Archive for Debt

Irish Economy Leads the Eurozone

Ireland has had it’s economic problems in past years, much of it documented in these pages. However Ireland’s recovery still continues and is showing the lead for other debt laden Eurozone countries to follow.  It’s a template which perhaps countries like Greece, Spain and Italy should look to follow.  For the fourth year the small republic has produced the highest growth rates of an country in the Eurozone and it looks likely to continue with some forecasts suggesting that 2017 will produce a growth percentage of nearly 3.5%.

Ireland instigated some pretty tough measure to pull itself out of the previous crisis and has been rewarded with rises in foreign investment and soaring levels of employment.  This has already filtered in to the general economy with strong retailing figures supporting the recovery.

Some economists are even predicting higher growth figures with mentions of 4% becoming more common.  Yet there is a huge black economic cloud circling which will restrict this growth and nobody quite knows by how much.

Of course, it’s Britain’s decision to leave the EU and as by far Ireland’s biggest trading partner the impact is bound to be large.  The general consensus is that the impact of Brexit will initially be fairly negative even to the extent that it is bound to cause some disruption and uncertainty.  However no-one is quite sure when this will happen and what the impact will be on the irish economy.

No other Eurozone member will be impacted as much as Ireland however and most economists are unclear of what the long term impacts will be.  The agricultural sector is the most important sector likely to be affected as the country’s farmers send over half their exports to the UK.  It is a large, convenient and essential market which is not easily replaced if it ends up falling into a mass of tariffs and controls.

Still much of this is pretty much out of the Irish government’s control and a a strong economy at least allows it the maximum possibilities or riding out any economic impact when the UK leaves.   As such Irish businessmen and politicians will be pleased that they can watch BBC in Ireland using a VPN to keep up with the developments.  It is likely that the UK government will also seek to restrict any changes made in the two countries trading agreements as well, the UK is likely to need a friend in Europe and difficulties with borders will only cause problems for both countries.

Australia’s Rising Debt

There are many countries who despite looking prosperous on the surface face huge risks to their economy.  One of those is Australia who some experts fear may face a huge economic slump if global events go against it.   The problem is once again that of debt, in a variety of forms – Australia has huge household debt, a record level of foreign debt and the potential risks of a massive housing bubble which has developed over the last ten years.

We live in a turbulent times for the global economy and it doesn’t take much to tip debt laden economies over the edge.  In modern times consumers are much more used to higher levels of consumer debt yet these levels are now at record highs, only the depression of the 1920s has there been the same figures.  In the short term this might be sustainable as long as the economy is growing sufficiently, some statistics report that Australia’s level of household debt as a proportion of household income stands at an average of 187%.

Anyone can see that this level puts the economy in a perilous position, any shocks can send families in a spiral of debt and repayment problems dragging the Australian economy with it.   High levels of sustained household debt rarely end well, and in fact they mirror all of the biggest Australian economic depressions of the last century.

It’s not just consumers who are drowning in debt either, Australia’s net foreign debt has been rising too and now stands at a record level of over 63% of Gross Domestic Product – the levels are eye watering for a relatively small economy at over $1 trillion.  Again this is probably sustainable in the short term but any global events, a government crisis or banking issue would make Australia extremely vulnerable.

Much of this is a direct result of Government fiscal policy with a huge amount of credit being expanded in all sectors of the society.  The housing bubble has been a consequence of this expansion of credit with housing credit now at a level of 95% of Australia’s GDP compared with about 20% in 1991.

Other levels of credit such as that directed towards business investment has not risen to such a level and has been fairly static.  Many Australians look across at Europe and North America and feel that they are far removed from any financial risks yet that is simply not the case.  You can sit and watch the BBC in Australia of course using a VPN yet in many ways these economies have some of these same risks yet on a lower level simply because of the size of their economies.

The levels of debt ranging from consumer to government represent a huge problem to the Australian economy however it seems that there is little political motivation to correct them.  Bringing down debt and raising taxes is never a popular move but sometimes it’s a prudent one!.

John Sessions

http://bbciplayerabroad.co.uk/

Zimbabwe Financial Crisis Deepens

The Zimbabwe economy has many problems but there’s one that’s threatening to finally to tip the balance into possible disaster.  Simply speaking the economy has run out of cash, leaving many sectors unable to function properly.

Typically a business will deposit money into their bank accounts but that doesn’t help.  Normally payments can be made electronically but usually only locally, most businesses will not be allowed to make payments outside Zimbabwe.  Obviously this is crippling for any firm which needs imports or foreign materials to support their core business.

The freeze on liquidity has affected all sectors, companies have been unable to pay their workers in cash.  Any sector which needs foreign suppliers have struggled because they’ve been unable to pay them, most of them just went out of business creating even more problems and unemployment.  It is estimated that the Zimbabwe economy shrank by 0.3% last year but that’s set to fall steeply to contract nearly 3% this year according to the IMF.

It is thought that the economy might slowly improve after Zimbabwe abandoned it’s defunct currency eight years ago and adopted the dollar.   The move at least stopped the raging hyper inflation unfortunately did little to help all the other problems in a floundering economy.  Indeed the strong value of the dollar made the situation even worse, exports are virtually non-existent and imports have become much more expensive.  There are very few banknotes left in circulation which makes day to day life very difficult for most Zimbabweans.

The typical reactive measures are being implemented which do little to solve any of the underlying issues.  The latest is a cap on withdrawals for customers at ATMs of $150, the reality is that this hasn’t been possible for months anyway.   No-one knows how much cash is circulating in the economy, the Reserve Banks suggests it’s about $4 billion however more impartial estimates think it’s about $100 million.

Unless action is taken soon, then the situation is only going to get worse without the ability to pay workers and suppliers businesses will obviously fail.  It would be surprising if the incompetent government led by Robert Mugabe will do anything constructive, the usual tactic is to blame foreign intervention for it’s economic woes.  The Mugabe Government has halved the size of the economy since 2000 with a variety of ridiculous decisions.

The most damaging was probably the land seize authorised by Mugabe.  Taking profitable, successful white owned farms and handing them over to individuals with no interest or skills in farming, crippling the agricultural sector in a few years.

Brian Collins

 

Would a Maximum Wage Make the UK Fairer?

The world is full of extreme inequality, arguably globalism has made this worse but although there are plenty of idealistic rants against this disparity it’s difficult to find genuine real-world solutions.  Unfortunately Jeremy Corbyn, the Uk Labour leader, also seems to be struggling finding a sensible solutions too. His latest suggestion is that the British Government should instigate a cap on maximum wages in order to address this issue.

Let’s think about it for a minute, it’s about rich people right?  Rich people have too much money, take most of it off them and set a ceiling and we’ll all be more equal.  It might work in a socialist economic workshop but unfortunately in the real world there are many reasons why it would be a complete disaster.

Most successful Western economies are pretty aspirational, people generally don’t hate high earners.  They don’t boo the overpaid Premiership footballers off the pitch because of the size of their wage packets.  In fact you could guarantee the cries of despair if the millionaire superstars left to play in more lucrative leagues.  We don’t despise rock stars, well paid actors or a host of other overpaid people – mostly we feel just a little jealous and hope to be in the same situation.

Imagine a country where you knew if you became successful past a certain level the government would take all your cash off you.  How would they do it, is just one of the obvious problems.  You can guarantee that there would be a mass exodus of high achievers before they reached that level. A guaranteed  consistent brain drain would obviously help with inequality as everyone would get significantly poorer and the rich would move countries.

Even those who stayed would likely have numerous method of avoiding any ceiling, their wages would be transferred in shares, dividends, bonuses and routed through a selection of financial instruments in order to avoid whatever legislation was in place. Say goodbye to economic growth, to wealth generation, to risk taking and investment,  to job creation – to the rewards that create entrepreneurs and new businesses.

Even for those of us who think there is a genuine problem in how wealth is distributed in the global economy – this is a seriously flawed idea. It just makes everyone poorer, the economics of envy simply doesn’t work in the real world.

John Galway

Debt Worries in Tanzania

For any developing country the prospect of financing projects through foreign investment particularly infrastructure related ones is obviously attractive.  However it’s important to realise that these ‘investments’ often constitute debt and there needs to be a payoff to GDP in order to finance them.

This is the worry that many economists see in Tanzania, a country who has been increasing their national debt in order to finance a variety of different schemes.  It was thought that this increase in debt would lead to a similar improvement in the country’s export capacity but it looks like this isn’t the case.   Economists are suggested that the increase in Government borrowing is simply being used to service existing debts rather than investing in the country.  Anyone knows that borrowing to pay off loans is rarely a successful strategy from the individual level to National exchequers.

The levels of debt are not yet of huge concern, as the country is still showing a growth in it’s economy.  The 6% rise in the last five years means that Tanzania’s debt is still relatively sustainable, the worry is that the rise in debts is having little economic impact.  An example was in a recent documentary detailing some of the failed projects which have been increasingly common, unfortunately this is now restricted and you can’t access without a local VPN (see article – my VPN stopped Working)

A country like Tanzania which is increasing it’s level of foreign debt needs to ensure that these create wealth and new investments. Using further debt to simply service existing positions is likely to lead to economic problems in the future.  Tanzania has areas which would benefit from increased investment particularly those which would stimulate exports and generate foreign capital in a more sustainable way than simply borrowing it.  There is also concern that the mineral sector is under funded and there is substantial options for investing in this sector too.

There are worrying signs in the economy despite the modest growth, there are increasingly reports that the population are short of liquid cash too.  Inflation is falling, which is obviously good in some senses however it is often the sign of a failing private sector.  As spending falls, prices tend to fall in line with the falling demand.  Many Tanzanian businesses are struggling too, many banks are struggling because of lack of deposits.

A major hotel in Dar-es-Salaam has closed and been turned into a hostel and many others are struggling which will potentially close in the next year.

Debt Crisis in Mozambique

The government of Mozambique has issued a stark warning to it’s creditors warning that a debt restructure was essential in order for the country to recover.  It revealed last week that the country would simply be unable to repay or even fully service it’s loans until the gas revenues it was expecting was available sometime after 2021.

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It’s a grim picture for the South Eastern African nation – which expects public debt to reach an unsustainable level of 130% of GDP by the end of this year.  The International Monetary Fund has offered it’s assistance in negotiating new terms with it’s creditors however direct aid was suspended after they discovered hidden loans of over $2 billion which were not declared.

As hidden debts go this was pretty spectacular, most of it had been built up by various state firms primarily to purchase various security and military equipment.  These were ironically supposedly needed to protect the purchase from a previous secret loan which was used to buy a Tuna fishing fleet.  All of these purchases and loans were kept secret from both investors and creditors alike.

The total of Mozambique’s debt doesn’t sound that much in the context of some Western countries but the total of almost $10 billion is way outside Mozambique’s ability to service.  It is estimated that the country is able to manage a maximum repayment schedule of about $25 million a year, unfortunately it’s current liabilities require repayments of around $38 million dollars every single month.

Many analysts have previously promoted Mozambique as one of the safest investment opportunities in Africa for a variety or reasons.  It’s politically very stable and has some good mineral reserves particularly a large amount of natural gas.   The country had been experiencing some good growth levels however violent clashes in the North and the worldwide drop in commodity prices have stalled both inward investment levels and the overall economic growth which does still stand at about 3.7% however.

The debt crisis though threatens to halt the economic progress being made in Mozambique.  Much of the country has benefited greatly from both the growth and the political stability.  You’ll see a new professional middle class emerge in the cities, who purchase luxury good and utilize the improving internet infrastructure.  Large media firms like Hulu and Netflix are available there although you’ll need a working Netflix VPN to access properly.

It’s a worrying time for the citizens of this beautiful African country, once more the promise of a better life and economy has been threatened by reckless mismanagement by the State. Hopefully the debt can be restructured in some way in order to allow the country to continue it’s growth story.

US Debt Heading One Way

Many of the world’s economic problems are rooted in debt.  Of course this takes many forms and there’s government Debt, residential debt and the debt that sits on companies balance sheets with seemingly little issue.  Debt isn’t necessarily bad, in fact it would be easy to argue than in today’s global economy it is almost impossible to be successful without acquiring some levels of debt either personal, corporate or national.

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However there are times when the levels of debt in some scenarios just seem so incredibly large that it’s difficult to even comprehend that basis premise that these debts ultimately need to be paid back at some point.   The US National debt is one of those incredibly scary figures which is so large it almost seems an irrelevance.  You would guess that reducing it would be the cornerstone of any election promises but it appears that both the successful Trump proposals and the rejected democratic proposals would both have actually raised this figure.  Of course, we’ll only see how the Republican plans pan out but it’s certainly a concern that reduction doesn’t seem to be even considered as a policy objective.

Some analysts have estimated that the democrat’s plans would have added about $200 billion dollars to the country’s debt which seems a huge increase.  Until you look perhaps at the estimates of the Trump proposals which would apparently add a staggering $5.3 trillion dollars to the national debt.  That would represent an incredible ratio – almost 105% of  gross domestic product owed.

It’s easy to see where these figures would come from, Trump’s populist promise to slash taxes across the board obviously would cost billions at least in the short term.  The corporate tax reduction would also incur huge costs but presumably this would eventually pay off in big rises in GDP as more companies are attracted to the low rate environment.

Indeed any rises in national debt in relation to policy changes need to be looked at in the context of the overall economy.  If GDP starts to rise significantly these should eventually feed through to overall spending and the debt should start to fall again – it is however a huge risk.

Other parts of the policies would also incur a cost, investing in education raises debt again in the short term yet an educated work force is usually more productive and efficient.   Badly motivated and educated people sitting at home watching TV claiming welfare isn’t going to help the economy.  Although perhaps the shares in media firms like Netflix might improve despite the illegal downloading using anonymous torrenting techniques – see this article on this contentious issue. Unfortunately you also need to invest heavily in capital and infrastructure projects in order to create the employment needed.

Despite all the solutions to the global crisis seemingly involving more debt, it’s easy to see why people get uncomfortable with the current levels.   It’s huge and the people in charge don’t seem to have any sort of idea how to reduce it – President Obama proudly claimed that federal spending has risen at the slowest level of any President over  the last 60 years.  That means it’s still heading upwards just not quite as quickly!

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 some anonymous company who conducts most of their business through a residential VPN to be 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