Year: 2014

Latin America’s Pacific Alliance trade bloc is one to watch

Posted on by Ashton Wenborn

Trade deals are becoming an increasingly popular way for economies to foster growth and promote exports in a globalised world. The new kid on the trade block is the Pacific Alliance, which is set to become a chief trading organ for the dealing with Latin American region. The potential is enormous, as the four founding nations of the Pacific Alliance – Chile, Colombia, Mexico and Peru – represent nearly 36 percent of Latin American GDP. Yet other country leaders from the continent have voiced concerns that the new trade bloc is not so much an economic initiative, but a political tool to circumvent certain Latin American countries.

Notably, Bolivia’s President Evo Morales said at the São Paulo Forum in 2013 that the Pacific Alliance was a “geopolitical scheme” through which the US could oppose the left-wing governments of Brazil, Argentina, Uruguay, Bolivia, Venezuela and Ecuador.

The Pacific Alliance, which was created on April 28, 2011, aims for deep economic integration among its member states through free trade, visa-free travel, a common stock exchange and joint diplomatic representation. In its initial ‘Declaracion de Lima’, which established the alliance, the bloc also said that it would have a clear orientation towards economic integration with Asia. As such, its observer states include Japan, South Korea, China, Singapore, India, Australia, New Zealand, the US, Canada, several South American states, as well as the UK and a plethora of European countries as well.

With its main goal set as reducing trade barriers, the Pacific Alliance sealed a deal in February to eliminate tariffs on 92 percent of goods and services traded between the four founding countries and soon-to-be member, Costa Rica. The accord was reached at the alliance’s eighth summit in Cartegna, Colombia, and has boosted free trade between Chile, Colombia, Mexico and Peru, which together represent more than half of total Latin American exports, at $550bn alone in 2012.

Tonnage-exported-globally “The Pacific Alliance could become the largest intra-regional agreement in the Americas since NAFTA,” says Scotiabank’s Latin American economist, Daniela Blancas. “In our view, the importance of the alliance goes further than just a hoped-for increase in intra-regional trade flows; we think that the goal of improving supply chains will lead to creating products capable of penetrating other markets, particularly in the Asia-Pacific region. Additionally, the trade negotiations have been advancing relatively quickly, implying that results can be achieved in shorter periods of time when treaty aims are modest and major political obstacles are absent.”

This stands in stark contrast with regional economies such as Brazil and Argentina, which are employing inward-looking policies, as well as protectionist stances reducing cross-border trade, which has impaired their economic growth. This is interesting, given that both nations are key members of rival Latin American trade bloc, Mercosur.

Political tool?
As mentioned, several heads of state have criticised the alliance for being a political tool, rather than solely an organ to promote economic cooperation. The São Paolo forum, which is a conference of leftist political parties and organisations from Latin America and the Caribbean, hosted a heated debate discussing the goals and impact of the Pacific Alliance, which state leaders said was an attempt at recreating the Washington Consensus in South America. In its closing statement, the forum defined the alliance as an “opportunistic, interventive, anti-leftness approach to attack the sovereignty of South American nations.”

The statements raised the concern that both Mercosur and the Pacific Alliance are moving in an increasingly political direction. What’s more unsettling, said the Director of Latin America studies at the Council on Foreign Relations, Julia Sweig, in a recent commentary on the São Paulo Forum, “is the frequent suggestion that the Pacific Alliance is the 21st-century cool-kids fraternity of capitalist freedom, while Mercosur has become the club of stuffy socialist militants who would rather read Lenin and Galeano than Hayek and de Soto”.

Source: World Bank
Source: World Bank

Many of the nations at the forum are currently members of the South American trade bloc, Mercosur, which was set up in March 1991 by Argentina, Brazil, Paraguay and Uruguay and later developed into a fully fledged customs union. Bolivia, Chile, Colombia, Ecuador and Peru have since joined as associate members able to participate in free-trade agreements, which regulate imports and exports and arbitrate trade disputes. Similar to the Pacific Alliance, Mercosur set out to create a continent-wide free-trade area (see Fig. 2), including the establishment of a development bank. However, following serious disputes between members, as well as public critique that the economic organ had a political agenda, the bloc’s initiatives have stagnated.

The main point of contention occurred in 2012, when Paraguay was suspended from Mercosur, allowing Venezuela to become a full member. Paraguay objected to the move, which it considered an institutional blow to the union, as it did not consider Venezuela a democratic state. Furthermore, disputes have arisen among member states after the question was raised as to whether Mercosur should adopt a political stance in addition to its economic goals. This was further aggravated when Venezuela’s President Hugo Chávez said that “Mercosur should prioritise social concerns,” by moving “farther away from the old elitist corporate models of integration that look for financial profits, but forget about workers, children, life, and human dignity.”

Honing in on economics
By comparison, the Pacific Alliance, despite the claims of some sceptics, has refrained from any official political commentary. Instead, the alliance is becoming increasingly pro-business and private sector, promoting foreign investment into member economies and pushing for less government intervention in economic affairs.

“Based on the similarities of these four economies and the main objectives of the Alliance, this treaty will likely be more functional than Mercosur. Mexico, Peru, Colombia and Chile have been very active in increasing their free trade agreements with other regions. These economies enjoy a positive economic outlook, solid public finances, relatively high foreign reserves as a percentage of GDP, manageable current account balances, central bank credibility and relatively stable electoral cycles, which is not necessarily the case for all of the Mercosur members,” says Blancas. She emphasises that “business-friendly policies for investors have been implemented in the last decade, with all the PA countries now in the top-third of the World Bank’s ‘ease of doing business’ ranking (see above).”

Bolivia’s President Evo Morales said…the Pacific Alliance was a “geopolitical scheme” through which the US could oppose the left-wing governments of Brazil, Argentina, Uruguay, Bolivia, Venezuela and Ecuador

Similarly, Chile’s new Foreign Minister Heraldo Muñoz wrote in a column in the Spanish newspaper El Pais in March that he values the economic integration scheme and a trade platform, which allows for “collective projection towards the Asia-Pacific region”. He also rejected claims that the Pacific Alliance functions as an excluding ideological or antagonist trade bloc and argued in favour of further Latin American integration. “As a matter of example we should discuss the possibility of materialising a convergence of the Pacific Alliance with Mercosur,” Muñoz said.

Key initiatives
As such, the alliance has worked on strengthening its ties across borders through the establishment of The Mercado Integrado Latinoamericano (MILA), which currently integrates the Colombia, Santiago and Lima Stock Exchanges, making it the largest market in Latin America by number of issuers, the second by market capitalisation and the third by turnover. What’s more, the Mexican Stock Exchange is in the process of being fully incorporated into MILA by the end 2014, having already acquired shares in the Lima Stock Exchange in order to develop joint business activities.

In addition, the Pacific Alliance has furthered the creation of joint embassies and consulates that will help provide citizens of Pacific Alliance member countries with needed diplomatic services. In the Declaration of Cali, the alliance highlighted the importance of opening an embassy shared between Chile, Colombia, Mexico and Peru in Ghana, as well as the agreement between Chile and Colombia to share embassies in Algeria and Morocco and between Colombia and Peru to share an embassy in Vietnam.

According to the alliance’s website, the member states also hope to promote larger growth, development and economic competitiveness, achieving greater welfare, overcoming socioeconomic inequality and achieving greater social inclusion of their inhabitants. To this end, the Latin American leaders said at a panel discussion at the World Economic Forum in January, that the alliance poses the opportunity to learn from the other members’ good practices.

Mexico’s President Enrique Peña Nieto argued that “the Alliance goes beyond a free trade agreement” by strengthening the relationship among the four countries and fostering social development.

Disproving sceptics
For sceptics questioning the relevance of the Alliance, this has become a key point of interest. Sweig argues that trade agreements such as these are strictly investment strategies that are “not intrinsically designed to substitute for public policies key to human development, citizen security, or fiscal solvency.”

Mercosur-imports-and-exports However, the Pacific Alliance seems to be blissfully aware of this, and as such is attempting to go above and beyond the normal grasp of trade unions. Crucially, the alliance will have to refrain from engaging in ideological spats, which could put a damper on momentum and shift focus away from integrative initiatives, if it is to achieve the economic ambitions its members are hoping for.

“Mexicans, Chileans, Colombians and Peruvians know full well that trade alone cannot substitute for a smart state and that growth without social inclusion and strong institutions is a recipe for violent conflict and instability. By comparison with the growth-at-all-costs gestalt of just a few years ago, the relatively strong consensus among the citizens and leaders of Pacific Alliance countries around investing in the education and wellbeing of people, and in strategies to reduce poverty and inequality, reassures this skeptic,” Sweig wrote in an analysis in June 2013.

The alliance itself stipulates that in order to create business potential and meet the challenges of the global economy, its members are working for free mobility of people, preservation and respect for the environment including a network of scientific research on climate change, cultural promotion, the integration of securities markets, improved competitiveness and innovation of micro enterprises and SMEs, as well as enforcing tourism as a key driver for growth alongside trade. With the latter as a key focus, Blancas believes there’s no doubt that the alliance can reach its goals of significantly boosting its members’ economies.

“Trade flows among the PA economies are relatively low as a share of their total trade, although the levels have been expanding rapidly. Intra-regional trade between the PA economies reached $45bn in 2012, significantly higher than the $8.6bn registered in 2000. The creation of a regional supply chain and the development of economies of scale will be the key benefits for each economy,” says Blancas.

Joining the alliance could prove “vital” for ascending member Costa Rica, said President Laura Chinchilla when officially announcing the country’s intention to join the Pacific Alliance in February. In order to become a full member, Costa Rica must adopt the alliance’s framework agreement, which is estimated to take about a year.

“This is the best way to project Costa Rica to the world. Costa Rica considers full membership in the Pacific Alliance vital, and we can only hope that this proposal will attract more countries,” Chinchilla said, reiterating the alliance’s ambitions to expand its reach even further.

Blancas adds that there is no downside in this respect: “Economies will benefit from agreements like this, as they will have the opportunity and the means to target other markets that maybe by themselves will be harder to reach.”

With the potential to grow further as more states move towards full membership, the alliance will represent a bigger market than any other Latin American bloc or country, seemingly becoming the regional one to watch.

Pacific Alliance member performance

Mexico

Population: 116 million GDP (USD, 2013 current prices): $1.3trn Exports (2013): $396.4bn Exports (percentage change 2012-13): +6.9% Imports (2012): $380.5bn Foreign direct investment (2012): $12.7bn

Colombia

Population: 47.2 million GDP (USD, 2013 current prices): $394bn Exports (2013): $65.1bn Exports (percentage change 2012-13): +7.9% Imports (2012): $59.1bn Foreign direct investment (2012): $15.8bn

Peru

Population: 31 million GDP (USD, 2013 current prices): $200bn Exports (2013): $49.3bn Exports (percentage change 2012-13): +8.1% Imports (2012): $42.5bn Foreign direct investment (2012): $12.2bn

Chile

Population: 17.8 million GDP (USD, 2013 current prices): $292bn Exports (2013): $81.8bn Exports (percentage change 2012-13): +4.5% Imports (2012): $79.5bn Foreign direct investment (2012): $30.3bn Source: International Monetary Fund, UNCTAD, World Trade Organisation

BJP secures landslide victory in India’s general election

Posted on by Ashton Wenborn

In what is being billed as a triumph for India’s struggling business community, Narendra Modi has been swept to victory in the country’s general election. It also brings to an end the decade long rule of the Congress Party, and crushes the hopes of its young campaign leader Rahul Gandhi.

So far 269 of the country’s 543 constituencies have been declared as victories for Modi’s Bharatiya Janata Party (BJP), with just 49 voting for Congress. It is thought that more than 540m of the country’s 810m citizens voted.

While some constituencies are yet to be declared, the seemingly huge victory has led to Congress conceding defeat. Randeep Surjewala, a spokesman for the party, said, “We concede that the people of India have spoken and we will humbly accept the verdict and perform the role assigned to us as a responsible opposition.”

Many young voters and business leaders have called for a BJP win, with the hope that jobs will be created

A hugely divisive figure, the 63-year old Modi has seen his pro-business party secure a landslide victory that will be a welcome relief to both international and domestic business leaders that had become fed up with the intransigence, corruption and bureaucracy over the last ten years.

Many young voters and business leaders have called for a BJP win, with the hope that jobs will be created and large-scale infrastructure projects will finally get off the drawing board.

Claiming victory, Modi declared on Twitter, “India has won. Good days are here again.” However, it will also cause despair among the country’s considerable Muslim community – as well as its already fraught relations with neighbouring Pakistan – who have not forgiven Modi for his actions in his home state of Gujarat during the riots of 2002. Those riots saw hundreds of Muslims murdered by Hindu mobs, and Modi’s dismissive reaction to the deaths has caused huge ill feeling from the country’s Muslim community.

The crushing defeat for Congress also represents something of a surprise. Many observers predicted that the party would lose, but the manner in which they have been ousted from office has come as a shock.

The party has been in power for the last ten years, and represents the political dynasty of the influential Nehru-Gandhi family. The man chosen to represent it at the election, Rahul Gandhi has disappointed many Congress supporters with his stunted public performances and lacklustre policies.

UNB strives to become best bank in the UAE

Posted on by Ashton Wenborn

Confidence in the UAE banking sector is regaining momentum, and justifiably so, taking into account a string of new opportunities and recent results that serve to suggest the industry’s prospects are on the up.

The clearest indication of the country’s banking boom can be seen in Moody’s’ UAE banking system outlook, which was upgraded from negative to stable late last year, owing to a strong funding and liquidity profile, as well as a cash-rich federal government.

The ratings agency’s improved outlook also reflects improvements in the region’s operating environment, a recovering real estate market and the capital buffers that have remained intact since the global financial crisis took hold in 2008. All in all, banking in the UAE looks set to experience something of an explosion in the months and years ahead.

The importance of Union National Bank (UNB) and the wider UAE banking sector in shaping the country’s future will be aided by the World Expo 2020, which is due to be held in Dubai. The event will no doubt act as a catalyst for growth, and authorities estimate that it could generate upwards of $23bn – 25 percent of Dubai’s GDP – over the course of the next seven years or so.

The UAE’s GDP as a whole is predicted to rise two percent as a result of the event, and investment in infrastructure is widely expected to skyrocket to an unprecedented level. The inflows that will come as a result of Expo 2020 should also present UNB and the wider banking community with an opportunity to expand their existing international connections and reap their fair share of rewards as a result of increased bank borrowing and cash flow.

Leading an industry
Aiming to be the best requires an organisation to be a leader. The edge we maintain comes from being simultaneously progressive and prudent. Our policies are built along sound and conservative lines and are translated into efficient processes and sensible procedures.

Our 2010-18 vision is to position UNB as the best in class for the banking industry in the UAE. Moreover, our mission for the years 2013-15 reads “through innovation, staff well-being and outstanding customer service, we will grow shareholder value and maintain our financial stability,” which offers an indication of the bank’s ambitious objectives for the years ahead.

The bank’s impressive reputation has not come about overnight, and is the result of over three decades of work and experience. First established in 1982, UNB is the only financial institution in the UAE with significant shareholdings shared between the governments of both Abu Dhabi and Dubai, who hold 50 and 10 percent respectively, while the bank’s remaining 40 percent is listed on the Abu Dhabi Securities Exchange and held by public parties. In essence, the bank’s shared ownership structure is in itself indicative of that spirit of collaboration and community.

UNB Net Interest Income

2012

AED 2.19bn

2013

AED 2.27bn

The bank operates through a network of 66 branches and over 220 ATMs across the UAE. It has also extended its reach to Egypt with the acquisition of ACMB, and today operates under the name of UNB Egypt there, with over 30 branches in the country. UNB has also opened a representative office in Shanghai, thereby becoming the first bank in the region to do so. UNB was also granted a licence to operate in Kuwait in 2011 and has been growing in stature there ever since. Moreover, the bank has a fully functional branch at the Qatar Financial Centre, Doha.

As a result of the bank’s progressive policies, operating income for 2013 rose to AED 3.2bn, a four percent gain on 2012’s AED 3.1bn equivalent. In addition, the group added a further 14 branches to its existing network, bringing UNB’s total footprint to over 100 branches spanning five countries. UNB’s coverage is even more impressive when taking into account that at the beginning of this century the company was a standalone bank, whereas today it represents a group of business entities that span share brokerage, Islamic finance and provision of captive sales support, to name a few.

Taking responsibility
Just as important to the country’s burgeoning banking sector, alongside sound financials, is its ethos of responsibility, which has come to play a huge part in spurring the UAE’s wider economic and social development of late. UNB has set a corporate social responsibility (CSR) high point for the country’s banks, and its commitment to matters beyond financial performance have helped cement its reputation as one of the industry’s leading forces.

UNB’s core philosophy is embedded in its tagline ‘the bank that cares’; it views its stakeholders as partners and customer satisfaction as a key indicator of success. The bank measures these parameters on a regular basis through satisfaction surveys, benchmarking, mystery shopping schemes and various other methods to ensure its brand image and reputation continues to be enhanced; the underlying principle being that a commitment to humanitarian and social causes is mutually beneficial for both the bank and the UAE community at large.

Having weathered the worst of the post-crisis jitters, the UAE’s banking sector is well positioned
to exploit emerging
market opportunities and expand upon its international renown

In this past year alone, UNB has pursued a number of initiatives as part of its ambitious CSR programme, and contributed to all manner of causes. Among the most notable of the bank’s initiatives in 2013 was an agreement with the Make a Wish foundation; sponsorship of the Autism Awareness Campaign organised by Emirates Autism Centre and the Zayed Higher organisation for Humanitarian Care & Special Needs Event; and ongoing cooperation with the Mafraq Hospital in hosting a special awareness lecture concerning breast cancer. These actions are but a select few examples of the bank’s past year of work, and offer an insight into the impressive contributions it is making in terms of CSR.

To believe in and commit to sustainable management is fundamental to ensuring quality for our stakeholders, in all aspects of our business. UNB does not invest in sustainability for publicity; we do it for conviction. Our inaugural sustainability report was rated ‘A+’ by the Global Reporting Initiative, and we have committed to publishing our independently validated sustainability KPIs every year.

UNB’s success delivering on its promise of superior customer service and CSR has cemented the bank’s reputation ahead of its competitors as a pioneer in the banking space. Without the influence of parties such as UNB, the UAE banking industry would not have the clout it has today in dealing with matters of major social and economic importance.

Regardless of the bank’s impressive performance, there still exist a number of challenges. The environment for business and banking has become much more demanding; margins are under pressure; the pace of business (aided by modern technology) is accelerating as we speak. The biggest challenges we face start with human capital, especially growing and retaining talent, staying focused on innovation and the inevitable rapid technology changes, as well as cyber security.

Having weathered the worst of the post-crisis jitters, the UAE’s banking sector is well positioned to exploit emerging market opportunities and expand upon its international renown. Considering the challenging market conditions that arose during the world’s recent financial turmoil, UNB has continued to deliver solid results by maintaining strong liquidity and proactively managing its asset quality under the guidance and visionary leadership of its Chairman Sheikh Nahayan Mabarak Al Nahayan. UNB is aware that the road ahead is paved with both risks and opportunities, and is taking the lead in responding to these issues by considering sustainability as a vital part of its business strategy.

IronFX explores impact of risk aversion on currency markets

Posted on by Ashton Wenborn

It seems often nowadays there is only one trade in the market: risk-on or risk-off. For currency investors, it’s crucial to understand how these episodes affect each currency. There’s money to be made in understanding the different reactions.

Researchers at the IMF investigated how currencies are affected by risk aversion and came up with some solid insights into these events. They defined a bout of risk aversion as to when the Chicago Board Options Exchange Market Volatility Index (VIX) rose 10 points above its 60-day average.

About IronFX Global

IronFX Global is the award-winning leader in online trading. With 15 platforms trading over 200 instruments in forex, spot metals and CFDs on US and UK stocks and commodities, the company serves retail and institutional customers from over 180 countries in Europe, Asia, the Middle East, Africa and Latin America. With over 50 offices worldwide, and more than 1,100 employees providing support in over 45 different languages, IronFX Global clients benefit from round-the-clock coverage delivered by one of the world’s largest and most accomplished global client coverage teams. The customer-centric model combines bespoke trading functionality through its platforms with the widest suite of products to offer the best pricing, execution and liquidity.

Daily market news feed and insightful research give clients access to the best information and data to make informed trading decisions. Evidencing the leadership of IronFX Global in the worldwide online trading arena, the company has also announced its official partnership agreement with FC Barcelona, one of the most successful professional football clubs in the world. It also complies with international regulatory standards, and is authorised and regulated by the Financial Conduct Authority, ASIC, FSP, CRFIN, UCRFIN and CySEC. The company is a member of the Eurex Exchange and is also EU regulated, and a Markets in Financial Instruments Directive (MiFID) compliant firm.

On its calculation, there have been 11 risk-off episodes since 1997 (see timeline below). It has become noticeable that these risk-off episodes are becoming more frequent. In the nine years from 1997 to 2006 there were five such events; in the seven years from 2007 to today there were six.

This is in part due to the increased integration of global financial markets, which allows markets to get re-priced faster in reaction to global risks. More people all over the world hold stocks and bonds in other countries. Even if someone doesn’t sell their assets during periods of risk aversion, they are likely to hedge their exposure.

Also, it’s clear that all of the episodes from 2007 – except the Japanese earthquake in 2011 – have origins in concerns about excessive debt in Europe and the US. Sometimes, like with the US housing crisis in 2008, it’s private sector debt; elsewhere, like with the Greek crisis of 2010, it’s because of public sector debt.

Predicting the curve
The researchers verified that the Japanese Yen and the Swiss Franc – which have a reputation as “safe haven” currencies – do in fact appreciate relative to the US Dollar at the beginning of a risk-off period. As time went on, however, the behaviour differed. The Swiss Franc’s appreciation tended to reverse between the first and third week of the risk-off period, while the yen’s appreciation tended to last longer.

The currencies that get hit immediately are the Australian and New Zealand Dollar, among the G10 currencies. Within emerging markets, the Brazilian Real, the Mexican Pesos, and the South African Rand get hit too. In Asia, the South Korean Won, the Philippine Peso, the Indian Rupee and the Malaysian Ringgit are quick to fall. Then, other currencies tend to depreciate three-to-six weeks after the start of the risk-off episode.

These include the British Pound, the Canadian Dollar and the Swedish Krona, among the G10 currencies. Again, within emerging markets, the Swedish Krona, Indonesian Rupia and the Turkish Lira are among the losers three-to-six weeks after the start.

Finally, some currencies have no consistent movement and don’t seem to be particularly affected by risk-avoidance. These include the Euro and the Danish Krone as well as the Thai Baht, the Icelandic Krona, and of course, the closely managed Chinese Yuan Renminb. There’s also an important difference in the movement of the currencies of the industrial countries and the developing countries.

The developed market currencies, such as the Australian and New Zealand Dollar and the Swedish Krona tend to mean revert after a few weeks. Emerging market currencies, however, tend to remain weak for longer, and some currencies, such as the Brazilian Real, the Mexican Pesos, the Philippine Peso and the South African Rand can remain weak for months afterwards. High-yielding currencies, which are often used for carry trades, tend to depreciate the fastest, fall further, and stay weak for longer, probably because it takes time before confidence comes back and people put the carry trades back on.

This difference in timing could create trading opportunities when risk avoidance sets in. After the first week one could buy a quick-rebounding currency, such as the Australian Dollar, against a slower rebounding one, such as the Mexican Pesos. The only problem would be the cost of carry, which will probably be negative in buying a developed market currency against an emerging market currency. How much of a problem that is depends on how long one has to wait for mean reversion to set in.

For me, the finding of which currencies are most stable during risk aversion periods is a key insight. Given the researchers’ finding that the Euro is not usually affected by risk aversion, I would think that using the Euro to fund trades would improve one’s risk-adjusted return. I think it’s worth paying the 15bps difference between the Euro and the Japanese Yen one-week rates (0.26 percent versus 0.09 percent) to avoid getting wiped out when a sudden bout of risk aversion causes the Japanese Yen to soar.

Major risk-off episodes since 1997

Risk aversion (when the VIX index rose 10 points above its 60-day average)

29.10.97: Escalation of Asia Crisis

Escalation-of-Asian-crisis

04.08.98: Russian Financial Crisis

Russian-Financial-Crisis

12.10.00: Fear of slowing US Economy

Fear-of-slowing-US-economy

17.09.01: 9/11 Attacks

911-attacks

10.07.02: Fear of slowing US economy

slowing-US-economy

10.08.07: BNP Paribas halts withdrawals

BNP-Paribas

12.11.07: Disruptions in US dollar money markets

Disruptions-in-US-money-markets

17.09.08: Failure of Lehman Brothers

Failure-of-Lehman-Brothers

06.05.10: Greek Financial Crisis

Greek-Financial-Crisis

16.03.11: Uncertainty over impact of Japan’s earthquake

Japan's-earthquake

04.08.11: Confrontation over US debt ceiling

US-debt-ceiling

‘Wrong-headed economics’: for and against unconditional basic income | Video

Posted on by Ashton Wenborn

For a full roundup of our coverage of universal basic income please click here.

Unconditional basic income: is it the answer to Europe’s unemployment problems and economic inequality, or a misguided macroeconomic policy that could do more harm than good? Guy Standing, Liam Halligan and Frances Coppola relay their expert opinions in this special World Finance debate.

World Finance: First, let’s take a look at what is unconditional basic income?

[Transition to news clip]

Narrator: Imagine no welfare or means-tested benefit payments. Instead, a set amount of money unconditional, and the same for everyone. That’s the premise of unconditional basic income.

Barbara Jacobson [European Citizens’ Initiative for unconditional basic income]: The main concern is, the people who are very poor at the moment in Europe, and the way that the economies in Europe have been going down very quickly. We feel that basic income would support demand, and also be a fairer way of allocating money within the economy.

Narrator: It sounds idealistic, but the concept is gaining traction, with supporters throughout America and Europe. In Switzerland, the Swiss parliament is voting on whether to implement the initiative later this year. But, if basic income were made a reality, how would it affect economies?

Dr Holger Schmieding [Chief Economist, Berenberg Bank]: If this minimum income is seen as a tool to actually raise the living standard of those currently on welfare, that would sound very nice. But it would mean that those people would have no incentive left to actually start looking for a job. And as a result, there would be few people looking for a job in the economy, there would be fewer people having a job in the economy, there would be fewer people paying taxes, and as a result, the government as a whole could afford less welfare benefits rather than more welfare benefits. So basically, almost everybody would be worse off.

[End of clip]

World Finance: So Guy, “almost everybody would be worse off”. As the co-President of the Basic Income Earth Network, I imagine you disagree with this statement?

Guy Standing: What we’ve got to realise is that in the 21st century, we’ve moved into a global system where insecurities are pervasive, where the growing precariat, about which I’ve been writing, are facing uncertainty in every aspect of their lives. And we’ve got a system of welfare which has moved decisively towards means-testing – that is, only if you can prove you are poor will you get any benefit – you put millions and millions of people into poverty traps!

If they go and take the available low-wage, casualised jobs that are proliferating, they will lose more by taking that job than they had in benefits. You cannot have a greater disincentive to labour than that!

If we move to a system where you have an anchor, a floor of basic security provided by a modest monthly basic income, as a right of citizenship, I would argue very fundamentally – we’ll perhaps come back to that – that it is primarily a matter of social justice.

World Finance: Well Frances I saw you nodding there, what do you think is wrong with the current system? Do you agree with Guy?

Frances Coppola: There’s a lot of uncertainty in peoples’ lives, and the problem that creates is that it’s hard for people to plan. It’s hard for people to look ahead. It’s hard for them to create roots.

It’s partly a matter of social justice; it’s also a matter of social stability. That if people are constantly moving around, moving from job to job, don’t know where their next job’s coming from; they can’t put down roots, it’s hard for them to engage with their communities. And we suffer a fragmentation of our social fabric. Which could be incredibly dangerous.

World Finance: Well Liam, during the clip we heard Barbara say that it’s a fairer way to allocate money in the economy. Do you think that that’s true?

Liam Halligan: I think that it’s perhaps fairer, but I think it creates more problems than it solves. I mean, Guy makes a very strong case of course. Nobel Laureate James Meade argued for a basic income, this is an idea that goes back all the way to Thomas Paine, and maybe even before. And nobody’s saying that advocates of a basic income aren’t making a case from the best possible motives.

My concern is that the state is already almost 50 percent of GDP in this country. I think the idea of a basic income would lead to an even bigger expansion of that, to levels that are completely unaffordable

My concern is that the state is already almost 50 percent of GDP in this country. I think the idea of a basic income would lead to an even bigger expansion of that, to levels that are completely unaffordable. We have a gilts market that’s propped up by printed money in this country. The only reason that the unsustainability of our public spending in this country isn’t in our faces every single day, is because the Bank of England owns a third of the outstanding gilt stock, which is absurd.

I completely agree with Guy; I’ve been studying most of my adult life the problems of benefit traps and poverty traps. I think they can be countered with the use of clever tapering, and people like Frank Field would agree with that.

I also agree about the rising precariat. But this is at least partly because working class people, and lower-middle class people, for want of a better phrase, find it very very difficult to own assets, to get onto the property ladder. And that’s a problem that can be solved by something beyond a basic income. Building more homes! We’re building 115,000 homes in this country last year; that’s one of the lowest figures in peacetime since the general strike. We need to build 250,000 homes a year at least to meet the demand hard-wired into our democracy. That’s what will get people security.

Look: I’m the son of immigrants from the west of Ireland. We had no security whatsoever. What did my parents do? They went out every single day and worked their backsides off. They managed to get a small home. That was their security that they owned. That dream has now gone for a large number of people, that you are – for the best possible motives – trying to help, because they can’t get on that property ladder.
That’s where we really need to focus our intellectual energies and ire. Not on an idea which to all intents and purposes sounds good in the senior common room, but is never going to cut it in the political real world.

World Finance: So Guy: advocating hard work to get on the housing ladder. Is that right? What do you think of that?

Guy Standing: Everybody always opposes a new social idea, and says ‘It will have perverse effects, it won’t work, it’ll impede other things’. And then after they’ve been introduced, 10 years later they say, ‘It’s obvious’. That’s often the case.

We’ve just been doing basic income pilots in India. You could say of course, India’s not Great Britain, it’s totally different. But they said we couldn’t do it, they said it would divert other facilities, they said it wouldn’t lead to having property, and everything like that.

All I can say is, after two years of receiving that basic income, the thousands of people who’ve been receiving the basic income, have transformed their lives.

Liam Halligan: And the average income per head in India is?

Guy Standing: It doesn’t matter

Liam Halligan: It does! It’s $1,500. In this country it’s $25,000 plus!

Guy Standing: It…

Liam Halligan: In India the alternative is to have a medieval existence, that hasn’t changed for hundreds of years. Yes in that instance, a tiny little bit of income can transform people’s lives.

Guy Standing: All right, let me… it’s the same in Britain. If you’re in a homeless situation. If you are not receiving any benefits because you’ve been sanctioned by kind Mr Ian Duncan Smith. And if you are in chronic debt to Wonga or whatever. To have a little liquidity will actually…

Liam Halligan: So you have a basic income across the income distribution to fix this?

Guy Standing: Let me finish, please. No no, you have a universal base, because the thing is, you need to get rid of the poverty trap. We also need from psychological research – not common room stuff, that’s a cheap point! But we also know from applied research that people who have basic security as a right, actually work harder. They have more confidence. They work more productively. They become more tolerant to others. And one of the problems…

Liam Halligan: Let’s get our low income people on the housing ladder then!
Guy Standing: No no, you.. the housing ladder is a dream!

Frances Coppola: Liam, why do you think that housing is security?

Liam Halligan: Because…

Frances Coppola: Because since 1970 we have had three housing crashes?

Liam Halligan: Because the market’s been hyped up by politicians with a deliberate lack of supply in order to generate feel-good factors in the run-up to elections.

Guy Standing: And cheap credit!

Frances Coppola: Right. So rather than giving people the basic security that they need, you want to raise the prices of property and prevent the market, artificially prevent the market from crashing, in order to create the illusion of security?

Liam Halligan: No, exactly the opposite. That’s exactly the opposite of what I said. We need people to own assets in their lives…

Frances Coppola: Assets whose value can fall?

Liam Halligan: …not government promises that can be taken away by the electoral cycle.

World Finance: Well can I just introduce the… we’ll just go to the next clip, who is Selwyn Parker, who is a financial journalist and author of The Great Crash, and he has points I think that follow on nicely, so let’s just listen to that clip.

Selwyn Parker: Probably the best example was in America, in the early 40s, when Roosevelt was trying to get America out of the Great Depression. And he threw lots of money at the problem. It worked for a while, and then it stopped working. Economists would now say that if he’d adopted a different tactic, and allowed the economy to work normally without throwing in these enormous stimuli, then America would have got out of the depression much sooner.

Unconditional wages is similar, in the sense that unearned wages are being paid. But the stimulus would be absolutely massive. And I would suspect hugely destabilising. Income should be paid for work. Any kind of work! The problem for this is that the income is being paid out of taxpayer funds. If you allocate money willy-nilly like this, you’ve got something entirely new and pretty dangerous.

World Finance: Well Guy, in your most recent book you argue that Europe’s people are starved of their basic human right to live free of financial hardship. But we just heard Selwyn there speak about unconditional basic income and unearned wages, and that it’s hugely disabling and even dangerous. So surely there must be a middle ground?

Guy Standing: Every government spends well over five percent of its GDP, its national income, on subsidies to rich corporations and rich individuals. Okay? We also have a dysfunctional welfare system which is increasingly relying on tax credits. Every single year this country spends £21bn or more on tax credits! They are completely dysfunctional.

Liam Halligan: Agreed.

Guy Standing: Because what they do is they actually subsidise low wages. It’s a subsidy to capital. It isn’t a subsidy to the poor. So when you say we haven’t got the resources, how come we’ve got the resources to give to corporations? While I’m in favour of what you’re saying about building houses, and we need more homes, no policy is a panacea for dealing with every problem. You can’t win a golf match with just one golf club!

Liam Halligan: Nor is the basic income! That’s not a panacea for dealing with all problems.

Guy Standing: Exactly! The basic income is not a panacea. Don’t expect it to cure all our economic and social problems. But it must be part of a policy package. Because means-tested, behaviour-tested, workfare, sanctions? They’re a disgraceful way to run a society!
Liam Halligan: Of course! It’s a disgrace that when people are in a really bad situation, the administration, the bureaucracy moves very very slowly. That’s because it’s run by lots of surly public sector civil servants.

Guy Standing: ATOS! ATOS, which is a private French multinational. What are you talking about?

Liam Halligan: And it was surly for years before that! Let’s not get idealogical about it. These are not priorities for politicians, because cynical politicians feel that very poor people don’t vote anyway. They’re often not even on the electoral register. Why should they help them? That’s the problem.

We need to use our brains and our platforms to campaign for people to be helped within the
existing system

We need to use our brains and our platforms to campaign for people to be helped within the existing system. Because your extremely well-made and well-meant points, with which I concur in many many ways, would just be blown away because people will dispute your use of basic income in order to solve them. Because basic income is so ambitious a policy, it’s so arithmetically unachievable with all respects in terms of the public finances of the country…

Guy Standing: It’s easily achievable. It’s easily achievable.

Liam Halligan: …you will detract from the very problems that you want to solve at the bottom end of the income spectrum.

Frances Coppola: Liam I’m not sure I agree with you there. If you actually look at what we have, we’re not actually that far off a basic income now. The difference is, and this is something I keep talking about. We talk about benefit traps, but actually it’s the economic effects of trying to reduce the value of out of work benefits. The moment you start trying to push down the value of out of work benefits relative to in-work ones, you create downwards pressure on wages straight away.

If you actually bring them together, so they’re at the same level. And you remove the sanctions so that people can refuse work that simply is not well paid enough, then you’ve effectively created something very like a basic income.

World Finance: Can I just ask how you think we’d pay for this?

Frances Coppola: I’m kind of in favour of dismantling a lot of what we already have!

Liam Halligan: Okay, on that point. A huge chunk of the welfare system of course is paid to housing benefit, which often goes to private landlords. If we had more homes, those private rents for people on welfare that the state effectively pays, will come down.

There’d be a lot less money spent on housing benefit, and then there would be a lot more money Guy, to do what you want to do – which I agree with – which is to plug the holes, have a proper safety net, for the genuinely vulnerable in society. Not giving a basic income to people who are well capable of making their way in the world. That would discredit your very good ideas about the people on the lowest incomes and no incomes.

Guy Standing: The trouble with all means-tested schemes, and all behaviour-tested schemes, is you automatically get a low take-up. You exclude many people who should be included. And there is no means-tested system in the world where they get a very high take-up. And what this means is that 20, 30, 40 percent of the people who should be getting an income out of need, don’t get it. Whereas if you have a universal basic income – and then you claw back the income going to richer people, by having a slightly higher marginal tax or something else – you actually guarantee that everybody gets a basic security.

Liam Halligan: We already have a taxation system, and a benefits system, that are absolutely riddled with fraud, corruption, and also basic errors. Maladministration.

Guy Standing: I completely agree with that! I agree with that!

Liam Halligan: You’re suggesting Guy that for a huge proportion of the population – hold on, let me finish – we pay our taxes, the state takes the money off us in taxation, then the state gives us some more money, then it takes it back again…

Guy Standing: No no no no no….

Liam Halligan: …how can that possibly be efficient?

Guy Standing: …the point I was trying to make…

Liam Halligan: That’s what would happen if you had a basic income right up the income scale, and then you correct for it.

Guy Standing: If you don’t have a universal base, I guarantee that at least 20 percent of those in need will not receive it!

Liam Halligan: Well let’s plug the holes at the bottom end, not give money to everybody, then take it back three or four times!

Guy Standing: You can’t do that!

Frances Coppola: Liam, how are you going to decide who should receive and who shouldn’t? We’ve been trying to decide who deserves support and who doesn’t since the 14th century, and we’ve failed every time.

Liam Halligan: So you give money to everybody?

Frances Coppola: And you claw it back through the tax system.

Liam Halligan: So it’s a four-way movement?

Guy Standing: I would go back to the affordability. The ideal way of dealing with it in the long-term is something like the Alaska Permanent Fund. Okay? The Alaska Permanent Fund, what it does is, it takes part of the profits from oil – but it could be from high-tech, it could be from patents or whatever – puts it into a national capital fund that’s invested, and the returns are paid into a basic income for every individual.

Liam Halligan: It’s a sovereign wealth fund.

Guy Standing: It’s a sovereign wealth fund. We can now create national capital funds that are not dependent on oil per se. They can be from high tech industries, they can be from fracking if we decide to go ahead. What we should be doing, just as the French have decided to do, and a number of other countries, is you set up a national capital fund that can be then used to gradually build up a right to a basic income.

Liam Halligan: What’s the national debt of this country?

Guy Standing: I don’t know the exact figure offhand, but the national debt is not something that is constrained…

Liam Halligan: It’s £1.2trn.

Guy Standing: So what?

Liam Halligan: Within four years it’s going to be £1.7trn on the government’s numbers.

Guy Standing: Then raise corporation tax please sir! Raise corporation tax!

Liam Halligan: I completely agree with that, but that’s hardly…

Guy Standing: But a capital fund would actually retain in this country more of the capital. The $1trn or whatever it might be today debt is only going to increase because that tendency will go to wherever taxes are lowest, corporation tax, now Osborne has lowered corporation tax to a ridiculous level, which is going to drag other countries down to the same sort of level.

So you’ve got a totally dysfunctional, regressive fiscal system, and unless you address that fiscal system nothing else will change. You’ll still have that debt!

Liam Halligan: If…

Guy Standing: So here we have a situation where you’re charging your precariat 80 percent tax, and you’re charging corporations less than 20 percent, and you’re charging patent holders 10 percent. So you’ve got a totally dysfunctional, regressive fiscal system, and unless you address that fiscal system nothing else will change. You’ll still have that debt!

Liam Halligan: So after your basic income, what percentage of GDP do you think would be accounted for by taxation? From the current high 40s.

Guy Standing: I would say it should be about the same. But it should be redistributed. It shouldn’t be that somebody who’s a wealthy earner pays 10 percent, and somebody down in the precariat.

Liam Halligan: No no no, you can’t promote one idea by just saying it will solve lots of other realities that many people, including me, will find egregious. Corporate behaviour, corporate excesses, our ridiculous banking sector that we have to bail out every 10 years, that doesn’t even make a positive contribution in net terms once you include all the bailouts.

My concern is, the public finances of this country are extremely precarious. Balanced on a pinhead. I do want to see a lot better welfare system for people at the lower level. I do want to see a lot less means testing. I do want to see an end to Brown’s ridiculous tax credits. But I think that basic income is so pie in the sky – with respect – that it discredits the whole notion of good government policy to alleviate genuine poverty at the lower end.

World Finance: This leads us very nicely onto our next clip with Selwyn, so let’s just listen to that, and then we’ll get back to this.

Selwyn Parker: You would have a massively inflationary effect from all this money ending up in people’s pockets unearned. But on the other side of the coin, you would also have an extremely destabilising effect too. Because this money will come out of taxes. It can’t come from anywhere else. In fact I think it’s dead in the water. The whole concept is really based on the idea that work from home, or care type work is somehow superior to any other kind of work. I don’t buy that at all. I do think that the economic assumptions behind it are wrongheaded. However, I think it’s a philanthropic kind of thing, and I would say that people’s hearts are in the right place. But I don’t think that’s really good enough these days.

World Finance: Okay, so Frances I want to start with you. “Hearts in the right place but wrong-headed economics by people who don’t understand economics.” That’s what Selwyn said, and I think we have to look at this in inflationary terms. How do you think it would impact inflation?

Frances Coppola: If you guarantee jobs, the effect of a job guarantee tends to be deflationary, because it tends to depress wages. Conversely a basic income, if there are no sanctions – in other words if people can refuse work – tend if anything to push up wages, and that has an inflationary effect. Okay? So he’s right on that.

I just look at where we are now and say…. yeah. And we’ve got wages that have been stagnating for the last 10 years, well below productivity. Looking ahead, it might be that you would say, it could potentially create an inflationary spiral. It’s hard to say. I’m of the opinion myself that big inflationary spirals are mostly caused by lack of confidence in government rather than by excess pressure on wages, really.

Also there is the whole monetary policy side of things. Do we expect our central bank to take action to calm inflationary pressures in the economy? Yes we do.

World Finance: So Liam, there was nodding – are you in agreement?

Liam Halligan: My fear is that a policy like this would be paid for not by taxation, it would be paid for by more borrowing, and therefore by more printed money. It’s ridiculous: we’ve broken a massive policy taboo, and in the end when you break taboos you warp your society. And that’s what’s happened. A big reason we’ve got such inequality, and growing inequality in this country – and it’s something that bothers me deeply – is because of QE. Backdoor bank bailouts that juiced up the stock market, juiced up oil prices, juiced up the housing market, and now there’s an iron triangle of interest between governments, banks, and homeowners, to the detriment of everybody else in the society. And it’s a disgrace.

So the problem is that if we did a policy like that, it would be paid for out of printed money inevitably. That would be inflationary, and of course that again would hit people at the lowest end.

Guy Standing: I thought the speaker was doing what we call one-hand economics. Okay? I mean basically it’s not going to be inflationary if we’re talking about expenditure switching. All right? If we’re talking about phasing out tax credits, you’re talking about shifting £21bn that is already being spent into a basic income. Right? So you’re not talking about suddenly finding new money and raising taxes and borrowing and extra stuff. That is a complete red herring.

World Finance: So finally my question to all of you really is: what is the likelihood of it being implemented? So Liam, do you think we’re ever going to have an unconditional basic income?

Liam Halligan: My hope is that the interest generated by discussion of this policy, and other books that are out at the moment, including those by Guy, will make a higher starting rate of tax not just a policy that the coalition sees as a little side issue, but a centrepiece of our electoral discourse in the run-up to next year’s election. That’s my hope.

World Finance: Frances?

Frances Coppola: I guess if you’d asked people in the 1920s whether we would ever have a free universal healthcare system they’d have said ‘Don’t make me laugh!’ And yet we do, free at the point of delivery. So we can do big, and we can do radical. We can make radical changes.

We’ve actually experimented in the UK with basic income before. And the last time we did it was during the last industrial revolution. It foundered on all sorts of things, for which it was largely incorrectly blamed. I think this time we have an opportunity to look at it, and I really hope we do. Because last time we replaced basic income we replaced it with possibly the cruellest form of workfare ever devised. That was the workhouses.

World Finance: Guy?

Guy Standing: I don’t think we should be pessimistic, or dismissive in calling it ‘pie in the sky’ or somesuch nonsense. But as you said. A lot of things were dismissed as pie in the sky, and then 10 years later, ‘Well, that’s obvious’. So let us be open-minded about it.
What I’ve liked about this discussion is that I think the values that we share are what the mainstream British people share. They want decency, they want less inequality. They don’t want their fellow people insecure throughout their lives. If those are the values we share, then we’ll start looking more positively towards new ideas. Because the old ideas certainly aren’t working.

World Finance: Guy, thank you. Francis, Liam, thank you.

Afore XXI Banorte on Mexican pension funds | Video

Posted on by Ashton Wenborn

In many parts of the world, pension funds have taken a hit. But one country that has diverted that norm is Mexico, with Fitch Ratings agency saying that the outlook for pension funds in the country is positive. World Finance speaks to Ignacio Saldaña, Chief Investment Officer at Afore XXI Banorte, to find out how the pension market has changed over the past few years, and how his firm is responding.

World Finance: Well Ignacio, in many parts of the world pension funds are taking a hit, but in Mexico they’re actually growing. Why would you say this is?

Ignacio Saldaña: Mexico is enjoying a demographic bonus. The biggest part of our population, its working age, which is between 15- and 65-years-old, so basically what we have is a very young country, that is contributing to a defined contribution system that started recently, and it’s now accruing a lot of income from these companies and from these workers into their segregated accounts, and its growing at 10-15 percent per annum rates.

[W]hat we have is a very young country, that is contributing to a defined contribution system

World Finance: So how would you say the pensions market has changed over the past few years in Mexico?

Ignacio Saldaña: I think that the most important change was back in 1997 when we changed from a defined benefits system to a defined contributions scheme, when the AFOREs or the pension fund system was born, and from there to now there has been relevant changes. For example, it was born as a fixed-income only fund, very low risk, government securities, no equities in the portfolio. Back in 2005, we got allowed to invest in equities and foreign securities. 2008 we changed from two funds to five, and then to four funds, and these four funds are different in their investment strategy. For example, we have the number one fund, which is basically for workers which are closer to the retirement. This has a lower equity stake and a higher fixed-income proportion of investments, and we have for the younger people which have more time for retirement, we have the Fund 4. Basically, we’ve changed from sole government securities portfolio, only debt, to a highly diversified portfolio. And another important change that I was not mentioning is that, in 2007, the government employees were also incorporated to the system, which is a big change also for the public pension costs of the country’s retirement plans.

World Finance: Well you actually reported higher than expected earnings for the last quarter of 2013, what do you attribute to this success?

Ignacio Saldaña: The higher than expected income was done through our parent company, Grupo Financiero Banorte, which is a listed entity in Mexico. And Afore XXI Banorte’s contribution to this income, it’s basically done through our consolidated earnings to the group. We’re streamlining our costs, we have merged Afore BBVA Bancomer, which was bought back in March last year and merged also in March, and we’ve been streamlining as I was saying all our costs and we’ve been giving more earnings to the group.

World Finance: So what do you have in place to manage risk?

Ignacio Saldaña: We have a very high compliance-oriented process. All our trades are authorised with risk management on a pre-trade status. So, before we do a trade, we already know that it complies with this investment regime, that it’s in line with our committee’s approach to these asset classes, and it’s always compliant with regulations.

World Finance: So finally, what’s next for Afore XXI Banorte?

Mexico has a lot of room to grow, and especially the pension plans and the pension funds

Ignacio Saldaña: It’s in a consolidation mode. We have been merging with Afore XXI a couple of years ago, and last year with the merger of BBVA, we have become the largest pension fund. So I think this year for consolidating our acquisitions, stabilising our earnings, and trying to improve them with more efficiencies and synergies in the coming months. We have a lot of things to do in Mexico on the portfolio investment side, we should lobby with our regulator to increase the foreign entity market, we can only invest 20 percent of our assets under management abroad or outside Mexico. We think we should go in Chile or other South American countries that have been incrementing this limit. There’s a strong correlation between Mexico, the pension plans in the future, and how we should diversify the money of our clients. There’s a lot of things going on in Mexico, and we have a very strong outcome on our energy reform. This pension fund assets should also be investing in infrastructure, in energy sector, I know there’s big challenges ahead on this, and we should find the correct vehicles and the correct way to get involved with the highest security for our investors. But I think Mexico has a lot of room to grow, and especially the pension plans and the pension funds are growing at 15 percent per annum for the last 15 years. The local market is becoming smaller and smaller every day for us, and we should start looking into more asset classes and try to get involved, introduce this and higher returns for our clients.

World Finance: Ignacio, thank you.

Ignacio Saldaña: Thank you.

Syria sanctions: who’s paying the price?

Posted on by Ashton Wenborn

Despite their mixed reception and contested effectiveness, economic sanctions have a long and prolific history. Used as far back as ancient Athens, with, admittedly, mixed results, they are seen in modern times as a stop-gap to avoid real military conflict. The theory behind them is sound – punish a country for internal aggression, military ‘adventures’ or policymaking that the wider international community finds objectionable.

Yet traditionally, institutionally endorsed sanctions, such as those utilised by the UN since 1990, have been largely ineffective. The UN has been accused of lagging behind in imposing sanctions in the past, and only using them as a reactionary measure. Unfortunately, a vicious cycle can rapidly form: if sanctions are only ever placed on a country under totalitarian control, then the regime can normally deflect the bulk of the punishment onto its citizens.

As current issues between Russia and Ukraine bring these measures back into the spotlight, the civil war in Syria still rages on and the Al-Assad regime’s institutions and officials are still subject to near-worldwide sanctions. Condemnation was piled on the Syrian government very rapidly, but the conflict has all but faded from the news. Despite this, the sanctions still go on – trade embargoes, financial sanctions and other national controls. As the big diplomatic players levy some of these measures on Russia, it is perhaps time to evaluate the breadth, legality and, moreover, the effect of the sanctions on Syria as it struggles with civil war.

Marco Velásquez Ruiz, LL.M and PhD Candidate at Osgoode Law School, York University in Toronto, who has published analysis of economic sanctions in the framework of international law, says that the premise behind the usage of sanctions is very clear. Speaking to World Finance, Velásquez Ruiz said: “In the context of international relations, the imposition of sanctions has traditionally been used as a manoeuvre to punish the conduct of a state that is considered contrary to the interests of a state, a group of states or the ‘international community as a whole’, and eventually create incentives for a shift in such behaviour.”

Sanctioned individuals

Adib Mayaleh
Governor of the Central Bank of Syria, Adib Mayaleh finds himself included on the international sanction list. Mayaleh has presided over the bank since 2005 and has been fighting to stabilise Syria’s currency and gold reserves. During his tenure the bank has also enacted several reforms in an attempt to bolster financial stability through more active participation. Perhaps Mayaleh’s most significant achievement during his time in charge has been the signing of a $3.6bn credit line from Iran to prop up Syria’s war-torn economy and buy oil products.

Rami Makhlouf
Syria’s wealthiest and most powerful businessman, with an estimated net worth of $5bn, Rami Makhlouf is also President Assad’s cousin and close ally. In 2011 The FT reported that Makhlouf controlled almost 60 percent of Syria’s economy thanks to his web of businesses, which includes banking, real estate, and one of Syria’s two mobile phone providers, Syriatel. A member of President Assad’s inner circle, Makhlouf has been accused of directly encouraging pro-government rallies by providing flags, food and other boons to people to get them to participate.

Asma Al-Assad
Syria’s First Lady, Asma Al-Assad was included on a list of new sanctions in 2013. She was raised and educated in the UK and has a degree in computer science from King’s College London. Asma married Bashar Al-Assad in 2000. Reported to be an extravagant shopper, the sanctions against her include EU travel bans and measures to stop her seeking material assistance abroad. In October 2013 she made a public appearance and denied claims that she had fled the country, saying that she “was here yesterday, I’m here today and I will be here tomorrow.”

Banking on sanctions
Sanctions are not new for Syria. The US has imposed them in one way or another on its regimes from as far back as 1986. It doesn’t seem like they will be going away either, as diplomatic relations between the country and much of the West have been virtually non-existent since the start of the civil war in 2011. The range of punitive measures is broad, ranging from restricted trade to asset freezes on some of the Assad regime’s most prominent members and companies known to support the government.

Also included are some of Syria’s state-run banks, such as the Agricultural Co-Operative Bank and the Commercial Bank of Syria, both of whom are suspected to provide direct financial backing for the regime. The Central Bank of Syria hasn’t been spared either; both the institution and its governor find themselves unable to move assets overseas. Also prohibited as part of a large package of sanctions on the central bank is a ban on trading in Syrian-denominated cash and also a ban on trading in gold or other precious metals.

Although there had also previously been an arms embargo on the nation – both for the regime and the rebels – this was lifted by the EU in May of last year. The British government, however, has decided to impose national controls on certain equipment that was previously embargoed if the equipment could be used for “internal repression”. Although this could be good news for the opposition, no official statement from the EU has suggested the possibility of supplying arms to fuel the conflict.

A woman walks past the central bank building decorated with a huge banner of President Bashar al-Assad in Damascus
A woman walks past the central bank building decorated with a huge banner of President Bashar al-Assad in Damascus

Meanwhile, other financial sanctions continue to be in place across the EU. Most notably, “import, purchase, transport and financial assistance of Syrian crude oil or petroleum products” continue to be sanctioned.

The sanctions have had a dramatic effect on the Syrian economy, reversing the growth made over the last decade. Of course, the existence of a functioning economy is academic in a nation as war-torn as Syria, but beyond the warfare it is the Syrian citizens who must live with the outcome. The private research group Syrian Centre for Policy Research said in a recent report that the country had lost nearly 40 years of economic development and accumulation of capital. The wealth in the country at the moment is around the level it was at the end of the 1960s.

Down to business
Sanctions have not just been restricted to the EU, of course. The Arab League, the regional organisation of 21 member states, has excluded Syria and has placed their own punishments on the country. There are asset freezes and arms embargoes, as well as several more severe measures in response to alleged government atrocities. Syrian officials and VIPs are banned from travelling to Arab states, and flights from Arab airlines to and from Syria are also suspended. President Assad himself, however, and some other key officials, are not featured on the list. This is so that he can be allowed to make international appearances if needed, or to give room for the regime to leave power and seek asylum in a neighbouring nation.

More drastically, the Arab League has suspended all dealings with the Syrian central bank and state-owned banks, and all financial dealings and trade agreements have been halted. Moreover, Arab financing of Syrian projects, mainly infrastructure upgrades that the country desperately needs, have also been suspended. Unfortunately for Syria’s people, the cumulative consequence of all these sanctions, both from the Arab League and the wider international community, has, in effect, turned Syria into a pariah nation.

The Dar Al-Shifa hospital in the northern city of Aleppo, Syria, in 2012, after part of it was bombed

All of this has had a catastrophic effect on the lives of Syria’s businessmen and women, to whom the bulk of the damage from the sanctions has been deferred. There is simply no safe place for investment, and nor is the Syrian pound a safe option; between the sanctions and the conflict, there is nowhere to go. As foreign currency reserves dwindle, more and more the country finds itself between a rock and a hard place, needing money to resolve some of the core humanitarian issues of the conflict, but without a steady supply of income thanks to external pressure.

The sanctions have had a dramatic effect on the Syrian economy, reversing the growth made over the last decade

Although there are humanitarian exemptions, these have been a sticking point, both in Syria and historically. A UN document entitled Promotion and Protection of the Rights of Children writes that “humanitarian exemptions tend to be ambiguous and interpreted arbitrarily and inconsistently… confusion and denial of requests to import essential humanitarian goods can cause resource shortages. While these effects might seem to be spread evenly across the target populations, they inevitably fall most heavily on the poor.”

It is especially damaging for cities like Aleppo and Damascus, where massive investment in the past decade had not only made them hubs of innovation, but also relatively free forums, both politically and socially. The northern city of Aleppo, Syria’s biggest, has been fought over bitterly. Rebels now control half of the city but much of it has been turned to rubble as shelling from both sides destroys both historical and economic sites of value. Another result of the conflict has been the mass evacuation of Syria’s best and brightest. Scientists, business leaders and technological innovators have all fled, trying to escape the conflict.

The new normal
It is a mighty fall for the country; on paper Syria has one of the most developed social safety-net programmes in the Arab world. Historically, citizens have enjoyed free healthcare, free education and subsidised staple foods. The outbreak of civil war has stopped all of these programmes, putting Syria’s poor in real danger. A comprehensive safety net matters little now in a country with dwindling infrastructure and spiralling inflation; a country where hospitals are used to treat the war-wounded and schools used to house thousands of war orphans displaced by the conflict.

Banned items for import into Syria

  • Protection and detection equipment such as gas masks and protective suits
  • Chemical manufacturing facilities such as reaction vessels and storage tanks
  • Human, animal and plant pathogens, for example certain viruses, bacteria and toxins
  • Caviar, truffles and cigars with a sales price exceeding $13.80 per item
  • Wines and spirits (with a sales price exceeding $69 per litre)
  • Leather goods (sales price above $276), garments and shoes (items above $829)
  • Jewellery, gems and pearls; tableware, clocks and watches (above €500), lead crystal glassware (above $276)
  • Luxury vehicles, planes and boats
  • New vehicles (above $35000
  • Prohibition on the trade of gold, precious metals and diamonds

As for the legalities of sanctions, the UN Charter is quite clear. UN Sanctions can only be issued by the Security Council and members have to make best efforts to comply if requested. Article 41 of the UN Charter reads: “The UN Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the members of the UN to apply such measures.”

Article 39 is very clear that any sanctions must be imposed to keep or restore international peace. As for individual nations, the prerogative lies with them, and the legality is generally flexible and indistinct. For example, the US embargo of Cuba, in place since the Cold War, has drawn very little critique; indeed, for both countries it has become the status quo. In cases such as Syria’s, where the international community has condemned the Assad regime almost universally, it is a little clearer cut. The problem comes when sovereign law – that of the countries imposing the sanctions – overlaps with fundamental laws, like the Universal Declaration of Human Rights. Because of this overlap, the true legality of sanctions is hard to define and it is even harder to decide when sanctions go too far.

Speaking on legality, Velásquez Ruiz agrees that sanctions are hard to define, saying: “Sanctions are permitted by International Law (UN Charter) but have limits; on the one hand, the ones included in the charter (types of sanctions, how they must be enacted and applied and their compliance with the UN principles and purposes, also contained there), and on the other, restrictions imposed by other international legal norms, such as human rights, international humanitarian law, international criminal law and international development law. Since a sanction represents the use of force – perhaps not physical violence but certainly a coercive-oriented action that generates pressure on a state – the delimitation of its content and scope is critical.”

In the past, however, there has been a recognisable effect of sanctions. For example, in the wake of the Gulf War, continued sanctions on Saddam Hussein’s regime wiped 10 percent of Iraq’s GDP according to official UN estimates. Truthfully, the full cost of the Syrian conflict may never be calculated; indeed, it is impossible to even see an end to the civil war. That must happen before Syria and whoever controls it are able to consider repairing the deep wounds the country has been dealt.

‘Savage’ Australian budget harsh on welfare

Posted on by Ashton Wenborn

In a move that has prompted shocked reactions across Australia, the conservative government has presented what will be the toughest budget in years, making harsh cuts on welfare and start-up subsidies, as well as hiking the national pension age and top taxes.

The proposals add up to the most radical reshaping of Australian social safety, as broad structural reforms to welfare, healthcare, higher education and pension will see 16,500 public sector employees lose their jobs. The most controversial moves include the rolling back of universal healthcare leaving people to pay for visits to the doctor, hiking the pension age from 65 to 70 and having the country’s highest tax bracket rise by two percent.

The proposals add up to the most radical reshaping of Australian social safety

Prime Minister Tony Abbott and Treasurer Joe Hockey said the budget was a blueprint for tackling “unsustainable deficits forecast at A$29.8bn ($27.9bn) next year and totalling A$60bn over the next four years.”

However, Former Treasurer of Australia, Wayne Swan, argued that the budget was unnecessary in a time of no economic emergency.

“There is no budget emergency. Yes, there is a job to do in the future to ensure that our expenditure is sustainable, but what we’ve seen is really savage cuts on health and education and they are being used to pay for the government’s other priorities, not debt,” Swan told CNBC.

Unnecessary?
Australia’s debt has grown in recent years, and is set to reach 14.6 percent of GDP in 2016/2017, its highest in 20 years. Nevertheless, this pales in comparison to other developed areas like the US and eurozone which both have debt accounting for more than 100 percent of GDP according to the OECD.

Australia’s economy has fared well through the financial crisis thanks to a mining boom fuelled by Chinese demand. However, as resources began to slump in 2013 along with a rising expenditure, the government issued concern on the budget deficit.

“We know that for some in the community, this budget will not be easy. But this budget is not about self-interest. This budget is about the national interest,” Treasurer Joe Hockey said in his Budget Speech.

Still, the budget might do more harm than good according to several banks and economic experts, who have expressed concern that the public spending cuts and tax hikes will hurt consumer sentiment and encourage the central bank to keep interest rates at record lows for longer than planned.

“In an environment where domestic demand growth is already fragile and significant risks remain in the handover from mining led economic growth, this Budget does pose a risk to the near-term outlook despite having laudable medium term objectives,” economists at Goldman Sachs wrote in a note.

Start-ups hit
Aside from welfare cuts and changes to pension age and tax maximums, the Budget 2014, also revealed a new entrepreneurs infrastructure program. The $485m program will be rolled out over the next five years and replace eight initiatives, including those for start-ups, to deliver A$846m in savings.

Admitting that the budget will be tough on many, Cormann added that the government is “hopeful that the people of Australia will come with us”

Critics say that the entrepreneurs infrastructure program is skewed towards SME’s instead of start-ups, and amongst those organisations hit, is Commercialisation Australia which has supported more than 500 start-ups with A$200m-plus in grants.

“Saving A$846m means the government will reduce its support for innovation by nearly A$170m a year. The reality is there’s nothing in this budget that indicates the government wants to support tech start-ups in Australia,” Steven Baxter, a board member at not-for-profit StartupAUS told The Australian.

Similarly, cuts above A$100m to arts and cultural activities across Australia are set to have a devastating impact on the film and arts industry, experts say.

Still, Australia’s Finance Minister Mathias Cormann maintained, “it’s a budget that puts our government spending on a more sustainable medium to long-term trajectory.”

Admitting that the budget will be tough on many, Cormann added that the government is “hopeful that the people of Australia will come with us”.

Areas that won’t be cut as part of the new budget for the fiscal year beginning July 1 include defence spending, as well as increased investments in infrastructure and a new Sydney airport. It is estimated that the financial reforms will reduce the Australian deficit from A$49.9bn this year to AU$29.8bn in 2014-15.

Path Solutions steps up digital banking

Posted on by Ashton Wenborn

As Islamic finance grows and expands into new markets, greater opportunities have emerged and the technology that comes with it has evolved. World Finance spoke with Rosie Kmeid, Global Head of Corporate Communications and Marketing at Path Solutions to find out more.

What were the biggest challenges in the sector last year?
The biggest challenge faced in the Islamic finance technology sector was the reluctance to invest in new software applications due to global economic uncertainty and political unrest in many regions. This caused reluctance in adopting new solutions, and possibly postponing any planned projects until the turbulence settles down. Of course, this has had a negative impact on Islamic financial services, which is a sub-sector of the global financial services industry.

What do you anticipate the trends will develop to be in 2014?
Recently the banking industry has been focusing on customer relationships, risk management, and micro finance. We believe this will remain the focus this year, whereby with the hope that political unrest will be resolved, risk management and regulatory compliance will be key trends to allow the financing sector to mitigate the different risk factors as prescribed under Basel II and III.

Digital banking trends are also projected to predict their biggest push, where we will see greater experimentation in new products built around mobile, web and social commerce. By 2015, it is projected that over 60 percent of customers worldwide will be using mobile banking, and more than 90 percent will use online banking, according to a survey by Capgemini. More and more people are quickly embracing these tech trends and advances as they will have the luxury of performing their businesses anywhere, anytime.

How has the development of Islamic finance in Africa impacted the technology sector?
The origin of Islamic finance in Africa can be traced back to the 1960s with Egypt being the first African country to offer Islamic banking products. Several African countries followed suit, which helped raise the African market for Islamic finance. Recently it has been noted that many existing banks are considering the conversion to Islamic banking in Nigeria, Kenya, Somalia and other nations across the continent.

The origin of Islamic finance in Africa can be traced back to the 1960s with Egypt being the first African country to offer Islamic banking products

This of course has positively impacted on the sharia-compliant technology providers allowing them to supply these banks with the solution to support their new initiatives. African banks have been approaching Islamic finance aggressively, and are providing state-of-the-art ethical banking services with the same level of service their customers are used to in conventional banking. This includes internet and mobile banking, while they have also focused on servicing the SME business layer by providing sharia-compliant micro finance solutions to expand and support a wide range of non-subsidised Muslim resources.

From which region do you anticipate the most interest this year?
We believe that growth will be sustained in Africa, though this will be subject to the slowdown of the turbulence in some areas, especially North Africa (Egypt, Libya, Algeria and Tunisia). Of course, we have noted some demand in other parts of the world, like the Sukuk initiative in the UK, and the growing Islamic banking in CIS countries, for example Azerbaijan, Kazakhstan, Tajikistan and Russia.

What do you see will be the biggest challenges this year technology-wise?
This will be coping with the banks’ appetite to provide next-generation services to their customers, addressing data privacy and the security of information, cultivating customers’ loyalty and giving them increased confidence and the convenience to perform safe online banking transactions.

We also consider that cloud computing will facilitate infrastructures proven valuable with the globalisation of financial institutions, which operate international activities or cross-border finance, requiring a robust infrastructure to reach all branches around the world.

Moody’s gives Ethiopia an inaugural credit rating

Posted on by Ashton Wenborn

Ethiopia has been one of the fastest growing economies in the world over the past decade, averaging a GDP increase of over 10 percent a year in that time. Investors have been taking notice, and international retailers like H&M are already settled there – Ethiopia has certainly come a long way since the famine of 1984 that wiped out huge swathes of its population. Now, the world’s three leading ratings agencies are joining in the hype by issuing the country’s first sovereign credit rating.

Moody’s has issued the country with a B1 rating for currency sovereign credit, slightly higher than the B rating given by Fitch and S&P’s recently. The largely positive ratings will help move the government’s plan to issue a Eurobond soon, and it will certainly boost foreign direct investment.

According to a statement by Moody’s, the country’s credit rating was held back despite its rapid growth in recent years because of ‘Ethiopia’s relatively small economy and low per-capita income’. The agency also cited ‘weak institutional strength, in line with B-rated peers,’ and ‘moderate fiscal strength, with the debt burden and related financing cost remaining low given a largely concessional funding base, balanced by its increasing reliance on non-concessional financing.’

[Ethiopia] aims to become one of the leading providers of power in Africa

Recent bond issuances by countries in the region have been largely oversubscribed, even as the US limits its stimulus programme. It is likely that Ethiopia will experience similarly positive results as it issues its bonds. Though the local authorities have so far provided no date or details, Prime Minister Hailemarian Desalegn has previously suggested that as soon as sovereign credits ratings had been secured, a bond sale would soon follow.

Ethiopia has been investing heavily in its electricity infrastructure, and aims to become one of the leading providers of power in Africa. “Energy is a very strategic sector for us,” Miheret Debebe, Energy Advisor to the Prime Minister told the FT. “Ethiopia is going to be the renewable energy hub of the region.” The ambitious 25 year plan, which includes building a giant dam on the Blue Nile, is being backed by the African Bank of Development and the World Bank, who have provided ample financing, including $1.5bn to develop a grid link to Kenya – a top energy importer.

Ethiopia is likely to continue growing fast for the foreseeable future, as the government continues to invest in vital basic infrastructure. Fitch has predicted growth of around nine percent this year, and eight percent in 2015. Though these rates are slightly lower than what Ethiopia has become accustomed to over the past decade, they are still significantly higher than those for the rest of the region.

MP Matthew Hancock fails to justify Silicon Roundabout | Video

Posted on by Ashton Wenborn

The government’s tech hub, Silicon Roundabout, was hailed as an instrument that would boost employment and drive innovation in London. But has the initiative lived up to expectations? MP Matthew Hancock talks to World Finance about the impact Silicon Roundabout has had on the UK’s economic prospects, if data accurately reflects the project’s success, and whether entrepreneurship can branch out of the capital to other regions.

World Finance: It’s been about three years, Minister, since we had Tech City first officially launch, do you think it has lived up to its hype?

Matthew Hancock: Well, it’s been a big success, there’s no doubt about that. In terms of the numbers of jobs in tech in London, they’ve almost doubled over the last three years or so. They’ve provided for about a quarter of the total jobs growth in London. So measured on jobs, which is one of the most tangible ways to measure this, it’s been a success.

In terms of the numbers of jobs in tech in London, they’ve almost doubled over the last three years

World Finance: I just want to take a look at the Tech City numbers, if you wouldn’t mind, these are press-release from 10 Downing Street. As you can see, 15 tech companies in 2008, topping the chart for new business generation in the UK for 2013, with more than 15,000 start-ups. I was able to speak with your press, which made clear that the 15 tech companies came form observational data by the person who actually coined the term Silicon Roundabout. The 15,000 came from an accountancy firm which said those numbers are not only tech companies, but a wide range of business in the area. Do you think that’s the best way to perhaps substantiate the claims in terms of success for the government?

Matthew Hancock: I think there’s loads of different ways to do it. Jobs is one way. The numbers of companies is another, and the other is the use of office space in that part of London. But what really matters is getting the dynamic growth, getting companies moving to Britain, and we’ve seen some of that happen to.

World Finance: But is there any way of providing perhaps an accurate assessment of the lifespan of some of these companies? Considering that you and I can today decide that we want to start companies, establish them in Tech City, and perhaps mine could be a hot-dog business, yours could be a tech company. That doesn’t necessarily lend itself to more growth in the region.

Matthew Hancock: Sure, of course. There’s many different types of company, these things inherently move quickly, change fast, measuring them is always difficult. That’s why the first measurement I resorted to was jobs, because they’re pretty tangible and pretty reliably measured. So you measure the economy as best you can. The economy is a complex beast. Of course measurement is an issue, but that shouldn’t take away from the fact that there’s very clear expansion, and there’s clearly companies moving in from overseas, and there’s clearly a vibe on.

What drives policy is, what can we do to make the lives of entrepreneurs easier in Britain as a whole

World Finance: Some of the big issues that entrepreneurs have told me are the talent shortage, that’s just one of many, including the opportunity to have VCs at the mid-stage level, offering up millions of dollars of investment, and something as basic as even enough intranet support. These are areas where governments can really prove themselves as very capable in supporting the infrastructure. But if those are some of the issues that are stymieing success, do you think that the government has done enough?

Matthew Hancock: This is exactly why we have this focus on Tech City. You bring together the different players, and if there’s a problem with broadband, it may well be that the solution can be, financially, a private sector one, with a company like BT coming in to provide the answer. But if there’s a direct line into government, they can pick up the phone and say, look, we’ve got a problem with broadband in this area in London in Tech City, we need you to fix it.

World Finance: Standard Industrial Classification code, notoriously difficult to track the successes of technology business in particular across the UK. But I attempted to do so, and actually I was looking at Tech City companies, 10,000 of which had a turnover of £2.47bn. Cambridge companies: 4,000, turnover of £6.15bn. If you calculate the average turnover per company, £247,000 for Tech City, whereas Cambridge had £1.54mn per company. Just based on that raw data (provided by DueDil), wouldn’t you say that Cambridge in many ways is more effective in driving the economy forward?

Matthew Hancock: I think there’s lots of things that go into those sorts of calculations, and in a sense there’s no need to make the comparison. It’s interesting, the comparison, but it doesn’t drive policy. What drives policy is, what can we do to make the lives of entrepreneurs easier in Britain as a whole.

World Finance: We had a chance to sit down with a leading figure in the tech community, Hanadi Jabado, she is with Cambridge University, and she is one of several voices who feel neglected, frankly, by the federal government. The say all the focus has been on this marketing machine that’s propped up Tech City, when there is a lot of efficiencies of scale and lots of opportunities and jobs being created in Cambridge. What do you say to that?

[W]e’re doing everything we can

Matthew Hancock: Well, as I say, the fact that there’s lots of different bits of the country competing to be the best at creating jobs, as a Minister for the whole country, that is a good thing. And as I said, this spread, after the success of Tech City, spreading that concept to other parts of the country is something that we are actively doing, I mentioned Manchester, Cambridge is another place that clearly can benefit from that. Actually, I’ve been in Cambridge recently with the Prime Minister talking to the tech hub there, they certainly get my attention.

World Finance: But a lot of the campaigns, as I’m sure you’re aware, Tech City, that website alone is very much focused on the London example, but people who are fuelling it are tax payers from across the country. Don’t you think there should be more of a marketing machine for the rest of the country?

Matthew Hancock: Absolutely, get in touch. We’re at the moment going through a process, striking growth deals with every local enterprise partnership in the country, covering the whole country. In order to listen to what people want locally, and to see how we can put that into practice. The enterprise investment scheme is a really popular one, in the latest budget we made the seed enterprise investment scheme, the smaller-scale version. We made that permanent, we brought it in for a couple of years to see how it went, and we’ve made that permanent.

World Finance: Do you think the government’s done enough to support the other hubs equally?

Matthew Hancock: Well we’re doing everything we can, and we’re going through this process now, we’ve struck some city deals with particular cities, like Leeds for instance, Manchester as I mentioned, also Birmingham and then some of the smaller cities, including Ipswich, and a total of 38 cities I think. Now we’re spreading that to make sure it covers the whole country through the local enterprise partnerships.

World Finance: Minister, thank you so much for joining me today.

Matthew Hancock: Pleasure.

HotForex: on a mission to become the most reliable forex broker | Video

Posted on by Ashton Wenborn

The popularity of forex trading has surged in recent years, with many considering it an effective way to earn a good profit. World Finance speaks to George Koumandaris, CEO of HotForex, to find out what punters should look for in a forex trading company, any advice he has for beginner traders, and what trends we can expect in the industry over the coming years.

World Finance: Well George, let’s start with what sets HotForex apart from other companies?

George Koumandaris: Reliability. The mission of HotForex is to be the most reliable broker in the industry in terms of the services we offer. Judging from the feedback we get from our clients we are highly successful in achieving our mission. This is because of the high quality of people we employ, and the fact that they are very committed to our mission. We always strive to hire the best individuals, and we pay them well. So to answer your question in one statement, the way we differ from other brokers is that we hire the best people that are fully committed to our mission.

The mission of HotForex is to be the most reliable broker in the industry in terms of the services
we offer

World Finance: Well what should one look for when choosing a forex trading company?

George Koumandaris: The first priority is the fund security, so the trader needs to feel very comfortable that the funds are secure so they can concentrate on their trading. Also, the traders should look for a regulated broker, which has a good reputation and a proven track record in the industry. Other than that, they should look for favourable execution and trading terms, excellent support and good education.

World Finance: How different is the forex industry from a couple of years ago?

George Koumandaris: One of the main differences is the speed of change in the market. Historically, the forex market was always dynamic and changing, but now, because of technology, this rate of change is much faster. This means that brokers nowadays have to be very flexible and adaptable. HotForex is positioned to take advantage of this change in the industry. The reason being that we have highly skilled IT and programming teams, and that means that contrary to many other brokers, many of our systems are developed in house. It allows us to quickly adjust a product based on the feedback of our clients. For example, our client-area called My HotForex was developed 100 percent in house, and when our clients give us feedback, they’re very impressed at the speed that we take that feedback on board and make it a reality.

World Finance: Well what products does HotForex offer its clients?

George Koumandaris: We offer several account types, from micro to VIP accounts, to match each trader’s needs. Also, we offer a lot of different products that someone can trade. For example, not only forex but also gold, silver, CFDs on stocks, commodities. We have daily competitions, and new competitions coming in. And lastly, we keep adding new products. For example, we will soon be launching a social trading product.

[T]he trader needs to feel very comfortable that the funds are secure

World Finance: What advice would you give to people who are just starting to trade on the forex?

George Koumandaris: Don’t rush it. A new trader should, first of all, come to our website, subscribe to our newsletters, that provide the trader with an easy to understand daily analysis of the market. One should come on our website and watch trading tutorials, that can introduce someone in the markets. One should open a free demo account first, so they can test the basic mechanics of trading. Once the potentially new trader feels ready, they should invest more by opening a micro-account, and only trade with micro-lots, so they don’t commit a big capital from the get-go.

World Finance: So where do you see the trends in the forex industry in the coming years?

George Koumandaris: I believe the forex industry will continue consolidating, and this will be a recurring pattern over the next few years. There’s much more competition in the industry nowadays. Also, the clients are much more sophisticated and, rightly so, have much higher demands, and also there’s a lot of regulatory requirements, so only brokers who work professionally, are adaptable and have the client in mind will survive.

World Finance: Well what are some of the challenges that forex brokers currently face, and how is your company addressing these challenges?

George Koumandaris: The biggest challenges are the high competition, and the highly demanding clients. The way we deal with this challenge is by continually improving a product and opening our services into new markets. But most importantly, the way we deal with this challenge is by investing in our people, and ensuring that we offer the best services we can to our clients. I would say that currently we have the best teams that we ever had in our company, so I’m very confident that we will continue being very successful.

World Finance: George, thank you.

George Koumandaris: Thank you very much.

The evolution of political lobbying

Posted on by Ashton Wenborn

It has long been the accepted discourse that corruption is the reserve of poor and developing nations that lack robust legal frameworks. Developed, industrialised nations suffer less from this malaise, but instead operate on a much more sophisticated system: lobbying.

“When faced with a regulatory constraint, firms can either comply, bribe the regulator to get around the rule, or lobby the government to relax it,” says Bard Harstad and Jakib Svensson of Northwestern University and Stockholm University, respectively, in their Bribes, Lobbying and Development paper in the American Political Science Review.

“In equilibrium, when the level of development is low, firms are more inclined to bend the rules through bribery, but they tend to switch to lobbying when the level of development is sufficiently high.”

Paying for change
Over the decades, lobbying has evolved from a shady underground of the political arena to an accepted part of the debate, though many would still struggle to correctly pinpoint exactly what separates this practice from bribery or corruption. However, Harstad and Svensson’s research has concluded that there is indeed a meaningful difference between bribing an official and pumping money into his election fund: lobbying works much more effectively. The key, for the two academics, is that a person or entity bribing an official is looking to operate outside of the law; those investing in lobbying are looking to change it.

This difference is particularly clear in the political model that has emerged in Washington over the decades, where elected officials increasingly depend on donations and contributions to fund exorbitant campaign costs. And donations, though supposedly given charitably in support of a cause or ideology, hardly ever come without any strings attached. Lobbying ensures that these strings are not only kept firmly attached, but are also pulled at the right times, for the right reason.

It is a mercenary political system that has flourished for decades in the US, and has been replicated all over the world. It is not an attractive facet of the American political model, and it is one the Barack Obama has tried hard to dissipate. On the first day of his first term in office, the president issued an executive order trying to limit the overarching grip that lobbyists exert over all spheres of political power in the US. His government ruled that any registered lobbyists were banned from working in his administration on any issue they had touched while lobbying, and that registered lobbyists who work at and then leave the government are not allowed to lobby the administration at all, except with a special permission from the White House budget director.

Catch-22
It was a bold move by the president, and while it might have limited the access lobbyists have to the administration, it has not really curbed the influence professional lobbyists have over government. It also woefully underestimates how much the American political machine relies on lobby dollars, and fails to distinguish between the type of lobbying that is productive and necessary and the type that is damaging and dangerous.

For Harstad and Svensson, the key distinction between lobbying and exerting undue influence is that any gains achieved through lobbying tend to affect an entire industry, whereas bribery tends to only benefit one specific company. Which is why it is not uncommon for many companies with similar interests to club their resources together in order to achieve more significant results.

[F]or a democratic system to work, government authorities should be held accountable to the electorate and what the electorate want

According to Consumer Watchdog, the tech industry, led by AT&T and Google, is among the most generous in Washington. Google’s lobbying efforts tallied up to $14m in 2013, Microsoft spent $10.5m – an increase of almost 30 percent from the year before.

“Policymaking in Washington is all about how much money you can throw around,” says John M Simpson, Consumer Watchdog’s Privacy Project Director. “These tech guys are increasingly willing to spend whatever it takes to buy what they want.”

Tech companies lobby on a variety of issues, from the revision of privacy controls online to US immigration laws, an issue it should perhaps have no authority on. But it is a dangerous game; in 2011, Google led the cavalry against the proposed SOPA and PIPA acts that aimed at getting international piracy under control and protecting copyright.

The powerful tech lobby successfully shaped the public debate to make SOPA and PIPA out as censorship bills that would curb freedom of speech and innovation. Regardless of the merits of the anti-SOPA and PIPA movement, what was remarkable was the swiftness with which the debate was overcome, and the internet companies had their way.

Proponents of the practice will argue that lobbyists and lobby groups have a better knowledge of the industry and processes and are therefore better positioned to address lawmakers than the general public. The trouble is, clearly, that for a democratic system to work, government authorities should be held accountable to the electorate and what the electorate want, rather than to a minority of powerful and well-connected individuals, regardless of how well informed they are.

But as always there is a catch. Lawmakers cannot be expected to be knowledgeable about every single issue on the political agenda, and therefore rely on special interest groups, lobbyists and experts to help shape policy. Thomas Sowell, the renowned American economist, says that lobbyists are such a massive force in government because “reform through democratic legislation requires either ‘public consensus or a powerful minority lobby.’” For Sowell, though, this is not altogether a bad thing, as lobbyists are armed with fair knowledge.

However, it would be naïve to accept that a lobby will only ever use its knowledge, influence and connections – because those are also pivotal parts of a lobbyist’s arsenal – for what is in the public interest. Professional lobbyists are employed by companies to protect their interest with lawmakers, and will therefore work to get laws changed even when there might be no consensus or public interest.

The line is a dot
Over the years the lobbying process has moved from shady back tables at restaurants and subjected itself to the rule of law. Lobbyists today must be registered and every donation must be accounted for by all political entities. In theory it must all be done above board, every penny must be traced, but in practice this is almost impossible to police. Donations to political campaigns can be tracked and monitored, but few will ever know what deals were struck behind closed doors to secure those dollars. It can then become difficult to draw the line between a politician accepting donations and accepting a bribe.

A bribe is a bribe. People authorised only to act in the public interest may not use their office for private gain. Period

Former secretary of labour Robert Reich told Michael Maiello at Forbes that there is no difference as he sees it. “What’s the real difference between me bribing a customs agent so that I can bring a banned substance into the country or me contributing money to a senator and then cajoling him into making the substance legal for import?” Reich said. “Frankly, I don’t see much difference. A bribe is a bribe. People authorised only to act in the public interest may not use their office for private gain. Period.”

But the oversimplification of the issue can be just as problematic. “A government that ponders a change in the rules might have quite different concerns than a bureaucrat considering a bribe,” argue Harstad and Svensson.

“Possibly the most important difference… is that the bending of rules is temporary. Bureaucrats can seldom commit to not asking for bribes in the future, because corrupt deals are not enforceable in courts and because firms deal with different officials over time. A legislative change, on the other hand, alters the status quo and is therefore likely to last longer.”

A successful lobby for a change in legislation or procedure is, therefore, the gift that keeps on giving. Morally, though, the distinction is certainly a lot less easily defined.

Lobbying today is entrenched in the international political agenda and is not only confined to political donations. Successful lobby groups – corporations or special interest groups alike – control the environment in which an issue of interest is debated.

“If a public discussion on a company’s environmental impact is unwelcome, lobbyists will push instead to have a debate with politicians and the media on the hypothetical economic benefits of their ambitions,” say Tamasin Cave and Andy Rowell, in The Guardian’s summary of their book, A Quiet Word: Lobbying, Crony Capitalism and Broken Politics in Britain. “Once this narrowly framed conversation becomes dominant, dissenting voices will appear marginal and irrelevant.”

For Cave and Rowell, regardless of how regulated lobbying is in developed countries like the US and the UK, lobbyists will continue to operate behind closed doors. They quote one unnamed lobbyist as saying that the “influence of lobbyists increases when it goes largely unnoticed by the public.”

Part of that trick is to manipulate the media and the public to accept the message in the way lobbyists are trying to convey it. “Even if the corporate goal is pure, self-interested profit-making, it will be dressed up to appear synonymous with the wider national interest,” say Cave and Rowell. “At the moment that means economic growth and jobs.”

Bending the rules
And as the public and governments grow more aware and weary of traditional lobbying activities, it has become fundamental for the industry to branch out. Think tanks and sponsored research have emerged as an effective way to make a case.

Former UK minister Patricia Hewitt told undercover reporters posing as potential lobbyists during a Channel 4 Dispatches investigation that “the think tank route is a very good one… Does that think tank already have a relationship with minister X? Can we invite minister X to give a seminar on this subject? Your client would then sponsor the seminar and you do it via the think tank. It’s very useful because what you get for your sponsorship is you basically sit next to the minister.”

Harstad and Svensson concluded through complicated mathematical models that lobbying works, but their samples and assumptions come from an already uneven playing field. Large companies have the budget to lobby for policy change; small companies are stuck bribing petty bureaucrats. Underdeveloped nations will remain trapped in poverty as corruption prevents the implementation of adequate regulatory frameworks that would enable the shift away from bribery and towards lobbying. And, above all, it remains a matter of perception: would it be preferable to bend the rules or have them changed on a personal whim?

Lobbying is all about public perception, and globally that is getting increasingly difficult to manipulate as public debate moves online and becomes more accessible and compelling to the general public. And the louder the noise around an issue, the harder it is for lobby groups to control it. It explains the booming lobby budgets in the US, as companies try to remain in control of the situation.

However, it is unlikely that the nature of the relationship between politics and lobbying will change with records going online and information being made available legally. What will happen is that the lines between the legal and the illegal will continue to be blurred.

The BP oil spill disaster: a timeline of events

Posted on by Ashton Wenborn

On the evening of April 20, 2010 a methane gas release triggered an explosion on the BP-run Macondo Prospect site and, for 87 days, oil was expelled over 68,000sq m of ocean and 16,000 miles of coastline off the Gulf of Mexico. The now infamous Gulf of Mexico spill killed 11 people and sliced the oil giant’s share price in half, forcing the company to offload assets worth some $38bn and pay out billions upon billions of dollars in fines.

Despite the damage done thus far, the result of a crucial multi-billion dollar civil litigation case is still yet to be decided on. It’s now over four years and $42.7bn in fines on from the disaster and the civil trial has not yet entered its third and final phase. While it’s true that the company has taken on a far better shape in the immediate aftermath of the spill, the trial will continue to act as an unknown quantity for as long as it takes to arrive at a final settlement.

Awaiting the final phase
There’s comfort to be taken, however, from the simple fact that US District Judge Carl Barbier, along with BP attorneys, agreed in March to a January 20 trial, which, if successful, looks set to decide on the fines BP will pay in relation to the spill. Although Barbier originally intended to bring the case forward to this summer, the reams of evidence still being brought to the table by both parties has left him with little option but to postpone the hearing. “I feel like I’ve spent the last year dealing with nothing but distractions, fighting and refighting old battles instead of moving forward with the litigation,” he said of the case.

[T]he US Government and BP are still locked in a dispute with regards to how many barrels of oil were spilled in total

The second stage of the trial came to a head last October, and centred on how much oil was released as a result of the spill, whereas the first came to a conclusion last April and focused principally on BP’s liability for the oil spill disaster. And while the vast majority of the evidence for and against BP has been put forward already, both sides will come equipped for the third phase with a great deal more, though Barbier has made it clear that he will be putting strict caps on new information brought to the stand come January.

Although the results are yet to materialise, the case could see BP incur a maximum penalty of near $18bn, to come on top of a $4.53bn fine paid out in 2012. However, estimates of the final sum are nothing short of guesswork given that the information unveiled thus far has been kept secret so as not to be discovered before the penalty stage begins early on next year.

Among the most important factors to be decided upon in the case are the extent to which BP acted with negligence, and the total amount of oil spilled. The penalty for gross negligence could bring the fine per barrel of oil spilled to anywhere between $1,100 and $4,300, depending on the court’s findings under the Clean Water Act. What’s more, the US Government and BP are still locked in a dispute with regards to how many barrels of oil were spilled in total, with the former putting the total at approximately 4.2 million barrels and the latter at 2.45 million barrels.

Post-spill improvements
Granted, the spill has put the company under extraordinary pressure, with the world’s media having weighed in on the issue and its share price and profitability having taken a major hit. However, the fact remains that BP is still today one of the world’s largest oil companies, owing to CEO Bob Dudley’s ‘shrink to grow’ strategy and a focus on value ahead of volume.

BP’s return to form here has not come without its fair share of sacrifices; since the disaster, the company has offloaded a reported $38bn in assets, including half of its offshore platforms and refineries, and reduced its output – excluding Russia – to 2.25 million barrels of oil a day from three million previously. In addition, BP last year formed a partnership with Rosneft, handing TNK-BP back to the Russian giant for $12.48bn in cash and an 18.5 percent stake in the company.

Arguably the most significant of BP’s actions since the disaster is the $4.53bn settlement with American authorities in November 2012, which removed some of the uncertainty accompanying the trial. The company’s emboldened prospects as a result of the agreement again illustrate the importance of the civil case on the long road to BP’s recovery, whether it be financial or reputational. And only in the event of a civil settlement will BP be rid of the looming air of uncertainty that has loomed large over the company since April 20, 2010.

Timeline

The lead up to the case

2010

April 15

Halliburton employee advises BP via email that 21 centralisers are needed to centre the drill pipe at Macondo Prospect in the well, and warns of a “severe risk” of a natural gas leak with only six in place.

April 16

BP manager ignores advice and proceeds with six centralisers. “Who cares, it’s done, end of story, will probably be fine and we’ll get a good cement job,” he wrote, according to a copy of an email cited in court.

April 22

BP and Transocean sued by the family of Shane Roshto, one of 11 workers killed in the incident.

May 10

BP investor sues company directors, on the accusation that the company pursued profit at the expense of safety, which was followed by many similar suits.

June 1

US Attorney General Eric Holder opens criminal and civil investigation into spill.

June 16

BP puts $20bn into fund meant to pay damages in relation to spill. Less than two months on, more than 225 lawsuits have been filed.

August 10

Panel of judges orders that all claims be presented to one judge: US District Judge Carl Barbier in New Orleans.

October 20

Environmental groups sue BP, saying it should pay damages in relation to affected wildlife and habitats.

December 15

Obama administration sues BP for violating environmental laws and seeks damages under the Clean Water Act.

2011

March 3

Louisiana sues BP and partners, seeking $1m a day for damages.

April 20

BP sues Transocean, claiming that without the company’s ‘misconduct” there would have been no accident.

April 26

Business and individuals suing BP win judge’s approval to seek punitive damages in pursuing claims of economic and environmental loss.

November 14

Judge rules BP must face claims by Louisiana and Alabama for negligence and product liability under general maritime law.

2012

January 2

BP seeks to have Halliburton pay all spill-related costs and damages. BP has paid over $21bn in clean-up costs and economic damages up until this point.

January 31

BP ordered to cover a select few claims lodged against Halliburton, which totalled $40bn in clean-up costs and economic losses.

Feb 9

US seeks fines of up to $4,300 for each of the four million plus barrels spilled.

Feb 13

BP faces fraud claims from investors who say the company lied about accident response capability pre- and post-spill.

February 26

February 27 trial delayed until March 5 by Barbier to allow settlement negotiations to continue.

March 2

BP and lawyers representing spill victims reach $7.8bn settlement to resolve private claims for property damages, economic losses and medical injuries.

April 18

BP and plaintiff lawyers’ committee submit proposed settlement agreement to Barbier.

April 25

Former BP engineer arrested and charged with obstruction of justice for deleting text messages related to investigation.

May 3

BP wins preliminary approval of $7.8bn economic and medical settlement from Barbier, who sets January 2013 start date to restart postponed trial.

September 11

Spill victims ask Barbier to reject BP’s settlement after Hurricane Isaac reveals further oil contamination off the Gulf Coast.

October 26

Barbier delays start of trial until February 25.

November 15

BP agrees to $4bn settlement for all criminal charges related to spill.

December 21

Barbier gives final approval to economic portion of BP’s $7.8bn settlement.

2013

January 11

Barbier gives final approval to medical portion of BP’s $7.8bn settlement.

January 29

BP wins approval of guilty plea to resolve 14 criminal charges tied to spill. Pays $4.53bn in penalties and fines, including $525m to the SEC for securities violations.

February 5

BP increases cost of economic and medical settlement by $680m to $8.5bn.

‘Luxury sector is much more resilient than people think’, says Chalhoub Group | Video

Posted on by Ashton Wenborn

Despite the economic crisis of 2008, the luxury sector has thrived, with corporations such as the Middle East’s Chalhoub Group benefiting from prolific global demand for their products. The company’s co-CEO, Patrick Chalhoub, talks to World Finance about the group’s work in the Middle East, what’s attracting Chinese and Russian customers, and whether any external forces can close down the luxury sector.

World Finance: Now I’ve named just a few of your clients Patrick, can you tell me some of the others?

Patrick Chalhoub: The Chalhoub Group today have about 30 percent of the market share, with brands as extraordinary as Chanel, Christian Dior, Lancôme, and in gifting, Bachhara, Bernado and so many of the other brands that make all the women so excited, and desirable brands.

World Finance: Patrick, why do you think high end retailers have sought out strategic partnerships rather than opening their own shops locally?

Patrick Chalhoub: Our role as the partners of luxury brands is to really give them an insight about the market and how the market has developed. Adding to that, there is a complexity in doing business in our part of the world, and within this complexity, part of our job is to try to simplify the way the brands would be able to operate, to give them common areas of support in terms of back offices, human resources management, and the most important is to plug in resources people who could be trained and who have the understanding and the knowledge both of the market and the luxury industry.

[W]e have seen an influx of Russians who are coming
to Dubai

World Finance: Dubai has really become a retail hub for Russian as well as Chinese high-end customers. Can you tell me, what are the Russian buying, what are the Chinese buying?

Patrick Chalhoub: It is true that, since the opening of the Russian market about 15-18 years ago, we have seen an influx of Russians who are coming to Dubai. They enjoy the luxury brands experience, they focus their buying really on fashion. They are very much fashion-oriented, clothes-oriented. Definitely they would buy also shoes, handbags, but they are very much into the fashion, and very knowledgeable about the best of the brands which exist. The Chinese are not yet into clothes and fashion, they are much more into the accessories, they are more into the bags, shoes, but very much branded. Often with a calculator, in order to see if the prices are competitive, and they are, but looking more of the choices which could exist.

World Finance: Which luxury sectors have seen the most growth?

Patrick Chalhoub: The bags are the way, I would say, our consumers are expressing the fact that they are linked with the luxury brands and fulfilling it, but it is moving slowly to the other areas of the luxury fashion products. Very recently it’s really about shoes. Women are becoming absolutely crazy about shoes, so there has been a huge shoe development into the industry.

World Finance: The luxury retail sector thrived in spite of the 2008 economic crisis. Is there any external force that can slow down the global luxury retail market?

Patrick Chalhoub: Obviously if there is insecurity, everything could stop. But once there is a certain stabilisation of the situation, and even into difficult economic situations, we are seeing that the consumers are still looking for luxury products, not extravagancy, but something which is accessible, and this is what has happened when we have seen the events happening in Asia. In spite of what is happening there are people who still have a certain amount of wealth and who will be spending it. So then it’s for us to adjust our offers or adjust our marketing in order to be able to approach them. Luxury is much more resilient than people think, if we know how to adapt it to the situation of every moment.

[T]here has been a huge shoe development into
the industry

World Finance: Now when your company was started 50 years ago you were one of the only luxury retailers in the region, but of course the marketplace has changed quite a bit and there are more competitors. How has that changed everything?

Patrick Chalhoub: As a leading partner of luxury into the Middle East, our role is often not only to play with the other competition and try to grasp market share, but to try to also expand the market, develop the market basically, because if we develop the market we have room for us and the other. I strongly believe that the more we have competition, and Dubai is a place where I have competition from all over the world, the more it keeps us on our toes, and it keeps the customer even happier because he will have ample offers, and ample answers to his demands.

World Finance: Do you have any plans to expand internationally?

Patrick Chalhoub: I don’t dream just to be present wherever we have to be present. The Middle Eastern market offers ample opportunity, because we have a young population, which is coming to the marketplace. We have a middle class in the making, which is accessing the consumer world and the luxury world. So what we are extremely focused on is this development in our part of the world, and make sure that we capture this development rather than have some aspiration but do well at what we have to do.

World Finance: Patrick, thank you.

Patrick Chalhoub: Thank you, I appreciate it.