Author: Max Tomlin

Santander rescues Banco Popular from collapse

Posted on by Max Tomlin

On June 7, Santander bought Spanish competitor Banco Popular for €1 ($1.12), saving the bank from the brink of collapse. The buyout was triggered by an announcement from the European Central Bank (ECB), which revealed Popular’s dwindling funds meant it was “likely to fail”. Santander has said it plans to raise €7bn ($7.89bn) to cover Popular’s capital shortfall.

ECB said in statement: “The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debt or other liabilities as they fell due.”

Popular’s market value has halved after a series of large banks dropped out of an auction to purchase the institution last week

Popular has continued to struggle with bad debt on real estate loans since the Spanish housing crash, triggered by the global financial crisis in 2008. In February, the bank posted a record €3.5bn ($3.94bn) loss, owing partly to its real estate debts and restructuring costs. Weeks after posting the loss, newly-appointed Chairman Emilio Saracho announced plans to rein in the bank’s debts by selling assets and issuing more shares to raise capital. The market has proved unresponsive to his efforts, however.

Popular’s situation has rapidly deteriorated in the last few days, with its market value halving after a series of large banks dropped out of an auction to purchase the institution last week. Santander, Spain’s largest bank by assets, had been working on an offer to buy the bank but stipulated the deal would be subject to generating a return on investment within three years.

In an interview with Bloomberg TV, Santander’s Chairman, Ana Botin, said she felt “no pressure” from regulators to rescue Popular, adding the acquisition would not affect the bank’s financial targets over the next few years, and Popular was expected to become profitable by 2019.

Political instability sends South Africa into recession for the second time in eight years

Posted on by Max Tomlin

After an unexpectedly poor first quarter, South Africa has officially entered recession, with economic growth contracting by 0.7 percent. Led by weak results in manufacturing and trade, the downturn follows a 0.3 percent decline in GDP in the final quarter of 2016.

The contraction marks the second time South Africa has slipped into recession in the past eight years, raising concerns over the nation’s deep-seated obstacles to economic growth. Unemployment has risen to its highest level since 2003, while stagnant wages and political instability have damaged business’ confidence in the South African economy. While the nation posted impressive growth prior to 2009, the recession and subsequent decline in consumer spending has seen growth slow to a modest level in recent years.

The dismissal of Finance Minister Pravin Gordhan led to a five percent plunge in the value of the rand and prompted credit agencies to downgrade South Africa’s credit rating to junk status

Agriculture and mining were the only two sectors to avoid contracting in the first quarter, with this unexpectedly negative result increasing pressure on President Jacob Zuma to address the nation’s mounting economic turmoil. Earlier this year, Zuma fired the nation’s respected Finance Minister, Pravin Gordhan, who had been committed to eradicating corruption and keeping government spending to a minimum. Gordhan’s dismissal led to a five percent plunge in the value of the rand, prompting two credit agencies to downgrade South Africa’s credit rating to junk status.

The financial downgrading has made it more expensive for the struggling nation to borrow money from international markets, as it is perceived to have a higher risk of defaulting on its loans. Despite the ongoing fallout from this controversial cabinet reshuffle, economists had still predicted a stable growth rate of 0.9 percent for Africa’s third largest economy. However, poor results from the nation’s usually dependable customer-facing sectors saw growth fall short of these initial estimates.

With corruption allegations swirling around the government and uncertainty over who will succeed President Zuma as leader of the African National Congress party, it now appears unlikely the nation’s leaders will deliver the stability needed to recover from this fresh recession.

Adani Group to push ahead with $12.4bn Australian coal mine despite protests

Posted on by Max Tomlin

On May 6, India’s Adani Group announced it had given final investment approval for plans to build a $12.4bn coal mine in Queensland, Australia. The decision signals the group’s determination to push ahead with the construction of the mine – known as the Carmichael project – despite fierce opposition from environmental activists.

Adani is yet to secure funding for the mine, which is the largest of its kind to be approved on a greenfield site for several years, but hopes to start pre-construction work within the next few months.

In a statement, Adani Group Chairman Gautam Adani said the project would create 10,000 jobs in Australia and “mark[ed] the official start of one of the largest single infrastructure and job-creating developments in Australia’s recent history”.

To coincide with the announcement, Queensland Premier Annastacia Palaszczuk officially opened Adani’s regional headquarters in Townsville, Queensland. Palaszczuk described the project as a vote of confidence in the Queensland economy, which has suffered from a downturn in resources in recent years.

Environmental campaigners fear the mine will pave the way for a multitude of similar projects in the year to come, destroying the region

Yet, despite the financial benefits, the Carmichael project has faced staunch opposition from environmental groups. Campaigners fear the mine, which will be the first in the Galilee Basin, will pave the way for a multitude of similar projects in the year to come, destroying the region. The remote expanse in the outback is, as of yet, an untapped source of coal, but holds the potential to become Australia’s largest producing region.

Protesters have been particularly angered by the significant public subsidies offered to assist in the construction of the mine, with the Queensland Government agreeing to pay royalties to the group after it threatened to shelve the project. The project’s shipping route is also planned to pass through the Great Barrier Reef Marine Park in Northern Queensland, which campaigners say leaves the area vulnerable to damage.

Despite the confidence of the announcement, Adani Group is yet to raise the required funding, with many Australian banks pulling out of the project for fear of public backlash. The commercial viability of the project has also been questioned, with the coal market already well supplied.

Julien Vincent, CEO of Market Forces, an environmental investment group, described the announcement as a PR stunt: “Announcing an intention to invest is a far cry from having the finance to do so.”

Oil prices on the rise as Gulf states sever ties with Qatar amid fears of terrorism

Posted on by Max Tomlin

On June 5, oil prices rose by one percent after several Arab states – led by Saudi Arabia – cut political ties with Qatar, accusing the country of supporting terrorism.

The UAE, Egypt and Bahrain all joined Saudi Arabia in severing transport ties with Qatar, leaving Qatari citizens residing in the countries just two weeks to relocate. Further, the Qatari military has been dismissed from a Saudi-led alliance fighting terrorism in Yemen.

The schism represents a marked escalation over Qatar’s continuing financial and political support of the Muslim Brotherhood. Operating under different guises in the various countries involved, the Muslim Brotherhood has been recognised as both a legitimate political opposition and an alleged terrorist organisation. In Egypt, for example, the group has faced prosecution for alleged attempts of overthrowing the government.

The schism represents a marked escalation over Qatar’s continuing financial and political support of the Muslim Brotherhood

The rift has prompted a rise in the price of oil, which will provide relief to OPEC’s largest producers after months of low prices. Countries such as Russia and Saudi Arabia have suffered from a prolonged period of reduced prices, as well as a rise in alternatives to fossil fuels. In recent years, governments and companies from around the world have begun divesting from fossil fuels in an attempt to build renewables into more sustainable energy plans. The rise in US shale gas production has also exacerbated the problem.

The US, once one of the world’s largest importers of oil, has increasingly made use of its own natural resources after the introduction of fracking. Seen by many as a cheaper alternative to traditional deep drilling, the introduction of fracking in the US has added to the overproduction of oil that caused prices to plummet. The Energy Information Administration even estimates the US will be capable of matching the levels of production seen in Russia and Saudi Arabia by next year. Saudi Arabia currently produces in excess of 10 million barrels of oil per day.

OPEC countries had hoped the swelling middle classes in developing countries like China and India would replace the void left by the US, but it seems increasingly likely these countries will use greener, more efficient technologies instead.

After a meeting on May 25, OPEC countries agreed to extend supply cuts by a further nine months. Prices still slumped, however, as investors had hoped cuts would extend further into 2018. In a statement underlining the determination of oil-dependent OPEC economies to avoid lower prices, Saudi Arabia’s Energy Minister Khalid Al-Falih said the group would do “whatever is necessary” to curb the global oversupply.

Barclays sells Bank of Zimbabwe as African withdrawal continues

Posted on by Max Tomlin

On June 2, Barclays announced the sale of its outpost in Zimbabwe to Malawi-listed lender First Merchant Bank, a continuation of the bank’s exit from Africa. The price of the sale was not announced, but the deal is set to reduce Barclays’ risk-weighted assets by £292m ($376m).

The bank first announced its intention to sell its stake in Barclays Bank of Zimbabwe in March, in keeping with its broader strategic decision to exit the continent entirely and refocus operations in the US and UK. The sale is not expected to lead to any job losses, with all of the bank’s 700 employees set to continue under the new owner after the deal completes later this year.

Barclays first announced its intention to sell in March, in keeping with its broader strategic decision to exit the continent entirely

News of the sale comes just a day after Barclays announced it had sold £2.2bn (£2.8bn) worth of shares in Barclays Africa, reducing its stake in the group from 50 percent to 15 percent. Barclays Africa is not affiliated with the Barclays Bank of Zimbabwe.

The decision to drastically reduce involvement in Barclays Africa represents a significant shift in the bank’s involvement in the continent over the past year. When Barclays first announced its intention to cut the majority of its shares in March, it owned 62.3 percent of the group. The sale was planned to take place over a two to three year period, but, despite suffering early delays due to regulatory constrictions, now comes earlier than expected.

Barclays has a long history of business in the continent, with its presence in Zimbabwe dating back to colonial rule in 1912, while Barclays Africa was established close to 90 years ago. However, political turmoil and instability has hampered the region’s profitability, leading Barclays CEO Jes Staley to initiate the group’s withdrawal from Africa when he took the top position last year.

Instead, Staley plans to refocus the bank’s business in the US and UK, placing a particular emphasis on the investment banking division. Despite the initial costs of the sale, Barclays expects to see a dramatic increase in its capital ratio by withdrawing from Africa.

Barclays departure leaves Standard Chartered as Zimbabwe’s only western bank. A number of factors have driven western firms from the country in recent years, principally the threat of political instability and a dire shortage of dollars. Appointing a successor to President Robert Mugabe will be key to restoring some stability to the region, but, despite his age, the 93 year-old has announced his intention to stand for another term in next year’s election.

 

Vietnam secures $8bn deal with US companies as new trade agreement takes shape

Posted on by Max Tomlin

On May 31, US companies signed deals worth in excess of $8bn with Vietnam, marking the beginning of a reformed trade relationship between the two countries. The deals were announced as Vietnamese Prime Minister Nguyen Xuan Phuc embarked on the second day of his trade-focused tour of the US. Phuc began his three-day visit by declaring his intention to arrange deals for US goods and services worth between $15bn and $17bn.

“Vietnam will increase the import of high technologies and services from the United States, and on the occasion of this visit, many important deals will be made”, Phuc told the US Chamber of Commerce at a dinner earlier this week.

The prime minister’s visit follows President Trump’s decision to pull out of the Trans-Pacific Partnership (TPP) in favour of upholding the protectionist stance he championed on the campaign trail. Trump’s decision to pull out of the trade treaty – and focus instead on building bilateral arrangements – will have come as a heavy blow to Vietnam, which was expected to be one of the main beneficiaries of the TPP.

Phuc began his three-day visit to the US by declaring his intention to arrange deals for goods and services worth between $15bn and $17bn

Yet, the US remains by far the world’s largest consumer of Vietnamese products. These products have historically centred on low cost items such as clothes, shoes and furniture. Increasingly, however, the country’s export industry has provided electronic hardware, particularly in the form of semiconductors.

Last year, the US’ trade deficit with Vietnam was its sixth largest, prompting US Trade Representative Robert Lighthizer to express concern over the rapid growth of the deficit.

“Over the last decade, our bilateral trade deficit has grown from about $7bn to nearly $32bn”, Lighthizer said in a statement. “This concerning growth in our trade deficit presents new challenges and shows us that there is considerable potential to improve further our important trade relationships.”

Of the collection of deals signed already, US Commerce Secretary Wilbur Ross said the transactions would include $3.4bn worth of products manufactured in the US, while also reinforcing the service sector and supporting 23,000 jobs.

General Electric (GE) agreed one of the largest deals, securing $5.6bn in exchange for providing power, aircraft and services to Vietnam. The deal represents the largest single sale to Vietnam in GE’s history.

Other engineering firms also stand to profit from the new arrangement. For example, multinational aerospace services company Honeywell signed a $100m deal to supply VietJet with power units for a new fleet of aircraft, while Caterpillar agreed to provide generator management to over 100 generators in Vietnam for an undisclosed fee.

Tourism is another industry that stands to benefit: hotel chain Hilton negotiated a deal in the region of $650m to manage a large hotel in Vietnam, while port security firm Passport Systems signed deals worth $1bn.

But, while Trump will undoubtedly proffer these deals as evidence he is succeeding in his promise to restore jobs to the country, Vietnam’s desire to increase the level of “high technology and services” coming from the US will raise concerns Trump is negotiating deals that don’t directly benefit US manufacturing.

Deutsche Bank fined $41m by US Federal Reserve for “unsafe and unsound practices”

Posted on by Max Tomlin

The Federal Reserve has fined Deutsche Bank $41m for failing to ensure adequate controls were in place to counter money laundering in its US operations. The settlement is the latest in a series of fines for Germany’s largest bank, with penalties costing the bank billions in the past year alone.

In a brief statement confirming the penalty, the Fed said Deutsche Bank was guilty of “unsafe and unsound practices”, along with “anti-money-laundering deficiencies”. According to the Fed, the lender had failed to comply with the Bank Secrecy Act, which requires banks to assist federal agencies in cracking down on illegal transactions and money laundering operations.

The Fed has ordered
Deutsche Bank to improve its anti-money-laundering controls and demonstrate greater compliance with US banking regulations

Between 2011 and 2015, Deutsche Bank’s insufficient monitoring allegedly allowed billions of dollars worth of “potentially suspicious transactions” to take place between Deutsche Bank’s European affiliates. While the Fed did not specify any particular instance of unsound practice, it  did confirm the bank had failed to provide “accurate and complete information” on transactions between these European affiliates.

In addition to imposing the $41m fine, the Fed has ordered Deutsche Bank to improve its anti-money-laundering controls moving forward, and requires the bank to demonstrate greater compliance with US banking regulations.

The multimillion dollar fine is the latest in a string of hefty fines for the German lender. In January, Deutsche Bank was fined £163m ($209.4m) by the UK’s Financial Conduct Authority for failing to prevent an estimated $10bn of Russian money laundering. In the same month, the German bank was fined a further $452m by US regulators for failing to clamp down on money laundering violations at its Moscow branch.

In April, Deutsche Bank was hit with further fines, after the Fed found the lender guilty of violating the Volcker Rule. According to the Fed, Deutsche Bank failed to adequately monitor whether traders were using the bank’s own money to perform trades on behalf of their clients. This alleged violation of the Volcker Rule saw the bank fined $156.6m.

“We are committed to implementing every remediation measure referenced in the Fed’s order and to meeting their expectations”, Deutsche Bank said in an emailed statement following the most recent fine. With continued scrutiny of its present and past financial conduct, Deutsche Bank may well be locked in a number of lengthy legal battles for some time to come.

Goldman Sachs attacked for “strengthening the brutal repression” in Venezuela

Posted on by Max Tomlin

Goldman Sachs has come under attack from critics of the Venezuelan Government after its asset management arm purchased $2.8bn in bonds issued by PDVSA, Venezuela’s state-owned oil company. The country is in the middle of a humanitarian and economic crisis, and critics have described the purchase as a show of support for President Nicolás Maduro.

Through its asset management arm, GSAM, Goldman Sachs paid approximately $865m for $2.8bn worth of PDVSA bonds issued in 2014. The purchase was made on the secondary market, with the bonds previously held by Venezuela’s central bank.

Goldman Sachs paid approximately $865m for $2.8bn worth of PDVSA bonds issued in 2014

GSAM has defended the purchase, stating it did not directly interact with the Venezuelan Government and acknowledged the country’s current crisis. “We agree that life there has to get better, and we made the investment in part because we believe it will”, a statement released by GSAM said.

Venezuela’s opposition has strongly criticised the bank for the purchase, with the president of the country’s National Assembly, Julio Borges, accusing Goldman Sachs of aiding a dictatorial regime. “Goldman Sachs’ financial lifeline to the regime will serve to strengthen the brutal repression unleashed against the hundreds of thousands of Venezuelans peacefully protesting for political change in the country”, read a letter from Borges to Goldman Sachs President Lloyd Blankfein.

The letter added the National Assembly would be opening an investigation into the transaction, and any future democratic government of Venezuela will refuse to recognise or pay the bonds.

The humanitarian, political and economic crisis gripping Venezuela has intensified in recent months. In the last two months alone, protests against Maduro have seen almost 60 people killed. The collapse of the price of oil and widespread economic mismanagement has generated shortages of almost everything, including power, food and medicine. Amid the crisis, Maduro’s government has prioritised paying its foreign debts over supporting its citizens.

An overview of the Venezuelan crisis, published in the latest edition of World Finance, is available here.

British Airways faces PR disaster after a wave of bank holiday cancellations

Posted on by Max Tomlin

British Airways (BA) faces a PR disaster after a computer system failure forced the airline to cancel the flights of over 75,000 customers, leaving thousands of passengers stranded in airports over the bank holiday weekend. The failure comes at a difficult time for the airline, which has faced mounting criticism for scaling back on economy flights in an attempt to compete with its low cost rivals.

Chaos unfolded at London’s Heathrow and Gatwick airports after all BA journeys were cancelled, while a smaller number of flights into London were also suspended. BA CEO Alex Cruz told Sky News the disruption was caused by a power outage at a “local data centre”.

The airline managed to restore a normal level of service quickly, with 95 percent of flights running as scheduled by Monday. But, despite the rapid return to service, customer anger over the failure is likely to cause lasting damage.

Customer anger over the airline’s failure is likely to cause lasting damage to
BA’s reputation

BA has already confirmed it will compensate its customers fully, with payments expected to exceed $70m even before passengers’ hotel costs are taken into account. However, this figure is likely to be dwarfed by the revenue losses stemming from the brand’s damaged reputation.

The airline, which has traditionally positioned itself as an upmarket alternative to budget rivals like Ryanair, has come under fire in recent months for cutting costs in an attempt to compete with the growing number of budget airlines. This was typified earlier this year, when a decision to cut inflight meals on short haul flights was met with widespread criticism.

Meanwhile, BA’s end of year report highlighted an erosion of brand reputation as one of the factors with the greatest potential to severely damage the airlines profitability in a fiercely competitive market. As customers increasingly prioritise low prices over comfort, BA’s focus on quality has become increasingly redundant.

United Airlines recently struggled to contain a similar PR nightmare, after a video showing a passenger being manhandled and dragged off a plane against his will was posted to social media. United has since announced measures to improve the customer experience on its flights.

BA must now work to regain its foothold within UK air travel. In a statement, Cruz hinted the process to rebuild trust would be a long one: “Once the disruption is over, we will carry out an exhaustive investigation into what caused this incident, and take measures to ensure it never happens again.”

 

OPEC agrees to extend output curbs, but falls short of experts’ expectations

Posted on by Max Tomlin

At a meeting in Vienna on May 25, representatives from both OPEC and non-OPEC countries – including Russia – agreed to extend current production cuts for a further nine months. With existing output curbs originally due to expire next month, a new deal had been widely anticipated.

On the whole, however, markets expected the group to go further to tackle the ongoing glut in global supply. Industry experts had predicted OPEC would agree to deeper curbs or a 12-month extension. Indeed, upon the announcement of the deal, bent crude prices fell by $2.60 to $51.36 as the agreement failed to live up to expectations.

The meeting was co-chaired by Saudi Arabia’s Energy Minister, Khalid al-Falih, and his Russian counterpart Alexander Novak, both of whom face heavy political pressures to keep a lid on oil prices. The agreement involved over 20 oil-producing countries, and set out to collectively cut production by 1.8 million barrels a day.

Industry experts had predicted OPEC would agree to deeper curbs or a 12-month extension

During the meeting, Khalid al-Falih reportedly said, while the oil market is on its way to recovery, “more time is needed” before oil supplies can be expected to return to their five-year average.

However, it is unclear whether the deal will be able to support a considerable increase in prices. Historically, OPEC has played a pivotal role in balancing the market, but the group’s market power has become increasingly diluted owing to the emergence of US shale production. Indeed, any effort by the group to support prices through production cuts runs the risk of being undermined by a surge in US shale production.

This said, the agreement would likely succeed in preventing prices from returning to the rock bottom levels seen at the start of last year. As quoted in the Independent, Roger Diwan, an expert from IHS Markit, said: “OPEC is settling in for the long haul… I think we’ll remain between $50 and $60 a barrel for the time being.’’

Moody’s downgrade China’s credit rating amid fears of slowing economic growth

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On May 24, Moody’s Investor Service cut China’s credit rating for the first time in nearly three decades, citing concerns the country’s economy will erode as a result of slowing growth and excessive leveraging. The rating agency’s decision to downgrade long term local and foreign issuer ratings – down from Aa3 to A1 – emphasises a lack of confidence in the Chinese Government’s ability to reign in current debt levels. Moody’s last downgraded China’s rating in 1989, months after the Tiananmen Square Protests.

Driven mainly by government stimulus, growth in the Chinese economy has gone hand in hand with rapid credit growth, creating a glut of debt that stands at almost 300 percent of the country’s GDP. As a result, Beijing must now attempt to wean the economy off its reliance on credit-fuelled stimulus while maintaining ambitious growth targets.

Moody’s decision to downgrade China’s rating emphasises a lack of confidence in the Chinese Government’s ability to reign in current debt levels

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows”, the rating agency said in a statement. The agency also suggested Chinese authorities’ emphasis on maintaining current levels of growth would result in further stimulus and increased debt.

Meanwhile, China’s Ministry of Finance claims the methodology used in the downgrade does not accurately account for the country’s capacity to expand demand, and said Moody’s “overestimate the difficulties facing the Chinese economy”.

As noted by The Wall Street Journal, this latest downgrade will likely increase the cost of borrowing for Chinese firms, with the revision of China’s rating likely to have a knock-on effect on the country’s banks. Broadly, China’s commercial sector has a lower rating than the government. But, since banks are mostly state owned, and it is assumed the government would intervene in a crisis, banks are often allowed to issue debt at a higher rating. This may now be notched down.

However, according to the IMF, while state-owned debt is high, China’s external debt is relatively low by international standards. With external debt sitting at just 12 percent of GDP, the downgrade may not prove as damaging to China as it would for an economy more reliant on international borrowing.

S&P and Fitch have also revised their ratings, placing China’s foreign and local currency long term debt at AA- with a negative outlook, and A+ with a stable outlook, respectively. Moody’s rating places China on par with countries such as Japan, Saudi Arabia and Estonia.

World Health Organisation elects first African director-general amid mounting pressure

Posted on by Max Tomlin

On May 23, Ethiopia’s Tedros Adhanom Ghebreysus became the first African to be elected as director-general of the World Health Organisation (WHO). Upon taking the UN agency’s top position, the former Ethiopian health minister promised to pursue universal health coverage in the world’s poorest nations, support greater access to birth control for women and strengthen emergency responses. Throughout his lengthy campaign, Tedros also vowed to make the bureaucratic organisation more transparent and accountable.

While working as Ethiopia’s health minister, Tedros made significant progress in cutting deaths from AIDS, tuberculosis and malaria, while also overseeing the expansion of basic health services across the nation. With Tedros at the helm, the Ethiopian Ministry of Health built a network of 4,000 health centres, trained over 40,000 female health workers and organised an efficient ambulance system. Tedros also oversaw a tenfold increase in Ethiopian medical school graduates.

Tedros’ appointment shows a commitment among WHO member states to support leaders from low and middle-income nations

To take the top job, Tedros beat Pakistani cardiologist Sania Nishtar and British physicist David Nabarro, who led the UN’s effort to fight the West African Ebola outbreak in 2014. Nabarro’s leadership bid had been strongly backed by the UK Government, which is currently engaged in a post-Brexit drive to create a ‘global Britain’. Tedros’ appointment, however, shows a commitment among WHO member states to support leaders from low and middle-income nations.

The leadership campaign lasted almost two years and had turned rather sour in recent weeks, with severe accusations levelled at the remaining candidates. Tedros himself has been accused of covering up repeated outbreaks of cholera in Ethiopia, allegedly labelling them as ‘acute watery diarrhoea’ instead. The newly elected director-general has also come under scrutiny for his close involvement with a government accused of prolonged and repeated human rights abuses.

Nevertheless, Tedros’ appointment comes at a crucial time for the UN agency. In recent years, WHO has struggled to secure the funding it urgently needs, and has come under intense fire for its delayed response to the 2014 Ebola epidemic. Last week, the Associated Press released a scathing report on the state of WHO’s finances, revealing the agency spends more on travel expenses than it does on AIDS, tuberculosis and malaria combined. What’s more, with President Trump’s administration taking a step back from development spending, WHO could be in danger of losing funding from its single largest donor.

As he steps into the director-general role on July 1, Tedros will come under pressure to steer the WHO away from imminent crisis. But, if he can ensure adequate funding and effective management, then Tedros may succeed in stabilising WHO at this critical moment in its history.

Donald Trump seeks $3.6trn in cuts as part of an ambitious first full budget proposal

Posted on by Max Tomlin

On May 24, President Donald Trump will unveil his administration’s first comprehensive budget proposal, which includes a planned $3.6trn in spending cuts over the next 10 years. The ambitious plan, entitled A New Foundation for American Greatness, seeks to balance the budget by reducing spending on programmes such as Medicaid, Medicare and the Supplemental Nutrition Assistance Programme (commonly known as food stamps). The budget proposal also calls for deep cuts to education, slashing funding by $9.2bn over the next decade.

Cuts to social security and non-defence-orientated government agencies will allow the Trump administration to reallocate federal funds and ramp up spending on defence, border security and infrastructure. Under the president’s proposed plan, military spending will increase by approximately $25.4bn a year over the course of the next decade, while $2.8bn of border security funding will be funnelled into Trump’s controversial border wall project. The president is also calling for $25bn to introduce the US’ first nationwide paid parental leave programme.

Military spending is set to increase by approximately $25.4bn a year over the course of the next decade

In a meeting with reporters at the White House on May 22, Trump’s budget chief, Mick Mulvaney, called the proposal a “taxpayer-first budget”. Mulvaney added: “This is the first time in a long time that an administration has written a budget through the eyes of the people who are actually paying the taxes.”

While the budget proposal is still yet to be officially released, it has already been met with scepticism by Capitol Hill lawmakers. Interestingly, the plan assumes an ambitious sustained growth rate of three percent, which far exceeds the current projected rate of 1.9 percent. With a low labour force participation rate and sluggish productivity, many economists doubt whether the US can indeed meet this three percent growth target. As such, relying on economic growth to provide revenue for federal spending may be unwise.“The ugly truth is this: you can never balance a budget at 1.9 percent growth”, Mulvaney told reporters.

Such an overreliance on growth may make it difficult for the budget proposal to gain support on Capitol Hill, particularly in the wake of President Trump’s proposed series of tax cuts, which could cost the federal government up to $5trn in lost revenue. While the budget may fail to make significant headway in Congress, it does confirm the Trump administration’s drastic stance on fiscal policy.

OECD: economic growth decelerates across developed countries

Posted on by Max Tomlin

According to data published on May 22 by the Organisation for Economic Cooperation and Development (OECD), growth rates across the 35 members dipped in the first quarter of 2017. The provisional data estimates growth across the OECD area at 0.4 percent for the first quarter of this year, down by 0.3 percent from the final quarter of 2016.

The deceleration was largely driven by a slow start to 2017 in both the US and the UK. The US registered growth of just 0.2 percent, down from 0.5 percent in the final quarter of 2016, while the UK’s growth fell from 0.7 percent to 0.3 percent over the same period. However, this downturn was fairly broad-based, with five of the major seven economies posting slower growth at the start of 2017. Of the seven, only Germany and Japan posted an uptick in growth.

Despite this, year-on-year growth remained stable at two percent, with the UK recording the highest annual rate of 2.1 percent, while Italy and France posted the lowest at 0.8 percent. Indeed, the figures come against a backdrop of broadly stable momentum, and a sustained decrease in the OECD area’s unemployment rate.

Of the major seven economies, only Germany and Japan posted an uptick in growth

In 2014, OECD unemployment stood at 7.4 percent, dropping to 6.8 percent in 2015 and to 6.3 percent in 2016. By the first quarter of this year, OECD unemployment had hit 6.1 percent. Youth unemployment within the OECD has also followed a downward trend in recent months, now standing at 12.1 percent – only 0.1 percent above rates seen in 2008 before the financial crisis.

Forecasts for global growth are also positive, with the International Monetary Fund recently upgrading its growth projection for the world economy to 3.5 percent. Further, according to the OECD’s Composite Leading Indicators, which are designed to anticipate turning points in economic activity, the area is likely to experience “stable growth momentum” over the coming six to nine months.

Thus, while the figures demonstrate a lacklustre start to 2017, underlying trends point to a continued recovery. As a result, the recent slowdown is likely to be a minor glitch rather than a substantial setback.

Hundreds of jobs to be cut as Cathay Pacific posts first annual loss in almost a decade

Posted on by Max Tomlin

On May 22, Cathay Pacific announced it would cut 590 jobs in order to drag itself back towards profitability. The restructuring of Hong Kong’s flagship carrier will be its biggest in 20 years, as increased competition in Asia puts pressure on its ticket prices.

The cuts will affect 190 management and 400 non-management roles at the airline’s head office in Hong Kong, and falls under a broader three year plan to return to profitability. In a statement, the airline revealed the cuts would be complete by the end of the year. CEO Rupert Hogg, who replaced Ivan Chu Kwok-leung earlier in May, said the cuts were “tough but necessary”.

Cathy Pacific needs to sell 123.5 percent of its available seats in order to make a profit on ticket sales alone

The restructure comes after Cathay Pacific posted its first annual loss since the global financial crisis in 2008. In March, the airline announced a loss of HKD 575m ($74m) for 2016, citing growing competition from Chinese and Middle Eastern carriers. This is a stark contrast to 2015, in which the carrier reported a profit of HKD 6bn ($770m) on the back of increasing demand.

While Cathay Pacific fills a relatively high percentage of its seats, increasing competition has forced the airline to lower its ticket prices to untenable levels. According to recent figures published by Bloomberg, in order to make a profit on ticket sales alone, Cathay Pacific needs to sell 123.5 percent of its total available seats. While additional charges for luggage and food make up some of the difference, Cathay Pacific’s comparatively high overhead costs have made cuts necessary.

According to Reuters, the restructuring is the airline’s biggest since the 1998 Asian financial crisis, and will save Cathay Pacific at least HKD 500m ($64m) annually.

Global aviation is a challenging industry to turn a profit in: while demand is currently very high, the playing field is often uneven due to subsidised and government-owned carriers willing to operate at unprofitable levels. Further, costs are often dictated by external factors, leaving airlines with very little control.