mother was born there, and so was she. Neither of them has set foot outside the five-square-mile (13 square kilometers) camp.

They still live out of her grandmother’s suitcases, waiting for a chance to move on.

Like Somaya, most refugees live in the developing world.

And yet, too often, development organisations that could

Global child poverty rates in perspective According to the OECD, child poverty is measured as the proportion of children living in households with an equivalised disposable income of less than half of the median income of the total population. Just how prevalent is child poverty across the world’s developed economies? While countries in northern Europe have the lowest rates of child poverty, according to the OECD, the highest rates can be found in Israel, Turkey and Mexico where over a quarter of children live in poor families. Child poverty is seven times higher in Israel and Turkey than in lowest-placed Denmark. Since 2007, child poverty has risen in over two-thirds of OECD countries with considerable increases seen in Turkey, Spain and Greece. (Source: Statista)

“Most refugees live in the developing world. And yet, too often, development organisations that could provide refugees with a hand up face insufficient funding and stiff regulations that prevent them from addressing refugees’ needs” provide refugees with a hand up face insufficient funding and stiff regulations that prevent them from addressing refugees’ needs.

Long-term displacement inflicts profound burdens on people like Somaya. Refugees too often face limits on their ability to work and move freely, making it all but impossible to provide for their families or to contribute to their host communities. They live in limbo, with no choice but to rely on humanitarian aid. Or they are obliged to seek a living in the informal economy, where they risk falling victim to arrest, sexual exploitation, child labour, or other abuses.

Consider another example: Anas, a 13-year-old Syrian refugee in Lebanon. His family cannot survive without the $5 he earns every day. So, instead of going to school, he sorts lumps of coal for sale as fuel. Refugees like Anas struggle to exercise precisely those rights – to education, health care, freedom of movement, and access to work, land, and housing – that are essential to escaping poverty.

Fixing this will require political and economic changes that allow the development community to provide more support. The relationship between development and displacement is clear, and we need to begin to consider these challenges as areas of joint responsibility.

Large-scale displacement strains public resources, even in middle-income countries; without sufficient outside help, it can undo years of progress. Until the world gives more and better support to host countries and the refugees living there, we can expect to pay ever-larger sums for humanitarian programmes that never end.

But there is another side to the coin. When displaced people are allowed to develop their skills and pursue their aspirations, they create new opportunities for growth. This is why development agencies must have more flexibility to address new cycles of poverty and fragility – wherever they appear – before they spiral out of control.

The time has come to discard the clichéd image of refugees as passive recipients of aid, sitting idly with outstretched hands. If anything, that image reflects circumstances that have been imposed upon refugees and reinforced by the world’s incomplete response. Refugees are entrepreneurs. They are artists. They are teachers, engineers, and workers of all types. They are a rich source of human capital that we are failing to cultivate.

The international community can no longer afford to ignore so much potential or to sit by while the most vulnerable are pushed to the margins of society. As news headlines call attention to the human costs of these tragedies, we must remember that we have the choice to respond with more than just shock.

We can reject the economic exclusion of those who live among us but were born somewhere else. We can redouble our efforts to seek political solutions to conflict and persecution. We can empower humanitarian and development partners to work together from the moment a crisis erupts. In short, we can honor our pledge to “leave no one behind.”

Helen Clark, Administrator of the United Nations Development Programme, is a former prime minister of New Zealand. Filippo Grandi is United Nations High Commissioner for Refugees. © Project Syndicate, 2016 - www.project-syndicate.org

January 13 - 19, 2016

20 | BACK PAGE | financialmirror.com

The Chinese economy’s Great Wall

By Mohamed A. El-Erian Αuthor of When Markets Collide The recent decline in China’s currency, the renminbi, which has fueled turmoil in Chinese stock markets and drove the government to suspend trading twice last week, highlights a major challenge facing the country: how to balance its domestic and international economic obligations.

The approach the authorities take will have a major impact on the wellbeing of the global economy.

The 2008 global financial crisis, coupled with the disappointing recovery in the advanced economies that followed, injected a new urgency into China’s efforts to shift its growth model from one based on investment and external demand to one underpinned by domestic consumption.

Navigating such a structural transition without causing a sharp decline in economic growth would be difficult for any country. The challenge is even greater for a country as large and complex as China, especially given today’s environment of sluggish global growth.

For years, China’s government sought to broaden equity ownership, thereby providing more Chinese citizens with a stake in a successful transition to a market economy. But, like the United States’ effort to expand home ownership in the years preceding the 2008 crisis, Chinese policies went too far, creating a financially unsustainable situation that implied the possibility of major price declines and dislocations.

As a result, the adjustment challenge has grown dramatically. With Chinese companies no longer able to sell a rapidly increasing volume of products abroad and support further expansion of productive capacity, the economy has lost some important growth, employment, and wage engines. The resulting economic slowdown has undermined the government’s capacity to maintain inflated asset prices and avoid pockets of credit distress.

In an effort to limit the detrimental impact of all this on citizens’ wellbeing, Chinese officials have been guiding the currency lower. A surprise devaluation last August has been followed by a number of lower daily fixes in the onshore

exchange rate, all intended to make Chinese goods more attractive abroad, while accelerating import substitution at home. The renminbi has depreciated even more in the offshore market.

China’s currency devaluations are consistent with a broader trend among both emerging and advanced economies in recent years. Soon after the global financial crisis, the US relied heavily on expansionary monetary policy, characterized by near-zero interest rates and large-scale asset purchases, which weakened the dollar, thereby boosting exports. More recently, the European Central Bank has adopted a similar approach, guiding the euro downward in an effort to boost domestic activity.

But in pursuing its domestic objectives, China risks inadvertently amplifying global financial instability.

Specifically, markets worry that renminbi devaluation could “steal” growth from other countries, including those that have far more foreign debt and far less robust financial cushions than China, which maintains ample international reserves.

This concern speaks to the even more challenging balancing act that China must perform as it seeks to play the

role in global economic governance that its economic weight warrants. After all, China is now the world’s second-largest economy (and, by some non-market measures, the largest).

And, indeed, China has lately been showing greater interest in gradually internationalising its financial system.

Notably, it recently succeeded in persuading the International Monetary Fund to add the renminbi to the basket of currencies that determines the value of the Special Drawing Right, the unit the IMF uses in dealing with its 188 member countries.

That step – which places the renminbi on par with the major global currencies (the US dollar, the euro, the British pound, and the Japanese yen) – will enhance public- and private-sector acceptance of China’s currency in the international monetary system. At the same time, it created the expectation – though not the obligation – that China will refrain from aggravating global financial instability.

There will come a time when China’s domestic and international responsibilities will again be relatively well aligned. But that time is not now; and, given the country’s tricky ongoing structural transition, it probably will not come anytime soon. In the meantime, it seems likely that China will continue to feel compelled to place its domestic obligations first, but in a nuanced way aimed at avoiding large disruptive tipping points for the global economy.

Whether that will be enough to avoid disorderly outcomes, however, is not totally assured.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, is Chairman of US President Barack Obama’s Global Development Council and author of the forthcoming book The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. © Project Syndicate, 2016 - www.project-syndicate.org

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