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Posts Tagged ‘equity’
Tuesday, December 30th, 2008
This is the right way to close out 2008!! The most tumultuous year in decades was a turning point for everyone in the wake of a global economic tsunami. As the tide recedes…the doubters, deniers, dreamers and dogmatists some of whom once thought socialism was the way forward, have begun to pillory the very system that has brought the greatest amount of wealth, prosperity and progress to humankind. Capitalism..or at least what is referred to describe the current system-if that is possible-is again the enemy.
On the eve of a new year, Caroline Baum writing on www.bloomberg.com , nails the manifesto-however old and tattered- to the public square of the internet for all to see. In the light of examination and reflection, her thesis stands.
Happy New Year from MBS, Ltd!
Capitalism Is Worst System Except for the Rest
Commentary by Caroline Baum
Dec. 30 (Bloomberg) — The year 2008 will be remembered as one that exposed the fatal flaws in free-market capitalism, sending it to an untimely death.
Or will it?
That capitalism’s obituary is already being written suggests the enemies of the free market were waiting to pounce.
Last week, Arianna Huffington, co-founder of the Huffington Post, wrote that laissez-faire capitalism, “a monumental failure in practice,” should be “as dead as Soviet Communism” as an ideology.
On National Public Radio, Daniel Schorr pronounced “the death of a doctrine” in his year-end review.
All I could think of was Winston Churchill’s assertion about democracy. Capitalism is surely the worst economic system, except for all the others that have been tried.
With its ideology under fire and its practice falsely maligned, it is to the defense of free markets that I devote my final column of the year.
Before you can declare free markets a failure, you have to establish that they exist, says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago.
“We do not have free markets in credit in the U.S. or anywhere else that I know of,” he says. “The price of short- term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit” at the precise level that a free market would.
Chosen People
Fixing the price of any other commodity, including labor, has proven to be a failure, an affront to the inviolable invisible hand. Yet when it comes to setting the interest rate that will keep the economy on an even keel, we put our faith in a chosen few to get it right.
All sorts of unintended consequences flow forth from central bankers’ fixing of a short-term rate. Hold the rate too low, and it leads to a misallocation of capital into, say, housing or dot- com stocks. That’s what happened in the late 1990s and again in the early part of this decade.
“We are now experiencing the economic and financial market fallout from (Alan) Greenspan’s interference with the free market,” Kasriel says.
In a true free market, risk-takers are punished for bad bets. Not so in the current crisis, where financial institutions — with the exception of Lehman Brothers — are deemed too big to fail and rescued, merged or recapitalized.
Army of Regulators
One supposed nail in capitalism’s coffin is the assertion that deregulation created the problems. This is curious, given that banks, which are at the root of the credit crunch, are among the most highly regulated institutions.
“There is a small army of people overseeing the banking industry,” says Paul DeRosa, a partner at Mt. Lucas Management Corp. in New York. And yet “we’ve had a banking crisis every 15 years since 1837. The number of people devoted to regulation doesn’t seem to matter.”
Regulators from the Federal Reserve, Securities and Exchange Commission, Office of the Controller of the Currency and New York State Banking Commission are “on the premises 365 days a year,” he says.
The regulatory structure may have been antiquated and overlapping. That’s no excuse for the regulators to be caught napping.
Censuring the free market is a way of deflecting blame from the true source, according to Dan Mitchell, senior fellow at the libertarian Cato Institute in Washington.
Compromised Overseers
“The genesis of the problem is bad government policy,” Mitchell says, pointing to everything from easy money to “affordable lending schemes” to the “corrupt system of subsidies from Fannie Mae and Freddie Mac” to the tax code’s favorable treatment of debt (the interest is deductible) versus equity.
Fannie’s and Freddie’s generous campaign contributions (anywhere else, these would be called bribes) encouraged Congress to look the other way as the two housing finance agencies used their implicit government guarantee to increase their leverage and buy riskier mortgages.
Those clamoring for more regulation as a solution to the current crisis are forgetting that Congress has oversight responsibility for the regulator of those agencies.
“I have no confidence regulation will solve the problem,” says Allan Meltzer, professor of economics at Carnegie Mellon University in Pittsburgh. “Lawyers and bureaucrats make regulations. Markets figure out how to circumvent the costly ones.”
Imperfect Like Us
As a case in point, Meltzer pointed to the Basel Accords, which “required banks that hold more risky assets to hold more reserves. So they held them off their balance sheet, where they went from being poorly monitored to not monitored at all.”
Capitalism has spread across the globe, lifting millions out of poverty as “a direct consequence of government stepping out of the way,” DeRosa says.
Yet critics of free-market capitalism are implicitly arguing for a bigger role for government.
Alas, government isn’t some benevolent matriarch acting in the public interest, even if it knew what that was. It is a conglomeration of politicians acting in their own self-interest, guided by payoffs from special-interest groups. That’s a poor substitute for the market’s price signals, not to mention a guarantee of inefficiency and waste.
“Capitalism is the only system that produces both growth and freedom,” Meltzer says. Unlike socialism and communism, “it doesn’t depend on someone’s ideas of perfection.”
Yes, markets are guilty of excess, greed, even corruption.
“We’re not perfect people,” Meltzer says. “Capitalism matches mankind.”
Technorati Tags: 2008, turning point, global economic crisis, capitalism, Anton Olff, socialism, MBS Ltd., Caroline Baum, www.bloomberg.com, free markets, Arianna Huffington, Huffington Pos, Soviet Union, Communism, National Public Radio, Daniel Schorr, Winston Churchill, democracy, ideology, Paul Kasriel, Northern Trust Co., Chicago, central banks, short-term credit, commodity, labor, Alan Greenspan, risk takers, Lehman Brothers, deregulation, credit crunch, banking industry, Paul DeRosa, Mt. Lucas Management Corp., New York, Federal Reserve, Securities and Excahnge Commission, Office of the Controller of the Currency, New York State Banking Commission, Dan Mitchell, Cato Institute, Washington D.C., Fannie Mae, Freddie Mac, debt, equity, Congress, Allan Meltzer, Carnegie Mellon University, Pittsburgh, lawyers, bureaucrats, Basel Accords, special interest groups, freedom, greed, corruption, mankind
Tags: 2008, Alan Greenspan, Allan Meltzer, Anton Olff, Arianna Huffington, banking industry, Basel Accords, bureaucrats, capitalism, Carnegie Mellon University, Caroline Baum, Cato Institute, central banks, Chicago, commodity, Communism, Congress, corruption, credit crunch, Dan Mitchell, Daniel Schorr, debt, democracy, deregulation, equity, Fannie Mae, Federal Reserve, Freddie Mac, free markets, freedom, Global Economic Crisis, greed, Huffington Pos, ideology, labor, lawyers, Lehman Brothers, mankind, MBS Ltd., Mt. Lucas Management Corp., National Public Radio, New York, New York State Banking Commission, Northern Trust Co., Office of the Controller of the Currency, Paul DeRosa, Paul Kasriel, Pittsburgh, risk takers, Securities and Excahnge Commission, short-term credit, socialism, Soviet Union, special interest groups, turning point, Washington D.C., Winston Churchill, www.bloomberg.com
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Saturday, December 20th, 2008
Here is the weekend update from MBS staff…and an article from www.businessneweurope.eu
While we agree with much of Ben here, we note the wide disparity not only between Ukrainian Government projections-which are optimistic to say the least-but also among the various firms tracking the Ukrainian economy.
We find it ironic that Ukraine’s economy is considered more diverse than many other economics, yet the emphasis is still on steel prices. The consensus would be that it is the lynchpin of the Ukrainian economy.
The one thing we believe will happen are more privatizations. We also don’t think the Ukrainian Government projection of a 7.30 hryvnia to the U.S. dollar as the average rate for 2009 is realistic. We believe the hryvnia will depreciate further in 2009. That could however, accelerate reforms. However, Ukraine will have to endure economic pain during that transition period.
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UKRAINE 2009: tough times ahead |
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Ben Aris in Berlin
December 20, 2008
Ukraine will have a harder time of it in 2009 than any other country in the region. It enters the year in recession and the prospects for growth in the second half of the year depend heavily on what happens to the global economy.
In general, the economy remains more resistant to external shocks, as it is relatively well diversified by Eastern European standards and the large consumer base helps. However, public finances are in mess and monetary policy is weak. The banking system was also teetering on the brink of collapse in late 2008 when the National Bank of Ukraine had to resort to administrative measures to prevent bank runs and a total meltdown.
The crisis was feeding through into the retail sector by the end of 2008 as retail turnover fell by 1.1% in November after growing by 16% the month before, bringing a consumer boom that has been running for years to an end.
An emergency $16.5bn loan from the International Monetary Fund (IMF), of which $4.5bn was already disbursed before the end of 2008, saved Ukraine’s bacon during the worst of the instability.
Still, the outlook for the second half of 2009 is rosier and Ukraine has made a lot of progress in recent years. “By many measures, Ukraine is currently much more immune to cyclical shocks: foreign exchange reserves have increased substantially, foreign capital increased its share on the local financial market (which is now well capitalized and profitable), the fiscal system has a strong budget code (with defined roles and responsibilities in the budget process) and the [World Trade Organisation] has liberalized external trade,” Maryan Zablotskyy, macroeconomist at Erste Bank Ukraine, points out.
Ukraine’s economic policy is weak both fiscal and monetary wise. On the one hand, the state budget has had a good balancing influence on fiscal policy - since 2000, the average budget deficit has stood at just 0.75% of GDP. However, budget planning was only conducted for one year, which meant that the government has tended to increase spending in nominal terms during times when steel prices and growth were increasing and this tends to amplify the economic cycle and the impact of steel price volatility on the economy. Consequently, the sudden plummeting of steel prices in the current crisis caught the government off guard.
ECONOMIC FORECAST
Ukraine will see the sharpest slowdown of all the countries in Eastern Europe in 2009. The cabinet released its macroeconomic forecast for 2009, projecting real GDP growth of just 0.4% on year. These numbers are based on the Economy Ministry’s optimistic scenario and assume an improvement in foreign demand and effectiveness of the government’s anti-crisis measures. Earlier, the ministry announced an estimated 5% GDP decline based on the pessimistic scenario, which the ministry has not released.
Dragon has a bit more pessimistic scenario, with GDP declining by either 0.7% in case of a fast global recovery, or by 4%, in a more pessimistic case. Fitch forecasts a contraction in Ukraine’s real GDP in 2009 by 3.5%. Erste analysts project a recession of 2.5% of GDP in 2009, with economic growth returning only in the second half of 2009.
“Despite clearly having very strong international support, it will take some time to sort out the imbalances. Still, as the political sphere is now united by a foreign anchor (International Monetary Fund loan), we believe that there is a good chance that Ukraine might finally start implementing the reforms that it did not do for 10 years,” says UBS.
If it does, the medium term looks good: “GDP growth will return to its potential growth of 5-6% in 2010, while inflation is likely to come down to a single-digit figure,” conclude Erste analysts.
Ukraine had the highest rate of inflation in Europe in 2008, but the crisis was a blessing in that it at least helped slow to 22.3% in November the galloping price rises. “We consider the government’s one-digit inflation forecast much less realistic as the hryvnia’s sharp depreciation will put significant pressure on domestic prices. We currently expect inflation in Ukraine to rise by 14.2% on year (base case) or 16.9% on year (pessimistic case) in 2009,” says Dragon
inflation forecasts
Government 9.5%
Dragon 14.2% (base) - 16.9% (pessimistic)
Fitch 17.5%
Foyil Securities 14.5%
DEVALUATION
Ukraine is vulnerable to external shocks to its currency as nearly 50% of total lending in Ukraine is in foreign currency. After spending more than $7.5bn – 20% of its reserves – to support the hryvnia in October and November, the NBU lowered both its official rate repeatedly, and its interbank intervention rate to finally unify them both at the IMF’s behest.
The hryvnia lost nearly 60% of its value from its high in May 2008 of UAH4.5/USD as a result of the crisis. By the end of December the currency had probably oversold and was trading at UAH8.2/USD, at which point the government said it would stabilize.
The optimal level of the UAH/USD will depend on steel prices and Erste analysts project the optimum level to be around UAH7 per dollar, which suggests the currency has overshot at UAH8/USD. However, ultimately the value of the currency will depend on where steel prices settle.
In order to remove some of this unpredictability from the public finances, one of the strings the IMF has attached to its loan is the government must set up a UAH40bn stabilisation fund that can be used to issue stabilisation loans and bail out banks. The fund will be maintained in the future partly from privatisation receipts and the whole privatisation programme has been put back on the agenda for 2009.
The average exchange rate in 2009 will be UAH7.30/USD, according to the government. However, the currency will be affected by Ukraine’s unpaid gas debts to Russia and the price it has to pay for gas imports.
However, the really big change is the current crisis has effectively smashed the foreign currency trading band inside which the NBU has kept the hryvnia more or less constant at about UAH5/USD for most of the last five years.
CURRENT ACCOUNT DEFICIT
The government is hoping to reduce the current account deficit in 2009 as a result of the devaluation. “I hope that a fall in fuel prices, a very moderate rise in gas prices and the exchange rate will bring a zero or a deficit of the current account at 1-2% [of GDP],” Deputy Governor of the National Bank of Ukraine Oleksandr Savchenko said in December.
Fitch estimates the current account deficit will rise to $4.5bn, while the total foreign debt that needs to be paid in 2009 is $45.6bn, equivalent to 157% of Ukraine’s international hard currency reserves. Andrew Colquhoun, the director of sovereigns group at Fitch Ratings, said that clearly Ukraine will not be able to meet these payments unless it can raise some external financing.
With steel exports falling and the compensatory inflow of foreign direct investment (FDI) also slowing, balancing the current account has become a major challenge going forward. FDI in Ukraine in 2008 is projected at $8bn-9bn and in 2009 at over $5bn, said the NBU’s Oleksandr Savchenko.
BANKS
Ukraine’s fast growing bank sector came close to collapse and the rescue measures are likely to have far reaching consequences on the whole sector.
“The government received the right to borrow money in foreign currency on the local market and use government bonds to buy troubled banks [as part of its new crisis powers]. These, alongside the increase in the state fund guarantee for deposits from UAH50,000 to UAH150,000 (covering 99% of individual accounts) and the increase in refinancing activities by the NBU are meant to secure overall banking system stability, which is likely to go through a period of large-scale evolutionary changes,” say analysts at Erste. “The IMF and Ukraine have effectively agreed on driving further consolidation in the banking sector. Even with minimum capital requirements twice those in Europe, Ukraine has some 170 banks, a number that could fall by as much as 30% in 2009 and 2010.”
An attempt to rescue the troubled Prominvestbank seems to have failed and is likely to be nationalised. The whole sector should enter a period of consolidation running into 2009.
EQUITY
After equity prices rose 136% in 2007, the Ukrainian equity market lost nearly 80% in 2008, wiping out all the gains for the last several years in the process. By the start of 2009, Ukraine was one of the cheapest markets in the world in terms of P/E ratios. Only Russia is cheaper.
“Ukraine’s premiums over Russia are justified in our view, as the Ukrainian economy is to a large extent hedged against decreasing commodity prices,” explain analysts at Galt & Taggart. “The country is a large net importer of hydrocarbons, which impact directly on production costs for energy-intensive Ukrainian industries. We believe any potential natural gas price hike in 2009 is more likely to be symbolic. Despite Gazprom’s fear-mongering rhetoric, reference prices are falling and Ukraine holds the transit and storage keys to the bulk of Russian gas exports to Europe. In addition, a bottom-up inspection offers a number of national champions like Enakievo Steel and Ukrsotsbank, among others, which have some of the lowest valuations in their Eastern European peer groups.”
But comparisons to Russia are of limited value due to the vast difference in the size of the markets. Daily trading volumes on the Russian markets are in the billions of dollars whereas in Ukraine the volumes have crashed from between $30m-60m down to about $1m a day as of the end of 2008. Such tiny liquidity makes prices extremely susceptible to shocks.
“Given the liquidity and volatility issues are likely to plague the Ukrainian market until the world finds answers to the financial upheaval, we recommend investors look at shares traded abroad, namely London and Warsaw. Liquidity on those markets remains better than on the local market due to stricter disclosure requirements, better market infrastructure and the presence of ‘quality’ long-term investors. For all intents and purposes, the Ukrainian agricultural sector is represented only on foreign bourses and we see the sector as a solid performer in uncertain times,” says G&T.
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Technorati Tags: MBS Ltd., fiscal policy, commodity prices, Galt & Taggart, natural gas prices, Gazprom, Romania, Hungary, Poland, equity, P/E ratios, Prominvestbank, Oleksandr Savchenko, bank sector, Andrew Colquhoun, Fitch Ratings, foreign direct investment, FDI, current account deficit, foreign debt, Russia, NBU, inflation, domestic prices, slowdown, recession, economic growth, monetary policy, budget planning, Maryan Zablotskyy, economic cycle, GDP, steel prices, external trade, World Trade Organization, Erste Bank Ukraine, foreign exchange reserves, International Monetary Fund, IMF, instability, East Europe, National Bank of Ukraine, Anton Olff, retail sector, reforms, hryvnia, U.S. dollar, depreciation, privatiziations, www.businessneweurope.eu, Ukraine, economy,
Tags: Andrew Colquhoun, Anton Olff, bank sector, budget planning, commodity prices, current account deficit, depreciation, domestic prices, East Europe, economic cycle, economic growth, economy, equity, Erste Bank Ukraine, external trade, FDI, fiscal policy, Fitch Ratings, foreign debt, foreign direct investment, foreign exchange reserves, Galt & Taggart, Gazprom, GDP, hryvnia, Hungary, IMF, inflation, instability, International Monetary Fund, Maryan Zablotskyy, MBS Ltd., monetary policy, National Bank of Ukraine, natural gas prices, NBU, Oleksandr Savchenko, P/E ratios, Poland, privatiziations, Prominvestbank, recession, reforms, retail sector, Romania, Russia, slowdown, steel prices, U.S. dollar, ukraine, World Trade Organization, www.businessneweurope.eu
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