finance
monthly
Personal Finance. Money. Investing.
Contribute
Newsletter
Corporate

While attending the World Bank and IMF spring meetings in Washington on Thursday, Bailey said the BoE is striking a difficult balance between combating inflation and tackling the threat of recession. He also voiced concerns over increasing wages keeping inflation higher for longer.  

"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation," Bailey said at the Peterson Institute for International Economics.

While officials have begun to tone down their language on the need for further rate hikes, Bailey did point to another rise next month. The BoE has already increased interest rates on three occasions since December. Some traders believe the bank is looking to adjust rates from their current 0.75% level to 2.5% by this time next year. 

In March, consumer price inflation hit a record 7%, over three times higher than the BoE’s target of 2%. 

The Monetary Policy Committee (MPC) voted by a majority to act amid pressure from the International Monetary Fund (IMF) who warned it against further delays. The MPC also voted to maintain the amount of quantitative easing at £895 billion. 

According to recent data from the Office for National Statistics (ONS), inflation in the UK rocketed to its highest level in over a decade in November, climbing to 5.1%. This is a figure that comes in significantly higher than the Bank of England’s 2% target and notably above its 4.5% prediction, largely due to the rising cost of fuel, clothing, and second-hand vehicles. 

"Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices," the Bank of England said.

The 5.1% figure, reported on Wednesday, sparked intrigue as to whether the Bank of England would hike interest rates despite the rapid spread of Omicron through the country. However,  inflation hit a rate not expected by the Bank until spring 2022, seemingly outweighing concerns around the new coronavirus variant. 

The comments from Nigel Green, chief executive of deVere Group, come after China fuelled hopes that a deal can be reached to end its trade war with the US after agreeing with Washington to roll back on some tariffs.

The deal to reduce trade tensions could encourage the International Monetary Fund (IMF) to revise up global growth forecasts next year.

Mr Green notes: “There has been an argument that in regard to the trade war, China was holding out, playing the long game and waiting for President Trump to leave office, before dealing with another administration.

“Whilst this argument might have held water before, I now believe this is not the case – and it is what is fueling recent developments in the trade war negotiations.”

He continues: “It is likely that China is currently fueling hopes to reach a phased agreement in the trade dispute with the U.S. and cancel tariffs as soon as possible because it will help President Trump’s re-election.

“His re-election would suit them for two major reasons.

“First, because they will assume that reaching a deal with Trump to end the damaging trade war will probably be easier than with some others. These include Elizabeth Warren, the potential Democratic rival, who could, say many supporters, win next year’s presidential election.  

“Ms Warren can be expected to be even tougher with China than Trump, and not only on trade, but on other difficult issues, including climate change and human and labor rights.

“And second, despite the trade war, Trump’s policies and rhetoric have proven to be strategically helpful to China in achieving its longer-term goals.  

“In many respects, President Trump has undermined Washington’s global credibility, international governance bodies and key alliances, and has been indifferent if not antagonistic towards major trading agreements.

“This all compromises America’s standing as the world’s primary superpower and it provides China with openings and opportunities it has previously never had in terms of global influence and setting international trade conventions.” 

The deVere CEO concludes: “The positive signs coming from Beijing and Washington on the trade talks between the world’s two largest economies have been welcomed by stock markets – some reaching all-time highs this week.

“Investors’ exuberance will grow further still should the deal be cemented, and also should Trump be re-elected.

“However, US investors should perhaps also question whether Mr Trump’s administration has, in fact, handed China a great strategic opportunity that could damage America’s preeminent superpower status in the longer-term and, therefore, its economic dominance.”

Written by Andrew Boyle, CEO of LGB & Co

 

With global debt hitting another record high in the first quarter of 2018, some are sounding the alarm over the threat of a new financial crisis. The global economy has been growing for a prolonged period, so the argument goes, and it is now at the stage in the cycle at which something could go wrong. The latest figures from the Institute of International Finance (IIF) are undeniably eye-wateringly high. According to the IIF, the global debt mountain was $247 trillion (£191 trillion) in the first quarter of 2018. Meanwhile, the International Monetary Fund (IMF) has begun to warn that corporate and government debt is now higher than before 2008’s financial crisis at 225% of global GDP. The IMF also warned that governments in particular, and corporations, with elevated debt levels were “vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and jeopardise economic activity.” But the current level of global debt may not be as destabilising as some fear. Taking into account its composition, we are probably better placed today to manage global debt than we were ten years ago.

Debt levels are high but have rebalanced

There are some differences between the 2008 financial crisis and now. The main one is debt which is now more evenly distributed. According to the IIF’s own figures, in the first quarter of 2018 household debt accounted for 19% ($46.5trillion) of global debt, corporate debt stood at 30% ($73.5 trillion), government debt at 27% ($66.5 trillion) and debts of financial institutions at 25% ($60 trillion) of the total figures.

Compare those figures with the same quarter a decade ago and they look like this: household debt 21% ($37 trillion), corporate debt 26% ($46 trillion), government debt 21% ($37 trillion) and financial institutions, 32% ($57 trillion).

Two things stand out. The first is that household debt has fallen a little in percentage terms, which suggests its current level is not excessive. The second is the increase in government debt and decrease in financial debt are almost the same. This is consistent with the objectives of the quantitative easing (QE) that we have seen since the financial crisis. QE involves financial institutions selling government and corporate bonds to central banks and on-lending the proceeds principally to companies.

Government debt can be good for economic growth

The debt to global GDP ratio has actually been falling for four consecutive quarters, according to the IIF. This is because global GDP has been picking up fairly robustly over the last year leading to incomes rising faster than debts. This should make the private sector debt burden easier to service, even if interest rates start to creep up.

While other factors are also at play, greater levels of public debt lead to private sector surpluses and stimulate economic activity. A simple way to look at this is that government expenditures include salaries and payments to contractors that are deposited into bank and savings accounts. Financial institutions then enable governments to balance their books by purchasing government bonds.

A substantial portion of a government’s deficit expenditure should be allocated to investment in infrastructure and innovation so that productivity gains will enable the additional debt burden to be serviced through rising tax contributions. Infrastructure investment and support for innovation are certainly high up on the UK government’s agenda. Of course, we will only know in hindsight if its allocation of resources to these areas has been adequate.

Corporate net debt ratios are stable

There is a fear that corporate debt is now so high that should interest rates rise suddenly, many companies would be unable to service the increased interest. Once again, the aggregate level of debt is not the only factor to consider.

In fact, many large corporates have huge stockpiles of cash sitting idle. US corporations alone are estimated to be sitting on around $2.1 trillion at present. While admittedly the majority of this cash stockpile is held by the US giants, corporates overall have borrowed fairly responsibly and have, in general, manageable maturity schedules. Corporate net debt levels are sitting around their 30-year average, so while the headline figures look alarming, the ability of most companies to cover their debts is reasonably robust.

Central bank policy will remain accommodative

Moreover, central banks have been at pains to point out that they are in no hurry to hike interest rates. Levels of government borrowing make them inclined to do so only if absolutely necessary.

When the Bank of England raised rates on 2nd August, its main concerns were the tightness of the labour market and firming of unit labour costs, and the impact that these factors might have on inflation. However, its Monetary Policy Committee concluded that any future increases in the Bank Rate were likely to be at a gradual pace and to a limited extent. Markets currently forecast that the Bank of England will only hike interest rates once next year and once again in 2020 taking the UK base rate to 1.25%. At this rate of increase it may not be until the 2030s that we reach the interest rate levels last seen in 2008.

In the US, while the Federal Reserve has already begun hiking interest rates and done so at a slightly faster pace, this has been justified by the fact that its economy is growing more quickly than the UK’s. It also still has more than $4 trillion of QE to unwind and, as was seen in February, any attempt to speed up the process up is likely to lead to a sell-off on Wall Street. So, the US Federal Reserve is likely to continue to tread carefully as will the Bank of England and the European Central Bank (ECB). Any rise in interest rates and any unwinding of QE will happen at a slow and gradual pace.

Borrowing in foreign currencies

Many countries have run into trouble by borrowing in foreign currencies. For example, Argentina has $4.1 billion in debt to pay this year and $13.3 billion in 2019, of which $3.4 billion and $5.9 billion are denominated in US Dollars. The recent collapse of the Peso and hiking of interest rates to 60% have made its position precarious.

Turkey too has seen a 40% plunge in the value of its currency, the lira, as well as high inflation. Turkey faces a series of problems, not least of which, around $179bn of Turkish external debt matures in the year to July 2019, equivalent to almost a quarter of its annual economic output. Most of the maturing debt — around $146 billion — is owed by the private sector, especially banks. With luck the knock-on effect of Turkey’s difficulties is likely to be minimal. While the collapse of the lira has an obvious and crippling impact on their ability to refinance that debt, no foreign financial institution has lent so much to Turkish companies that it is at risk of collapse, although some may take a significant hit.

The main concern is that the crises in Argentina and Turkey will spread to other countries and that the current strength of the US dollar puts at risk the $3.7 trillion of dollar denominated debt that has been borrowed by emerging market economies in the past ten years. But the current dollar strength will probably also hold back the US Federal Reserve from raising interest rates for fear of putting the whole of that debt at risk.

It is possible that significant currency movements will be triggered by political developments such as Brexit or international trade disputes. For the time being the pattern seems to be a sharp rhetoric from political leaders followed by compromise or a shift in position.

China

And then there is China. In 2007, China accounted for just 4% of global debt, but this had ballooned to 15% by 2016. When critics of global debt talk about their concerns about a looming crisis or fresh financial crash, a large part of that is bound up with concerns about China and it’s not hard to see why.

Corporate bank-borrowing has exploded since the global financial crisis. It is harder to understand where debt is being invested in China and there are many who are suspicious that much of this money has been wasted risking a destabilising financial crisis or long-term stagnation in the world’s second largest economy.

Debt in Chinese state-owned entities (such as banks) stands at 115% of GDP, but equally China is a huge creditor nation. Meanwhile, the pace at which debt is being accumulated in China has been falling for a number of years, so it is likely that the risk presented by debt in China is also falling.

Have the lessons been learnt?

Taking into account the composition of global debt, it does seem that the risks to the world’s financial system are less than implied by the absolute level of borrowing. The exposure to households, corporates and financial institutions is proportionately less than it was ten years ago. Debt service costs are low. Nevertheless, events in Argentina and Turkey highlight the need for all borrowers, whether governments or in the private sector, to match borrowing with the resources to pay.

According to Ismail Ertürk of the Alliance Manchester Business School at The University of Manchester, banks and regulators are mis-selling the free banking argument, implying that consumers should not have to pay for the outdated technologies of banks and prop up their ill-designed profit models. Here, Ismail introduces Finance Monthly to a history of banking regulation and potential solutions that exist in eliminating this consumer-bank barrier.

Before the global wave of deregulation and liberalisation of banking industry and products since the early 1980s a typical commercial bank would earn its profits mainly from credit intermediation- collecting deposits from public at low cost and lending these to borrowers at a high margin. The name of the game was: 3-6-3 (borrow at 3% lend at 6% and go to play golf at 3pm). The well-meant but badly realised deregulation and liberalisation reduced net interest margins in banking to very low levels forcing banks to search for business models to increase fee income by selling financial products ranging from insurance to asset management. Around this time, a new global bank regulation called Basel Capital Adequacy Accord came into effect too shifting the focus in bank financial performance measurement from net interest margin and return on assets to return on equity. Stock markets started to use return on equity as the key financial performance metric to value banks. Fee generating businesses including securitisation of loans- like sub-prime loans that caused the financial crisis of 2008- do not require capital under Basel risk algorithm and make it easier for banks to achieve high return on equity targets.

Such historical understanding of bank business models and the role of net interest income in bank valuation by investors is very important because today's discussion about free banking being detrimental to bank profitability cannot be sensibly made without understanding how we arrived here. Currently with banks in the UK and Wells Fargo in the US paying substantial amount of fines for mis-selling products to their financially illiterate customers it is absurd to argue that bank retail customers have been enjoying free banking. Banks have been using free deposit products as a bait to charge all sorts of unjustified fees and commissions to their customers from mis-selling borrowing related insurance products to overcharging for overdrafts. Therefore, the argument that banks provide free banking for deposit customers needs to be factually supported. The issue could be that banks are under pressure from stock market investors to achieve unrealistic return on equity targets under the current low interest rate environment and therefore are looking for ways to overcharge their retail customers. Regulators should first fully understand this shareholder value-driven bank business model before supporting banks for the end of so called “free banking”, which really is more like banks asking for a licence to overcharge consumers.

At a time when developments in digital technologies make electronic payments almost costless and globally available 24 hours the demands by banks, regulators and international official institutions like IMF for uncontrolled charges for payments in the name of ending the sol-called free banking look unjustified and not supported by facts.

What we need is not the end of so-called “free-banking” but a new non-bank shared public technological infrastructure fit for purpose for our digital times for payments. The cost of this infrastructure should be met by a public body that recoups its costs from banks and other users. With big data analytics, it should not be difficult to do maths for transparent costing and pricing under such system. Therefore, ending the “free banking” is a false debate that is likely to support outdated bank IT infrastructure and bank business models that promise to the stock market unrealistic return on equity targets. With the developments in payment technologies the regulators should creatively think a payments infrastructure that is run in the interest of consumers of retail financial services. In addition, regulators should scrutinise shareholder value-based bank business models and ask justifications for profitability targets that banks promise to their investors. It is time to reshape banking radically to introduce digital technological developments in payments for fair pricing and economic efficiency. Consumers should not be paying for banks’ ill-designed and not fit for purpose business models.

Somalia faces numerous challenges on its quest for peace, stability, and economic prosperity. The recent drought and famine will test the country's resilience to provide humanitarian assistance and will require help from the international community. The government's recent policies demonstrate its strong commitment to improving the state of the country and Somalis' livelihoods.

Here are five things to know about Somalia's economy since the country resumed relations with the international community five years ago.

The drought is severely affecting vulnerable populations. The harsh impact of the ongoing drought on the agricultural sector has put about 6.2 million people (about half the Somali population) in need of assistance and at risk of food insecurity, prompting an urgent need for humanitarian and financial assistance from the government and the international community. The government will also need to better coordinate and monitor humanitarian aid distribution amid security challenges across some regions with a focus on the most affected regions.

Somalia is a fragile state, located in the horn of Africa, that has emerged from a two-decade-long civil war that caused significant damage to the country's economic and social infrastructures. In 2012, the Federal Government of Somalia was elected and recognized by the international community. Postwar conditions continue to be difficult, however, with poverty widespread and weak institutional capacity.

Donors' support is key. The Somali economy is sustained by donors' grants, remittances, and foreign direct investment mostly by the Somali diaspora. Since 2013, the donor community has given over $4.5 billion in humanitarian and developmental grants, which is essential in contributing to finance Somalia's trade deficit of nearly 55 percent of GDP (average during 2013-16). The current drought is expected to slow economic activity and raise inflation this year, thereby making donor support all the more critical to sustain growth.

Tackling unemployment is crucial for political stability. The unemployed youth population (about 67 percent) contributes significantly to irregular migration and participation in extremist activities, including Al-Shabaab—the militant jihadist group—which is viewed as another form of employment. With very high youth unemployment and low overall labor force participation (particularly by women), the Somali authorities established the National Development Plan that focuses on the following key areas: how to achieve higher economic growth, create jobs, and absorb the Somali refugees returning from Kenya; remittances flows; and prioritizing social safety nets and pressing humanitarian conditions.

Preparations for currency reform are under way to help strengthen governance . As part of a wider Somali reform initiative, the Central Bank of Somalia and the Federal Government of Somalia are preparing to reissue new Somali shilling banknotes—for the first time in 26 years—to combat the existing massive counterfeiting in the country, restore confidence in the national currency, and to allow the central bank to start implementing monetary policy. The IMF is helping the authorities to implement the measures that need to be in place for the launch of the new currency.

The IMF is working closely with Somalia. Since resuming its relationship with the country in 2013, the IMF has concluded two annual economic assessments—the first in 2015—marking the first IMF consultation with the country since 1989. Because Somalia is in arrears with the IMF it cannot benefit from IMF loans; however, the authorities have engaged with the IMF in the context of a 12-month staff-monitored program. This has helped create a framework to support Somalia's economic reconstruction efforts, rebuild institutional capacity, and establish a track record of policy and reform implementation. The first review of this program was completed in February 2017.

Technical assistance is helping. Somalia is among the largest beneficiaries of IMF technical assistance—which helps build institutional capacity—receiving over 70 technical assistance and training missions since 2014. Tangible progress is being made in budget preparation and fiscal reporting, currency reform, and financial sector reporting and licensing. For example, the authorities have been able to prepare a national budget for 2014-2017 and since January 2015, the government produced its first monthly fiscal reporting data. Starting from a very low capacity and a mix of Islamic and western accounting systems, central bank staff have developed a bank licensing framework, methods for periodic reporting by commercial banks, a system for bank financial analysis, and a supervisory scoring system that monitors the overall health of a bank. As Somalia continues to engage more with the international financial institutions, the IMF will deepen and scale up its capacity-building efforts as necessary.

(Source: International Monetary Fund)

Albania's official Institute of Statistics (INSTAT) has released figures showing GDP growth for 2016 of 3.46%, fuelled in part by a fourth-quarter export surge of 16%. Growth exceeded forecasts by both the International Monetary Fund and the World Bank.

INSTAT reported that the growth was led by commercial trade, tourism, construction and energy production, all of which generated robust figures. Overall, the year's performance was the best since 2010 when growth was 3.7%.

In welcoming the encouraging data, Prime Minister Edi Rama said: "This is good news, but it's only the start of what we hope to achieve on the economy. My government's first term has focused primarily on institutional reform and improved governance. Now we are starting see the results -- in investment, business expansion and in job creation. Now we must pour all our efforts into economic expansion and generating rewarding jobs for our fellow citizens."

The Prime Minister highlighted major reforms to the power generation system which, in 2013, needed an infusion of US$ 135 million from the state budget merely to remain operational. The revamped grid, now almost fully replaced with new technologies, has reduced power losses to 28% from 45%. As a consequence of the reforms, electrical energy sector production rose 62% in the final quarter of 2016 alone, and 30% for the full year, Mr Rama said.

Restored confidence in the Albanian economy meant that foreign direct investment for 2016 reached a record EUR 983 million, a 10.5% rise over the previous year, according to the Bank of Albania. In the last quarter, FDI reached EUR 276 million, a full 70% rise year-on-year.

Commenting on the INSTAT announcement, Finance Minister Arben Ahmetaj said it confirmed an overall improvement in the Albanian fiscal situation. "Stable government debt, as one of the most vital indicators of the macroeconomic health in the country, is now in a much more favorable position than it was a few years ago," Mr. Ahmetaj said.

"After more than two decades during which, with a brief exception in 2010, the State Budget was operating at a deficit, now in 2016 the budget has been able to record a surplus. In the 2017 budget as well as in the medium term framework for the years to follow, a primary positive balance has been established as a target and will be adhered to, meaning another surplus, and a growing one. As a consequence, fiscal policy followed in the last few years has made it possible to halt and reverse the unhealthy trend of government debt since 2008."

A new fiscal rule, backed by legislation, mandates the government to decrease government debt every year until it reaches a stable maximum of 45% of GDP.

(Source: Belgrave Strategic)

Europe - shutterstoc#D909E6After intense speculation over the possible consequences if Greece defaulted on its loan payments, the country has successfully made a €750 million ($834 million) payment to the International Monetary Fund one day before its first deadline.

Worries were rife within the international community, extending to speculation that the country would have to leave the eurozone. It was difficult to predict what effect this would have on the economy of other countries.

It is for now unclear how the Greek government – currently lead by Alexis Tsipras of Syriza - sourced the money. Currently Greece owes €320 billion ($360 billion), €240 billion of which is due to European bailouts. The country currently has a 177% debt-to-GDP ratio.

The Eurogroup today made an official statement on the situation, "We welcomed the progress that has been achieved so far. We note that the reorganisation and streamlining of working procedures has made an acceleration possible, and has contributed to a more substantial discussion. Once the institutions reach an agreement at staff level on the conclusion of the current review, the Eurogroup will decide on the possible disbursements of the funds outstanding under the current arrangement.”

For now, Greece has eased some fears of a complete liquidity crisis. The euro is currently trading below $1.12 level, undoubtedly affected by the financial situation. Eurogroup chairman Jeroen Dijsselbloem said there needs to be further specific agreements in place before Greece receives any further payments. Crisis averted, for now. But for Greece's economy there is a long way to go.

Greece - shutterstoc#E7F547Greece confirmed it has made its €450 million loan repayment to the IMF today, allaying some fears over the country’s ability to repay its current debts.

Euro zone partners have given the country six working days to improve a package of proposed reforms in order for the currency bloc to consider releasing more funds to the ailing state. Greece is hoping to secure a further €7.2 billion in loans to stave off possible bankruptcy.

As part of its attempts to get back to financial stability, the struggling country is now looking once again at selling state assets, according to Finance Minister Yanis Varoufakis. It has not been specified which tenders will go ahead, but it is believed that the government is looking for public private joint ventures.

https://www.zoomproperty.com/en/rent/residential/dubai/apartment-for-rent-in-umm-suqeim-area

Money Cogs - shutterstock_133008380The IMF has cut its global growth forecast for 2015 to 3.5%, down 0.3% from its October prediction. It expects a lower oil price to be positive for the global economy, but to be offset by negative factors.

The IMF believes a lower oil price will stimulate more growth in advanced economies that import oil rather than in emerging economies, as the benefit feeds more directly through to consumers. In many developing nations, like India, the government subsidises energy consumption, therefore the government tends to benefit from price drops.

However, the IMF believes the US will see strong growth in 2015, helping push the global economy upwards. The US is forecast to see 3.6% growth in 2015, up 0.5% from the IMF’s October forecast.

Meanwhile the IMF sounds notes of concern over Russia, and China. The Russian economy is expected to contract by 3% in 2015, while China is expected to grow by 6.8%, a 0.3% reduction from October's forecast. This follows on official data just released showing Chinese growth slowed to 7.4% in 2014, an enviable level of growth for advanced economies, but its lowest level in 24 years.

European growth has been downgraded and is now expected to come in at 1.2%, down 0.2% from October. However, Spain provides a European bright spot, with 2% growth expected this year, up 0.3% on October's forecast. The UK is expected to grow by 2.7% in 2015, unchanged from October.

“Economic forecasts of this nature are more like a dowsing rod than a GPS tracking system, but they do confirm what market behaviour suggests- that uncertainty has increased in recent months,” said Laith Khalaf, Senior Analyst for UK-based financial service company Hargreaves Lansdown.

“The falling oil price is of course a major source of instability, though as the IMF notes this should be a boost to global economic activity, albeit with winners and losers.

“The US remains teacher's pet, with the growth forecast for the world's most influential economy revised sharply upwards. At the other end of the spectrum Russia is expected to suffer a 3% contracting in its economy over 2015, as a result of its high exposure to oil and gas production.

“While the IMF strikes a largely negative tone, stock markets have already absorbed much, if not all of the information referred to in these forecasts. For instance Russian and Chinese stocks are already looking relatively inexpensive by historical standards, while US companies are more fully valued, reflecting the respective conditions and confidence in these economies.”

About Finance Monthly

Universal Media logo
Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
© 2024 Finance Monthly - All Rights Reserved.
News Illustration

Get our free monthly FM email

Subscribe to Finance Monthly and Get the Latest Finance News, Opinion and Insight Direct to you every month.
chevron-right-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram