Archive for Debt

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

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.