Archive for February 20, 2018

Will Russia Gain a World Cup Boost

For football fans everywhere, there was some trepidation when Russia was announced as the host of this years world cup.  However so far the fears seem to have been unfounded at least with regards the infrastructure required to host such an event.  Obviously the main fears are around potential violence and what sort of welcome football fans will receive but it’s likely that these will not be issues either as President Putin is keen to use the event to promote Russia.

He won’t be the first leader to bank on a huge economic boost on the back of the tournament. However in passed years this has not been as large as hoped for, certainly the South African economy didn’t benefit quite as much as many had hoped. Yet it certainly will bring an exciting atmosphere to the football fans who are little bit more adventurous than those of us who simply what Match of the Day online on a Saturday night!

So what can the economy expect? Well it will almost certainly bring a short term boost to the economy in many sectors. The Russian Central Bank is hoping that the boost can be somewhat targeted as it has placed stadiums in areas of the country which need this sort of investment. The increase in spending was probably required anyway, so the chance to recoup some investment is certainly welcomed by Putin.  He is of course hoping to showcase the country as a global superpower once again, and it’s likely that spending will be fairly lavish in some public facing areas as well as in security.

There should be a growth in jobs and a similar increase in the demand for consumer services and products.  This should continue the positive growth that the Russian economy has experienced in the last year after a sharp fall in the previous two years largely related to the oil price.

The tournament is spread over 11 cities and it is believed will generate an additional .2% of gross domestic product in both the second and third quarters.  This doesn’t sound huge but it is in fact a very large rise in response to a single event like this.  President Putin’s hold on power though is heavily reliant on improving the living standards of the average Russian.  There is a danger here though in that inflation is likely to rise particularly in those cities as thousands of visitors arrive in a short time.

These price rises will likely occur in things like hotels plus ordinary goods and services in line with the increased demand. .The Russian authorities are however likely to clamp down on any excessive profiteering and abusing visitors. Many visitors have been in fact attempting to bypass these price rises by booking using a Russian IP address like this in order to access domestic prices wherever possible.

Is the Irish recovery in Jeopardy ?

The Irish economy is probably one of the  most studied in the world.  Despite it’s size – estimated at less than 0.5% of the Worlds economy, it’s quoted and studied by economists across the planet.  Only last week I read several articles in the Chinese press reporting on the Housing Boom/Bust and the effects of Brexit on the Irish economy.

One of the reasons is that the Irish have a cultural reach far beyond it’s tiny size and a high profile in many of the world’s biggest economies. Most British and Americans for example where well aware of the rise and subsequent fall of the Irish economy  in the first decade of this century.  It’s often covered in the US and UK media and during the boom year a decade ago the success of the Irish economy was well covered on the BBC News (check here for access via a VPN).

However another reason for it’s popularity with economists is that the Irish economy is often seen as a microcosm for advanced western style democratic nations.  They have targeted and in many senses succeeded in attracting high value/high tech businesses through offering competitive corporate tax rates.  Indeed many companies like Dell and Microsoft sell good s and service to the much larger UK market just across the sea.

However although the Irish economy was successful, expanding much quicker than most European countries  -it’s over investment and huge housing boom led to a spectacular crash in 2008. It’s taken a long time and many sacrifices by the population for the economy to recover, and in recent years has started to experience more modest growth.  However many worry that history is about to repeat itself.

That gentle recovery fueled by several austerity budgets has started to gain speed.  In 2017 the Irish economy grew by over 5%, the highest growth in the Euro-Zone for the fourth successive year.  It looks great news yet as we know, GDP rises are not the only indicator of an economy’s success.

There are problems, for example Ireland has one of the highest per-capita GDP figures in the world, much higher than  the UK or Germany for example.  Yet despite this high level of productivity, wages are still quite subdued and the property prices are rapidly approaching the high levels of the previous boom years.  The result a hugely successful economy where it’s citizens can’t afford to buy property is always a cause for concern.

Some of the success is indeed slightly artificial due to the relative undervalue of the single currency.  It is the same reason that Germany has always been so successful, a German Mark or Irish Punt would have a much higher value than the Euro does.  This is often a criticism of the single currency where the highly competitive and efficient economies benefit from the low valuation of the Euro where as less competitive countries like Greece always struggle.  There are full lists of these in the economic data sections of the BBC website, check out also some of the content on BBC News which you can access here from abroad.

The Irish recovery has been impressive although it has taken many years,. so why are we worried?  Well the economic success doesn’t always seem to be filtering through to the Irish people and budgets.  Some of that is due to the fact that much of the success is merely on ‘the books’ where foreign firms are allocating profits to Irish branches in order to benefit from the low corporation tax.  The level of unemployment is still much higher than across in the UK – most countries with high growth levels do not tend to have 9% of the population unemployed.

The worry is that the Irish economy overheats again under the rising prices of property.  The problem is that the main instrument to control this is higher interest rates but as these are set in Germany then there’s a lack of control there.  Cyclical boon and bust scenarios are extremely damaging to ordinary citizens who often end up paying the price.

South African Cryptocurrency Debts

Although many think that cryptocurrency may be the way to solve African debt and investment problems, there seems to be scant evidence that this is happening.  Like most areas of the world, the crypto craze looks to have little real world benefits. Sure some people are making huge profits betting on the enormous swings of Bitcoin and it’s rivals, but this is of little help to real world issues.

Certain African countries seem to be really keen on the new cryptocurrencies predictably Nigeria and South Africa where there’s intensive trading and speculation on both formal and informal trading networks.  Indeed in South Africa, there are many reports of people getting into financial trouble betting on the wild swings of various cryptocurrencies.

Much like the day trading crazes of the 1990’s, buying and selling these currencies in the short term is extremely risk but of course can be incredibly lucrative.  Many are investing money from second mortgages and credit card debt hoping to profit from the boom in prices.  Of course, the volatility goes both ways with Bitcoin trading in a range of around $8000 – $20000 in just a few weeks. Any of these currencies can easily rise or fall by over 30% in a single day and possibly much more than that.  One individual in cape Town was reported as selling his car just to invest in the cryptocurrency Ethereum after getting a tip on it’s imminent rise.

For ever investor who is losing money on investments in crypto speculation  there are a couple who have simply been scammed.  There are numerous Ponzi and MLM schemes operating in the African continent which supposedly invest in cryptocurrencies.  The schemes offer guaranteed returns and also referral schemes designed to draw in more victims. It should be noted that if there’s one thing for certain with regards investing in bitcoin or similar that’s uncertainty is guaranteed.  There is no way anyone can predict the long term prices of bitcoin as it doesn’t have any underlying value. Bitcoin is always going to be extremely volatile and as such no scheme could ever guarantee anything at all.

South Africans are not the only Africans embracing Bitcoin however, as a recent report from Citibank has indicated. Apparently Kenya, are the fifth highest bitcoin holders in the world just behind Nigeria.  There’s certainly a real appetite for investing in the digital currency on the African continent.

How important is this? Well the countries like Kenya who are investing large proportions of their private wealth in cryptocurrency are obviously very vulnerable to a collapse in prices.  What’s worse is that every cent invested in this digital world is not invested in traditional projects in the country.  More developed countries would cope with this investment drain better than most African nations.

Most financial institutions are very positive about blockchain the technology behind the currencies so this could have a beneficial effect in the long term on African economies.  The hype on cryptocurrencies however rises daily, you can see lots of reports and coverage on mainstream media – try watching UK TV abroad for some insight in their financial sections.

Much will depend on how cryptocurrencies fair in the long term, it may be that they turn out to be a valuable wealth generation tools.  African’s perhaps see these currencies as a way of investing in Western economies in a simple way.What is certain is that Africa’s economic success will be much more certain if the world of the cryptocurrency develops further in the coming years.

Steven (BBC News) Baker