International Debt Burden of Africa

The path to prosperity doesn’t lie amidst countries building even bigger international debt states Akinwumi Adesina, the head of the African Development Bank.   He is quite clear when he urges the continent’s governments to try and boost tax revenue not grab yet more international loans.  The statement comes whilst Africa, once again grapples with an economic slump.

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Mr Adesina is reported with an interview in the Financial Times to be expecting yet another downturn in the economy of Africa largely being triggered by a slump in commodity prices.  This issue greatly affects Africa as well as the slow down in Chinese economic growth.  Yet as always Africa is one of the first to suffer from external economic slowdown, largely because of it’s relative financial weakness, in other words it’s large levels of debt.

The phrase ‘fiscal consolidation’ is often used to describe Africa’s position and potential solution.  The reality is that decades of borrowing have had only limited success in delivering long term growth in the region.  Sure when economic booms are happening in other places, Africa is dragged along through a demand for it’s commodities but the weakness is evident as soon as this demand drops.  Nigeria has plunged into yet another recession simply due to the oil price fall, although to be fair this is the first for nearly twenty years.

The pattern will be repeated across sub-Saharan Africa, with GDP falling from it’s 3.5% level in 2015.  Many nations are suffering from dwindling government revenues, and the wide budget deficits mean that governments have little monetary options available to them.  The temptation of increasing debt is always there but this is precisely the reason why African economies are so vulnerable, billions of dollars of debt taken up in the ‘good years’ reduce the capacity of these governments to respond in a slump.

These debts have to be repaid and the costs of servicing them often rocket in poor economic conditions simply because of the weakness of most African currencies.  The scarcity of foreign currencies also impacts African countries and businesses to invest.

Borrowing overseas with a weak domestic currency is a recipe for disaster,  investment funds should ideally be sourced locally.  For example there are huge African investment and pension funds which ideally could be used to support the African economy.  Too often this money is invested in Western countries and businesses to the detriment of African businesses.  It’s often depressing to sit in the presentations of these Pension and investment funds produced by online video making software extolling the virtues of some international company with minimal links to the African continent when local companies are starved of investment and the potential for growth.

Frank Ifield

Free Trade Agreements – the Road to Prosperity?

For those of us stuck in the middle of post-Brexit political chaos, one of the expressions that is being increasingly bandied about is that of ‘free trade’ agreements.   Free trade with the Commonwealth, free trade with China or simply protecting free trade with the European Union – it all sounds a simple and easy way to ensure a booming economy.

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All a country needs is to have lot’s of these free trade agreements and goods and services will be flying out of the country in no time, jobs, money and prosperity are bound to follow.   Except that isn’t really the case and such an opinion represents a dramatic over-simplification of a subject which has divided economists for decades – international trade.

In fact it’s more than decades, try centuries and at least from the time of David Ricardo who suggested the way to maximise world output is a theory called Comparative advantage. He’s a man who deserves to be listened to – an economist who became fabulously wealthy! His theory basically suggested that each country specialised in the areas in which it had an advantage and let other countries do the same. Sounds great, but if you sign a completely open free trade agreement with another country who does have such an advantage then prepare to see that industry be completely destroyed in your country.

Economics and Politics often don’t sit well together, it would seem from an economics perspective that letting the British Steel industry die would be a sensible option however it won’t look that way to tens of thousands who rely on this industry to pay their mortgages.

Free trade will also rarely mean fair trade, if country A supports workers rights and welfare, and promotes high standards of health and safety – it’s goods are unlikely to be competitive in price if country B does’t protect workers and utilizes child labor.   Free trade will lose jobs and income for country A because there is no level playing field.

In many developed countries there are even more costs to production which can often wipe out advantages from efficiency. Most Western countries now have strict rules on levels of pollution that can be produced in manufacturing – if you ignore these you can drastically reduce the cost of production too.

There are reasons why ‘free trade’ agreements take years to negotiate, it’s because they can equally be potentially disastrous to an economy just as they can be beneficial.  They work best in similar economies using the same currency which is why the most successful example exists between the European countries however it’s evident even this isn’t a guarantee to economic success.

John Collins

Technology, Economics Writer

 

Does Britain Risk a Debt Filled Future?

Among the corridors of economists and financial analysts, there has been largely quiet praise for the UK’s approach to the global recession, the banking crisis and the high levels of debt which have resulted.  The cut backs in Government spending are of course not everyone’s prescription for the troubles and equally many suspect it has hindered and slowed the recovery.

The reality is that much of the UK Government’s spending levels were simply unsustainable and austerity although unpopular would have been inevitable at some point in time.   Increased growth obviously impacts these figures too and a healthy growing economy can also be used to reduce debt levels in tandem with any spending cuts.

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For several years this reduction in Government debt levels has been the main focus for the economy, however the Brexit decision seems to have thrown these goals up to the winds of political expediency.   If you watch the UK news and political reports, austerity now rarely get’s a mention – apart from the brief distraction of the Olympics, the talk is all about leaving the European Union.   The reality is that this decision is likely to have a much bigger effect than any trimming of welfare payments or cutting back government departments.

The most urgent problem though is the uncertainty, the simple fact that no-one seems to know what is happening. The protagonists who promoted the leave campaign now seem to have stepped into the background, leaving a variety of pledges and promises in the dust.  The truth was none of these were ever guaranteed and indeed many simply contradicted themselves, and in truth will probably be set aside mostly by the new government entrusted to deliver some sort of Brexit result.

It looks like nothing much is happening soon, and the uncertainty looks likely to continue for months and possibly years to come.  There is a suspicion that something is happening behind closed doors, in the corridors of power some sort of workable compromise is happening but we may just have to wait and see. Until then it’s almost certain that economy will start to shrink, maybe slowly but the current situation is not conducive to growth.

Business investment has already hit a 10 year low, as companies wait for direction.  There are lots of rumours of impending trade deals and agreements, but none of these can actually be implemented until the country leaves the European Union so all the talk is very premature.

Many seem to see the ‘free trade deals’ as a passage to huge prosperity and a sales fueled bonanza for a UK freed from the shackles of the EU.  The problem is that ‘free trade’ can also be extremely detrimental to an economy as well as being beneficial.  It’s why these agreement sometimes take a decade to negotiate, a bad deal can be much worse than no deal at all.  International trade, even is you simply use the base economic model of comparative advantage can be a complex and difficult area. Establishing a ‘free trade’ agreement sounds like a simple, beneficial thing to establish however it’s implication is that you offer trade advantages over other countries, which can have huge knock on effects in an economy.

The worry for the UK economy is on many fronts – the indecision, the confusion and what is actually going to happen.  Sometimes no decisions are actually worse that ‘bad decisions’ – government debt is only going to increase while the confusion remains.

Jim Harvey

Author of Online IP Changer

Brazil’s Economy Looking Up – But Don’t Thank the Olympics

If there’s one myth that should be severely laid to rest, it’s the ridiculous levels of investment needed to host an Olympic games can revive a failing economy.   Brazil’s economy has been in trouble for years, yet recently  there has been signs of recovery.

There are obviously many economic indicators which can suggest the future prospects of an economy – however often one of the most reliable is the quite simple measure of economic activity.  It doesn’t always suggest improvement, often activity can indeed be the precursor to very bad news but for a country in malaise like Brazil – increased activity is something that is essential for recovery.

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The last few months in the UK after Brexit – the measure has predicted a heading back towards recession, economic activity has plummeted while businesses and investors try and figure out what’s going on.  One of the main issue in Brazil is debt, and the President’s economic team has made this a priority.

As I sat and watched the BBC’s Olympic coverage last night of the opening ceremony – I and many were impressed not just by the spectacle but by the obvious restraint in budget.  An economy with huge debts will do itself no favors by displaying no sense of the value of money.  Remember not that long ago Greece through a lavish spectacle at the Olympic games too, it turns out that the  money spent wasn’t even theirs.  The Olympics will not help the Brazilian economy but a responsible attitude to the costs involved may just pay dividends.

There needs to be a serious improvement in macro-economic outlook in Brazil, to reduce the cost of the equity.   There is no doubt that Brazil and neighboring countries offer attractive investment opportunities as long as there is some stability in the economy and the Brazilian bond markets.

The Olympic games always lose money despite what anyone says, and this can be very painful for smaller and developing nations. According to the world news, the Rio Games are costing over $10 billion which is relatively modest in comparison to some recent games.  There are long term benefits and of course these can be assigned an economic value but overall the Olympics usually cause more problems that they solve at least in the short term.

The feel good factor in Brazil could go a long way though and hopefully these small improvements in economic activity combined with more sensible macro-economic policies could lead to a recover sooner rather than later.

Netflix – Debt and a Risky Business Model

Last week one of the internet’s darling companies Netflix suffered a huge drop in value. The precursor was a hugely disappointing earnings report by the media giant, much worse than expected with the companies attempt to focus on other key economic indicators being largely ignored.

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The success story of Netflix has been really driven by the growth of it’s subscriber growth now approximately 1.7 million a year across the world whereas the market had expected upwards of 2.5 million. It’s not known why these estimates where so wrong however it’s unlikely that subscriber churn is completely to blame.

The fundamental problem though wasn’t the number of subscribers which are still impressive, but more the huge levels of spending and debt being incurred by the company. As many internet darlings have discovered it’s not enough to just have users, a company needs to be profitable or at least have the expectation of profit. After all if you look at the total number of subscribers which is now not far off 80 million, the potential is massive. The problem is that although marketing expenses are relatively low for a media company – the costs for content are very large indeed.

All those films and movies don’t come cheap and remember since Netflix has expanded to a more global company covering around 190 countries, those costs will have spiraled upwards. Broadcasting rights and licenses are mostly agreed on a per country basis which is why Netflix’s content varies so much from region to region and why they have to artificially block access from different areas which users often do – see Netflix Blocked VPN and Proxies.  These deals have also to be over a long period which means that the content liability stretches out over years to come.

So how much is this liability and how much debt will be involved?  Well it’s estimated that Netflix’s streaming content obligations now total something like 13 billion dollars up over $3 billion from 12 months ago.  This means that it’s content liability has grown by over 31% compared whereas it’s subscriber base has grown around 27%.

This means that there is currently a pretty large difference between growth in earnings (via subscriber increase) and that of spending on content liability (remembering that these are not strictly capital assets although the value does depreciate over time).

The debt is going to keep rising for the near future and possibly beyond.

Further Reading:

The use of VPNs and proxies to watch Netflix is growing, in tis article – Residential VPN services, demonstrates how these Netflix VPN blocks are being fought.

 

Ireland’s Economy Vulnerable to UK Exit

There are many bystanders across Europe awaiting with baited breath the results of the UK’s referendum on leaving the EU.  In most cases it’s extremely difficult to assess what the potential impact is going to be on the UK economy never mind others in Europe.  However there’s some consensus from some economists that it is the Irish economy could be most affected by a decision to leave.

Trinity College Dublin

Trinity College Dublin

The latest research is from the Oxford Economics group who have studied the potential impact on Ireland’s economy in some detail.  Their conclusions are that a ‘Brexit’ is almost certainly bad news for Ireland with the worst case scenario suggesting a 2.2 fall in Irish GDP.

The Irish economy is of course, in a period of recovery after a meltdown in the recession.  This  year however the economy is forecast to expand by nearly 5% with a similar expectation for 2017.  This growth rate would be seriously affected if the UK left the EU and an even bigger impact would be on small businesses in Ireland.

It is difficult to overestimate the links between the UK and Irish economies.  Although they are separate economies which is often highlighted to me when I can’t catch the news on BBC iPlayer Ireland when visiting Dublin – the UK is by far their biggest trading partner in Europe and the referendum is bound to have a huge impact.

Over 40% of Irish exports are sent to the UK and the percentage is probably much higher among smaller Irish businesses who often are completely reliant on UK trade. The actual impact though would depend largely on post-exit negotiations with both the EU and the Irish government.

There are certainly some much more favorable options which involve various settlements and agreements being made on immigration and trade.  These could possibly mean that the impact is fairly inconsequential although these are likely to take time to negotiate and it is expected that even the uncertainly would have some impact on the economies of both the UK and Ireland.

 

US Jobs Rise Again

There are many ways of measuring the success of an economy, however for ordinary people – levels of employment are certainly one of the most important. When people are employed, the benefits accrue to the economy as a whole. People with jobs earn money to pay taxes, buy goods and services and invest in the economy. In addition, people with jobs don’t need supporting with benefits and support for food, housing and healthcare.

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So the March report from the US Labor Department was very good news, with the report that 242,000 new jobs were created last month in the USA. This was quite significantly higher than had been predicted by many economists who expected unemployment to begin rising mainly due to the global economic stagnation that has been taking place. IN fact there were rises in all sorts of sectors from food services, construction and education. In fact there were only a few sectors that did struggle including the mining industry which has been suffering directly over the last few months.

The reported Unemployment rate has held steady at 4.9% which still represents an eight year low. Of course, although this figure sounds quite manageable as a percentage it does however mean that nearly 8 million Americans are without a job. There are also an estimated 6 million people in part time employment who are actually wanting to work full time. These figures are based on a fairly static ‘participation’ rate which is the number of people who are working or looking for work in the US economy.

Although these results sound fairly promising, there are other reports which have more cause for concern. For one the state of the trade deficit which has got steadily worse over the last twelve months. The current deficit (the amount the US imports compared with it’s exports) is now at the highest level in nearly five years. The main issue is the fall in US exports which is largely the result of the extremely strong dollar. There are some interesting reports on NBC and ABC regarding these economic issues on their web sites but you’ll need an American IP address to access them.

This is a significant worry though, falling exports will inevitably eventually filter down into the jobs market. The reason is that exports represent the production of US made products using US labor in American businesses. Although domestic demand is good, without exporting goods then overall demand for US goods and services will definitely start to fall and cause unemployment to start rising again. The business community are well aware of these risks and there is an increased pessimism which could cause further damage to the US economic recovery.

Polish Government Increase State Control

It’s just over 3 months since the Poland Law and Justice party (PiS) won control over the country and ever since then they have been embroiled in a series of controversies.

First there have been a series of controversies over the press and media freedoms since the Conservative party came to power with a promise of supporting Catholic ideals and supporting families with economic aid. Many of the country’s leading media have seen new leader’s who are sympathetic to the new party. In addition the new government has packed judges into the highest courts to boost it’s power base and prevent controversial legislation being blocked.

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The latest laws implemented have seen increased the governments control over the prosecutor’s office and expanded surveillance laws to the police and security services.   Many are worried not only about the authoritarian approach by the new Government but also how it will bring it into conflict with European democratic rules and standards.

The weakness of the economy is the government’s most important focus and one of the areas they are focusing on is the disparity between foreign and domestic capital,  Foreign companies transfer over 20 billion euros every year from the Polish economy.  More than 50% of the Poland’s GDP comes from foreign capital supported companies, and there are estimated to be only 6 Polish companies who can effectively operate on the world stage.

This is where the Government hope that they can redress the balance and rebuild Polish companies by increasing state control to support domestic companies.  The hope is that Poland can become less dependent on foreign capital in strategic sectors like banks, energy and the media.   Although it should be noted that the high growth experienced by the Polish economy over the last  few years has largely been the result of foreign investment.

The worry is that an open European market does not work alongside nationalistic interventionist economic policies.  Freedom of the press is important and you can already seen that criticism and problems are being suppressed in the media, although you’ll need a Polish proxy to see them on internet sites based outside Poland.

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