Macro Economic Trend Analysis

Market Wrap : QE2, Interest Rates, Inflation, Deflation & Asset Bubbles

2010-10-21T11:15:00.000-07:00

Charles Malize

US & European Markets

Currency anxieties among countries are mounting as they crave for a weaker exchange rate to sustain growth through net export improvements increases. This usually translates into; one country’s gain becoming another country’s loss which tends to lead to a competitive devaluation war among trading partners. Protectionist concerns are on the rise. Currency wars in due course pilots trade wars, as the recent United States (US) trade legislation threatening China has indicated. With the US unemployment rate at almost 10% and Chinese growth at approximately 10%, it is no surprise the recent threat.

The US quest to accomplish a balanced budget in the interim, thus heightening confidence in its economy is fast disappearing. With signs of economic rebound receding, the Federal Reserve Chairman Ben S. Bernanke on 10/15/10 at a Boston conference indicated the application of the unconventional methods of quantitative easing (QE) to stimulate the US economy. The game plan would be the purchase of hundreds of billions of dollars of government treasury bonds.

A lean towards this strategy has seen the US dollar incessant slide against a basket of major currencies including the emerging ones. The Dollar Index, used by International Exchange Inc. to track the greenback (dollar) against a basket of currencies including the euro, yen and pound sterling, dropped 0.4 % on Friday to $77.041, the lowest level in 10 months. It fell to a 15 year low against the yen same period. The anticipated second round of quantitative easing is being dubbed “quantitative easing two” (QE2).

With the threat of deflation looking imminent by the day, the worries with policy makers in the US is the need to avert it. The Federal Reserve bond purchases would be intended to lower long-term interest rates to stimulate buying and spending and aid further employment. Critics fear that embarking on such a policy could trigger increase volatility in financial markets eroding confidence it so desires as a result. Others see it as another license for the treasury to print money, creating a new credit bubble in the process.

The European counterpart see the circumstance differently. According to a recent statement by the European Central Bank (ECB) President Jean – Claude Trichet at the World Policy Conference in Marrakech – a “modest” recovery persists in the euro zone. He confirmed he is completely against changing the euro- area’s inflation target and not convinced any major central bank is preparing to change the definition of price stability. In response to a question about the plans of the US Federal Reserve – “No central bank finds it appropriate to raise inflation at present.”

The US Consumer Price Index (CPI) has been lifeless for the past year. Although this has kept inflation on check, it raises the risk of tipping the economy towards deflation – a widespread drop in prices of goods and services that can set off a cascade of falling company profits. In the past twelve months, core prices rose only 0.8%, the smallest yearly gain in more than 49 years. According to the Federal Reserve Chairman: The economy is growing at a pace “less vigorous than we would like.” Unemployment, now at 9.6%, has been stuck near double digits for more than a year. Bernanke indicated that the Federal Reserve is concerned that the economic growth is likely to remain subdued and high unemployment is likely to keep consumers cautious in their spending.

The stock market saw its fortune turn for the better as a result of Chairman Bernanke’s remarks. It makes more sense for investors to buy stocks in this market as equities are cheaper and a more rewarding investment. But for how long? The expectation is that this policy could be short lived – instead of the interest rate dropping, it could ascend in the near future (four to six months) strengthening the dollar in the process. A turning point for global financial markets because as interest rate begin to rise the US dollar should gain – negatively impacting the equity and commodity prices across the board.

Another ensuing problem for the US markets is the high budget deficit that has become an intense campaign issue for the congressional election in November. The deficit for the fiscal year 2010 narrowed to $1.294 trillion from last years record $1.416 trillion. This is as a result of increase in tax collection and an evident drop in bailout spending. This is still considered very high. According to the Treasury Department statement on Friday, the deficit was @ 8.94% of GDP (Gross Domestic Product) for year ended September 30, versus 10% in fiscal 2009. Market observers including policy makers see this as very high and figures in the 6% range to change perceptions.

Chinese Markets

As the US and China politicize the issue of valuation of the Chinese currency (Renminbi)- China’s equity market in recent months has been on the rise as economic growth spurs higher fund flows into the country. With foreign direct investment on the increase has seen confidence return and as a result a boost to its stock market. According to the Ministry of Commerce, direct investment gained 6.1% in September from a year earlier to $8.38 billion. Foreign investment for the first nine months also rose 16.6% to $74.34 billion. The Shanghai stock index has recovered almost 26% in the last 3 months as a result of growth prospects.

Chinese property prices rebounded in September as urban property prices increased 9.1% y/y, according to the 70- city index of the National Bureau of Statistics, down from the 9.3% y/y gain in August. After two months of flat prices, the m/m index showed that prices increased 0.5% in September. Among the 70 cities surveyed, only one saw a m/m contraction in prices. Meanwhile, transaction as measured by the value of the real estate sold increased 15.8% y/y for the year through September, up from 12.6% in the first eight months of 2010.

Obviously the recent market appreciation has incited inflationary worries. In an attempt to stay ahead of the inflation curve, its policy makers unexpectedly yesterday raised its benchmark lending and deposit rates for the first time since 2007. This is ahead of October 21st data release. The fear is that the ensuing statistics may show inflation accelerated to the fastest pace in almost two years. The one-year lending rate will increase to 5.56 percent from 5.31 percent, effective October 20th, according to the People’s Bank of China. The deposit rate will increase to 2.5 percent from 2.25 percent.

The impact of the increase was felt by global markets as commodities and equities turned negative and the greenback rose. Another rate increase could be in the offing if increase in asset prices and inflation remains obdurate. “This is a bucket of cold water for the market,” said Zhang Yuheng, an analyst with Capital Securities in Shanghai. “The hike itself is not a big one, but the psychological impact is big as the expectations for more rate hikes will appear.” The quagmire with higher interest rates is that it may encourage inflows of speculative capital from abroad that could put a damper on the management of the fastest- growing major economy.

African Markets

Africa’s capital markets are categorized as emerging markets and can be defined as countries with developing economies that often experience rapid growth and offer good investment opportunities. They are also considered to be unstable and high risk due to the threat of unpredictable geopolitics.

Nonetheless, despite the dangers, money continues to flow in. The Emerging Markets Private Equity Association reported in August that private equity investment in emerging markets including Africa had risen to $13bn in the first half of 2010, up from $8bn the previous year. Year-to-date returns also look healthy. The S&P Africa 40 index, which includes stocks from frontier countries such as Botswana, Côte d’Ivoire, Ghana and Nigeria, is up 9.4 per cent year to date, while the MSCI Frontier Index, which covers 26 countries, is up 8.01 per cent.

Major western banks are raising money to capitalize on the booming frontier markets such as Africa. British bank Standard Chartered PLC surprised the market last week by asking its shareholders for nearly $5.2 billion in a rights issue to satisfy tighter international capital requirements. The company said it needs to be sure it has cash available for expansion after meeting the so-called Basel III rules, which are expected to raise the amount of money banks need to set aside as a buffer against potential problems. “We see many opportunities for growth across Asia, Africa and the Middle East as the world continues to rebalance between East and West,” said Chief Executive Peter Sands.

Emerging economies now account for more than 30 per cent of global GDP. Investors see an attractive scope for huge asset re-allocation. With the probability of QE2 in the US comes aggressive printing of money that is likely to incite investors to capitalize on this cheap money by allocating capital to emerging countries such as those in Africa. This could trigger asset bubbles and instability for a continent that is developing with weak infrastructure, income inequality, political instability, challenging business environments and crass corruption levels.

According to the International Monetary Fund (IMF), “fund managers’ habits are the core of the problem: with a powerful herd instinct, they tend to move together and risk swamping markets with their buckets of money.” It further stated in its report: “Investor flow data suggests emerging markets tend to suffer from herding behavior.”

Contact:info@cmcapitalmarketresearch.com

Nigerian Economy: Sleeping While Being Looted

2010-10-15T10:35:00.000-07:00

Charles Malize

It is stomach-turning when one reads or takes notice of how government and corporate bureaucrats abuse their positions of office in Nigeria. The country is dreadfully notorious in that respect and citizens have come to recognize and accept this as a way of life. As one observer put it…”sleepwalkers”- Nigerians more often use the notion; “follow - follow.”

It is an ignominy not just for the culprits that coddle in the crooked behavior of misappropriation of resources but for the citizens that appear brain washed and seem to accommodate the status quo. Could it be that society that have been subdued over the years now accept this as a way of life? A major problem for Nigeria is that the populace does not understand the mess the country is in – yet they opt to follow. A miserable and depressing situation.

Nigeria is Africa's most populous country with population @ 154.7 million (UN, 2009). A major oil exporter and a member of OPEC (The Organization of the Petroleum Exporting Countries). Life expectancy is about 47 years (men), 48 years (women) (UN). Income per capita is @ US $1,160 (World Bank, 2008) and Gross Domestic Product (GDP) of $339 billion (2009 est. – CIA World factbook.) Nigeria’s foreign exchange reserve as of September 2010 was at $34.57 billion and diminishing. A 15% drop from same period last year.

The mainstream population lives on acute poverty, surviving on less than $1.00 a day whilst less than 2% of the economy lives extremely wealthy boasting billions of dollars as net worth. Most of these billionaires are products of swindlers of Nigerian treasury and corporate bank accounts. This billion dollar precedence was set by previous treasury plunderers: Alhaji Umaru Diko (a former minister), Gen. (Rtd) Ibrahim Babaingida (a former military leader) and the late Gen.Sani Abacha (a former military leader). In recent year’s bankers, government officials and politicians followed suit using this number as a benchmark to enrich themselves, ransacking and looting companies and the country of their reserves as the economy decays.

The amount stolen over the years, by government officials total over $40 billion. The money robbed by corporate officials in recent years is estimated at $18 billion. The 2009 banks bailout at $4 billion. These numbers total over $62 billion and mounting. Nigeria’s annual oil revenue is circa $60 billion. The country is on a binge of accelerating its domestic and foreign debt for the next generation. The leaders and their associated plunderers appear to embrace the situation but trickling down to the average Nigerian - no one seems to have a clue. The ones that do choose to ignore. In the eyes of the international community, Nigeria has become a laughing stock.

A recent and well popularized case was the conviction of Mrs. Cecilia Ibru, an elite name in Nigeria. She was the Chief Executive Officer (CEO) of a well-known Nigerian bank- Oceanic bank that was financially bailed out by the Nigerian treasury together with eight other banks in 2009. While at the helm of the bank, she was said to have embezzled money to further her lifestyle. The indictment and conviction in a Nigerian court revealed money laundering and stolen assets that ran into almost $2 billions (the ones that could be traced). She owned two private jets, multiple single homes and streets listed as assets in the United States and Nigeria. These assets were allegedly masked in family and accomplices names. In a plea bargain struck with her investigators and prosecutors she agreed to forfeit these assets for a six month jail incarceration. A yarn for a crime this magnitude. There are other akin pending cases that the Central Bank of Nigeria Governor (Lamido Sansui) has acknowledged are worse and awaiting trial.

Some observers see her sentence as fair comparing it to white collar crimes committed in the United States and other western countries. Others seem to confuse it with the adage “Follow the money” principle that I perceive is used in the wrong context. The phrase “follow the money” is not associated with bank robbers and government/political thieves that embezzle from company /country coffers. “Follow the money” (smart money) would not want to be tagged in this manner. A ghastly stigma. It should be labeled – “follow the loot.”

Some have compared her crime to the recent Robert Moffat IBM hedge fund inside trading scandal of $50 million and Martha Stewart inside trading conviction of 2004. Both cases were in the United States and are laughable comparisons. In Moffat’s case he pleaded guilty to securities fraud and conspiracy to commit securities fraud. Authorities acknowledge his action (tips) resulted in no profits and he received no money. Lawyers on both sides agreed. Instead, Moffat was motivated by a desire to impress fellow defendant Danielle Chiesi, with whom he had an affair -court papers showed prior to sentencing. It further stated she “played” him by using their intimate relationship to get confidential information. He was sentenced to six months jail term and ordered to pay a fine of $50,000 by the District Judge.

Martha Stewart in 2004 was convicted of lying to investigators about a stock sale and served five months in prison with a fine of $30,000. According to U.S. Securities and Exchange Commission she averted a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001 after receiving inside information from her broker at Merrill Lynch – an investment bank.

Mrs. Cecilia Ibru’s crime is in the enormity of Bennie Maddoff and his ponzi scheme, Mr. Bernard J Ebbers – World Com, Jeffrey K Skillings of Enron and Dennis Kozlowski of Tyco. The first three names swindled investors billions of dollars. D. Kozlowski abused hundreds of millions of dollars of shareholders money. Bennie Maddoff got sentenced 150 yrs in jail and forfeited properties. The other three convicts received at least 25 yrs incarceration and forfeited properties for embezzlement. Compare the punishment. Nigeria’s privileged lawbreakers and criminals are normally set free after a short while and are released into the wild to continue their blitz raiding of accounts.

The current status quo of financial abuse is a dishonor and demoralizing for the country. The Berlin based agency; Transparency International (TI) that carries out the Transparency International index on corruption, ranks countries according to the attitudes of analysts and public officials and defines corruption as abuse of power for private gain. It rates Nigeria as one of the most corrupt and scandalous in recent years where massive misappropriation of public money by members of government is seen as common practice. The retired General Ibrahim Babaingida and the late General Abacha’s regime present a typical example where billions of dollars were siphoned out of the country’s coffers for private gain.

The country appears on the edge experiencing severe emotional distress through no fault of its own. It’s highly regarded human resources that can be applied locally to further the economy are scattered globally. The ones that are in Nigeria seem to be unreservedly confused. Doctors, lawyers, economists, accountants and other professionals crave for a political post. Several yearn for a bank manager assignment or associate of bank manager. The failed ones resort to 419 or drug smuggling. The successful ones become ‘fund managers’ for the Nigerian treasury and disperse accounts for self-seeking reasons. Some become bank robbers, conspiring with bank managers to raid accounts. Reason - easy access to money and greed. The naive and the hardworking tag along for the ride. There is a disconnect.

With this entire said, the country major sectors for growth are diminishing fast. Nigeria suffers from a deprived infrastructure. Sectors that are supposed to drive the economy are pooped. These segments: energy, financial, transport and agriculture are exhausted and begging for the right investment. Adding to these includes a depleted excess crude account, a tired and worn out currency, defective electoral process, a blemished health care sector, poor security, bombings and kidnapping. The country was recently linked to a slavery and prostitution ring in a neighboring country of Mali.

There is no visible growth although the treasury and the IMF (International Monetary Fund) claim otherwise. People on the ground find this assertion laughable and are demanding proof. No doubt IMF and other donors have capital they can lavish on developing countries. A country like Nigeria fits the bill. Obviously this comes at a cost-no free lunch. Current leaders have to be made accountable and society should carry a “big stick” to enforce it. With its current egalitarian leadership, the country still faces the threat of breaking away from each other down ethnic and religious lines. Nigeria appears on the brink of collapse and time is of the essence.

Contact: info@cmcapitalmarketresearch.com

Nigeria: NSE – Professor Ndi Okereke Onyuike takes the high road

2010-09-29T09:32:00.000-07:00

Charles Malize

The recent drama at the Nigerian Stock Exchange (NSE) resulted in today’s sacking of its Director General, Prof. Ndi Okereke Onyuike and the suspension of its president, Alhaji Aliko Dangote. The situation became scary as past gains in the stock market were viciously attacked and eroded as confidence in the marketplace waned. Although the NSE was in denial, investors bailed as an exodus of fund withdrawals increased. The fear is that NSE is insolvent and unable to meet its financial obligations.

How events unfolded

Alhaji Aliko Dangote, the suspended president of the NSE in a statement last week stated that the exchange was indeed broke as it could no longer honor its obligations. He said the exchange is currently dipping its hands in the Central Securities Clearing Systems (CSCS) accounts for N900 million to support its cash deficit position.

It was revealed that the NSE is indebted to the tune of N119.5 million to Accenture; a company that is engaged in the work of executive selection, trading platform selection/ completion and implementation of the operating model for the exchange.

According to him, Accenture had in the June 9, 2010 letter addressed to the Council of the NSE on and signed by the company’s country managing director, Niyi Yusuf, notified the Exchange of its decision. “As agreed in the contract with the NSE, our payments were to be made in installments and based on invoices which are payable upon presentation. However, despite all the necessary invoices, Accenture is yet to receive any payment on all outstanding invoices. We have written formal letters of reminder of this indebtedness to the management of the NSE to no avail,” the letter stated.

The letter further stated that “while we are mindful of the constrained financial position of the NSE but given this level of indebtedness and absence of a firm assurance of payment by NSE management, we will unfortunately not be able to commence any additional work (executive selection, trading platform selection completion and implementation of the operating model), until all outstanding invoices are duly paid in full”.

The suspended president acknowledges that the NSE poor accounting has made it difficult for it to function as an independent entity. This has further weakened investor confidence in the market place as lack of detail and poor accounting at the exchange has restricted investor’s ability to make informed decisions about investment alternatives. Fear and panic gripped the Nigerian capital markets following the news of financial misappropriation and mismanagement of the exchange.

This market has made great efforts to build investor confidence since last years bailing out of the nine banks that threatened the survival of its financial sector. Hard work by the Central Bank of Nigeria (CBN), Economic and Financial Crime Commission (EFCC) and Security and Exchange Commission (SEC) to create a clear awareness in the minds of both local and international capital market operators that investing in the Nigerian capital market would reap benefits appear vulnerable.

Transparency

The Nigerian All Share Index that is already up almost 20% percent this year lost about 3% in the last three trading days indicating lack of trust and confidence in its markets.

The current status quo is calling for transparency within the NSE that should aid unravel the true picture of their books. The request by the suspended president to dispatch Income Auditors and Resident Examiners to the exchange should enable SEC to establish any fraudulent act within the exchange.

Nigeria’s economy has benefited from foreign investment and these investors that have been fervently deposited money into Nigeria’s equity and bond markets are certainly begging for transparency.

Challenges

The threat; with foreign investors likely to rush out of the emerging market following the latest NSE crisis, the effect on the Nigerian capital market could be compelling. In 2007, Nigeria enjoyed one of the strongest performances of any emerging market, on the back of surging banking and insurance stocks. Loaded with cash, some of the bigger banks were able to expand their operations globally.

But growing international anxiety over transparency and valuations is a concern. These are serious challenges for the markets if the current crisis in NSE is not resolved any time soon. The outcome is that Nigerian financial institutions will find it challenging to secure enough credit internationally to finance trade – a bread and butter business for banks in an economy which imports goods worth thirty billion dollars per year.

The Nigerian currency may weaken as volatility in the markets augment. Foreign banks may put off trading with their Nigerian counterparts. The ongoing concerns about the outcome of the SEC’s investigation may trigger further capital flight. This may result in greater demand for foreign exchange, and is expected to negatively impact the Nigerian stock market. Naira will suffer as a result

Fraud

A wave of white collar fraud is a major worry for Nigeria. SEC and EFCC have their job cut out on this one. It is a major concern as they investigate. These frauds come in the form of granting of unauthorized loans, posting of fictitious credits, fraudulent transfers or withdrawals, outright money theft etc.

These two agencies should support all legitimate efforts aimed at safety and soundness, as well as sustainable growth and the development of Nigeria’s capital markets. In doing so they should ensure that those holding public posts should not use their position to abuse the system.

Nigeria: The Risk Factor: Pension Fund and Infrastructure Bond

2010-09-29T09:28:00.000-07:00

Charles Malize

Snap shot

Dogged by global financial squeeze and stagnation on oil prices, the Nigeria government has found a way to source money to fund its depleting infrastructure via the nation’s private pension plan. While this seems plausible, one must not overlook the risk factor associated with such scheme that could threaten life savings of retirees and older workers. There is a risk especially with the investment instruments available in the current economic environment. Nigeria needs to understand that when people approach retirement age, they should avoid exposure to peril such as speculation. Otherwise you could be looking at a lottery that involves financial hearsay.

Some questions:

1. What are the mechanics in protecting savers pensions? This investment is not is risk-free. Financial markets, whether they are shares, bonds or general financial instruments, operate with high levels of volatility, and none are immune from risk.

2. One has to acknowledge by their very nature, these markets provide significant levels of speculation that incubate like bubbles.

3. Savers should be concerned as the value of these funds can result in a sharp drop in the value of their financial assets. Assuming this to be the case, it will be difficult to predict how long it will take for the value of the assets to rally.

4. What experience does Nigeria local managers have in this arena? The West that claims to be experts in this area has had problems of their own. For example, In the United States where employees were encouraged to save in a 401k fund (a sort of pension fund) saw their “nest egg” evaporate due the recent global financial mayhem and as a result retirees in their sixties and seventies are back to work struggling to make ends meet.

5. The drop in the value of the funds could prove drastic for the country. The global economic crisis is still upon us; hence it will be interesting to know how managers of the fund are going to allocate assets.

6. Easier said than done – Given the situation, the government plan may not make it through both houses of Congress, as some lawmakers may oppose the plan.

7. Protesters/labor unions may see the government measures as a plan to plunder the funds of the retirees.

No doubt the scheme proposed could provide the country with much needed cash to meet its venture requirements. The country should be cautious especially when protecting investors from losses that could result from global market turmoil and impaired management of the fund. Nigeria’s national debt is on the rise as its financing needs spiral out of control. Reserves are faltering as global financial crises puts pressure on oil exports. Its capital markets have been on a down path as of late. The Nigerian stock market (All Share Index) has lost over 3% in the last 2 months, mainly due to global financial crisis and the recent allegations at the exchange on financial irregularities.

The impending outcome is government extending its powers by nationalizing pension fund across the board as it struggles to meet future obligations on its foreign debt obligations. Control of the funds could translate into the government raiding new pension contributions to cover short-term debts that are due and financing the rest by dipping into foreign reserves. Nigeria needs to avoid been largely shut out of international capital markets as a result of a sovereign-debt default. This is another step in the country’s road to an unwelcoming severe structural adjustment program (SAP). A familiar territory following more than a decade and half of a punishing military rule.

Nigeria vs. Ghana: The Challenges Ahead (Part 2)

2010-09-29T09:17:00.000-07:00

Charles Malize

Doing Business in Ghana

Ghana’s population totals approximately 22 million people. Having made the necessary investment within, it has led a peaceful democracy for nearly two decades. This can be observed in the economy where poverty and corruption level has steadily dropped.

As highlighted in the previous essay, a major oil discovery off the coast of Ghana in 2007 has led to significant international commercial interest in the country. This discovery affords the country the potential to be the third-largest producer of oil in West Africa within a five year period. It has an active chemicals industry, as well as being one of the larger markets in the lubricants industry in the region.

For now, Agriculture – mainly cocoa remains a major source of income for the economy and accounts for more than one-third of Gross Domestic Product (GDP) and about 55% of their formal workforce. Other agriculture earners include timber, coconuts and other palm products, and coffee.

Ghana’s industrial base is relatively advanced compared to many other African countries. This includes mining, manufacturing, construction and electricity that accounts for approximately 30% of GDP. Remittances from Diasporas abroad remain a major source of foreign exchange earning.

Corruption

Ghana’s post-independence economic story was a problematic one that took a turn for the better in the late 1980’s. During this era many investments were poorly visualized and managed particularly in the agricultural and industrial sector. With cocoa prices declining and the country’s foreign exchange reserves dwindling, the country could not meet repayment schedules on its sovereign debt – the country was virtually insolvent and stagnated during this period. The government responded by abandoning unprofitable projects and selling some inefficient state-owned enterprises to private investors to raise capital.

At this time corruption and mismanagement of state accounts became apparent at the highest political level. With bribery and misconduct of affairs, there was a record inflation that led to growing dissatisfaction within. Industrial and agricultural production suffered due to inadequate imported supplies. Budget deficits surged almost 40% of expenditures in the late seventies. The local currency, Cedi, was increasingly overvalued and smuggling in black markets became rampant. Theses negatively impacted foreign exchange revenues.

Flight Lieutenant G. Rawlings’ second stint at the helm was in I981.Prior to his successful coup, no effective measures were taken to reduce widespread corruption and black marketing as the economy remained quiescent. Industry ran at about 10% of capacity due to the never-ending shortage of foreign exchange to cover the importation of required raw materials and replacement parts. Economic conditions deteriorated further in early 1983 when Nigeria, a trading partner, expelled an estimated 1 million Ghanaians back to their home country. It further had to absorb an additional 100,000 citizens expelled from Nigeria in 1985.

In April 1983, Rawlings was able to coordinate with the International Monetary Fund (IMF), and launched an economic recovery program, aimed at reopening infrastructure log jam and reviving waning productive sectors–agriculture, mining and timber. The economy’s response to these reforms was initially hampered by the absorption of 1 million returnees from Nigeria, compounded by the decline of foreign aid. However, his two terms in office saw an overture of unyielding macro economic reforms, improvement in security and the obliteration of corruption that has aided economic growth till date.

Turning the corner

Returnees from Nigeria and a drop in agricultural prices, especially coca in the 1980’s made situation worse. But in the summer of 1988, the status quo changed as improved weather helped the agricultural sector and cocoa prices turn the corner helping much needed revenue. The end result was a boost in infrastructure repairs and other sectors. Also, there were producer incentives from donors that aided the revitalization of output, renewed exports, and a foreign exchange auction that helped ease hard currency constraints.

The continuation of concrete macro – economic management together with major debt relief, large inflows of donor resources, relatively high cocoa and gold prices resulted in steady improvements in real GDP growth, which reached 5% in 2004. It attained an estimated 6.2% of GDP growth in 2006. Annual remittances totaling approximately $4 billion from individuals as well as non-governmental organizations (NGOs) and embassies in 2008 helped put Ghana in an assenting balance of payments position.

Ghana was recognized for its economic and democratic achievements in 2006, when it signed a 5-year, $547 million anti-poverty accord with the United States’ Millennium Challenge Corporation. This focused on accelerating growth and poverty reduction through agricultural and rural development. The accord has three key components:

1. Enhancing the profitability of commercial agriculture among small farmers

2. Reducing the transportation costs affecting agricultural commerce by improvements in transportation infrastructure,

3. Expanding basic community services and strengthening rural institutions that support agriculture and agri-business.

After a decade of structural adjustment reforms, the country has established a significant record of economic growth, expanding export industries, a growing stock market and a favorable private investment setting for local and international investors. This has supported a stable political climate and is on track to meet the Millennium Development goal of severing extreme poverty by 2015.

Challenges

Amid the progress made so far, the country still has some economic challenges that need advancing and just like any other developing country, this comes with the territory. There are still infrastructure bottlenecks, pitiable management in some sectors especially natural resources; improving human resource capacity and development; sustaining an investment climate that encourages and allows private sector-led growth, and privatizing remaining state-owned enterprises.

It is a given that the recent discovery of a major offshore oil project that is expected to produce about 200,000 barrels of crude per day, delivering a windfall of profits, is expected to change the lives of the people. The anxiety with market observers is that they could follow the path of Nigeria where the oil windfall over the decades has been squandered by administrators leaving most of the country in poverty. Nigeria earned more than $200 billion from its huge oil reserves between 1970 and 1999, but during that time, the average Nigerian grew poorer. Rather than develop the country and build a future, oil created a political system obsessed with greed and plunder. The country lacks a commanding political force with the interest of the people at heart in holding the government accountable for their excesses and unrestrained behavior.

Doing Business in Nigeria

Nigeria is regarded as the most populous country in Africa, and the eighth most populous country in the world. Its economy is one of the fastest growing in the world; the third largest economy in Africa and the country is a regional power in West Africa.

Nigeria is classified as an emerging market, with its abundant supply of natural resources, a sound financial and legal system. It enjoys a fast developing communications and transportation sector. The stock exchange (the Nigerian Stock Exchange), is the second largest in Africa. Nigeria is ranked 37th in the world in terms of GDP (PPP)

What is PPP – Purchasing Power Parity? : A measure for an appropriate exchange rate between currencies. It is a rate that represents basket of goods in country ‘A’ costs the same as in country ‘B’ if the currencies are exchanged at that rate.

Nigeria is the United States’ largest trading partner in sub-Saharan Africa and supplies a fifth of its oil. It is currently the 50th-largest export market for U.S. goods with the United States the country’s largest foreign investor.

Previously, economic development was mired by years of military rule, as corruption, and mismanagement nearly brought the country to its knees. The restoration of democracy and subsequent economic reforms has successfully put Nigeria back on track towards achieving its full economic potential. According to the Economist Intelligence Unit and the World Bank, the Nigerian GDP at purchasing power parity has nearly doubled from $170.7 billion in 2005 to 292.6 billion in 2007. The GDP per head jumped from $692 per person in 2006 to $1,754 per person in 2007.

During the oil boom of the 1970s, Nigeria accumulated a significant foreign debt to finance major infrastructural investments. A fall in oil prices in the 1980s translated into the country struggling to meet its sovereign debt obligations. Default resulted in arrears and penalty interest accumulation on the unpaid principal that ballooned the size of the debt.

Negotiations by the Nigeria authorities, in October 2005 with creditors resulted in an agreement to write off majority of the outstanding loan. It then used part of its oil profits to pay off the remainder to its creditors (Paris Club) in April 2006. The country made history at this time by being the first African country to pay off its sovereign debt.

Challenges

A decade and half of military rule was a disaster for the Nigeria economy. At this time there was a collapse of law and order, unsavory reputation for corruption, a run down infrastructure and unpredictable conduct of public affairs. This negatively impacted economic growth.

The return to democratic rule in 1999 resulted in the administration eagerness to try to reverse the situation by attempting to attract investment in the various sectors in the economy. They understood the need to augment economic growth by providing an enabling environment for investment to flourish.

For this reason, it took the necessary steps to strengthen the Nigerian Investment Promotion Commission (NIPC) to drive the program of willfully marketing Nigeria to investors both home and abroad.

NIPC is a Federal Government Agency in Nigeria established to encourage, promote, and coordinate investments in Nigeria. The Agency provides services for the grant of business entry permits, licenses, authorizations and incentives in a One-Stop-Shop environment. The services are provided in a co-coordinated, streamlined, efficient and transparent manner to meet the needs of investors. Source: NIPC website.

Although the situation has improved somewhat, the economic climate is still exposed to unpredictable policy formulation and implementation. Also there is a problem that lies in the competence of civil servants that lack the sense of responsibility to execute and would choose to aggravate and discourage any would-be investor.

Another challenge is the unease in the Niger Delta that is creating unnecessary headache for the administration. Nigeria’s Delta region is home to vast oil reserves, which make the country one of the worlds biggest oil exporters. Disfigured with corruption, the region remains poor and undeveloped. For many years, Delta militants that hide out in the swamps and creeks have attacked oil pipelines and kidnapped foreign workers for ransom. There was an amnesty deal struck with the militants in 2009 by the administration. Albeit the case, abduction for money is still widespread.

Corruption

Last essay on corruption highlighted that; as the country embarks on the path of providing a series of incentives to attract foreign investment, deception within public agencies continues to be a major obstacle for international investors. Nigeria’s rating suffered a set back in the 2009 Transparency International ‘Corruption Perceptions Index’ highlighting the extent of the problem. According to the agency; the legal, accounting, and regulatory systems meet international standards, but enforcement is inconsistent and often appears arbitrary.

Citing a recent joint survey by the Nigerian Economic and Financial Crime Commission (EFCC) and National Bureau and Statistics (NBS); one out of three Nigerian businesses bribes public officials. The report identified crime and corruption as key obstacles to doing business in the country. One out of three enterprises on the average had to pay a bribe to public officials when carrying out certain administrative procedures.

Both agencies acknowledge that crime and corruption represent very serious obstacles to doing business in the country and creates an unsympathetic obstruction to economic activity.

As highlighted in the report, other impediments following closely to crime and corruption include inflation, political instability, changes in laws and regulations, unclear laws, complicated business registration as well tax regulations.

Resources

Oil accounts for more than 80% of the Nigerian government revenue. It is common knowledge amongst political and economic observers that the nation has the potential to earn more revenue from sources other than oil. Opportunities in other resource avenues remain largely untapped owing to neglect of the sectors.

Agriculture>

In the last essay I pointed out that oil remains a major source of revenue for the country and that the nation has the potential to enhance earnings from other sources like agriculture, but is neglected..

Lack of national focus on agriculture and manufacturing has weakened the country’s ability to create much needed jobs. This is a sector that has the ability of supporting the majority of the workforce in the country. Research and Development (R&D) in this sector is weak and corruption is extensive.

With the immense resources at hand, the obvious constraints including flawed infrastructure, corrupt institutions, difficulty in accessing bank credits, high lending bank rates, poor literature and governments inability to execute makes it challenging for this segment to progress. This space needs a government policy that favors a climate of strong alliance and support with private sector and this is misplaced.

Cement

A success story:

The Obajan Cement Company is an example of the new lease of life for the growth of Nigeria’s non-oil sector of the economy. A $1billion project that commenced in 2002 with local and foreign investors in Nigeria. This was initiated by the business entrepreneur, Mr. Aliko Dangote. This project has been completed and now feeds the Nigerian market. The company is described as the single largest cement plant in Africa with a capacity to produce close to 7.5-million tons of cement per annum.

The cement company is projected to save Nigeria about US$385-million in foreign exchange annually from cement imports. Source Case study: Obajan Cement Company; Ogbe Armstrong

Conclusion

To conclude, Nigeria and Ghana are rich in natural and human resources with a trading relationship that has spanned for decades. So why the recent backbiting? It is a given that just like any other sovereign nation they do have their own challenges.

A recent development lends credence that both countries have agreed to resolve any outstanding trade disputes by September 2010. As both countries embark on this positive path, it is in their interest to allow access to their markets. They are growing emerging frontier markets that should work on strengthening their affiliation. This remains strategic for the region. The two countries enjoy pulsating industries that need to be made stronger. The unnecessary government regulation to limit movement of trade defeats the free trade objective. It is anti- globalization. The world now is a “global village” and in the case of both sovereign nations, a partnership that has existed for decades should be fortified. Global markets necessitate free trade that promotes businesses which compliment one another.

Nigeria vs Ghana: Friend or Foe (Part 1)

2010-09-29T09:14:00.000-07:00

Charles Malize

Ghana

Ghana remains one of the fastest growing economies in the Sub Sahara Africa gifted with an assortment of natural resources. The domestic economy continues to create growth through agriculture. With a 55% workforce in this sector it generates approximately 35% of the country’s Gross Domestic Product (GDP).

In 2006, the country signed an agreement with the Millennium Challenge Corporation (MCC). This is an independent United States aid agency that is helping lead the fight against global poverty, and in the case of Ghana assists it in transforming its agricultural sector. It took advantage of the debt relief program under the Heavily Indebted Poor Country (HIPC) in 2002, and is also benefiting from the Multilateral Debt Relief Initiative that took effect in 2006.

Gold, cocoa productions and individual remittances remain major sources of foreign exchange. Sound macro-economic management along with high prices for gold and cocoa helped sustain GDP growth in 2008 and 2009. Albeit the case, it continues to some extent rely on international financial and technical assistance to grow its economy.

Ghana recently made a major oil discovery that could translate into 800 million barrels of recoverable oil. Its new found wealth is expected to have a major impact on growth within the next few years. Without doubt, this has made the country more attractive in the eyes of foreign investors at a time global investments in the petroleum industry are diminishing.

The new oil discovery well was struck by an American company – Anadarko Petroleum Corporation on the deepwater Kosmos Energy’s West Cape, while Ireland’s Tullow Oil announced the findings of its nearby Hyedua-1 well in the adjacent Deepwater. This deepwater find reveals the immense potential that exists in Ghana’s oil industry.

Ghana first discovered off shore oil reserves at commercial levels in the 1970s. In the year 1983, the government set up the Ghana National Petroleum Corporation (GNPC) to promote exploration and production. It began its production in 1990.The GNPC entered into several agreements with western oil exploration and development companies to prospect which led to a production of about 6,900 barrels a day by 1992.

With these new discoveries, the country entered into a pecuniary agreement with the oil giant, Exxon Mobil, to buy Kosmos’ interest in Ghana’s Jubilee Field at US$4 billion. This transaction reveals the magnitude of the growing interest in Ghana and its potential contribution to the region’s oil and gas industry.

Assuming all goes according to plan; this offshore oil project is billed to produce approximately 200,000 barrels of crude per day, bringing in a windfall of earnings. Gold and cocoa exports, the driving forces of the economy for decades, will certainly take a back seat. Although this seems to be the case, there is the anxiety within global community that oil could incite unpleasant corruption in the country and, just like other countries, ravage its economy and politics.

Nigeria

Nigeria is ranked number eight amongst the world’s largest oil producers. With this status, the country has struggled to boost its economy as progress has been undermined by corruption and mismanagement of its oil revenue. As a result, growth in real economy that is dependent on addressing and building key infrastructure has suffered. This is further aggravated by power cuts. Telecommunications, transport, energy infrastructure and security are poor and present operational challenges for companies. These items are fundamental components for longer-term stable growth for any economy. The country is keen to attract foreign investment but is hindered for these reasons.

Additionally, mismanagement of earnings has fuelled violence and corruption in the Niger Delta – the home of the oil industry. This negatively impacted the overall budgetary position as output declined and budget deficit widened.

As of recent, the status quo seems to be in reverse following an accord signed by the Niger Delta militants and the current administration. The situation is somewhat calm and as a result-oil production, has increased to over 2 million barrel per day compared to the middle of last year’s figure of a low 1.6 million. It is projected that output should remain at this level provided this calm remains in the region. With its budget on crude oil price set at US$57 per barrel (oil provides about 80% of government revenues), the government can easily finance its deficit for the next few years given its low level of indebtedness.

The country benefited from the debt relief program in 2005 and as a result its sovereign debt burden is quite low. This should aid the country to further its economy in the ensuing years. The debt relief with oil windfalls coupled with a build up of foreign reserves has to a large extent reduced external debt to 6% of Gross Domestic Product (GDP).

The government has recently introduced some reforms aimed at improving the investment environment. Notably and recently, is the announcement of its plans to reorganize the troubled oil sector. The plans propose to restructure the management of the Nigerian National Petroleum Corporation (NNPC), into five functional companies that should tackle corruption and deficiencies in management head on.

Other Resources

Although oil remains a major source of revenue for the country, it is common knowledge that the nation has the potential to enhance earnings from other sources like agriculture. However, these opportunities remain mostly untapped owing to neglect of the sectors.

Nigeria has one of the finest arable farmland in the region. Reports in this sector show that investment in the agricultural segment could earn the country an extra windfall and feed its citizens if the government executes the necessary reforms it so deserves. This should assist the country to compete profitably with global trading partners as well as earn the much needed foreign exchange to fuel its economy

The Cement sector is another space that is beginning to display signs of life as building construction in the region booms. It needs this sector to grow to enable it cope with the country’s vital infrastructure and housing needs.

Corruption

As the country embarks on the path of providing a series of incentives to attract foreign investment, subornment within public agencies continues to be a major obstacle for international investors. Nigeria’s rating suffered a set back in the 2009 Transparency International ‘Corruption Perceptions Index’ highlighting the extent of the problem. According to the agency, “the legal, accounting, and regulatory systems meet international standards, but enforcement is inconsistent and often appears arbitrary.”

Loggerheads on trade agreement

It is a given, Nigeria and Ghana, are two powerful “market frontier” neighbors that boast of healthy natural resources. Both countries have a long standing relationship and share historic bonds in terms of trade, traditions and culture. Amid such ties, tension on trade has been looming for some time.

Recently, both countries are at a stand-off in trade and commerce agreements that are expected to hinder their economic growth. Not too long ago, Nigeria banned trade in certain products with Ghana despite its ratification of the West African Protocol on trade liberation, which ensures free movement of goods and services among member states.

Equally, Ghana set conditions for Nigerians business community in Ghana that is considered “harsh economic conditions.” It recently introduced a $300,000 threshold deposit on Nigerians that want to venture into business in Ghana. What’s more, an entrepreneur under the condition must employ no fewer than ten Ghanaians before they are licensed to do business in the country. These extreme conditions are regarded as excessive and are likely to drive Nigerian nationals that want to set up shop in Ghana to leave.

As each country embarks on a troubling path of protectionism they should benevolently study and review the situation at hand and carefully seek reconciliation that should eliminate trade barriers across their borders. A resolution needs to be sort to maintain the long term economic ties that has existed between both countries over the years.

The partnership according to GIPC

According to a recent statement at a forum in Lagos, Nigeria by the Director of Marketing and Public Relations for the Ghana Investment Promotion Centre (GIPC), Mr. Edward Ashong-Lartey, “Nigerian businesses account for about 60 percent of foreign investment in Ghana.”

GIPC is a government agency that encourages, promotes and facilitates investments in all sectors of the economy except mining and petroleum. They facilitates and supports local and foreign investors in both the manufacturing and services sectors as they seek more value-creating operations, higher sustainable returns and new business opportunities.

Source: GIPC website

The agency regards Nigeria’s interest in the country as very high, especially in the area of communication, banking along with other sectors. It further added that the Ghanaian officials are discussing possible areas of further collaboration with Nigerian investors, the kind of incentives that will promote investment and business relations between both countries.

In, Mr. Ashong-Lartery’s talk titled “Investing and Growing Your Business in Ghana – Challenges and Opportunities”, he stated that it is aimed at enabling investors both in Africa and other continents to harness the business opportunities that are abound in Ghana, adding that the interest on Nigeria is borne out of the fact that she has the experience in manpower and technical capacity that are believed would be relevant to Ghana to develop its nascent sectors, especially oil and gas. Said Mr. Ashong-Lartery, “Talk about the population, the land mass, abundant natural resources, technocrats and so on. Already, Nigeria is seriously playing active role in Ghana’s economy.

“Ghana investment opportunities for Nigerians in agriculture and agro-processing; fish processing; sports, Leisure and Infrastructure, transport, infrastructure, power and telecommunications, among others.

“Government would harness the opportunity that abounds in the discovery of and exploration of oil in the country to woo and encourage would-be investors. All expectations of investors are assured and would not be dashed.”

According to American Central Intelligence Agency (CIA) fact book on Imports – partners: China 15.6%, Nigeria 14.7%, India 7.4%, US 5.5%, France 4.4%, UK 4.4% (2008)

What’s the Big Idea? Africa as the next “BRIC”

2010-09-29T09:09:00.000-07:00

To reposition Africa as the Fifth BRIC-A Destination for Investment, not just Aid

Harvard Kennedy School, May 14, 2010: “How has a decade of change shaped development thinking?”

What’s the Big Idea?
To reposition Africa as the Fifth BRIC-
A Destination for Investment, not just Aid

Remarks by Ngozi Okonjo-Iweala, Managing Director, The World Bank

Let me start with a riddle: What trillion dollar economy has grown faster than Brazil and India between 2000 and 2010 in nominal dollar terms and is projected by the IMF to grow faster than Brazil between 2010 and 2015?1 The answer may surprise you: it is Sub-Saharan Africa!

The Big Idea is that sub-Saharan Africa is on the verge of joining the ranks of the BRICs. As the world gets out of the global recession, forecasts made by the IMF and the World Bank stress that given the need for fiscal retrenchment in the advanced countries, some rebalancing of global demand is needed to sustain economic growth. Africa can serve as a new source of global demand. It’s only a matter of time before its population rivals that of China and India. As Bob Zoellick noted in a recent speech, we must start thinking about a “multipolar growth world”, where Africa can take its rightful place. In other words, this is not about charity: businesses are looking for new markets in which to invest and Africa is ripe for consideration.

An eminent businessman once commented that “profit lies where the gap between perception and reality is greatest.” That surely applies to Sub-Saharan Africa. At a time when Asian equity and debt markets are saturated and no longer offer substantial returns, SSA could be poised to provide the best global risk-return profile.

Let me give you some hard evidence to persuade you that Africa is not a hard sell!

Sub-Saharan African real GDP growth rose significantly from 3.4 percent per year over the six years 1996 to 2001 to 5.2 percent per year during the boom period 2002-2008.
Similarly, per capita GDP growth went from 0.7 percent per year over 1996 to 2001 to 2.7 percent per year over 2002 to 2008.
The median inflation rate in the mid-2000s was about half that in the mid-1990s.
Foreign exchange reserves including gold increased more than 300 percent from $37 billion in 2001 to $154 billion in 2008. And net FDI flows more than doubled from $14 billion in 2001 to $34 billion in 2008.
Now for some sectoral information:

Investment in telecoms with private participation virtually tripled from $4 billion in 2001 to close to $12 billion in 2008.
And international tourism receipts increased from $8.5 billion in 2001 to $23 billion in 2008, while remittances grew from $5 billion in 2002 to $ 21 billion in 2008.
On the political side, there are distinct signs of maturity:

Democracy is taking hold in the continent: the number of autocratic regimes fell from a peak of 36 in 1989 to only 3 in 2004. According to an Afrobarometer survey of 12 countries, more than two out of three Africans interviewed say that democracy is “always preferable” to non-democratic forms of government. In an interview earlier this week with Bono for the Africa Century edition of the Globe, President Obama singled out being met in Accra “…not just by the sitting President, John Atta Mills, but also by the political opponent he very narrowly defeated in Ghana’s last hard-fought but peaceful and fair election” as the most vivid memory of his last trip to Africa and as a mark of democracy working at its best on the continent.
The security situation is also improving. The number of state-based armed conflicts in Sub-Saharan Africa went down from a peak of 16 in 1999 to 5 in 2005 and 7 in 2006, although it went back up to 11 in 2008 and 2009. 2 As a result, battle-related deaths shrank from a peak of approximately 64,000 in 1999 to 1,400 in 2005, the lowest figure in decades, although it increased to 6,000 in 2008.
On the Human Development side:

Sub-Saharan Africa’s population rose from 672 million in the year 2000 to 820 million in 2008. It is only a matter of time before it rivals that of China and India.
Africa is the world’s youngest continent with more than 43 percent of the population under the age of 14 and 65 percent under the age of 30. And the number of youth in the region will peak in about 20-30 years, according to the 2009 World Population Data Sheet.
The battle to get children into school is being won; but problems linger with the quality of education and skills. Gross primary school enrollment rose from 78 percent in 1999 to 97 percent in 2007, while secondary school enrollment went from 24 percent to 33 percent over the same period. Girls’ enrollment has increased substantially. The primary school enrollment rate for girls rose from 71 percent in 1999to 92 percent in 2007, and secondary school enrollment climbed from 22 percent to 29 percent over the same period.
Africa has been resilient during the global financial crisis:

The crisis led to a drop in the growth rate to 1 percent in 2009; but the region is expected to rebound to 3.8 percent and then 4.5 percent in 2010 and 2011, faster than Latin America, and Europe and Central Asia.
This resilience is not an accident but underpinned by what has evolved over the past 15 years into a deep commitment to reform, and political and economic stability. More of the region’s countries are now regarded as frontier emerging markets, including Botswana, Cape Verde, Ghana, Kenya, Mauritius, Mozambique, Namibia, Nigeria, Seychelles, South Africa, Tanzania, Uganda, and Zambia.
They say that the litmus test of commitment to reform is when times are difficult. Two-thirds of African economies implemented reforms during the global financial crisis to make it easier for investors. In 2008–09 alone, Rwanda completed seven Doing Business-related reforms, Mauritius six, and Burkina Faso and Sierra Leone five each. Indeed, Rwanda’s and Liberia’s measures were so significant that they both received “top reformer” status: Rwanda was the number-one reformer worldwide in Doing Business 2010, and Liberia was number ten.3
Helping Africa Join the BRICs

To turn the BRIC vision into a reality, sub-Saharan Africa needs to grow even faster than it did before the global financial crisis. This could happen as the result of growth taking off in a few countries, which could serve as an engine for the rest of the continent. But for this to happen, Africa will need help on three fronts:
(i) a “Big Push” on infrastructure to achieve scale economies
(ii) deepening efforts to manage volatility; and
(iii) a major expansion in skills coupled with the ability to absorb global knowledge on an economy-wide scale.

1. The “Big Push”

Low-income countries in Africa severely lag low-income countries in other parts of the world on virtually every dimension of infrastructure. Let me give two examples: Electricity generation capacity is only 37 megawatts per million of population versus 326 megawatts for low-income countries elsewhere! And at 31 kilometers of road per one thousand square kilometers, paved road density in Africa is less than one-fourth that in low-income countries elsewhere.4 Not surprisingly, the Africa Competitiveness Report 2009 identified infrastructure as one of the top constraints to business. It notes that as much as 25 percent of sales of firms in some African countries are lost because of unreliable infrastructure, contract enforcement difficulties, crime, corruption, and poor regulation. Kenya’s factory floor productivity is close to China’s, but Kenyan firms face a 40 percent cost disadvantage because of so-called indirect costs. Bad infrastructure is offered as one reason why Africa only accounts for 2 percent of global trade in manufacturing.

On the other side of the world, in Asia, it is the giant economies, China and India that are prospering. Other large economies, like Indonesia and Viet Nam, are also growing fast. The development paradigm has shifted to emphasize the virtue of size. Whether it be from scale economies, the higher value-added that comes from branding and product differentiation, or the thickness of markets for labor and intermediate goods, market size is becoming predominant.

But Africa’s infrastructure deficiencies isolate it from global markets and its internal border restrictions fragment the region into a myriad of small local economies. It is neither regionally nor globally integrated.

A big push in infrastructure is the obvious solution. The trouble is how to finance this. President Obama noted in his interview with Bono that the G8, and I quote: “…needed to honour the aid commitments that are critical to development, and that we also look at: ….how we can foster the innovations that can be the game-changers in development.” Here’s one game-changing idea: let African countries securitize a small portion of their aid.

In 2009, DAC bilateral donors gave $27 billion in net disbursements of aid to sub-Saharan Africa. Imagine that instead of doling out the money in small annual contributions, DAC donors decided to give a big push to Africa. They could issue African Development Bonds in New York, with a yield that matches the US 30-year Treasury bond rate, currently averaging around 4.5% per year. The payments on such a bond (principal plus interest) would amount to a little more than 6 cents for each dollar raised. There should be no additional risk premium because payments would be made directly by the Treasuries of the US, UK and other rich donors. This means that if donors agreed on paying out just $6 billion a year in cash towards debt service on African Development bonds—less than a quarter of what is currently given and less than the shortfall in the Gleneagles promise to Africa, African countries could receive $100 billion in cash immediately.

Infrastructure spending needs for Sub-Saharan Africa (capital plus operations and maintenance) are estimated at $93 billion per year; deducting the amount governments actually spend and raising efficiency leaves a net funding gap $31 billion a year, mostly in the power sector.5 Therefore, a $100 billion bond could go a long way in filling the gap for a few years. Most importantly, issuing a bond like this could change perceptions overnight about Africa as a place to do business. Faced with secure financing of $100 billion, private firms across the world would line up to provide infrastructure in Africa.

A comprehensive program for infrastructure at the country and sub-regional level would need to be developed analogous to the African Union’s homegrown Comprehensive African Agricultural Development Program, to serve as a focal point for countries to invest their own resources at home as well as in regional projects, revamp regulation, pricing and administration; and to provide a framework for donors and private investors. The World Bank and the African Development Bank could provide the necessary technical assistance and oversight to make sure that viable projects are selected, and that transparent and above-board procurement procedures are followed.

2. Managing Volatility

Turning to the challenge of managing volatility, let me quickly cite two studies. The first, which covers the period 1960 to 2000, finds that macroeconomic volatility has a harmful effect on long-run growth which is exacerbated in countries which are poor, institutionally underdeveloped, financially shallow, or unable to conduct countercyclical fiscal policies. This study covered 79 developed and developing countries. Nine of the 15 most volatile countries were from Sub-Saharan Africa! For example, Nigeria’s average per capita growth in constant dollars on a PPP-adjusted basis was only 0.31 percent over 1960 to 2000, overwhelmed by a standard deviation of 7.56 percent. And some countries like the Democratic Republic of Congo, Sierra Leone and Niger actually had negative average per capita growth over this period.6

The second study used data from 40 low-income countries over the period 1965-1997 and found that external shocks stemming from the terms-of-trade, natural disasters, per capita GDP movements in rich countries, climatic or humanitarian disasters and aid flows accounted for only 11 percent of the volatility of real GDP in these countries. By inference, shocks stemming from domestic economic mismanagement, political instability and violent conflict are considerably more important.7

These two studies capture the challenge low-income countries face in managing volatility. Clearly, African countries must take responsibility for internally-driven sources of volatility emanating from bad policy, social conflict, and institutional weakness in the fiscal, financial and judicial sectors. They must also assume primary responsibility for managing terms-of-trade shocks within certain “normal” bounds through better countercyclical policy and by developing the infrastructure and necessary business incentives for diversifying away from commodity exports. And I submit that African countries have been doing precisely this since 2001, with vast improvements in macroeconomic and fiscal management, aided by the debt reduction under the Heavily Indebted Poor Countries program and Multilateral Debt relief Initiative.

But African countries need help in managing externally driven sources of volatility, of which the global financial crisis is the most serious shock by far that low-income countries have faced in decades. The global crisis is threatening to undo some of the earlier gains as governments are forced to divert spending from infrastructure to urgently needed social protection and humanitarian aid. Not only will long-run growth suffer but debt sustainability concerns are likely to resurface as revenues fall and the interest rates go up.

Two things can be done to cushion Africa against the harmful effects of externally-driven volatility. First, donor resources can be used more aggressively as countercyclical instruments—as indeed was done with IDA and IBRD resources during the global financial crisis, with IDA front-loading country allocations to help low-income countries. Second, steps can be taken to eliminate the costs associated with aid volatility, which are far from trivial as a study by Homi Kharas of the Brookings Institution shows.8

3. Skills and Knowledge

Tremendous strides have been made in getting kids into school and achieving parity between boys and girls in African classrooms at the primary school, and to a smaller extent at the secondary school, level. Universal primary education is one of the only Millennium Development Goals that is on track. But while rapid progress has been made in primary and secondary school enrollment, gross tertiary school enrollment has barely crept up, from 4 percent in 1999 to 6 percent in 2007. Besides, research shows more and more that it is cognitive skills and learning, not years of schooling that makes the difference to long-run growth. The reason is that cognitive skills could foster innovation and promote technology diffusion by equipping the workforce with the ability to absorb, process and integrate new ideas into production and service delivery. These cognitive skills are measured by reading, mathematics and science tests for students. A fairly recent survey article documents that cognitive skills have substantial and robust effect on economic growth which dwarfs the link between years of schooling and growth.9

The finding on the importance of cognitive skills for long-run growth should be a wake-up call for Africa, with questions being raised about the quality of the education now being provided. New tests show that in Mali, 94 percent of Grade 2 students cannot read a single word; in Uganda, half of grade 3 students fail this simple test.10

The good news is that rate of return to skills is high in Africa. What is therefore needed is a big push on quality education and skills, as Korea and other East Asian countries did to underpin their growth miracles. For this, partnerships among industry, government and perhaps even civil society in vocational and tertiary education should be formed.

The thriving telecommunication sector in many African countries can facilitate information transfer, knowledge, and learning. In several African countries, this is already happening. In Kenya, skilled agricultural workers can receive knowledge on crop patterns and practices and information about weather and price of products via cell phones. In Somalia, a forgotten land, farmers are using computers at internet cafes to sell livestock and do market research.

Not surprisingly, President Obama was struck by the inventive use to which mobile phones are being put to use in Sub-Saharan Africa. He said: “I am constantly amazed by the innovations that are coming out of Africa. Mobile banking that is bringing finance to millions of people. SMS [text-messaging] technologies that are empowering farmers with real-time pricing information. ….The continent is vibrant and not simply a place of enormous need.” The simple point is this: skills plus investment plus access to technology can unleash growth in several productive sectors from agriculture to manufacturing and services, which would propel Africa to BRIChood.

Conclusion

In conclusion, it makes eminent sense to work on the Big Idea that Africa is the next BRIC. Many of the obstacles Africa faces are similar to those faced by the BRICs in yesteryear, including integrating better with the global economy and improving the quality of education. But Africa is coming of age in a much more complicated environment, marked by problems ranging from global imbalances to climate change. It must seize the opportunities inherent in these problems and persuade the outside world that it is ready to play its role in a multipolar growth world. Young Africans realize more than ever that Africa’s future is up to them, and that Africa has to define the agenda and terms on which it engages with the international community. It’s high time Africa saw and presented itself as the fifth BRIC, an attractive destination for investment, not just aid. This is realistic and within reach. As Nelson Mandela said, “It always seems impossible until it’s done.”

Africa: Harnessing the Brain Drain; Potential for Development

2010-09-29T09:06:00.000-07:00

Isaiah Schulze

In discussions of African development issues, the subject of “brain drain” is often brought up. The basic thesis is that by immigrating to developed countries, highly talented Africans are depriving their home nations of the intellectual assets needed for development. Rich countries gain unfairly from this phenomenon as they retain the academic, political, and economic contributions of these skilled individuals, while African countries languish from a shortage of good ideas.

It is undeniable that a suction of talent from Africa is occurring. However, it does not necessarily follow that African countries are doomed because of it. Africa has produced one of the most educated diasporas in the world; if this force is harnessed correctly, it could play an amazingly powerful role in the development of home nations, while at the same time contributing to the continued prosperity of host countries.

A 2008 Brookings Institute paper by William Easterly and Yam Nyarko provides an excellent analysis of the situation. According to the data, 13 percent of skilled Africans live outside of Africa. Besides that for the Americas and Oceania, this is the highest ratio of skilled emigrants/ skilled citizens for any region in the world. For individual countries the statistics are often even more remarkable. For instance, a third of educated Angolans live outside the country, while nearly half of skilled Ghanaians reside outside their native land.

Furthermore, the African diaspora is a unique one. Despite the fact that only 1 percent of Africans emigrate, 43 percent of those who do so are skilled. This is 8 percentage points higher than the world average, and significantly above Europe’s 31% skilled emigrants/ total emigrants. In addition, according the last U.S. Census, 43% of Africans in America possess B.A.s or higher degrees, on par with historically well-educated Asians. And despite potential discrimination faced by African immigrants, their income levels are about the same as U.S. natives.

All these observations are significant because they point to the fact that Africa is producing highly talented individuals and sending them across the world at an exceptional rate. The question is, how can this global force be harnessed for the development of Africa? The diaspora already contributes much through remittance flows and valuable international networks. It also creates political pressure for leaders at home to strengthen institutions and provide a more hospitable living environment to keep skill from exiting the country in the first place.

However, there is much more that can be done. Individuals like Fred Swaniker provide a good example. A native of Ghana, he worked for McKinsey consulting company and gained two degrees from American universities, including Stanford Business School. In 2008, he started a world-class boarding school in South Africa, called the African Leadership Academy, which provided most of the students with free tuition, conditional on them working in Africa after their education.

Another innovative initiative is the African Diaspora Marketplace. Sponsored by Western Union and USAID, is seeks to facilitate “diaspora direct investment” by channeling funds to entrepreneurs on the ground in sub-Saharan Africa. Those with the best business ideas are given start-up capital of between $50,000 and $100,000 to develop their enterprises in coordination with Africans in the U.S. The Chinese and Indian diasporas have been particularly successful in using entrepreneurship to boost development back home; for example, Indian diaspora organization The Indus Entrepreneurs (TIE) has helped generate an estimated $200 billion in India since 1992.

Alarm abounds regarding the brain drain. However, just these few examples show that this is not cause for despair. The African diaspora is exceptional, particularly in its high human capital value. Creative ways of harnessing it will be key to furthering Africa’s development.

Africa: Avoiding Sovereign Debt Crisis

2010-06-16T10:51:00.000-07:00

May 21st, 2010

Charles Malize

When governments demonstrate inability to repay debt or default on their loan agreement the outcome is a trigger of a financial meltdown in their capital markets. A depressed economic growth and a weak stock market, make it harder to raise capital in the international markets and even more challenging to satisfy outstanding loans.
In light of the euro zone crisis, some African countries in the 1980s and 90s have been down this road before with similar severity if not worse. South African and Nigerian foreign trade and investments were affected by sanctions and boycotts during this period.

In the case of South Africa, the most effective sanctions measured during the apartheid era were the withdrawal of short-term credits in 1985 by a group of international financial institutions. Many foreign corporations sold off their South African investments and left hence immediate loan repayments proved challenging to meet. This negatively impacted its external debt and the economy.

In the case of Nigeria, the military coup by Rtd. General Ibrahim Babangida and Rtd. General Sani Abacha led to foreign investors withdrawing their investments amid international pressure to return the country to a democratic system. The outcome was a ballooned budget deficit that necessitated their seeking a lifeline from international donors –the International Monetary Fund (IMF) and the World Bank. This led to a number of austerity measures by these agencies popularly known as SAP (Structural Adjustment Program).

South Africa recovered following the end of the apartheid era. Nigeria avoided financial collapse following a change to a much needed democratic structure that resulted in debt forgiveness by international donors.

What is SAP?

Structural Adjustment Program are economic policies which countries must follow in order to qualify for new World Bank and IMF loans and help them make debt repayments on the older debts owed to commercial banks, governments and the World Bank.
SAPs’ generally require countries to devalue their currencies against the dollar; lift import and export restrictions; balance their budgets and not overspend; and remove price controls and state subsidies.Devaluation makes their goods cheaper for foreigners to buy and theoretically makes foreign imports more expensive.

Balancing national budgets can be done by raising taxes, which the IMF frowns upon, or by cutting government spending, which it definitely recommends. As a result, SAPs’ often result in deep cuts in program like education, health and social care, and the removal of subsidies designed to control the price of basics such as food and milk. So SAPs’ hurt the poor most, because they depend heavily on these services and subsidies. Source: The Whirled Bank Group

Africas’ Sovereign Debt

Amid the current financial crisis in the euro zone, African governments’ sovereign debt is increasingly being seen as less risky and more attractive than that of advanced economies. It is hard to underestimate the appeal of some of the emerging African countries, as financial institutions invest assertively for their securities, revealing a shift. The old status quo where these countries were considered a risky environment in part due to their troubling Debt to Gross Domestic Product ratio has changed. Today, it is the industrialized governments that are accumulating the biggest debts, not emerging market countries, and revealing a big change from previous sovereign debt crisis.

The diminutive sovereign debt in some of these emerging African countries has benefited them. A large part of debts were reduced as a result of debt forgiveness by donors. This aided them to record fast growth while restraining government spending. It helped their Debt to Gross Domestic Product (GDP) ratio contract sharply.

Note: As any nation’s debt level advances towards 100 percent of their GDP, it increases the country’s sovereign risks enormously. The obvious is that most of the country’s earnings from taxes and other sources have to be spent on interest payments to satisfy debt. The end result is one having their hat in hand to donors such as the World Bank and International Monetary Fund for help that is usually accompanied with punitive measure to qualify.

Although public finances in the emerging market countries appear somewhat strong, much needed attention is required and should focus on management of their sovereign risks. Assuming these countries find themselves in the same demise as their European neighbors the outcome is the risk of being denied access to raising new capital in the international markets. The ones that can raise funding will have to do so at a painful cost.

The interest rate for long term financing charged to developing countries in the international capital markets comes at a price and in some cases could be as high as 12 percent compared to the United States that is financing its own debt for less than 3 percent. This restricts economic growth and could lead to a cavernous recession as cost for a lifeline will have a profound impact on the revenue the government can raise. This will certainly make it challenging for the country to meet the needed targets for cutting the fiscal deficit. The outcome; a default as debtors are forced to repay every dollar owed.

Institutional Investors in Africa

While much of the distress today is confined to the euro zone, unsustainable government debt has become a global concern. As the debt crisis rages out of control the fear with investors is a threat that could cripple euro zone governments and spread to other regions around the globe including Africa. This will impede global economic growth going forward. With such a scenario, investors become self-protective with their investments.

Some of the European and American institutional investors that are exposed to the sovereign risks in the euro zone have operations in Africa. Muddling through the current mess in Europe is creating panic with investors as they dry up. They are fast disappearing as they become defensive in the market place. This is not conducive for global financial markets. The ones that are invested in Africa where markets has somewhat been less volatile are looking to raise cash. Their withdrawal of investments could threaten the stability of some of their African affiliates and the capital markets in the process. This could prove disastrous for the region that is trying to recover from decades of neglect and abuse. For this reason, containing the crisis requires euro zone policy makers to strengthen control and management of their fiscal position to avoid further financial mayhem from spreading.

Currency

In summary, beneficiaries of the current euro zone crisis have been the emerging markets, especially those seen as having well managed fiscal policies and reasonable growth prospects. These markets have seen strong capital inflows as investors choose their bonds and equities over those of the industrialized countries. This generally translates into stronger currency for the countries issuing those bonds. Although this appears good in the interim it does come with its own headache as there is a risk, exports could diminish leading to elevated budget deficits and creating more problems that it was suppose to solve.
Hence it is central that policy makers shadow the current euro zone fallout of the debt crisis carefully, and develop strategies to assist them manage their risks effectively.

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Nigerias’ Stock Market on a "Sugar High"

2010-06-16T10:49:00.000-07:00

June 11th, 2010

Charles Malize

Nigerias’ Markets

As of late, the Nigerian All Share Index that seems to be on a “sugar high” could be heading for a noteworthy retreat as signs for a pull back become apparent. I am not suggesting turmoil in its capital markets but rather a sobering recoil that could mute leveraging in the interim. Nigeria recorded an extraordinary return for investors prior to the financial crisis that rocked the international capital markets in 2008. The All share index had an impressive surge of 74 percent in 2007 from the previous year. It reached a historical value of 57,990 points during that period.

The market experienced a solemn correction in the wake of the crisis, shedding almost two third of its value in the fall of 2009. The index, however, appears to be on a surge as investors recently and guardedly return to the market. The index 30 day moving average has been hovering around the 26,000 points range.

The Nigerian stock market has outperformed most emerging markets this year with a gain of 30 percent. The fact that the market could be heading towards a tipping point, calls for investors to monitor their asset positions closely. The looming precariousness this time around, lies in the on going euro zone debt crisis that has foreign investors taking defensive positions in their asset allocation. This is evident as Hedge Funds and Mutual Funds are squeezed with their fund placements making it challenging to invest beyond their borders. The ones that are invested outside their precincts are liquidating as they become protective of their investments.

No doubt, the risk of another financial crisis in the industrialized and developing countries is back on the table. Over leveraging on some of the country’s balance sheets and the awaiting failure to service such debt is creating uneasiness and sending panic. These balance sheets issues are causing countries distress which in turn has incited financial institutions that have exposure to them to reign in loans. The impending outcome is a tightening of money accessibility in the international markets as financing dries up and the spreads widen, making it more challenging and costly to raise capital. Global markets, including the emerging ones like Nigeria, will be impacted. The country is not immune. Nigeria is already a part of the global village and will endure some grief as a result.

Nonetheless, though downside risk persists, any shock experienced should be absorbed more effectively when compared to last years near collapse of its capital markets. This hinges on macro economic reforms that are in progress and investors’ taking the necessary steps to diversify and efficiently manage their portfolio. Last years breakdown was as a result of over-leveraging, exploitation of margin loan facilities and companies’ doctoring of balance sheets that rocked its banking sector.

Euro Zone

Spain, late last week, lost its AAA credit grade at Fitch Ratings as Europe battles its debt crisis .The ratings company cut the grade one step to AA+ and assigned it a “stable” outlook. Spain has held the top rating at Fitch since 2003. Standard & Poor’s lowered Spain’s ratings to AA on April 28.

In a statement from the agency: “The process of adjustment to a lower level of private sector and external indebtedness in Spain will materially reduce the rate of growth/growth rate in these countries over the medium-term.”

Greece and Portugal has suffered from the same fate as their sovereign debt rating was lowered last month. United Kingdom is a concern for investors as the new coalition government (Conservative and Liberal Democrat Partners) undertake to rebalance and revive their economy by cutting the deficit and open up its markets. Last weekend saw the resignation of David Laws as chief secretary to the Treasury. This development, no doubt has cast shadows on the survival of the coalition as there are signs of internal policy disputes already. A dispute that could turn the complex spending negotiations on budget deficit on its head. Investors get stressed when there is uncertainty in government and undoubtedly this is not going to help the situation in the markets.

China

Chinese growth continues to be a problem for investors as they try to slow the pace of their economic expansion and inflation. This is as a result of increase house prices, inflationary wage increases and a continuing surge in money supply.
Past monetary policy measures introduced in the last month to cool the situation has so far proved unsuccessful. The growing inflationary strain has increased pressure in the country for further monetary measures that could pilot a sluggish global growth, as demand wanes and investors take a recess.

With these scenarios investors become cautious. International financiers under margin call pressure at home, coupled with their nervousness of Nigerian stock market over extending itself may choose to liquidate their equity positions. The outcome is an obvious cavity on its markets as they (investors) take a defensive position and vacate. This could send shock waves through its financial markets that is recovering as the ripple effect take its toll. The end result is a deleveraging of asset classes as they are marked down.

They have to be “marked to market.” The term “mark to market” (fair value) accounting assigns a value to a financial instrument that reflects the current fair market price for the instrument, or a similar instrument. This means that companies must value the assets on their books based on the latest market price those assets could be sold for at the given time.

International credit agencies are already monitoring Nigeria’s credit risks following last years market mayhem in its capital markets and are begging for transparency especially in the area of valuations. Lack of detail and pitiable accounting within the banking industry, restricted investor’s ability to make informed decisions on investment alternatives in the last years’ fallout. This weakened investors’ confidence and deterred them from participating and as a result markets were distressed.

Thus, the degree of the recent upward trend needs to be put in check to avoid another chaos that could create unnecessary headaches for a market that is already convalescing. Regulators and other market observers must carefully monitor global developments; especially the euro zone to make sure the situation does not get out of hand and contaminate its capital markets.

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Greece: A Resurgence of the Drachma

2010-04-30T08:55:00.000-07:00

Charles Malize

April 29th 2010

Fear that Greece may default on its debt obligations together with political uncertainty led to the rating agency, Standard & Poor to lower the sovereign rating on the country’s debt to BB+ from BBB-. This is ranked as “junk.” Recent downgrade makes this the first euro zone member to have its debt reduced to this level. “Junk” status means a country loses its investment grade standing. The rule of thumb for financial institutions is that they are barred from investing in "junk" bonds. This is because potential investors view the country as a risky place to invest.

Greece has become dysfunctional. No doubt, politicians and financiers have an understanding of what the symptoms and the causes are but are scrambling to find a precise prescription. Following last weeks meeting with the European Union and the International Monetary Fund, these agencies appear to be offering to solve a problem that requires a simple tool with a sledge hammer.

Greece is seeking 40bn euros (USD 60bn) from euro zone and the IMF. But conditions for accessing such funds have so far proved lurid. Furthermore, the Greek government's cost of borrowing on the international money markets is at a record level amid investor concern over whether the bail-out package will be agreed upon. Greece is required to pay 12.57 percent to borrow in the international markets as compared to Germany that can borrow at 0.79 percent. This is ‘loan shark’ territory.
The country does not have any other access to source funds. Investors are also concerned that Greek government's austerity measures will continue to prove decidedly unpopular with the Greek public.

Capitulation is terrible to contemplate but at times can be the only least painful solution. Greece appears to be in serious pain and on the verge. It is increasingly becoming the sacrificial lamb for the euro zone. Before the recent downgrade by S&P, Greece emerged as a country with a lot of fire power to fend off financial mayhem but has since shown lack of ammunition.

Contagion

S&P also reduced Portugal's debt rating by two marks to A- due to panic of a “contagion.” In addition, there is fear about the countries surging debt relative to GDP. Their assets have become risky. The downgrade on Greece and Portugal has incited investors to flee from riskier assets.

Greece's economic reforms that led to it abandoning the drachma, in favor of the euro in 2002, made it easier for the country to raise money in the international markets. Following the governments’ excessive borrowing in recent years the country indulged in a spending binge that put a significant strain on the economy. The country in the last two months has been scrambling to find ways to rescue itself from its excessive debt. Its budget deficit is regarded as very high under the EU (European Union) standards. Greece's budget deficit has soared to almost 13 percent of the Gross Domestic Product.

Greece will gain a temporary reprieve if it is able to raise the 9 billion euros it needs to honor its debt obligations that mature on the 19th of May 2010. This will be a short term fix as its huge budget deficit is likely to pose long term problems.
The region is becoming a nightmare for the European policy makers as the crisis spreads to other countries in the union. It is becoming obvious they may need over 500 billion euros (USD700billion) in aid to prevent the region from turning into an economic pandemonium.

Global financial markets digested the downgrade negatively. Financial markets seem to be obsessed with fright and feeding off its own paranoia. Almost USD 1 trillion of global equity value was erased in the markets following the downgrade although the markets have since recovered. The main concern is the expectation this will spread to other euro zone member states. On Wall Street, the Dow Jones index lost 2 percent shredding 213 points on the downgrade. Meanwhile shares in Greek banks gave up more than 9 percent on the same day.

What’s next for Greece?

Greece could adopt the option of leaving the euro. Revert back to their original currency: the Drachma. In doing so they can chose to devalue their currency to improve their competitiveness. This should reduce labor costs and advance exports.

The repercussion of such a move is apparent as this would cause a shatter in the financial markets as investors panic and bail. Other nations would follow, which could potentially lead to a break-up of the union. Investors could chose to move their funds outside the euro zone, creating headache for the monetary union banking system in the process. Hence, it could be argued that it is in the European Central Bank's interest to lend Greece the money it needs to meet its obligations, rather than risk the impairment to the currency if the country departs the union.

Other options could take the form of debt restructuring or a default on its obligations. This could translate into creditors (debt holders) taking a ‘hair cut’ in recovering money that is owed. (Rumored is 30 to 50 cents in the dollar). S&P is also echoing the same and concluded that “their weak long-term growth prospects have made the country less credit-worthy.”

The Greek Drachma

First introduced in 1832 and last replaced by the euro in 2001. (At the rate of 340.750 drachma to the euro). The euro did not begin circulating until 2002 but the exchange rate was fixed on 19 June 2000, with legal introduction of the euro taking place in January 2002. Source: Wikipedia

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EU & Greece

2010-04-20T12:02:00.000-07:00

Is Time Running Out for Greece?

Charles Malize

April 20th 2010

Challenges

Greece is a member of the European Union. Its national debt currently stands at approximately 300bn euros ($400bn). This is considered excessive and as a result, potential investors are reluctant to lend the country anymore money. The ones that do lend demand a higher premium. This predicament is particularly troublesome as Greece must refinance more than 50bn euros ($66.7bn) in debt for 2010.

Following the governments’ excessive borrowing in recent years the country indulged in a spending binge that put a significant strain on the economy. This is with public spending and public sector wages raging out of control. Together with the global financial meltdown which the country was inadequately prepared to handle, economic reality set in. The country in the last two months has been scrambling to find ways to rescue itself from its excessive debt. Its budget deficit is regarded as very high under the EU (European Union) standards. Greece's budget deficit has soared to almost 13 percent of the Gross Domestic Product.

Last week the Euro zone approved the details of a 30bn euro ($41bn) emergency loan package to assist them out of their debt crisis. Greece has not indicated if it will accept the funding from the EU/IMF (International Monetary Fund).

Nonetheless, because of the ensuing measures that are expected to follow the loan, the Greek government is reluctant to accept the funding package, and yearns for a package of austerity measures to cut its budget deficit.

Athens is aware that the conditions for providing these loans can prove punitive and difficult to swallow. This could translate into a prolonged recession as the economy contracts and consumers save. Governments don’t like this. Greece has shown reluctance to pile up additional debt and prefers to go the avenue of increased taxes and massive spending cut. The country hopes that a broad package of stern economic measures should assist it to reduce its debt levels and boost confidence in its government debt.

Some market observers agree that the EU position on Greece has been a disaster.
This is a serious sovereign debt issues that requires serious attention. At the beginning there was some denial from EU leaders of the seriousness of the crisis in the region, with Germany and France turning a blind eye. As time progressed, it became obvious Greece needed the right fiscal and monetary stimulus to absolve it from its problems.

Borrowing cost has remained a major concern as investors remain skeptical that the Greek government's program of spending cuts and tax rises, will be enough to restore confidence. This program is being ostracized at home. Following Greece’s plan for budget cuts, there has been a series of widespread public protests. Two prominent unions in the country have identified the austerity cuts as “anti-popular" and "barbaric".

Greece has outlined plans to cut its deficit to 8.7 percent in 2010, and to 3 percent or less by 2012. The approved austerity package is an attempt to save 4.8bn euros ($6.4bn). The measures taken include a freeze on public sector workers' pay, a raise in taxes and an increase in the average retirement age to cushion liquidity issues in the pension system. Also, there is a proposal to raise petrol prices. These could translate into the country raising money by itself, rather than rely on financial assistance from the eurozone and the International Monetary Fund.

Sovereign Ratings

Greece seems to have fallen off the cliff and the rest of the “PIIGS” (Portugal, Ireland, Italy, and Spain) look dreadfully vulnerable. On the currency front, the euro has weakened against a basket of major currencies including the US dollar. Furthermore, the rate at which the Greek government borrows money on the international capital markets has augmented.

Greece’s next payment on its sovereign debt becomes due in May and it needs to pay approximately 11bn euros ($15bn) to meet its financial commitments. In an effort to raise money, its success in auctioning a 1.2 bn euro package of treasury bills last week helped gain confidence among investors. It lessened the pressure of asking its eurozone partners and the IMF for help. This appears a short term fix with the expectation it will have no choice but to take advantage of the loan package proposed by the eurozone and the IMF.

Last week, saw Greece’s government debt down-graded by the rating agency Fitch, from BBB+ to BBB - . The latter (BBB-) rating is noteworthy, as this is the lowest rating that meets the criteria as an investment grade bond with Fitch. The pressure is on. A further downgrade by Standard & Poor and Moody’s could be ruinous for Greece as most influential investment houses will not be allowed to invest in their treasury bills. Greece is currently rated BBB+ by Standard & Poor and A2 by Moody's.

The loan package

From the outset, EU’s hopes of bailing out Greece seemed lost until the IMF stepped in and pledged funding. The situation was becoming intricate following the EU reluctance for a bail out. This position with the EU did not bode well for their credibility. The likely outcome is a similar crisis that will have a ripple effect in Italy, Spain and beyond.

The EU was forced to act after its initial proposal of a 22bn euro support package, agreed to in March, failed to convince investors that Greece will have the backing of their euro zone allies. Lack of detail in the plan left investors unconvinced that the eurozone would fully come to the rescue. The latest offer (30bn euro) is simply a more detailed, and an improved version of the original package that comprises a three-year financing program at interest rate of about 5 percent, less than the rate the Greek government would have to pay to raise money on the open market.

This amount may be enough to prevent Greece from defaulting in the short term but in the long term the problem of solving the debt crisis still remains. It gives the Greek government breathing space in the interim but fails to solve their long term issues. My view is that potential investors still perceive the Greek economy as weak and with time, Greece will come “hat in hand” to the EU asking for further bailout funding.

Assuming all is contained going forward, a major issue for Greece will be how to reshape the sovereign debt when the current distress has subsided.

Domino Effect

Questions about high levels of debt in Greece and its borders have raised eyebrows globally. The problem in the region: surging debt, poor capitalism, financial institutions sitting on a lot of assets that cannot be priced and the continuous weakness with the euro.

Also, the region could be heading into a stagnated recession as the financial crisis in Greece spiral out of control. The fear is an “L” shaped recession (prolonged) that may depress markets for extended period. These countries have to contract their economy to be able to satisfy their sovereign debt exposure. Beyond Greece are Portugal, Ireland, Italy, and Spain that seem to have the same liabilities. These countries are experiencing a synchronized contraction that requires a strong policy action to restrain the problem.

The IMF decision to step in with regards to Greece before the EU, showed a distinct weakness within the European Union. There seemed to be a policy stalemate within the EU over Greece due to the fiscal and monetary issues that are spread through sixteen member states. During the recent global financial crisis, the EU struggled to find a comprehensive approach in dealing with the crisis for this reason. What’s more, there is a nominal budget for the bloc. That raises the stakes for not having a joint plan in the event of the development of a major financial crisis occurring within member states.

There is anxiety that Greece's troubles in the international financial markets will trigger a domino effect on other weak members of the euro zone. These countries are facing difficulty balancing their accounts. The rating agency, Fitch has already downgraded Portugal's credit rating from AA to AA-. Due to the massive fiscal deficits in the region these countries face a downgrade on their sovereign ratings that will make it difficult to raise money in the international markets.

Sovereign ratings appear to be cracking amid financial crisis in the region. There is the possibility of insolvency in some of these countries and this is the danger.

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Nigeria: Dwindling oil prices putting strain on the Naira

2010-04-04T13:01:00.000-07:00

Charles Malize

Blog post, January 20th 2009

The much anticipated fear in the Nigerian foreign exchange market has come to roost. The same fear and panic that has gripped the Nigerian capital market has spread into its foreign exchange sector as the dollar recently exchanged $1 to N160. The recent fiasco has led to the Central Bank of Nigeria’s closure of the foreign exchange market earlier than usual, and three times within the last month. These actions are causing downward pressure on the local currency.

Oil is a major lifeline for the Nigerian economy, as almost ninety percent of Nigeria’s revenue is derived from it. As of late, dwindling oil prices in the international market have been negatively impacting revenue, as demand for the Naira becomes less attractive. This slide is the result of foreign investors selling Naira assets, because of the on-going global financial crisis that has taken its toll on many of the local and foreign investors.

Negative impact of the Naira’s free-fall on the Nigerian economy
Because of higher expenditure, Nigerian foreign reserves, which stood at $67 billion in the middle of last year, have dropped to $53 billion by years end. This situation is the result of falling oil prices following the recent decline in global demand, and excessive foreign exchange demand by investors.
The focus should be on developing a strategy to assist Nigeria in seeking other sources of revenue that could help it to increase earnings in a country that has only one major source of revenue. The non-oil sector contributes very little to the Gross Domestic Product.

Due to the sudden fall in value of Nigeria's currency, oil merchants involved in the importation of refined oil petroleum products are caught up in this misfortune, as financial losses mount. These losses, which are unlikely to abate any time soon, stem from the continuing disparity in the prevailing exchange rate compared to the time they imported refined oil.
Because of the global financial crisis, manufacturers are suffering as the anticipated drop in raw material orders materializes. The purchasing power of consumers is diminishing, as demand declines for products that require these raw materials. Importers are finding it more challenging to purchase abroad, due to foreign exchange constraints.

As the sharp decline in the exchange rate continues, the automobile sector, which relies on foreign exchange to purchase vehicles abroad for its local customers, is in for a shock. Car dealers may hike prices of new cars by as much as fifteen percent or more within the first half of this year to compensate for their losses. Unavoidable price hikes on both new and used cars is expected, due to soaring exchange rates. The cost of spare parts for these cars, as well as the costs of maintaining services rendered by car dealers, is likely to increase.

Power projects that should aid the nation’s infrastructure have been under considerable strain over the years, and are suffering even more. Today the federal government funding of N600 billion ($3.75 billion) earmarked from the Excess Crude Fund for completion of power projects, is threatening the targeted 6,000 megawatt power generation scheduled for the end of this year. The issue is not that Nigeria doesn't have the money. Obviously Nigeria is beginning to tighten its belt as it sees oil, its major source of revenue, impaired due to dwindling prices. Nigeria seems to have taken the approach of "wait and see," hoping that the situation in the energy market improves.

This is expected to backfire because, as in any developing country, a sound electrical infrastructure must be in place to engineer and grow the economy.
As the local currency depreciates against its major trading partners, small import and export business owners are experiencing hardship in conducting their transactions. Prices of imported goods are beginning to skyrocket, with the quality of services and products provided by some of these companies suffering as they try to cut costs. This is negatively impacting consumer sentiments. Consumers are faced with an influx of fake goods, some of which are of substandard quality.
Other sectors that appear to show signs of strain include health, education, labor, and the agriculture sector. As revenues in the economy decline, it is becoming difficult to fund certain parts of these sectors.

The solution is to defend the Naira and prevent the currency from further erosion, by raising interest rates and imposing some restrictions on the importation of goods, with the optimism that oil prices will recover quickly. Whether the strategy is sufficient to keep the Naira from a free-fall is unclear. The objective is to slow local demand for foreign currency, with the hope that oil prices recover swiftly enough.

Comment

Interesting analysis, but there are other areas Nigeria can act on to reduce the impact of the economic crisis.

• Nigeria must provide more foreign exchange to back up the Naira, especially for imports. This is because Nigeria is dependent on imports for over 90% of its needs. If it fails to back up the Naira, the inflation rate may reach 30 to 50% by the middle of this year, and over 100% by the end of this year. About 10 billon USD from its foreign exchange reserve should be earmarked for this over the next 2 months. I have a strong feeling that crude oil prices will have recovered by April of this year. Letting the Naira depreciate in any significant way will be a major mistake.

• Nigeria is essentially a cash society and that is why the crashing Nigerian stock market has had minimal impact on the individual. The employment picture has not changed. Shops are not closing, and real estate prices continue on an upward trend. All of this despite the fact that the capital market has all but collapsed. In 2008, the stock market lost about 45% of its value and since Jan 1, 2009 it has lost about 25%. As you mentioned in your essay, foreign investors are pulling out of the country and that will cause the stock market to slide even more. Raising or lowering the bank rate has little effect on the economy since the small businesses which are responsible for 95% of the county's non-oil GDP depend on informal sources for capital. The current MPR (CBN bank rate) is 8.5%

It was an enlightening article and I enjoyed reading it.

—— E. New Jersey

Response:

Thanks for your observation.

Tapping into Nigeria’s dwindling foreign reserves by allocating $10 billion (approximately twenty percent of its reserves) to defend the faltering Naira, in my opinion, is not a recommended approach for this predicament. This approach would be a temporary fix of doubtful long-term sustainability, and it is not the ideal therapy for the weakening currency and the economy.

Using foreign reserves as a means to revive the volatile Naira, with the expectation that oil prices will recover quickly enough could be a short-lived solution.
For Nigeria to consider the use of foreign reserves as a tool to support its currency, it needs to grow the diminishing current account and protect it.

• With its foreign reserves in retreat, Nigeria should be developing and investing some of its reserves, for example, the Sovereign Wealth Fund.
• The country should encourage investment in the manufacturing sector. Nigeria is exceedingly resourceful in this sector. This is an avenue the economy should be aggressively pursuing.
• Nigeria should enact the necessary fiscal stimulus from its reserves, and also seek private sector partnership to further develop its electrical power and infrastructure. Without these actions, the economy will continue to be in the same doldrums it has been in for the last four and one-half decades.
Enriching Nigerian imports is not a prudent solution. This would lead to an additional strain on the faltering currency, as the balance of trade becomes eroded.

Nigeria should refrain from gross dependence on foreign imports to fuel its needs at home. It should be seeking other sources of revenue, while boosting exports in the process. Having a 90% importation rate adds more strain on the currency.
Hoping that oil may recover from its current demise by April of this year may be premature. One must take into consideration the ongoing global economic slowdown, which does not appear to be abating any time soon. Currently, Nigeria’s dependence on oil for its revenue needs to be addressed. Oil is a major source of revenue for Nigeria, but this is diminishing. The strategy of oil dependence is only making matters worse for the dwindling Naira.

Nigeria, cash society or not, is already enduring some economic pain. New economic and political challenges facing any nation normally take three to nine months before they are felt. This is beginning to materialize in the case of Nigeria. One may not notice the impact, but rest assured, the negative impact is already trickling in:
• Banks have been curtailing lending as of late.
• Small businesses are restructuring, while others are closing, as banks refuse to extend credit lines for their operations. Limited access to overdraft facilities.
• Government agencies are foreclosing on small businesses as they default on their contractual obligations.
• Unemployment is on the rise as businesses restructure. (Source: Nigerian National Bureau of Statistics)
• The Naira is dropping in value, creating more pressure on businesses operations at home and abroad.
• Real estate projects are experiencing financial deprivation, as developments are reliant on debt financing, hence making it difficult for them to further same projects.
• Idle cranes on projects are beginning to appear, especially in the cosmopolitan areas of Lagos, Port Harcourt, and Abuja.
• Fraud and crime rates are on the rise.
• A good number of companies on the Nigerian stock exchange have been de-listed.
• Car loan default rates are rampant as banks find it difficult to recover overdue payments. Locating these vehicles for repossession is proving difficult.
The list goes on.
From an economic standpoint, Nigeria is relatively deprived. The country has a population of over 145 million people, and its Gross Domestic Product (GDP) per capita is low by international standards. More than half of the population lives below the poverty level.
Nigeria’s GDP was at $148.6 billion in 2007, and is likely to suffer following the recent drop in oil prices. Income per capita as of 2007 was $944. Nigeria was ranked 108th out of 178 countries on the 2005 global competitive index by the World Bank.
On the social and health front, over twelve million Nigerian children are not in school. One in five dies before the age of five. About twelve percent of the population is HIV positive. (Source: Foreign and Commonwealth Office).
In my article, I advocated a strong Naira by increasing interest rates and restricting imports. Nigeria needs to enact the necessary monetary policies that should enhance exports and revive the Naira. This is a painful but healthy prescription.

Increasing interest rates a possible 50 basis points from the current 9.75 percent (as of December 2008) could be a starter. This should attract foreign investment into the economy and strengthen the local currency, making it more competitive in the process.

Limiting imports and encouraging development from within should help the local currency and contain inflation. There is always a premium on goods when imported from the outside. Higher prices lead to inflated prices.
Please, at your convenience, peruse these articles on my site, as they have to some degree addressed a number of the issues highlighted above:
• Nigeria: credit crisis starting to impact small businesses and economy
• Nigeria: behind the curve
• Food for thought on the Nigerian real estate market
Once again, thank you very much for your comment.
—— Charles

Global economic crisis threatening Africa

2010-04-04T12:28:00.000-07:00

Charles Malize

Blog post, March 31st 2009

Global economic growth

As the worldwide recession shapes up to be the worst of its kind in decades and is taking its toll on global economies, due to the severe nature of the global financial crisis. Hope for growth in the emerging world—which would have kept the rest of the world from contracting in 2009—is fading exceedingly fast as the global economy is expected to expand by only 1% per year in 2009, down from the 3.2% that was originally projected by the International Monetary Fund.

Most of the expected growth from Brazil, Russia, India and China is dropping as domestic demand and exports in these countries diminish.
The United States economy, which is the main driver for universal growth, is contracting rapidly. Global economies are experiencing a period of comprehensive slowdown in economic activity that is affecting everyone.

With global operators coming to terms with the mixed economic data from China in the first quarter, the rebound in investment and the deepening slump in exports reveal a country spending huge sums at home to offset steadily weakening demand overseas, with no conclusive signal whether the stimulus program will succeed. Domestic consumption is decelerating and the stimulus may wear off before a sustained global recovery begins.Even if global output were stabilized in the interim, it is hard to see how a recovery can easily be sustained.

The challenges facing Africa

The Western model that has guided economic policy in the emerging markets since the 1990's suddenly looks seriously flawed. The secret of their success—trade and financial liberalization—appears to be disappearing from the region, leaving them exceptionally vulnerable in the downturn.With the international financial system on its death bed and doubtful to recover in its current form, a constructive restructuring is required to aid the global economy from deteriorating any further.
Some African companies are experiencing hardship by accessing credit lines from western banks, and in the process exacerbating the situation. Western banks are cutting credit lines to their African subsidiaries, and this is creating a problem for the region as capital markets dry up and foreign investors vanish.
With capital inflows to the African economies slowing to a trickle, a sharp correction is now underway in the external balances of these countries.

The drop off in Foreign Direct Investment (FDI) flows in the region, particularly in intra-bank lending (lending between foreign parent banks and their subsidiaries),is expected to continue medium term, creating a more negative impact on the countries' current account deficits.The concern is that those countries with significant deficits are extremely vulnerable to foreign capital reversals, especially in the current environment of global credit tightening.Moreover, the protectionist measures implemented recently in some western countries may hurt some African economies. In addition, some urbanized African countries may restrict the inflow of neighboring and foreign workers, creating a possible backlash over immigrant labor as countries try to protect their borders and their jobs. Reversing immigrant trends is likely to lead to a diminishing flow of remittance in these countries.

Governments are already cutting back on certain infrastructure projects and welfare spending plans, risking social unrest as austerity measures take effect and unemployment grows.Accelerating public discontent and protest in the region is likely, and may cause governments to fall. Trying to persuade citizens that sacrifices now will reap a stronger economy is likely to fail, as countries face increased public opposition to their tight fiscal policy.

Another significant risk is that further spending cuts and austerity measures could lead to power struggles in some of these countries. Coup d’ etat, which in the past were rampant in the region during the 1970s and the 1980s, may start to resurface.

Africa needs a coordinated rescue program to ensure that the continent is not engulfed in a serious depression. African countries need the help of the World Bank and the International Monetary Fund (IMF).These international organizations must not abandon the need to support Africa. To date, they have fallen behind on their pledges to double aid to developing countries, made at the Gleneagles summit in 2005. They need to cooperatively put their rescue machine for the region in place. Poorer countries are more vulnerable, as their financial systems are inadequately equipped to rescue them from this economic mayhem.

Meanwhile, the IMF has warned that the effects of the global economic slowdown are expected to hit Africa hard. Their expectation is that growth in sub-Saharan Africa will slow to about 3% in 2009, half the growth rate it previously projected. The organization has stressed the need for the voices of the poor to be heard and to ensure that this region is not left out in any global rescue package. The low growth forecast means that many African countries are likely to see very little increase in living standards, and could fall further behind in meeting poverty targets.

The IMF says that 15 out the 21 countries that it judges most vulnerable to the crisis are in Africa.

The Organization for Economic Co-operation and Development (OECD) composite leading indicators (CLIs) for January 2009 continues to point to a weakening outlook for the seven major economies in the region, and the economic outlook continues to deteriorate in the major non-OECD member economies as well; in particular Brazil, which joins China, India and Russia in the strong slowdown group. In order to create and sustain an upswing in the global economy, a stimulus measure by the Chinese and the United State governments is necessary.
While this seems plausible, Africa should not be overlooked as a beneficiary in this process.

Contact: info@cmcapitalmarketresearch.com

Nigeria: Credit crisis starting to impact small businesses and real economy

2010-04-04T12:22:00.000-07:00

Charles Malize

December 26th 2008

Nigeria’s stock market is on a downslide, shedding over fifty percent of its value within a year, and a lack of confidence and uncertainty is clouding the market. It has become alarmingly evident that reality has set in. As the noose tightens on the Nigerian capital market, small businesses are beginning to experience adversity.

With the cutting of foreign and local credit lines, small companies in particular are beginning to suffer hardship. The market is liquidity starved, as banks have ceased to grant margin facilities. Banks, having acknowledged the depressing state of the financial crisis both internationally and at home, and the negative impact it is having on their businesses, have recently begun premature recall of loans to their customers. Local depositors on the other hand, fearing the current state of financial mayhem, are refusing to roll-over fixed deposits as they seek better interest rates, thereby furthering unnecessary strain on the banks.

With the elevated exchange rate showing no sign of lessening, small import and export operators are finding it costly to conduct their transactions. With import and overdraft facilities from their banks withdrawn, the Naira (Nigerian currency) has declined sharply against the dollar. There is new anxiety over diminishing oil prices, and the impact on the real economy is becoming disconcerting. Prices of imported goods are beginning to skyrocket, with the quality of services and products provided by some of these companies suffering as they try to cut costs. As the real economy becomes impaired, consumers are faced with an influx of fake goods, some of which are of substandard quality.

Worst hit in this credit crisis are small businesses that have been deprived of their financial lifeline and are facing imminent closure. These businesses provide work for over half of the labor market in the country. With the labor market contracting, social instability is possible in the form of increased criminal activity, with armed robberies and financial scams starting to emerge.
Some companies are beginning to default on their contractual commitment to state government agencies, which have recently begun to close their premises.

contact:info@cmcapitalmarketresearch.com

US & China Relations

2010-04-02T13:25:00.000-07:00

Political & Economic Tension Escalating
April 1st 2010

Charles Malize

The Ongoing Saga

The United States sells weapons to Taiwan; China makes threat of sanctions on U.S. defense contractors; President Obama meets with the Dalai Lama of Tibet, and China cancels joint military meeting. In the interim, both cry foul with respect to the other’s economic policies.

There is a changing dynamic of economic and political influence in the world following the recent global financial crisis. To some extent, the financial crisis aggravated ongoing structural changes that elevated the role of emerging markets (especially China) in the global economy. This increased their influence in debates, financial regulation, trade and currency policy. The joint collaboration between the United States and China facilitated the staving off a near depression in 2009. This seems to have diminished as the global investment and diplomatic community experience muscle flexing between the two global economic giants; the world’s largest creditor (China) on one hand and the world’s largest debtor (the United States) on the other.

Political strain was heightened after December’s Copenhagen climate change meeting, in part due to the American perception that China’s behavior prevented a more ambitious agreement on carbon emissions from taking shape. Tension between the two countries seems to hinge on the following issues:

1. Trade

2. The treatment of foreign companies in China,

3. The ongoing issues such as U.S. support of Taiwan

4. The recognition of Tibet’s Dalai Lama and his recent visit to the United States

4. China’s responses to Iran’s nuclear ambitions

6. US especially exchange rates with China

5. Allowing the Chinese currency; the renminbi (RMB) to float

The uneasiness in the political and economic circle is the possibility that both countries could be heading to an unnecessary altercation. The Chinese have labeled the US as prickly and claim America is interfering in China’s security and economic affairs. However, given the importance of the relationship to global trade, growth and security, the hope is that both countries will avoid a full-blown confrontation.

The Chinese, and to a lesser extent, some of the other emerging market economies, are weary in fully embracing the economic and political multilateral policy initiatives that will help mediate the changes and continuities of the global economic order. At the same time, existing institutions such as the G20 have failed to provide the precise platform to press ahead for the much needed dialogue for change. G20 lends itself as a potential setting for such negotiation, but remains too large and diverse to be able and proficient.

The Chinese economy in the early of 2009 showed signs of weakness although its GDP (Gross Domestic Product) grew faster than most developed and developing countries. It’s GDP expanded by an average 8.4 percent in 2009. Further slowdown in its economy was avoided with the injection of an immense fiscal stimulus and relaxed monetary policy. Most of the stimulus package was directed towards infrastructure projects and lending. This helped it to sustain domestic growth. Furthermore, its huge accumulation of reserves, translated into assistance for others, especially cash-strapped countries and companies, during the global economic and financial crisis.

Leverage

The insinuation that China’s leverage on U.S. policy appears overstated. This is apparent as its willingness to diversify away from U.S. assets remains constrained by its desire for a stable economic policy. A recently released annual data by the US treasury showed that China, while reducing its holdings, still retained the top spot in holding US treasury.
The decline in Chinese holdings is coming at a time of increased tensions between the two nations. Regardless, the Chinese needs a vibrant US economy to purchase their goods. The US on the other hand needs China to buy its treasuries to support much needed growth at home.

Given the role of both countries in inciting and in the end easing the global economic crisis, it is no surprise that bilateral tensions would be suppressed during this period as both countries look inward to sustain growth. Although this seems to be the case, the risk remains that one or the other player might overplay its hand or badly misinterpret the intentions of the other.

China GDP Growth Rate

The last quarter saw the Gross Domestic Product (GDP) in China expand at an annual rate of 10.70 percent. According to the World Bank, China’s Gross Domestic Product is worth USD 4.3 trillion (6.98 percent) of the world economy. With the rapid growth in its private sector this makes its economy the second largest in the world after that of the United States. A major component supporting China's rapid economic growth has been the growth of their exports.

United States GDP Growth Rate

The United States economy is the largest in the world. Its Gross Domestic Product (GDP) expanded at an annual rate of 5.60 percent in the last quarter worth USD14.2 trillion. This represents 22.91 percent of the world economy, according to the World Bank. The United States economy is market-oriented where private individuals and business firms make most of the decisions. The federal and state governments buy needed goods and services typically in the private marketplace.

In the fourth quarter of 2009, the United States economy expanded at an annualized rate of 5.9 percent which is fairly strong compared to the last two years. This is on the backdrop of the recent global economic crisis.
For this to continue, household demand is necessary to elevate production levels. In addition, the poor condition of the labor market needs to improve to enable economic recovery to continue. This is a major concern. According to a recent publication by tradingeconomics.com: “Indeed, the US economy has lost 7.3 million jobs since the recession began in December 2007. And the job creation promise made by many politicians is not working because the unemployment rate is the highest in 26 years. In fact, consumer sentiment was weaker in February as more Americans became impatient with the government's effort to stimulate jobs.”

The political ballet

Although the hope within the diplomatic circle is for the wrangling between the two countries to calm down, the diplomatic cycle picks up again this month with China’s President Hu Jintao expected to attend an April summit on nuclear proliferation in Washington DC. Following this is the U.S.-China Strategic and Economic Dialogue (S&ED) scheduled for the summer of this year in Beijing, as well as upcoming G-20 meetings. As each side tries to prod for new sources of leverage, further bickering in public could develop.

With the US making mounting efforts with diplomatic interactions across the board with China (Especially in the area of climate change) the Chinese have concerns of their own. The past several months have revealed how sensitive certain issues on both sides have become. The Obama administration’s push for China’s cooperation on a global climate change deal in 2009 has so far proved fruitless. The fear for China is that a deal on binding emissions is likely to slow its economic growth. Beijing on the other hand is pressing the U.S. to stall future weapons sales to Taiwan in return for cooperation in Iran.

China is expected to drag its feet on Iranian sanctions, but at the end of the day it is not in a position to block any deal on Iran’s nuclear program if Russia comes on board.

Although the expectation in the economic and diplomatic circle is that neither side will seriously overplay its hand in 2010, there is a risk in areas where communication has become sporadic and phony, like military-to-military ties, one side may adopt policies or position which unintentionally provokes the other.

What's more, with faltering global trade growth, the tit-for-tat trade tensions seem destined to continue going into 2011. The US has been very careful in its wording in declaring China a currency manipulator, which could set in motion an economic and political response. This test remains as the upcoming summit draws close.
Over the years the US has argued that china artificially undervalues its own currency. This allows their exports to be cheaper to the US and other countries, and as a result they are able to generate massive trade surpluses, and excessive revenue for their reserves.
Up till now, efforts by the US to have the Chinese float its currency has met resistance. They have rejected American pressure to allow its currency to rise in value against the dollar, arguing that such efforts amounted to trade protectionism.
While China’s economic apparatus seems strong, its security position has not been able to boast the same. With this in mind, other U.S. allies, especially the Europeans, want the U.S. to retain its firm position on China, a topic that may permeate Obama’s upcoming trip to Asia.

Contact: info@cmcapitalmarketresearch.com

Disclaimer

Readers are advised that all data provided in this report are issued solely for information purposes and are not to be construed as an offer to sell or solicitation of an offer to buy, nor is it to be interpreted as a recommendation to buy, hold, or sell (short or otherwise) any security. All opinions, analysis, and information included in this report are based on sources believed to be worthy and written in good faith, but no representation or warranty is made concerning accuracy, completeness, correctness, timeliness, or appropriateness.

Private Sector Gains Ground in Africa

2010-03-21T17:04:00.000-07:00

By Simon Willson
IMF Survey online

March 04, 2010

Stronger fundamentals allowed Africa to withstand the crisis
Expanded role for the private sector
Progress on IMF-Africa relationship in financing, loan conditions, debt limits
The growing role of the private sector in Africa has been credited by a top IMF official for sustaining foreign investment during the recent global slump.
In an interview with IMF Survey online, the head of the IMF’s African department, Antoinette Sayeh, said Africa had demonstrated a new openness to the private sector in recent years. This, together with a more attractive climate for investors had helped to maintain investment from abroad.

“Africa has seen a significant increase in foreign investment that predates the crisis, and during the course of the crisis, those investments also fared reasonably well,” she said.

During a wide-ranging interview, ahead of a three-country trip to Africa by the Fund’s Managing Director, Dominique Strauss-Kahn, Sayeh said Africa had demonstrated considerable resilience during the recession, and she was now hopeful about the future prospects for the continent.

IMF Survey online: It seems that most of the countries of sub-Saharan Africa were better prepared to handle the effects of this latest global economic crisis than previous crises. What’s made Africa more resilient this time around?

Sayeh: One key factor has been the considerable progress made by African countries beginning in the late 1990s and in the first decade of this century, in addressing their fiscal problems and reducing their fiscal deficits. So that when the crisis hit, despite the fact that many countries suffered from lower revenues as a result of the reduced demand for African exports, countries were able to sustain spending on key priorities. Some of them made space for additional expenditure, in some cases to protect the poor from the impact of the crisis. That was possible because previous efforts at reform had borne fruit in more sustainable fiscal positions.

Another factor was that inflation had come under control so they were also able to use interest rate policy and reduce interest rates as another means of mitigating the impact of the crisis. Where exchange rates were flexible, countries let them adjust and this helped them deal with the shocks. I would say finally that African countries did not begin to put up barriers and look inwards. Instead they continued to pursue policies broadly encouraging foreign investment and trade.

All those factors, taken together, meant this time around Africa was able to better withstand the impact of the crisis. That gives us optimism that as the global economy recovers, the recovery in Africa will keep pace.

IMF Survey online: Related to your last point, Africa has been described as staying open for business during this latest crisis. Is that a view you would share?

Sayeh: Africa has made significant progress in charting the respective roles of the government and the private sector in African economies. Beginning in the late 1990s and through the past decade, African governments have increasingly withdrawn from the economic sphere and left that space for the private sector.

This, together with efforts to reign in fiscal deficits, stabilize African economies, and the introduction of policies more supportive of foreign investment has really helped. It’s been a very encouraging feature of African economies, this new openness to the private sector and this more level playing field for foreign direct investment as well.

IMF Survey online: South Africa is in its first recession since 1992. Is this mainly a cyclical rather than a structural downturn in Africa’s biggest economy?

Sayeh: Well, it is indeed cyclical. The recession in South Africa is, by and large, a reflection of the reduced demand for South African exports as the global crisis deepened.

South Africa is now starting to recover in line with the global recovery. It is beginning to grow again. But the impact of the crisis has been devastating for many South Africans, and significant structural challenges remain.

South Africa lost almost a million jobs in the course of this very deep recession, many of those jobs in low wage manufacturing. It’s not clear that workers who lost those jobs will be able to find jobs in that sector which has been on a long term structural decline. So there are big challenges around job creation and job growth in South Africa that are structural in nature. But the recession itself had its origins in the global crisis.

IMF Survey online: What has been the impact of the global financial crisis on Kenya?

Sayeh: Kenya had been emerging from a deep political crisis when the global recession hit. In addition to the impact of the recession and the impact on demand for Kenya’s exports, Kenya was also faced with a drought that has meant significantly reduced availability of food, with some ten million people facing the prospect of hunger. And so Kenya was hit by several shocks all at once: having to adjust to both the global crisis and the impact of the drought, at the same time dealing with significant political challenges.

IMF Survey online: What then remains as Kenya’s main policy challenges?

Sayeh: The main challenge is to accelerate and deepen economic growth as a basis for reducing poverty in Kenya. And around that are a number of issues that would be elements of a comprehensive reform program. These include more transparent management of budgetary resources, increased mobilization of domestic revenues, improved spending priorities—protecting higher priority spending and addressing emerging issues in the financial sector.

The Fund was able, as the crisis hit Kenya, to provide financing through the rapid access portion of the Exogenous Shocks Facility. The Fund stands ready to continue to provide support to Kenya’s efforts at reform with technical assistance, policy advice, and should the government be interested to consider the provision of financing as well. And so we’re looking forward to continued, deep dialogue with Kenya as it seeks to address what are formidable challenges in the months ahead.

IMF Survey Online: One year ago, the IMF co-hosted a major conference in Tanzania and that called for a decisive change in the relationship between the IMF and Africa. How would you assess the record one year later?

Sayeh: Well, I think the Tanzania Conference was a critical turning point in the relationship between the Fund and its African member countries, one that underscored the crucial importance of the IMF as a partner in Africa’s development. It acknowledged the strong partnership that has been built between Africa and the Fund. The issues that need to be addressed to deepen this partnership were discussed in a very frank and open fashion, with a view to helping African countries safeguard macroeconomic stability as a basis for robust, sustained growth.

The conference underscored the need to increase IMF concessional resources for Africa, and encouraged others to provide the needed financing for Africa to deal with the crisis. It welcomed the overhaul of the Fund’s lending architecture for low-income countries, the streamlining of conditionality, and the introduction of a new approach to debt limits in Fund-supported programs. It also stressed the need for Africa to have more influence in the governance of the IMF.

I think a year since the conference we can say that good progress has been made on many of the key issues outlined in the concluding statement, the Dar es Salaam Declaration, as we call it.

On the financing issue, in 2009, the Fund was able to provide financing of $5 billion to sub-Saharan Africa. That is, five times the amount we were able to provide a year earlier. Those resources were provided with streamlined conditionality. The Managing Director was able to bring to the G-20 discussions the voice of African countries, as he had been asked to do at the conference. This made possible significant commitments at the April G-20 meeting, including more than a doubling of concessional resources for Africa.

So, significant progress, I think, across the board from provision of financing, reform of conditionality, and our approach to debt limits in Fund-supported programs. There is, however, still some work to be done in terms of the membership’s confirmation of the reforms introduced in 2008 on increasing the voice and participation of African countries in the Fund.

But all-in-all, a lot of progress over the past year.

Comments on this article should be sent to imfsurvey@imf.org.

Africa Seeing Signs of Recovery After Global Crisis—IMF

2010-03-21T16:58:00.000-07:00

By Simon Willson
IMF Survey online

March 08, 2010

Strauss-Kahn in third visit to Africa in 12 months
Points to need to lay policy foundation for Africa's economic transformation
Longer-term challenges include governance issues and climate change
With recovery getting under way, Africa should now address longer term challenges to the continent’s future, including governance issues and climate change, to be able to press ahead with the region’s economic transformation, IMF Managing Director Dominique Strauss-Kahn said.

In a speech in Nairobi, Kenya, Strauss-Kahn assessed the impact of the global economic and financial crisis on Africa. While noting that the turbulence had struck Africa through many different channels, he said that “all across the continent, we can see signs of life, with rebounds in trade, export earnings, bank credit, and commercial activity.”

The IMF now expects growth of around 4½ percent in 2010. “In short, I think that Africa is back—although a lot depends on a global recovery that is in its early stages.”

The IMF chief is on a trip to Kenya, South Africa, and Zambia to meet political, business, and civil society leaders and assess the impact of the global economic and financial crisis on Africa.

Strauss-Kahn plants a tree at Nairobi University. (photo: Simon Willson/IMF)
“The twin challenges for Africa are to revive strong growth and reinforce resilience to shocks,” he stated in the speech on March 8 that set the scene for a panel discussion involving Kenya’s Prime Minister Raila Odinga, Finance Minister Uhuru Kenyatta, environmental activist and Nobel Prize winner Wangari Maathai, rock star and political activist Bob Geldof, and Transparency International’s Akere Muna.

The televised panel discussion took place in the University of Nairobi’s auditorium, where an audience of around 500 students, community leaders, and officials found standing room only. Moderator Charlayne Hunter-Gault put questions to the panelists that covered poverty relief, good governance, regional integration, intra-African trade, climate change financing, and the use of Africa’s natural resources. In the last half hour of the two-hour event, Hunter-Gault invited questions from students in the audience.

Improved policies

Strauss-Kahn said that because many African countries had undertaken good policies before the global economic crisis, this had helped to inoculate them against a more severe downturn—strengthening budget positions, reducing debt burdens, holding down inflation, and building comfortable reserve cushions. He noted that because debt positions had improved dramatically, many countries had been able to use the budget to counteract the crisis, including preserving social spending.

At the same time, Strauss-Kahn emphasized that there was no room for complacency regarding Africa’s economic outlook. “This is not the time to rest on our laurels,” he said. “Africa remains highly vulnerable to economic dislocation from many different sources. Think about swings in commodity prices, natural disasters, or instability in neighboring countries. Think about the risks that come from relying heavily on remittances, aid, and financial flows.”

Twin challenges

Looking forward, he said the twin challenges for Africa are to revive strong growth and reinforce resilience to shocks.

“The first place to start is with macroeconomic policies,” the former French finance minister said.

“A major lesson from the crisis is that countries that sowed in times of plenty were able reap in times of loss. Policy buffers must therefore be rebuilt, to allow for future countercyclical responses, with fiscal policy and with reserves. Social safety nets must be strengthened—this is the first line of defense against adverse shocks. We should also beware that widening income inequality—across regions or segments of the population—can aggravate tensions and make shocks more destabilizing.”

Opening the event, Kenyan Finance Minister Uhuru Kenyatta said he recalled that, at a conference in Tanzania a year ago, Strauss-Kahn had committed the IMF to mobilizing the international community after the global financial crisis to ensure that Africa’s interests were not sidelined.

“We do note that indeed you have lived up to your commitment, because we have already begun to see some of the results, in terms of increased financial support from the IMF as well as other development partners. This, as well as reforms within the IMF, has gone a long way to helping us all weather the crisis and putting our economies back on the path to sustainable development. And for this we are grateful.”

Calls for change

Starting the debate session, Kenyan Prime Minister Raila Odinga called for change in the way the international economy is managed. “Fundamental reforms are required here, and I am happy that the IMF Managing Director has spearheaded the process of this reform.

“We have seen a departure from ‘one size fits all’ that was there in the past, so that the IMF is now relating more constructively with countries and also incorporating the specific properties of the economies of the Third World.”

Answering a question from the floor, Strauss-Kahn said “the new IMF” is trying to propose to Africans a new kind of partnership. “You need us but, certainly, the global economy needs you. So in the coming years, maybe in the coming months and weeks, we will be trying with you here in Kenya and in other countries in Africa, to build something new that will help you to help us.”

Help for developing world on climate change

Strauss-Kahn also drew attention to the challenge of climate change. He called upon the international community to marshal the resources needed to help developing countries, particularly low-income countries, address this issue—which he said could be “the shock to end all shocks.”

“Without action, Africa will suffer more from drought, flooding, food shortages, and disease—possibly provoking further instability and conflict,” he added.

While “some may rightly argue,” Strauss-Kahn said, “that climate change is not in the mandate of the IMF … the amount of resources needed has clear macroeconomic implications—sustainable growth in developing countries will require large-scale, long-term investments for climate change adaptation and mitigation.”

In this context, he said IMFstaff are working on the idea of a “Green Fund” with the capacity to raise $100 billion a year by 2020. He emphasized that while the IMF did not intend to manage such a fund, it aimed to offer something that “can make a significant contribution to the global debate and for consideration by the international community. And now is the time to put new ideas on the table.”

Acknowledging that launching such a scheme would entail a major political effort, he also said that the “potential pay-off is enormous—for Africa and the world.”

Comments on this article should be sent to imfsurvey@imf.org

Post-crisis Rethink at Asia Conference

2010-03-21T16:50:00.000-07:00

THE SEOUL PAPERS
IMF Survey online

February 25, 2010

High-level meeting ponders how to reconstruct the world economy
Five papers explore key finance, macroeconomic issues
Traditional orthodoxies questioned, new solutions proposed
Top policymakers and academics from around Asia and G-20 countries have been meeting in Seoul to debate some of the most pressing issues to emerge from the worst economic slump since the Great Depression.
The one-day conference, organized by the Korea Development Institute (KDI) and International Monetary Fund (IMF) and entitled “How to reconstruct the world economy,” is centered around five papers prepared by IMF economists.

The “Seoul papers” represent a rethink of some traditional orthodoxies and are part of a larger reexamination of key macro and financial issues being undertaken by the IMF in response to the global economic crisis. The papers range from how to exit stimulus policies, through a reevaluation of macroeconomic policy, to proposals on strengthening the international financial architecture.

In an opening speech, the First Deputy Managing Director of the IMF, John Lipsky, said the papers did not represent the official IMF position, but reflected internal debate in the Fund.

“They are intended, in part, to be provocative,” he said.

Revisiting inflation

Included among the proposals is a suggestion by the IMF chief economist, Olivier Blanchard, and his coauthors, that central banks might consider setting their target inflation rate at 4 percent, rather than the long-held ideal of 2 percent.

“Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions,” they write.

The proposal has already provoked considerable lively debate in the public arena and was warmly endorsed by the liberal economist, Paul Krugman.

The Seoul papers

Exit Strategies

The paper’s authors suggest it is too early to withdraw from crisis-response policies, but they propose five basic principles to guide an exit from macroeconomic stimulus. These include the need for consistency across policy instruments, flexibility, clear communication, ensuring strategies rely on market-based incentives, and the need for cross-country consultation and coordination.

Advanced economies face a daunting challenge to bring fiscal and monetary policy back to normalcy, suggest the authors, who then present elements of a strategy to restore economies back to health.

“Addressing the fiscal problem will require clarity of intent and firm political resolve: health and pension entitlement reforms, cuts in the ratio between other spending and GDP, and tax increases will be necessary.“

Global Imbalances

This paper addresses future sources of growth and asks how the world’s economies can avoid the global imbalances that precipitated the current crisis.

It warns that a failure to address remaining domestic and international distortions “could result in the world economy being stuck in midstream.”

If global growth is to be put on a more sustainable footing, it says, the United States will need to save more, whereas major surplus countries such as China will need to consume more domestically. Similarly, oil-exporting countries will be able to boost domestic demand, if oil prices remain stable or higher in the medium term.

Rethinking Macroeconomic Policy

As well as a rethink by the IMF chief economist about the ideal target inflation rate, this paper also questions whether financial stability—including asset price performance—should be an explicit goal of policy, and if so, how that should be achieved.

It notes that monetary policy is a blunt tool and suggests that better and more targeted instruments should be developed.

The Future Financial System

The economic crisis, with its origins in the financial sector, has sparked a deep reevaluation of the global financial system. This paper proposes a number of reforms, including widening the scope of regulation to include all systemically significant financial institutions and limiting excessive leverage and risk-taking, but warns against stifling innovation.

The international linkages highlighted by the crisis have underscored the importance of creating a new regulatory framework that is consistent across countries, say the authors.

Reforming the International Monetary System

This paper addresses the question of how a new international financial architecture, and in particular a strengthened international monetary system, can help address some of the current challenges.

It discusses how the monetary system could be structured to dissuade economies from building up reserves to insure against capital account crisis—an issue that has long preoccupied the Fund (see: Exchange Rate Regimes and the Stability of the International Monetary System, March 2010)The paper proposes alternative insurance arrangements to mitigate this precautionary demand for reserves, while exploring a menu of alternative reserve assets which, the authors suggest, “could offer sustained stability and efficiency.”

Contact: info@cmcapitalmarketresearch.com

Economic Outlook

2010-03-21T16:36:00.000-07:00

IMF Revises Up Global Forecast to Near 4% for 2010
IMF Survey online

January 26, 2010

World economy bouncing back, but advanced economies drag
Global recovery from recession led by emerging markets
Countries should maintain stimulus measures while recovery not well established
The global economy, battered by two years of crisis, is recovering faster than previously anticipated, with world growth bouncing back from negative territory in 2009 to a forecast 3.9 percent this year and 4.3 percent in 2011, the International Monetary Fund said in its latest forecast.

But the recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures, the IMF said in an update to its World Economic Outlook, published on January 26.

“For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over. Right now it’s ok, but a year down the line, it will be a big question,” said IMF Chief Economist Olivier Blanchard in an IMF video interview.

IMF Managing Director Dominique Strauss-Kahn has warned that countries risk a return to recession if anti-crisis measures are withdrawn too soon.

The IMF said it had revised upwards its earlier forecast for global growth by ¾ percentage point from the October 2009 forecast.

Risk appetite returning

Along with the update to its forecast, the IMF also released a new assessment of global financial conditions in its Global Financial Stability Report (GFSR). It said that financial markets have rebounded since the lows of last March, the result of improving economic conditions and wide-ranging policy actions by governments.

“Notwithstanding the recent sell-off, risk appetite has returned, equity markets have improved, and capital markets have reopened,” Jose Viñals, Director of the IMF’s Monetary and Capital Markets Department, said.

But policymakers still face extraordinary challenges as they seek to unwind the unprecedented fiscal, monetary, and financial support they provided to keep their economies and financial markets from collapsing, the GFSR update pointed out.

Strength of U.S. consumption

The WEO forecast said that in advanced economies, the beginning of a rebuilding of corporate inventories and the unexpected strength of U.S. consumption had contributed to a rebound in confidence, and inflation was expected to remain contained. But high unemployment rates, rising public debt, and, in some countries, weak household balance sheets present further challenges to the recovery.

The IMF report said that the varying pace of recovery across countries called for a differentiated response in the unwinding of measures used to stimulated the economy and combat the crisis.

Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term, and the fiscal stimulus planned for 2010 should be implemented fully. However, given growing concerns about fiscal sustainability, countries should also make progress in devising and communicating exit strategies.

Financial sector repair

Crucially, there remains a pressing need to continue repairing the financial sector in advanced and hardest-hit emerging economies. In these cases, policies are still needed to tackle bank’s impaired assets and restructuring. Unwinding the financial sector support measures gradual; it can be facilitated by incentives that make measures less attractive as conditions improve.

Policymakers will also need to move boldly to reform the financial sector with the objectives of reducing the risks of future instability and rethinking how the potential fallout of financial crises would be borne in the future, while at the same time making the sector more effective and resilient.

At the same time, some emerging market countries will have to design policies to manage a surge of capital inflows. Macro-prudential policies can be used to address the potential for bubbles at an early stage by limiting a buildup in risks.

Excerpt from the book Options Investing: Keeping it simple

2010-03-21T16:24:00.000-07:00

Charles Malize

LEAPS

LEAPS are long term options and are one of the greatest secrets in the market place today. The term LEAPS stands for: Long Term Equity AnticiPation Securities. They can either be a put or call option. They generally become available for trading in July, and normally have 2.5 year duration.
When a LEAPS option has only six months or so remaining on the term, the option is no longer called LEAPS, but simply an option. Options that have more than six months until expiration are called LEAPS. To confirm the distinction, the symbol of the LEAPS is changed so that the first three letters are the same as the company’s other short- term options. All LEAPS expire on the third Friday of January.

Call LEAPS are similar to owning the underlying stock

Call LEAPS give the investor all the rights of stock ownership excluding voting on company issues and collecting dividends. They can use this investment instrument to leverage their stock position without the headache and the “carry cost” of purchasing on margin. An investor never gets a margin call on their LEAPS if the stock abruptly drops. They can never lose more than the cost of the LEAPS.

Limited “time erosion”

Like any other option, LEAPS depreciate in value over time. This is with the hypothesis that the stock price remains unchanged. While there are fewer months remaining until the expiration date, the option value will plummet and in some cases become worthless as the “time value” of the option becomes eroded. (Time decay).
A remarkable and appealing feature of the monthly decay is that it is less significant for LEAPS than it is for a short term options. In the last month of an option’s existence, the time decay is usually more than the monthly decay of LEAPS at the same strike price. An at-the-money or out-of-the-money option will sink to almost nil value in the expiration month, while the LEAPS retain value.

Buy LEAPS as a medium to long term investment

LEAPS are popular with institutional investors. Not many retail investors are aware of them. As a result, the volume is usually less than short-term options. This leads to an immense gap between the bid price and the asking price.
When investing in LEAPS, it is recommended that one plans on holding them long term. Perhaps, until a few months prior to expiration. Although, one can always sell the contract at any time, it can prove expensive because of the gap between the bid and the asking price.

LEAPS and taxes

As mentioned earlier, LEAPS are long term options and they expire on the third Friday of January. This is beneficial to the investor because if they sell their LEAPS when it expires, and have a profit, the tax will not be due for another fifteen months. They can also avoid the tax all together by exercising their option by purchasing the underlying stock at the strike price of the option they own. As a result LEAPS are regarded as tax friendly.

To sum up

LEAPS are long term options. They are either call or put options and generally have a 2.5 year life span. Call LEAPS give the investor all the rights of stock ownership excluding voting rights on company issues and collecting dividends.
Finally, the reader is urged to consult with a qualified tax advisor for up to date tax rules and regulations.

For more information on the book visit:www.cmcapitalmarketresearch.com

Contact:info@cmcapitalmarketresearch.com

Excerpt from the book : Betting on Grains & Oil seed

2010-03-21T16:07:00.000-07:00

The Reasoning behind high commodity prices

Charles Malize

With global food price inflation at a ten-year high and the United States dollar losing steam, supermarkets items globally have gotten more expensive. Records show that prices of basic staples, especially in Europe and the United States, have shot up between 10 and 12 percent over the past year.
As of 2008, the market saw the effects of such substantial increases on the poorer nations. An example is the riot in the Caribbean island of Haiti over exorbitant food prices that saw the removal of their Prime Minister. In 2008 Egypt saw riots over high prices of wheat. Recently, riots broke out in Mexico when tortilla prices rose.

The Law of Supply and Demand

The news is that agricultural commodities are now on most investors’ radar screens. (This is where the money is to be made.) Smart money investors like commodities sage Jim Rogers argue that soft commodities are where the big gains are at least for the next five to ten years. The reasoning behind this is the law of supply and demand.
On the demand side, global growth and rising wages among the world’s middle class are heightening the demand for food and luxuries. The new middle class wants to eat and enjoy the same luxuries as the West. Days of relying on a starch-based diet are becoming a thing of the past as populations crave more protein-based foods. China has over a billion people and their average calorie consumption is expected to double over the next decade.

Climate change is a major challenge for the supply side. Global inventories of soft commodities are at a low. For the past decade, China has been losing fertile land at an alarming rate each year. This drop has been blamed partly on weather conditions that have negatively impacted supply.

Australia, on the other hand, is a major producer of soft commodities and has, over the years, been facing water shortages that led the government to invest heavily in irrigation for its farmers. Rice production has dropped over 90 percent and cotton production has more than halved.

Biofuel Subsidy

Ethanol demand is set to jump significantly thanks to the US’s introduction of corn-based ethanol subsidy. Today, one out of five bushels of corn produced in the United States is likely to go toward ethanol. This subsidy is aggravating the problem of high prices in the soft commodity market. The estimated demand for crops for biofuel is set to double within the next 20 years. The projection is that half of the cars produced in America will run on mixed fuels by 2012. Statistics shows that for Europe to meet its green goals, it will have to allocate 25 percent of arable land toward ethanol production.

The quagmire here is the inadvertent consequence as land shifts toward corn. This move by the US government should make soybeans more expensive. The same case can be made for wheat and barley as fields are turned toward rapeseed crops. Also the new demand for corn means a bidding war has erupted between livestock producers and the ethanol industry. The consumer will be driving cleaner cars but eating less meat as global output of beef, pork, and chicken is expected to nose-dive.

Dollar

Most global commodities are traded in dollars and this tends to have an effect on commodity prices. For example, in October 2009, when the dollar lost value against major currencies, global commodity buying—especially precious metals—surged, including soft commodities.

When markets are in a panic mode over the unforeseen or bad news, investors tend to pull large amounts of money out of all markets. This occurred in 2007 and 2008 when the global financial crisis put a damper on the markets. This negatively impacted commodities in general. The credit turmoil saw the likes of corporate giants AIG, Citibank, and General Motors on the brink of insolvency. It resulted in investors pulling large amounts of funds out of the market that spread to other asset classes including commodities.An anxiety laden period hung over all markets as investors remained jittery while awaiting the fate of these institutions.

United States Department of Agriculture Monthly Supply and Demand Report

The United States is the world’s largest corn and soybeans producer and the third largest producer of wheat. Total acreage of cultivable land in the US for soybeans and corn is 160 million acres.

Grain investors usually have a number of factors to consider, with the main focus being the USDA report before placing their bets. Analysts’ projections and the government forecast on the amount of grains left for supply at the end of a given period tend to affect market prices. For example, a March 2009 US soybean and stocks report forecast a drop of 10 million bushels. This led to prices of soybeans rising. Investors and traders normally watch for open interest on the reports before venturing into the market. They study the report of the growing countries (the United States, Brazil, and Argentina) which may show the planting supply of soft grains meeting demand. (This report tends to be heavily dependent on grain drought worries.)

In the United States it is customary for investors to pay attention to the most important crop reports of the year when the US government forecasts how much corn and soybeans farmers will sow over a period across the country. This report normally is expected to project plantings of soy and corn for the period. It is billed the March 31 USDA Annual Planting Intentions report, the first official word on what farmers intend to plant during springtime based on actual farmers’ surveys. This is usually based on the USDA survey of about 86,000 farmers done in March, (a month before seeding begins in the Midwest grain belt) to establish what the farmers will be planting. This is the annual benchmark for the markets to gauge supply. Traders and investors generally use these numbers against an average five-year annual yield to pencil in expected US grain output until the USDA’s August crop report. The next farmers’ survey (in the August report) provides more insight into actual yields and acreage after corn pollination has taken place in the Midwest.

This data is a market driver as the report is eagerly awaited by investors in farm equipment companies, livestock producers, grains transporters, and/or makers of products ranging from bread and pasta to ethanol. Investors at times need to make a decision quickly as they await the report, because this is usually their last chance to see a price change that could sway them one way or the other.
Also, investors are eager to know how the US grain competitors are doing in terms of having an adequate supply in the marketplace. For example, farmers in Argentina, which competes with the United States in the world grain export market, with a recent long boycott of selling their grains normally leads to investor’s anxiety in terms of supply. The problem in Argentina has always been the government imposition of high taxes on their produce and the fight of these farmers for the higher export taxes proposed. With this distraction in mind, grain investors tend to pay attention to the basic supply fundamentals: Spring planting.

USDA Annual Outlook Conference

The United States’ prices are usually supported by short covering ahead of the USDA Annual Outlook Conference. The 2009’s conference was held in Arlington, Virginia. Investors and traders are generally interested in the USDA estimates of global wheat planting as well as expectations of US soybean vs. corn plantings.
The market will generally factor in USDA projections that are expected to come in the form of an increase in US soybean plantings opposed to corn, or vice versa.

Fertilizer Prices

It is a known fact among traders, investors, and analysts that the price of fertilizer combined with the national crop insurance rate help set grain prices. The insurance targets are used as the base price to determine crop loss payouts. In 2008, priced fertilizer and national crop insurance facilitated the setting of corn prices at $4.04 and soybeans at $8.80 per bushel. 2009’s retail price for fertilizer traded in the range of $850 to $900 a ton. Wholesale price is in the $350 to $400 range. Retailers in 2008 were stuck with exorbitantly high-priced fertilizer, buying it at high prices due to supply fears.

CBOT Price Ratio

(This information was culled from Reuters.com/commodity corner. U.S Midwest planting approaches. March 2009)
Movements in CBOT (Chicago Board of Trade) corn and soybean markets over a period also play a role in ascertaining how farmers finalize their planting decisions. A ratio norm is adopted by the market and farmers in relation to choosing whether to plant either of the grains. In 2008, the price ratio between new-crop November soybeans to December corn widened by mid January to 2.36:1, a level that made soybeans very attractive to plant as traders saw soy prices surge on worries that Argentina’s soy crop output would be cut due to drought.

The ratio dropped with rain in Argentina and was down to 2.09:1, a level which tends to favor corn over soybeans. The general rule of thumb is that the ratio 2.2:1 is the “indifference” point where plantings could go either way.
Following this, regardless of the current CBOT price ratio, market analysts expected more soybean acres going into 2009 than 2008. This was to stabilize prices of soybeans.

Weather

Weather conditions have always played a part in the pricing of commodities. For example, floods in the upper reaches of the United States bordering Canada have in the past threatened the seeding of spring wheat. Also, a drought in California and southwest Texas created a severe impact on crop yields.
The harvest in the growing countries, which tends to hinge on climate conditions, usually helps indicate how well the crop season will be. Soil moisture is equally important. Weak soil moisture tends to impact crop yield negatively and will result in future high prices. When there is a continuous hot dry weather on farmland it negatively impacts future supply and, as a result, prices. Therefore investors and farmers pay attention to weather and soil moisture conditions before deciding which direction to follow.

Mother Nature issues leading to disruptions of commodities supply usually translate into investors and traders holding long positions.

Economy

The recent US recession (2008–2009) clouded investments in soft commodities as the United States grain demand dropped. During this period, the market experienced a global trade volume drop of almost 10 percent. This was the most major contraction since WWII according to a World Trade Organization report.
One of the real challenges that surrounded grain pricing in early 2009 was the fast pace of the changing economic environment. Traders, investors, and farmers were eager to know when demand strength would return and how the likelihood of inflation would influence grain prices.

Government Intervention

Next, let’s look at how governments are intervening.

The United States

The increase in global grain prices in 2008, which threatened the poorer nations, saw Washington appoint a czar to contain the problem. One of the goals was to address global hunger and malnutrition. This issue was put on the front burner by Congress as two United States senators—Senator Glickman and Senator Lugar—supported appointing a White House food coordinator to take on the production of agriculture and food aid.

This “food czar” was assigned to coordinate efforts between the US Agency for International Development, the US Department of Agriculture, and other such agencies.
This move was welcomed in the US and global community, considering these events in the agricultural space threatened national security both at home and abroad. The soaring food prices in 2008 sparked food riots and political instability in some parts of the world. One of the goals of a food czar was to possibly alleviate this quandary by improving the United States’ role in making other nations self sufficient in agricultural production, an area some say the country has failed.
Some market observers were critical of the United States’ efforts to arrest the high global food prices. They argued the US was not doing enough. According to political science professor and author Robert Paarlberg, US efforts to address the long-term challenge of persistent malnutrition earned an F. He said US agriculture assistance to Africa has plummeted 85 percent since the 1980s. “So as things have been getting steadily worse in Africa, the United States government has curiously been doing steadily less.”
“A food czar,” Senator Lugar said, “would have the job of addressing this challenge.”

Argentina

Over the last few years, Argentina has been dogged by the farmers’ decision to strike over the ruling government’s threat to impose soy taxes. This led to anti-government protests and a political crisis. The hostility with the farmers usually resulted in a squeeze in global supply leading to a temporary spike in prices.

Earlier in 2009, President Cristina Fernandez announced a plan to share the soy tax revenue with the provinces, which critics see as a ploy ahead of a forthcoming election. They saw this policy as erratic and unnecessary and blamed it for the conflict between farmers and the ruling government. A number of observers were saying the president needed to change direction to reflect economic reality. Those in support claim the soy taxes are a vital tool to encourage more diversity in crops and redistribute wealth among the poor. Also, the Argentinean media was increasingly critical of the government and few defended the president’s handling of the standoff.

Book can be purchased at www.cmcapitalmarketresearch.com

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Investors commentary report

2010-03-21T15:57:00.000-07:00

February 11th 2010
Charles Malize

United States Dollar

The United States Dollar (USD) is gaining on the Euro (European currency) as anxiety over Greece’s finances swell. The U.S. Dollar Index, a six-currency gauge of the greenback’s value, added as much as 0.6 percent today. The dollar has climbed 5.1 percent against the euro this year on worry that fiscal gaps in Greece, Spain and Portugal may broaden.

Investors’ bullish sentiment on the U.S. dollar is on the backdrop that weakening government finances in European nations will hurt the global economic recovery. The world’s currency reserve is expected to rise over the coming months if the mounting budget deficit in Greece worsens. The expectation is that Greece’s distress is likely to spread beyond its borders. Spain and Portugal are also trying to control widening deficits.

Greece needs to convince investors that the government can cut its deficit below the European Union’s ceiling of 3 percent of the Gross Domestic Product. (GDP). The recent drop in the euro is as a result of the enormity of the fear associated with Greece.

European officials are debating on how to assist Greece to prevent its budget deficit from eroding confidence in the euro. The union has instructed Greece, a member with the highest budget deficit, to bring it under control to stem further collapse of its currency. The quagmire here is that as Greece is bailed out by the union, the euro could still be under pressure as other European countries increase their own deficits.

Furthermore, the odds are that economic growth within the European Union is likely to lag behind the U.S. Also the ensuing magnitude of the region’s debt is worrying for investors. The expectation is the two issues above will weigh on the euro currency, as well as on assets denominated in that currency.
There are some good reasons to be confident about the dollar. The economy is on the path of recovery. With the U.S. economy expected to expand 2.7 percent in 2010, this is twice as much as in the euro zone and Japan.

A jinx on commodity prices may occur if a stronger dollar persists. The general commodity market is bound to experience some adjustment in prices. This sector would then be on shaky grounds.

The budget crisis in Greece has also strengthened the appeal of U.S. government debt among investors. Their 10 year note yields are rising while their counterpart in Germany, France and Spain are lagging behind.

Yesterday, Treasury 10-year note yields rose to the highest level in a week as the U.S. prepared to sell a record-tying $25 billion of the securities. It came under pressure today as investors weighed the prospects of a possible European bailout of Greece. This development is likely to cut demand for US government bond as it prepares for auction.

Soft commodities

The recent rise in the USD is negatively impacting soft commodity prices – (especially corn, wheat and soybean) reducing its appeal for investors.
The rise in the trade weighted dollar index which measures the currency against a basket of United States major trading partners is putting pressure on soft commodity prices since these assets are traded in USD. A rise in the US dollar normally diminishes interest among overseas importers holding other currencies. United States corn, soybean and wheat should be less competitive on the world markets because of the recent dollar strength. As the greenback gains steam and demand for commodities decrease, they become less attractive which is bearish for future grains prices.
In addition, soft commodity prices are under pressure following concern on Greece’s efforts to close its budget deficit. Confidence among investors is waning as the situation in Greece loiters. This should translate to lower prices of commodities across the board.

On the other hand, a glimmer of hope on prices may be on the horizon.
China, the world’s biggest soybean buyer, seems to be stepping up its purchase lately. The country may import 42 million tons of oilseeds in the year through September, according to the China National Grain & Oils Information Center yesterday. That’s 2 million tons more than the center’s January forecast and 16 percent higher than purchases a year earlier.
The Asian nation boosted soybean imports by 34.5 percent January from the prior year, the Beijing- based customs office said on its Web site.

Also the U.S. Department of Agriculture earlier in the week lowered its estimates for global corn and soybean stockpiles for 2010 and boosted its outlook for demand.
According to the report, global corn consumption will outpace production for the first time in three years as rising use of the grain to make ethanol in the U.S., the world’s biggest consumer, grower and exporter, helps reduce supplies.

The report also cites a downward global stockpile of soybeans although this appears to be a short term fix. Soybean prices are likely to fall on speculation that favorable weather will help South America (Brazil and Argentina) output exceed U.S. forecasts this year. This is fundamentally weak for prices in the long term as demands loosen for U.S.exports of grain and oil seed products.
Investors are expecting the United States Department of Agriculture to forecast higher U.S. plantings this year, which is expected to keep pressure on the market and prices.
Copper

In recent months industrial metals including copper gained as reports in Australia and China signaled a stronger economic recovery. A major risk for the copper price is that it has increased significantly despite ample supply in the market as valuations remain stretched.

This augmented price increase is expected to weaken as the USD gains momentum and appreciates. China is the world’s number one consumer of base metals and in recent months has been stepping up its demand at attractive levels due to past USD weakness. Copper imports by China, gained 25 percent in January from a year ago as higher domestic prices encouraged shipments. Copper prices benefited in the process. However this situation is expected to change as the USD gains among the basket of currencies.

This suggests demand for raw material/industrial product is likely to stall. The market is experiencing a slack in demand globally especially in Asia as dollar appreciation renders these assets more expensive.
Copper is also coming under pressure on the backdrop of a recent China’s central bank decision to tighten banks reserves making it more challenging for them to lend. The People Bank of China (PBOC) increased commercial lenders' reserve requirement ratios (RRR) by 50 basis points. This is with the fear that the economy may be overheating. This could undermine investments and negatively impacts its growth ambitions going forward. It could prove disastrous for material prices such as copper used in industrial production.

The reserve ratio hike is a strong signal the central bank is stepping up efforts to absorb excessive liquidity. This quantitative shift shook financial markets, depressing stocks, high-yield currencies and commodities (including copper).
China has long used required reserves for mopping up excess cash in the economy generated by its cavernous trade surplus and speculative inflows. As such, it is an important weapon in its arsenal for curbing inflation. The move was prompted by concerns that a renewed surge in bank lending was flooding the economy with too much cash, risking overheating and a surge in inflation. This move is a sign that China’s economy is likely to hit a bump due the nation’s excess capacity and as loan growth slows. This will undermine industrial commodities in the short term.

In addition the recent pull back in the global equity markets is bearish for copper. Of all the commodities, industrial metals have the highest correlation with stock markets. Copper should be weaker, based on the fact that recent market pull back for equities is signaling a recent bullish run in the base metal sector that is likely to abate and lead to lower prices. As long as the stock market hovers around its current range, the market is likely to remain cautious.
Gold

Today, gold climbed to a one-week high in New York as signs of an economic recovery boosted demand for commodities and some investors sought a haven amid concern over Greece’s finances. The metal climbed alongside the dollar after an agreement, brokered by the European Union to help Greece weather its debt crisis, failed to offer details.

Gold is moving in tandem with all of the commodities. There’s some economic optimism that’s bringing in investors.
Sovereign risk (experienced in the euro zone) is bullish for gold. The precious metal is usually considered a safe heaven and a flight to quality for investors in times of economic crisis.

Earlier in the week prices retreated as a climbing dollar curbed demand for the precious metal. The dollar gained against the euro as the United States Federal Reserve signaled it may raise interest rates on direct loans to banks and amidst concerns that Greece may not get budget help. Gold typically falls when the U.S. currency rises. The greenback has jumped 1 percent this month on concern that fiscal gaps in Greece, Spain and Portugal may widen.

In addition, as global central banks add more liquidity to the capital markets to unfreeze clogs in the credit market, inflation is created which is expected to boost the appeal of the precious metal. The Federal Reserve chairman, Ben Bernanke, has made it clear the United States intention to take more action to boost lending putting more pressure on the dollar and in the process making gold more attractive. More liquidity will devalue currencies and stoke inflation. Gold is a safe haven in such a situation.

The government needs and wants an inflationary spurt to turn its economy around and that means more liquidity in the system. The Federal Reserve so far has maintained its benchmark interest rate between 0.5 percent and has provided over $1 trillion in loans to financial institutions to help ease the global financial crisis.
In 2009 gold advanced 24 percent as governments cut interest rates and spent trillions of dollars to prop up economies. Meanwhile, central banks in nations including India and China heightened bullion reserves. Furthermore, bargain hunters and investors stepped in to secure this precious metal due to its diversification attributes.

China has surpassed Japan by becoming the largest overseas holder of United States treasuries and has been accumulating gold for its currency reserves on the growing concern that the $700 billion US bank bailout is likely to cause declines in the dollar and treasuries. China holds the world biggest foreign exchange reserves at $2.3 trillion. With its reserves on an upward spiral and authorities grappling with how to best manage it, the consensus is one that supports an increase in its bullion reserves in case of a dollar decline.

China Investment Corp, the Asian nation’s sovereign-wealth fund, recently spent $155.6 million to buy 1.45 million shares, or 0.4 percent, of SPDR Gold Trust, the biggest exchange-traded fund.

With the United States budget deficit at elevated levels, some investors see the USD’s recent rise as temporary and are betting that the currency will weaken as the Treasury needs to start reducing its deficit. This is bullish for the precious metal.

Also, mining companies are facing growing challenges. As demand and mining costs increase, the decline in output production creates a bullish case for gold. Recent reports show that mining production peaked in 2001 and has since been declining while the acquisition of gold for jewelry rises, especially in India [the world largest user for this purpose].

Oil

Oil prices have been struggling, trading around the $75 per barrel range, as I write this report. Last week oil tested $69 per barrel. This is amid worries that the world economy is still struggling and global demand is feeble. Oil prices are reacting to weakening demand, falling equity prices and a rising US dollar. The recent dollar strength is putting a cap on oil prices. These are bearish factors that are likely to keep oil prices in the mid seventies range. What’s more, it appears there is plenty of oil out there for now. Supply seems to outweigh demand.

However, the current status quo on demand estimates are changing as they have been revised upwards by energy agencies. Official data released today by the International Energy Agency (IEA) indicates that the situation may change in 2010 as the global demand outlook is expected to rise and should support future high prices.
The IEA raised its forecast for global oil demand this year as developing countries need more crude to fuel their economies. It increased its estimate for world demand in 2010 by 170,000 barrels a day to 86.5 million barrels a day.
“Global oil demand now takes its cue primarily from rising emerging country incomes,” the Paris-based agency said in its monthly oil market report today.

Asian economies, in particular China, will lead the increase, according to the IEA. They left their estimate for oil consumption in OECD (Organization for Economic Co-operation and Development) countries unchanged from last month at 45.5 million barrels a day in 2010; the same level as last year, even as the International Monetary Fund (IMF) raised its economic growth forecast for the region.
Demand in those countries may have peaked, as they shift away from heavier oil products such as heating oil and fuel oil to cleaner, more efficient energy sources such as natural gas, renewables and nuclear power. Combined with relatively cheap natural gas prices, this means the economic recovery in those countries could be less oil-dependant citing the report.

The stronger oil consumption outlook means there will be a greater burden on the Organization of Petroleum Exporting Countries this year to balance global demand and supply, the IEA said.
Producers from outside the group will also contribute to meeting demand growth, according to the IEA.

The United States Energy Department inventory report is scheduled for Feb.12. The Energy Department recently boosted its outlook for global oil consumption this year to 85.3 million barrels a day from 85.18 million last month, according to its monthly Short-Term Energy Outlook, released yesterday. It is forecasting oil price at $79.78 a barrel for the year 2010.

Also the Organization of Petroleum Exporting Countries (OPEC), scheduled to meet on March 17 in Vienna, increased its forecast for the amount of crude its members may be called on to supply in 2010 by 150,000 barrels a day following signs of the global economic recovery. OPEC expects the world will need more of its crude oil this year than previously forecast.
OPEC, responsible for 40 percent of global supplies, predicted in a monthly report yesterday that consumers worldwide will need 28.75 million barrels a day of OPEC crude in 2010. It left its forecast for worldwide oil consumption in 2010 at 85.12 million barrels a day.

In addition, oil prices are expected to ascend following the US stand off with Iran. Recent oil price increases can also be attributed to the freezing of assets of four Iranian companies by the United States, heightening tensions with OPEC’s second-largest crude producer. The U.S. has accused Tehran of developing weapons of mass destruction and supporting terrorism. This escalation is pushing price of oil higher. The U.S. has been trying to rally reluctant countries, especially China, to sanction Iran as the government resists pressure to scale back its uranium enrichment work

These factors are bullish for oil prices going foreword.

Contact: info@cmcapitalmarketresearch.com

Disclaimer

Readers are advised that all data provided in this report are issued solely for information purposes and are not to be construed as an offer to sell or solicitation of an offer to buy, nor is it to be interpreted as a recommendation to buy, hold, or sell (short or otherwise) any security. All opinions, analysis, and information included in this report are based on sources believed to be worthy and written in good faith, but no representation or warranty is made concerning accuracy, completeness, correctness, timeliness, or appropriateness.

Global Investment Report

2010-03-21T15:47:00.000-07:00

February 15th 2010

Charles Malize

Emerging Markets: Africa an Emerging Market Frontier

Africa is a fast-growing emerging market. The recessionary effects that captivated the continent may have been milder than previously thought. No doubt, the global economic recovery is in progress. Nonetheless, every region is recovering at its own pace, which means investors should expect some irregular moves in the markets near term. The varying levels of recovery should play out in investment instruments
available to investors.
The global environment is playing a key role as investors search for yield, prompted by significant international financial market liquidity.
With this in mind, the International Monetary Fund (IMF) now projects Africa’s economy will expand 4.3 percent this year, .3 percent higher than previously forecasted. 2011 is expected to be better with a growth expectation of 5.3 percent. The IMF expects the Sub-Saharan African economy to also expand 4.3 percent this year and 5.5 percent the next. The agency raised its forecast as a result of improved financial liquidity globally, higher commodity prices and government stimulus programs that helped mitigate the effects of the global recession.
This is encouraging for investors as they seek ways to spread their horizons. Searching for a better return on capital, investors are becoming more risk tolerant and expanding their prospects.

Institutional Investors

As investors seek out emerging markets in 2010 and beyond, they are starting to look for markets that have yet to emerge from the global financial crisis. The last frontier on their radar is Africa. Provided the continent offer a stable political and market economics, it should turn out to be a hot hub for investors. The reality today is that institutional banks, hedge funds and private equities have resumed their interest in the region, to take advantage of the opportunities it offers. They access emerging economies largely through equity markets and, in some cases, foreign currency debt issues.
Growth in the region is no longer limited to South Africa. Investors from all over the globe are today investing in other African countries such as Nigeria, Kenya, Ghana, Angola and Botswana. The Russian based investment bank, Renaissance Capital, seems to be active with an operation and asset management fund of over 1 billion-dollars (USD). South Africa’s Pamodzi Investment Holdings has over 1.3 billion dollars (USD) in a fund which is backed by US financial institutions. The London-based fund Blakeney Management has exposure in Angola, Mozambique and Ethiopia. The list doesn’t end there.

The Saudi prince, Al-Walid Ibn Talal Al Saoud who has investments in Africa was a decade ago behind the creation of a new $400 (USD) million fund: HSBC Kingdom Africa Investments, in association with HSBC bank.
Last week Zain, Kuwait’s biggest phone company received a formal $10.7 billion offer from Bharti Airtel Ltd. for most of its African assets.
Beyond institutional investments from the developed world, other players such as China, India and Brazil, are also present on the continent. China and India have long had some presence in Africa, but not to the extent of today.

Return On Investment (ROI)

The investment landscape in Africa is changing. Growth in the region seems to be back on track, as governments’ fine tune their policies and promote private investments that should have a lasting impact on development. If this continues it should put their economies on a fast track to growth. This should translate into more opportunities for investments long term.
This and other external factors certainly play a fundamental role in capital influx in the region. International conditions with low yields in developed countries, improved liquidity and the search for high returns all lure investors into the arms of ever riskier investments. Africa is still dubbed a very dangerous region where crime, corruption and political instability is common and many companies only benefit from oil, gold, diamond and other mineral resources. Nonetheless, investment opportunities have expanded greatly in the region.

According to Emerging Markets Private Equity Association (EMPEA) research; despite an overall global decline in private equity ventures in 2009, Sub -Sahara Africa-focused fund allocation grew to make up about 9 percent of total emerging markets funds, from about 3 percent in the same period in 2008. EMPEA estimates that emerging market share of global private equity fundraising has risen from 5 percent in 2004 to 20 percent as of June 2009. Global private equity investment totals have risen from 7 percent to 24 percent in the same period.

In this day and age, financial markets have become more sophisticated and complex. Financial information and technology is transmitted to emerging markets at the same pace as it is in developed and sophisticated markets—although lack of market depth and infrastructure does hinder its application. African central banks are been encouraged by outside agencies (IMF and the World Bank in particular) to further its information technology advancement, communication infrastructure and managerial training to aid the financial sector stability. As financial information and communications improves, it affords market analysts the opportunity and the required due process to cover local equity markets, providing investors with the much needed information to make timely decisions and resourcefully allocate funds.

Nigeria a Rising Frontier

Nigeria recorded an extraordinary return for investors prior to the global economic and financial crises that rocked the international capital markets in 2008. The All share index had an impressive surge of 74 percent in 2007 from the previous year. Reaching a historical value of 57,990 points during that period.
The market has since undergone a sobering correction following global financial crisis, corruption and the doctoring of company balance sheets that unraveled its banking sector.

Last week the Nigerian broader All-Share index fell as much as 1.8 percent to 23,408.63, the most in three weeks. Most market watchers argue that the valuations in Nigeria are very attractive at these levels, but remain cautious pending the on going reforms in the banking sector.
The Nigerian Stock Exchange’s Banking Index, which comprises the country’s 10 largest lenders by market value, has risen 14 percent this year. It declined as much as 4.4 percent (360.32) during the same period, the biggest slump since Sept. 4. Banks comprise at least 40 percent of the index. Source: Bloomberg

According to Bloomberg, the Nigerian All-Share index trade at 4.5 times estimated earnings, while those in the banking index are at 7.3 times. That compares with 9.23 times on the broader MSCI Frontier Market Index.
This in my view makes the country’s capital market attractive. Furthermore, the country has minimal exposure to foreign tradable and domestic debt, which is encouraging for its financial markets and should make a viable investment for investors.

According to Gregory Kronsten, an economist at London-based CSL Stockbrokers, “We know the Nigerian government doesn’t have tradable foreign-currency debt and domestic debt is still very low,” The European selloff was partly because of the banks’ holdings of sovereign debt, and “Nigerian banks don’t have that kind of exposure.”

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Excerpt: Investors Commentary Report (Vol. 1 - 2)

2010-03-21T15:33:00.000-07:00

U.S. Equities and Commodities

March 12th, 2010

Charles Malize

US Equities

This week has seen the U.S. equities advance as economic and earnings reports heightened optimism that the recovery from the recession will be sustained. Also there was optimism with last Friday’s job report that showed only 36, 000 jobs lost. This is less than expected following last month’s weather hiccups.
On more than 450 companies in the S&P 500 that have reported fourth-quarter earnings since the beginning of January, about three-quarters have beaten analysts’ estimates on a per-share basis. Source: Bloomberg
Last week, the Standard & Poor’s 500 index rose 0.7 in New York. Oil and copper rose more than 2 percent, pushing the S&P GSCI Index of commodities up 1.2 percent.
Albeit, there are doubts if this is sustainable. A number of poor economic data in the US over the past few weeks suggests that the economy is headed for a U-shaped (eighteen months to two years) recovery. As the past fiscal stimulus fades, the macro news, including data on consumer confidence, home sales, construction and unemployment, supports the motion of a further downside in the US economy.

Consumer confidence, based on the Michigan survey appears negative. On the real estate front, transactions seem to be in a bind as new home sales are in danger of further plunge. Existing home sales are also falling sharply, and construction activities (both residential and commercial) are depressed.

Durable goods orders are down. Initial claims for unemployment benefits remain high (above the 400K mark). Month on month real disposal income for January 2010 was negative and real disposable income for Q4 of this year has been revised downward.

For the month of February 2010; The Institute of Supply Management - Manufacturing index (ISM) while still expanding and still above 50, appears feeble and its production and new orders index levels have dropped. ISM's Production Index registered 58.4 percent in February, which is a decrease of 7.8 percentage points from the January reading of 66.2 percent (seasonally adjusted). This is the ninth consecutive month the Production Index has registered above 50 percent.

This report is a vital economic indicator. It is a monthly index released by the Institute of Supply Management in the U.S. It tracks the amount of manufacturing activity that occurred in the previous month. The values for the index can be between 0 and 100.If the index has a value below 50, due to a decrease in activity, it tends to indicate an economic recession, especially if the trend continues over several months. A value substantially above 50 likely indicates a time of economic growth.

Furthermore, global PMIs (Production, Manufacturing and Information) suggest a loss of momentum in the worldwide economic recovery.

The euro zone including the United Kingdom is at the risk of a double-dip recession. The sovereign debt issue in the region remains a major concern. Fiscal spending cuts, plummeting confidence, the threat of rising unemployment and a drop in wages in both the public and private sector for the region remains. This region especially the PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries including the UK remain a concern. These countries are on the verge of bankruptcy and the global investment community is heavily exposed to them. They are currently experiencing a wave of fiscal austerity.

Growth in domestic demand in the region appears anemic and on the face of it is further constrained than in the United States. The expectation is a drag on U.S. exports (Euro zone not buying US goods and vice versa). Europe will have great difficulty purchasing U.S. exports. All these could create grounds for a plunge in global demand and negatively impact growth across global economies. In addition, Dubai debt issue is still a problem. The recent U.S. dollar rally on risk aversion echo’s this risk.
Equity is a dicey sector to be in for any investor unless one has the experience on how to hedge the market. To invest in this sector one has to question whether global economy is going to be subdued for the foreseeable future. To have enhanced growth the global economies especially the US, China, Japan and the Euro- zone (including the UK) have to improve. These regions need jobs enhancement and sustainable demand.
Investors should be selective in their equity investing. The US market seems to be getting ahead of itself. My barometer for exiting the equities is shadowing the US S&P 500 that closed 1045 yesterday. There is a likelihood of the index reaching 1200 points that could trigger a 10 to 15% correction.

Reason: Global consumption is still subdued. Liquidity for businesses is still tight. Recent company earning reports on profits on past two quarters are cost driven. Furthermore, the market is becoming over bought.
Also, China that is expected to lead the world out of recession is tightening their monetary policy. The country sees their spending raging out of control as their economy overheats and threats of elevated inflation.

Dollar

U.S. dollar has been inching up as the United States Federal Reserve in February 2010 increased discount rates. The Fed raised the discount rate from 0.5 percent to 0.75 percent. This is a move to encourage financial institutions to rely more on money markets rather than the central bank for short-term financing.
The dollar is also rising after minutes of the Fed’s Jan. 26-27 meeting release, showed some officials favored the selling of assets in the near term as a way to shrink the bank’s balance sheet. They prefer the central bank return to holding just Treasuries. They unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time.”

The momentum for the US dollar is upwards. A stronger dollar will create a negative impact on company’s bottom line. Gains are likely to be risky for a company’s margin as they (U.S. companies) struggle to recover from recession. The expectation is that this will threaten profit predictions for the year as US exports become more expensive and overseas sales suffer. Recovery will likely be stifled. Weakness in the dollar in 2009 helped improve the manufacturing exports for the US economy.

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Nigeria:

2010-03-21T15:29:00.001-07:00

Oil / Niger Delta /Inflation: a worrying phenomenon.

June 15th 2009

Charles Malize

Oil and Niger Delta conflict

The recent rise in oil price and Nigeria’s mission to eliminate the militants in the Niger Delta should put the country on an affirmative path. Following the recent military incursion into the Niger Delta, the government is expected to experience a drop in oil production. This phenomenon is likely to negatively impact oil revenue in the short term. Stabilizing the situation in the region could enhance future production assuming Nigeria’s military are successful in their operations. Market watchers for the region anticipate oil staying above $60 for the rest of the year. This should benefit Nigeria, provided it resolves the Niger Delta conflict.

Nigeria, the largest oil producer in Africa faces the risk of a sharp slowdown in growth if the crisis in the Niger Delta is not arrested soon. Also the country has been hit hard by global financial crisis. As its currency depreciates, fueling inflation in a country that is import dependant, a deeply worrying trend will be further erosion of its foreign reserves and a drop in government spending that is a key engine for growth. The economic growth forecast by the World Bank for 2009 has been reduced from 6.1% to 2.9%. This could change with the recent spike in oil prices and the possibility of increased oil production pending successful military operations against the Delta militants.

Although, there is rationale for optimism, Nigeria’s outlook seems bleak. On the budget deficit front, it is expected that savings from the last few year’s windfall from oil is expected to help finance Nigeria’s unexpected budgetary shortfalls for the 2009 and 2010. Nigeria is believed to have over $12 billion available in its excess crude account to fund deficit spending. While this seems plausible any contraction in government revenue due to the on going crisis in the Niger Delta region could affect consumption and output, coupled with decline in asset prices. This is prone to depress the economy further.

If oil can be maintained at a current price level of ($70 a barrel) and the production level improved to at least 2 million barrels a day, there should be enough money in the excess crude account to maintain sound expenditure levels through 2009 and 2010. In addition, some of the top domestic banks remain strong and well capitalized. The government could fund its budget deficits through the capital markets (primarily from these banks).

Inflation and Yar’ Adua’s re- election bid

The recent drop in Gross Domestic Product (GDP), Foreign Reserves and Liquidity necessitated the Central Bank of Nigeria (CBN) to adopt tailor made solutions by easing its monetary policy to address these concerns. It took inflationary measures to bolster the liquidity in the economy by easing the monetary policy rate from 9.75% to 8%, cut the cash reserve requirement for banks from 2%. to 1% and banks minimum liquidity ratios to 25% from 30%.

There are debates from various camps, whether this monetary policy will be successful in achieving its goal as Nigeria’s core inflation has risen from 2.5 percent in January 2008 to 8 percent in January 2009. Food inflation, which constitutes a 64% of consumer price index (CPI) rose from 12.6 % in January 2008 to 18% in January 2009. Although, there are inconsistencies with the way these figures are calculated, which has led some to question its accuracy.

Inflation comes in the form of increased price of goods and services and also in the form of demand for higher wages. This is a problem for the government as inflation expectations rise and necessary adjustments are required. Nonetheless, because 2010 will be a general election campaign year, the fiscal authorities will be doubtful to turn down workers and will likely hike wages, which could dramatically fuel a return to the vicious cycle of inflation.

With this inflationary exposure, CBN in an effort to contain it, would have no other option than to return to the tightening of the monetary policy which may not bode well for President Umaru Musa Yar’ Adua’s re- election bid as this might become a political tool to harm his reputation politically and foil his ambition. Hence as the year 2010 approaches, CBN is expected to face an unpopular credibility testing task of tightening monetary policy amid a general election campaign year.

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