Year: 2015

Economics professor becomes Greek IMF representative

Posted on by Ashton Wenborn

The appointment, which will come into effect as of June 29, comes as relations between the Greek government and European lenders deteriorate – with an agreement on conditions for unlocking a much needed bailout fund worth €7.2bn failing to materialise.

European Commission president, Jean-Claude Juncker, has recently suggested the Syriza party misled voters, while Greek prime minister Alexander Tsipras accused the IMF of “criminal responsibility” for the role it has played in the debt crisis. According to analysts at BNP Paribas, the country is “staring down the barrel at default.”

The background of Psalidopoulo is not unique

Michalis Psalidopoulo is an economics professor at the University of Athens, and served as a professor at Tufts University in Massachusetts, US between 2010 and 2014. He was nominated after a previous appointee turned down the role following a backlash from the anti-austerity party.

The former professor’s appointment, despite his training and career as an economist, is unlikely to see a deal reached between Greece and European politicians. The background of Psalidopoulo is not unique, with a number of Syriza politicians having also previously served as economists at universities around the world. The Greek finance minister, Yanis Varoufakis, previously lectured at the University of Texas, Austin, while the influential Syriza MP Costas Lapavitsas taught at the SOAS, University of London for many years. Further, according to Reuters, Psalidopoulo’s appointment came as a proposal from the finance minister. Varoufakis, known for his flippant statements and uncompromising character, is perhaps the most reviled of all Greek officials by EU lenders.

Renewables could overtake coal in 15 years, says IEA

Posted on by Ashton Wenborn

With pressure mounting on countries to agree to new climate change targets, there now seems to be a concerted effort to back renewable energy over traditional fossil fuel-based sources, according to the International Energy Agency (IEA). If a deal is agreed this year, then the IEA predicts that renewables – led by solar power – could overtake coal, gas and nuclear power as the world’s main source of electricity.

Solar could account for as much as a third of global power generation by 2030

Solar power has been growing in use for the last couple of years, after a troubled period where much-touted companies collapsed and government subsidies in the US and Europe were cut. It is now seen as a commercially viable source of power, with China heavily backing the technology and bringing down costs as a result. According to the IEA, solar could account for as much as a third of global power generation by 2030, which would be up from the fifth of market share it has currently.

The IEA’s Energy and Climate Change report also highlighted how coal will likely remain a key component of the global energy mix in 2030, but would have slightly reduced its dominance. However, the report also calls for governments to phase out fossil fuel subsidies by 2030 in an effort to reduce the reliance of countries on polluting fuels.

The UN is pushing for stringent emissions targets to be agreed at a conference in Paris in December, and it is thought that most countries are keen to sign up to tougher goals. Previously, many states have been reluctant to meet targets that might have affected their economic development.

Maria van der Hoeven, the IEA’s Executive Director, said in the report that “time is of the essence” if the world was to mitigate the effects of greenhouse-gas emissions. “It is clear that the energy sector must play a critical role if efforts to reduce emissions are to succeed. While we see growing consensus among countries that it is time to act, we must ensure that the steps taken are adequate and that the commitments made are kept.”

The last year has seen a dramatic shift in the global energy market, with plunging oil prices exacerbated by an increase in production by the Saudi Arabia-led Organisation of the Petroleum Exporting Countries (OPEC). As discussed in the latest issue of The New Economy, the are fears in Saudi Arabia that the rise of renewable energy means that it makes more sense to get produce as much oil as possible now, before it is no longer of any value.

Rio Tinto scraps support for uranium mine

Posted on by Ashton Wenborn

The challenging period the nuclear industry has faced since 2011’s Fukushima disaster has continued with the news that Rio Tinto, one of the world’s largest mining companies, was pulling out of a proposed expansion of an Australian uranium mine. The news sent shares in Rio Tinto’s subsidiary, Energy Resources of Australia (ERA), tumbling to nearly half of what they were at the start of the day.

The [nuclear] industry has seen a steady decline over the last few years

The industry has seen a steady decline over the last few years, accelerated by the disaster that struck Japan’s nuclear power plants after a devastating tsunami struck the country. Uranium prices peaked in 2007 at $137 per pound, before collapsing to today’s value of just $35 per pound, according to the FT.

ERA’s operations in Australia were previously centred around the Ranger mine in the north of the country, but having exhausted resources there, the company was looking to develop another mine, Ranger 3 Deeps, nearby. However, in light of the collapse in price, ERA, which is 68 percent owned by Rio Tinto, has withdrawn its plans.

Announcing the news, Rio Tinto said that a feasibility study had shown it would not make economic sense. “”After careful consideration, Rio Tinto has determined that it does not support any further study or the future development of Ranger 3 Deeps due to the project’s economic challenges.”

The news also led to Rio Tinto warning investors that it might be forced to write off as much as $300m of ERA’s value. “Rio Tinto is engaged with ERA on a conditional credit facility to assist ERA to fund its rehabilitation program, should additional funding be required beyond ERA’s existing cash reserves and the future earnings from processing ore stockpiles.”

Default looks increasingly likely for ‘gambling’ Greece

Posted on by Ashton Wenborn

Greek authorities have failed to secure a cash-for-reforms deal with the IMF, following the dramatic walk-out of the fund’s lead negotiators during discussions on June 11. The country’s prime minister Alexis Tsipras would not concede on any reforms proposed by the EU, such as higher value-added tax, which resulted in the negotiations reaching an impasse.

“There are major differences between us in most key areas,” IMF spokesman Gerry Rice is reported as saying. “There has been no progress in narrowing these differences recently and thus we are well away from an agreement.”

European Council President, Donald Tusk, has spoken out against the tactics maintained
by Greece

European Council President, Donald Tusk, has spoken out against the tactics maintained by Greece, warning that there is no longer any time left for “gambling”. It appears that Tusk has abandoned the neutral stance he has maintained through the painstaking discussions, thereby indicating the mounting likelihood that an ultimatum will be given to the incumbent Greek government.

Yet, while the left-leaning Syriza government still fights to unlock funds, which would enable it to make repayments, Tsipras refuses to further enhance austerity measures and make more concessions on areas such as pension benefits. However, time is running out to reach a new deal with the IMF as the upcoming bundle debt repayment of €1.6bn is due at the end of the month. The Greek government is hopeful that a deal can be brokered at the next meeting of Eurozone leaders, which takes place on June 18. But while Tsipras sustains what some may argue is blind optimism, Angela Merkel’s inner circle has begun preparing for a Greek default, including drafting capital controls for Greek banking customers and a debt haircut.

As the stalemate with both the Eurozone leaders and the IMF reaches new levels of intractability, the chance of Greece defaulting grows stronger, which would lead to the unavoidable abandonment of the Euro. The consequences of which is likely to set the country on an even steeper economic downturn than it is currently inflicted with. An economic backlash from a “Grexit” could also send ripples through the rest of the Eurozone.

“Whatever we do, whatever measure we take, no matter what we do, if we don’t start addressing the debt issue, there is no chance that the Greece economy kickstarts,” Greek state minister, Alekos Flabouraris, said in a statement following the walk out of the IMF. “And if the Greek economy doesn’t kickstart, we cannot deal with unemployment, shops will close down.”

Although the Greek population has already suffered through a prolonged period of harrowing austerity measures, sadly, the end to the hardship faced by individuals is not yet in sight. The government has little choice but to buckle to the demands of its debtors, for if it does not, an even greater economic catastrophe for Greece could be round the corner.

South Korea cuts interest rate to historic low

Posted on by Ashton Wenborn

South Korea’s central bank responded to the worsening MERS virus on June 11 by slashing its key interest rate to a historic low. With exports having taken a hit and household debt rising, the quarter of a percentage point cut should serve to mitigate, at least in part, the economic fallout.

Korean exports are down almost 11 percent on the year previous

The move marks the second time the central bank has slashed its key interest rate this year, and the fourth in under a year. The latest has come more in response to the recent MERS virus outbreak than anything else, and the announcement coincided with a reported 14 new cases. “We decided to cut rates today in a pre-emptive move to contain the economic fallout from MERS,” said the bank’s Governor Lee Ju-yeol at a media briefing.

The MERS virus, or Middle East Respiratory Syndrome, emerged in the Middle East in 2012, and has since reached 122 in South Korea, the largest number of infections outside of Saudi Arabia. Over 2,400 schools and kindergartens have been shut as a result, and thousands of travellers have chosen not to visit the country, for fear of contagion. The death rate currently stands at little under 40 percent, and there is as yet no vaccine to stop the spread.

The dip in exports is a worrying sign for a country that is still in large part dependent on them, and one that ranks currently as the seventh largest worldwide. Looking at the latest figures, Korean exports are down almost 11 percent on the year previous, representing the greatest year-on-year contraction since the height of the crisis in August 2009.

Rousseff unveils $64bn infrastructure plan

Posted on by Ashton Wenborn

In a desperate bid to boost Brazil’s flagging economy, re-elected president Dilma Rousseff has announced an infrastructure package that will cost around $64bn. While the majority of this figure encompasses new projects, it does also include planned investment into existing infrastructure.

“This program is a way to a better future. Like every major logistical investment, it will affect every area of the economy: agriculture, industries, services, and most of all, it will affect the lives of the Brazilian people,” Rousseff said during her speech at the opening ceremony of the Investment Programme in Logistics on June 9.

Economists often point to Brazil’s inadequate infrastructure as being a principle hindrance to the country’s recent disappointing growth

Brazil’s planning minister, Nelson Barbosa, who presented the strategy alongside the president, highlighted the severe strain facing the country’s infrastructure due to an expansion in activities in recent years, such as grain production doubling and the volume of road vehicles trebling since 2000.

The plan that was outlined in a speech includes $2.7bn for four large airports, a 7,000km road network costing $21,3bn, $12.1bn for ports and $27.9bn for railways. A third of the programme is due to be carried out by 2018 – the last year of Rouseff’s presidency.

Another prong to the strategy to bolster the struggling economy comes via the private sector as it was announced that private firms would be commissioned to build and operate Brazil’s new transportation infrastructure. This move is in stark opposition to the previous tendency of actively suppressing tariffs and profits for organisations that won such contracts, which had long discouraged investors. The gesture may therefore signify a pivotal change in the incumbent government, which has been often criticised for its unfriendly market approach. Prompting the labour market, together with market confidence, are also hoped as by-products of the $64bn programme.

However, although the intended inclusion of the private sector indicates a flourish of activity in Brazil’s industrial sectors, the government has yet to find partners for the various projects. In addition, there is a level of scepticism present regarding the completion of these ambitious plans, particularly as the last time an infrastructure programme was announced in 2012, only a fraction of the ventures pledged actually came to fruition.

Economists often point to Brazil’s inadequate infrastructure as being a principle hindrance to the country’s recent disappointing growth. Currently, exports of goods, such as soya beans, coffee, sugar, oil and iron ore, are not at their full potential due to the state’s poor transportation network, improving it is therefore vital in boosting Brazil’s economy. Increasing exports is as another key economic driver that can reverse the economic downward spiral inflicting the country – and was also mentioned during Rousseff’s speech as receiving special focus during her last term as president.

Malaysia Airlines to ‘become new company’

Posted on by Ashton Wenborn

Following the tragic events of 2014 that saw two Malaysia Airlines passenger jets crash, the company has announced that it is to completely restructure itself on order emerge from a state of ‘paralysis’.

Mueller said that morale at the firm has been extremely low over the last 12 months

Christoph Mueller, the man hired at the end of last year to oversee the restructuring, revealed this week that there would likely be around 6,000 job losses at the new company, although claimed the transition would be done in “an orderly process”. He added that because of the troubles of last year – where flights MH370 and MH17 were shot down over Ukraine and went missing over the Indian Ocean, respectively – the company was now “technically bankrupt.”

The airline’s new CEO formally started work at the beginning of May. In an interview with CNN on Monday, Mueller said that morale at the firm has been extremely low over the last 12 months. “Everything was happening a little bit in slow motion…and that’s the reason why it’s important that we work on the morale. The fighting spirit has suffered.”

While the airline has yet to decide whether it would fully rebrand itself under a new name, Mueller says that the company had deep-seated problems that extended well beyond last year’s tragic plane incidents. Strong competition in Asia and soaring costs meant that considerable losses had hit since 2008, amounting to around $1.8bn. Mueller added to CNN that the restructuring was therefore long overdue, “That has been mushrooming over the years, so we have to reset the system.”

MSCI releases market classification review

Posted on by Ashton Wenborn

The Morgan Stanley Capital Index has released its MSCI 2015 Market Classification Review, which determines the inclusion of each country into the MSCI indexes and which market category it should occupy.

[I]nvestor concerns were cited as the reason for the continued exclusion of China [from the Emerging Market Index]

The research firm provides a series of indexes to measure the performance of stock markets around the world. It divides countries into different market categories, such as the World Index, which is composed of 23 developed economies, the Emerging Market Index and the Frontier Market Index. The total market capitalisation of each country’s listed companies are aggregated and then added to that of the rest of its peer group to work out a global benchmark. These benchmarks are used as a base by exchange-traded funds and as a means for comparison by managed mutual funds.

This year’s review was widely expected to announce that China’s A-shares would be included in the Emerging Market Index. However, according to the MSCI, “China A‐shares will remain on the 2016 review list for potential inclusion into Emerging Markets.” Chinese companies based in Hong Kong are already included, but Chinese A Shares, those listed domestically, have a number of restrictions upon purchase by foreigners.

While the MSCI praised Chinese stock regulators for their liberalisation efforts, investor concerns were cited as the reason for the continued exclusion of China. Investors, the report notes, were still apprehensive about China’s quota allocation process, restrictions on capital mobility and repatriation, as well as beneficial ownership of investments. MSCI is working with Chinese financial authorities and says that the country will be included once these concerns are adequately addressed.

Pakistan may see itself promoted from the Frontier Market Index to the Emerging Market Index, with the report noting that it has been added to the review list of 2016 Annual Market Classification Review. Pakistan’s stock market has seen a number of positive developments that satisfied the MSCI’s accessibility criteria and increased liquidity.

The report also recognises Saudi Arabia’s recent opening up of its stock market to foreign investment, noting that a standalone index of the Saudi stock market has been compiled, using its Emerging Markets Index methodology. However, the MSCI will first “monitor the effectiveness of the opening of the market and gather feedback from international investors,” before considering the country’s inclusion in the index.