Posts Tagged ‘economy’

Swedbank opens kimono on Baltic Lending … not a pretty sight

SwedbankSwedbank, Sweden’s fourth largest lender & one of the biggest banks in the Baltic region, revealed the full scale of Swedish exposure to economic turmoil in Eastern Europe last week. The bank posted dismal figures due to large losses on loans made to firms in the troubled Baltic region.

Swedbank was the first in a series of Swedish and other Nordic banks scheduled to announce results in coming days as the region’s lenders count the cost of aggressive expansion in Latvia, Lithuania and Estonia. Nordic banks piled into the former Soviet states after their entry into the European Union in 2004 and initially prospered from rapid growth in the region.

The bank revealed a surge in bad loans from the Baltic States and Ukraine. Investors were reassured by the bank’s insistence that it could weather the storm without raising fresh capital, pushing the stock up more than 11 % after a day of volatile trading. At the same time, it announced that it would slash 16% of its workforce. However, it closed on Friday up 21.5% as investors were reassured that it would not raise extra capital.

The worse-than-expected second-quarter losses show that Sweden’s banking sector is still facing a barrage of bad loans from the Baltic States, even as the country is hailed as a financial role model after its recovery from a banking crisis in the 1990s. Bank’s aggressive lending has backfired in recent months as the Baltic economies have plunged deeper into recession than anywhere else in the EU.

Swedbank, the largest lender in the Baltics, posted net losses of SKr 2, 01bn ($257m), compared with net profits of SKr 3,6 bn a year earlier. It was the bank’s second consecutive quarterly loss and much worse than the SKr 1,27 bn deficit forecast by analysts. Loan losses soared from SKr 423 mln a year ago to SKr 6,67 bn, with about two-thirds of the amount in the Baltic States and a third in Ukraine. In response, the bank said it planned to reduce staff by 3,600, about 16 % of its workforce, by this time next year, with most of the cutbacks in the Baltic States.

“The most recent quarter has been marred by continued uncertainty about the future of the economy,” the bank’s Chief Executive, Michael Wolf, said in a statement. “The recession is now making itself more visible, and all signs are that the downward trend will continue for some time.”

Faced with mounting losses on loans in recession-hit economies, where bad loans have shot to highs of 18% of total lending in Latvia and 24% in Ukraine, Swedbank is trying to cut costs and lower its risk profile to secure funding and ride out the storm. Swedbank will continue to close branches and increase staff cuts as it takes a defensive stance, in anticipation of further economic hardship in the region, having followed a more aggressive path of expansion, the bank will be returning to more traditional practices.

“We are taking the necessary steps to right-size business units to reflect the lower economic activity in the banking sector as a whole,”  said Wolf  “We expect impaired loans to increase in the second half but it will be less than in the first half”

The negative results came after a mission from the International Monetary Fund visited Latvia recently in order to negotiate the release of a € 200 mln ($283m) tranche of a €7.5bn emergency loan agreed late last year. The IMF has held back the funds while it seeks commitments from the Latvian government over structural reforms, increasing nervousness that the rescue package could unravel.

Swedbank assured investors that it was strong enough to absorb its Baltic losses, quashing fears it would have to raise fresh capital. The bank’s chief financial officer, said the bank had “a very resilient capital situation”

Another Swedish bank – SEB, the second-biggest banking group in the Baltic region after Swedbank, is to report activity results next week. Analysts forecast that its operating profits will be down more than 40 %.

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Goldman Sachs : Ten Things for India to Achieve its 2050 Potential (A synopsis)

India FlagIn recent years, we have published a number of papers pointing to remarkably positive potential growth for India up to 20501. Having the potential and actually achieving it are two separate things. In this paper, we outline ten crucial steps
that we believe India must take in order to achieve its full potential. In our latest annual update to our Growth Environment Scores (GES), India scores below the other three BRIC nations, and is currently ranked 110 out of a set of 181 countries assigned GES scores. If India were able to undertake the necessary reforms, it could raise its growth potential by as much as 2.8% per annum, placing it in a very strong position to deliver impressive growth.

We highlight ten key areas where reform is needed. In all likelihood, they are not the only ten, but we consider them to be the most crucial:

  • Improve governance. Without better governance, delivery systems and effective implementation, India will find it difficult to educate its citizens, build its infrastructure, increase agricultural productivity and ensure that the fruits of economic growth are well established.
  • Raise educational achievement. Among more micro factors, raising India’s educational achievement is a major requirement to help achieve the nation’s potential. According to our basic indicators, a vast number of India’s young people receive no (or only the most basic) education. A major effort to boost basic education is needed. A number of initiatives, such as a continued expansion of Pratham and the introduction of Teach First, for example, should be pursued.
  • Increase quality and quantity of universities. At the other end of the spectrum, India should also have a more defined plan to raise the number and the quality of top universities.
  • Control inflation. Although India has not suffered particularly from dramatic inflation, it is currently experiencing a rise in inflation similar to that seen in a number of emerging economies. We think a formal adoption of Inflation Targeting would be a very sensible move to help India persuade its huge population of the (permanent) benefits of price stability.
  • Introduce a credible fiscal policy. We also believe that India should introduce a more credible medium-term plan for fiscal policy. Targeting low and stable inflation is not easy if fiscal policy is poorly maintained. We think it would be helpful to develop some ‘rules’ for spending over cycles.
  • Liberalise financial markets. To improve further the macro variables within the GES framework, we believe further liberalisation of Indianfinancial markets is necessary.
  • Increase trade with neighbours. In terms of international trade, India continues to be much less ‘open’ than many of its other large emerging nation colleagues, especially China. Given the significant number of nations with large populations on its borders, we would recommend that India target a major increase in trade with China, Pakistan and Bangladesh.
  • Increase agricultural productivity. Agriculture, especially in these times of rising prices, should be a great opportunity for India. Better specific and defined plans for increasing productivity in agriculture are essential, and could allow India to benefit from the BRIC-related global thirst for betterquality food.
  • Improve infrastructure. Focus on infrastructure in India is legendary, and tales of woe abound. Improvements are taking place, as any foreign business visitor will be aware, but the need for more is paramount. Without such improvement, development will be limited.
  • Improve Environmental Quality. The final area where greater reforms are needed is the environment. Achieving greater energy efficiencies and boosting the cleanliness of energy and water usage would increase the likelihood of a sustainable stronger growth path for India. Perhaps not all these ‘action areas’ can be addressed at the same time, but we believe that, in coming years, progress will have to be made in all of them if India is to achieve its very exciting growth potential.

The rest of this white paper can be found at Goldman Sachs Global Economic Website

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Phillipines makes further moves towards agricultural stability

philippines flagDevelopment of the Filipino agricultural sector is key to the economic and social progression of the country, especially considering the potential impact the industry can have on poverty and unemployment. In 2007 agriculture activity already employed nearly 12m people, equating approximately to one-third of the country’s entire labour force, while also accounting for nearly one-fifth of GDP at 18%. The government’s primary focus is on food security for the country’s growing population. In order to accomplish this goal the Department of Agriculture has set its eyes on maintaining at least 5% annual growth in the sector over the long term.

Underlining the importance of agriculture in the Philippines is the fact that the country’s population growth rate has hovered over 2% for the last two decades – during which time the population has jumped from 60.7m in 1990 to over 90m today. The agricultural sector – unable to provide food for the country’s swelling population – has been forced to import rice and other staple foods from neighbouring countries such as Vietnam and posted a $1.75bn agricultural trade deficit in 2007. Moreover, agricultural production, in particular the growing of rice, provides a considerable number of jobs due to its labour-intensive requirements and will likely play a large role in stemming growing unemployment.

Arthur Yap, the secretary of agriculture, highlighted the government’s strategy in a recent interview, stating that, “In the short term, the Department of Agriculture’s primary goal, as set by President Gloria Magapacal Arroyo, will be to achieve food security. We are aiming to increase production and lower costs as a hedge against rising international prices.”

The year 2008 saw the Philippine’s agricultural production grow by 3.92% in the face of the global financial turmoil. Though the industry failed to achieve its targeted 5% growth, last year’s performance seems to have maintain the industry’s forward momentum. However, agriculture slowed even further in 2009 – to 2.02% in the first quarter.

The crop sub-sector, which expanded by 4.05% in 2008, fell sharply in the first quarter of 2009, posting near-flat growth of 0.61%. While the country’s production of one of its largest crops, rice, increased by 5.13%, production of its other primary crop, corn, fell by 3.39% – partially offsetting gains in other areas. The news of near-flat growth in the beginning of the year is particularly worrying as crop production represents 49% of total agricultural production.

Meanwhile, the livestock segment, which represents 12% of total agricultural production, has turned around last year’s 1.06% contraction by posting a first-quarter increase of 2.37%. A decrease in hog production was blamed for last year’s decline, an area that appears to have been restored. The final sub-sector, fisheries, fell slightly from last year’s 5.78% expansion to register 3.49% growth in the first quarter of 2009. Currently, the fisheries sub-sector contributes 24% to total agricultural production, primarily due to aquaculture and commercial fishing.

Several factors could determine agricultural growth, with the government clearly playing an important role through its FIELDS (Fertilisers, Irrigation, Education, Loans, Dryers and Seeds) programme. However, budgetary restraints dictate that government assistance will not be enough to sustain the kind of strong growth that is required to attain the adequate domestic food production. Organisation and cooperation among farmers has been ongoing for years and will continue to play a vital role in the industry’s development.

Cooperative groups have existed in the Philippines for decades and often provide the necessary platform for farmers to ensure maximum utilisation of lending, borrowing, production and distribution. Probably the most important function of the cooperative lies in its ability to access loans that would have been otherwise unattainable to its individual members.

Rural banks and some larger financial institutions, such as the Land Bank of the Philippines, specialise in providing liquidity to the rural marketplace. Land Bank currently operates a P185bn ($3.86bn) loan portfolio, of which at least 65% goes to small-scale farmers, fisherman and other rural enterprises.

According to Gilda Pico, the president & CEO of the Land Bank of the Philippines, “Cooperatives have organised and galvanised small and medium-sized rural farmers to the extent that lending from the financial sector is becoming more and more viable. This increase in liquidity in rural areas is vital from an investment standpoint and we hope to continue this trend in the coming years.” She later added, “Infrastructure development is a key driver of agricultural growth and we will continue to provide the necessary funds to build and upgrade roads, irrigation channels and other required infrastructure for the sector.”

Regardless of the success cooperatives have had in organising agricultural producers, it is essential that the sector strengthens these associations moving forward. Not only are cooperatives a vital vehicle for attracting loans and investments, they are a critical platform for farmers to discuss key issues concerning production and distribution – thereby making agricultural production more efficient.

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China : first to bottom – first to bounce

renminbiThe global financial crisis has forced Canada to rethink the received wisdom about fiscal management. It should also force a rethink of the international economic order and how we must position ourselves for a post-crisis world. Can we count on our traditional ties with the U.S. to sustain long-term development? If the crisis marks a shift in economic power toward emerging countries, especially China, what are the implications for international policy?

The current crisis has blunted the more extravagant claims of emerging market ascendancy: China, India and Brazil are facing the same challenges as the rest of the world. The notion of “decoupling” – that emerging markets are no longer subject to Western business cycles – has been debunked. In the case of China, a precipitous fall in exports has led to the closure of thousands of factories and added millions to the ranks of the unemployed.

To put it crudely, the U.S. is suffering from excessive debt and China is suffering from excessive savings. But there is a world of difference between a downturn precipitated by bad debt and one due to domestic under-consumption. When the toxic assets have been finally excised from U.S. balance sheets, Americans will be saddled with a massive debt. This will mean higher interest rates and below-potential growth for the foreseeable future.

China is also feeling the pain of a downturn, but the similarity ends there. Unlike the U.S., Beijing can afford a massive stimulus package. Relative to national income, the $600-billion (U.S.) spending boost announced by the Chinese last year is the largest of any major country. In terms of contributing to global reflation, China has done its share and more.

The critical question is whether the Chinese response represents a change in the country’s economic model. Skeptics say China is merely buying time for its exporters and will continue to pursue mercantilist policies (such as a weak currency) in a bid to gain global market share.

But the early signs point in the opposite direction: Beijing has recently expanded social programs and transfer payments for the needy, and introduced reforms to health insurance that increase coverage for an additional 400 million citizens. The expansion of social safety nets will reduce the need for precautionary savings at the household level, and result in increased discretionary spending. Given the low levels of debt in China and the huge pent-up demand for consumer goods, private consumption is destined to play a much larger role in Chinese growth. This will be good for China, and good for the world.

For these and other reasons, there is a growing consensus among experts that China will be the first to find the bottom of the economic crisis, and the first to come out of it.

It is surprising, therefore, that there is so little awareness in Canada about the impact of the global recession on China’s economic rise. The federal stimulus package did not give any hint that Canada has to build stronger economic ties with China. Bay Street, for its part, is looking to Washington for salvation, in the form of trickle-down from the U.S. rescue packages.

Paradoxically, the global crisis has emboldened China skeptics, who point to the fallacy of decoupling as proof of fatal flaws in China’s economy. This argument is sometimes conflated with the view that Beijing should be blamed for the crisis and that protection against Chinese imports must be part of a recovery strategy.

A more insidious argument is that the crisis exposes the fundamental weaknesses of Chinese authoritarianism, and will lead to the collapse of the Chinese Communist Party. Setting aside the obvious objections to this notion of “performance legitimacy,” the proposition that China is facing a crucial test of leadership may be instructive in thinking about China’s role in a changing world order.

If Beijing is able to keep domestic peace and China emerges from the crisis as a stronger player in the world economy, will we have any excuses left to not take seriously the rise of this new global power?

Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada

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Malyasia – not in recession, but government steps up cash injection

petronas-malaysia1

Malaysia is facing a difficult time due to the global economic downturn but the country has still not entered into recession, Second Finance Minister Tan Sri Nor Mohamed Yakcop said. The government is prepared to take proactive measures to stimulate the economy in the country and ensure that the people, especially the unemployed get better treatment through the strategy that will be presented under the country’s
upcoming mini budget.

“We are not in recession yet. Recession is defined as two consecutive quarters of negative growth in real gross domestic product (GDP),” noted the Minister when asked to comment on the current economic scenario in the country.”We are facing a challenging time,” Yakcop told reporters after winding-up the debate on the motion of the King’s address at the Parliament per Bernama.

The country recorded a GDP growth of only 0.1 percent in the fourth quarter of 2008 compared with a growth of 4.7 percent in the third quarter. For the whole of 2008, Malaysia recorded a GDP growth rate of 4.6 percent compared with 6.3 percent in 2007.
Being an open economy, the global economic downturn will have some impact on the economic growth of the country.

“The economic slowdown in other countries like the United States, Europe and Singapore where many companies have gone bankrupt and many workers have lost their jobs has become a challenge for Malaysia, which is small and dependent on global trade,” the Second Finance Minister said.

Deputy Prime Minister and Finance Minister, Datuk Seri Najib Tun Razak will table the mini budget at the Parliament on March 10. Yakcop also said that among the major items that will be discussed in the mini budget will be on ways to boost the level of confidence among the public, especially investors.

“We believe that we can retain confidence level in the economy through a strategy that we will take, and via working very closely with the private sector.”

Meanwhile in his speech, he said the second economic stimulus packagewas not expected to have a significant impact on inflation. In fact, the country’s inflation is expected to subside this year, supported by moderating commodity prices and the price reduction campaign undertaken byseveral retailers.

In January, Malaysia’s Consumer Price Index stood at 3.9% compared with 4.4% in December 2008. To date, a total of RM5 billion out of the RM7 billion allocated under the first economic package has already been distributed to more than 20 ministries andagencies involved and they are in various stages of implementation. A total of 8,474 projects worth RM567.9 million have been carried out to date.

Chinese officials nervous about US economy

The New York Times reports that Beijing is becoming increasingly nervous about its high stakes in America’s economic well being: Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year. China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.

In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being. Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

The good news: the U.S. will become less dependent on China. The bad news: America has to get its money from somewhere.

Although many Americans have complained in recent month about their dependence on China, the Chinese – interestingly enough – feel it is the other way around. One of the Chinese government’s top monetary economists, Yu Yongding,told the NYT he believes that the balance of financial power between the two countries is “mainly in favor of the United States.”

“If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

It will be interesting to see how both sides will deal with the economic crisis; it’s difficult to imagine that it will not have a tremendous influence on their relationship.

Chile leads the way for South American ETFs

london-metal-exchangeWhilst suffering from shrinking export markets, led by the all important 20% supply of global copper, a shrinking economy & climbing unemployment; Chile continues to buck global trends, with ratings agency, Moody’s Investors Service making it the first investment- grade country to be awarded a higher credit rating this year. The South American country’s $22 billion of savings in wealth funds has put it in a position to recover more quickly from the global credit crisis than other, similarly rated nations, Moody’s said yesterday in raising Chile’s foreign debt to A1 from A2 with a positive outlook.

This has been the result of a canny economic long game by President Michelle Bachelet, while near neighbours have splashed out on the commodities boom over the last decade, Chile has followed a prudent path of pumping  profits from state owned copper giant Codelco into soverign funds, providing the nation with a $22Bn cushion against global turmoil. That cushion is equal to roughly 13% of Chile’s GDP ($154Bn), so Chile looks as thought it should weather the storms of 2009 quite nicely.

“Nobody else compares with Chile,” Moody’s analyst Mauro Leos said in a phone interview from New York. “Like everywhere else, they’re getting hit hard. But because of the work they did ahead of time, they can go from a 5 percent surplus to a 5 percent deficit without any additional borrowing.”

Also helping is the price of copper on global markets, which is on a slow uptick, & an expectation that China’s economic recovery package will drive demand for the metal towards the end of 2009, this is reflected in current long term copper contracts on the London Metal Exchange. Central government has acted promptly, with Bachelet committed to a $19.5Bn package incorporating tax cuts & subsidies that should help stymie economic contraction. Even with copper prices at all time lows, economists think that Chile can still exit the current crisis without hitting recession.

Codelco announced its full year results earlier this month, generating a pre-tax profit of $4.968 Bn to December 2008, it is estimated that Codelco has provided an average of $7.5Bn per annum in revenues for the last 4 years. This follows Fitch rating $600M of the company’s debt as “A” back in January.

According to Fitch : “The company had USD 4.6 billion of total debt, of which USD 1.3 billion was classified as short-term. Codelco has adequate liquidity, backed by a track record of accessing debt in the local and international markets and a well-diversified debt maturity profile. Short-term debt is expected to be refinanced through a combination of the 2019 notes, bank loans from undrawn facilities and cash flow from operations.”

Chile’s banking sector is also helping stem the flow, business loans grew sharply in January, despite a deep economic slowdown amid the financial crisis, the country’s superintendent of banks said on Monday. Gustavo Arriagada told lawmakers that loans continued to grow, though at a slower pace, as Chilean banks, in counterpoint to their Western counterparts pass on a series of aggressive from the central bank to customers

“Although we have seen tighter credit conditions in the last few months and a fall in requests for credit, that is due to factors like an increase in risk and worsening of employment conditions and client income,” Arriagada said in his presentation.

This has led analysts to rethink their strategy regards South America, the single country ETF –  iShares MSCI Chile Investable Index : (NYSE : ECH) has seen some good buying activity of late, even if there is a 15% weighting towards Codelco within this product. ECH managed to add 5% over the last five days, with a huge spike in trading in yesterdays surge on the US markets. Along with Brazil / EWZ & Mexico /EWW, it looks as though Chile could be an interesting mid to long term long within the country specific ETFs.