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Issue No. 1171 €1.00 February 3 - 9, 2016
BOCY hikes provisions on €400m losses NO NEED FOR FRESH CAPITAL, CET-1 RATIO STRONG AT 14%
The 2015 successes and failures of this government By Antony Loizou - SEE PAGE 13
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February 3 - 9, 2016
2 | OPINION | financialmirror.com
FinancialMirror More Iran opportunities ahead Published every Wednesday by Financial Mirror Ltd.
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Now that the Cyprus economy is improving, its energy and political hub status in the eastern Mediterranean is elevated, and growing bi-lateral trade opportunities with Iran are cropping up, the employers’ and industrialists federation OEV has rightly announced a trade mission to Tehran, scheduled for early-March. The timing of the visit could not have been better, as soon after the western economic sanctions on Iran were lifted, the rating agency Moody’s declared that “Iran is fiscally and structurally well placed for international re-emergence.” This vote of confidence to the second largest economy in the Middle East, after Saudi Arabia, has come to overshadow recent noises about Iran’s missile programme, with the U.S. once again imposing new sanctions and jeopardising the momentum that has so far succeeded in getting Tehran to negotiate, or at least discuss, issues that would have been unthinkable for the hardliners a decade ago. What is attractive for Cyprus is not just the opportunities created for shipping and construction companies that need to join forces with larger international peers in order to get a slice of the
action. Iran’s Finance Minister has said that the country will need $90 bln a year in external financing to meet its 8% economic growth target. Although the Cyprus banking sector is as dry as the Persian desert, when it comes to financing, however, there are major fund managers who might be keen to enter the market and share in the boom that is cure to follow. Fortunately, the “disadvantage” of being a small and defenceless nation allows Cyprus to establish good relations with all its neighbours, as last week’s tripartite summit with the prime ministers of Greece and Israel has shown, while a similarly warm cooperation is already underway with Egypt. Just as the three leaders sought to reassure Turkey that the Greece-Cyprus-Israel alliance should not be deemed as a threat, the same must also apply to Israel, with Cyprus and Greece jointly making inroads to Iran and reassuring the Israelis that any commercial tie-up with Tehran is not a threat either. If President Anastasiades has the courage to put aside for a few days the childish petty politics that have gripped our party leaders, desperate to get reelected in the May parliamentary elections, then he should probably join the OEV trade mission and give the delegation a far higher status with his presence in Tehran.
THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO
M&As up 23%, VAT to rise in 2007 Mergers and acquisitions hit CYP 106 mln in the past year, with Greek investors snapping up Cyprus companies, while a higher VAT rate is to be introduced in 2007, according to the Financial Mirror issue 656, on February 1, 2006. M&As up: Mergers and acquisitions climbed 23% in 2005 to CYP 106 mln as Greek investors continued to snap up Cyprus bargain companies. By far, the largest deal still in progress is the takeover by 3E (Hellenic Bottling Co.) of Lanitis Bros for CYP 43 mln, while the second biggest was the CYP 21.6 mln paid
by Carrefour Marinopoulos for Chris Cash & Carry. VAT rise: VAT is expected to rise from the end of 2007 on food and pharmaceuticals, from 0 to 5% and on restaurant bills from 8% to 15%, while land purchases will also be subject to the higher rate, as new member states were up in arms in the rate hike, while older EU nations were allowed to delay their higher VAT. LTV in dual listing: Subscriber channel Lumiere TV is waiting for the green light from the SEC to list its shares on both the Cyprus and Athens stock exchanges, some time by the end of the first quarter, based on higher earnings of CYP 12.5 mln in 2004,. Compared to 11.5 mln in 2003.
CAIR pilots strike: Cyprus Airways pilots will stage a four-hour warning strike on February 9, protesting at the way the board and the government were handling the rescue plan, in an effort to win the European Commission’s approval for a CYP 58 mln loan. The unions say the company is trying to slip in further cutbacks through the back door. Marcos return: Marcos Baghdatis is headed straight home when he returns on Friday, after making it to the final of the Australian Tennis Ope, only to lose to world champ Roger Federer. Marcos’ mother Andri was hospitalised with stomach pains an was subjected to a minor gallstone operation.
restrictions including that importers also take up a large part of local production to compensate for the loss of local farmers and dairy makers. Imia tension: Greece called on Turkey to withdraw its warships from the dispute Aegean island of Imia, warning that it did not want to send in reinforcements that would lead to an escalation. Foreign Minister Theodoros
Pangalos dismissed Turkish claims on the barren island, as an effort to doubt Greek sovereign rights in the Aegean, while Turkish opposition leader, Abdullah Gul of the pro-Islamic Welfare Party, called on Ankara to use greater force. Keo Pepsi bid: Keo has lost its bid to take over the Pepsi bottler from Loizos Louca & Son, as rival brewer Carlsberg and Montano water bottler Photiades Group is reported to have put in a higher offer of CYP 11.5 mln. In other deals, Pittas Dairis took over Kyknos, maker of the Pantelakis milk brand in an effort to expand its production facility and fend off competition from the Shacolas-Christis Dairy merger. Interamerican deal: Nicos Shacolas and Demetris Kontominas have concluded the takeover of Interamerican by the NKS Group, with the new sales force expected to reach 400 people and annual premium income of more than CYP 30 mln.
20 YEARS AGO
EU protest over imports, Greece-Turkey tension The EU issued a strong protest note to the Cypriot delegation in Brussels over its delay to lift import controls on European beef and dairy, while tensions rose over Turkish threats over the Aegean island of Imia, prompting Greece to send in its navy, according to the Financial Mirror issue 147, on January 31, 1996. EU protest: The European Commission issued a strongly worded protest note to Cyprus, deploring the island’s import policy on beef and cheese with
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February 3 - 9, 2016
financialmirror.com | CYPRUS | 3
BOCY issues warning for €400 mln losses Dogged by NPLs, provisions hiked to €1 blnfor 2015 The Bank of Cyprus said it will more than double its provisions for 2015 to EUR 1 bln, effectively resulting in an after tax reporting of EUR 400 mln, it announced on Tuesday, adding, however, that it will not need to raise further capital as its Common Equity Tier 1 (CET1) ratio “will continue to be strong” at 14%. The bank, that was twice bailed out by depositors and shareholders, and burdened in 2013 with a colossal debt of about EUR 11 bln from the now-defunct Laiki Popular Bank, said that its non-performing loans will “improve” to 50% of its loan-book and that it has now reduced its ECB-funded ‘emergency liquidity allowance’ to EUR 3.5 bln. In a statement for its preliminary financial results for 2015, that will be put to the board on February 25, the bank said that as a result of amendments to the assumptions in its provisioning methodologies, provision coverage levels against the Bank’s loans in arrears for more than 90 days will improve to levels approaching 50%. The bank also expects a EUR 0.7 bln reduction in the loans in arrears for more than 90 days, for the fourth quarter of 2015. “The Bank expects to increase its provisioning levels by EUR 0.6 bln to a full-year charge of about EUR 1 bln, resulting in an expected full-year loss after tax of EUR 0.4 bln,” a press release said . It noted that “were the bank not to make any changes to its provisioning assumptions, the profit after tax for the year 2015 would have been about EUR 100 mln. The bank’s CET1 ratio would, in these circumstances, exceed 16%”. Bank of Cyprus announced profits of EUR 73 mln for the first nine months of the year, marginally down from the same three quarters the previous year, hampered by the lossmaking Russian subsidiary Uniastrum that was only disposed of in September 2015. The changes provisioning assumptions relate to extending recovery periods and applying additional realisation discounts on certain portfolios of problem loans and they “will significantly bridge the regulatory dialogue with the ECB and explicitly bolster the bank’s provisioning levels”. The statement said that the bank’s CET1 ratio (transitional basis) will continue to be strong at about 14%, remaining higher than the minimum required ratio of 11.75% relating to the Pillar II capital requirement, “confirming that there is no need for the Group to raise additional capital”. During the fourth quarter of 2015 and during January 2016, the bank said it completed the restructuring of a number of large lending exposures and that further reductions for the early quarters of 2016 are expected as the restructuring efforts continue. It also said that the bank’s liquidity position continues to improve, benefiting from continuing deposit inflows, with customer deposits growing by EUR 0.6 bln during the fourth quarter of 2015 (4% increase) and that EUR 1.4 bln of ELA funding has been repaid post 30 September 2015, reducing it to a current level of EUR 3.5 bln. Only last week, Moody’s warned that “while the recovering economy is supporting loan recoveries and depositor confidence, Bank of Cyprus’ and Hellenic Bank’s extremely weak loan quality will only gradually improve in 2016.” “The economic recovery and a raft of new legislative measures to help lenders recover unpaid loans are improving Bank of Cyprus’ and Hellenic Bank’s restructuring prospects, funding conditions as well as their profitability. However, the large stocks of problem loans will take several years to work through, with the weak real-estate market hampering collateral sales,” said Moody’s analyst Melina Skouridou. However, the rating agency recognised that “because of the increased economic activity and strengthening depositor confidence, customer deposits are starting to rebuild gradually.” Although steadily declining, Bank of Cyprus remains
dependent on ELA, while Hellenic Bank faced fewer outflows during the crisis and maintains a stronger deposit-based funding profile, the Moody’s report said. Bank of Cyprus is ahead in terms of restructuring and recovering on problem loans. As a result, its profitability, which also benefits from recoveries on the discounted assets it acquired when it took over Laiki’s domestic business in 2013, is recovering at a faster pace. However, both banks’ profits will remain modest the coming years as they build up their low levels of provisions. Accounting for around 41% of problem loans, the banks’ loan loss provisions provide a limited buffer against losses from their high stock of NPLs which continues to pose risks to their capital levels. The ratio of non-performing loans to gross loans, which stood at 56.9% of total lending for Hellenic Bank and 52.5% for Bank of Cyprus as of September 2015, will remain high over the foreseeable future.
February 3 - 9, 2016
4 | CYPRUS | financialmirror.com
Tourism growth to continue The positive trend in tourism is expected to continue this year, Tourism and Energy Minister Yiorgos Lakkotrypis said, adding that the major challenges for the world tourist industry will affect Cyprus as well. In his address to the 38th conference of the Cyprus Hotel Association (CHA), Lakkotrypis said that the unrest in the geopolitical scene and the continuing threat of terrorism is expected to negatively affect global tourism and in particular in the eastern Mediterranean and the Middle East, with which potential visitors are connecting Cyprus due to geographical proximity. He also pointed out the risk of a domino effect on the sustainability of large tour operators because of losses they suffer in certain countries, with possible negative economic fallout on other destinations. He noted, however, that government efforts to upgrade the tourist product and increase the flow of tourists to Cyprus will continue. Lakkotrypis said that 2015 was not an easy year for tourism and that the achievements of local tourism with nearly a 9% increase in arrivals were not coincidental and have little to do with the problems in neighbouring countries. Referring to the increase in arrivals, the Minister said that in 2015 there was a large influx of tourists by many of the target markets: 19.5% from the UK, 30% from Germany, 43% from Israel, 38% from Greece, 25% from France, 32% from the Netherlands, 35% from Austria, 49% from Poland and 23% from the Ukraine. These increases outweighed the inevitable reductions in arrivals from Russia and the Nordic countries. At the same time he referred to large tourist projects that will diversify Cyprus by competing destinations like new golf developments, additional marinas and the creation of an integrated casino-resort. He also said that the Ministry intends to substantially improve the air connectivity of Cyprus and facilitate visas from countries considered pure tourists exporters like China. The government is proceeding with establishing five authorised centres for visa application in China with a view to creating another ten in the future.
GRS appointed H&M recruitment partner in Cyprus Store recruits managers, to hire 70-80 more Leading Cyprus based recruitment firm, GRS Global Recruitment Solutions, has been appointed by Swedish multinational retail-clothing company, H&M Hennes & Mauritz AB, as their official recruitment partner in Cyprus. GRS will be working closely with H&M to attract and select applicable candidates for their new store, due to open in Nicosia in September 2016. Leading the team will be Donna Stephenson, co-founder and Director at GRS Recruitment, who possesses indepth knowledge and expertise of the market as well as with the networking skills required to source the most applicable candidates. Working alongside Donna will be three other GRS staff members: business manager, Philippa Stephanou, who has been working at GRS since 2011 and has established herself as a
successful recruitment consultant with strong business relations and excellent recruitment campaign management experience; recruitment consultant Annita Paliou, who has been working at GRS since 2013 along with the recruitment skills, she brings a creative and positive energy with excellent communication skills, and recruitment team assistant Lorraine Brown, who began her recruitment career in London in 2005 and now contributes to the continued success of GRS across Cyprus. All four team members will play a fundamental role throughout the recruitment process for H&M Cyprus. The first phase of recruitment commenced on January 18 with the attraction and selection of the store manager and assistant store managers, department managers and visual merchandisers.
Attraction and selection of the sales advisors will commence later in the year in the summer period, where the company is looking to recruit around 70-80 personnel on a full and part time basis. Greek and English fluency is a must for all available positions. As one of the world’s largest fashion retailers, H&M prides itself on excellence, passion and simplicity. To work in this busy, fast-paced retail environment you need to possess excellent communication skills, motivation, enthusiasm, good common sense and strong leadership skills. To learn more about any available opportunities with H&M Cyprus, contact GRS Recruitment today on +357 25342720 (Limassol) or +357 22769369 (Nicosia), or email hmcyprus@grsrecruitment.com
Unemployment stable at 15.7% The Euro area unemployment rate fell to 10.4% in December, down from 10.5% in November, and from 11.4% in December 2014. This is the lowest rate recorded in the Euro area since September 2011, according to figures published today by Eurostat. In Cyprus, the unemployment rate remained stable at 15.7% in December, down from 16.5% in December 2014, placing fourth highest in EU28. According to the same figures, the EU28 unemployment rate was 9.0% in December, stable compared to November, and down from 9.9% in December 2014. This is the lowest rate recorded in the EU28 since June 2009. In the same month 4,454,000 young persons (under 25) were unemployed in the EU28, of whom 3,057,000 in the euro area. In Cyprus the respective rate has fallen to 31.1% and remains stable through the laste quarter of 2015, lower compared to 34.3% last year.
13 week T-bills yield 0.54% The Public Debt Management Office announced that during Monday’s 13-week treasury bills auction, tenders for a total amount of EUR 191 mln were submitted, out of which, 120 mln total nominal value have been accepted with a weighted average yield of 0.54%. The accepted yields ranged between 0.42% and 0.69%. The yield was increased in relation with the auction on January 4, where the average weighted yield was 0.48%. The issue date of the bills is 5 February 2016 and the maturity date 6 May 2016.
SIF study by end of March A new study on the long-term viability of the Social Insurance Fund will be ready by the end of March. The study will be ready based on the timetable set by the International Labour Office and will not consider the strict references set by Cyprus’ international lenders, the Troika (EC, ECB, IMF), in the previous study in 2013.
Shipping has weathered the crisis Hadjiyiannis elected shipowners’ president
The shipping industry has weathered the global and Cyprus financial crises, demonstrating “remarkable resilience,” Transport Minister Marios Demetriades said, adding that the sector is looking to the future with confidence. Addressing the annual general meeting of the Cyprus Union of Shipowners at the Athens Ledra Hotel, the Minister thanked the Union for trusting, supporting and promoting the Cyprus flag and Cyprus shipping, since its establishment. Shipping is vital to Cyprus, Demetriades said, noting that it constitutes an important pillar for the country’s development, by attracting foreign investment. During the members’ meeting, the Union of Shipowners elected Andreas Hadjiyiannis as its new President and Polys
L. Haji-Ioannou was reappointed as Honorary President. Also on the Executive Committee are Vice President Anastassis David and Christos Chrysanthou, and outgoing President George Mouskas. The remaining members and officers of the board are Ninos Yamakis (Treasurer), Elias Angelakos, Zacharias Zachariou, Mark Clerides, Dr. John Coustas, Antonis Mikellides, Nicole Mylonas, George Tsavliris, Dr. Nicolas Hadjiyiannis and Nikos V. Hajioannou. The elections were followed by an extensive discussion of matters pertaining to the strengthening of the cooperation between the government and shipowners for further improvement of the Cyprus flag and for enhancing the Cyprus shipping role in the national economy.
February 3 - 9, 2016
financialmirror.com | CYPRUS | 5
The impact of Zohr on the development and export of East Med gas By Mona Sukkarieh
Balancing competing tensions: Warwick’s Prof. Heracleous on ambidextrous companies Warwick Business School Professor of Business Strategy Loizos Heracleous shared with over 200 industry professionals, including Finance Minister Harris Georgiades, a lecture on the essence of business strategy and how companies can achieve ambidexterity. Organised by the European Institute of Management and Finance (EIMF) and Plus500, the Israel-based global trading platform with offices in Cyprus, Prof. Heracleous’s hour-long discussion focused on the essence of business strategy and what it takes for a company to become ambidextrous. For Marios Siathas, General Manager of EIMF, it was the right economic climate to organise this lecture, considering that “the worst is really behind us and a bright future lies ahead.” Marios credited the local business community for this financial upsurge, remarking on how “their perseverance and hard work managed to maintain the level of services and provision of support at the highest standard.” Ofir Chudin, CEO of Plus500CY Ltd., shared this sentiment, adding that the island “has demonstrated time and time again that, even after cataclysmic events such as the economic and banking crises of 2013, it has the strong determination and the ability to bounce back, bigger and stronger.” Taking as points of reference case studies involving companies such as Apple, Toyota, Singapore Airlines, Uber, airbnb, Narayana Hrudayalaya Hospitals and NASA, Prof. Heracleous challenged the audience to think in terms of balancing the competing
tensions of exploration — prowling for new opportunities—and exploitation — using available resources to their fullest. Heracleous stressed the fact that balance is imperative and that companies have “a limited lifespan if you only exploit or only explore.” He cited the case of Xerox in the 1970s and 80s and its inability to integrate the work being done by its Palo Alto Research Centre (PARC). More specifically, Heracleous touched upon the reasons for Xerox’s slowdown, mentioning the favouring of the dominant logic, disjointed inventions that were cast aside, and politicking “more vicious than that in [former US President Richard] Nixon’s government” as the main culprits behind the company’s failure. He then focused exclusively on Apple and “the level of efficiency with which innovation, design, exceptional financial performance and premium offerings are accomplished.” Banking on Apple as his primary example, Prof. Heracleous explained that the key to ambidexterity is to apply a five-tiered framework that balances competing tensions. Most importantly, he said, this model allows a company to “make strategic use of technology,” “configure [company] culture and processes,” make “investment decisions beyond financials towards ambidexterity,” and “harness the power of business systems and networks,” all linked by “an ambidextrous leader” who’s willing to emphasise both exploitation and exploration.
The discovery of the Zohr offshore gasfield complicates the export of east Mediterranean gas to Egypt, though it does not necessarily rule it out. Egyptian production is declining, and demand is rising, fuelled by economic development, low prices and a fast growing population. Zohr, in addition to other fields expected to be developed by 2020 (West Nile Delta, North Alexandria, Atoll), will reduce and probably also eliminate the need for imports by the early 2020s. Until then, Egypt will still need to import gas. Which leaves the door somewhat open for East Med gas, less expensive than LNG. But, the short timeframe makes this option challenging, particularly that two of the three gas fields in question (Aphrodite and Leviathan) are not expected to be developed before 2019-2020. In the rush to supply the local Egyptian market before the need for imports dissipates, Tamar appears to have an advantage. But even here there are challenges: the only agreement being negotiated between the Tamar partners and clients to supply the local Egyptian market is the preliminary deal with Dolphinus for the supply of 5 bcm of gas over three years. Two obstacles stand in the way: The Egyptian decision to freeze gas imports talks following the ICC ruling in favour of Israeli companies (which required Egypt to pay $1.7 bln), and EMG’s unwillingness to cooperate under current conditions (EMG being the operator of the pipeline that will be used to transfer the gas). Both can be managed if there is a will. For Cyprus in particular, there is the
possibility to pipe gas to another regional market via Egypt: Jordan, a market with a rising gas consumption and looking for an alternative to relatively expensive LNG imports. But this would involve using a pipeline that was the target of over a dozen attacks since 2011. Chronic instability in this part of Egypt is a major challenge. In addition, since much of Zohr will be absorbed by the local market, this leaves two Egyptian LNG plants still needing to be refilled. This situation puts Israeli and Cypriot gas in competition, with, on the one side, an advantage for Tamar, already in production, possibly offset by the less “problematic”, from a socio-political perspective, Cypriot gas. Also in favour of Cypriot gas was the acquisition by BG of a stake in Block 12, which improves the prospects of sending Aphrodite gas to Idku. Though it remains to be seen what Shell intends to do with the LNG facility. This analysis is part of a presentation given at Chatham House by MESP co-founder Mona Sukkarieh on January 26, during session 5 of the MENA Energy Conference, on “North Africa: Security, Stability, and Investment”. www.mesp.me
February 3 - 9, 2016
6 | COMMENT | financialmirror.com
Birth of a geopolitical bloc: Israel-Greece-Cyprus axis The proximate cause may be natural gas, but the ultimate cause of the new alignment is Turkey
ANALYSIS: HAARETZ By Arye Mekel Last week saw an unprecedented flurry of diplomatic activity that culminated with a summit of the Israeli, Greek and Cypriot leaders in Nicosia. For Israel, this is a win-win development, creating a new geopolitical bloc in the eastern Mediterranean in which closer relations with Greece and Cyprus counterbalance Turkey to some extent. It also has some military and security significance. On Tuesday, Defense Minister Moshe Ya’alon paid an official visit to Athens as the guest of his Greek counterpart Panos Kammenos. On Wednesday, Prime Minister Benjamin Netanyahu and several cabinet colleagues met in Jerusalem with Greek Prime Minister Alexis Tsipras and around a dozen Greek cabinet members. On Thursday, the leaders of all three countries met in Nicosia. Ya’alon’s visit to Greece followed intensive defense cooperation between the two states in recent years, consisting mainly of frequent joint air force and navy maneuvers. Since 2014, an Israel Defense Forces attache has been stationed in Athens, with responsibility for Cyprus as well. In a statement at a press conference with the Greek defense minister, Ya’alon said Turkey supports terror and buys petroleum from the Islamic State organisation. At the conclusion of the Nicosia summit, which Netanyahu termed “historic”, Netanyahu, Tsipras and President Nicos Anastasiades issued a joint statement saying their cooperation was not exclusive, making it clear that Turkey could join the group. The leaders of Greece and Cyprus stressed that the cooperation is not aimed against any other state, hinting at Turkey. The Turkish shadow hovered over all of last week’s meetings. The reports of Israel’s talks with Turkey to achieve a reconciliation agreement, with the United States’ encouragement, pushed the Greeks and Cypriots to expand their cooperation with Israel. Although Greece claims its relations with Turkey are normal and despite the talks between the Turkish and Greek leaders in Cyprus in a bid to solve the 40-year crisis, Athens and Nicosia still view Turkey as a potential enemy.
Greece says Turkey is deliberately moving masses of Arab refugees into it, to harm it, and Cyprus is still partially under Turkish occupation, which began in 1974. Tsipras’ policy toward Israel is surprising and impressive. Tsipras, whose left-wing Syriza party was very critical of Israel, is conducting a centrist policy both inside Greece and in foreign affairs. He is continuing to upgrade his country’s relations with Israel, which began in 2010. Since relations began to improve, Greece has feared that an Israeli-Turkish reconciliation would be at its expense. Israel is making efforts to allay this fear. Tsipras wants to prove Greece has its own status in the east Mediterranean and has even announced his desire to help solve the IsraeliPalestinian conflict. Greece is prepared to help Israel in the European Union institutions and has already proved it when it recently headed the opponents to marking products made in the West Bank settlements. This is a sharp change in Greek’s policy in the EU. Until 2010, Greece was one of the least friendly states to Israel, alongside Portugal and Ireland. Cyprus supports Greece’s positions almost automatically, so that gives Greece a double vote in EU institutions. Another Israeli advantage is that it may encourage Syria to be more flexible in its negotiations with Israel over normalising the relations. Cyprus of course has its own score with Turkey and is also
interested in demonstrating its independence to the Turks. Israel and Cyprus have close military ties, which began to be forged a few years ago in the days of Communist President Demetris Christofias. This policy is being upheld by the conservative Anastasiades. The joint statement in Nicosia after the tripartite summit said the states’ cooperation would focus on seven areas — energy, tourism, research and technology, environment, water, migration and fighting terror. It was also decided to examine relaunching the East Med gas pipeline project, which would funnel Israeli natural gas to Europe via Cyprus and Greece. This last issue is far from concluded. Israel doesn’t know how much gas it will have, whether it will be able to export it, to whom and how. It has been holding talks with Greece and Cyprus on this for several years with no real results. Laying a gas pipeline is possible, but is technically very complicated and will cost several billion dollars. Turkish companies are also interested in the Israeli gas, creating a further incentive for Greece and Cyprus to move ahead in this area. Arye Mekel, Israel’s ambassador to Greece from 2010 to 2014, is a senior research associate at the Begin-Sadat Center for Strategic Studies, Bar-Ilan University. www.haaretz.com
Is Turkey the odd man out as Egypt, Greece and Cyprus cozy up? ANALYSIS: AL MONITOR By Ahmed Fouad
On January 4, Cypriot Minister of Agriculture Nicos Kouyialis visited Egypt and met with President Abdel Fattah al-Sisi and a number of Egyptian officials, including the ministers of agriculture and environment. Kouyialis said his visit was to discuss joint cooperation projects to be implemented between Egypt and Cyprus in aquaculture and among Egypt, Greece and Cyprus with regard to land reclamation and the development of new agricultural methods. The Cypriot ambassador in Egypt, Haris Moritsis, also met with Egyptian Minister of Transportation Saad al-Geyoushi on January 14 to discuss cooperation between Egypt and Cyprus in maritime transport. Egyptian Ambassador Hossam Zaki, who is assistant foreign minister for European affairs, said in a January 17 statement to Egypt’s Al-Youm Al-Sabea newspaper that he is preparing for another meeting with officials of the tripartite summit projects. Cooperation among the countries was the product of the Cairo Declaration, which the three presidents forged during a November 2014 summit. The declaration includes a preliminary agreement among the countries on their visions for political, economic and security cooperation, especially with regard to energy and counterterrorism. Their
cooperation is expected to introduce a broader regional dialogue between the Arab world and the European Union. Regarding opportunities to increase trade, Kouyialis said in a press statement, “Egypt views Cyprus as its gate to the EU, while Cyprus views Egypt as its gate to the Arab world and Africa.” The pursuit of increased trade exchange between the three countries might not be the only reason for the development of relations. There may be more important common interests that pushed them for developing their cooperation. The need to create new economic alliances beyond the EU has perhaps become a priority for Greek leaders, especially since the economic crisis has cast a shadow over Greece since 2010. This situation prompted European Commission President JeanClaude Juncker to threaten to kick Greece out of the eurozone should it fail to comply with the EU’s bailout programme. Greece took out numerous EU loans to pay off its debts. The country defaulted on some of its debts and still might stall in paying off some others, most recently a 7 bln euro bridge loan in July. The economic crisis has led to a decline in foreign direct investment stock in Greece, from $40.3 bln in 2010 to $24.8 bln in 2012. EU direct investment stock in Greece declined from $33.8 bln in 2010 to $19.1 bln in 2012. Economist Farag Abdel Fattah told Al-
Monitor such declines may continue, “especially in light of the increasing tensions in the eurozone from 2013 until 2015.” “Greece is unlikely to return as a hub for EU investors, and the latter are unlikely to attract Greek investors. Therefore, Greece is looking for new partnerships with other countries, including Egypt,” he said. Abdel Fattah expects the same for Cyprus, whose economic crisis began in 2012 and peaked in 2013. According to the UN Conference on Trade and Development, there are no official foreign direct investment statistics for many countries, including Cyprus and Greece after 2012. However, the 2012 figures show EU direct investment flows in Cyprus fell 42%, declining from $796 mln in 2011 to $461 mln in 2012. The yearly decline in investment flowing from the EU to Cyprus did not result in a corresponding drop in EU direct investment stock in Cyprus. On the other hand, Cyprus’ direct investment stock in EU countries dropped significantly from $8.33 bln in 2011 to $3.6 bln in 2012, a decline of 56.8%. Following the economic problems of Greece and Cyprus with the EU, both countries developed relations with Russia — Egypt’s most prominent ally, currently. Cypriot President Nicos Anastasiades declared in February 2015 that his country would allow Russia to establish a military base in Cyprus. The two states signed nine military cooperation agreements in the
same month. As is the nature of shifting relationships in the region, these new rapprochements may have much to do with Turkey’s strained relations with both Russia and Egypt, especially since there’s an old conflict between Greece, Cyprus and Turkey about gas discoveries in the Mediterranean Sea. During the Cairo Declaration conference in November 2014, Turkey was warned to stop natural gas exploration in the Mediterranean Sea without a clear demarcation of the maritime borders to protect each state’s discoveries and gas fields. Turkey responded by commissioning naval forces to engage in the area to protect against any actions toward its projects of oil and gas excavation. This suggested that the gas exploration operations may stir conflict among Egypt, Cyprus, Greece and Turkey. Yasri al-Ezbawi, a researcher at Al-Ahram Centre for Political and Strategic Studies,told Al-Monitor at the time that Egypt, as a preemptive step, rushed to ally with Cyprus and Greece. Ahmed Fouad is an Egyptian journalist working as newsroom assistant manager for Al-Shorouk. He specialises in coverage of Islamists and analysis of the political situation in Egypt, especially after June 30, 2013. http://www.al-monitor.com
February 3 - 9, 2016
COMMENT | 7
The need for an entrepreneurial ecosystem By George Theocharides Cyprus International Institute of Management
I recently took part in an entrepreneurial educational field trip to Athens organised by CIIM’s Entrepreneurship and Innovation Centre (ENTICE). This is part of a series of educational field trips that CIIM organises every year that includes a second entrepreneurial field trip to Tel Aviv. The purpose was to visit various organisations (stakeholders) that make up the entrepreneurial ecosystem in Greece as well as various successful start-up companies and entrepreneurs. Given the current state of the Greek economy and the problems that it has been facing for many years, my expectations were very low. To my surprise, I discovered that Greece (yes, Greece!) has a well-functioning entrepreneurial ecosystem that promotes and supports innovation and the creation of new businesses that are so vital for the country.
Greece’s entrepreneurial ecosystem The programme included visits to institutional organisations promoting the creation of the entrepreneurship and innovation ecosystem (TANEO, PRAXI, Corallia Clusters Initiative), accelerator and co-working spaces (Egg, IQbility), innovation and entrepreneurship funding bodies (Attica Ventures, PJ Tech Catalyst), successful start-up and spin off companies (Pollfish, Covve, i-sieve and
Apivita) and a half day of lectures at ALBA Graduate Business School. TANEO is a Greek state-sponsored and privately funded, independently managed “fund of funds” that uses its funding to invest through venture capital funds in Greek start-up companies. PRAXI/HELP-FORWARD Network, on the other hand, is a national technology transfer organisation that aims to transfer knowledge, promote innovation and entrepreneurship, and improve competitiveness of Greek companies by linking research institutions with the industry. Corallia Clusters Initiative is an organisation that was established to develop and manage innovation clusters in specific sectors and regions of the country with the aim to establish a competitive advantage for the participating players. Egg (enter-grow-go), as well as IQbility are incubator/accelerators with the role to identify, incubate and accelerate the development of high-potential start-ups in Greece. Attica Ventures and PJ Tech Catalyst are venture capital funds that draw their money either from private institutional investors (banks in this case) or from EU structural funds and their role is to identify, invest (finance) potentially successful start-ups by acquiring an equity stake in them with an exit plan usually in 5-7 years.
Lessons for Cyprus We should draw lessons from the set-up of the Greek entrepreneurial ecosystem and of course from the Israeli one. President Anastasiades should include it in his agenda as another area of collaboration following last week’s discussions with the Greek and Israeli Prime Ministers and ask for help and guidance. The statistics provided at the moment for Cyprus on
innovation and entrepreneurship are not encouraging. According to a recent study by EY Cyprus (Innovation and Entrepreneurship Dynamics, September 2015), Cyprus was among two EU member states that exhibited a declining innovation performance in 2014 (Innovation Union Scoreboard 2015), and has been reclassified downwards from “innovation follower” to “moderate innovator”. The level of our innovation index is now well below the EU average. Another interesting statistic in this report is the percentage of the country’s GDP that is used for Research and Development (R&D). For 2013, this is at 0.48% (or EUR 86.1 mln in real terms), which is amongs the lowest rates in the EU. Reading the full report, I came to the conclusion that although there are some individual, scattered efforts from participating stakeholders (government, private organisations and networks, academic institutions, etc.), the effort must be coordinated and needs a greater support from the government and the business community. Already, the CIIM together with the Bank of Cyprus launched the IDEA programme (Innovate-Develop-Excel-Accomplish) last year to identify, support, incubate and accelerate innovative startups with a global outlook. Many more of these efforts though are needed if we want our youth to enter this field and become entrepreneurs. Promoting innovation and entrepreneurship creates a more competitive environment, promotes growth, creates new jobs, and helps to increase the foreign direct investment in the country. Dr George Theocharides is an Associate Professor of Finance at Cyprus International Institute of Management (CIIM) and the Director of the MSc in Financial Services. www.ciim.ac.cy
February 3 - 9, 2016
8 | COMMENT | financialmirror.com
A PENNE FOR YOUR THOUGHTS...
FOOD, DRINK and OTHER MATTERS with Patrick Skinner
I have a penchant for pasta. Almost any shape or size, but perhaps my most favourite is Penne, those little tubes of dried flour and water each about 3 cms long. You can buy several types of penne – with a smooth surface, or ridged. I prefer the ridged because they take up more sauce. I have often bought Cyprus-made penne, which is very good. It needs a minute or two less cooking than Italian, because it is made from less hard wheat and is softer when cooked. It needs around 8-9 minutes as against 10-11. I have six favourite sauces: 1. With butter, parsley and garlic with a touch of lemon. 2. “Alio, Oglio” – garlic and oil. 3. Al Pomodoro, with quickly stir-fried fresh, ripe tomatoes or a can of Italian. Add a little sliced onion and some chopped garlic to the frying, if you will. 4. Ragû the traditional metay Bolognese. 5. Arrabiatta – “The Hot One” 6. Mushrooms, leeks, peas and cream. Try these recipes for the last two…
Penne All’ Arrabbiata From the region of central Italy, Northern Latium, this “hot one” can be as fiery as you like. A small plate makes an excellent starter – with, say, a thin slice of bread-crumbed fried pork or veal to follow – or in a larger quantity as a main dish.
Ingredients for 4 servings as a main course 1 clove garlic 4 oz streaky bacon or pancetta A generous 450 g /11b ripe tomatoes (or 14oz canned) 325 g /12 oz ridged penne (quills) 1 tbsp butter 1 fresh red chili pepper 1 cup grated Pecorino cheese Salt and pepper.
Method 1. Finely chop the onion and garlic and cut the bacon into thin strips. 2. Scald the tomatoes for 1 min in boiling water, then skin and remove the seeds. 3. Chop or slice. (If you are using canned tomatoes, put them through a sieve, if you don’t want pips.) 4. Melt the butter in a wide skillet and cook the chopped onion, garlic and bacon over low heat until golden brown. 5. Add the tomatoes and the red chili pepper. 6. Simmer over moderate heat, and discard the chili pepper when the sauce is sufficiently spicy to suit your taste. 7. Half cook the pasta and drain after about 5 min, reserving a little of the cooking water. 8. Transfer to the saucepan, add 1-2 tbsp grated Pecorino cheese and stir gently for about 5 min until the pasta is cooked. 9. Dilute the sauce with some of the pasta cooking water if it is too thick. 10. Serve with the rest of the grated Pecorino cheese.
Penne with mushrooms, peas and leeks Ingredients for 4 servings 2 - 3 tbsp olive oil 100 g / 4 oz fresh, firm button mushrooms 1 small-medium leek 1 cup of frozen peas 1 cup of cream Salt and pepper
2. Remove any coarse and “choggy” green bits of the leek and cut into slices. 3. Wash and remove any grit or dirt. 4. Put leeks in a saucepan, pour boiling water over and simmer until they are almost cooked through. 5. Drain and seat aside. 6. In a sturdy non-stick pan heat the oil and fry the mushrooms quickly until they are browned all over. 7. Add the peas and stir round for a minute or two, then add the leeks and the cream. 8. Gently heat the mixture – do not let it boil – and simmer until it is warmed all through. 9. Serve at once, with fresh bread and a glass or two of a nice dry rosé.
Your write…. Mrs. D.K. (by email) asks: “I seem to remember you doing a recipe a few years ago for Halloumi Balls - I made them at the time, but I’ve lost the recipe”. My pleasure, Ma’am. It was produced by the chef at the Londa, for a festival meal we organised there called HURRAH FOR CYPRUS. They look like this…
And they’re made like this…. For around 10-12 little balls… 1. Grate one pack of halloumi cheese quite finely into a bowl. 2. Add two eggs yolks and mix well. 3. Mix in two finely chopped sprigs of fresh mint. 4. Sprinkle with black pepper and mix well. 5. Make small balls of the halloumi. 6. Heat oil and fry them in batches of 4 6 for about three minutes, making sure they are browned all over. 7. Serve with cherry tomatoes and baby cucumbers.
Method
Make as a part of a starter or as a side dish for a main course. I sometimes do it with a dish of slow-cooked lamb.
1. Put the penne on to cook in plenty of salted water or stock (chicken or vegetable) for about nine minutes. When done, drain and keep warm in a large bowl in the oven.
Go to www.eastward-ho for recipes, food and wine news and notes.
February 3 - 9, 2016
financialmirror.com | COMMENT | 9
Is Twitter an acquisition target? The past few months haven’t exactly been easy for Twitter’s CEO Jack Dorsey. Ever since he took back the reigns at the company he co-founded in 2006, he has had to let more than 300 employees go, see several top executives leave and witness his company’s stock price crumble to new lows. Since the day Dorsey was named permanent CEO of the social media company in October 2015, Twitter’s stock price dropped by 40%, shaving more than $6.5 bln off the company’s valuation. Twitter’s market cap currently stands at $11.5 bln, down from almost $40 bln at its peak in December 2013. Twitter’s low valuation has made the company a subject of acquisition rumours. After News Corporation had dismissed takeover rumours earlier this year, another rumour surrounding Twitter’s possible acquisition by a group of investors surrounding venture capitalist Marc Andreessen surfaced on Monday. Twitter’s stock price was up almost 10% in early trading, stabilising to a 8% gain by afternoon at $18.12 as Wall Street appears to like the idea of Silicon Valley investor Andreessen and his and firm Silver Lake Partners getting involved. According to The Information, several investors in Silicon Valley are pulling together plans to buy or restructure the company. Talk of a potential acquisition follows upheaval in its management ranks, with several executives including the heads of product and engineering leaving Twitter, Dorsey confirmed last month. USA Today reported that the company is also expected to unveil new board members when it reports quarterly earnings next week. Once again, the big question for investors is how quickly is Twitter adding monthly active users. Last quarter, Twitter missed Wall Street forcecasts with 307 mln monthly active users. Looking back, a glitch involving one of the underwriters of Facebook’s embarrassing initial public offering (IPO) back in May 2012 and the near immediate fall below IPO price, even Mark Cuban said he got burned on his investment and had to sell at a loss one
month after buying the IPO. Then reality set in, and three and a half years later shares are pushing $112 and a $360 bln valuation, nearly 200% higher since the infamous IPO flub, according to 24/7 Wall St.com. Those who have stayed away from Facebook these past three years plus can vent, and those who were squeezed out at the lows along with Cuban can only weep now. The important question however is what can we learn from an investment perspective from the case of Facebook? Will such a rise also happen with Twitter Inc? One could argue that Twitter’s current flops are similar to what Facebook already experienced in 2012 and 2013, when major ad campaigns were pulled at the last minute, embarrassing the company. Only weeks before the Facebook IPO, General Motors cancelled a $10 mln ad campaign over ads not being flashy enough. That also contributed to the IPO flub. One year later, in May 2013, both Nissan and Nationwide pulled ad campaigns because their ads were
showing alongside offensive posts. May 2013 was the last time Facebook shares were available in the $25 range. So perhaps the same is in store for Twitter? It doesn’t seem so, according to 24/7 Wall St.com. While Facebook’s mistakes early on were rookie faux pas that was correctable, Twitter’s mistakes since its own IPO are more fundamental to the nature of the company itself. GM’s infamous cancellation on the eve of the Facebook IPO was arguably GM’s own mistake. Facebook stuck to its ad format and didn’t change it just to suit GM. As for the Nissan and Nationwide fiasco one year later, Facebook has since figured out how to protect its advertisers from being juxtaposed to offensive content. As for Twitter, its decline is not an issue of some glitch or flub or embarrassing incident with its advertisers. Its biggest problem is that its per user value is so much lower than Facebook’s and does not seem to be climbing much. Twitter has 320 mln monthly active users as of its last filing. Divide that by last
quarter’s revenue and you get $1.78 per user. Keep in mind that these numbers already attempt to filter out spam accounts. Granted, Facebook’s user base is much bigger, but the real issue is that its average revenue per user is nearly $12, almost seven times Twitter’s. The reason is that Facebook connects tight social circles of people who tend to stay on the site longer to talk (or yell) at each other. This allows for better targeting and increases the chances that ads will be clicked on and effective. Twitter users on the other hand are not necessarily socially connected to one another, so the site functions more like micro news with users flipping in and out quickly. This damages per-user revenue and is less conducive to targeted advertisements. Even back in 2012 when Facebook was floundering, its average revenue per user was $5.32, still three times higher than what Twitter’s is now. That number more than anything is the biggest reason Twitter now does not look like Facebook in 2013.
Smoother sailing for G7, commodities lower PwC economists reveal predictions for 2016
Having entered the New Year, PwC’s economists made their predictions for 2016, expecting smoother sailing for the G7 economies, that geopolitics, rather than economics, will be at the top of policymakers’ agendas, and that commodity prices will remain lower for longer. The G7 is expected to grow faster than 2% in GDPweighted terms, which would be the fastest pace since 2010. In contrast, the E7 emerging economies will grow slower than their trend rate (but still faster than the G7). Within the E7, the Brazilian and Russian economies will contract and China will slow, but India will be the star performer. Three geopolitical issues will continue to dominate the news headlines. First, the migrant crisis in Europe, which may slow down in the winter, but could flare up again in the spring. Second, the response of the international community to the crisis in the Middle East. Third, the referendum on the fate of the UK’s membership of the European Union. As for commodity prices remaining lower, this will be good news for most businesses, households and policymakers in commodity importing economies, but a challenge for countries that rely heavily on commodity exports. PwC economists also provide more detailed predictions for the year ahead, as summarised by UK Chief Economist,
John Hawksworth: “We expect the US recovery to switch into a higher gear in 2016, while the UK will also enjoy continued consumerled growth. We should also see at least the beginning of the end of the Eurozone crisis. The once-mighty BRICs (Brazil, Russia, India, China), however, will have another tough year in 2016, with the notable exception of India.” The other preductions by PwC economists suggest: The US will top the G7 GDP growth league table - The US economy will grow by almost 3% and so contribute to around two-thirds of overall G7 growth in 2016. It is also expected that the US will continue to create an average of around 200,000 jobs per month, helping to sustain consumer spending growth. US and UK interest rates to rise in 2016: In December last year, the Fed led the way with its first rate increase since 2006. PwC economists expect it to continue to raise rates, albeit only gradually, in 2016. Barring any major adverse global shocks, it is expected that the Bank of England will follow suit at some point later in 2016. In contrast with the US and the UK, the European Central Bank, the Bank of Japan and the People’s Bank of China are expected to maintain an accommodative monetary policy stance in 2016. The end of the Eurozone crisis - The peripheral economies will grow faster than the core economies for the
second year in a row. The Greek crisis could flare up again but this should not lead to contagion to the rest of the bloc, which is why PwC economists expect 2016 to mark at least the beginning of the end of the wider Eurozone financial crisis. With most imbalances in peripheral economies under control and structural reforms underway, it is likely that Eurozone GDP will expand by around 1.6% in 2016 – its fastest growth rate since 2011. India will be the star performer amongst the E7 - For the second year in a row, we expect India to grow faster than China, expanding by around 7.7% in real terms. Chinese GDP growth will ease to 6.5%: China’s economic slowdown looks set to continue with rebalancing now underway. Growth in manufacturing and exports will continue to slow gradually. However, Chinese business leaders will continue to move into higher value added areas of manufacturing. SubSaharan Africa (SSA) will add ‘an Australia’ to the world’s population: SSA’s population will grow by more than 25 million people in 2016, which is larger than the entire population of Australia. This will be in line with past trends as SSA has added more than 20 million people per year to its population in every year since 2006. At a country level, just under 20% of SSA’s population growth in 2016 will be driven by Nigeria alone.
February 3 - 9, 2016
10 | WORLD MARKETS | financialmirror.com
Green bond issuance could exceed $50 bln Moody’s said that global issuance of green bonds could surpass $50 bln in 2016, exceeding the $42.4 bln recorded in 2015, which was also the highest level for such bonds since they first appeared in 2007. “We expect the momentum from the UN Conference on Climate Change (COP21) as well as the signing of the Paris Agreement scheduled this April to likely motivate additional and repeat issuance of green bonds,” said Henry Shilling, a Moody’s Senior Vice President. “In this favourable environment, even after more recent bond market headwinds, and assuming a resumption of the growth rates seen in 2012-14, issuance could exceed $50 bln by a significant margin,” said Shilling. “While volume growth in 2015 had slowed to 16%, it had
exhibited gains of 158% in 2012; 255% in 2013; and 233% in 2014.” Moody’s said that further support for issuance in 2015 will come from continuing institutional, high net worth and retail investor appetite for green bonds. The rating agency also said that regulatory encouragement to issue and invest in green bonds along with the presence of newly issued guidelines for such bonds in China and India will bolster issuance as well. In particular, China’s green bond market could potentially expand more rapidly than internationally designated green bonds in 2016 due to central bank policy support and incentives announced for financial institutions issuers in the form of collateral eligibility, relending and interest subsidies
— terms which are generally not available in other countries. Early in 2016, green bonds from non-financial corporations received a boost with proposed guidelines by the Chinese National Development and Reform Commission (NDRC). Looking back on 2015, Moody’s noted that 105 distinct issuers came to market with 197 transactions, averaging $215 mln. Of the total of $42.4 bln issued, financial institutions were the largest single issuer in terms of type of institution, accounting for about $17 bln, or 40%. Global issuance for green bonds spiked in Q4 2015, bolstered by active issuance from financial institutions in November just ahead of the start of COP21, reaching $15.2 bln, the highest quarterly figure for the year.
Google dethrones Apple As of Tuesday, Apple is officially no longer the most valuable company in the world. After a positive Q4 earnings report, Alphabet, aka the company formally known as Google, saw its shares soar in early trading, lifting its market capitalisation past Apple’s. As of 10:15 AM, Alphabet was valued at $553 bln, eclipsing Apple’s market capitalisation by $25 bln. Some 12 months ago, Google trailed Apple’s valuation by $330 bln. Since then, the search giant’s market cap increased by more than 50% while Apple saw its valuation drop by 24%. Apple had first become the world’s most valuable company in 2011, when it surpassed Exxon Mobil, the long-time leader in this category. After several comebacks from Exxon, Apple reclaimed the title in August 2013 and had been on top ever since. Until yesterday. (Source: Statista.com)
Iran “fiscally and structurally well placed” for comeback SWIFT return to international transfers for Iran’s banks
Iran has significant economic growth potential, and structural reforms have helped strengthen its fiscal foundation, Moody’s Investors Service said in a special report, “Sovereign Credit Profile Set to Improve in Aftermath of Sanctions.” “Sanctions relief will grant Iran access to an estimated $150 bln in frozen foreign assets. We project the resulting implementation of investment plans, as well as a recovery in oil production, to contribute to higher GDP growth of 5% in 2016-17,” said Atsi Sheth, an Associate Managing Director at Moody’s. Unrated Iran’s $417 bln economy, the second largest in the Middle East after Saudi Arabia (rated Aa3 stable), is more diversified than other regional oil exporters. Nevertheless, Moody’s expects the removal of oil-related sanctions to result in an investment inflow, which will help revive the country’s ageing oil infrastructure. According to Iran’s Finance Minister, the country will need $90 bln annually in external financing to meet its 8% economic growth target. “International sanctions meant that Iran had to adapt to the reality of lower oil revenues and implement structural reforms much earlier than other oil-exporters. Most other oil-dependent sovereigns are only just beginning to consider structural fiscal reform,” Sheth added. Iran’s capital and financial accounts remain resilient to external shocks. Iran’s exposure to the capital flow volatility, which many emerging market economies are undergoing as
a result of the US Fed interest rate hike, is negligible. However, Iran’s key credit driver remains political, in particular whether it will continue to meet its obligations under the recent agreement, and whether other countries will continue to agree that it has done so. Meanwhile, with the nuclear deal that led to the lifting of international sanctions, Iran suddenly has access to around 100 bln euros of its assets that were frozen in countries around the world. And as of last week it is back in the global banking business, able to use the worldwide transaction networkSWIFT, the Belgian based cooperative which handles cash transfers and letters of credit between financial institutions, according to Euronews. Mohsen Jalalpour, the head of Iran’s Chamber of Commerce, Industries, Mines and Agriculture, said: “Banks can now access SWIFT. We should note that our banks were subject to banking sanctions and needed to prepare the necessary infrastructure and they managed to do that by today.” Re-engaging with the banking world through the Swift system is vital for Iran’s trade, particularly of crude oil. While international banks are expected to link up with their Iranian counterparts via SWIFT, Iran will also be looking to encourage foreign institutions to expand involvement in the country’s financial system. However, foreign banks considering establishing a
subsidiary in Iran will in most cases require a partnership with a local entity unless they set up in one of a handful of free zones, said Nicholas Gilani, senior partner at Arjan Capital, a consultancy advising on Iran business. And for many foreign banks, there are concerns about being caught up in ongoing US sanctions. Many international sanctions relating to Iran’s nuclear programme were lifted but most involving U.S. measures remain in place. Non-US banks may trade with Iran without fear of punishment in the United States, but U.S. banks may still not do so, directly or indirectly. Washington’s sanctions prevent U.S. nationals, banks and insurers from trading with Iran and also prohibit any trades with Iran in U.S. dollars from being processed via the U.S. financial system. This is a significant complication given the dollar’s role as the world’s main business currency. European banks are also cautious – with some, including Deutsche Bank, remembering past fines from US regulators for breaking sanctions, though Commerzbank has said it is reviewing its policy of not doing business in Iran. An Iranian central bank official said banks from European countries including Germany, France, Britain and Italy, had been in talks to open branches after the lifting of sanctions. “God willing, soon we will witness that too. Iran is a very attractive market for business and they know that,” the official said.
February 3 - 9, 2016
financialmirror.com | WORLD MARKETS | 11
The Great Escape from China By Kenneth Rogoff
Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilising. Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. The question is how much drama will take place in the interim, as political and economic imperatives collide. It might seem odd that a country running a $600 bln trade surplus in 2015 should be worried about currency weakness. But a combination of factors, including slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows. Private citizens are now allowed to take up to $50,000 per year out of the country. If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. At the same time, China’s cashrich companies have been employing all sorts of devices to get money out. A perfectly legal approach is to lend in renminbi and be repaid in foreign currency. A not-so-legal approach is to issue false or inflated trade invoices – essentially a form of money laundering. For example, a Chinese exporter might report a lower sale price to an American importer than it actually receives, with the difference secretly deposited in dollars into a US bank account (which might in turn be used to purchase a Picasso).
Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house. The Chinese hardly invented this idea. After World War II, when a ruined Europe was smothered in foreignexchange controls, illegal capital flows out of the continent often averaged 10% of the value of trade or more. As one of the world’s largest trading countries, it is virtually impossible for China to keep a tight lid on capital outflows when the incentives to leave become large enough. Indeed, despite the giant trade surplus, the People’s Bank of China has been forced to intervene heavily to prop up the exchange rate – so much so that foreign-currency reserves actually fell by $500 bln in 2015. With such leaky capital controls, China’s war chest of $3 trln won’t be enough to hold down the fort indefinitely. In fact, the more people worry that the exchange rate is going down, the more they want to get their money out of the country immediately. That fear, in turn, has been an important factor driving down the Chinese stock market. There is a lot of market speculation that the Chinese will undertake a sizable one-time devaluation, say 10%, to weaken the renminbi enough to ease downward pressure on the exchange rate. But, aside from providing fodder for the likes of Donald Trump, who believes that China is an unfair trader, this would be a very dangerous choice of strategy for a government that financial markets do not really trust. The main risk is that a big devaluation would be interpreted as indicating that China’s economic slowdown is far more severe than people think, in which case money would continue to flee. There is no easy way to improve communication with markets until China learns how to produce credible economic data. It was a huge news story when China’s 2015 GDP growth was reported at 6.9%, just short of the official
target of 7%. This difference ought to be irrelevant, but markets have treated it with the utmost importance, because investors believe that things must be really bad if the government can’t rig the numbers enough to hit its target. A good place for the authorities to start would be to establish a commission of economists to produce a more realistic and believable set of historical GNP figures, paving the way for more believable GNP figures going forward. Instead, the government’s immediate idea for relieving exchange-rate pressure is to peg the renminbi to a basket of 13 currencies, instead of just to the US dollar. This is a good idea in theory; in practice, however, basket pegs tend to have chronic transparency problems. Moreover, a basket peg shares most of the problems of a simple dollar peg. True, the euro and yen have fallen against the dollar over the past couple of years. If the dollar retreats in 2016, however, the basket peg implies a stronger renminbi-dollar rate, which might be unhelpful. The government has also indicated that it intends to clamp down more heavily on illegal capital flows; but it will not be easy to put that genie back in the bottle. Life would be a lot easier today if China had moved to a much greater degree of exchange-rate flexibility back when the going was good, as some of us had advised for more than a decade. Maybe the authorities will be able to hold on in 2016; but it is more likely that the renminbi will continue its rocky ride – taking global markets along with it. 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
China economic woes threaten WTI Markets Report b By Lukman Otununga, Research Analyst at FXTM
WTI oil plummeted over 6% on Monday with prices edging closer to $31 as tepid manufacturing data from China, the world’s largest energy consumer, renewed fears that demand may be dwindling. These anxieties added to the rapidly fading expectations around OPEC cooperating with Russia to curb production, while ongoing concerns over the excessive oversupply of oil in the markets continued to haunt investor attraction. Although there was some initial optimism directed towards Russia’s willingness to slash production, Saudi Arabia remained defiant on the idea of any cuts, while Iran had already pledged to pump up to 1.5 mln barrels a day in a mission to reclaim its lost market share. The visible clash of interests from various cartel members, combined with an appreciating Dollar, has added to oil’s woes consequently obstructing any opportunity for a recovery in prices. WTI remains firmly bearish and this horrible combination of record high productions, a heavily saturated oil market and fears over sluggish demand should encourage sellers to attack oil prices towards $30. From a technical standpoint, WTI oil is bearish and prices have respected the daily bearish channel. Current candlesticks are in the process of crossing below the daily 20 SMA while the MACD points to the downside. A breach below $31 should invite an opportunity for a further decline towards $30.
Stock markets under pressure The violent movements in the oil markets and renewed wave of risk aversion from the ongoing issues with China have soured risk appetite and this has consequently left the stock markets depressed. Although China stocks experienced a heavy selloff on Monday as Asian equities declined, the losses in the Chinese markets were rapidly clawed back early Tuesday with the Shanghai Composite Index trading +2.17%. European and American equities also received punishment and closed negative as risk
aversion encouraged investors to scatter away from riskier assets. Although some short-term erratic movements may be observed in the stock markets as expectations grow around central banks expanding further stimulus measures, the lingering fears over slowing global growth and downside pressures from ongoing global concerns should encourage further selloffs in the future. EURUSD: Euro bears failed to retrieve inspiration on Monday despite Mario Draghi stating that Eurozone inflation was weaker than expected in the European Parliament in Strasbourg. This dovish statement should have reinforced the growing expectations of further ECB stimulus measures in March, but investors rejected this rhetoric and the Euro appreciated against the Dollar. Inflation remains at worrying levels in the Eurozone while falling commodity prices have sabotaged the attempts for
the ECB to jumpstart growth. Although the EURUSD bounced higher towards 1.090, the growing expectations around the possibility of further stimulus measures in March should keep prices pressured to the downside. While the pair currently trades in a wide range, a solid breakdown below 1.080 should encourage a further decline towards 1.070.
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)
February 3 - 9, 2016
12 | PROPERTY | financialmirror.com
Leptos Coral Seas Villas: a prime beachfront resort Coral Seas Villas is a new coastline project by Leptos Estates located on a pristine area of the picturesque Coral Bay, within walking distance to the 5-star Coral Beach Hotel and Resort, a 10 minute drive to Paphos and the Akamas natural preserve to its north. The area has become very popular with International holiday makers who are either living permanently in Cyprus or have invested in a holiday home. This unique resort development stretches on 65,000 sq.m. of land, on one of the most sought after beach front locations in Cyprus. It will comprise of around 100 freehold, luxury detached villas and junior villas, many of them with a private pool and with direct access to the sparkling blue waters of the Mediterranean Sea, and will be built around a Residents Clubhouse with pools and gardens, a trademark of the Leptos Group popular from its other projects. Coral Seas Villas is divided into neighborhoods with the central villas enjoying a large communal pool and
landscaped gardens offering a resort lifestyle experience with privacy and security and first class property management services. Leptos Estates is one of the largest private companies in Cyprus and leading property
developers, with over 55 years of experience, diversified in real estate development with design, construction, sales and marketing and a worldwide network of offices (including the UK, China, Russia, UAE,
Ukraine and Greece) with associates and agents in 75 countries and more than 25,000 residential units sold to mainly international customers.
UK house price rises “moderate” following expansion of help-to-buy The expansion of the help-to-buy initiative in the UK will increase mortgage lending, leading to moderate rises in house prices, said Moody’s Investors Service. The net effect of the UK government’s initiatives is that house prices will increase at a rate of 0-5%, which is within Moody’s current forecasts. Rising house prices reduce losses and increase recoveries if a borrower defaults on their mortgage loan, which supports the performance of UK residential mortgage-backed securities (RMBS). “London in particular will benefit from a separate help-tobuy initiative, with a higher equity loan payout from the government. However, the London scheme is only limited to new builds, which limits its benefit somewhat. Amendments to the scheme will also open up the mortgage market to borrowers with low-to-mid incomes,” noted Greg Davies, author of the Moody’s report. The UK government increased the initial equity loan payout from 20%, as originally enacted, to 40% to compensate for the larger gap between earnings and house prices in London versus the rest of the country. “The government’s preventative steps, such as limiting the benefit of the programme to the owner-occupied sector, and surcharges in the buy-to-let space, may reduce demand and will curb an overheating in house prices on the back of the help-to-buy initiative’s expansion,” observed Kamran Sabir, a senior analyst at Moody’s. As early as mid-January 2016, there has been a 6.6% increase in the supply of one- and two-bed flats coming onto the UK market, which is a mainstay of the BTL sector. This anecdotally suggests that some investors may be exiting the
BTL sector in light of the cuts to tax relief on interest payments announced in the Summer 2015 budget. Given the stamp duty surcharge, marginal BTL property owners will be further discouraged from entering the market, therefore moderating overall the house price appreciation level for the year. The existing initiative - comprising both the equity and the guarantee initiative - has been used by almost 130,000 people (62,569 participating in equity loans and 65,920 in guarantees) and has led to GBP 23.3 bln in house purchases (GBP 13.6 bln in equity loans and GBP 9.7 bln in
guarantees). Moody’s typically associates a high loan-to-value (LTV) ratio with a higher default risk. Therefore, help-to-buy loans with high overall LTV ratios carry a higher borrower default risk (taking into account both the underlying mortgage and the equity loan) rather than just the underlying mortgage without the equity loan. A high proportion of help-to-buy loans with high overall LTV ratios may result in a higher default rate in the mortgage market in the event of an economic downturn. In addition, a possible consequence of expanding the help-to-buy initiative could be the acceleration of house prices, which increases the risk of prices
overheating. However, the government has imposed restrictions on the help-to-buy initiative and on the growth of the BTL sector. These restrictions will substantially alleviate some of these risks. Furthermore, the help-to-buy initiative is restricted to borrowers who have a clean credit history and no other properties, who pass the affordability levels established through the Financial Conduct Authorities Mortgage Market Review and who are not participating in other statesponsored initiatives.
Steady but sure growth for Eurozone property markets, France lagging There has been a lot of talk about how the Eurozone economy is still taking its time to pick up, with the UK – which is outside – seeing a stronger recovery, but Ireland and Spain are also seeing solid growth. It is a similar story when it comes By to the housing markets, although it is very much a case of some countries doing better than others. Overall, house prices in the Euro area increased by 2.3% year on year in the third quarter of 2015 and by 3.1% in the European Union, according to figures from Eurostat, the European Commission’s statistics office. Year on year prices increased the most in Sweden with growth of 13.7%, followed by Austria up 9.3%, Ireland up 8% and Denmark up 7.2%. The biggest decline in house prices was in Latvia with a fall of 7.6%, followed by Croatia down 3%, Italy down 2.3% and France down 1.2%. The highest quarterly increases were in
Malta with a growth of 6.2%, followed by Ireland up 4.5%, Austria up 4.1%, and Sweden and the United Kingdom both up 3.9%. The largest quarterly fall was in
France. Indeed, figures from Notaires, which exclude new builds, show that overall house prices in France increased by 0.4% in the final quarter of 2015 while apartment prices rose 0.3% in metropolitan Ray Clancy- Editor, Property Wire areas, but are down 1.6% and 1.9% year on year, respectively. In Paris and the surrounding area house Hungry where prices were down 5.9%, prices increased by 1% in the third quarter of Slovenia down 3.5% and Estonia down 2015 and apartment prices were up by 0.7%, 1.9%. The index figures show that prices are House prices are now down 1.1% and 1.3% growing year on year across most of the year on year, respectively. In rural areas Eurozone area. France is perhaps a surprise house prices increased by 0.2% quarter on coming in as one of the main countries, quarter but apartment prices fell by 0.1%. along with Italy that are popular with The Notaires predict a stable market in overseas buyers to see prices still falling. the coming months with apartment prices However, the rate of price falls has slowed in up around 0.4% and house prices by 1.4% by France and prices were up by 1.7% in the the end of the first quarter. The report adds third quarter of 2015, compared to a fall of that a year on year rise in sales of 12.5% up 2% in the fourth quarter of 2014, indicating to the end of November 2015 bodes well for that the market is slowly coming back in the market in 2016 as this level of sales has
not been seen since spring 2012. It is also looking good for the Spanish property market. Sales in Spain have increased for 18 months in a row, according to data from Notaires. Prices are still a bit over the place and very much depend on location, but this is a sign of a steady recovery and there will always be a big discrepancy in terms of price in locations that are popular and rural areas where foreign buyers, for example, do not feature. It is also a good sign that in Ireland house prices outside of Dublin are now recovering well and the strong, some might say worrying, steep rises of 2014 have now settled down to more solid and steady growth. Although prices in Ireland, like Spain and France, are still some way below the peaks of the market just before the global economic downturn of 2007. Steady but sure must be the order of the day. www.propertywire.com/
February 3 - 9, 2016
financialmirror.com | PROPERTY | 13
The successes and failures of this government µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers
I would like to refer both to the successes and failures of the government in matters related to the real estate sector. The past year (2015) was one of many changes. Some of these were the result of pressure from the Troika (thankfully), while others came from a different philosophy from the former “left” mentality, versus a new “capitalist”, which has a completely different approach. It would also be a mistake not to recognise the pressure from both local and foreign groups with the aim of improving matters. The market is still numb with a limited number of transactions (8,170 in 2009 vs 4,952 in 2015). The demand is mainly in the high quality permanent / holiday homes and investment properties with a yield of 5% -6%, while demand for ordinary and agricultural land remains limited. At the same time, development land near or on the beach has been showing increased interest and these plots seem to have a positive future. On the plus side: • The main positive point is the measure for visas and passports and the contribution of our office was up 50% since 2011, as the incentive existed since 2007 but the previous government failed to adopt it. • The vague interpretation for residency to foreigners, that until recently was interpreted as the purchaser having to live at his home in Cyprus more than 183 days, has changed and the permanent residency is now interpreted as when a foreigner is in Cyprus
for an undetermined time. • Closing the ‘catastrophic’ Cyprus Airways opened new horizons for the tourism and aviation sectors with new destinations, where (mainly) young tourists are a precursor for interest in the property market. • The incentives given to large infrastructure projects in rural areas, increasing the building coefficient for golf courses, marinas, etc., increased the profitability and attractiveness of such investments. • Replacing the planning amnesty by increasing the building coefficient by 20% (up to 60sq.m.) has contributed greatly to bypass the bureaucracy that existed with the urban planning amnesty. • The new assessment of property values based on 1.1.2013 instead of 1.1.1980, despite its faults (the six month adjustment period was enough for objections). • The new tax regulations for repatriated Cypriots and foreigners, adding to the attractiveness of the Cyprus tax system, in addition to the new tax regime for shipping. • The more liberal interpretation on relaxations unlike the older system of exemptions that takes years to conclude and has higher costs. • The new provisions for the 50% discount on transfer fees, avoidance under certain conditions of the capital gains tax, evasion of the mortgages, the charge of property tax on the purchasers, etc., were all positive results. It would be wrong not to mention the breath of fresh air introduced by the Minister of Interior in the property sector, resulting in a feeling of “protection” of the industry against the “persecution” from other stakeholders. On the negative side: • Rebuilding confidence in the economy
Jasmine Gardens – A new neighbourhood in the heart of Paphos With a successful track record of more than 35 years and a portfolio of more than 265 projects, Aristo Developers started 2016 with the launch of new developments added to the 50 or so currently underway all over Cyprus. Jasmine Gardens is a project of luxury residences in the heart of Paphos located with immediate access to all the amenities of a modern city such as schools, shopping malls, luxury hotels, and restaurant facilities, and only five minutes from the historic centre. The project consists of 3-bedroom detached homes up to 210 sq.m. with high specifications combining comfort and functionality. Each residence has its own private pool, covered parking and large garden. Overlooking the sea, Jasmine Gardens is offered as an ideal choice both for residential use and for investment. Achievements by Aristo Developers in recent years includes landmark projects such theme parks such as the Aphrodite Water Park and golf courses including the Secret Valley Golf Club. The crown jewel of the Group is the new Venus Rock Golf Resort – the largest golf-integrated resort in the south eastern Mediterranean currently under development.
following the events of March 2013 is not easily forgotten. Fortunately, to some extent we were helped by the misfortunes of our competitor destinations, but again this is not the way to base the future development of the economy depending solely on the troubled situation in other countries. • Some lenders in Cyprus have not fully understood the problems of the housing market, while others aspire to a quick exit rather than a long-term investment. • The Central Bank has not lived up to expectations and does not inspire confidence that it can play the role that Cyprus needs. • Foreign investors do not add great value to the efforts of the government, despite the efforts of the President and some other politicians. There is strategy to utilise foreign interest, such as the promotion of sports tourism and other activities in an effort to attract interest from foreign markets, even in
coordination with various municipalities and local authorities. • The archaic system of licensing procedures, and issuing title deeds, instead of being replaced from scratch, is constantly being subjected to minor “corrections” that alone can not meet the challenges ahead. • There is some sense among both locals and foreigners that government officials exploit their status, promoting their own interests. Whatever the issue, the past year will go down in the history of the Cyprus property market, as at least a year of some effort to better things. If the economy is freed from the chains of trade unions and allowed to correct itself, then we will have a positive future for 2016 in the property sector.
Construction materials prices down 2.7% in 2015
· Asphalt concrete: -16.84% · Building iron: -8.87% · Air conditioning units: -7.89% · Roofs and metallic parts for gypsumboards and cementboards: -4.57% · Paints and solvents: -2.78% · Wardrobes, cupboards, benches: -2.75% · Industrial wood: -2.73% · Structural steel: -2.51% · Ready-mix concrete: -1.11% On the other hand, some materials recorded an increase in their prices compared to 2014. The most significant are: · Lamps: 5.65% · Sanitary ware of prorcelain: 3.79% · Aluminium doors and windows: 1.88% · Outlets, switches, fuses and insulators: 1.80% · Acrylic sanitary ware and other plastic bathroom products: 1.67%
The price of construction materials for the period January-December 2015 recorded a decrease of 2.68% compared to the corresponding period of the previous year, according to data from the Statistical Service of Cyprus. The Price Index of Construction Materials for December 2015 reached 100.73 units (base year 2010=100.00), a decrease of 0.24% over the previous month. According to Cystat, the decrease of the index in 2015 over the previous year is mainly due to the decline in the prices of the following materials: · Bitumen asphalt: -25.74%
www.aloizou.com.cy ala-HQ@aloizou.com.cy
February 3 - 9, 2016
14 | MARKETS | financialmirror.com
Gasoline prices are down - should we celebrate? By Oren Laurent President, Banc De Binary
Gasoline prices across the United States are down; even in California where prices are typically at the highest levels in the country, it is possible to pay less than $2.39 per gallon. The cheapest states include the Midwestern states and Texas, where consumers can expect to pay less than $1.68 a gallon. The sharp reductions in the price of crude oil have a significant impact on the price of gasoline, but it is less than what one might imagine it to be. According to the Energy Information Administration (EIA), the average price of gasoline in the US on 25 January 2016 was $1.856, which is $0.188 lower than it was a year ago. When it comes to the composition of regular gasoline prices (as at December 2015), crude oil accounts for 42% of the price, refining makes up 19% of the price, distribution and marketing makes up 17% of the price and taxation the remaining 22%. Diesel (as at December 2015) prices are comprised of 37% crude oil prices, 11% refining, 30% distribution and marketing and 22% taxation. It is clear that the cost of crude oil is significant and is the dominant factor in gasoline and diesel pricing.
Is cheaper crude good for the economy? For the most part, consumers will be welcoming cheap gasoline prices. In a relatively short period of time, prices have literally halved from over $3.50 a gallon to their current levels. Naturally, this places more disposable income in your back pocket which can be used for things like savings. The retail sector did not benefit as expected from increased personal disposable income in Q4 2015. Savings levels increased, but retail was largely flat. Cheap prices for crude oil are the norm nowadays and with plunging commodity prices across the board, nobody is quite sure where the bottom lies. The beauty of declining oil prices is that it translates into discernible savings at the pump and that is easily seen by anyone who pays for gasoline. The savings that are generated in this way are substantial. On 30 July 2014 the price of regular gas per gallon in the US averaged around $3.51, and has steadily declined until 17 January 2015 when it was trading in a range between $1.97 and $2.14 per gallon. Thereafter the price of gasoline increased until mid-June 2015 when it was averaging $2.66 – $2.83 per gallon. Since then we have endured a seven-month period of declining prices to its present level at around $1.75 per gallon. When the price of crude oil hit a 12-year low of $26.55 a barrel, consumers may have been celebrating, but oil companies and equity markets were reeling. There are several
factors coming together to make it difficult for markets to rally in the face of crude oil declines. The strong USD is a disincentive to economic growth when emerging market currencies are facing increasing weakness. Dollardenominated commodities, like crude oil, sell less when the USD is strong. This is exacerbated by the fact that the Federal Reserve is looking to hike interest rates further in 2016. While nothing concrete is in the pipeline for March 2016, the statement released by the Fed on January 27 did not rule out the possibility of gradual rate hikes throughout the year.
The takeaway for crude oil Whether or not rate hikes come to pass is doubtful because recent economic data suggests that the US economy hit substantial weakness in Q4, 2015. The problem was an inventory build-up which was made worse by a rampant USD. With demand at multi-year low levels, businesses found it difficult to clear stockpiles of commodities like iron ore, copper, steel, crude oil, gasoline and others. GDP spiked by 0.7% annually and major cutbacks in free investment spending by energy companies is resulting in mass layoffs across the board. The Fed acknowledged in recent statements that US economic growth weakened recently, notably in Q4 2015. If the weakness in global commodity markets continues in 2016, the next rate hike will probably be pushed back until June 2016. Without trade and inventories, the economy grew at a rate of 1.6% for Q4, 2015. Crude oil prices are being further weakened by the reality that Iran will be
engaged in sales of up to 500,00 barrels of crude oil per day. Already there are some 18 Iranian oil tankers off the coast with upwards of 12 million barrels of crude oil waiting to be offloaded. But there are several other things to consider in the equation, notably the following: Oil and natural gas companies are losing money at a rate of knots and this is impacting heavily on employment numbers, peripheral industries, major averages and general investor sentiment. Cheap oil can only continue as long as OPEC and nonOPEC countries continue to oversupply. That is unlikely since Russia and Saudi Arabia are already in negotiations. Most all analysts agree that the price of crude oil is going to increase toward the $60 level before the end of 2016. China has been stockpiling substantial inventories of crude oil at current price levels; this is leading to high inventory levels which are not being cleared owing to low demand. Shale oil producers in the US have reported losses of $26 bln YoY for Q3 2015 and many analysts are likening what’s happening with crude oil to what happened with the equities bubble that burst. Crude oil producers are now facing challenges of another kind, with debts that can’t be repaid as a result of falling revenues and profitability. To alleviate these stress factors, banks have to reassess their relationships with oil companies and negotiate more lenient terms. Just recently, Bank of America made $500 mln available for assisting struggling oil companies. Please note that this column does not constitute financial advice.
The Financial Markets Interest Rates Base Rates
LIBOR rates
CCY USD GBP EUR JPY CHF
0-0.25% 0.50% 0.05% .-0,1% -0.75%
Swap Rates
CCY/Period
1mth
2mth
3mth
6mth
1yr
USD GBP EUR JPY CHF
0.43 0.51 -0.23 0.02 -0.79
0.52 0.55 -0.20 0.03 -0.77
0.62 0.59 -0.18 0.04 -0.76
0.87 0.73 -0.11 0.05 -0.69
1.14 1.00 0.00 0.12 -0.62
CCY/Period USD GBP EUR JPY CHF
2yr
3yr
4yr
5yr
7yr
10yr
0.86 0.80 -0.18 -0.07 -0.76
1.02 0.93 -0.13 -0.07 -0.74
1.17 1.05 -0.04 -0.05 -0.62
1.30 1.16 0.07 -0.01 -0.54
1.55 1.38 0.32 0.09 -0.28
1.81 1.60 0.66 0.26 -0.01
Exchange Rates Major Cross Rates
CCY1\CCY2 USD EUR GBP CHF JPY
Opening Rates
1 USD 1 EUR 1 GBP 1 CHF 1.0915 0.9162
100 JPY
1.4381
0.9795
0.8279
1.3175
0.8974
0.7585
0.6811
0.5757
0.6954
0.7590
1.0209
1.1143
1.4682
120.79
131.84
173.71
0.8452 118.32
Weekly movement of USD
CCY\Date
05.01
12.01
19.01
26.01
02.02
CCY
Today
USD GBP JPY CHF
1.0778
1.0824
1.0826
1.0788
1.0852
0.7322
0.7451
0.7587
0.7583
0.7543
GBP EUR
128.55
127.07
127.40
127.22
130.63
1.0776
1.0811
1.0897
1.0924
1.1046
1.4381 1.0915 120.79 1.0209
JPY CHF
Last Week %Change 1.4227 1.0788 117.93 1.0126
-1.09 -1.18 +2.43 +0.82
February 3 - 9, 2016
financialmirror.com | MARKETS | 15
Symptoms of dysfunction Marcuard’s Market update by GaveKal Dragonomics If bank shares are the canary in the global economic coalmine, they are currently singing a very alarming tune. In Japan bank shares have cratered -10% since last Friday’s decision by the central bank to move to negative interest rates, even though the new negative -0.1% rate will only apply on the margin to additional deposits at the Bank of Japan. Elsewhere, in Europe, the banking component of the Euro Stoxx index has slumped -16.8% year-to-date, while the broader index is down a “mere” -6.8%. Similarly, in the US, bank shares are down -11.9% YTD, compared with the S&P 500, which is down some -5%. In part, this underperformance reflects market fears about what may be lurking on bank balance sheets; Japan’s megabanks, for example, have significant exposure to oil producers. But in a broader sense, the slump in bank shares is symptomatic of persistent dysfunction in the sector. Seven and a half years after the global financial crisis (and quarter of a century after the bursting of Japan’s bubble economy), efforts to clean up and strengthen bank balance sheets have fallen far short of what is needed to create healthy and resilient banking sectors. Worse, the sense is growing that when it comes to banking sector stability, the tools adopted by central banks to pump up inflation and revitalise economic growth — ultra-low and even negative interest rates across much of the curve — are doing more harm than good. For a picture of banking dysfunction, investors need look no further than Europe. Despite much-vaunted plans for “a fully-fledged banking union”, problems abound. The biggest is arguably the weakness of Italy’s banking sector. Last week, the Italian government agreed a plan to help Italy’s banks dispose of the EUR 350 bln in non-performing loans — equivalent to 22% of gross domestic product — they are carrying on their balance sheets. We doubt it will work. Under new EU rules which prohibit direct state aid to the banking sector, Rome cannot copy the formula adopted by Spain and Ireland, and move non-performing assets off bank balance sheets and into a state-backed “bad bank”. The government’s solution, agreed after months of negotiation, is to offer a guarantee mechanism it hopes will encourage private investors to buy securitised NPLs. Under the new scheme, banks will bundle their bad loans into securities so that the senior tranche of each issue — the first to be repaid out of proceeds recovered from the underlying assets — is of sufficiently high quality to achieve an investment grade credit rating. The government will then
guarantee this senior tranche (and only this tranche). To circumvent the rules against state aid, issuing banks will have to pay a regular fee to the government for its guarantee. The fee will be priced off benchmark credit default swaps for reference credits of similar quality, and will be reset upwards over time to encourage a speedy recovery process. By offering a guarantee, the government hopes to bump up the market value of the underlying loans more closely into line with the value at which they are carried on the banks’ books, minimising bank losses, while simultaneously encouraging investors to buy the bonds, so creating a new market for distressed debt. However, because of the EU’s new restrictions on state aid, the Italian deal falls far short of the Spanish and Irish resolution schemes, under which large tranches of NPLs were transferred into “bad banks”, freeing up the “good banks” to restructure and resume lending. In both Spain and Ireland, banks were forced to participate in the restructuring programmes. Under Italy’s plan each individual bank will decide whether to pay for the government guarantee and accept a writedown in asset values, or alternatively to leave the bad assets on its balance sheet. Even in Spain and Irelan,d NPLs remain painfully elevated at 10% and 20%, respectively, suppressing new credit creation. So, it looks unlikely that Italy’s new plan will cut NPL levels by anything like enough to make an appreciable difference to banks’ willingness to extend new loans. As a result, banking sector profits will continue to underperform, while Italy’s economy will remain handicapped by weak credit creation and investment. Worse, companies with
unresolved debt problems will be unable to restructure, hampering the process of creative destruction. The government is promising to publish further details of its guarantee mechanism soon, which may assuage some of our doubts. However, as things stand now, much of the Italian banking system remains dysfunctional, calling into question the ability of the EU’s proposed banking union to deliver a strong, healthy and integrated banking system for the European continent. Judging by the recent price action in global markets, things are scarcely any better elsewhere.
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
21500 1.4381 1.7915 24.754 6.8369 14.3363 1.0915 2.465 285.09 0.64395 3.1634 0.3933 20.15 8.7132 4.033 4.1299 78.9911 8.55 1.0212 25.8
AUD CAD HKD INR JPY KRW NZD SGD
0.7049 1.4016 7.7822 67.98 120.82 1207.19 1.5414 1.4267
BHD EGP IRR ILS JOD KWD LBP OMR QAR SAR ZAR AED
0.3770 7.8074 30187.00 3.9529 0.7090 0.3026 1513.50 0.3850 3.6400 3.7474 16.0349 3.6729
AZN KZT TRY
1.56 376 2.9557
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
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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
February 3 - 9, 2016
16 | WORLD | financialmirror.com
The return of the currency crash By Carmen Reinhart Currency-market volatility has been around for decades, if not centuries. Wide gyrations in exchange rates became a staple of international financial markets after the Bretton Woods system broke down in the early 1970s, and megadepreciations were commonplace later in the decade and through much of the 1980s, when inflation raged across much of the world. Even through much of the 1990s and early 2000s, 10-20% of countries worldwide experienced a large currency depreciation or crash in any given year. And then, suddenly, calm prevailed. Excluding the mayhem associated with the global financial crisis of late 2008 and early 2009, currency crashes were few and far between from 2004 to 2014 (see figure). But recent developments suggest that the dearth of currency crashes during that decade may be remembered as the exception that proves the rule. The near-disappearance of currency crashes in the 20042014 period largely reflect low and stable international interest rates and large capital flows to emerging markets, coupled with a commodity price boom and (mostly) healthy growth rates in countries that escaped the global financial crisis. In effect, many countries’ main concern during those years was avoiding sustained currency appreciation against the US dollar and the currencies of other trade partners. That changed in 2014, when deteriorating global conditions revived the currency crash en masse. Since then, nearly half of the sample of 179 countries shown in the figure have experienced annual depreciations in excess of 15%. True, more flexible exchange-rate arrangements have mostly eliminated the drama of abandoning pre-announced pegged or semi-pegged exchange rates. But, thus far, there is little to suggest that the depreciations have had much of a salutary
effect on economic growth, which for the most part has remained sluggish. The average cumulative depreciation versus the US dollar has been almost 35% from January 2014 to January 2016. For many emerging markets, where depreciations have been considerably greater, weakening exchange rates have aggravated current problems associated with rising foreigncurrency debts. Moreover, in an interconnected world, the effects of currency crashes do not end in the country where they originate. Back in 1994, China reformed its foreign-exchange framework, unified its system of multiple exchange rates, and, in the process, devalued the renminbi by 50%. It has been persuasively argued that the Chinese devaluation resulted in a loss of competitiveness for Thailand, Korea, Indonesia, Malaysia, and the Philippines, which had pegged (or semi-pegged) their currencies to the US dollar. Their cumulative overvaluation, in turn, helped set the stage for
the Asian crisis that erupted in mid1997. Overvalued exchange rates have been among the best leading indicators of financial crises. So one cannot help but wonder if we are facing a repeat of what happened from 1994 to 1997 – only this time with the roles reversed. Since early 2014, the renminbi has depreciated by a mere 7.5% against the dollar, compared to the euro’s roughly 25% depreciation in this period, not to mention even faster currency weakening in many emerging markets. For a manufacturingbased economy such as China’s, the overvaluation-growth connection should not be underestimated. What distinguishes the Chinese case from others is the sheer size of its economy relative to world GDP, as well as its effects on numerous countries across regions, from suppliers of primary commodities to countries that depend on Chinese funding or direct investment. The broader point is a simple one: Emerging markets now account for around 60% of world GDP, up from about 35% in the early 1980s. Restoring global prosperity requires a much broader geographical base than it did back then. The return of the currency crash may make achieving it all the more difficult.
Carmen Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government. © Project Syndicate, 2016 - www.project-syndicate.org
The global economy’s marshmallow test By Jeffrey D. Sachs The world economy is experiencing a turbulent start to 2016. Stock markets are plummeting; emerging economies are reeling in response to the sharp decline in commodities prices; refugee inflows are further destabilising Europe; China’s growth has slowed markedly in response to a capitalflow reversal and an overvalued currency; and the US is in political paralysis. A few central bankers struggle to keep the world economy upright. To escape this mess, four principles should guide the way. First, global economic progress depends on high global saving and investment. Second, saving and investment flows should be viewed as global, not national. Third, full employment depends on high investment rates that match high saving rates. Fourth, high private investments by business depend on high public investments in infrastructure and human capital. Let’s consider each. First, our global goal should be economic progress, meaning better living conditions worldwide. Indeed, that goal has been enshrined in the new Sustainable Development Goals adopted last September by all 193 members of the United Nations. Progress depends on a high rate of global investment: building the skills, technology, and physical capital stock to propel standards of living higher. In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards. High investment rates in turn depend on high saving rates. A famous psychological experiment found that young children who could resist the immediate temptation to eat a marshmallow, and thereby gain two marshmallows in the future, were likelier to thrive as adults than those who couldn’t. Likewise, societies that defer instant consumption
in order to save and invest for the future will enjoy higher future incomes and greater retirement security. (When American economists advise China to boost consumption and cut saving, they are merely peddling the bad habits of American culture, which saves and invests far too little for America’s future.) Second, saving and investment flows are global. A country such as China, with a high saving rate that exceeds local investment needs, can support investment in other parts of the world that save less, notably low-income Africa and Asia. China’s population is aging rapidly, and Chinese households are saving for retirement. The Chinese know that their household financial assets, rather than numerous children or government social security, will be the main source of their financial security. Low-income Africa and Asia, on the other hand, are both capital-poor and very young. They can borrow from China’s high savers to finance a massive and rapid build-up of education, skills, and infrastructure to underpin their own future economic prosperity. Third, a high global saving rate does not automatically translate into a high investment rate; unless properly directed, it can cause underspending and unemployment instead. Money put into banks and other financial intermediaries (such as pension and insurance funds) can finance productive activities or short-term speculation (for example, consumer loans and real estate). Great bankers of the past like J.P. Morgan built industries like rail and steel. Today’s money managers, by contrast, tend to resemble gamblers or even fraudsters like Charles Ponzi. Fourth, today’s investments with high social returns – such as low-carbon energy, smart power grids for cities, and information-based health systems – depend on public-private partnerships, in which public investment and public policies help to spur private investment. This has long been the case: Railroad networks, aviation, automobiles, semiconductors, satellites, GPS, hydraulic fracturing, nuclear power, genomics, and the Internet would not exist but for such partnerships (typically, but not only, starting with the military). Our global problem today is that the world’s financial intermediaries are not properly steering long-term saving
into long-term investments. The problem is compounded by the fact that most governments (the US is a stark case) are chronically underinvesting in long-term education, skill training, and infrastructure. Private investment is falling short mainly because of the shortfall of complementary public investment. Shortsighted macroeconomists say the world is under-consuming; in fact, it is underinvesting. The mainstream macroeconomic advice to China – boost domestic consumption and overvalue the renminbi to cut exports – fails the marshmallow test. It encourages overconsumption, underinvestment, and rising unemployment in a rapidly aging society, and in a world that can make tremendous use of China’s high saving and industrial capacity. The right policy is to channel China’s high saving to investments in infrastructure and skills in low-income Africa and Asia. China’s new Asian Infrastructure Investment Bank (AIIB) and its One Belt, One Road initiative to establish modern transport and communications links throughout the region are steps in the right direction. These programs will keep China’s factories operating at high capacity to produce the investment goods needed for rapid growth in today’s low-income countries. China’s currency should be allowed to depreciate so that China’s capital-goods exports to Africa and Asia are more affordable. More generally, governments should expand the role of national and multilateral development banks (including the regional development banks for Asia, Africa, the Americas, and the Islamic countries) to channel long-term saving from pension funds, insurance funds, and commercial banks into long-term public and private investments in twenty-firstcentury industries and infrastructure. Central banks and hedge funds cannot produce long-term economic growth and financial stability. Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth. Jeffrey D. Sachs is Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University. He is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.
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The three fears sinking global markets By Anatole Kaletsky January is usually expected to be a good month for stock markets, with new money gushing into investment funds, while taxrelated selling abates at the end of the year. Although the data on investment returns in the United States actually show that January profits have historically been on only slightly better than the monthly norm, the widespread belief in a bullish “January effect” has made the weakness of stock markets around the world this year all the more shocking. But the pessimists have a point, even if they sometimes overstate the January magic. According to statisticians at Reuters, this year started with Wall Street’s biggest firstweek fall in over a century, and the 8% monthly decline in the MSCI world index made January’s performance worse than 96% of the months on record. So, just how worried about the world economy should we be? Three fears now seem to be influencing market psychology: China, oil and the fear of a US or global recession. China is surely a big enough problem to throw the world economy and equity markets off the rails for the rest of this decade. We saw this in the first four days of the year, when the sudden fall in the Chinese stock market triggered January’s global financial mayhem. But the Chinese stock market is of little consequence for the rest of the world. The real fear is that the Chinese authorities will either act aggressively to
devalue the renminbi or, more likely, lose control of it through accidental mismanagement, resulting in devastating capital flight. Such a scenario seemed quite plausible for a few weeks last summer, and it reemerged as a threat in the first two weeks of this year. By the end of January, however, market sentiment had moved back in favor of stability in China. This calm could be disrupted again if China’s foreign-exchange reserves show another huge monthly loss, and the authorities’ efforts to manage an orderly economic slowdown will remain the biggest source of legitimate concern for financial markets for many years ahead. But, judging by market behavior in the second half of January, the fear about China has subsided, at least for now. That cannot be said about the market’s second great worry: collapsing oil prices. From the moment investors stopped panicking about China, in the second week of January, stock markets around the world started falling (and occasionally rebounding) in lockstep with the price of oil. Unlike the reasonable concern about China, market sentiment seems simply to have gotten the relationship between oil and the world economy wrong. In anything but the very short term, the correlation between oil prices and stock markets should be negative, not positive – and will almost certainly turn out that way in the years ahead. When oil prices plunge by 10% daily, this is obviously disruptive in the short term: credit spreads in resources and related sectors explode, and leveraged investors are forced into asset fire sales to meet margin calls. Fortunately, market panic now seems to be subsiding, as oil prices reach the lower part of the $25-50 trading range that always seemed appropriate in today’s political and
economic conditions. Now that oil prices are stabilizing at a reasonable long-term level, the world economy and non-commodity businesses should benefit. Low oil prices increase real incomes, stimulate spending on non-resource goods and services, and boost profits for energy-using businesses. Yet, despite these obvious benefits, most investors now seem to believe that falling oil prices point to a collapse in economic activity, which brings us to the third fear haunting financial markets this winter: a recession in the global economy or the US. Past experience suggests that oil prices are not a useful leading indicator of economic activity. In fact, if oil-price movements have any relevance at all in economic forecasting, it is as a contrary indicator. Every global recession since 1970 has been preceded by a big increase in oil prices, while almost every decline greater than 30% has been followed by accelerating growth and higher equity prices. The widespread view that plunging oil prices augur recession is a clear case of the belief that this time is different – a belief that typically takes hold in financial markets at the peaks and troughs of boom-bust cycles. Finally, what about the falling stock market itself as an indicator of recession risks? One could quote the great economist Paul Samuelson, who famously quipped in the 1960s that the stock market had “predicted nine of the last five recessions.” There is, however, a less reassuring answer. While markets are often wrong in predicting economic events, financial expectations can sometimes influence those events. As a result, reality can sometimes be forced to converge towards market expectations, not vice versa. This process, known as “reflexivity,” is a powerful force in financial markets,
especially during periods of instability or crisis. To the extent that reflexivity works through consumer and business confidence, it should not be a problem now, because the oil-price collapse is a powerful antidote to the stock-market decline. Consumers are gaining more from cheap oil than they are losing from falling stock prices, so the net effect of recent financial turmoil on consumption should be positive – and stronger consumption should feed through to business revenues. A greater worry is the workings of reflexivity within the financial system itself. Bankruptcies among small energy-sector companies, which are of limited economic importance themselves, are creating pressures in global banking and reducing the availability of credit to healthy businesses and households that would otherwise be beneficiaries of cheaper oil. Fears of a Chinese devaluation that has not happened (and probably never will) are having the same chilling effect on credit in emerging markets. Meanwhile, banking regulators are continuing to tighten lending standards, even though economic conditions suggest they should be easing up. In short, nothing about the condition of the world economy suggests that a major slowdown or recession is inevitable or even likely. But a lethal combination of selffulfilling expectations and policy errors could cause economic reality to bend to the dismal mood prevailing in financial markets. Anatole Kaletsky is Chief Economist and CoChairman of Gavekal Dragonomics and the author of Capitalism 4.0, The Birth of a New Economy. © Project Syndicate, 2016. www.project-syndicate.org
The elephant in the boardroom By Lucy P. Marcus Business and government leaders worry about a multitude of issues these days. Climate change, weapons of mass destruction, water scarcity, migration, and energy are the greatest threats we face, according to the 750 experts surveyed for the World Economic Forum’s Global Risk Report 2016. And at the WEF’s annual meeting in Davos this year, the sheer number of unsettled issues – the Middle East meltdown, the European Union’s future (particularly given the possibility of a British exit), America’s presidential election, the refugee crisis, China’s economic slowdown, oil prices, and more – was itself unsettling. But consider this: None of the risks highlighted in the WEF report caused the recent spike in debt crises or the wave of scandals that engulfed – just in the last year – Volkswagen, Toshiba, Valeant, and FIFA. These developments (and many more) are
rooted in a more pedestrian – and perennial – problem: the inability or refusal to recognise the need for course correction (including new management). As anti-establishment parties and candidates gain ground with voters throughout Europe and in the United States, political leaders who continue to pursue a business-as-usual approach could find themselves looking for new jobs. And the same is true of business leaders: Activist investors are fed up and determined to force change, either with a hands-on approach or by voting with their feet and divesting from companies that don’t meet their criteria. As Barbara Novick, a vice chair of BlackRock, noted on a panel on corporate governance and ethics at this year’s Davos gathering, her firm looks carefully at whether the boards of companies in which BlackRock invests include people who are engaged and asking hard questions consistently throughout the year. And yet the heads of some of the world’s largest companies still seem to be in denial. I spent several hours last year with the chief executive and chair of a bank who thought it unfair that investors were planning to vote against him holding both posts. Though he agreed that having one person in both roles is, in principle, a bad idea, he insisted that he was the exception. I had a similar conversation this year with someone who noted that most of his company’s board had served for upwards of
20 years, and that his company had just established an age limit of 80 for board members. More rapid turnover might work for other companies, he conceded; but, again, his company was somehow exceptional. On the other hand, Hiroaki Nakanishi, CEO and Chairman of Hitachi, spoke eloquently to me about the importance of corporate governance and the changing demands that global companies faced. He noted the importance of having nonJapanese board members as Hitachi seeks to expand further internationally. The problem is that those now speaking up for long-term investing, commitment to the community, and building companies that last are doing so over dinner, behind closed doors, or under the protection of the Chatham House Rule (which requires that reported statements remain unattributed to those who made them). Indeed, in the program for this year’s Davos meeting, the phrase “corporate governance” appeared just once (for the panel with Novick that I was on). The same was true for “board” and “boardroom,” while a search for “ethics” turned up sessions on medicine and biotech. “Governance” was primarily about political governance, and “stewardship” referred to the planet. Many people are cynical about Davos – and they aren’t completely wrong. Years ago, it was because the meetings were so openly secretive (much like the way people
perceive board meetings). Nowadays, the WEF webcasts many of its sessions, and the cynicism comes from the sense that what is being discussed is not what business and government leaders need to think about. That’s not the WEF’s fault. Davos has extraordinary convening power and the ability to bring important issues to the fore, including LGBT issues this year. There is no reason it cannot also include issues like the pay gap between executives and labor, the impact of corporate decisions on communities and the environment, and the growing loss of trust toward business and government. What it can’t do is force CEOs, board directors, investors, and policymakers to speak about such issues openly and on the record. It is easy for companies to see far-off risks that they cannot control. It is a lot harder, but a lot more important, for them to acknowledge the risks stemming from how they operate. And it is harder still to persuade those business leaders who do comprehend such risks to talk about them on a public stage. That reluctance to speak openly about how to restructure corporate governance in a way that improves stewardship places all of us at risk. Lucy P. Marcus is CEO of Marcus Venture Consulting. © Project Syndicate, 2016. www.project-syndicate.org
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China’s bumpy new normal By Joseph E. Stiglitz China’s shift from export-driven growth to a model based on domestic services and household consumption has been much bumpier than some anticipated, with stock-market gyrations and exchange-rate volatility inciting fears about the country’s economic stability. Yet by historical standards, China’s economy is still performing well – at near 7% annual GDP growth, some might say very well – but success on the scale that China has seen over the past three decades breeds high expectations. There is a basic lesson: “Markets with Chinese characteristics” are as volatile and hard to control as markets with American characteristics. Markets invariably take on a life of their own; they cannot be easily ordered around. To the extent that markets can be controlled, it is through setting the rules of the game in a transparent way. All markets need rules and regulations. Good rules can help stabilise markets. Badly designed rules, no matter how well intentioned, can have the opposite effect. For example, since the 1987 stock-market crash in the United States, the importance of having circuit breakers has been recognised; but if improperly designed, such reforms can increase volatility. If there are two levels of circuit breaker – a short-term and a long-term suspension of trading – and they are set too close to each other, once the first is triggered, market participants, realizing the second is likely to kick in as well, could stampede out of the market. Moreover, what happens in markets may be only loosely coupled with the real economy. The recent Great Recession illustrates this. While the US stock market has had a robust recovery, the real economy has remained in the doldrums. Still, stock-market and exchange-rate volatility can have real effects. Uncertainty may lead to lower consumption and investment (which is why governments should aim for rules that buttress stability). What matters more, though, are the rules governing the real economy. In China today, as in the US 35 years ago, there is a debate about whether supply-side or demand-side measures are most likely to restore growth. The US
experience and many other cases provide some answers. For starters, supply-side measures can best be undertaken when there is full employment. In the absence of sufficient demand, improving supply-side efficiency simply leads to more underutilisation of resources. Moving labor from lowproductivity uses to zero-productivity unemployment does not increase output. Today, deficient global aggregate demand requires governments to undertake measures that boost spending. Such spending can be put to many good uses. China’s critical needs today include reducing inequality, stemming environmental degradation, creating livable cities, and investments in public health, education, infrastructure, and technology. The authorities also need to strengthen regulatory capacity to ensure the safety of food, buildings, medicines and much else. Social returns from such investments far exceed the costs of capital. China’s mistake in the past has been to rely too heavily on debt financing. But China also has ample room to increase its tax base in ways that would increase overall efficiency and/or equity. Environmental taxes could lead to better air and water quality, even as they raise substantial revenues; congestion taxes would improve quality of life in cities; property and capital-gains taxes would encourage higher investment in productive activities, promoting growth. In short, if designed correctly, balanced-budget measures – increasing taxes in tandem with expenditures –could provide a large stimulus to the economy. Nor should China fall into the trap of emphasising backward-looking supply-side measures. In the US, resources were wasted when shoddy homes were built in the middle of the Nevada desert. But the first priority is not to knock down those homes (in an effort to consolidate the housing market); it is to ensure that resources are allocated efficiently in the future. Indeed, the basic principle taught in the first weeks of any elementary economics course is to let bygones be bygones – don’t cry over spilt milk. Low-cost steel (provided at prices below the long-term average cost of production but at or above the marginal cost) may be a distinct advantage for other industries. It would have been a mistake, for example, to destroy America’s excess capacity in fiber optics, from which US firms gained enormously in the 1990s. The “option” value associated with potential future uses should always be
contrasted with the minimal cost of maintenance. The challenge facing China as it confronts the problem of excess capacity is that those who would otherwise lose their jobs will require some form of support; firms will argue for a robust bailout to minimise their losses. But if the government accompanied effective demand-side measures with active labour-market policies, at least the employment problem could be effectively addressed, and optimal – or at least reasonable – policies for economic restructuring could be designed. There is also a macro-deflationary problem. Excess capacity fuels downward pressure on prices, with negative externalities on indebted firms, which experience an increase in their real (inflation-adjusted) leverage. But a far better approach than supply-side consolidation is aggressive demand-side expansion, which would counter deflationary pressures. The economic principles and political factors are thus well known. But too often the debate about China’s economy has been dominated by naive proposals for supply-side reform – accompanied by criticism of the demand-side measures adopted after the 2008 global financial crisis. Those measures were far from perfect; they had to be formulated on the fly, in the context of an unexpected emergency. But they were far better than nothing. That is because using resources in suboptimal ways is always better than not using them at all; in the absence of the post-2008 stimulus, China would have suffered substantial unemployment. If the authorities embrace better-designed demand-side reforms, they will have greater scope for more comprehensive supply-side reforms. Moreover, the magnitude of some of the necessary supply-side reforms will be markedly diminished, precisely because the demand-side measures will reduce excess supply. This is not just an academic debate between Western Keynesian and supply-side economists, now being played out on the other wide of the world. The policy approach China adopts will strongly influence economic performance and prospects worldwide. 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
The coming wave of oil refugees By Michael Meyer The idea that oil wealth can be a curse is an old one – and it should need no explaining. Every few decades, energy prices rise to the heavens, kicking off a scramble for new sources of oil. Then supply eventually outpaces demand, and prices suddenly crash to Earth. The harder and more abrupt the fall, the greater the social and geopolitical impact. The last great oil bust occurred in the 1980s – and it changed the world. As a young man working in the Texas oil patch in the spring of 1980, I watched prices for the US benchmark crude rise as high as $45 a barrel – $138 in today’s dollars. By 1988, oil was selling for less than $9 a barrel, having lost half its value in 1986 alone. Drivers benefited as gasoline prices plummeted. Elsewhere, however, the effects were catastrophic – nowhere more so than in the Soviet Union, whose economy was heavily dependent on petroleum exports. The country’s growth rate fell to a third of its level in the 1970s. As the Soviet Union weakened, social unrest grew, culminating in the 1989 fall of the Berlin Wall and the
collapse of communism throughout Central and Eastern Europe. Two years later, the Soviet Union itself was no more. Similarly, today’s plunging oil prices will benefit a few. Motorists, once again, will be happy; but the pain will be earth-shaking for many others. Never mind the inevitable turmoil in global financial markets or the collapse of shale-oil production in the United States and what it implies for energy independence. The real risk lies in countries that are heavily dependent on oil. As in the old Soviet Union, the prospects for social disintegration are huge. Sub-Saharan Africa will certainly be one epicenter of the oil crunch. Nigeria, its largest economy, could be knocked to its knees. Oil production is stalling, and unemployment is expected to skyrocket. Already, investors are rethinking billions of dollars in financial commitments. President Muhammadu Buhari, elected in March 2015, has promised to stamp out corruption, rein in the free-spending elite, and expand public services to the very poor, a massive proportion of the country’s population. That now looks impossible. As recently as a year ago, Angola, Africa’s second largest oil producer, was the darling of global investors. The expatriate workers staffing Luanda’s office towers and occupying its fancy residential neighbourhoods complained that it was the most expensive city in the world. Today,
Angola’s economy is grinding to a halt. Construction companies cannot pay their workers. The cash-strapped government is slashing the subsidies that large numbers of Angolans depend on, fuelling popular anger and a sense that the petro-boom enriched only the elite, leaving everyone else worse off. As young people call for political change from a president who has been in power since 1979, the government has launched a crackdown on dissent. On the other side of the continent, Kenya and Uganda are watching their hopes of becoming oil exporters evaporate. As long as prices remain low, new discoveries will stay in the ground. And yet the money borrowed for infrastructure investment still must be repaid – even if the oil revenues earmarked for that purpose never materialise. Funding for social programmes in both countries is already stretched. Ordinary people are already angry at a kleptocratic elite that siphons off public money. What will happen when, in a few years, a huge and growing chunk of the national budget must be dedicated to paying foreign debt instead of funding education or health care? The view from North Africa is equally bleak. Two years ago, Egypt believed that major discoveries of offshore natural gas would defuse its dangerous youth bomb, the powder keg that fueled the Arab Spring in 2011. No longer. And to make matters worse, Saudi Arabia, which for years has funneled
money to the Egyptian government, is facing its own economic jitters. Today, the Kingdom is contemplating what was once unthinkable: cutting Egypt off. Meanwhile, next door, Libya is primed to explode. A half-decade of civil war has left an impoverished population fighting over the country’s dwindling oil revenues. Food and medicine are in short supply as warlords struggle for the remnants of Libya’s national wealth. These countries are not only dependent on oil exports; they also rely heavily on imports. As revenues dry up and exchange rates plunge, the cost of living will skyrocket, exacerbating social and political tensions. Europe is already struggling to accommodate refugees from the Middle East and Afghanistan. Nigeria, Egypt, Angola, and Kenya are among Africa’s most populated countries. Imagine what would happen if they imploded and their disenfranchised, angry, and impoverished residents all started moving north. Michael Meyer, a former communications director for UN Secretary-General Ban Kimoon, is Dean of the Graduate School of Media and Communications at Aga Khan University in Nairobi. © Project Syndicate, 2016. www.project-syndicate.org
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The lonely Arab crowd By Sami Mahroum In The Hubris of the Zero Point, the Colombian philosopher Santiago Castro-Gomez describes René Descartes’s 1637 declaration “I think, therefore I am” as the moment white Europeans installed themselves above God as the sole arbiters of knowledge and truth. With this turning point, they began to think of themselves as observers whose scientific methods, morals, and ethics overrode those of other cultures. Cultural “zero points” are important because they serve as a dividing line – a clear demarcation of “before” and “after” that holds fundamental implications for the development of private and public life. So it is instructive to consider the implications of Castro-Gomez’s concept for the Arab world. Indeed, it could be argued that much of the region’s troubles are attributable to the absence of an indigenous “zero point” onto which a modern culture could be sturdily pinned. In The Lonely Crowd, the American sociologist David Riesman identified three broad cultural types: traditiondirected cultures that look to inherited rituals, morals, and values for guidance; inner-directed cultures, in which people behave according to self-nourished values; and otherdirected cultures that react predominantly to external norms and peer influences. Riesman’s framework has particular resonance in the Arab world today, where rising literacy rates and rapid advances in communication technology have stirred a maelstrom of competing cultural narratives, with his three types competing to define the region’s future. Ironically, it is the combination of increased literacy and modern technology that is fanning the flames of conflict
between the two types of “reformers” – religious revivalists and Western-oriented modernisers. Taking advantage of their ability to mass-produce and instantly disseminate ancient religious texts and Western-originating literature, the two camps battle for the hearts and minds of otherwise traditional societies. According to the Lebanese publisher Samar Abou-Zeid, however, religious books are among the most downloaded works of literature in the Arab world. The trouble is that most religious texts consumed today in the Arab world address an audience of specialists that no longer exists and – as Riesman warned – they are often misconstrued. The people and the times for which these texts were written are completely different from the people reading them today. Devout Muslims, of course, have their own zero point: the year 610, when the Angel Gabriel revealed the Koran’s first verse to the Prophet Muhammad. From then on, many Muslims have regarded themselves as the bearers of a righteous truth and moral vision that takes precedence over all others. This has inevitably put religious revivalists in opposition to the second cultural type vying for preeminence in the Arab world: western-educated, inner-directed modernists who hold Descartes’s declaration as their reference point. These Arabs – often the economic elite – read, admire, and consume products of a culture that, despite its proclaimed commitment to “universal values,” continues to be stingily Eurocentric and dominated by Christian intellectual tradition. As a result, they are increasingly likely to feel like exiles both at home and abroad. The final, other-directed strand of Arab culture is arguably the most dominant: those whom Riesman would have called the “lonely Arab crowd.” Free of roots or tradition, they take refuge in superficiality from the conflicts that surround them, seeking fulfillment in consumerism, careers, and lifestyles. Their zero point is the latest fad or fashion.
This cultural turbulence is due – at least in part – to the absence of a contemporary homegrown intellectual tradition capable of providing Arab societies with an inner compass based on local values and modern perspectives. This cultural vacuum is most evident in the mismatch between the region’s reading habits and the response of its publishing industry. Egyptians, for example, read for an average of 7.5 hours per week, compared to five hours and 42 minutes in the United States. And yet in 2012, according to Abou-Zeid, the entire Arab world and its 362 million inhabitants produced just over 15,000 titles, putting it in the same league as Romania (with a population of 21.3 million), Ukraine (45.6 million), or the American publisher Penguin Random House. To maintain a similar proportion to population, the Arab world should be publishing 10-20 times more titles than it does today. The dominance of old religious texts and Westernproduced works has left modern Arab readers polarised, without a zero point of their own. It is ironic that increased literacy and adoption of modern technology have contributed not to intellectual growth, but to regional strife. It may be no coincidence that Lebanon, one of the first countries in the region to boost literacy rates, was also the first to tumble into civil war. Unless Arab and Muslim societies rediscover, revitalise, and in some respects create their homegrown contemporary intellectual tradition, the result will be cultural drift or, far worse, the continuation of bloody civil strife. Sami Mahroum is Director of the Innovation & Policy Initiative at INSEAD. © Project Syndicate/Mohammed Bin Rashid Global Initiatives, 2016 - www.project-syndicate.org
Doing well by doing good Laura Tyson and Lenny Mendonca If you get most of your ideas about government from speeches by America’s Republican presidential candidates, it’s easy to believe that the US federal government is incapable of doing anything right. But not even the Republicans actually believe it. The proof is just beneath the surface, where a remarkable bipartisan consensus is emerging around an approach to America’s most serious social problems – including homelessness, criminal recidivism, preschool education, and chronic illness – that combines the best principles of conservatism and progressivism. It is a strategy that is playing out in Republican states such as Utah and Kentucky and Democratic ones like Massachusetts and California. This nationwide trend is being catalyzed in part by the federal government. But it is being implemented mainly at the community level through partnerships among local governments, community groups, philanthropic organisations, and for-profit investors. These are, in a sense, pay-for-success projects, sometimes structured as social impact bonds – formal contracts that tie payments to actual results. Private investors and philanthropic organisations finance the upfront costs of the pilot projects, and local or state governments (sometimes supplemented with federal money) pay the investors only if the project produces the promised results. Though the pay-for-success model is still in its infancy, dozens of projects are now underway. Indeed, the United States is already the largest pay-for-success market in the world, with over $100 mln invested in such transactions. Utah was an early pioneer, launching a novel pilot project in preschool education that is funded by $7 mln from Goldman Sachs and the Pritzker Foundation. The city of Chicago has launched a similar but larger project for $17 mln, with
upfront funding from some of the same investors as in Utah. Massachusetts has a $27 mln project to test a programme for reducing recidivism among young men on probation. Pay-for-success projects mark a radical departure from traditional approaches to funding solutions to complex social challenges. The most obvious difference is that taxpayers avoid the upfront financial cost of trying an unproven strategy. Santa Clara County, California is introducing a pilot project aimed at reducing the cost of supporting people with acute mental illness. At least 250 people will receive temporary housing along with “wrap-around” support and psychiatric services. The goal is to lower public costs by reducing reliance on expensive acute-care hospitals, minimising the number of emergency-room visits, and avoiding jail sentences. The programme’s effectiveness will be evaluated by a randomised control trial comparing the data of patients who participated with those who did not. The key to success is that the incentives are based on outcomes, not the outflow of money. A traditional social programme is usually judged by the volume of services provided, such as the number of people trained or homeless people sheltered. President Barack Obama’s administration has been extremely active in this area, and it is now doubling down. The White House Office of Social Innovation and Civic Participation (SICP) has been working with agencies across the federal government to spur pay-for-success efforts around the country. The Social Innovation Fund has provided matching grants to dozens of communities, which are working closely with organisations such as Harvard’s Social Impact Bond Lab and Third Sector Capital, to identify and structure promising payfor-success ventures. The SICP just launched a competition for a new $10.6 mln round of matching grants. If the broad social goals sound “Democratic,” the method and strategy are in many ways “Republican.” They rely heavily on the private sector, require tough quantitative evaluation, and devolve most of the actual work to states and localities. Call this “progressive federalism.” The “progressive” component is in taking on major social problems. The “federalism” consists in the recognition that states and local
communities are the primary sources of bold and effective new strategies. Lawmakers in both parties have teamed up to introduce a variety of bills that would encourage and fund pay-forsuccess projects. Meanwhile, the Obama administration has pushed through two important regulatory changes that could free up billions of dollars in private capital for socialimpact investing, including pay-for-success schemes. In September, the Treasury Department provided new regulations to philanthropic foundations that relaxed the perceived barriers to “mission-related investments.” It was an important move: Foundations oversee some $600 bln, but had long worried that certain social-impact investments might jeopardize their tax-free status. In October, the Department of Labor followed up with a “clarification’’ that eased worries at pension funds about investing in ventures that produce social as well as economic returns. Of course, though these changes open the way for philanthropic foundations and pension funds to become major investors in pay-for-success projects, success is not guaranteed. For example, a project to reduce recidivism among juvenile inmates at Rikers Island in New York City produced disappointing results. But that is exactly how the approach is supposed to work: risk-conscious investors, rather than taxpayers, assume the upfront financial costs of innovating. Failed efforts are not only inevitable; they are essential to finding real solutions. Americans are generally wary of “big government,” but they do want solutions to their country’s biggest social problems. A results-oriented pay-for-success approach, based on what we know works well in the private sector, provides an ideal opportunity to test bold and innovative solutions, learn from scores of competing projects about which work, and ramp up those that do. Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group. Lenny Mendonca, Senior Fellow at the Presidio Institute, is a former director of McKinsey & Company.
February 3 - 9, 2016
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The end of the new normal? By Mohamed A. El-Erian Αuthor of When Markets Collide
Just when the notion that Western economies are settling into a “new normal” of low growth gained mainstream acceptance, doubts about its continued relevance have begun to emerge. Instead, the world may be headed toward an economic and financial crossroads, with the direction taken depending on key policy decisions. In the early days of 2009, the “new normal” was on virtually no one’s radar. Of course, the global financial crisis that had erupted a few months earlier threw the world economy into turmoil, causing output to contract, unemployment to surge, and trade to collapse. Dysfunction was evident in even the most stable and sophisticated segments of financial markets. Yet most people’s instinct was to characterise the shock as temporary and reversible – a V-shape disruption, featuring a sharp downturn and a rapid recovery. After all, the crisis had originated in the advanced economies, which are accustomed to managing business cycles, rather than in the emerging-market countries, where structural and secular forces dominate. But some observers already saw signs that this shock would prove more consequential, with the advanced economies finding themselves locked into a frustrating and unusual long-term low-growth trajectory. In May 2009, my PIMCO colleagues and I went public with this hypothesis, calling it the “new normal.” The concept received a rather frosty reception in academic and policy circles – an understandable response, given strong conditioning to think and act cyclically. Few were ready to admit that the advanced economies had bet the farm on the wrong growth model, much less that they should look to the emerging economies for insight into structural impediments to growth, including debt overhangs and excessive inequalities. But the economy was not bouncing back. On the contrary, not only did slow growth and high unemployment
persist for years, but the inequality trifecta (income, wealth, and opportunity) worsened as well. The consequences extended beyond economics and finance, straining regional political arrangements, amplifying national political dysfunction, and fueling the rise of anti-establishment parties and movements. With the expectation of a V-shape recovery increasingly difficult to justify, the “new normal” finally gained widespread acceptance. In the process, it acquired some new labels. IMF Managing Director Christine Lagarde warned in October 2014 that the advanced economies were facing a “new mediocre.” Former US Secretary of the Treasury Larry Summers foresaw an era of “secular stagnation.” Today, it is no longer unusual to suggest that the West could linger in a low-level growth equilibrium for an unusually prolonged period. Yet, as I explain in my new book The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, growing internal tensions and contradictions, together with over-reliance on monetary policy, are destabilizing that equilibrium. Indeed, with financial bubbles growing, the nature of financial risk morphing, inequality worsening, and nontraditional – and in some cases extreme – political forces continuing to gain traction, the calming influence of unconventional monetary policies is being stretched to its limits. The prospect that such policies will be able to keep the economic engines humming, even at low levels, looks increasingly dim. Instead, the world economy seems to be headed for another crossroads, which I expect it to reach within the next three years.
This may not be a bad thing. If policymakers implement a more comprehensive response, they can put their economies on a more stable and prosperous path – one of high inclusive growth, declining inequality, and genuine financial stability. Such a policy response would have to include progrowth structural reforms (such as higher infrastructure investment, a tax overhaul, and labour retooling), more responsive fiscal policy, relief for pockets of excessive indebtedness, and improved global coordination. This, together with technological innovations and the deployment of sidelined corporate cash, would unleash productive capacity, producing faster and more inclusive growth, while validating asset prices, which are now artificially elevated. The alternate path, onto which continued political dysfunction would push the world, leads through a thicket of parochial and uncoordinated policies to economic recession, greater inequality, and severe financial instability. Beyond harming the economic wellbeing of current and future generations, this outcome would undermine social and political cohesion. There is nothing pre-destined about which of these two paths will be taken. Indeed, as it stands, the choice is frustratingly impossible to predict. But in the coming months, as policymakers face intensifying financial volatility, we will see some clues concerning how things will play out. The hope is that they point to a more systematic – and thus effective – policy approach. The fear is that policies will fail to pivot away from excessive reliance on central banks, and end up looking back to the new normal, with all of its limitations and frustrations, as a period of relative calm and wellbeing. 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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