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Emerging and Frontier Markets: Economic and Geopolitical Analysis
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LeveragedBuyout
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The Rebirth of Egypt by Merit Al-Sayed , Mark Esposito and Terence Tse - Project Syndicate
BUSINESS & FINANCE
MERIT AL-SAYED
Merit Al-Sayed is an economist and Strategic Projects Implementation Manager at the Arab African International Bank in Cairo.
MARK ESPOSITO
Mark Esposito is a member of the teaching faculty at the Harvard University Extension School, an associate professor of business and economics at Grenoble Graduate School of Business, and a senior associate at the University of Cambridge-CISL.
TERENCE TSE
Terence Tse, an associate professor of finance at ESCP Europe, is the head of competitiveness studies at the i7 Institute for Innovation and Competitiveness.
OCT 23, 2014
The Rebirth of Egypt
CAIRO – If macroeconomic indicators are to be believed, Egypt’s economic growth has ground almost to a halt over the past three years. Inflows of foreign direct investment have dried up, and GDP growth rates have plummeted from as high as 7% in 2008 and 2009 to merely 2% in 2013. But are the indicators to be believed?
The answer is yes and no. Though GDP should never be taken as an accurate representation of a country’s economic health, in Egypt, the figures do reflect the collapse of the country’s entire productive capacity in the years following the fall of Hosni Mubarak’s regime in 2011. The major ratings agencies, which previously regarded Egypt as one of the region’s most promising emerging markets, have slashed the country’s credit scores, deterring foreign investors. Moreover, the anti-Mubarak revolution led to massive capital flight, which has halved the country’s currency reserves.
And the bad news does not stop here. There have already been seven governments since 2011, with social turmoil pushing policymakers into a defensive mode that has stifled any reformist impulse. With unemployment running at 30-40%, the government faces a disenfranchised and increasingly bitter population. Meanwhile, crony capitalism fuels income inequality, impedes rural development, and erodes the education system.
Worse, however, the past three decades attest to the failure of conventional macroeconomics to guide policymakers in managing development. A misguided focus on GDP has neglected the costs of natural-resource depletion, pollution and other externalities, and the asymmetrical distribution of growth in predetermined economic sectors, all of which have long been associated with emerging economies like Egypt.
Policymakers commonly assume that what cannot be easily measured statistically is either inconsequential or irrelevant. But applying the static, linear, and closed analyses of conventional macroeconomics to open, non-linear, dynamic, and interconnected systems is bound to yield flawed results.
The British economist E.F. Schumacher argued that human institutions, as complex structures with dynamic governance, require broad systemic analysis. Likewise, a country’s prosperity can be measured properly only by including elements of moral philosophy and sociology, which fall outside of the boundaries of wealth creation and individual rationality that form the domain of conventional macroeconomic analysis.
When looking through this lens, Egypt’s economy is not as moribund as the country’s GDP and other indicators suggest. In fact, Egypt is on the right track, undertaking a transition to a resilient economy oriented toward enhanced competitiveness. But, because the relevant changes are not captured or adequately reflected in national-accounts data, perceptions are at odds with the activity that is unfolding beneath the macroeconomic level.
In addition to the injection of $12 billion into replenishing the country’s foreign-currency reserves and enacting new market-oriented policies to encourage competition, President Abdel Fattah el-Sisi’s government has introduced some far-reaching measures. For example, the authorities have built up the micro-financing industry to grant credit to the poor and under-banked population. Equally important, the government has slashed woefully inefficient energy subsidies and unveiled a new mega-project: widening the Suez Canal to accommodate the ever-increasing amount of traffic.
But perhaps the most dramatic step has been to formalize many parts of the economy. With the informal economy worth an estimated $360 billion, new policies aim to add all of this underground activity to Egypt’s recorded output. This project has received wide acclaim from officials, economists, and entrepreneurs, reflecting a widespread belief that boosting growth and competitiveness starts at the grass roots level.
In short, the outlook for Egypt’s economy is not as gloomy as many believe. With the revolution now over, the world has heard little about how the country is rebuilding itself. As a result, there is a tendency to assume that Egypt has reached an economic impasse.
The reality, however, is that the country is marching, slowly but surely, away from the omnipresent and omnipotent state that has dominated Egyptian economic life for many decades. The authorities have started to use all of the levers at their disposal to increase competitiveness and unleash the potential of Egypt’s people.
Egypt’s government has the ability to create a favorable and inclusive environment for growth, innovation, and entrepreneurial change. All it takes is a little more will to challenge large incumbents whose position rarely yields optimal social and economic outcomes. If that will is found, Egyptians may finally gain the prosperity they deserve.
The Rebirth of Egypt by Merit Al-Sayed , Mark Esposito and Terence Tse - Project Syndicate
Read more at The Rebirth of Egypt by Merit Al-Sayed , Mark Esposito and Terence Tse - Project Syndicate
BUSINESS & FINANCE
MERIT AL-SAYED
Merit Al-Sayed is an economist and Strategic Projects Implementation Manager at the Arab African International Bank in Cairo.
MARK ESPOSITO
Mark Esposito is a member of the teaching faculty at the Harvard University Extension School, an associate professor of business and economics at Grenoble Graduate School of Business, and a senior associate at the University of Cambridge-CISL.
TERENCE TSE
Terence Tse, an associate professor of finance at ESCP Europe, is the head of competitiveness studies at the i7 Institute for Innovation and Competitiveness.
OCT 23, 2014
The Rebirth of Egypt
CAIRO – If macroeconomic indicators are to be believed, Egypt’s economic growth has ground almost to a halt over the past three years. Inflows of foreign direct investment have dried up, and GDP growth rates have plummeted from as high as 7% in 2008 and 2009 to merely 2% in 2013. But are the indicators to be believed?
The answer is yes and no. Though GDP should never be taken as an accurate representation of a country’s economic health, in Egypt, the figures do reflect the collapse of the country’s entire productive capacity in the years following the fall of Hosni Mubarak’s regime in 2011. The major ratings agencies, which previously regarded Egypt as one of the region’s most promising emerging markets, have slashed the country’s credit scores, deterring foreign investors. Moreover, the anti-Mubarak revolution led to massive capital flight, which has halved the country’s currency reserves.
And the bad news does not stop here. There have already been seven governments since 2011, with social turmoil pushing policymakers into a defensive mode that has stifled any reformist impulse. With unemployment running at 30-40%, the government faces a disenfranchised and increasingly bitter population. Meanwhile, crony capitalism fuels income inequality, impedes rural development, and erodes the education system.
Worse, however, the past three decades attest to the failure of conventional macroeconomics to guide policymakers in managing development. A misguided focus on GDP has neglected the costs of natural-resource depletion, pollution and other externalities, and the asymmetrical distribution of growth in predetermined economic sectors, all of which have long been associated with emerging economies like Egypt.
Policymakers commonly assume that what cannot be easily measured statistically is either inconsequential or irrelevant. But applying the static, linear, and closed analyses of conventional macroeconomics to open, non-linear, dynamic, and interconnected systems is bound to yield flawed results.
The British economist E.F. Schumacher argued that human institutions, as complex structures with dynamic governance, require broad systemic analysis. Likewise, a country’s prosperity can be measured properly only by including elements of moral philosophy and sociology, which fall outside of the boundaries of wealth creation and individual rationality that form the domain of conventional macroeconomic analysis.
When looking through this lens, Egypt’s economy is not as moribund as the country’s GDP and other indicators suggest. In fact, Egypt is on the right track, undertaking a transition to a resilient economy oriented toward enhanced competitiveness. But, because the relevant changes are not captured or adequately reflected in national-accounts data, perceptions are at odds with the activity that is unfolding beneath the macroeconomic level.
In addition to the injection of $12 billion into replenishing the country’s foreign-currency reserves and enacting new market-oriented policies to encourage competition, President Abdel Fattah el-Sisi’s government has introduced some far-reaching measures. For example, the authorities have built up the micro-financing industry to grant credit to the poor and under-banked population. Equally important, the government has slashed woefully inefficient energy subsidies and unveiled a new mega-project: widening the Suez Canal to accommodate the ever-increasing amount of traffic.
But perhaps the most dramatic step has been to formalize many parts of the economy. With the informal economy worth an estimated $360 billion, new policies aim to add all of this underground activity to Egypt’s recorded output. This project has received wide acclaim from officials, economists, and entrepreneurs, reflecting a widespread belief that boosting growth and competitiveness starts at the grass roots level.
In short, the outlook for Egypt’s economy is not as gloomy as many believe. With the revolution now over, the world has heard little about how the country is rebuilding itself. As a result, there is a tendency to assume that Egypt has reached an economic impasse.
The reality, however, is that the country is marching, slowly but surely, away from the omnipresent and omnipotent state that has dominated Egyptian economic life for many decades. The authorities have started to use all of the levers at their disposal to increase competitiveness and unleash the potential of Egypt’s people.
Egypt’s government has the ability to create a favorable and inclusive environment for growth, innovation, and entrepreneurial change. All it takes is a little more will to challenge large incumbents whose position rarely yields optimal social and economic outcomes. If that will is found, Egyptians may finally gain the prosperity they deserve.
The Rebirth of Egypt by Merit Al-Sayed , Mark Esposito and Terence Tse - Project Syndicate
Read more at The Rebirth of Egypt by Merit Al-Sayed , Mark Esposito and Terence Tse - Project Syndicate
LeveragedBuyout
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EU Parliament Approves Zero Tariff Extension for Ukraine Exports - Frontier Markets News - Emerging & Growth Markets - WSJ
ByLaurence Norman
The European Parliament overwhelmingly approved extending a zero tariff regime for most Ukrainian exports to the bloc, allowing the system to remain in place through the end of next year.
Some 497 lawmakers voted in favor of the move, with fewer than 100 opposing it.
The measure could save Ukrainian exporters around €500 million ($634.6 million) a year in export duties.
The EU introduced the zero tariff regime in May for six months to help Ukraine before the launch of a broader trade and political agreement between the country and the bloc.
Last month, under pressure from Russia, the EU’s executive and Ukraine’s government agreed to give Kiev until the end of next year to start implementing key parts of the trade agreement, including scrapping duties on EU exports.
However, the bloc offered to keep the zero tariff regime for Ukrainian exporters in place in the interim. That agreement has now won backing from the European Parliament and member states.
Russia has fiercely opposed the EU and Ukraine’s trade and political pact. It is lobbying for significant changes to the agreement which it claims would soften the impact on Ukraine-Russian trade ties.
- October 23, 2014, 4:36 PM ET
ByLaurence Norman
The European Parliament overwhelmingly approved extending a zero tariff regime for most Ukrainian exports to the bloc, allowing the system to remain in place through the end of next year.
Some 497 lawmakers voted in favor of the move, with fewer than 100 opposing it.
The measure could save Ukrainian exporters around €500 million ($634.6 million) a year in export duties.
The EU introduced the zero tariff regime in May for six months to help Ukraine before the launch of a broader trade and political agreement between the country and the bloc.
Last month, under pressure from Russia, the EU’s executive and Ukraine’s government agreed to give Kiev until the end of next year to start implementing key parts of the trade agreement, including scrapping duties on EU exports.
However, the bloc offered to keep the zero tariff regime for Ukrainian exporters in place in the interim. That agreement has now won backing from the European Parliament and member states.
Russia has fiercely opposed the EU and Ukraine’s trade and political pact. It is lobbying for significant changes to the agreement which it claims would soften the impact on Ukraine-Russian trade ties.
LeveragedBuyout
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IMF Warns Eastern European Income Convergence Has Stalled - Frontier Markets News - Emerging & Growth Markets - WSJ
ByPaul Hannon
The IMF said most formerly Communist countries have dramatically transformed since the Berlin Wall was breached 25 years ago.
Associated Press
A quarter century after the fall of Communism, progress toward closing the gap in incomes between eastern and western Europe has stalled, and in some cases is going in reverse, the International Monetary Fund said on Friday.
In a special report to commemorate 25 years since the Berlin Wall was breached in November 1989, the IMF said that over that period, most formerly Communist countries had undergone “a dramatic transformation,” involving their “reintegration” into the global economy and “major improvements in living standards.”
But it acknowledged that much of that progress had been made in the run-up to the financial crisis, when growth in large parts of the region was fueled by overseas borrowing to finance consumption and construction.
The fund estimated that between 1995 and 2008, incomes in the region as a whole were catching up toward average European Union incomes at a rate of about 1 percentage point a year, from around 35% to nearly 50%. Since the financial crisis, however, little progress has been made, in contrast to some developing economies.
The IMF warned that with economic growth in central and Eastern Europe likely to remain weak in the coming years—a trend that may be exacerbated by the conflict between Russia and Ukraine—further progress is likely to be slow.
“Measured against all advanced economies, most countries of the region have been flat or falling back,” the IMF said. “Relative incomes in emerging Asia, in contrast, have continued to rise strongly, albeit from a much lower base.”
Speaking in Warsaw, IMF First Deputy Managing Director David Lipton said the stalling of convergence may spark a backlash against the progress already made in transforming centrally planned into market economies.
“The region risks a vicious circle of weak growth, disillusionment and retreat from market-oriented policies,” Mr. Lipton said.
- October 24, 2014, 12:35 PM ET
ByPaul Hannon
The IMF said most formerly Communist countries have dramatically transformed since the Berlin Wall was breached 25 years ago.
Associated Press
A quarter century after the fall of Communism, progress toward closing the gap in incomes between eastern and western Europe has stalled, and in some cases is going in reverse, the International Monetary Fund said on Friday.
In a special report to commemorate 25 years since the Berlin Wall was breached in November 1989, the IMF said that over that period, most formerly Communist countries had undergone “a dramatic transformation,” involving their “reintegration” into the global economy and “major improvements in living standards.”
But it acknowledged that much of that progress had been made in the run-up to the financial crisis, when growth in large parts of the region was fueled by overseas borrowing to finance consumption and construction.
The fund estimated that between 1995 and 2008, incomes in the region as a whole were catching up toward average European Union incomes at a rate of about 1 percentage point a year, from around 35% to nearly 50%. Since the financial crisis, however, little progress has been made, in contrast to some developing economies.
The IMF warned that with economic growth in central and Eastern Europe likely to remain weak in the coming years—a trend that may be exacerbated by the conflict between Russia and Ukraine—further progress is likely to be slow.
“Measured against all advanced economies, most countries of the region have been flat or falling back,” the IMF said. “Relative incomes in emerging Asia, in contrast, have continued to rise strongly, albeit from a much lower base.”
Speaking in Warsaw, IMF First Deputy Managing Director David Lipton said the stalling of convergence may spark a backlash against the progress already made in transforming centrally planned into market economies.
“The region risks a vicious circle of weak growth, disillusionment and retreat from market-oriented policies,” Mr. Lipton said.
LeveragedBuyout
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Sober Look: The Saudis have the staying power to undercut the competition
The Saudis have the staying power to undercut the competition
According to Deutsche Bank, the Saudi government can sustain itself for almost 8 years with Brent crude at $83/bbl. The nation's government has accumulated sufficient "rainy day funds" to withstand a prolonged period of budget deficits driven by low oil prices.
Source: DB
Armed with such staying power, Saudi Arabia is undercutting the competition in order to expand market share. They know they have the funds to outlast most of the competitors. The goal is to pressure OPEC cheaters as well as to shake out US "tight oil" producers. The Saudis could presumably deal with the notion of US "energy independence", but having Americans export large amounts of crude (currently being debated in the US) and compete head on with OPEC is not acceptable. While Saudi Arabia cannot entirely stop the growth of North American production, it is going to try slowing it.
The Saudis launched their attack with the comment that the nation "will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two". With energy markets already soft, the selloff acceleration ensued.
Another recent development shows that the Saudis are also willing to back their statement with action. With OPEC already producing 700-900K bbl/d above its quota, Saudi Aramco started undercutting the competition by lowering prices.
http://ftalphaville.ft.com/2014/10/27/2020412/why-saudi-arabias-best-bet-may-be-to-increase-output/
Why Saudi Arabia’s best bet may be to increase output
Izabella Kaminska
In their latest oil note, Goldman Sachs describe the oil market as having a “dominant firm/competitive fringe” structure, in contrast to say a monopolistic or perfect competition structure.
This is basically the description of an oligopoly, in which a dominant firm (for decades, Saudi Arabia) only differs from a monopolist in one key aspect…
The structure results from the fact that no single entity is ever likely to be able to service the entire market by itself, meaning full monopoly is not desirable, since the consequences of failing to provide the market with the supply it needs may be even more undesirable than being able to control the market.
As a result, the strongest player never has an incentive to push prices to a level that may encourage new competition in, nor does it have an incentive to allow prices to drop below the break-even levels of competitors. It’s primary incentive instead is to protect as steady a revenue stream it can given its position as the provider of the marginal barrel. And that involves hedging.
Hence the need, as Goldman Sachs notes, to base prices on the strongest player’s marginal cost curve:
There is only problem with the strategy, however. It assumes that the dominant firm wants to maximise profits today.
If the dominant firm is sneaky, however, it may wish to set production quantities higher today (reducing profits in the short-run) in order to drive the fringe firms out of the market, and later return to monopolist pricing.
And this really is what we’re facing now.
Simply put, Saudi Arabia has more of an incentive to dump even more oil on the market by upping production, than by cutting production.
The chances of such a production increase, however, are still grossly under-estimated by the market due to a misunderstanding about what Saudi Arabia’s situation really is.
As Goldman Sachs notes, the additional quantity has flown into the market because fringe firms that are now supplying additional quantity at a fixed price of $80 per barrel. But the dominant player’s supply never changed.
So the question is, why should Saudi Arabia — which still has spare capacity to hand — be inclined to preserve that additional output at this stage?
One argument, of course, is that Saudi’s spare capacity is not large enough to take prices below $80 per barrel for long enough to truly kill off the competition.
That may be true, but as we have already stressed, leaves Saudi Arabia with only one workable strategy: to grab what it can, while it can:
Unfortunately, while this may be the optimum strategy for Saudi Arabia right now, it’s anything but for the rest of the oil producing world given that what it really amounts to is the transfer of oil hegemony to the US government.
While it may be true that the “organised” marginal barrel is via the process replaced by a competitive marginal barrel — because, let’s face it, the US shale network will never organise the way Opec did — the pricing uncertainty, volatility and revenue risk associated with the transfer doesn’t necessarily have to be absorbed by the shale sector directly.
Indeed, the swing capacity factor transfers directly to US government SPR purchases and releases instead, providing in the process an oil backing for the US dollar-reserve system as well.
The Saudis have the staying power to undercut the competition
According to Deutsche Bank, the Saudi government can sustain itself for almost 8 years with Brent crude at $83/bbl. The nation's government has accumulated sufficient "rainy day funds" to withstand a prolonged period of budget deficits driven by low oil prices.
Source: DB
Armed with such staying power, Saudi Arabia is undercutting the competition in order to expand market share. They know they have the funds to outlast most of the competitors. The goal is to pressure OPEC cheaters as well as to shake out US "tight oil" producers. The Saudis could presumably deal with the notion of US "energy independence", but having Americans export large amounts of crude (currently being debated in the US) and compete head on with OPEC is not acceptable. While Saudi Arabia cannot entirely stop the growth of North American production, it is going to try slowing it.
The Saudis launched their attack with the comment that the nation "will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two". With energy markets already soft, the selloff acceleration ensued.
Another recent development shows that the Saudis are also willing to back their statement with action. With OPEC already producing 700-900K bbl/d above its quota, Saudi Aramco started undercutting the competition by lowering prices.
Deutsche Bank: - ... we can observe that the differential of Saudi Arabia’s Arab Light blend versus the Oman/Dubai average for Asian deliveries has fallen sharply from a premium of USD1.65/bbl for September loadings to a discount of USD1.05/bbl for November loadings. This suggests that Saudi Aramco is determined to maintain current levels of exports at the expense of sales prices achieved. This represents the sharpest discount since the -USD1.25/bbl level observed in December 2008, during a quarter in which global oil demand contracted by 3.0 mmb/d, in contrast to the current quarter when we still expect oil demand to grow by 0.8 mmb/d.
Source: DB
The November OPEC meeting is expected to be tense, with a number of nations pushing for production cuts. But ultimately the Saudis will prevail and the pressure on high-cost crude producers will continue. Pain will be felt in Iran, Russia, Venezuela, as well as across the North America's energy sector.
Source: DB
The November OPEC meeting is expected to be tense, with a number of nations pushing for production cuts. But ultimately the Saudis will prevail and the pressure on high-cost crude producers will continue. Pain will be felt in Iran, Russia, Venezuela, as well as across the North America's energy sector.
http://ftalphaville.ft.com/2014/10/27/2020412/why-saudi-arabias-best-bet-may-be-to-increase-output/
Why Saudi Arabia’s best bet may be to increase output
Izabella Kaminska
In their latest oil note, Goldman Sachs describe the oil market as having a “dominant firm/competitive fringe” structure, in contrast to say a monopolistic or perfect competition structure.
This is basically the description of an oligopoly, in which a dominant firm (for decades, Saudi Arabia) only differs from a monopolist in one key aspect…
… when deciding on production it must take into account not only the market demand curve (as a monopolist does) but also the reaction of the competitive fringe producers to its production decisions.
The structure results from the fact that no single entity is ever likely to be able to service the entire market by itself, meaning full monopoly is not desirable, since the consequences of failing to provide the market with the supply it needs may be even more undesirable than being able to control the market.
As a result, the strongest player never has an incentive to push prices to a level that may encourage new competition in, nor does it have an incentive to allow prices to drop below the break-even levels of competitors. It’s primary incentive instead is to protect as steady a revenue stream it can given its position as the provider of the marginal barrel. And that involves hedging.
Hence the need, as Goldman Sachs notes, to base prices on the strongest player’s marginal cost curve:
From this ‘residual’ demand curve we now calculate the marginal revenue curve and equate it to the dominant firm’s marginal cost (or supply) curve. Equating these two functions is exactly how the monopolist behaves, with the key exception that the monopolist did not have to first account for fringe producers. With the dominant firm’s supply decided, the competitive fringe firms will supply the remaining quantity demanded at the prevailing price level (Pdominant).
Importantly, this price level is lower than what would have been set by a monopolist (Pmonopoly) yet higher than the competitive price, and hence the total quantity supplied to the market is larger than under monopoly yet less than under perfect competition (Qdominant> Qmonopoly).
Importantly, this price level is lower than what would have been set by a monopolist (Pmonopoly) yet higher than the competitive price, and hence the total quantity supplied to the market is larger than under monopoly yet less than under perfect competition (Qdominant> Qmonopoly).
There is only problem with the strategy, however. It assumes that the dominant firm wants to maximise profits today.
If the dominant firm is sneaky, however, it may wish to set production quantities higher today (reducing profits in the short-run) in order to drive the fringe firms out of the market, and later return to monopolist pricing.
And this really is what we’re facing now.
Simply put, Saudi Arabia has more of an incentive to dump even more oil on the market by upping production, than by cutting production.
The chances of such a production increase, however, are still grossly under-estimated by the market due to a misunderstanding about what Saudi Arabia’s situation really is.
As Goldman Sachs notes, the additional quantity has flown into the market because fringe firms that are now supplying additional quantity at a fixed price of $80 per barrel. But the dominant player’s supply never changed.
So the question is, why should Saudi Arabia — which still has spare capacity to hand — be inclined to preserve that additional output at this stage?
One argument, of course, is that Saudi’s spare capacity is not large enough to take prices below $80 per barrel for long enough to truly kill off the competition.
That may be true, but as we have already stressed, leaves Saudi Arabia with only one workable strategy: to grab what it can, while it can:
Applying this stylized theory to the oil market we see a number of effects: Saudi spare capacity is currently around 1.5 mil bbl/day vs. US shale production of around 5 mb/d. Accordingly, Saudi Arabia no longer has the ability to push prices lower than the production costs of US Shale.
Cutting production would accommodate the further expansion of US shale, as well as reduce Saudi profits.
Hence the optimal response would be to increase production to maximum (removing spare capacity, similar to non-core OPEC producers) as Saudi Arabia’s dominant-firm pricing power wanes – the scenario outlined in Exhibit 22.
Thus US shale, through its $80-$85 range of breakeven prices, takes over the function of the primary margin for balancing supply. In summary, the key pricing dynamic in the oil market has moved away from the dominant firm (Saudi Arabia) and towards the pace of technological improvement (change in marginal costs) of the US shale fringe firms – remembering that these firms have no individual pricing power.
The great thing about the “dump it on the market” strategy for Saudi Arabia is that at least this way — by eliminating spare capacity from its repertoire — it can stabilise revenue flows by locking in long-term supply agreements at maximum production levels.Cutting production would accommodate the further expansion of US shale, as well as reduce Saudi profits.
Hence the optimal response would be to increase production to maximum (removing spare capacity, similar to non-core OPEC producers) as Saudi Arabia’s dominant-firm pricing power wanes – the scenario outlined in Exhibit 22.
Thus US shale, through its $80-$85 range of breakeven prices, takes over the function of the primary margin for balancing supply. In summary, the key pricing dynamic in the oil market has moved away from the dominant firm (Saudi Arabia) and towards the pace of technological improvement (change in marginal costs) of the US shale fringe firms – remembering that these firms have no individual pricing power.
And this way at least, the burden of managing marginal-barrel revenue risk — and the volatility that comes with it — meanwhile, is passed over to the US shale millionaires.Unfortunately, while this may be the optimum strategy for Saudi Arabia right now, it’s anything but for the rest of the oil producing world given that what it really amounts to is the transfer of oil hegemony to the US government.
While it may be true that the “organised” marginal barrel is via the process replaced by a competitive marginal barrel — because, let’s face it, the US shale network will never organise the way Opec did — the pricing uncertainty, volatility and revenue risk associated with the transfer doesn’t necessarily have to be absorbed by the shale sector directly.
Indeed, the swing capacity factor transfers directly to US government SPR purchases and releases instead, providing in the process an oil backing for the US dollar-reserve system as well.
Last edited:
LeveragedBuyout
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IMF Says Less Concerned About Frothy Dubai Housing Market - Middle East Real Time - WSJ
ByAsa Fitch
IMF Middle East director Masood Ahmed says risks associated with Dubai’s property market have decreased, in part due to steps taken by local authorities to stamp out speculation.
Reuters
A recent surge in Dubai real estate prices has become less of a worry for the International Monetary Fund, its Middle East director said Monday, reversing his earlier calls for additional reforms to prevent another market bubble.
An apparent slowdown in price increases has proven the effectiveness of government efforts to calm market froth, said the director, Masood Ahmed, and led the IMF to reassess its stance on the need for further reforms.
“I think all of these [regulations] are little grits of sand in the machine that have helped to slow down that pace, which is good, so we are certainly a little less concerned about that,” Mr. Ahmed said. “We still think it’s an area to watch. It’s important to keep watching that going forward, but compared to May our degree of concern would be lower.”
Dubai’s property market was one of the world’s best-performing before the global financial crisis hit at the end of 2008, sending prices down by more than half in some areas. After a period of stagnation, the market recovered sharply beginning last year, leading to renewed fears of a bubble.
Average apartment prices in Dubai went up by 31% year-on-year in the third quarter, according to a report by Asteco Property Management. But prices actually declined by 1% during the three-month quarter, the report said, underscoring how prices have moderated more recently.
Dubai has responded to worries of a new bubble in part by doubling real estate transaction fees to 4% of sales prices last year, while the central bank of the United Arab Emirates, the country of which Dubai is a part, instituted borrowing limits on mortgages. IMF Middle East director Masood Ahmed praised those moves in May, but he said “stronger measures” should be considered to calm market froth.
Given the market’s slowdown, however, additional measures don’t appear to be as urgently needed.
“If you look at the last few months, I would say that the pace of that property market price increase has moderated quite a lot,” Mr. Ahmed said, adding that the credit should go to government measures for quelling the rise.
Mohamed Alabbar, the chairman of Emaar Properties, Dubai’s biggest developer, also said on Monday that he was unconcerned about real estate prices, although he would welcome more frequent reviews of property-related regulations to keep up with rapid developments in the market.
“We developers have learned a very, very tough lesson, too, and we watch what we’re doing almost on a daily basis,” he said. “I think the governments have also learned.”
Mr. Ahmed gave his assessment as he unveiled the IMF’s economic outlook for the Middle East and North Africa, which painted a relatively grim picture for a region fraught with conflict and beset by high unemployment and government budget woes. The IMF is projecting a 2.6% rise in regional GDP this year, followed by 3.8% next year, a rate it says is not sufficient to redress unemployment and raise living standards to equal the developed world.
- October 27, 2014, 11:08 AM ET
ByAsa Fitch
IMF Middle East director Masood Ahmed says risks associated with Dubai’s property market have decreased, in part due to steps taken by local authorities to stamp out speculation.
Reuters
A recent surge in Dubai real estate prices has become less of a worry for the International Monetary Fund, its Middle East director said Monday, reversing his earlier calls for additional reforms to prevent another market bubble.
An apparent slowdown in price increases has proven the effectiveness of government efforts to calm market froth, said the director, Masood Ahmed, and led the IMF to reassess its stance on the need for further reforms.
“I think all of these [regulations] are little grits of sand in the machine that have helped to slow down that pace, which is good, so we are certainly a little less concerned about that,” Mr. Ahmed said. “We still think it’s an area to watch. It’s important to keep watching that going forward, but compared to May our degree of concern would be lower.”
Dubai’s property market was one of the world’s best-performing before the global financial crisis hit at the end of 2008, sending prices down by more than half in some areas. After a period of stagnation, the market recovered sharply beginning last year, leading to renewed fears of a bubble.
Average apartment prices in Dubai went up by 31% year-on-year in the third quarter, according to a report by Asteco Property Management. But prices actually declined by 1% during the three-month quarter, the report said, underscoring how prices have moderated more recently.
Dubai has responded to worries of a new bubble in part by doubling real estate transaction fees to 4% of sales prices last year, while the central bank of the United Arab Emirates, the country of which Dubai is a part, instituted borrowing limits on mortgages. IMF Middle East director Masood Ahmed praised those moves in May, but he said “stronger measures” should be considered to calm market froth.
Given the market’s slowdown, however, additional measures don’t appear to be as urgently needed.
“If you look at the last few months, I would say that the pace of that property market price increase has moderated quite a lot,” Mr. Ahmed said, adding that the credit should go to government measures for quelling the rise.
Mohamed Alabbar, the chairman of Emaar Properties, Dubai’s biggest developer, also said on Monday that he was unconcerned about real estate prices, although he would welcome more frequent reviews of property-related regulations to keep up with rapid developments in the market.
“We developers have learned a very, very tough lesson, too, and we watch what we’re doing almost on a daily basis,” he said. “I think the governments have also learned.”
Mr. Ahmed gave his assessment as he unveiled the IMF’s economic outlook for the Middle East and North Africa, which painted a relatively grim picture for a region fraught with conflict and beset by high unemployment and government budget woes. The IMF is projecting a 2.6% rise in regional GDP this year, followed by 3.8% next year, a rate it says is not sufficient to redress unemployment and raise living standards to equal the developed world.
LeveragedBuyout
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@somsak Rates are rock-bottom. There's never been a better time to get a bailout. Get yours now, before they run out!
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IMF Forced to Raise Key Lending Rate to Protect Lender Nations - Real Time Economics - WSJ
ByIan Talley
The International Monetary Fund has been facing a perverse scenario: Key interest rates slipping into negative territory could have forced its member nations to pay interest for the privilege of bailing out other nations.
The IMF, the world’s emergency lender, was forced to change a policy Monday to keep that from happening. The fund set a floor on the rate that determines the interest it pays to creditor nations for lending money to the IMF’s bailout kitty, and the cost for borrowing countries to access emergency IMF loans.
Now, the IMF will pay lenders at least 0.05%, even if the rates that compose the fund’s benchmark fall into negative territory, as rates have done in Japan and some eurozone countries.
The IMF’s key rate is determined by the cost to borrow short-term debt in the U.S., U.K., eurozone and Japan. In the wake of the global financial crisis, central bankers have pushed down borrowing costs in an effort to spur growth, testing the “zero bound,” or lowest rate limits, of monetary policy.
The aggregate effect cut the IMF’s lending rate to a historical low of 0.03% last week. That’s down from 4.38% in July 2007 before the financial crisis hit.
The IMF feared it could cross into negative territory as the European Central Bank and Bank of Japan continue easing monetary policy.
Without the a floor rate, it could create a “perverse situation because our creditor nations would be paying for providing us resources,” a senior IMF official said.
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IMF Forced to Raise Key Lending Rate to Protect Lender Nations - Real Time Economics - WSJ
- October 27, 2014, 10:19 AM ET
ByIan Talley
The International Monetary Fund has been facing a perverse scenario: Key interest rates slipping into negative territory could have forced its member nations to pay interest for the privilege of bailing out other nations.
The IMF, the world’s emergency lender, was forced to change a policy Monday to keep that from happening. The fund set a floor on the rate that determines the interest it pays to creditor nations for lending money to the IMF’s bailout kitty, and the cost for borrowing countries to access emergency IMF loans.
Now, the IMF will pay lenders at least 0.05%, even if the rates that compose the fund’s benchmark fall into negative territory, as rates have done in Japan and some eurozone countries.
The IMF’s key rate is determined by the cost to borrow short-term debt in the U.S., U.K., eurozone and Japan. In the wake of the global financial crisis, central bankers have pushed down borrowing costs in an effort to spur growth, testing the “zero bound,” or lowest rate limits, of monetary policy.
The aggregate effect cut the IMF’s lending rate to a historical low of 0.03% last week. That’s down from 4.38% in July 2007 before the financial crisis hit.
The IMF feared it could cross into negative territory as the European Central Bank and Bank of Japan continue easing monetary policy.
Without the a floor rate, it could create a “perverse situation because our creditor nations would be paying for providing us resources,” a senior IMF official said.
LeveragedBuyout
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http://blogs.ft.com/beyond-brics/2014/10/27/poverty-in-the-horn-of-africa-world-bank-and-un-step-in/
Poverty in the Horn of Africa: donors step in
Oct 27, 2014 1:37pmby Katrina Manson
What links a middle-income powerhouse growing at 5 per cent a year with a failed state limping in with a $2.6bn economy and a jihadi insurgency? The answer is: a border. Kenya and Somalia are among the two most extreme bedfellows in the Horn of Africa, a region that is home to 240m people in eight countries, the prospect of economic riches, oil exports and – worryingly – four conflicts.
That’s one of the reasons five sets of donors, from the European Union to the Islamic Development Bank, have today said they will put $8.1bn towards the region over the next few years.
It’s the third African hotspot tackled by the heads of the World Bank and the United Nations, following trips to deliver big aid packages for the Great Lakes region last year, and “an unprecedented joint trip” that involved several sets of donors to the Sahel earlier this year.
“This region is too isolated and in some ways forgotten… Things are tough here in the Horn of Africa,” Jim Yong Kim, president of the World Bank Group, which is allocating $1.8bn for the region, told beyondbrics from Addis Ababa on Monday, before heading into a meeting of regional foreign ministers.
“It’s very significant that there is an Ebola outbreak raging in west Africa, great cause for concern, but there are areas of fragility where conflict could potentially start again at any moment and cause huge amounts of human suffering,” he said, underlining the prospect of humanitarian crisis due to flooding in South Sudan.
While the region boasts natural riches and some of the fastest growing economies in the world, poverty, inequality and Islamist militancy threaten prospects for growth and stability. Ethiopia will grow at 8.2 per cent this year, according to the IMF, but 78 per cent of the population lives on less than $2 a day.
“The proportion of people living on less than $1 a day is declining only marginally, while in many countries the absolute number of poor people is increasing,” says a World Bank working paper on the region.
Most youth in the region are unemployed and the population is expected to double in the next 23 years. Conflict in the Horn has also displaced 8.7m people, 2.7m of them outside their own borders.
Much of the money will go to palliative efforts to ease life for the most vulnerable. It will also support everything from a regional oil pipeline whose cost the World Bank estimates could run to $16-20bn, to spreading broadband, where penetration rates for the region stand at 1.5 per cent, compared with 9.8 per cent in South Africa. A previous World Bank report says every extra 10 per cent broadband coverage boosts GDP growth by 1.4 per cent.
Kim travelled to the region along with UN Secretary-General Ban Ki-moon, a new partnership he says works because, although the World Bank is not mandated to touch political issues, he believes joint meetings enable the two global institutions to unite political and development goals. Many diplomats and civil society activists fear that the prospect of several African presidents staying on beyond the official expiration of their mandates would erode development.
“This is precisely the reason why the Secretary-General and I travel together… the World Bank cannot get involved in domestic politics, political elections and processes but of course for the Secretary-General it’s one of his major priorities… We think this is a formula that has already helped,” said Kim.
But the donor deluge also acts as a reminder of the risk of dumping aid on fragile countries ill-equipped to receive or direct it.
In 2011, the G7+, a group of 20 fragile states, successfully lobbied for a “New Deal” to ensure donors work according to fragile countries’ own priorities. But its first monitoring progress report, out this year, is scathing, saying its potential is “still untapped” and progress is slow.
“The change is slow and not systemic,” says the monitoring report, which highlights a “rushed and donor-driven” approach to peace-building in Somalia.
Kim defended the World Bank’s record, saying the need to involve countries in determining their own priorities is “huge”.
“These commitments we’re announcing have been very carefully vetted with the countries, and with the countries being in the lead,” he said. “In regional projects it gets a little trickier; this is why we think [with this joint trip] we have a better chance to ensure everything is coordinated.”
He suggested that, despite long, lingering concerns over corruption at the heart of the Mogadishu government, the World Bank was keen to develop a way for Somalia to clear its debts, along the lines of that followed by Myanmar.
“We cannot provide any concessional loans to Somalia because of the arrears situation [but] they’re eligible for debt relief,” he said. “We’ve made real progress in other parts of the world; working with states previously isolated and bringing them into the world; Myanmar is a good example. We know there are still problems, reports of corruption [in Somalia], but it’s critical for us to prepare these countries for joining the rest of the world.”
Poverty in the Horn of Africa: donors step in
Oct 27, 2014 1:37pmby Katrina Manson
What links a middle-income powerhouse growing at 5 per cent a year with a failed state limping in with a $2.6bn economy and a jihadi insurgency? The answer is: a border. Kenya and Somalia are among the two most extreme bedfellows in the Horn of Africa, a region that is home to 240m people in eight countries, the prospect of economic riches, oil exports and – worryingly – four conflicts.
That’s one of the reasons five sets of donors, from the European Union to the Islamic Development Bank, have today said they will put $8.1bn towards the region over the next few years.
It’s the third African hotspot tackled by the heads of the World Bank and the United Nations, following trips to deliver big aid packages for the Great Lakes region last year, and “an unprecedented joint trip” that involved several sets of donors to the Sahel earlier this year.
“This region is too isolated and in some ways forgotten… Things are tough here in the Horn of Africa,” Jim Yong Kim, president of the World Bank Group, which is allocating $1.8bn for the region, told beyondbrics from Addis Ababa on Monday, before heading into a meeting of regional foreign ministers.
“It’s very significant that there is an Ebola outbreak raging in west Africa, great cause for concern, but there are areas of fragility where conflict could potentially start again at any moment and cause huge amounts of human suffering,” he said, underlining the prospect of humanitarian crisis due to flooding in South Sudan.
While the region boasts natural riches and some of the fastest growing economies in the world, poverty, inequality and Islamist militancy threaten prospects for growth and stability. Ethiopia will grow at 8.2 per cent this year, according to the IMF, but 78 per cent of the population lives on less than $2 a day.
“The proportion of people living on less than $1 a day is declining only marginally, while in many countries the absolute number of poor people is increasing,” says a World Bank working paper on the region.
Most youth in the region are unemployed and the population is expected to double in the next 23 years. Conflict in the Horn has also displaced 8.7m people, 2.7m of them outside their own borders.
Much of the money will go to palliative efforts to ease life for the most vulnerable. It will also support everything from a regional oil pipeline whose cost the World Bank estimates could run to $16-20bn, to spreading broadband, where penetration rates for the region stand at 1.5 per cent, compared with 9.8 per cent in South Africa. A previous World Bank report says every extra 10 per cent broadband coverage boosts GDP growth by 1.4 per cent.
Kim travelled to the region along with UN Secretary-General Ban Ki-moon, a new partnership he says works because, although the World Bank is not mandated to touch political issues, he believes joint meetings enable the two global institutions to unite political and development goals. Many diplomats and civil society activists fear that the prospect of several African presidents staying on beyond the official expiration of their mandates would erode development.
“This is precisely the reason why the Secretary-General and I travel together… the World Bank cannot get involved in domestic politics, political elections and processes but of course for the Secretary-General it’s one of his major priorities… We think this is a formula that has already helped,” said Kim.
But the donor deluge also acts as a reminder of the risk of dumping aid on fragile countries ill-equipped to receive or direct it.
In 2011, the G7+, a group of 20 fragile states, successfully lobbied for a “New Deal” to ensure donors work according to fragile countries’ own priorities. But its first monitoring progress report, out this year, is scathing, saying its potential is “still untapped” and progress is slow.
“The change is slow and not systemic,” says the monitoring report, which highlights a “rushed and donor-driven” approach to peace-building in Somalia.
Kim defended the World Bank’s record, saying the need to involve countries in determining their own priorities is “huge”.
“These commitments we’re announcing have been very carefully vetted with the countries, and with the countries being in the lead,” he said. “In regional projects it gets a little trickier; this is why we think [with this joint trip] we have a better chance to ensure everything is coordinated.”
He suggested that, despite long, lingering concerns over corruption at the heart of the Mogadishu government, the World Bank was keen to develop a way for Somalia to clear its debts, along the lines of that followed by Myanmar.
“We cannot provide any concessional loans to Somalia because of the arrears situation [but] they’re eligible for debt relief,” he said. “We’ve made real progress in other parts of the world; working with states previously isolated and bringing them into the world; Myanmar is a good example. We know there are still problems, reports of corruption [in Somalia], but it’s critical for us to prepare these countries for joining the rest of the world.”
LeveragedBuyout
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http://online.wsj.com/articles/imf-says-mid-east-north-africa-face-poor-growth-1414400288
IMF Says Mid-East, North Africa Face Poor Growth
Region Under Pressure from Conflict in Iraq, Syria and Libya, Weak Oil Prices
By
ASA FITCH
Oct. 27, 2014 4:58 a.m. ET
DUBAI—The Middle East and North Africa is set for another year of poor economic growth, weighed down by conflict in Iraq, Syria and Libya and beset by sky-high unemployment coupled with lower oil prices, according to the International Monetary Fund.
The IMF expects the region’s economy to grow by 2.6% this year, rising to 3.8% next year, it said in a regional economic outlook released on Monday. But there are serious downside risks to that forecast. Chief among them are the brewing conflict with Islamic State extremists in Syria and Iraq and political instability in Libya.
“The regional economic impact has been limited so far, but an estimated 11 million displaced persons are already putting pressure on budgets, labor markets and social cohesion in neighboring countries,” IMF Middle East director Masood Ahmed said.
Middle Eastern growth has been muted during the almost four years since Arab Spring unrest swept across Egypt, Tunisia and other countries. The economic ripples of these jarring transitions are still being felt today against the backdrop of a more fragile than hoped-for global recovery from the financial crisis.
One major contributor to recent socioeconomic ills has been double-digit unemployment rates in many Middle Eastern countries. But the IMF’s baseline gross domestic product growth projections aren’t high enough to reduce unemployment in a meaningful way, it said.
Unemployment is of special concern among oil importers such as Egypt, Jordan, Morocco and Tunisia, which have some of the highest jobless rates in the region, especially among young people. In Egypt, unemployment is at 13.3%, according to the most recent government estimates.
To solve the jobs riddle, Middle Eastern countries needed “deep, multifaceted transformation” that buttressed the private sector and raised living standards, the IMF said.
“The region needs sustained, stronger and more inclusive growth to markedly reduce unemployment—a critical issue facing nearly all countries in the region,” Mr. Ahmed said.
For oil exporters, mostly in the Persian Gulf, challenges revolve mostly around containing government budgets. Gulf countries responded to the Arab Spring by ramping up social infrastructure spending to head off local unrest. While that has boosted economic growth, it has put a fresh strain on budgets.
Assuming current fiscal policies continue, the oil exporters’ fiscal surpluses will disappear by 2017, the IMF estimates, forcing them to tap savings in sovereign-wealth funds to finance current expenditure. Bahrain and all Middle Eastern countries outside the Gulf are already running government budget deficits.
Christine Lagarde , the IMF’s managing director, said this week that Gulf countries needed to seek fiscal consolidation in the medium-term, a priority that has become more urgent because of the 25% decline in oil prices since the summer.
If the oil market stays depressed, the reckoning could come even sooner.
“If oil prices stay at current lows for a prolonged period, oil exporters on aggregate could move from fiscal surplus to deficit already next year,” Mr. Ahmed said. He urged reforms to improve education, spur private-sector growth and diversify economic activity away from energy.
Egypt, Jordan, Morocco and Tunisia are among a number of Middle Eastern countries that have drawn back energy subsidies recently, moves that the IMF has cheered. The money saved is now being diverted to targeted investments to reduce poverty and to contain budget deficits, the IMF said.
IMF Says Mid-East, North Africa Face Poor Growth
Region Under Pressure from Conflict in Iraq, Syria and Libya, Weak Oil Prices
By
ASA FITCH
Oct. 27, 2014 4:58 a.m. ET
DUBAI—The Middle East and North Africa is set for another year of poor economic growth, weighed down by conflict in Iraq, Syria and Libya and beset by sky-high unemployment coupled with lower oil prices, according to the International Monetary Fund.
The IMF expects the region’s economy to grow by 2.6% this year, rising to 3.8% next year, it said in a regional economic outlook released on Monday. But there are serious downside risks to that forecast. Chief among them are the brewing conflict with Islamic State extremists in Syria and Iraq and political instability in Libya.
“The regional economic impact has been limited so far, but an estimated 11 million displaced persons are already putting pressure on budgets, labor markets and social cohesion in neighboring countries,” IMF Middle East director Masood Ahmed said.
Middle Eastern growth has been muted during the almost four years since Arab Spring unrest swept across Egypt, Tunisia and other countries. The economic ripples of these jarring transitions are still being felt today against the backdrop of a more fragile than hoped-for global recovery from the financial crisis.
One major contributor to recent socioeconomic ills has been double-digit unemployment rates in many Middle Eastern countries. But the IMF’s baseline gross domestic product growth projections aren’t high enough to reduce unemployment in a meaningful way, it said.
Unemployment is of special concern among oil importers such as Egypt, Jordan, Morocco and Tunisia, which have some of the highest jobless rates in the region, especially among young people. In Egypt, unemployment is at 13.3%, according to the most recent government estimates.
To solve the jobs riddle, Middle Eastern countries needed “deep, multifaceted transformation” that buttressed the private sector and raised living standards, the IMF said.
“The region needs sustained, stronger and more inclusive growth to markedly reduce unemployment—a critical issue facing nearly all countries in the region,” Mr. Ahmed said.
For oil exporters, mostly in the Persian Gulf, challenges revolve mostly around containing government budgets. Gulf countries responded to the Arab Spring by ramping up social infrastructure spending to head off local unrest. While that has boosted economic growth, it has put a fresh strain on budgets.
Assuming current fiscal policies continue, the oil exporters’ fiscal surpluses will disappear by 2017, the IMF estimates, forcing them to tap savings in sovereign-wealth funds to finance current expenditure. Bahrain and all Middle Eastern countries outside the Gulf are already running government budget deficits.
Christine Lagarde , the IMF’s managing director, said this week that Gulf countries needed to seek fiscal consolidation in the medium-term, a priority that has become more urgent because of the 25% decline in oil prices since the summer.
If the oil market stays depressed, the reckoning could come even sooner.
“If oil prices stay at current lows for a prolonged period, oil exporters on aggregate could move from fiscal surplus to deficit already next year,” Mr. Ahmed said. He urged reforms to improve education, spur private-sector growth and diversify economic activity away from energy.
Egypt, Jordan, Morocco and Tunisia are among a number of Middle Eastern countries that have drawn back energy subsidies recently, moves that the IMF has cheered. The money saved is now being diverted to targeted investments to reduce poverty and to contain budget deficits, the IMF said.
somsak
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@somsak Rates are rock-bottom. There's never been a better time to get a bailout. Get yours now, before they run out!
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IMF Forced to Raise Key Lending Rate to Protect Lender Nations - Real Time Economics - WSJ
IMF Forced to Raise Key Lending Rate to Protect Lender Nations
- October 27, 2014, 10:19 AM ET
ByIan Talley
The International Monetary Fund has been facing a perverse scenario: Key interest rates slipping into negative territory could have forced its member nations to pay interest for the privilege of bailing out other nations.
The IMF, the world’s emergency lender, was forced to change a policy Monday to keep that from happening. The fund set a floor on the rate that determines the interest it pays to creditor nations for lending money to the IMF’s bailout kitty, and the cost for borrowing countries to access emergency IMF loans.
Now, the IMF will pay lenders at least 0.05%, even if the rates that compose the fund’s benchmark fall into negative territory, as rates have done in Japan and some eurozone countries.
The IMF’s key rate is determined by the cost to borrow short-term debt in the U.S., U.K., eurozone and Japan. In the wake of the global financial crisis, central bankers have pushed down borrowing costs in an effort to spur growth, testing the “zero bound,” or lowest rate limits, of monetary policy.
The aggregate effect cut the IMF’s lending rate to a historical low of 0.03% last week. That’s down from 4.38% in July 2007 before the financial crisis hit.
The IMF feared it could cross into negative territory as the European Central Bank and Bank of Japan continue easing monetary policy.
Without the a floor rate, it could create a “perverse situation because our creditor nations would be paying for providing us resources,” a senior IMF official said.
What is negative interest rate? Negative w.r.t. inflation? Or does it mean lender should pay deposit fee?
- In fact, if interest rate is too low, what one should do is to loan the money out of banks and then speculate in stock market. Any stock whose dividen is higher than that small interest can give easy profit.
- Given different between interest rate among countries, if you can do cross border borrowing, and cross border stock market, or even better, foreign government bonds, using the above logic, one should get higher profit with ease.
^
^
Am I correct? If so, let's start arbitrage the market!
LeveragedBuyout
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The article isn't clear on this point, but it's entirely possible that even nominal interest rates have gone negative. This has already happened in Germany, where there was such demand for short-term bunds that the interest rate went negative (i.e. investors paid for the privilege of holding bunds, because they wanted a safe vehicle in which to invest). I wouldn't be surprised if this happened to the IMF as well, but because the IMF isn't a sovereign government, it would obviously be deeply harmful to the IMF's mission if it had to charge for the privilege of contributing to the IMF!
- In fact, if interest rate is too low, what one should do is to loan the money out of banks and then speculate in stock market. Any stock whose dividen is higher than that small interest can give easy profit.
- Given different between interest rate among countries, if you can do cross border borrowing, and cross border stock market, or even better, foreign government bonds, using the above logic, one should get higher profit with ease.
^
^
Am I correct? If so, let's start arbitrage the market!
I'm afraid you're a bit late to this party. Quantitative easing and the carry trade already accomplished this arbitrage. Don't worry, though--if you wait long enough, another asset bubble will inflate somewhere, and you'll be able to participate in that. Heh.
LeveragedBuyout
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My commentary: There is a glut of savings in the world, and savers (investors) seek the best returns they can get for those savings. Thus, they try to invest where they can get the highest risk-adjusted returns, and that means there is a steady flow from low-growth, low-interest rate developed economies to high-growth, high-interest rate developing economies. Some of this money flow takes the form of FDI (foreign direct investment, or investment in/acquisition of businesses), but most of the flow is directed into the country's capital markets (debt markets, equity markets, and as a proxy, foreign exchange markets). This latter flow is often termed "hot money," because it is invested in liquid assets. It can be invested easily, and can be liquidated easily. Because the money can enter and leave the country so easily, it causes large fluctuations (volatility) in the target country's bond markets, equity markets, and foreign exchange rate.
The common solutions to combat "hot money" flows are capital controls (i.e. making it harder to get money into and out of the country) and interest rates (i.e. if you want money to come in to the country, raise interest rates to attract investors, and if you want money to leave the country, lower interest rates, so investors will look for their returns elsewhere). This article appears to indicate that capital controls and interest rate tools have not been as effective in controlling hot money flows as previously believed when the country in question is in a period of crisis.
@AUSTERLITZ How was that?
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What Can Emerging Markets Do to Protect Against Hot Money Flows? Not Much, Apparently - Real Time Economics - WSJ
ByIan Talley
The International Monetary Fund has been warning for years that emerging markets must put their economic houses in order to avoid getting burned by “hot money” cash flows when global markets freak out. (Like they might again in the unlikely event that the U.S. Federal Reserve changes its rate guidance Wednesday.)
But it may not really matter.
“There is little policy makers can to do tame the effects of the global financial cycle on gross private capital inflow,” Erlend Nier, Tahsin Saadi Sedik and Tomas Mondino write in a new paper published by the IMF.
The three economists found that when the market’s fear gauge, the VIX, is high, foreign investors sell off without much discrimination. “During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance,” they said.
The IMF economists said that effect only increases the more a country allows free-flowing investment flows, or an open capital account, a key tenet advocated by the U.S., Europe and other major industrialized nations. Controls on cross-border investments only have marginal effects, they said. And if authorities use the tool with the biggest impact–interest rates–to counter “hot” flows, “it may also be damaging the domestic economy.”
Take the so-called “taper tantrum” that rocked emerging markets across the board last year after U.S. Fed officials changed market expectations about U.S. interest rates. In the weeks that followed the Fed’s May signaling, equity, bond and currency markets in industrializing nations plummeted, some losing more than 20% of their value, as investors pulled out cash.
“A substantial part of the flows could not be explained by emerging market’s economic fundamentals,” the IMF said in a review of the episode.
After the initial shock, the IMF and the Institute of International Finance argue that investors showed increasing discrimination between those economies that had better balance sheets and healthier growth fundamentals and those that didn’t. Since then, exchange rates, debt pricing and equity values in countries with weaker economic fundamentals and questionable balance sheets have seen the value of their currencies fall much faster and farther than those with healthier economies.
But the first round of selling hit pretty much all emerging markets as investors shied away from potential risk and put their cash into U.S. treasuries and other assets considered relatively safer bets in July 2013.
Hung Tran, executive managing director at the IIF, said data since then shows declining correlation of asset valuations among emerging markets, reflecting more differentiation by investors.
“Good policy matters, helping to contain the volatility of capital flows which has been at times a challenge to emerging market policy makers,” he said in a recent note to the IIF’s members, 500-plus of the world’s largest private financial institutions.
A main problem, says Mohamed El-Erian, chief economic advisor at Allianz, is what he calls “tourist dollars” that dominate investment in developing countries.
“A tourist dollar…is pushed to take risk as opposed to being pulled to take risk,” Mr. El-Erian said in a lecture at the Peterson Institute for International Economics. “During the good times, capital comes flooding in.…It distorts your credit system, it creates all sorts of macro difficulties, and then, virtually overnight, the capital flows out.”
Mr. El-Erian said that despite a raft of measures emerging market authorities took to dissuade investment in vulnerable sectors or control cross-border cash movements, “There’s a sense that they are unable to protect themselves from the vagaries of capital flows.”
The IIF says that recent bouts of volatility are likely to continue as rates move in different directions in the U.S., the eurozone, Japan and other major economies. As volatility spiked to multiyear highs this month, investment in emerging markets reversed in many emerging markets. The IIF estimated that portfolio capital flows fell to a net $1 billion for the month, with emerging Europe, Asia, Africa and the Middle East seeing net outflows of cash.
“There is an increased risk of abrupt shifts in expectations about…monetary policy paths, which could spark a rise in risk aversion and a retrenchment of EM capital flows,” said Charles Collyns, IIF’s chief economist in a recent note. For example, the bank industry group estimates annual portfolio flows to emerging markets would fall by around $100 billion if markets were to start expecting an increase in the federal-funds rate by 50 basis points per quarter instead of the current 25 basis points.
It’s a trend that could be exacerbated by the fact that 10 of the world’s top global asset management firms account for more than $19 trillion in managed assets.
The combination of asset concentration, overvaluation of asset prices and skittish investors risks more market shocks ahead, the IMF warned in its latest review of global financial conditions.
“Emerging markets are more vulnerable to shocks” than they’ve historically been, the IMF said.
The common solutions to combat "hot money" flows are capital controls (i.e. making it harder to get money into and out of the country) and interest rates (i.e. if you want money to come in to the country, raise interest rates to attract investors, and if you want money to leave the country, lower interest rates, so investors will look for their returns elsewhere). This article appears to indicate that capital controls and interest rate tools have not been as effective in controlling hot money flows as previously believed when the country in question is in a period of crisis.
@AUSTERLITZ How was that?
---
What Can Emerging Markets Do to Protect Against Hot Money Flows? Not Much, Apparently - Real Time Economics - WSJ
- October 28, 2014, 2:16 PM ET
ByIan Talley
The International Monetary Fund has been warning for years that emerging markets must put their economic houses in order to avoid getting burned by “hot money” cash flows when global markets freak out. (Like they might again in the unlikely event that the U.S. Federal Reserve changes its rate guidance Wednesday.)
But it may not really matter.
“There is little policy makers can to do tame the effects of the global financial cycle on gross private capital inflow,” Erlend Nier, Tahsin Saadi Sedik and Tomas Mondino write in a new paper published by the IMF.
The three economists found that when the market’s fear gauge, the VIX, is high, foreign investors sell off without much discrimination. “During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance,” they said.
The IMF economists said that effect only increases the more a country allows free-flowing investment flows, or an open capital account, a key tenet advocated by the U.S., Europe and other major industrialized nations. Controls on cross-border investments only have marginal effects, they said. And if authorities use the tool with the biggest impact–interest rates–to counter “hot” flows, “it may also be damaging the domestic economy.”
Take the so-called “taper tantrum” that rocked emerging markets across the board last year after U.S. Fed officials changed market expectations about U.S. interest rates. In the weeks that followed the Fed’s May signaling, equity, bond and currency markets in industrializing nations plummeted, some losing more than 20% of their value, as investors pulled out cash.
“A substantial part of the flows could not be explained by emerging market’s economic fundamentals,” the IMF said in a review of the episode.
After the initial shock, the IMF and the Institute of International Finance argue that investors showed increasing discrimination between those economies that had better balance sheets and healthier growth fundamentals and those that didn’t. Since then, exchange rates, debt pricing and equity values in countries with weaker economic fundamentals and questionable balance sheets have seen the value of their currencies fall much faster and farther than those with healthier economies.
But the first round of selling hit pretty much all emerging markets as investors shied away from potential risk and put their cash into U.S. treasuries and other assets considered relatively safer bets in July 2013.
Hung Tran, executive managing director at the IIF, said data since then shows declining correlation of asset valuations among emerging markets, reflecting more differentiation by investors.
“Good policy matters, helping to contain the volatility of capital flows which has been at times a challenge to emerging market policy makers,” he said in a recent note to the IIF’s members, 500-plus of the world’s largest private financial institutions.
A main problem, says Mohamed El-Erian, chief economic advisor at Allianz, is what he calls “tourist dollars” that dominate investment in developing countries.
“A tourist dollar…is pushed to take risk as opposed to being pulled to take risk,” Mr. El-Erian said in a lecture at the Peterson Institute for International Economics. “During the good times, capital comes flooding in.…It distorts your credit system, it creates all sorts of macro difficulties, and then, virtually overnight, the capital flows out.”
Mr. El-Erian said that despite a raft of measures emerging market authorities took to dissuade investment in vulnerable sectors or control cross-border cash movements, “There’s a sense that they are unable to protect themselves from the vagaries of capital flows.”
The IIF says that recent bouts of volatility are likely to continue as rates move in different directions in the U.S., the eurozone, Japan and other major economies. As volatility spiked to multiyear highs this month, investment in emerging markets reversed in many emerging markets. The IIF estimated that portfolio capital flows fell to a net $1 billion for the month, with emerging Europe, Asia, Africa and the Middle East seeing net outflows of cash.
“There is an increased risk of abrupt shifts in expectations about…monetary policy paths, which could spark a rise in risk aversion and a retrenchment of EM capital flows,” said Charles Collyns, IIF’s chief economist in a recent note. For example, the bank industry group estimates annual portfolio flows to emerging markets would fall by around $100 billion if markets were to start expecting an increase in the federal-funds rate by 50 basis points per quarter instead of the current 25 basis points.
It’s a trend that could be exacerbated by the fact that 10 of the world’s top global asset management firms account for more than $19 trillion in managed assets.
The combination of asset concentration, overvaluation of asset prices and skittish investors risks more market shocks ahead, the IMF warned in its latest review of global financial conditions.
“Emerging markets are more vulnerable to shocks” than they’ve historically been, the IMF said.
Last edited:
AUSTERLITZ
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My commentary: There is a glut of savings in the world, and savers (investors) seek the best returns they can get for those savings. Thus, they try to invest where they can get the highest risk-adjusted returns, and that means there is a steady flow from low-growth, low-interest rate developed economies to high-growth, high-interest rate developing economies. Some of this money flow takes the form of FDI (foreign direct investment, or investment in/acquisition of businesses), but most of the flow is directed into the country's capital markets (debt markets, equity markets, and as a proxy, foreign exchange markets). This latter flow is often termed "hot money," because it is invested in liquid assets. It can be invested easily, and can be liquidated easily. Because the money can enter and leave the country so easily, it causes large fluctuations (volatility) in the target country's bond markets, equity markets, and foreign exchange rate. The common solutions to combat "hot money" flows are capital controls (i.e. making it harder to get money into and out of the country) and interest rates (i.e. if you want money to come in to the country, raise interest rates to attract investors, and if you want money to leave the country, lower interest rates, so investors will look for their returns elsewhere). This article appears to indicate that capital controls and interest rate tools have not been as effective in controlling hot money flows as previously believed when the country in question is in a period of crisis.
@AUSTERLITZ How was that?
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What Can Emerging Markets Do to Protect Against Hot Money Flows? Not Much, Apparently - Real Time Economics - WSJ
What Can Emerging Markets Do to Protect Against Hot Money Flows? Not Much, Apparently
- October 28, 2014, 2:16 PM ET
ByIan Talley
The International Monetary Fund has been warning for years that emerging markets must put their economic houses in order to avoid getting burned by “hot money” cash flows when global markets freak out. (Like they might again in the unlikely event that the U.S. Federal Reserve changes its rate guidance Wednesday.)
But it may not really matter.
“There is little policy makers can to do tame the effects of the global financial cycle on gross private capital inflow,” Erlend Nier, Tahsin Saadi Sedik and Tomas Mondino write in a new paper published by the IMF.
The three economists found that when the market’s fear gauge, the VIX, is high, foreign investors sell off without much discrimination. “During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance,” they said.
The IMF economists said that effect only increases the more a country allows free-flowing investment flows, or an open capital account, a key tenet advocated by the U.S., Europe and other major industrialized nations. Controls on cross-border investments only have marginal effects, they said. And if authorities use the tool with the biggest impact–interest rates–to counter “hot” flows, “it may also be damaging the domestic economy.”
Take the so-called “taper tantrum” that rocked emerging markets across the board last year after U.S. Fed officials changed market expectations about U.S. interest rates. In the weeks that followed the Fed’s May signaling, equity, bond and currency markets in industrializing nations plummeted, some losing more than 20% of their value, as investors pulled out cash.
“A substantial part of the flows could not be explained by emerging market’s economic fundamentals,” the IMF said in a review of the episode.
After the initial shock, the IMF and the Institute of International Finance argue that investors showed increasing discrimination between those economies that had better balance sheets and healthier growth fundamentals and those that didn’t. Since then, exchange rates, debt pricing and equity values in countries with weaker economic fundamentals and questionable balance sheets have seen the value of their currencies fall much faster and farther than those with healthier economies.
But the first round of selling hit pretty much all emerging markets as investors shied away from potential risk and put their cash into U.S. treasuries and other assets considered relatively safer bets in July 2013.
Hung Tran, executive managing director at the IIF, said data since then shows declining correlation of asset valuations among emerging markets, reflecting more differentiation by investors.
“Good policy matters, helping to contain the volatility of capital flows which has been at times a challenge to emerging market policy makers,” he said in a recent note to the IIF’s members, 500-plus of the world’s largest private financial institutions.
A main problem, says Mohamed El-Erian, chief economic advisor at Allianz, is what he calls “tourist dollars” that dominate investment in developing countries.
“A tourist dollar…is pushed to take risk as opposed to being pulled to take risk,” Mr. El-Erian said in a lecture at the Peterson Institute for International Economics. “During the good times, capital comes flooding in.…It distorts your credit system, it creates all sorts of macro difficulties, and then, virtually overnight, the capital flows out.”
Mr. El-Erian said that despite a raft of measures emerging market authorities took to dissuade investment in vulnerable sectors or control cross-border cash movements, “There’s a sense that they are unable to protect themselves from the vagaries of capital flows.”
The IIF says that recent bouts of volatility are likely to continue as rates move in different directions in the U.S., the eurozone, Japan and other major economies. As volatility spiked to multiyear highs this month, investment in emerging markets reversed in many emerging markets. The IIF estimated that portfolio capital flows fell to a net $1 billion for the month, with emerging Europe, Asia, Africa and the Middle East seeing net outflows of cash.
“There is an increased risk of abrupt shifts in expectations about…monetary policy paths, which could spark a rise in risk aversion and a retrenchment of EM capital flows,” said Charles Collyns, IIF’s chief economist in a recent note. For example, the bank industry group estimates annual portfolio flows to emerging markets would fall by around $100 billion if markets were to start expecting an increase in the federal-funds rate by 50 basis points per quarter instead of the current 25 basis points.
It’s a trend that could be exacerbated by the fact that 10 of the world’s top global asset management firms account for more than $19 trillion in managed assets.
The combination of asset concentration, overvaluation of asset prices and skittish investors risks more market shocks ahead, the IMF warned in its latest review of global financial conditions.
“Emerging markets are more vulnerable to shocks” than they’ve historically been, the IMF said.
Brilliant, very nice.Keep going,but no rush.
LeveragedBuyout
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http://online.wsj.com/articles/cong...n-bid-to-bolster-food-productivity-1414506517
Congo Seeks Investors for Farmland Bigger Than France
African Country Seeks to Attract Capital and Technology to Bolster Jobs, Food Production
ENLARGE
The Democratic Republic of Congo, one of the world's poorest countries, is rich in mineral resources, forests, cultivable soil and water. AGENCE FRANCE-PRESSE/GETTY IMAGES
By
SIMON CLARK
Updated Oct. 28, 2014 10:50 a.m. ET
The Democratic Republic of Congo plans to lease farmland covering an area larger than France in an attempt to attract capital and technology capable of boosting jobs and food productivity in one of the world’s poorest countries.
Congo may lease as much as 640,000 square kilometers, or more than a quarter of the central African nation, according to John Ulimwengu, an adviser to the Congolese prime minister who is organizing the project. The land is scattered across Congo, which is rich in mineral resources, forests, cultivable soil and water, including the Congo River, Africa’s second-longest after the Nile. The government wants investors to transform the country’s subsistence-farming.
The farmland will be leased rather than sold outright in a bid to avoid future conflicts with investors who might be accused of land-grabbing. Memories of colonial injustice abound on the African continent. Investors from China to the United Arab Emirates and Western nations are buying African land as they search for yield and productive assets. Clashes over land have occurred in Zimbabwe, where President Robert Mugabe seized farms from white settlers.
“We don’t want what happened in Zimbabwe happening in DRC—land conflict,” said Mr. Ulimwengu, who is also a senior researcher at the Washington-based International Food Policy Research Institute. “We want to make sure that we are doing it properly.”
Africom Commodities (Pty) Ltd., a closely held South African company, is developing the first of Congo’s agribusiness parks at Bukanga-Lonzo in partnership with the Congolese government. Africom has already planted 2,200 hectares of maize, and a total of 10,000 hectares will be planted by the end of January, according to Tania Grobler a spokeswoman for the company.
Converting African land into large farms is “a hugely sensitive issue” because investors can encounter conflicting claims to ownership and usage from locals, said Andrew Brown, chief investment officer of Emerging Capital Partners, a private-equity firm that invests in Africa. “If you get into clearing previously unused land you have to pick your way very carefully through the ownership rights and land rights,” Mr. Brown said in an interview.
Badly devised projects can harm or displace local people, who may then find ways to ensure the projects fail, said Jennifer Duncan, the Africa program director at Landesa, a Seattle-based nonprofit that works to secure land rights for the world’s poorest farmers. Congo ranks second-last on the United Nations’ Human Development Index, a measure of human development indicators such as living a long and healthy life, being knowledgeable and achieving a decent standard of living.
“I have yet to see an agricultural investment in Africa that I am convinced will be to the net benefit of the communities that were using the land before,” Ms. Duncan said. “Respecting land rights so that investments are sustainable is essential to effective risk management and long term financial success.”
Congo’s plan to lease land to investors was developed after an earlier initiative to support small-scale farmers failed. A government project to provide seeds and equipment such as new hoes and machetes wasn’t sustainable because it depended on limited public funds, Mr. Ulimwengu said. The farmers also didn’t have the capacity to store, process and transport their produce to market.
The government plans to initially develop 21 agribusiness parks that will provide food, employment and a market for the produce of nearby small-scale farmers, Mr. Ulimwengu said. Infrastructure including power, water and roads will be provided by the government, which plans to sell 25-year leases to the land. The leases may be longer if new legislation is passed.
Mr. Ulimwengu hopes the agricultural parks will grow into new cities. The first 80,000-hectare site near the capital, Kinshasa, is being connected to power from a hydroelectric dam. The government has spent $83 million on the site, which could expand to a population of one million.
“The private sector won’t come unless there is some basic infrastructure,” Mr. Ulimwengu said in an interview in London in October, where he spoke at an African conference attended by investors managing about $245 billion. “It is another way of doing rural development while making money.”
Africom will next year start growing vegetables on 1,000 hectares. The food will be for domestic consumption and eventually for export too. The South African company is developing a fresh produce market to export goods in Kinshasa.
“It is Africom’s wish to continue with more parks,” Ms. Grobler said. “We will prove ourselves to the Congolese government.”
Congo’s population of 67.5 million live on average of $400 each a year, according to the World Bank. A mining boom that followed the end of a bloody civil war in 2003 spurred economic growth but brought few improvements to the well-being of the majority of people, who depend on farming for their livelihoods.
“Growth is being driven by the mining sector, mostly copper and cobalt. They are not known to be pro-poor sectors. You come in with a big chunk of equipment. You extract whatever you want. You don’t need many jobs for that,” Mr. Ulimwengu said. “It is becoming politically and socially difficult to celebrate growth while you have many people in poverty.”
There have been more than 1,000 international purchases of land in developing countries, from Kenya to Brazil, totaling 375,976 square kilometers, according to the Land Matrix, a database coordinated by groups including the Rome-based International Land Coalition. That’s bigger than Germany.
“We need to build the whole value chain around the agriculture sector,” Mr. Ulimwengu said. “It isn’t the government who’s going to revamp the agriculture sector. It has to be the private sector.”
Congo Seeks Investors for Farmland Bigger Than France
African Country Seeks to Attract Capital and Technology to Bolster Jobs, Food Production
The Democratic Republic of Congo, one of the world's poorest countries, is rich in mineral resources, forests, cultivable soil and water. AGENCE FRANCE-PRESSE/GETTY IMAGES
By
SIMON CLARK
Updated Oct. 28, 2014 10:50 a.m. ET
The Democratic Republic of Congo plans to lease farmland covering an area larger than France in an attempt to attract capital and technology capable of boosting jobs and food productivity in one of the world’s poorest countries.
Congo may lease as much as 640,000 square kilometers, or more than a quarter of the central African nation, according to John Ulimwengu, an adviser to the Congolese prime minister who is organizing the project. The land is scattered across Congo, which is rich in mineral resources, forests, cultivable soil and water, including the Congo River, Africa’s second-longest after the Nile. The government wants investors to transform the country’s subsistence-farming.
The farmland will be leased rather than sold outright in a bid to avoid future conflicts with investors who might be accused of land-grabbing. Memories of colonial injustice abound on the African continent. Investors from China to the United Arab Emirates and Western nations are buying African land as they search for yield and productive assets. Clashes over land have occurred in Zimbabwe, where President Robert Mugabe seized farms from white settlers.
“We don’t want what happened in Zimbabwe happening in DRC—land conflict,” said Mr. Ulimwengu, who is also a senior researcher at the Washington-based International Food Policy Research Institute. “We want to make sure that we are doing it properly.”
Africom Commodities (Pty) Ltd., a closely held South African company, is developing the first of Congo’s agribusiness parks at Bukanga-Lonzo in partnership with the Congolese government. Africom has already planted 2,200 hectares of maize, and a total of 10,000 hectares will be planted by the end of January, according to Tania Grobler a spokeswoman for the company.
Converting African land into large farms is “a hugely sensitive issue” because investors can encounter conflicting claims to ownership and usage from locals, said Andrew Brown, chief investment officer of Emerging Capital Partners, a private-equity firm that invests in Africa. “If you get into clearing previously unused land you have to pick your way very carefully through the ownership rights and land rights,” Mr. Brown said in an interview.
Badly devised projects can harm or displace local people, who may then find ways to ensure the projects fail, said Jennifer Duncan, the Africa program director at Landesa, a Seattle-based nonprofit that works to secure land rights for the world’s poorest farmers. Congo ranks second-last on the United Nations’ Human Development Index, a measure of human development indicators such as living a long and healthy life, being knowledgeable and achieving a decent standard of living.
“I have yet to see an agricultural investment in Africa that I am convinced will be to the net benefit of the communities that were using the land before,” Ms. Duncan said. “Respecting land rights so that investments are sustainable is essential to effective risk management and long term financial success.”
Congo’s plan to lease land to investors was developed after an earlier initiative to support small-scale farmers failed. A government project to provide seeds and equipment such as new hoes and machetes wasn’t sustainable because it depended on limited public funds, Mr. Ulimwengu said. The farmers also didn’t have the capacity to store, process and transport their produce to market.
The government plans to initially develop 21 agribusiness parks that will provide food, employment and a market for the produce of nearby small-scale farmers, Mr. Ulimwengu said. Infrastructure including power, water and roads will be provided by the government, which plans to sell 25-year leases to the land. The leases may be longer if new legislation is passed.
Mr. Ulimwengu hopes the agricultural parks will grow into new cities. The first 80,000-hectare site near the capital, Kinshasa, is being connected to power from a hydroelectric dam. The government has spent $83 million on the site, which could expand to a population of one million.
“The private sector won’t come unless there is some basic infrastructure,” Mr. Ulimwengu said in an interview in London in October, where he spoke at an African conference attended by investors managing about $245 billion. “It is another way of doing rural development while making money.”
Africom will next year start growing vegetables on 1,000 hectares. The food will be for domestic consumption and eventually for export too. The South African company is developing a fresh produce market to export goods in Kinshasa.
“It is Africom’s wish to continue with more parks,” Ms. Grobler said. “We will prove ourselves to the Congolese government.”
Congo’s population of 67.5 million live on average of $400 each a year, according to the World Bank. A mining boom that followed the end of a bloody civil war in 2003 spurred economic growth but brought few improvements to the well-being of the majority of people, who depend on farming for their livelihoods.
“Growth is being driven by the mining sector, mostly copper and cobalt. They are not known to be pro-poor sectors. You come in with a big chunk of equipment. You extract whatever you want. You don’t need many jobs for that,” Mr. Ulimwengu said. “It is becoming politically and socially difficult to celebrate growth while you have many people in poverty.”
There have been more than 1,000 international purchases of land in developing countries, from Kenya to Brazil, totaling 375,976 square kilometers, according to the Land Matrix, a database coordinated by groups including the Rome-based International Land Coalition. That’s bigger than Germany.
“We need to build the whole value chain around the agriculture sector,” Mr. Ulimwengu said. “It isn’t the government who’s going to revamp the agriculture sector. It has to be the private sector.”
SvenSvensonov
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http://online.wsj.com/articles/cong...n-bid-to-bolster-food-productivity-1414506517
Congo Seeks Investors for Farmland Bigger Than France
African Country Seeks to Attract Capital and Technology to Bolster Jobs, Food Production
ENLARGE
The Democratic Republic of Congo, one of the world's poorest countries, is rich in mineral resources, forests, cultivable soil and water. AGENCE FRANCE-PRESSE/GETTY IMAGES
By
SIMON CLARK
Updated Oct. 28, 2014 10:50 a.m. ET
The Democratic Republic of Congo plans to lease farmland covering an area larger than France in an attempt to attract capital and technology capable of boosting jobs and food productivity in one of the world’s poorest countries.
Congo may lease as much as 640,000 square kilometers, or more than a quarter of the central African nation, according to John Ulimwengu, an adviser to the Congolese prime minister who is organizing the project. The land is scattered across Congo, which is rich in mineral resources, forests, cultivable soil and water, including the Congo River, Africa’s second-longest after the Nile. The government wants investors to transform the country’s subsistence-farming.
The farmland will be leased rather than sold outright in a bid to avoid future conflicts with investors who might be accused of land-grabbing. Memories of colonial injustice abound on the African continent. Investors from China to the United Arab Emirates and Western nations are buying African land as they search for yield and productive assets. Clashes over land have occurred in Zimbabwe, where President Robert Mugabe seized farms from white settlers.
“We don’t want what happened in Zimbabwe happening in DRC—land conflict,” said Mr. Ulimwengu, who is also a senior researcher at the Washington-based International Food Policy Research Institute. “We want to make sure that we are doing it properly.”
Africom Commodities (Pty) Ltd., a closely held South African company, is developing the first of Congo’s agribusiness parks at Bukanga-Lonzo in partnership with the Congolese government. Africom has already planted 2,200 hectares of maize, and a total of 10,000 hectares will be planted by the end of January, according to Tania Grobler a spokeswoman for the company.
Converting African land into large farms is “a hugely sensitive issue” because investors can encounter conflicting claims to ownership and usage from locals, said Andrew Brown, chief investment officer of Emerging Capital Partners, a private-equity firm that invests in Africa. “If you get into clearing previously unused land you have to pick your way very carefully through the ownership rights and land rights,” Mr. Brown said in an interview.
Badly devised projects can harm or displace local people, who may then find ways to ensure the projects fail, said Jennifer Duncan, the Africa program director at Landesa, a Seattle-based nonprofit that works to secure land rights for the world’s poorest farmers. Congo ranks second-last on the United Nations’ Human Development Index, a measure of human development indicators such as living a long and healthy life, being knowledgeable and achieving a decent standard of living.
“I have yet to see an agricultural investment in Africa that I am convinced will be to the net benefit of the communities that were using the land before,” Ms. Duncan said. “Respecting land rights so that investments are sustainable is essential to effective risk management and long term financial success.”
Congo’s plan to lease land to investors was developed after an earlier initiative to support small-scale farmers failed. A government project to provide seeds and equipment such as new hoes and machetes wasn’t sustainable because it depended on limited public funds, Mr. Ulimwengu said. The farmers also didn’t have the capacity to store, process and transport their produce to market.
The government plans to initially develop 21 agribusiness parks that will provide food, employment and a market for the produce of nearby small-scale farmers, Mr. Ulimwengu said. Infrastructure including power, water and roads will be provided by the government, which plans to sell 25-year leases to the land. The leases may be longer if new legislation is passed.
Mr. Ulimwengu hopes the agricultural parks will grow into new cities. The first 80,000-hectare site near the capital, Kinshasa, is being connected to power from a hydroelectric dam. The government has spent $83 million on the site, which could expand to a population of one million.
“The private sector won’t come unless there is some basic infrastructure,” Mr. Ulimwengu said in an interview in London in October, where he spoke at an African conference attended by investors managing about $245 billion. “It is another way of doing rural development while making money.”
Africom will next year start growing vegetables on 1,000 hectares. The food will be for domestic consumption and eventually for export too. The South African company is developing a fresh produce market to export goods in Kinshasa.
“It is Africom’s wish to continue with more parks,” Ms. Grobler said. “We will prove ourselves to the Congolese government.”
Congo’s population of 67.5 million live on average of $400 each a year, according to the World Bank. A mining boom that followed the end of a bloody civil war in 2003 spurred economic growth but brought few improvements to the well-being of the majority of people, who depend on farming for their livelihoods.
“Growth is being driven by the mining sector, mostly copper and cobalt. They are not known to be pro-poor sectors. You come in with a big chunk of equipment. You extract whatever you want. You don’t need many jobs for that,” Mr. Ulimwengu said. “It is becoming politically and socially difficult to celebrate growth while you have many people in poverty.”
There have been more than 1,000 international purchases of land in developing countries, from Kenya to Brazil, totaling 375,976 square kilometers, according to the Land Matrix, a database coordinated by groups including the Rome-based International Land Coalition. That’s bigger than Germany.
“We need to build the whole value chain around the agriculture sector,” Mr. Ulimwengu said. “It isn’t the government who’s going to revamp the agriculture sector. It has to be the private sector.”
With the problems still ongoing in the DRC, this is one hell of a risky proposition for foreigners. However, many of the problems in the region, and in the DRC, are related to a lack of money and opportunities for the people of these regions. Few work opportunities, they turn to crime and war. Corrupt politicians siphoning funds, they turn to crime and war. Inflation and a declining stock of resources, they turn to crime and war. Just like Greece or Spain with their problems and daily protests, sometimes investors need to take a risk to solve long-term problems. Investing in the DRC might make it more stable. I just don't know if I would have "the balls" to do so.
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