2015 | World Finance

China supports Africa’s iron mines and steel market

Posted on September 17, 2015 by Ashton Wenborn

Chinese investment and trade with Africa encompasses many industries and commodities, from oil projects in Angola and Sudan, to cotton from Burkina Faso and fish from Namibia. Recently, however, China has increasingly been investing in iron-ore mines and steel metal works. While Chinese purchase of African mines is nothing new – it has for many years owned and operated Zambian copper mines – the Communist state has made a number of notable acquisitions of late.

One result of the West African Ebola outbreak in 2014, aside from the tragic loss of human life, has been a slowdown of mining operations in the region. In August of that year Mining Review noted that the health crisis had increasingly made it ‘difficult to transport supplies and skills to the mines’. The world’s biggest steelmaker, ArcelorMittal, the industry magazine reported had, “seen disruption to the expansion of its iron ore mine in Liberia due to the Ebola outbreak. Furthermore, the share prices of some mining companies in Sierra Leone, such as London Mining and African Minerals, have slumped on potential disruption of operations there.” By the end of the year, African Minerals had shut down the continent’s second-largest iron-ore mine, in Tonkolili, Sierra Leone.

At every point in the production process of steel, from the mine to sales, it seems, China is acquiring new assets on the
African continent

Industry take-over
The mine was quickly snatched up by the Chinese state owned enterprise Shandong Iron and Steel Group in April this year. Likewise Hebei and Steel Group – also an SOE – is building a massive steelworks in South Africa, while in May 2015 it was granted permission to buy out the Swiss firm Duferco’s African steel processing and sales network. At every point in the production process of steel, from the mine to sales, it seems, China is acquiring new assets on the African continent. The country is by far the world’s largest steel producer and reportedly facing a glut. According to The Guardian in June, steel was “cheaper per tonne than cabbage”. The motive behind such moves, then, raises some questions.

In March, the National People’s Congress’ opening session started with a declaration that the government is doing everything it can to fight pollution. China’s high polluting steel industry has been at the heart of this, with a number of the worst polluting mines shut down. There is speculation then that China could be trying to shift its high polluting metal industry overseas, where pollution is not its problem.

Alternatively, these seemingly counterintuitive acquisitions may be seen as part of a strategy to solidify China’s reputation in Africa. Due to the country’s supposed newcomer status, China is using a “stick-at-it-strategy”, according to Henry Tugendhat from the Institute of Development Studies. “They hope that good behaviour during a crisis – even if it loses them money in the short run will secure them better contracts in the future”, wrote The Economist. “The better the mine, the fewer impurities in the ore, and the cheaper it is to turn it into high-grade metal.”

The next step
This seems unlikely. China has had a longstanding partnership with many African countries. The famous 1955 Bandung Conference, where 29 countries met to try and foster Afro-Asian relations and to oppose colonialism, China committed itself to fostering economic relations with African states, leading to 50,000 Chinese workers helping to construct the Tanzam railroad that linked the port of Dar es Salaam in Tanzania with Zambia.

Economic cooperation accelerated after China’s gradual embrace of market reforms. In the 1980s total trade between the country and the continent was worth $1bn a year. This increased sixth fold by the 1990s, and by 2012 reached $163.9bn. By 2014, ODI from China to Africa totalled $130bn. At the same time, on average Africans have the highest positive view of China, according to polling by the Pew Research Centre in 2014. China, it would seem, does not need to curry favour by investing in currently unprofitable mines. Chinese intentions aside, these acquisitions will provide much needed jobs and investment for the continent.

Isn’t it time Americans got a four-day week?

Posted on September 17, 2015 by Ashton Wenborn

A four-day workweek seems like a no-brainer. Who wouldn’t want to work fewer hours for the same amount of pay? Sadly, implementing a reduction in working hours, although well within the realm of possibility, is not as simple as it sounds and, according to Daniel Hamermesh, a professor of economics at the Royal Holloway University in London, anyone who says otherwise is being dishonest.

What bothers him most about the 32-hour working week debate – a topic that has seemingly sprung out of the ether and gained prominence in the media recently – is that people appear to believe that they’re going to get something for nothing. That somehow we can work fewer hours, but keep the exact same living standards.

He does, however, believe that people in the US are spending far too much time in the office. “Americans certainly work too much”, said Hamermesh. “We are getting richer and richer, despite everyone’s complaints, and yet our hours haven’t dropped one iota.” And he isn’t the only one who thinks that Americans are overworked.

We are getting richer and richer, despite everyone’s complaints, and yet our hours haven’t dropped one iota

In a recent Gallup poll, full-time US workers, on average, work a whopping 47 hours a week (see Fig. 1). That’s a whole 13 hours more on average than the Norwegians. A country that, believe it or not, is considerably more productive than the US. So much so that its GDP per capita is $100,818.50, which is nearly double that of its American brothers and sisters ($53,041.98), despite its proclivity to working less.

One explanation for why Americans are working more than anyone else is because they consume more than anyone else. Data compiled and published by the World Bank shows that household consumption expenditure per capita in the US sits at a whopping $31,190. Meaning that Americans consume on average $11,220 more than the French, a country where they work 35 hours per week on average and where the average household consumption comes in at just $19,970.

Another thing stopping Americans from spending less time at work is how they choose to fuel such disproportionately high levels of consumption – by taking on a whole lot of debt. Economic data compiled by the Federal Reserve Bank of St Louis shows that the ratio of household debt to GDP in the US in 2013 was 81.5 compared to just 54.9 during the same period across the pond in France (see Fig. 2).

“We are definitely on the consumer treadmill”, explained the British psychiatrist, award-winning author, and Director of UCLA’s Institute for Neuroscience and Human Behaviour, Peter Whybrow. “You can have a choice about whether or not you want to work 32 or 40 hours a week in a theoretical sense, but in fact, Americans work 47 hours on average because they simply can’t afford not to.”

Your economy needs you
The Republican presidential candidate Jeb Bush managed to make headlines and upset a large proportion of the electorate after he told onlookers during a routine visit to New Hampshire earlier this year that Americans need to work longer hours in order to pull the country out of its economic slump.

“We have to be a lot more productive, workforce participation has to rise from its all-time modern lows”, said Bush during an interview with the editors of the New Hampshire Union Leader. “It means that people need to work longer hours and, through their productivity, gain more income for their families. That’s the only way we’re going to get out of this rut that we’re in.”

The former Governor of Florida is right, to a degree. Working longer hours would, for a while at least, help give the US economy a boost, but working excessively for a prolonged period of time can actually reduce overall productivity rather than increase it.

In an article for Salon, the journalist Sara Robinson points to research collated by Evan Robinson, a software engineer interested in programmer productivity. In a white paper he produced for the International Game Developers’ Association in 2005, he outlined the history of the 40-hour workweek and provided evidence that long-term worker output is maximised near a five-day, 40-hour workweek.

Despite the evidence, longer hours might be agreeable for workaholics up and down the country and they should not be denied the right to work more if they wish too. But as the science shows, working in excess of 40 hours a week can negatively affect productivity and, therefore, this metric should not be used to justify longer hours. Equally there are a lot of people that would like to spend a lot less time at work and there are a number of socio-culture benefits derived from spending less time at work, such as strengthening interpersonal relationships by giving friends and families more time together.

The real question, therefore, according to Hamermesh, is how do we get more flexibility and more freedom for those who want to work less, while not infringing on those who wish to work more?

“This is not going to be accomplished on a broad-brush federal legislative basis”, said Hamermesh. “It is doable, and I think it would actually help employers, because happier workers are going to be more productive. But some kind of one-size fits all will not make people better off.”

One solution he offers, and one provided in abundance by many other developed countries around the world, is greater paid holiday allowance. As it stands, there is no statutory minimum in the US, with annual leave being left to the discretion of the employer, though the vast majority do offer paid vacation as part of the compensation and benefits package.

Yet the average amount of paid vacation offered by private employers, according to the Bureau of Labour Statistics, is just 10 days after one year of service, with 14 days permitted after five years, 17 after 10 years, and 19 days after 20 years.

Compare this with Germany, a country that, according to the World Economic League Table 2015, is the seventh largest economy in world, and still manages to offer its workforce 34 days off a year for some much needed rest and relaxation.

Living for leisure
“I think [more paid vacation] would be a heck of a lot better”, said Hamermesh. “Also, the impact on total industrial output would be much smaller than if we cut hours.”

It’s important to remember that cutting back to a 32-hour week is the equivalent to taking two months off each year. It is also necessary to consider that neither a four-day week, nor greater allowance of paid vacation is going to happen unless companies are guaranteed that their competitors are doing the same. So it will require some kind of federal mandate in order to stop a company gaining an advantage in the market. But even if more holidays are the answer, and legislative action is taken to provide it, it is unlikely that many Americans will even take a break.

“Americans don’t take holidays”, said Whybrow, half-jokingly. “I think they take on average seven to nine days of holiday a year. My joke has always been: if we keep going like this we will be able to reduce that to a weekend.”

There really does appear to be a cultural aversion to taking time off in the US. In a recent report by the LA Times, it found that “more than 135 million Americans, or 56 [percent]” have not taken a vacation in over a year. So not only does the US not have a lot of leisure time, it appears that many are struggling to know what to do with the minimal amount they’re currently afforded.

Getting people to slowdown and take some time off is extremely difficult in today’s world, especially in the US, where workers work longer in order to support a higher rate of consumption, and where consumption itself is deeply connected with the American dream.

That is not to say that other cultures around the world are not consumerist by nature, but as the data makes clear, they are nowhere near the sorts of levels exhibited in the US.

Contrast this with the relaxed attitude of the French. A country that prides itself on being the land of the long lunch; taking a two-hour break from the daily grind to talk, drink, eat and unwind and you start to realise that the work-life balance is effected by socio-cultural forces, as much as economic ones.

Cultural shift
“Man does not live for bananas, televisions and air-conditioned cars, we live for leisure, enjoyment, and to help others, but I don’t think we are doing enough of that in the US”, explained Hamermesh. But getting the US to embrace a world with less work, especially when long hours has been a staple of its society for so long, will inevitably take time.

One company that is attempting to find a better work-life balance and provides a strong case for a shorter working week is the San-Francisco-based company, Treehouse, which maintains a four-day workweek for its employees.

So far, it has managed to generate a $3m plus yearly revenue run rate, boasts a team of 34 full-time staff, with the intention of hiring more in the coming months, and has even managed to secure $4.75m worth of investment from the likes of Chamath Palihapitiya, Kevin Rose and David Sze, according to a recent company blog post.

“We have proven that you can take it from an experiment to something that is actually doable for real companies [and] for real people in highly competitive markets”, said the company’s CEO, Ryan Carson, during a short documentary produced by The Atlantic. “Right now, we can compete with scary companies like Google for talent because we pay full salaries and we give you full benefits and we basically take ridiculously good care of people because we think it’s the right thing to do.”

It is unclear whether more US companies will follow in the Treehouse’s footsteps or if the country as a whole will one day become famed for its relaxed attitude to work in a similar fashion to the French. Though, the mere fact that US workers are beginning to question their work-life balance and even entertain the idea of a four-day week means that it is a possibility.

Liquefied natural gas suffers from a series of setbacks

Posted on September 17, 2015 by Ashton Wenborn

Poring over the biggest stories of 2013, it quickly becomes apparent that the energy industry of then was awash with bright hopes for the future; for reduced energy poverty, for renewables, and – most of all perhaps – for LNG. Born of advances in technology and changing consumption patterns, its ready availability and proximity to major consumers has handed the industry, particularly in Asia, a much-needed pick-me-up (see Fig. 1)

“Liquefied natural gas has experienced remarkable developments in commercialisation and export capacity in a span of just 50 years”, wrote Craig Pirrong, Professor at the Bauer College of Business University of Houston, in a paper entitled Fifty Years of Global LNG. “The world now stands on the cusp of another major surge in capacity.”

Treading on the tailcoat of America’s shale revolution, LNG’s relative cleanliness and easy availability hinted at a not-too-distant future wherein natural gas rather than oil would be the lifeblood on which the global economy would feed. Advances in drilling technology, together with supply constraints in Japan, China and in Eastern Europe paved the way for a gas-fired transition, and significant discoveries in Canada, Mozambique and Australia, to name a few, have ignited a fire under the industry.

Reduced emissions and improved energy efficiency are the promises of an LNG revolution, and, assuming these to be true, a spike in consumption looked in 2013 to be nailed on with certainty. Two years on, however, and the global energy market is a changed proposition.

Blow after blow
An oil price collapse at the turn of the year – which needs no explanation here – was significant not just for oil producers, but also for rival energy companies. And where, prior to the decline, LNG’s competitiveness gave rise to a string of ambitious projects, the Brent price swing has reset the price differential and dialled down its prospects. Fresh from a hard knock in the summer of 2014, courtesy of ExxonMobil’s Papua New Guinea project, LNG prices – in the wake of the oil price collapse – have suffered another blow, and margins in many instances have been squeezed to borderline unmanageable extremes. What’s more, with the price of natural gas so closely tied to Brent crude fluctuations, analysts at the turn of the year were united in the opinion that the resource, after a half century-long rise, was headed only one way.

In South Korea the return of nuclear power has contributed to an almost 20 percent decline in
LNG imports

“The first quarter of 2015 could be the last hurrah for LNG prices for a while”, said Trevor Sivorski of Energy Aspects, speaking to Reuters at the time. Far from the optimistic outlook that has so characterised its 50 year rise, analysts – many for the first time – have started to fear for the immediate future of LNG, as the fall in global oil prices has unearthed weaknesses not seen until now.

For a resource that is yet to carve out a niche, at least as far as pricing is concerned, its value is dictated still – some would say illogically – by long-term fixed contracts indexed to the price of oil. Existing as a means of injecting stability into an otherwise unstable supply/demand equation, the ties also mean that any bad news for the black stuff is bad news for natural gas. However, the emergence of LNG as a global contender – soon to eclipse iron ore as the second most traded commodity after oil – means that this formula is seen by many as inadequate to reflect the commodity’s true value.

According to Bloomberg, around 73 percent of global LNG is sold in this manner, and the majority of the rest sold as Asian spot cargoes, with neither priced according to the resource’s own fundamentals. Under this framework, expectations at the year’s onset read that LNG prices would fall from $15 to $16 per million British thermal units (Mbtu) to around $10 or $11, and in doing so render billions of dollars in planned projects unviable.

Speaking about LNG’s close ties to oil, Andrew Grant, Financial Analyst at Carbon Tracker, said that the falling price of crude is “very significant,” adding, “LNG prices have fallen significantly, both on a long-term contract basis and spot basis. Further, following market tightness in recent years [and particularly since Fukushima], the market has swung into oversupply that may last for several years.”

One key reason why these contracts can prove so destructive, both to planned projects and to the overall health of the market, lies in Asia, where there’s good reason to seek an oil alternative, preferably one that is more readily available and cheaper. However, in linking the value of LNG to that of oil, Asian buyers are unable to realise the benefits on its own terms.

It could even be said that low LNG prices fail to reflect the value of the resource itself, yet talk of oil-delinkage is premature, given that most sellers would rather keep the long-term guarantees tied to existing price mechanisms rather than the gains associated with independence. True, the price hit has impacted key segments of the LNG business, some critically so, though the issues go far beyond pricing, and extend also to the undue importance placed on the resource in days past.

Dealing with over capacity
Occupying a two-thirds majority share of the global LNG trade, unfavourable demographic trends in Asia have contributed to a glut in supplies, and in doing so stifled the industry’s growth.

In Japan, as one of the three traditional LNG buyers alongside South Korea and Taiwan, a nuclear retreat has done much to ease the transition to natural gas and reinforce the country’s existing commitments to the oil alternative. If only for the simple reason that Japan is a credit-worthy buyer willing to invest in LNG, investors in the 1960s ploughed billions of dollars into its development, to the point that the resource today is often mentioned alongside oil and coal as a stalwart of the energy market. Adopted first as a low-pollution alternative in a time when environmental regulations were beginning to take hold, a nuclear retreat inflated LNG’s prospects.

Accounting for about a third of all global LNG shipments, Japan last year spent over $63bn on the resource, although spending in the first half of this year is down on the last. What’s more, public opposition to nuclear is waning and the government looks dead set on a restart, which together suggest that the window of opportunity for LNG is narrowing. Also, in South Korea the return of nuclear power has contributed to an almost 20 percent decline in LNG imports, whereas in China sluggish growth has contributed to a nine percent decline.

While in Asia demand for the resource is slowly falling, production remains a constant, with the resulting excess finding its way to lesser consumers, mostly in Europe, which, while useful, contributes to some of LNG’s spiralling price. Whereas on the one hand pricing mechanisms and changing consumption patterns in Asia are part of the decline, discussion on the subject has focused mostly on oversupply and its consequences for planned projects.

“Partly due to the long lead time, LNG supply is covered for a low demand scenario for the next decade. Beyond this LNG with supply costs below around $10/mmBtu delivered to Japan will be needed”, according to a Carbon Tracker report on the subject, entitled Carbon supply cost curves: Evaluating financial risk to gas capital expenditures. “But there are $283bn of high cost, energy intensive LNG projects that would continue to be deferred if demand disappoints. In particular the number of LNG plants in the US, Canada and Australia could disappoint those expecting large LNG industries to develop.”

Stumbling over hurdles
An explosion of export capacity is yet to come online, with a great many projects having hit a roadblock recently courtesy of price concerns, and with many projects still underway, the implications for the industry at large are unclear. Insofar as supply is concerned, some analysts fear that a string of completed projects could inflict price pressures on the industry reminiscent of the shale boom. Having enjoyed a prolonged stint in which supply has been equal to or just shy of demand, early signs show this is no longer the case, and that the imbalance could be setting in for the long haul.

“We see the main challenge as the large number of LNG projects that have recently come on stream or are being built. We expect the LNG market to grow over the next 20 years, but the build out of capacity has been such that the market is oversupplied already, and there remains a large pipeline of further projects that have been proposed”, said Grant. “In our recent gas report, under a scenario where LNG demand grows by 3.5 percent over the next 20 years, no new developments are needed at all until 2024.

Beyond this, some projects will be able to go ahead in the next 20 years, but only the most efficient and cost advantaged – we see a limited amount of additional US Gulf Coast supply, Mozambique, brownfield Pacific and some other projects as being the most likely. A significant number of the proposed projects, however, are simply not needed.”

In North America at least, a procession of multi-billion dollar export terminals are scheduled soon to reach conclusion, which, while important for the continent’s low carbon drive, could depress Asian prices further.

The only thing keeping prices from falling through the trapdoor is a spill over of uncertainty stemming from the oil price collapse. In this sense LNG has suffered from the decline and benefitted, as cautious investors choose not to resume LNG projects, and, in doing so, keep prices relatively stable until the oil price picks up.

Having said that, there’s a consensus that the uncertain situation in the oil market is staving off the inevitable, and may even magnify the consequences, given that the LNG market has been made vulnerable already by a spate of uncertainty. Ultimately, LNG looks on course to perform well in the years ahead (see Fig. 2), though its recent short-term setback has highlighted the dangers of the reigning pricing structure and the risks associated with a sudden explosion in supply.

A tough road ahead for China’s manufacturing industry

Posted on September 17, 2015April 6, 2018 by Ashton Wenborn

China muscled in on America’s hard-earned manufacturing dominance in 2010 when the news broke that the resurgent eastern superpower had clinched a title held by the US since 1895. Powered by a mass migration of people from rural farmland to inner city factories, along with a record investment drive at home and abroad, the world’s number two economy became the world’s number one manufacturer (see Fig 1).

The news item was one that took very few by surprise. Back in 2000, the powers of Western Europe, North America and Japan accounted for 72 percent of manufacturing output, though by 2010 their collective share of the market was down to barely more than half. China’s factory output, meanwhile, tripled, and multinationals from around the world eyed its cheap and plentiful supply of labour with keen interest. Responsible for a measly three percent of global production in 1990, today its share borders on a quarter.

Manufacturing now makes up approximately one third of China’s GDP, far and above any other economy of its stature, and locals – for whom simple manufacturing jobs no longer cut it – are looking to advance up the ladder. Where photos of workers scrambling for an early morning shift or penned tightly on a factory floor were once commonplace, the sector’s barebones make-up and lack of governance are no more. Auto manufacturing, robotics and consumer electronics all feature in the modern-day picture, and the sector’s simple beginnings are today but a distant memory.

Manufacturing now makes up approximately one third of China’s GDP

With this, workers’ rights are more stringently upheld and their pay more plentiful, and this newly anointed manufacturing powerhouse is losing jobs as a consequence. After a dramatic climb to the summit, China is no longer the world’s factory floor, and given that the sector employs approximately 15 percent of the national workforce, continued declines could inflict serious pains on its population.

Falling factory output
At the turn of the year, manufacturing activity shrunk for the first time in more than two years, and the figures that followed served only to reinforce the reading that China was headed for its worst economic showing in almost a quarter of a century. After a three-decade-long stint of breakneck expansion, the country’s factory output looks set to suffer the adverse effects of China’s ‘new normal’: single-digit and sustainable growth.

Figures from HSBC’s Manufacturing Purchasing Managers’ Index (PMI) in April showed that job shedding was at its worst in seven months, as manufacturers offloaded positions in response to worsening market conditions and lacklustre demand. Capping a 17th consecutive month of contraction, insofar as manufacturing employment was concerned, the findings again signalled to policymakers that solutions must come soon if they are to stop the rot.

“Wage levels for factory workers increased rapidly during a period of high inflation in the early 2010s, but in the last couple of years, the rate of pay increases has dropped,” said Geoffrey Crothall, Communications Director for the China Labour Bulletin and former correspondent for the South China Morning Post. And while the country is stabilising more so than it is collapsing, the same priorities remain: manufacturing must move on or die out.

For a country that has in recent times grown accustomed to double-digit growth and any investor of its choosing, its expansion remains largely dictated by simple manufacturing. For all intents and purposes, the age of cheap labour in China has come to an end, and a failure on the industry’s part to either diversify or progress to the next stage could leave it dangerously exposed to the whims of low-cost manufacturing.

Rising wages
Where investors from across the globe in years past clamoured to get in on the building spree, mostly in and around coastal provinces and commercial centres, increased taxes, land prices and regulation ate into their margins. Workers that once toiled on the land for barely a basic day’s pay have grown accustomed to regular working hours and branded goods, and inflated salary expectations have chipped away at its former competitiveness.

“The vast majority of the economy has seen double-digit wage growth for the past decade, with the minimum wage in many cities doubling in less than five years,” according to a report authored by the Director and Chairman of McKinsey Asia, Gordon Orr. “This has created an expectation that this is simply the new normal for income growth. It is not.” Looking only at average annual wages in manufacturing, the figure jumped to RMB 46,431 ($7,406) last year, up from RMB 15,757 ($2,527) in 2006 (see Fig 2).

“Manufacturing wages are up fourfold in dollar terms over the past decade. In recent years, private-sector enterprises have had to agree to annual wage increases three to four percentage points higher than state-owned enterprises in order to narrow the significant pay differential that had developed by 2010,” reads the report.

Official figures state that monthly wages for factory workers last year were up 11.6 percent to RMB 2,832 ($457), although the figures vary greatly from region to region given that local governments stipulate the minimum wage. According to data from CBX Software’s Q2 Retail Sourcing Report, wages have risen in 16 of 31 provinces, while Trading Economics statistics show that wages in select areas of the Northern Hebei Province were up 22 percent last year. Likewise, wages in Shaanxi and Tibet were up 16 and 17 percent, and in Guangzhou City base pay was up a mammoth 22 percent.

The wage situation is made even more problematic by a divergence of interests, with foreign investors on the one hand seeking an attractive home away from home, and the government on the other, whose ambition it is to lead the transition to consumer-orientated economy. The difficulty lies in striking the right balance between modest pay and maintaining an appropriate level of cost competitiveness. However, in promoting growth less driven by imports, the focus has fallen on industries outside of low-cost manufacturing; this, alongside regulatory reforms and an appreciating currency, has played a major part in discouraging low margin investment.

For any manufacturer under the assumption that China’s is a passive workforce, make no mistake: its workers are militant and organised. There are few who shy away from worker action, and figures compiled by Voice of America recently found that there were nearly 1,400 strikes in 2014. Furthermore, looking at the opening two months of the year, the number has climbed higher still.

“A substantial number of labour disputes in the manufacturing industry are triggered by factory closures, relocation, mergers and acquisitions,” said Crothall. “All too often, employers ignore employees’ legal entitlements to severance pay, social insurance etc, but employees are very well aware of their rights and entitlements and are willing to take collective action to defend them.”

Broken down into its simplest parts, China’s budding geopolitical influence and economic clout has grown exponentially over the past few decades, and with this so too have worker expectations – not unreasonably so. The issue arises when foreign investors, whose reasons for being there are primarily the country’s low-cost and loose-touch regulations, find that the benefits of a Chinese home away from home have escaped elsewhere.

Big names bow out
“Many foreign manufacturers are downsizing or leaving the country due to an increase in the supply of low-cost/low-quality products, as well as an increase in labour costs in China,” said Melody Kong, Business Analyst for China Market Research Group. Foxconn, for example, has voiced concerns time and again that rising worker demands could eliminate its competitive advantage, and the firm, which assembles both the iPhone and iPad, has lately favoured markets outside China.

Going back to 2013, the company’s founder, Terry Gou, spoke on the difficulty of convincing young workers to take low-paid assembly line jobs. “The young generation don’t want to work in factories, they want to work in services or the internet or another more easy and relaxed job,” were his comments, according to the Financial Times. “Many workers are moving to the services sector and, in the manufacturing sector, total demand [for workers] is now more than supply.”

Having shifted Foxconn’s manufacturing base away from its native Taiwan in the late 1980s, China’s largest private sector employer looks to be doing much the same again in a bid to make peace with cheaper alternatives. “Probably the biggest challenge is moving away from the labour-intensive, low-cost, low-profit-margin model of production that fuelled China’s boom years towards higher-value production that relies to a greater extent on skilled and experienced labour. There are fewer young people entering the work force and those [who] are joining tend to be better educated and have higher aspirations,” said Crothall.

Microsoft has also been shutting up its Chinese factories lately, for fear of the country’s spiralling wage demands and militant tendencies. If only to appease a workforce that in 2013 was reported by The Washington Post to have taken hostages in response to job layoffs, Microsoft handed out free Lumia 630 phones to the first 300 workers to leave, provided they left quietly. Plant closures in Beijing and Dongguan, both in China’s expensive south-east, stink of a nationwide retreat, and the resulting 9,000 job losses make up half of the 18,000 announced in 2014. Where Foxconn has shifted its manufacturing operations to India, Microsoft has done much the same, though in Vietnam.

The decisions fall in step with that of fellow mobile manufacturer Samsung a year previous; made when the realisation hit that the low costs and slack regulations on which the market was built were no more. Constrained by the rising costs of Chinese production, it didn’t take long for Vietnam, with its promise of cheap labour and generous tax incentives, to come calling. Speaking to Bloomberg about the move, Lee Jung Soon of the Korea Trade-Investment Promotion Agency, said: “The trend of companies shifting to Vietnam from China will likely accelerate for at least two to three years, largely because of China’s higher labour costs [see Fig 3].” He added: “Vietnam is really aggressive in fostering industries now.”

Rival names and regional expansion
Where China and Thailand’s benchmark purchasing managers’ index has contracted for months on end, neighbouring Vietnam has racked up a plus-50 reading every month since August 2013. New orders are flooding in and productivity is on the rise. Facilitated both by accommodating government policy and a robust workforce, Vietnam is fast emerging as Asia’s latest manufacturing powerhouse.

Aside from Vietnam, major manufacturers are also looking to nearby Indonesia, Bangladesh, India and Thailand in keeping to their preferred margins. Rwanda, Ethiopia and Tanzania, meanwhile, have been received warmly by the garments industry. “A lot of industries that rely on low-cost labour, such as the garment industry, for example, have already relocated a lot of production to smaller Asian counties such as Bangladesh, Vietnam and Cambodia and even further afield in Africa. So the problem for manufacturers in China is not higher wages as such, but more to do with matching up the differing needs and requirements of employers and employees,” said Crothall. “It is very common for employers to complain that they cannot find the right staff and for workers to complain that they cannot find the right job.” However, while these countries and others better satisfy the financial specifications of low-cost manufacturing, they present new and often unseen challenges.

Reliable access to electricity, socioeconomic stability and a robust infrastructure network each underpin China’s manufacturing superiority. Without them, investors run the risk of exposure to unforeseen losses and complications.

Easy to forget is manufacturing’s contribution not just to the national economy, but also to the building of ‘Factory Asia’ as a whole, and for as long as the region continues to attract investment, China’s prestige will remain. If not the immediate future of Asia’s manufacturing push, China is most certainly the biggest beneficiary, and any branches added to the continental supply chain promise to stoke the engine.

For example, China’s increased share of the global manufacturing pie means that its reliance on imported components is far less now than in years past – 35 percent, as opposed to 60 percent in the 1990s. Furthermore, the empowered Chinese consumer means that the country is today home today to both the making and selling side of the business, and any company privy to this information would surely see fit to stay loyal.

“Many Chinese manufacturers have realised these challenges, and they are making good progresses in improving the situation – they are becoming more competitive up the value chain, by investing heavily in hi-tech facilities such as robotics and state-of-the-art facilities so they can compete for higher value manufacturing contracts,” said Kong. “For example, over the next decade we will probably see more Chinese factories capable of fabricating microchips, or making aerospace components. The process has already started, there just may be consolidation in the market as low-value manufacturers go out of business and hi-tech, high-value manufacturers expand.”

With observers quick to cast China as a country whose attractiveness has faded in light of its inflated price tag, the focus should fall instead on whether the country can advance up the value chain in a way that its precursors could not. Unlike Mexico and South Africa before it, China must now make good on its standing at the helm of Factory Asia and make clear that its capacity goes beyond that of a low-cost manufacturing hub.

Made in China 2015
In a bid to take Chinese industry to the next level, policymakers in May unveiled the Made in China 2015 initiative, in the hope that the blueprint would offer some indication on how exactly manufacturing might go about extending its influence to new areas. With tighter constraints on resources, greater wage expectations and wave upon wave of regulatory reform to contend with, the State Council has set out a series of commitments to revitalise the sector.

“Increasing labour costs is one of the key factors that is causing China’s manufacturing problems,” according to Kong. “However, in order to solve these problems, Chinese manufacturers also need to focus on improving technology and try to become more competitive up the value chain, to meet the growing demand for high-quality products.”

Homing in on a chosen 10 advanced industrial sectors, including robotics, aerospace, advanced transport and new-energy vehicles, the government has promised to boost its R&D spending to 1.68 percent of manufacturing revenues by 2025, up from 0.88 percent in 2013. Doing so, according to the blueprint, should whet investor appetites once again, and in doing so upgrade Chinese industry.

Labelled often, and unfairly so, as an industry past its better days, China’s manufacturing sector is about to dive headlong into a multibillion-dollar modernisation process, from which there is no reasonable chance of return. Low-cost manufacturing – and all its trappings – will likely move inshore and abroad, as China takes heed of Germany’s Industry 4.0 concept, if only to make good on Beijing’s ambition to become an industrial superpower by 2049. In order to realise broad-based and sustainable gains, the country must forsake its low-cost supremacy and move its industry into the fast lane.

AB InBev launches bid to buy SABMiller

Posted on September 17, 2015January 28, 2016 by Ashton Wenborn

Brazilian owned AB InBev has entered into talks to takeover SABMiller. If successful, the move would enable it to dominate the world’s global beer market with a combined worth of at least $230bn. AB InBev’s bid has not yet been disclosed, although industry experts predict that it could be anywhere in the excess of SABMiller’s current market value, $75bn.

Speculation has been rife for over a year that the two companies would merge to form a group that brews one third of the world’s beer

Speculation has been rife for over a year that the two companies would merge to form a group that brews one third of the world’s beer. At present, AB InBev leads the global market with 45 percent, while London-based SABMiller boasts 25 percent with well-known brands such as Coors, Fosters and Grolsch, among numerous others.

Given the size of both companies, it is expected that AB InBev will have to sell several assets in order to comply with anti-trust rules, which could see it sacrifice some of its market share in China. Yet the acquisition will enable the Brazilian group to strengthen its presence in Africa considerably as SABMiller has brewing operations in 17 countries and distributes in a further 21 on the continent.

Over the past year, both companies have suffered significant setbacks in terms of sales and share prices. Despite its market dominance, AB InBev’s profits plummeted by 32 percent in this year’s second quarter. This downturn can be largely attributed to Brazil’s struggling economy and changing consumer tastes in North America and Europe, which is seeing a growing trend for wine and spirits.

The reaction to the news has been generally positive, with an increase in share prices for both companies – 21 percent for SAB Miller and 8 percent for AB InBev, according to CNN Money.

In accordance with UK acquisition rules, if AB InBev does not make a formal offer by October 14 it must exit the talks.

Trading loses its human element as futures pits close down

Posted on September 16, 2015December 13, 2016 by Ashton Wenborn

The decision by CME Group to close many of its open outcry futures trading pits in Chicago and New York came in response to trading volumes falling to just one percent of the company’s total futures volumes. Thus helping to put the final nails in the coffin of a 167-year-old tradition that, for many, embodies the very heart and soul of the global financial market, in favour of the unparalleled efficiency and speed offered by machines.

Though the decision itself was a long time in the making, as a consequence of more and more volume migrating to electronic trading screens that promise greater liquidity and price transparency, when the closing bell finally rang for the last time the mood in the pits was sombre to say the least. “It felt like losing a close friend”, recalled John Pietrzak, a corn broker for more than 35 years. “It certainly wasn’t a celebration.”

The frantic, frenzied style of trading that is a staple of the open-outcry futures pits saw traders hooting and hollering for attention, all the while throwing out bizarre hand signals…

Sentiments such as these are understandable considering his family’s long history on the trading floor. His grandfather first started at the Chicago Board of Trade (CBOT) as a runner when he was just 13 years old ferrying messages between clerks and taking phone orders from customers that would then be passed on to brokers to execute. His father would then join his grandfather in pits in his early 20s. However, his own path to the trading floor, unlike his elders, was not as immediate. Instead, opting to start his financial career as a Certified Public Accountant (CPA), though it wasn’t long before he realised that it wasn’t the right fit for him.

“There really isn’t a lot of thrill in being an accountant”, he said. “So I decided to go down to the trading floor and scream and yell and try and make a lot of money.”

Another veteran of the exchange is Scott Shellady, best known for wearing a black and white cow print jacket to help him stand out from the crowd. While he, along with many of his colleagues had recognised a long time ago that the closing of the pits was inescapable, it didn’t stop him feeling a sense of loss when the inevitable finally came to fruition.

“It was sad”, explained Shellady. “There were a lot of gold guys who came back and toured the floor before they said goodbye. It is a strictly no smoking building, but I saw one guy sit down and have a big fat cigar, which was kind of a cool thing to see. It was a real passing of the torch.”

As a member of the board of directors at the Chicago Mercantile Exchange (CME), Pietrzak knew that if the futures pits continued to transact less than one percent of total CME volume, as they had done for several years, that it would be one of the first places the exchange would look to make changes. Even so, the fact that it took as long as it did to shut down the pits, shows just how difficult a decision it was and what the tradition meant to all those involved.

Hand-to-hand combat
When the CME began the process of stripping away over half of its 35 trading pits on July 2, it wasn’t just taking away a defining feature of the Chicago’s financial centre, but one of the city’s most popular tourist attractions. The frantic, frenzied style of trading that is a staple of the open-outcry futures pits saw traders hooting and hollering for attention, all the while throwing out bizarre hand signals that have become synonymous with the market itself. But while both insiders and outsiders alike will sadly miss the pits, the CME is after all a business and has to listen to its customers.

One of the main drivers behind CME’s decision to close pits was end users demanding access to greater levels of liquidity and transparency, along with wanting an ever-lowering of transactions costs, all of which are easily provided through electronic trading screens. But while these systems may provide access to all of the above in abundance, the one thing they will never be able to emulate successfully is the fun of the floor.

“I just enjoyed the fact that the pits were a form of hand-to-hand combat”, explained Shellady. “The sights, the sounds and smells of the pit that help you make your decisions on a guttural level rather than staring at a computer screen all day and listening to the air conditioning – its just not as fun.”

Not only do the dozens of screens that he and his colleagues now sit behind fail to offer the same buzz that they felt on the floor of the exchange, but they also fail to offer an adequate feel for the market. “There used to be a great sense to the market that you picked up just from the way the crowd reacted and it is very difficult to get that from a screen”, said Pietrzak. “The screen is a machine; a bunch of algorithms, and trying to pick up the rhythm of the market on it requires a very different skillset. You can surround yourself with dozens of screens that give you information that you never had access to down on the floor, but the buzz, the electricity in the room that was always there was something you don’t get fed off of”, he added.

Tech transparency
Traders nowadays needn’t rely on flashy trading jackets or their loud voice in order to buy low and sell high, nor do they require knowledge of the vast array of hand signals designed to communicate their position in the market. Instead, they need to adapt to the speed of electronic trading, along with the many different strategies that allow them to gain the edge in a market where transparency is abundant.

Since the financial crisis in 2008, risk-averse regulators looking to more closely monitor trading activity have acted as a catalyst for the development and proliferation of electronic trading, which is meant to offer greater market efficiency. This relatively new technology is meant to provide more proficient markets by offering greater liquidity, price transparency, and counterparty anonymity, with the trader’s identity being kept a secret to all parties, except the broker nominated to execute the trade.

But while many, including the regulators, favour the transparency offered by electronic trading, many senior traders with experience of both the pit structure and CME’s trading platform GLOBEX, assert that there is a lot of meaningful information on the floor that simply cannot be replicated electronically.

“In my opinion, the screens present less transparency”, said Pietrzak. “When you were in the pit you always knew when the guys that represent hedge funds were buying or selling and when the commercials were buying or selling. But there is almost no way to discern that now.

“I’m looking at my screen right now and I can’t tell you whether the size on the bid side is a hedge fund or an algo”, he added.

In Pietrzak’s opinion the market has traded in the thrill of the floor for not just greater efficiency of trade, but also an increased certainty of trade too. He admits that when he started on the trading floor back in 1979 that often the size of orders on the bid and offer side wouldn’t match up, causing a number of missed trades.

“You’ve effectively traded a certain amount of the transparency for knowing it was Cargill buying corn or Bunge selling wheat”, he explained. “You used to know that by who was selling the orders in the pits for making sure that all those trades and positions were checked and correct. It used to be minutes to confirm a trade, but now it occurs in terra-seconds.”

Human error
The trading floor was once the place that provided the most market colour – those precious nuggets of information that helped investors and traders get a feel for the direction the market was heading that day. The best brokers were the ones that got it right more often than they got it wrong and over time a number of trends arose that helped provide investors with a handle on the market. Old adages like Tuesday reverses a Monday or Turnaround Tuesday were successful for many people in the market.

The trading floor was once the place that provided the most market colour

But with the increased efficiency of electronic trading, offering greater certainty of price, and thus allow people to know more accurately where the market is at any given time has removed the need for such pricing proverbs. But Pietrzak hopes and asserts that losing this common sense approach to the market needn’t be lost and could even be incorporated into automated systems over time.

“Common sense was always important in the pits”, he said. “Not only that, but when you’re wrong, being able to catch yourself and turn it around. Typically machines don’t do that and once they start buying they keep buying. There are some algos that don’t do this and just take advantage of inefficiencies in the market, but the problem is that most of those systems have narrowed the inefficiencies so much that their profitability is diminishing.”

Before the shift to electronic trading human error and misinformation created a lot of inefficiencies, which added greater risk and instability to the market, something that many would like to reduce as much as possible. However, it was these same discrepancies between real and perceived market value in which many traders made their fortunes.

Ultimately, the move to automated systems will provide a far more efficient and fairer market for all, but there are concerns still about a market dominated by machines.

“When you were filling orders or you were trading for yourself and the market got away from you, you could always stop”, said Pietrzak. “You could stop trying to buy and stop trying to sell and just wait for things to settle down, but now, with all the machines all going the same way at the same time that doesn’t happen. There still has to be some human interaction with the markets to make them reliable and give confidence to the investing public that it is still a true market, not just a roulette wheel or a slot machine.”

In the end, much of the fear surrounding electronic trading and the subsequent reduction of human element posing a substantial risk to the market are unfounded. In fact, it is easily argued that behind every automated system is a person tinkering away. Meaning that the human element is still present, but instead of existing in a physical form on a trading floor is incorporated into the algorithms trading strategy in digital form.

Evolve and thrive
Regardless, of the pros and cons of electronic trading, it is the direction that the market has decided to take. Though it didn’t stop a small number of traders attempting to oppose the CME’s plans by requesting the US Commodity Futures Trading Commission (CFTC) to review the potential repercussions the move would have on the market.

Their chances of success were slim to say the least, and in reality, their efforts represented a last-ditch attempt to try and delay the inevitable.

“It was futures traders who wanted to try and keep the pits open for a few more months”, explained Shellady, “but in the grand scheme of things, more people just wanted it to be over and done with. The sooner you make the career change the better”.

The cow-coat wearing trader doesn’t just talk the talk and asserts that change needn’t be seen as a bad thing. He still has a business executing customer orders on the screen, in a similar fashion to the brokers in London. “We are going to adapt and embrace the change rather than run from it”, he added.

The spectacle of the trading floor has not gone away completely, however. The floor-based S&P 500 futures market, which continues to provide an important venue for trading the underlying futures contract for the open outcry S&P 500 options market, will remain open on CME Group’s Chicago trading floor for the time being.

But for those traders that had to say goodbye to the job they love in July, the CME showed why so many refer to it as their home from home, helping floor traders who want to continue trading by making booth space available following the closure of the futures pits.

“Anybody who has been trading in the last five years has to have known that this was coming”, said Pietrzak. “Somebody who plays golf has to adjust their game as they get older and in the same way businesses have to adjust too. People who want to not only survive, but thrive in the future have to change with the times.”

Is nuclear fusion the best way to support rising energy demands?

Posted on September 16, 2015July 21, 2016 by Ashton Wenborn

This December, world leaders will gather in Paris for the United Nations Climate Change Conference, where they will attempt – yet again – to hammer out a global agreement to reduce greenhouse-gas emissions. Despite the inevitable sense of déjà vu that will arise as negotiators struggle to reach a compromise, they must not give up. Whatever the political or economic considerations, the fact remains: if global temperatures rise more than 2˚C from pre-industrial levels, the consequences for the planet will be catastrophic.

But the challenge does not end with reducing emissions. Indeed, even if we make the transition to a cleaner world by 2050, we will need to determine how to meet a booming global population’s insatiable appetite for energy in the longer term – an imperative that renewables alone cannot meet. That is why we need to invest now in other technologies that can complement renewables, and provide reliable electricity for many centuries to come. And one of the most promising options is nuclear fusion – the process that powers the sun and all stars.

[O]f course, holding the sun in a bottle is no
small challenge…

Foundations for fusion
Brought down to earth, nuclear fusion – a process fuelled primarily by lithium and deuterium (an isotope of hydrogen), both of which are plentiful in seawater and in the earth’s crust –could provide a major source of low-carbon energy. A fusion power station would use only around 450kg of fuel annually, cause no atmospheric pollution, and carry no risk of accidents that could lead to radioactive contamination of the environment.

But, while the fusion process has produced some energy (16 million watts of it, to be specific), scientists have yet to create a self-sustaining fusion ‘burn’. Indeed, unlike nuclear fission, which went from the laboratory to the power grid within two decades, fusion has proved a tough nut to crack.

The problem is that fusion involves joining two positively charged nuclei – and, as basic science shows, same-sign charges repel each other. Only at extremely high temperatures – over 100 million degrees Celsius, or almost 10 times hotter than the sun – do the nuclei move so rapidly that they overcome their repulsion and fuse.

Scientists have spent the last 60 years trying to figure out the best way to create these conditions. Today, the frontrunner is a device known as a ‘tokamak’, a magnetic bottle in which the fuel, held at 100-200 million degrees Celsius, fuses, unlocking huge amounts of energy. Of course, holding the sun in a bottle is no small challenge, especially when one considers that the systems must be engineered so that they can create electricity for a price consumers are willing to pay. But in a sunny corner of Southern France, a global megaproject is coming together that will, for the first time, test the technology on an industrial scale, creating the first controlled fusion burn.

Everything about the so-called ‘ITER reactor’ is big. It will be heavier than three Eiffel Towers; the material for its superconducting magnets would stretch around the equator twice; and it has a price tag of more than €15bn ($16.8bn), making it one of the largest international science endeavours in history. The ITER partners – China, the EU, India, Japan, Russia, South Korea, and the US – represent half the world’s population. And, if it is successful, the reactor will produce half a gigawatt of fusion power and open the way for commercial reactors.

But the tokamak is not the only game in town. Other designs are emerging to join the race for fusion power. Lawrence Livermore National Laboratory’s National Ignition Facility in California is getting impressive results by firing high-powered lasers at capsules of fuel, crushing the particles together to trigger fusion reactions.

Energy’s Holy Grail
Elsewhere, particularly in the US, privately funded fusion ventures are springing up like mushrooms, each with its own concept for what some call the Holy Grail of energy. As the most advanced design, the tokamak still looks like the safest bet, but the competition from its rivals can only spur further innovation and progress.

Some discourage investment in nuclear fusion, claiming that, given how far from being market-ready the technology is, our financial resources are better allocated to tried and tested energy options. The critics have a point: given that fusion can be carried out only on a large scale, its investment requirements are considerable.

In the 1970s, American researchers estimated that getting fusion power on the grid would demand investment of $2-3bn annually in research and development until anywhere from 1990 to 2005 (depending on the amount of effort applied). They also estimated a minimum level of investment, below which funding would never be sufficient to build a fusion power plant. Nuclear fusion research budgets have remained below that line for 30 years.

But fusion’s potential is simply too great to give up. And, in fact, the progress that has been made in recent years – despite the lack of adequate investment – belies the naysayers. Machines all over the world are reaching fusion temperatures and extending our technological capabilities. The ITER experiment, when it starts up in the early 2020s, will embody those advances, achieving the long-awaited fusion burn – and place us just one step away from the ultimate goal of getting fusion power on the grid in an affordable manner.

Without nuclear fusion, future generations’ energy options will be severely limited – creating a serious problem for developed and developing countries alike. Lev Artsimovich, the tokamak’s inventor, said that “fusion will be ready when society needs it”. One hopes that he is right. But, rather than depending on fusion researchers to defy the odds, the world should step up investment in the technology. Our future may depend on it.

Steven Cowley is CEO of the UK Atomic Energy Authority and Professor of Physics at Imperial College London

© Project Syndicate 2015

Does technology offer a lifeline to corporate treasurers flying blind?

Posted on September 16, 2015 by World Finance

Today’s treasury landscape is developing rapidly, with new technological innovation changing the role of the corporate treasurer. Martin Bellin from BELLIN, a leading web-based treasury software company, explains the data-gathering challenges treasury managers face, and how new technology is improving workflows.

World Finance: Today’s treasury landscape is developing rapidly; especially with new technological innovation changing the traditional approach and the role of corporate treasurer is evolving as result.

With me now is Martin Bellin of BELLIN a leading web-based treasury software company. Well Martin let’s start with how the treasury landscape is evolving and the challenges it faces.

Martin Bellin: If you take a look back in time for a while, then you will see that treasury has become the centre of financial operations in many corporations now. In the former past it was more an extra to accounting and things like that, so it was not recognised as a very important topic.

Nowadays, treasury has become in the middle, and it’s getting more and more important for corporations. They became a department, they became a body in the corporate finance and it is going to raise attention in the meantime. Especially because treasury is not concerned about certain legal entities and divisions, they are concerned about groups, groups of companies.

So they are tearing down the walls between the different divisions and different departments and different legal entities by taking a look at global corporations and the global view. And that exactly, enables global business, and corporations are taking a closer look at global business more and more often and more and more intensively.

World Finance: And how does BELLIN fit into this?

Martin Bellin: When I started this company, I actually had that in mind already, so my idea, my problem actually at that time was, to build an environment, which could enable me to control the whole group of companies. To control not just my financing and my treasury business and my central treasury but around the whole operation – this couldn’t be fulfilled with any instruments available because it’s technology driven.

Technology is required to collect all the information in a global scale. So I developed and tried to develop – at least at the very beginning – I tried to develop a system environment, which enables me to get hold of all the data on the global level.

Now by having the data available at my fingertips, I am able to manage now, exactly what I am supposed to manage: the global financial impact, the global financial risk of my corporation.

World Finance: Treasurers are spending more and more time now on risk management, capital liquidity management and business strategy – what needs is this prompting and how do you approach this?

Martin Bellin: If you go back you’ll find a survey which has been made by Gardner and published by Gardner and I figured out, a couple of years ago, that 75 percent of the time of an average treasurer is spent on data collection.

Now imagine: none of these treasures have on their business cards a title ‘treasury data collector’ – they are all called treasury manager.

Now in the meantime, we do have systems available, which are helping me to collect all the data from the different subsidiaries together in one spot. Now if I can spend the time, which I have spent before on data collection, on management; I can exactly do what I am supposed to do; manage my risk, my liquidity, my positions, and what I am supposed to manage.

World Finance: And how is increased regulation impacting the industry?

Martin Bellin: Well treasurers are not accustomed to regulation because there was no regulation, actually, for corporate treasures in the past. Accountants are very used to regulation. Now as treasurers become more and more affected by regulations, we all know about Dodd Frank, about EMIR, which are affecting treasury business.

My concern is that corporations are starting to avoid or to change their risk management in a way that they are weakening their risk – because they do not want to follow the regulations, they cannot comply with the regulations. So there are coming more regulations in the future, we are all sure of that, because the financial industry is requiring regulation for different reasons, we all know about that. So and this is going to affect corporate treasurers as well. Now this is going to affect corporate treasurers that have to comply with regulations.

How do I comply with regulations? By implementing proper technology – which helps me to get rid of data collection again to build the reports, which are required and to do all these things, which are now regulated. We have to get used to that in corporate treasury as well, and we have to implement the systems, which are going to help me to comply with them.

World Finance: Looking at treasuries now from a global perspective and how important is it that they are connected?

Martin Bellin: Business is all about information, the more you know, the easier the business is. Just imagine a pilot – I flew in this morning to London, imagine the pilot wouldn’t have any instruments, wouldn’t have any sight were he is flying to, or a captain sailing the seas. If he would have no idea where he is going to go, then he will be in trouble very easily. Now that applies to treasury as well.

If the treasurer doesn’t have all the information at hand to manage the corporation – how could they? Now the question is, how does technology impact the future of treasury? I need systems, I need information – I need all the real-time information at hand to really do what I am supposed to do – to manage my risk for the corporation; for the benefit of the corporation.

World Finance: And finally, how do you see the industry evolving over the coming years and what trends you see impacting it?

Martin Bellin: Well, there are different trends I will say. First of all there are corporations, which have a professional treasury in place right now, so they reconsider their existing set up. They have the ability now to consolidate their existing landscape. They have implemented payment systems, risk management systems, planning systems, all these kind of things. Now there are systems available which can put all the things together in one, that’s one trend.

Another trend is that more and more corporations are going to come aware that treasury is really a core part of their financial set up – and they are just starting to implement and to run a treasury department at a professional level. That is the most important impact and the change in the future, because there are still too many companies that do not consider treasury a part of their financial set up.

And third, we do have a possibility now to increase our abilities in treasury – what does that mean? If you want to have a global set up in treasury you have to run global payments. That means you have to have one platform in place, which enables you to process all the payments from any subsidiary in the world through this one platform. Now this communication exists, more and more companies are implementing exactly this bank independent payment hub.

Now by having this payment hub available, you have the ability to communicate to banks in a professional level. Having this in same place, enables you to do much more than just payment processing – enables you to do deals conforming through finance dealings, and all kind of other deal types, that now can be processed through the same channels. So there is a bright future just in front of the professional treasuries to increase automation, SDP and efficiency in their operations, through the whole operation and whole corporation.

The IMF’s euro crisis

Posted on September 15, 2015September 28, 2015 by Ashton Wenborn

The IMF’s participation in the effort to rescue the eurozone may have raised its profile and gained it favour in Europe, yet its failure, and the failure of its European shareholders, to adhere to its own best practices may eventually prove to have been a fatal misstep.

One key lesson ignored in the Greece debacle is that when a bailout becomes necessary, it should be done once and definitively. The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations. In Greece, the problem is even worse, as the €86bn ($94bn) plan now under discussion follows a €110bn bailout in 2010 and a €130bn rescue in 2012.

At the time of the crisis, the fund was floundering once more in the aftermath of the east asian crisis

Under pressure
On its own the IMF is highly constrained. Its loans are limited to a multiple of a country’s contributions to its capital, and by this measure its loans to Greece are higher than any in its history. Eurozone governments, however, face no such constraints, and were thus free to put in place a programme that would have been sustainable.

Another lesson that was ignored is not to bail out the banks. The IMF learned this the hard way in the 1980s, when it transferred bad bank loans to Latin American governments onto its own books and those of other governments. In Greece, bad loans issued by French and German banks were moved onto the public books, transferring the exposure not only to European taxpayers, but also to the entire membership of the IMF.

The third lesson that the IMF was unable to apply in Greece is that austerity often leads to a vicious cycle, as spending cuts cause the economy to contract far more than it would have otherwise. Because the IMF lends money on a short-term basis, there was an incentive to ignore the effects of austerity in order to arrive at growth projections that imply an ability to repay.

Meanwhile, the other eurozone members, seeking to justify less financing, also found it convenient to overlook the calamitous impact of austerity. Fourth, the IMF has learned that reforms are most likely to be implemented when they are few in number and carefully focused. When a country requires assistance, it is tempting for lenders to insist on a long list of reforms. But a crisis-wracked government will struggle to manage multiple demands.

In Greece, the IMF, together with its European partners, required the government not just to cut expenditures, but to also undertake far-reaching tax, pension, judicial, and labour-
market reforms.

And, although the most urgently needed measures will not have an immediate effect on Greece’s finances, the IMF has little choice but to emphasize the short-term spending cuts that boost the chances of being repaid – even when that makes longer-term reforms more difficult to enact.

Lessons learnt
A fifth lesson is that reforms are unlikely to succeed unless the government is committed to seeing them through. Conditions perceived to be imposed from abroad would almost certainly fail. In the case of Greece, domestic political considerations caused European governments to make a show of holding the government’s feet to the fire. The IMF, too, sought to demonstrate that it was being as tough with Greece as it has been on Brazil, Indonesia, and Zambia – even if doing so was ultimately counterproductive.

The sixth lesson the IMF has swept aside is that bailing out countries that do not fully control their currencies carries additional risks. As it learned in Argentina and West Africa, such countries lack one of the easiest ways to adjust to a debt crisis: devaluation.

A fighting fund
Having failed to forewarn Greece, Portugal, Ireland, and Spain about the perils of joining a currency bloc, the IMF should have considered whether it was proper or necessary for it to intervene at all in the eurozone crisis. Its rationale for doing so highlights the risks associated with its decision.

The most obvious reason for the IMF’s actions is that Europe was failing to address its own problems, and had the power and influence to drag in the fund. The IMF’s managing director has always been a European, and European countries enjoy a disproportionate share of the votes on the IMF’s board. Equally important, however, is the fact that the IMF made its decision while facing an existential crisis. Historically, the biggest threat to the IMF has been irrelevance. It was almost made redundant in the 1970s when the US floated the dollar, only to be saved in 1982 by the Mexican debt crisis, which propelled it into the role of global financial lifeguard.

Struggling for power
A decade later, the IMF’s relevance had started to wane again, but was revived by its role in the transformation of the former Soviet-bloc economies. At the time of the euro crisis, the fund was floundering once more in the aftermath of the East Asian crisis, as its fee-paying clients did anything they could to avoid turning to it. The IMF’s participation in the eurozone crisis has now given powerful emerging economies another reason to be disenchanted.

After the US stymied their demands for a greater say within the fund, they now find that the organisation has been doing Europe’s bidding. It will be difficult for the IMF to regain the trust of these increasingly prominent members. Unless the US and the EU relinquish their grip, the fund’s latest bid for relevance may well turn out to be its last.

Ngaire Woods is Dean of the Blavatnik School of Government

© Project Syndicate 2015

The profit-sharing economy

Posted on September 15, 2015September 15, 2015 by Ashton Wenborn

Over the last 35 years, real wages in the US failed to keep pace with productivity gains; for the typical non-farm worker, the latter grew twice as fast as the former. Instead, an increasing share of the gains went to a tiny fraction of workers at the very top – typically high-level managers and CEOs – and to shareholders and other capital owners. In fact, while real wages fell by about six percent for the bottom 10 percent of the income distribution and grew by a paltry five to six percent for the median worker, they soared by more than 150 percent for the top one percent. How can this troubling trend be ameliorated?

One potential solution is broad-based profit-sharing programmes. Together with job training and opportunities for workers to participate in problem-solving and decision-making, such programmes have been shown to foster employee engagement and loyalty, reduce turnover, and boost productivity and profitability.

Profit sharing also benefits workers. Indeed, workers in companies with inclusive profit-sharing and employee-ownership programmes typically receive significantly higher wages than workers in comparable companies without such arrangements. About half of Fortune’s list of the 100 best companies to work for have some kind of profit-sharing or stock-ownership program that extends beyond executives to include regular workers.

Get with the programme
Despite the demonstrated benefits of broad-based profit-sharing programmes, only about one-third of US private-sector workers participate in them, and about 20 percent own stock in their companies. If these programmes work so well, why are they not more widespread?

First, executives for whom shared profits already account for a significant portion of income may resist programmes that distribute profits to more workers, fearing that their own income would decline. Even when such programmes increase overall profitability, they could reduce the profits going to top management and shareholders.

Second, workers are concerned that profit-sharing may come at the expense of wages, with the substitution of uncertain profits for certain wages resulting in lower overall compensation. Effective profit-sharing schemes must be structured to prevent this outcome, and strong collective bargaining rights can help provide the necessary safeguards.

Third, if inclusive profit-sharing programmes are to have the desired effect on productivity, they should be combined with other initiatives to empower workers. One way to achieve this is by establishing ‘works councils’, elected groups of employees with rights to information and consultation, including on working conditions.

Works councils and strong collective bargaining rights, both features of high-productivity workplaces, are common in developed economies. But they are lacking in the US, where federal law makes it difficult for companies to establish works councils and prohibits negotiations between employers and employees over working conditions outside of collective bargaining, even though most workers lack collective bargaining rights. Promisingly, the United Automobile Workers union recently announced that, as it continues to push for collective bargaining rights, it is also cooperating with management to form a works council in the German-owned Volkswagen plant in Tennessee.

The fourth impediment to the establishment of profit-sharing programmes is that they require a fundamental shift in corporate culture. Though most companies emphasise the importance of their human capital, top executives and shareholders still tend to view labour primarily as a cost driver, rather than a revenue driver – a view embedded in traditional and costly-to-change human-resources practices.

Reluctant firms
Unlike the financial benefits of reducing labour costs, the financial benefits of profit sharing, realised gradually through greater employee engagement and reduced turnover, are difficult to measure, uncertain, and unlikely to have an immediate effect on earnings per share, a major determinant of executive compensation. It is unsurprising, therefore, that the advantages of profit-sharing are undervalued by many companies, especially those that focus on short-term success metrics.

Moreover, even when they do recognise the advantages of profit sharing, companies may lack the technical knowledge needed to design a programme that suits their needs. Some states have established technical-assistance offices primarily to help small- and medium-size companies overcome this gap. The federal government should create its own technical-assistance programme to build on states’ efforts and reach a larger number of companies.

From a policy perspective, much more can be done to encourage firms to create broad-based profit-sharing arrangements. Current US law allows businesses to deduct from their taxable income the wages of all employees, except the top five executives, for whom deductions are limited to $1m of annual pay, unless the excess compensation is ‘performance-related’. Spurred partly by this tax incentive, corporations have shifted top executives’ compensation toward shares, options, and other forms of profit sharing and stock ownership, largely leaving out regular workers.

Some have proposed limiting the tax deduction for performance-based pay to firms with broad-based profit-sharing programmes. But, although this approach might encourage profit sharing with more workers, it would continue to provide companies with significant tax breaks for huge compensation packages for top executives.

Clinton’s proposal
US presidential candidate Hillary Clinton has a more targeted proposal: a 15 percent tax credit for profits that companies distribute to workers over two years. By providing temporary tax relief, the scheme would help companies offset the administrative costs of establishing a profit-sharing programme. In order to limit costs and prevent abuse, profits totalling more than 10 percent on top of an employee’s wage would be excluded; the overall amount offered to individual firms would be capped; and safeguards against the substitution of profit sharing for wages, raises, and other benefits would be established. The tax credit could also foster changes in corporate culture, by spurring board-level discussions not only of the benefits of profit sharing, but also of sharing information and decision-making authority with employees.

The stagnant incomes of the majority of US workers are undermining economic growth on the demand side (by discouraging household consumption) and on the supply side (through adverse effects on educational opportunity, human-capital development, and innovation). It is time to take action to promote stronger and more equitable growth. Clinton’s profit-sharing proposal is a promising step in the right direction.

Laura Tyson is Former Chair of the US President’s Council of Economic Advisors and Professor at the University of California

© Project Syndicate 2015

Global review: a look at the WEF’s Human Capital Report 2015

Posted on September 15, 2015 by Ashton Wenborn

graph 1

Finland (Rank 1)
According to the WEF’s Human Capital Report, Finland is the top performing country in the region and in the index overall. The country scored highest on the ‘ease of finding skilled employees’ indicator, while its 55-64 age group recorded the highest attainment rate of tertiary education of any country included in the sample. In addition, the quality of primary schools is high, with the country ranking first in terms of enrolment and quality of education for the under-15 age group. Life expectancy among the 55-64 age group was the highest recorded in the study. The country shares a great deal in common with neighbouring and second-placed Norway, in terms of unemployment and education.

Japan (Rank 5)
Japan is Asia’s highest-ranking country in the index and the only one to feature in the top 10. Looking at the headline figures, the country’s employment-to-population ratio is 56.8 percent and its unemployment rate only four percent, which, while impressive, is a far cry from Singapore, Asia’s next highest ranked country, at only 2.8 percent. Japan’s under-15 age bracket scored well, owing mostly to its basic education survival rate, quality of primary schools and incidence of child labour, ranking third of 124 with a score of 95.47. Of note also is the number of healthy life years beyond the age of 65 (11) and life expectancy at birth for the 55-64 category (76).

US (Rank 17)
Within its income group, the US scored slightly above average in every age category except under-15, and clocks in at an impressive 17th overall. The study shows that the country’s labour force participation rate is 62.5 percent, while its employment-to-population ratio is 57.8 percent. Where the country scores highest is in its secondary enrolment gender gap in the under-15 bracket, its youth literacy rate in the 15-24 bracket, and its healthy life expectancy at birth for the 55-64 category. However, the US scored a less-than-impressive 88.09 overall for its under 15 category, as a result of dismal primary and secondary enrolment, although the low score was offset by an impressive showing for the 15-24 age group.

Chile (Rank 45)
At 45, Chile is South America’s highest-ranking country in the 124-country sample, and places particularly well in the 15-24 age group. Barriers to mobility in education have decreased significantly in recent years, and a more educated workforce has done a great deal to change Chile’s labour market regulations for the better. The country’s labour force rate is just shy of 62 percent and the unemployment rate, at the time of the survey, sat at six percent. Perhaps the most notable achievement is that Chile is ranked 17th in terms of its tertiary enrolment rate among 15-24 year olds, and its basic education survival rate and secondary enrolment gender gap is unmatched in the region.

graph 2

Saudi Arabia (Rank 85)
Although Saudi Arabia has performed poorly over the years, the country’s growing emphasis on human capital in driving economic development means that the picture is fast improving. The gulf between the past and the present can be seen clearly in the WEF’s Human Capital Report, and whereas the 65-and-over age group ranked at 115 overall, the under-15 category placed 66th. Saudi Arabia has done a good job of fostering a range of diverse skills, for which it ranks 30th, and its rapidly expanding workforce stands the country in good stead for the future. A continued commitment to education means that the country will likely place higher in the years ahead.

Honduras (Rank 96)
Poverty is particularly acute in the West of Honduras, and, as a result, education and educational materials are sorely lacking. Of the five age categories, the country scores most poorly in the under-15 group, and ranks outside the top 100 countries on the quality of primary schools and basic education survival rate parameters. Unusually, the country’s secondary enrolment gender gap is first rate. As far as business is concerned, there is a distinct lack of talent in Honduras, and very few are what businesses would call skilled workers. On a scale of one to seven, the ease of finding skilled employees is 3.73, and high-skilled workers’ share of the overall 25-54 market is a lacklustre 12.9 percent.

Nigeria (Rank 120)
Although Nigeria’s working age population is verging on 100 million, a significant skills shortage means that the country has been unable to make good on its human capital potential. Over 25 years of military rule has resulted in a depreciation in the learning environment, and the country requires a far greater number of specialised workers to reverse the slide. Nigeria’s youth literacy rate is particularly poor, as is its primary enrolment rate, and without changing its education infrastructure, the country will struggle to climb up through the rankings. For more of an insight into the seriousness of the situation, Nigeria scored well-below average across all five categories in its income group.

Yemen (Rank 124)
Going by the overall index score, Yemen ranked last of the 124 countries contained in the study. The median age of the population is 18 years, and scores for the two oldest categories ranked particularly poorly. For example, in the 55-64 age group, the primary, secondary and tertiary education attainment rates all rank dead last, and it is the same for the 65-years-and-older group. The country’s capacity to retain talent, on a scale of one to seven, scores 1.89, whereas its capacity to attract talent clocks in at a marginally better 2.02. Positives can be taken from the fact that Yemen’s under-15 group scored 62.7 in the index overall, but this was the only age bracket to score above 42.

Failing banks, winning economy: the truth about Iceland’s recovery

Posted on September 15, 2015April 9, 2018 by Ashton Wenborn

News of Iceland’s catastrophic collapse reverberated around the world, but as spectacular as it was, many were already waiting for the country’s over-inflated bubble to burst. Like a child on their first visit to a candy store, full of zeal and lacking caution, chasing the high of unfettered excess, Iceland’s system inevitably came crashing down.

Its swift transition from an export-driven economy – with fishing, energy and aluminium smelting as its staple industries – into an international financial centre had quickly made Iceland a popular destination for foreign investment and currency trading. But the inexperienced, badly managed system was simply unsustainable and soon began buckling under the size of its own expansive growth. In tragically poetic timing, the 2008 financial crisis hit; with fiscal decline echoing around the globe, Iceland’s economy had no hope of saving itself from imploding.

The authorities responded with the unthinkable: they let the country’s three biggest banks collapse. It was the third-largest bankruptcy in history. Then came the implementation of strict capital controls, austerity measures and a series of reforms as Iceland set out to reinvent itself. Scepticism was rife, but contrary to the qualms of critics, the controversial model actually seems to be working. Unemployment is down (see Fig 1), interest rates have deflated and pre-crisis output levels are now being surpassed.

As the banks had become too big to save, the authorities decided to let them fail

What goes up must come down
During the 1990s, using the Irish financial model as a blueprint, the Icelandic authorities decided to revamp their economy. The country repositioned itself in the international community as a low-tax base for foreign finance and investment. Iceland’s three biggest banks – Landsbanki, Glitnir and Kaupthing – expanded exponentially, with Landsbanki in particular extending its retail operations in overseas markets. Despite being a tiny island, home to only 320,000 people, the krona became a major trading currency, surging by an astonishing 900 percent between 1994 and 2008. At one point, the banking system held assets that were worth 10 times more than Iceland’s GDP.

The badly considered deregulation of the banking system in 2001 further enhanced Iceland’s reputation as an international financial centre. With much higher interest levels than those offered in their domestic markets, traders from the around the world flocked to the Nordic island. They borrowed in dollars, converted them into krona and then made a sizeable profit from bond acquisitions. Even individuals that were not in finance played the game: the Netherlands and the UK in particular made deposits with Landsbanki under what was known as ‘Icesave’.

“In essence, after the rapid expansion of the bank balance sheets, the banks experienced a wholesale run, where bond investors simply did not have the appetite to maintain the necessary growth in bond issuance to keep them afloat,” Gudrun Johnsen, Assistant Professor of Finance at the University of Iceland, told World Finance. This was further exacerbated by poor-quality lending books, which included large shares of zero coupon loans that were extended to holding companies. The banks had insufficient equity buffers to meet inevitable losses, and their liabilities had risen to more than 20 times the budget of the Icelandic state. To make matters worse, liabilities were mainly denominated in foreign currency.

With the unprecedented flow of capital to Iceland’s financial sector, banks went on a foolhardy, debt-fuelled spending spree, rapidly snapping up real estate and companies in overseas markets. The Harpa Concert Hall, a mammoth project that was funded by Landsbanki and hyped as Europe’s biggest glass building, now looms as a reminder of Iceland’s excess and the reckless behaviour of its banks. A luxury complex comprising shops and restaurants, which was due to be constructed around the hall, never came to fruition.

Drastic measures
As the banks had become too big to save, the authorities decided to let them fail. “Bailing out the banks in the traditional sense was never an option, therefore no such decision was made,” Johnsen said. Within days, the krona collapsed. Over 80 percent of the Icelandic financial system buckled and almost all businesses on the island were bankrupted. The stock market fell by around 95 percent, interest payments on loans soared to more than 300 percent, over 60 percent of bank assets were written off within a few months after the banks collapsed, and interest rates were hiked up to 18 percent in order to curb inflation rates. In the years that have followed, the Icelandic Government has gradually reduced interest rates, progressively falling to 4.25 percent in 2011 and then impressively falling further to meet the government’s low inflation target.

Although the banks themselves were not being bailed out, the government needed an injection of capital in order to stay afloat. Iceland received a $2.1bn loan from the IMF, as well as $2.5bn from neighbouring countries. With this, the government was able to protect domestic deposits and also keep the currency from devaluing even further. In a testament to its impressive economic growth within such a relatively short timeframe, Iceland began repayments to the IMF earlier than scheduled, beginning in 2012 with 20 percent of the loan. Government officials recently announced that they expect the remainder to be paid before the end of this year.

The financial sector has made substantial reformation efforts by adopting more sustainable models and introducing a more effective regulatory framework. “After the crash, the government cleaned house in all the three banks, establishing new boards and management. Banks in Iceland are well capitalised with high equity levels, and financial supervision has been strengthened immensely,” said Johnsen. There has been success in the improvement of supervisory and macrofinancial stress tests, although more still needs to be done in terms of monitoring and the establishment of financial safety nets. Changes have also been made to safeguard the interests of customers, shareholders and the wider economy. While these legal parameters are relatively weak, they indicate an adjustment in outlook and a shift in how banks operate in order to better serve society.

Fishing boats, Seydisfjordur Harbour. Fish and fishery products remain Iceland’s most profitable exports — Fishing boats in Seydisfjordur harbour. Fish and fishery products remain Iceland’s most profitable exports

During the country’s rehabilitation, a primary necessity was to make the economy more competitive, as well as making wages lower so they fell in line with those of other countries. Rather than drastically cutting pay, which naturally reduces both spending and the ability of citizens to repay their loans, Iceland devalued its currency by around 60 percent, thereby keeping wages at around the same level but making the krona worth less.

Here lies a key advantage of a single currency during times of economic crisis, and a vital step that enabled the country to recover. The nature of the euro, on the other hand, makes it supremely more difficult for countries such as Ireland and Greece to play with this economic parameter, forcing governments instead to resort to more harmful measures in which living conditions for the population are drastically hit and the flow of capital is detrimentally restricted. The result, which has been illustrated by the case of Greece, can cause social unrest, a severe loss of confidence in the incumbent regime and an economic downward spiral that is increasingly difficult to escape from.

Warm results
Iceland has become one of Europe’s top performers in terms of growth – a trend that is set to continue throughout the course of the current financial year, as GDP growth is expected to reach 4.1 percent. This would leave GDP at $17.07bn (see Fig 2). Moreover, unemployment levels have fallen to four percent and inflation has reached the target rate of 2.5 percent (see Fig 3). A number of Iceland’s post-crisis strategies have contributed to this steady progress. Capital controls, for example, provided the price and currency stability needed for economic recovery, which was aided further by debt relief and austerity measures, both in the public and private sectors. According to Johnsen: “A large part of the work of the new banks was to restructure their assets and provide debt relief both to corporates and households alike. Legal disputes had to be settled before the courts, including legal standing of foreign currency linked loans that had been extended during the boom period.”

Furthermore, through the devaluation of the krona, export revenue increased considerably. Fish and fishery products continue to dominate Iceland’s exports, raking in €945m ($1.03bn) in 2013, according to the European Commission. While cod has always been the biggest focus of Iceland’s marine sector, fruitful new opportunities are now being explored, most notably for mackerel, as the fish has recently started swimming in Icelandic waters.

More ardent interest from tourists also began to burgeon as the tiny island gained unprecedented appeal as a cheap travel destination. Tourism has grown by 100 percent since 2006, thus indicating the economic value of an extremely promising stream of revenue for the country. In recognition of this potential, Iceland is transforming: trendy cafes, restaurants and shops now populate cities, taking the place of the bank branches that once lined the streets. The country has also invested in a host of new attractions with which to lure tourists, such as a $2.5m project to tunnel Europe’s second-largest glacier, the Ice Cave. Recent additions to the travel agenda also include the Icelandic Museum of Rock ‘n’ Roll and the country’s first crime fiction festival, Iceland Noir, in 2014. Hiking tours across the country’s volcanic edifices, as well as sailing and skiing adventures, have become extremely popular. And to accommodate the influx of visitors, more hotels are opening in the capital and in areas surrounding slopes and the coast.

Spurring growth
Naturally, there are also downsides to the approach undertaken by Iceland. Despite the overall success, the private sector has suffered, primarily due to the difficulty in acquiring loans, as well as the stifling restrictions of the capital controls. Obtaining mortgages has become particularly troublesome as home loans are ‘indexed’ to inflation rates or foreign currency, while household debt has augmented as a result of the government’s recovery measures.

Despite these drawbacks, in the grand scheme of things, they are secondary to the achievements that Iceland can boast. Its success can be highlighted further by the recent pivotal moment in Iceland’s economic recovery: in June, government officials unveiled their plans to abolish the capital controls that had remained in place since 2008. The move is a vital step in the normalisation of the Icelandic economy and marks the island’s return to the global financial community.

The process will be gradual, and withdrawals are subject to a 39 percent tax in order to prevent the mass exit of capital. Investors have been categorised into three groups: the first are creditors of the three failed banks, mostly comprising hedge funds that had bought bad debt from secondary markets in a desperate attempt to recover their assets. Foreign investors that have assets stuck in Iceland will be the second group permitted to take capital out of the country, followed finally by citizens wishing to invest abroad. These steps are expected to further spur Iceland’s economic growth as both private and public sectors stand to benefit from diversification. Foreign investors will be encouraged to keep their assets in Iceland through various government-led schemes, including “an option for currency, an option for different bonds in different currencies with different maturity dates”, Iceland’s Finance Minister, Bjarni Benediktsson, told Reuters.

Lessons learned
“A myriad of lessons are borne out of the Icelandic story,” said Johnsen. “The most basic one that should be introduced into public policy with relative ease is the importance of equity. Banks need to be funded with equity to a much larger degree, we are starting to see such changes being made across the board at a modest level and bank lending to holding companies needs to be scrutinised much more.” The government has also enforced a policy whereby banks can no longer create the krona when new loans are issued; generating currency thus falls solely in the jurisdiction of the central bank.

Another lesson learned by the crash is the much-needed restriction on bankers’ bonuses and stricter regulations on wage packages. As Johnsen explained, despite a lack of political will, legislation stating that the variable pay of bankers cannot exceed 25 percent of their total pay was implemented soon after the crash. “Many of those bankers who transgressed against the law have been prosecuted and imprisoned, which certainly helps maintain the right incentives within the system. White-collar crime does not always pay off in Iceland,” Johnsen explained.

So much can be learned from Iceland’s highly impressive and unexpected turnaround – as such, this tiny glacial island has a lot to teach the rest of Europe, and in fact the world. The country became victim to a vicious financial trap, one which saw it become the pinnacle of wealth and status within the international community. Because of this, it is understandable for the sins of excess and greed to take over – after all, they have for so many other countries in similar situations.

The difference with the case of Iceland is that once it dipped to its lowest point, it had the freedom to start again from scratch. Of course, using the word ‘freedom’ to describe Iceland’s predicament in 2008 may seem peculiar, but that is essentially what its dire situation facilitated. The country’s government did what others would avoid at any cost, even at the anger and outright desperation of their citizenry: it let its banks fail. As shocking at it seemed, it was the best move that the Icelandic authorities could have made. This decision allowed the country to lay new foundations, implement a new framework and revert back to the strengths of the economy prior to its foray into international finance.

Iceland is now growing at one of the fastest rates in Europe and is even paying back its enormous loans early – a tremendously impressive feat and one that could never have been imagined not so long ago. Along with the individual lessons that can be taken from the Icelandic example, perhaps the most important and over-reaching is to not follow the standard protocol for escaping national debt and economic crises – these methods clearly do not work, as is perfectly illustrated by Greece at present, as well as the debt-shackled economies of post-colonial Africa. Iceland made its own success – of course, with some help from its neighbours and the ever-present IMF – but it managed to save itself from economic self-destruction and carve a positive future by doing things its own way and, ultimately, proving everyone wrong.

A woman hiking beside one of Iceland’s iconic lakes. Hiking, sailing and other activities have seen tourism grow by 100 percent in the country since 2006

Berlin puts the brakes on rapidly rising rent

Posted on September 15, 2015 by Ashton Wenborn

The fall of the Berlin Wall on November 9 1989 coincided with the collapse of East-German industry. The event left most of the city’s commercial buildings vacant and helped to drive down residential rent prices in the area along with it. Some 26 years later and this combination has helped transform the German capital into not only one of the trendiest cities in Europe, but one of the most tech-savvy, with many of the world’s brightest, young minds opting to create the next big thing in Berlin.

Like London and New York, Berlin is ridding itself of dilapidated urban sprawls, reinvigorating areas and helping to drive up demand, which increases the overall value of property in these cities. In fact, according to a report published by Jones Lang LaSalle earlier this year, demand for housing in the capital has grown so much that it has exceeded supply.

Berlin is ridding itself of dilapidated urban sprawls, reinvigorating areas and helping to drive up demand

“Since 2010, the stock of residential space in Berlin has risen by 0.8 percent or 15,500 residential units”, writes the report’s author and principal consultant at Jones Lang LaSalle, Juilus Stinauer. “Compared to the rise in population of almost 150,000 people over the same period…” This has helped push rental prices through the roof in Berlin, with new leases reaching as high as €8.95/sqm on average during the first half of 2014, which according to the Stinauer, represents a rise of more than 9.1 percent compared to the same period a year ago – prompting politicians to take action.

Enough is enough
In an effort to stem the rapid rise in rental prices, the Bundestag passed the rental price brake law or mietpreisbremse, as it is known in Germany and, which took effect in Berlin on June 1. The new law prohibits landlords from charging new tenants more than 10 percent over the local average.

Immobilienscout24 examined that the rents in Berlin first decreased by three percent in June, which is great news in a city where, over the last year and a half, rents have risen by an average of 0.3 percent per month. However, there are those that believe it is too soon to start attributing any decrease in rental price solely down to the new rent laws.

“We assume that it is too early to draw firm conclusions about the rent laws that have only been in force for a short time”, said Wibke Werner, Associate of Management for the Berlin Tenants’ Association. “The average rent amounted to €8.53/sqm during [Immobilenscout24’s] investigation. That’s more than 10 [percent] above the average local comparative rent in Berlin (€5.93/sqm). Only the coming months will show the effect of the rent laws.”

While the mietpreisbremse seems a positive step for renters in the city, there is still a lot more that needs to be done in order to stop rental prices spiralling out of control. Members of Berlin’s Tenants’ Association stress the importance of not just building new homes, but affordable ones too. Also, what it’s likely to do to the lending side of the market is yet to be known.

“Affordable housing must occur in order to supply the majority of the population with housing”, said Werner. “In addition to that, existing affordable housing must be protected. In social housing, the rent levels must be limited and will only be rented to tenants with low incomes.”

A pro-rent economy
Germany has a long history of being very pro-tenant. It is a country where the vast majority of people rent, rather than own the property they live in – making politicians more likely to listen to them. The strength of the rent culture in cities like Berlin has led to the adoption of some powerful legislation. Existing laws allow tenants to stay in the same residence, under the same contract, for many years, meaning that rent rises are often small and are only substantial if tenants decide to move.

“In the past, the rents were in new lease agreements 30 to 40 percent above the local comparative rent”, explained Werner, but even this trend seems likely to end as a result of the mietpreisbremse law.

Millennials opt for digitally savvy banks

Posted on September 15, 2015April 9, 2018 by Ashton Wenborn

The banking industry has undergone a quite extraordinary transformation in recent years, and the changed consumption patterns coupled with rapid technological advances have asked that the industry rethink traditional operating models if they’re to survive. As a result, banking applications have become a fixture of the modern banking industry, and, with this, technology firms have chipped away at the old guard. Long gone are the days when applications were seen as an afterthought, and recent studies serve to illustrate, increasingly so in fact, that they are a key point of differentiation when it comes to bringing millennials onboard.

Deciphering feedback
Going by the results of a recent SNL Financial survey, the majority of respondents said that they’d be willing to switch accounts based on which bank had the better app. Of the 4,371 respondents, 54 percent attested to having done so already, whereas 53 percent of the same sample said that their app was lacking. Asked whether they would pay $3 a month to use their mobile banking app, 76 percent answered ‘no’, although the responses varied significantly depending on the age of the person in question, with opinions split between boomers, generation X and millennials.

Going by the results of a recent SNL Financial survey, the majority of respondents said that they’d be willing to switch accounts based on which bank had the better app

The key takeaway was that younger consumers, more than any other cohort, believed banking apps to be among the most important factors when arriving at an account, and banks in the here and now must respond accordingly if they’re to stand up to non-traditional competitors.

SNL’s John Fisher wrote in the survey, “Smartphone users willing to jump ship for a better app in general, according to our survey data, tend to be younger, live on the coasts and be far more likely than the overall survey population to pay $3 per month to use their banking app.” Further to the findings, Fico statistics show that 90 percent of American consumers regularly use a smartphone, whereas 63 percent do much the same for their tablets, as opposed to 38 and 30 percent for boomers. With this, internet banking and – more pertinently perhaps – mobile banking are fast becoming the preferred points of contact for consumers, and app usage looks only to continue on upwards in the years ahead.

Stifled mostly by security concerns in years past, banking apps are clearly a key point of differentiation, and 26 percent of the SNL sample attested to having already switched accounts in the past year based on banking app inadequacies. Millennials and the rise of the connected consumer will dictate the rate and direction of change in the near future, and what’s imperative for banks is that they hone their focus on app development in the here and now if they’re to feature in this hyper competitive digital marketplace.

Jumping ship
The need to develop an accessible and flexible app that also holds up to security concerns is important, though so to is the threat posed by technology companies, whose superior technological understanding means that banks are struggling to compete. FinTech firms, for instance, are beginning to challenge leading names, and the likes of TransferWise, Funding Circle, Kabbage and others mean that the expectations are greater and the criticisms harsher.

Unlike previous generations, millennials feel little in the way of loyalty towards any bank, and tend not to shy away from switching accounts should another show itself to be superior. The Millennial Disruption Index, for example, commissioned by Viacom media networks, shows that a third of the segment are open to switching within a 90 day period. Banks therefore, particularly those in retail, can ill afford to rest on their reputations, and must compete with technology companies, for whom integrating new technology with age old systems is not an issue.

With customer numbers dwindling and margins under pressure, the challenge mounted by technology companies leaves those without serious technological know-how serious cause for concern. Worrying as it is, few are of the opinion that technology companies will inherit banking’s slice of the pie. Rather, the responsibility lies with banks to take note of the ways in which dedicated apps have better served consumers, and, what’s more, to incorporate these advances into their own operations.

The success or failure of any bank in the near future will be dictated in large part by their ability to bring millennials on board, and a focus on digital presence should serve to stave off the competition from elsewhere. Already a fixture of the banking landscape, expect to see apps play a far bigger part in this picture.

The who’s who of the American presidential election

Posted on September 15, 2015 by Ashton Wenborn

After eight years of a financially hamstrung presidency from Barack Obama, America is getting ready to go to the polls once again in 2016. But whereas elections in most countries tend to take a matter of weeks, the race to choose the next President of the United States usually takes the best part of two years. Candidates from both main parties – and occasionally the odd independent – jostle for attention well in advance of the actual vote, competing for airtime and campaign finances.

The two-year race to secure the position of leader of the free world involves exhaustive tours of the country, speeches, handshaking, and pleading for vital financing. Indeed, most successful campaigns require hundreds of millions in backing from donors. In 2012, the total amount of donations made were $2.6bn, but it’s thought that next year’s will almost double that figure, as the richest members of American society place their bets on their preferred candidates. While the field of candidates from the Democrats is relatively thin, the Republicans are putting forward around 20 different candidates from every branch of the party. These include a number of previous runners, such as Mike Huckabee, and previously touted ones whose popularity has waned, like Ted Cruz, but few of them have much of a chance of gaining the party’s nomination.

Here, World Finance highlights the leading contenders for both the Republican and Democrat nominations for next year’s crucial presidential election, and looks at what they would do to restore the US economy to its former glory.

Hillary Clinton

The frontrunner and by far and away the most recognisable Democrat candidate in the race, Hillary Clinton’s presidential ambitions have been well known for decades. She had to take a backseat during the career of her husband, former President Bill Clinton, but has spent the last 15 years since he stepped down carving out her own career as a leading Democratic politician.

A former senator of New York State, her stint as Secretary of State during President Obama’s first term in office was praised, especially as she chose to serve under the man that had ultimately defeated her during the 2008 presidential election. Her time in charge was filled with incident, not least the uprisings in Egypt, Syria and Libya, and Osama bin Laden’s death.

Her policies include backing climate change targets, although she did initially support the Keystone XL pipeline that President Obama eventually blocked.

She has proposed a major rewriting of the tax code, while fighting income inequality through equal pay for women and paid family leave. Another eye-catching policy announcement made in August was her proposal for the federal government to help students go through college without the need for large loans. Currently there is $1.2trn of student debt in the US, with eight million graduates defaulting on those loans.

However, she has been beset by a number of unfortunate scandals in recent months, mostly linked to her time in office as Secretary of State. This included the discovery in July that she had been sending classified government information from a personal email account.

Her strong corporate links to banks and long career on Capitol Hill have somewhat hindered her ability to reach out to those elusive everyday Americans. Indeed, at the end of July, The Wall Street Journal revealed that her charitable organisation, the Clinton Foundation, that she set up with her husband, had received millions of dollars in donations from Swiss bank UBS. Eyebrows were then raised after she had intervened over an Internal Revenue Service court case against the Swiss bank over the identity of some of its clients.

It remains to be seen whether Clinton can continue to sit by over the coming months as the solitary credible Democrat candidate without buckling under the pressure of prolonged media scrutiny.

Bernie Sanders

While many expected Hillary Clinton to have a free run at the Democratic nomination, it fell to the veteran left wing junior senator from Vermont, Bernie Sanders, to prevent there being a Clinton coronation. Sanders has been flirting with the idea of running for President since 2013, but formally announced the start of his campaign in April. Although he is broadly aligned with many of the Democrat Party’s values, he has served as an independent senator for much of his political career.

Sanders is seen by many as the figurehead of a populist, radical left wing of the political spectrum that has had little representation in US politics for many years. The focus of his campaign has been towards income and wealth inequality, as well as campaign finance reform, and he is a staunch opponent of economic austerity. It is these efforts that have placed Sanders firmly as the outsider candidate, untainted by Washington’s apparent close links with big business and the wealthy.

His candidacy has captured the attention of disgruntled young voters in a similar way to the populist left wing campaigns that have swept Europe over the last year, from Syriza in Greece, Podemos in Spain, and to a lesser extent, Jeremy Corbyn for the UK’s Labour Party.

Indeed, Sanders enthusiastically backed Greek voters in July after their rejection of a bailout package, saying, “I applaud the people of Greece for saying ‘no’ to more austerity for the poor, the children, the sick and the elderly. In a world of massive wealth and income inequality, Europe must support Greece’s efforts to build an economy which creates more jobs and income, not more unemployment and suffering.”

Sanders has said he would scrap tax deductions that benefit hedge funds and corporations, break up banks previously deemed ‘too big to fail’, oppose the Trans-Pacific Partnership trade agreement, and increase the use of worker-owned cooperatives. He would also target offshore tax havens, which he says have allowed large corporations to evade at least $34.5bn in tax since 2008. It is this radical message that has drawn huge crowds to his rallies. It seems unlikely, however, that the political mainstream in Washington will accept him over the more pragmatic Clinton.

Jeb Bush

Like Clinton, Jeb Bush has a highly recognisable surname that gives him the sort of platform that would usually be hugely advantageous. His father, George H W Bush, was a single term president that was widely seen as pragmatic – if uncharismatic – leader that came undone due to a recession and the leftfield upstart candidacy of Bill Clinton in 1992. However, it is the rein of Jeb’s seemingly calamitous older brother George W Bush that has considerably tainted the Bush name.

Seen by many as the most credible, centrist and pragmatic Republican candidate that’s running; Jeb Bush has years of experience in public administration, having served as Governor of Florida between 1999 and 2007. He has been reluctant to pander to the more extreme wings of his party, which some feel has hampered his bid. However, Bush’s experience and recognition that the country as a whole is not made up entirely of Tea Party supporters means he is probably the most credible candidate in the field. This has been reflected in the enthusiasm his campaign has seen from donors.

Bush’s big policy statement has been to turn the US back into an “economic superpower”, with a target of four percent GDP growth each year and the creation of 19 million new jobs. He cites his record as Florida governor, where he made it the top job-creating state in the country.

GDP in the US has languished in recent years, sitting at just 2.9 percent in 2014, while only 6.9 million jobs have been added during Obama’s tenure. Bush’s goals are ambitious, but not unrealistic. He is hoping to achieve this growth through a streamlining of the tax system, as well as relaxing a number of regulations.

It is his brother’s legacy that will likely hamstring him, however. He has flip flopped over the Iraq War that his brother began, eventually stating in May that he wouldn’t have gone into Iraq given the benefit of hindsight. However, the universal ridicule and hatred for George W Bush’s presidency is likely to seriously dent Jeb’s chances of persuading the electorate to give the Bush family a third chance to run the country.

Donald Trump

While many initially saw Donald Trump as somewhat of a joke candidate, his runaway poll ratings have made people sit up and listen to his frequently controversial statements. His views on immigration have been condemned as offensive, while his statements on foreign policy – such as Ukraine being “Europe’s problem” – have made many in the international community look on apprehensively at the prospect of a Trump presidency.

Democratic candidate donors for the 2012 presidential race: Barack Obama

Candidate donors USD, $2,500 maximum:

Under $200

57%

$200 to $2,499

33%

$2500

11%

Super pac donors, no maximum:

Under $100k

11%

$100k to $1m

40%

$1m+

49%

Major donors:

James H Simons

$5.5M

Fred Eychaner

$4.5M

Steve Mostyn

$3M

Trump’s entrance into the race and soaring popularity in opinion polls has had an unfortunate effect on many of the other candidates. Indeed, his increasingly outlandish and controversial statements on immigration and foreign policy have caused many of the other previously more moderate candidates to try and outdo him.

Mike Huckabee was widely condemned for suggesting Obama’s deal with Iran would “take the Israelis and march them to the door of the oven”.

While Huckabee is certainly not one of the moderate candidates in the Republican Party, his statement was put down to the ‘Trump Effect’ by many commentators, who felt he was trying to grab some of the attention.

Much of the media spotlight has focused on Trump’s immigration policies and badmouthing illegal Mexican immigrants, going as far as describing them “criminals, drug dealers, [and] rapists”. However, his plans for the economy also warrant scrutiny. He wants to heavily reduce regulations on business to create growth and job opportunities. His simplified ‘1-5-10-15’ income tax plan would see inheritance and corporation tax scrapped, while also lowering the capital gains tax. He is also in favour of a free market energy policy. His strategy with healthcare would be to scrap the recently implemented Affordable Care Act with a free market plan.

With regards to America’s influence overseas, Trump has described Obama’s deal with Iran as “terrible”, while he would also “bomb the hell” out of Iraqi oil fields controlled by ISIS, resisting sending any troops into the region. Combined with his pronouncements on illegal immigration, Trump has proven to be an extremely controversial candidate that is repelling many of the more centrist voters the Republicans need to win. However, as things stand, he is defying all the experts and running away in the opinion polls among Republican supporters.

Rise of the democratic candidates

Joe Biden
The avuncular counterpoint to President Obama’s intellectual persona, Vice President Joe Biden has often been seen as somewhat gaffe-prone during his two terms in office. However, beneath the jokey exterior is a man with vast experience of the ins and outs of Washington, having served as the US Senator for the state of Delaware between 1973 and 2009.

The 72-year-old’s potential candidacy has come as a particular surprise to many, partly because of his age. However, after the death of his son Beau in May from brain cancer at the age of 46, Biden is said to be considering a dying plea to run for the White House. While some might question his credibility as a candidate – having failed twice previously in 1988 and 2008 and being linked to the divisive Obama – many think Biden could be a popular alternative to Clinton. It’s thought the focus of his campaign would be addressing inequality and low wages.Elizabeth Warren

Another Democrat candidate from the left of the party, Elizabeth Warren has apparently been toying with the idea of a bid for the presidency for a number of years. Despite repeated denials that she would run, her supporters have been begging her to throw her hat in the ring for a while, largely because of her stance on big business, Wall Street reform, and inequality.

A big theme of her outlook on the economy is the lack of infrastructure spending made by the US government, which spends just 2.4 percent of its GDP on big growth-driving projects, compared to around five percent in Europe and nine percent in China.

Republican candidate donors for the 2012 presidential race: Mitt Romney

Candidate donors USD, $2,500 maximum:

Under $200

24%

$200 to $2,499

37%

$2500

39%

Super pac donors, no maximum:

Under $100k

14%

$100k to $1m

44%

$1m+

42%

Major donors:

Sheldon Adelson

$15m

Miriam Adelson

$15m

Bob J Perry

$10m

A big proponent of breaking up the banks to prevent another situation like 2008’s financial crisis, Warren has also been a strong critic of the relationship between Wall Street and Washington, and in particular Citigroup’s influence on Capitol Hill.

The rest of the Republican candidates

Chris Christie
At one stage seen as the sort of bipartisan figure that could provide a serious challenger to Clinton, Chris Christie’s campaign has faltered as a result of some unfortunate scandals to emerge that went against his jovial and relaxed public image. These have included a debt-rating downgrade and some petty political actions over the closure of a bridge.

New Jersey Governor Christie came to prominence in 2012 after Hurricane Sandy devastated his state. Praised for taking a non-partisan approach to his response, he welcomed President Obama’s efforts while going as far as criticising the House Republican leadership for its delaying of an emergency relief bill, worth $60bn.

Despite his fall in media profile over the last 12 months, many donors are still pumping money into his campaign, suggesting he may still be in with a chance.

Marco Rubio
Widely talked of as the Republican Party’s answer to its critics that it lacks diversity, Marco Rubio would represent a break from the party’s past, having been born to Cuban immigrant parents. The 44-year-old junior Senator from Florida was touted as a potential running partner for Mitt Romney in 2012, but ultimately turned down the offer.

He is regarded as a charismatic and relatively moderate on immigration. His economic policies have centred on balancing the federal budget, while also investing heavily in R&D to help spur growth, citing the tech industry as central to the country’s future prospects. He is also in favour of a flat rate of tax. A relatively pragmatic candidate, Rubio would look to encourage business to power America’s economy by lowering the corporate tax rate to 25 percent, capping federal regulation costs, and allowing businesses to bring back overseas revenue to the US without being taxed.

Rand Paul
A relative outsider in the Republican Party, but yet another candidate with a famous surname and plenty of political pedigree, Rand Paul is the figurehead of the libertarian wing of his party. Like his father and perennial presidential candidate, Ron Paul, Rand believes the government should be far less invasive in people’s lives, both at home and abroad.

His economic policies involve simplifying the tax code dramatically, implementing a 14.5 percent flat rate of tax to all Americans. Business regulations would be scaled back considerably, while government spending would also be axed. His stance on foreign policy is at odds with his party, taking an isolationist view that would see the US not intervening in many overseas conflicts. Although not considered to be a likely winner, he is continuing the work of his father in promoting libertarian views in the political debate.

Scott Walker
Having announced his candidacy in July, Wisconsin Governor Scott Walker has been talked of as a likely Republican president for a number of years now. He has been discussed as a frontrunner for the Republican nomination, largely because of his down to earth style that has appealed to many Republicans. His successful leadership of Wisconsin has been praised, although he has found it hard to boost the state’s economy and increase employment.

His vision for the economy is one where Americans are less reliant on government and more on their own actions. He also wants to balance budgets, but is not as dedicated to ideological cuts as some of his rivals. He has also been a strong supporter of the oil and gas industries, backing the Keystone XL pipeline and opposing climate change legislation that would raise taxes. He is hoping that when Republicans vote on their candidate for the presidency, they will choose pragmatism over populism.