China May Refrain From More Easing, IMF Official Says
By Bloomberg News – Jul 25, 2012
China may refrain from stepping up its monetary stimulus or increasing spending because measures now in place are sufficient to support growth, the International Monetary Fund’s top official in the nation said.
Authorities will probably maintain the “status quo” after already shifting their monetary stance to a “more neutral or accommodating one” and may forgo expanding this year’s budget, Il Houng Lee, 54, the IMF’s senior resident representative in China, said in an interview yesterday in the fund’s Beijing office.
Lee’s comments reflect confidence at the IMF, which last week cut its China growth forecasts three months after releasing updated projections, that the pace of expansion will accelerate in the second half of 2012. Premier Wen Jiabao’s government enacted two interest-rate cuts in a month and accelerated approval of investment plans to stem six quarters of deceleration in the world’s second-largest economy.
“Broadly what they have been doing has already been adequate to ensure that the economy is bottoming out,” said Lee, head of the IMF’s China office since 2010. “They most likely maintain the current status quo,” he predicted. Authorities “will most likely allow credit growth to continue to increase,” while avoiding the record scale of lending in the aftermath of the global financial crisis, Lee said.
The IMF official didn’t rule out another rate cut, saying a drop in the inflation rate could prompt such a move. Meantime, the government sees “adequate space in the existing budget to continue to adjust policies to support growth,” assuming Europe’s debt crisis doesn’t worsen, he said. Revenue may come in above projections, allowing higher spending, he said.
The IMF issued an annual review late on July 24, saying that while China’s economy “seems to be undergoing a soft landing,” achieving that is a key challenge. “China is well placed to respond forcefully, if needed, to a deterioration of the external environment, in particular through fiscal policy,” the Washington-based lender said.
The fund repeated its forecast from last week that China’s economy will expand 8 percent in 2012, compared with the 8.2 percent seen in April. It sees an acceleration to 8.5 percent growth in 2013, compared with 8.8 percent predicted three months ago. Inflation will range from 3 percent to 3.5 percent for the year and slow to 2.5 percent to 3 percent in 2013, “barring further shocks to agricultural supply,” the IMF said.
Leaders have implemented stimulus as the Communist Party prepares for a once-a-decade leadership succession, starting later this year.
“Our baseline scenario assumes no disruption” from the leadership shift, Lee said. Asked if domestic or foreign investment decisions are being postponed, Lee said that he “would have thought that uncertainties in the global economy were much larger than the uncertainty, if any, over the political risks here.”
The IMF on July 24 reiterated its assessment that the yuan is “moderately” undervalued, which China disputed. The fund omitted an estimated range for the currency’s undervaluation that was included in an earlier draft, according to two officials at the fund who had seen the previous language and spoke on condition of anonymity.
With a slowdown in export growth, China has overseen a weakening in the yuan this year. The currency has dropped about 1.4 percent against the dollar in 2012 after a 4.7 percent gain in 2011. The yuan fell less than 0.1 percent against the dollar to 6.3885 yesterday.
The yuan “is assessed to be moderately undervalued against a broad basket of currencies,” the IMF staff wrote, reiterating an assessment last month by David Lipton, the IMF’s first deputy managing director. That was a change from the previous stance that the currency was “substantially” undervalued.
China said the yuan was “now close to equilibrium or, at most, slightly undervalued,” according to the report.
Markus Rodlauer, head of the IMF’s China team, asked why estimates of the yuan’s undervaluations were left out this year, said on a conference call with reporters that “numbers tend to get a life of their own.” Some estimates will appear in a separate exchange-rate report to be issued “shortly,” he said. Last year’s report gave a range of 3 percent to 23 percent for the undervaluation.
Bill Murray, an IMF spokesman, declined to comment on the omission of the yuan’s estimated undervaluation that was in an earlier draft.
IMF directors “noted that the pace of activity has slowed and downside risks are significant,” the fund said on July 24. Options to support the economy while avoiding the side effects of a credit-fueled stimulus include subsidies for consumption, incentives to reduce pollution and greater spending on a social safety net, the IMF staff wrote.
China is accelerating capital spending in response to the slowdown, and the IMF said its directors expressed concern about the sustainability of “such a high level of investment in the context of weak external demand and excess capacity.” The IMF sees gross domestic investment little changed this year at 48.5 percent of GDP.
Gome Electrical Appliances Holding Ltd. (493), China’s second- biggest electronics retailer, warned on July 24 it may post a first-half loss as revenue declined and its e-commerce unit was unprofitable. Gome and larger Suning Appliance Co. last year benefited from government subsidies on home-appliance purchases.
New home sales tumble but upward trend intact
By Lucia Mutikani
WASHINGTON (Reuters) – New home sales recorded their biggest drop in more than a year in June and prices resumed their downward trend, dealing a setback for the budding housing market recovery.
Single-family home sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest pace in five months, the Commerce Department said on Wednesday.
The percentage decline was the largest since February 2011 and much of the drop in sales reflected a record 60 percent plunge in the Northeast, which had enjoyed hefty gains since December last year.
“Housing will continue to recover gradually throughout the year but fundamentals are not supportive of a fully fledged housing market recovery,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
The drop in new home sales last month came on the heels of a decline in home resales during the same period.
Housing had appeared to be bucking the broad weakness in the economy, marked by a sharp slowdown in job growth and a cooling in manufacturing against the backdrop of fears of tighter U.S. fiscal policy in early 2013 and a lingering debt crisis in Europe.
While sales of both new and previously owned homes fell last month, other parts of the housing markets exhibited strength.
New home construction in June hit its highest since October 2008 and confidence among home builders this month touched its best level in more than five years, reports showed last week.
This offers cautious optimism the pullback in sales will be temporary.
“It is hard to believe that the market is turning downward when the home builders’ confidence index jumped in July to its highest level in over five years,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
“Either developers are clueless or the data have yet to catch up with reality. I am on the side of the latter.”
WEAK DEMAND FOR LOANS
May’s sales pace was revised to show 13,000 more units sold than previously reported. New home sales were up 15.1 percent, compared to June last year.
The weak sales and a rare earnings stumble from Apple weighed on the Standard & Poor’s 500 index and the Nasdaq composite index.
The S&P 500 index fell for a fourth straight day, but strong results from plane maker Boeing and construction equipment maker Caterpillar lifted the Dow Jones industrial average.
U.S. Treasury debt prices fell marginally but yields held near record lows, while the dollar fell broadly.
An 8.2 percent unemployment rate and stringent lending conditions remain major challenges for the U.S. housing market.
Applications for loans to buy homes fell last week despite record-low mortgage rates, a separate report from the Mortgage Bankers Association showed.
Caterpillar forecast housing starts this year to exceed 750,000 units, a decline from its previous estimate of 800,000.
The median price of a new home fell 3.2 percent from a year earlier after rising strongly in May. The home price decline had appeared to have bottomed, with other measures of home values trending higher in recent months.
The inventory of new homes on the market increased 0.7 percent to 144,000 in June but remained near record lows. At June’s sales pace it would take 4.9 months to clear the houses from the market, up from 4.5 months in May.
New home sales last month were dragged down by the record plunge in the Northeast, which puzzled economists.
“There is no obvious explanation for the drop, but one possibility consistent with patterns in other data is that the unusually early spring boosted sales earlier and as a result the usual spring sales pop has fizzled early,” said Chris Low, chief economist at FTN Financial in New York.
Sales in the South fell 8.6 percent. In the West, sales rose 2.1 percent and were up 14.6 percent in the Midwest.
(Editing by James Dalgleish)
Bernanke May Hit Limit From Buying Too Many Treasuries
By Joshua Zumbrun – Jul 24, 2012 2:41 AM GMT+0700
Federal Reserve Chairman Ben S. Bernanke may hit an obstacle as he considers whether more bond purchases are needed to spur growth: owning too much.
Excessive Fed buying of Treasury securities may reduce liquidity by leaving less for private investors to buy, said Nathan Sheets, global head of international economics at Citigroup Inc. Bernanke instead may favor buying mortgage-backed securities or using new tools for easing, he said.
Purchasing too many Treasuries may “have a serious long- term effect on the market,” Sheets, who until last August was the Fed’s top international economist, said in a phone interview. “The Fed implicitly has a mandate for financial stability, and as part of that they’re concerned about ensuring the functioning and integrity of financial markets.”
Bernanke testified to Congress last week that the Fed is evaluating additional steps to create jobs and reverse an economic slowdown, including buying mortgage bonds or changing language for its policy outlook. Unemployment hasn’t dropped below 8 percent even though the central bank has held its main interest rate near zero since December 2008 and purchased $2.3 trillion in bonds. Policy makers plan to meet July 31-Aug. 1.
Some Fed officials believe continued purchases of longer- term Treasury securities may “lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy,” according to minutes of their June 19-20 meeting. Policy makers said it would be “helpful” to determine the magnitude of Fed holdings in Treasuries that would harm the market.
“They are obviously concerned about the costs of disrupting the Treasury market and probably” the market for mortgage-backed securities, said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York. “They are thinking about liquidity and smooth market functioning” and how to ensure “the market doesn’t start to get clogged up.”
Still, the central bank will probably begin a third round of large-scale asset purchases in September to fulfill its congressional mandate to achieve maximum employment, said Hanson, a former economist in the Fed’s division of monetary affairs. “Ultimately their dual mandate probably trumps most concerns about market functioning.” Price stability is the second part of the mandate.
The Federal Open Market Committee last month voted to prolong Operation Twist, which is intended to push down long- term borrowing costs by extending the maturities of assets on the Fed’s balance sheet. Also, as many as four policy makers were “quite receptive at this time” to more asset purchases, Atlanta Fed President Dennis Lockhart said July 13, citing minutes of the June meeting.
The Fed’s programs have helped reduce borrowing costs to record lows. The yield on the 10-year U.S. Treasury note declined to 1.44 percent at 3:25 p.m. in New York after reaching an all-time low of 1.4 percent. The yield on the 30-year bond fell to 2.51 percent after reaching a record 2.48 percent.
Average daily trading in U.S. government securities was $438.3 billion as of July 11, according to primary dealer data from the Fed compiled by Bloomberg News. That compares with an average of $571.3 billion in 2011.
The decline in volume comes as international investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. That shortage is helping drive up the value of the dollar. Intercontinental Exchange Inc.’s Dollar Index has risen 13 percent in the past year.
Lower Treasury yields have helped hold down the cost of mortgages and other debt. The average 30-year fixed-rate mortgage fell to a record 3.53 percent on July 19, according to an index from Freddie Mac.
The Fed owns $1.65 trillion of Treasury securities, $91 billion of Federal agency debt and $863 billion of mortgage- backed securities. While those amounts are small compared with the $10.5 trillion Treasury market, the Fed has concentrated its purchases in longer-duration assets.
For example, the U.S. government has $405 billion of debt maturing in the year 2021, according to data compiled by Bloomberg News. The Fed owns $128.6 billion of that debt, or more than 30 percent. That share will grow as the central bank purchases $267 billion of longer-term securities through the extension of Operation Twist.
Pace of Purchases
“If you keep buying bonds at the pace they may have to, you’re certainly going to be complicating market functionality,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York.
Prior to the financial crisis and the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. in 2008, the central bank’s balance sheet was less than $900 billion and consisted primarily of short-term Treasury securities.
In December of 2007, 77 percent of the Fed’s portfolio of Treasury securities had less than five years to maturity.
The Fed combatted the financial crisis through two rounds of quantitative easing. In the first round starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.
Policy makers will be wary of impairing a debt market used to fund the federal deficit and which investors deem a benchmark for fixed-income markets worldwide, said Stephen Stanley, chief economist for Pierpont Securities LLC in Stamford, Connecticut.
“If they’re doing something that threatens to ruin the Treasury market, you can be certain that folks at Treasury are going to squawk pretty loudly,” Stanley said. “If the market for the government to finance itself doesn’t work we’d have really big problems.”
Bernanke said in response to questions from lawmakers that Fed purchases of Treasuries would eventually backfire.
“Beyond a certain point, if the Federal Reserve owned too much it would greatly hurt market functioning,” he said. “I wouldn’t say that we’re at that point yet. But ultimately there would be some limit to how much you could do.”
Bernanke said he doesn’t “have a number” for the level of purchases that would prove harmful, adding “we still have some capacity at this point.”
“You still want a functioning market, you still want there to be bids,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Federal Reserve. “You can’t do so much that it harms liquidity further.”
Central bank buying in recent years has already disrupted markets. By purchasing mortgage-backed securities the Fed reduced available supply. As a result, investors were unable to complete an unprecedented amount of trades.
Uncompleted trades in the $5 trillion market for agency mortgage securities rose to a record of almost $2.4 trillion during a week in November of 2010, according to Fed data. That compared with a weekly average of about $300 billion over the past 10 years.
The data encompass incomplete trades continuing over many days and strings of failures triggered by a single party that doesn’t settle a contract.
The constraints of supply mean that new Fed buying of government-backed mortgage bonds would be limited to no more than $500 billion to $600 billion a year, according to research by Barclays Plc.
“The agency MBS market might have more trouble accommodating the Federal Reserve this time,” Barclays analysts, including Nicholas Strand, Siddarth Ramkumar and Sandipan Deb wrote in a June 15 report.
Several Fed officials at their June meeting said the central bank should look into “new tools” to improve financial conditions and boost the economy.
The search by policy makers for new ways of stimulus stems partly from their “concern about preserving the markets and not doing any irreversible damage to them,” Citigroup’s Sheets said.
S&P 500 Rises to Two-Month High on Earnings Amid Fed Bets
By Rita Nazareth – Jul 20, 2012 4:42 AM GMT+0700
U.S. stocks rose, sending the Standard & Poor’s 500 Index to a two-month high, amid better- than-estimated earnings and bets that disappointing economic data will lead the Federal Reserve to add stimulus.
International Business Machines Corp. (IBM), the biggest computer-services provider, and EBay Inc. (EBAY), the largest Internet marketplace, gained at least 3.7 percent as profits beat forecasts. Walgreen Co. (WAG) soared 12 percent after renewing a contract with Express Scripts Inc. (ESRX) Morgan Stanley (MS) slid 5.3 percent after missing estimates as trading revenue plunged. Google Inc. (GOOG), owner of the most popular search engine, rose 3.1 percent at 5:34 p.m. New York time as revenue surged 35 percent.
The S&P 500 (SPX) advanced 0.3 percent to 1,376.51 at 4 p.m. New York time, the highest since May 3. The Dow Jones Industrial Average added 34.66 points, or 0.3 percent, to 12,943.36. The Nasdaq Composite Index gained 0.8 percent to 2,965.90. Volume for exchange-listed stocks in the U.S. was 7 billion shares today, up 4.8 percent from the three-month average.
“We’ve been watching very good earnings, but there were too many disappointing economic reports today,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “There’s some comfort based on the idea that if things get worse, the Fed will do something. We’ll have to wait and see.”
Today’s advance extended a three-day rally in the S&P 500 to 1.7 percent. Earnings have exceeded analyst estimates at about 71 percent of the 108 S&P 500 companies that have reported quarterly results so far, according to data compiled by Bloomberg. Analysts project a 2.1 percent decline in second- quarter profits, the data showed.
Investors also watched economic data. Sales of existing U.S. homes unexpectedly dropped and manufacturing in the Philadelphia region contracted for a third month. Other reports today showed consumer confidence weakened, claims for unemployment benefits rose and an index of leading economic indicators declined more than forecast.
Earlier this week, Federal Reserve Chairman Ben S. Bernanke said policy makers are studying options for further easing that could be deployed in case economic growth remains too feeble to produce a lasting decline in unemployment. The Federal Open Market Committee meets Aug. 1 to continue debating whether further action is needed.
Bets on more stimulus measures and better-than-estimated earnings helped send the Morgan Stanley Cyclical Index of companies most-tied to the economy up 2.7 percent in three days. Technology companies, which make up about 20 percent of the S&P 500, added 1.4 percent today for the best gain among 10 groups.
IBM (INDU) climbed 3.8 percent, the most since Jan. 20, to $195.34. IBM, which accounts for more than 11 percent of the Dow, added 54 points to the share price-weighted average.
The company’s decade-long shift to higher-margin software sales helped it overcome a slowdown in technology spending last quarter. IBM aims to get half of its earnings from software by 2015 — a move away from less-profitable hardware and services.
EBay soared 8.6 percent to $43.95, the highest price since 2006. Chief Executive Officer John Donahoe has increased spending on advertising and new technology to expand beyond EBay’s auction roots and let shoppers buy more items in instant sales, similar to those on Amazon.com Inc.’s site.
Google rallied 3.1 percent to $611.15 after the close of regular trading. Including the impact of Motorola Mobility Holdings acquisition, sales were $12.2 billion, compared with $9.03 billion a year earlier. Profit before some costs was $10.12 a share.
Microsoft Corp. (MSFT) also reported results after the close of regular trading. Fourth-quarter unearned revenue, a yardstick of future sales, topped analysts’ estimates. The largest software maker gained 2.4 percent to $31.41 at 5:34 p.m. New York time.
Qualcomm Inc. (QCOM) increased 4.3 percent to $58.44. The largest seller of mobile-phone semiconductors gained after quarterly results showed consumers in emerging markets are trading up to next-generation handsets, lifting profitability.
Textron Inc. (TXT) rallied 12 percent to $26.50 as earnings beat estimates. The company is considering a bid for part or all of Hawker Beechcraft Inc., the bankrupt business-jet maker in exclusive talks with China’s Superior Aviation Beijing Co.
Capital One Financial Corp. (COF) climbed 2.7 percent to $56.37. The lender that gets more than half of its revenue from credit cards reported results that exceeded some analysts’ estimates.
Walgreen soared 12 percent, the most since 2008, to $34.62. The largest U.S. drugstore chain renewed a contract to provide Express Scripts customers with prescriptions, ending a dispute that contributed to an 11 percent drop in the retailer’s quarterly profit.
Express Scripts rallied 1.9 percent to $58.76. CVS Caremark Corp. (CVS) lost 6.5 percent to $45.43.
J.C. Penney Co. (JCP) jumped 4.8 percent to $20.66. Bill Ackman, the founder of Pershing Square Capital Management LP, reiterated his confidence in Chief Executive Officer Ron Johnson’s turnaround efforts.
Electronic Arts Inc. (EA) surged 6.7 percent to $12.27. The second-largest video-game publisher gained after Chief Executive Officer John Riccitiello suggested investors are overlooking the company’s growth potential.
Some of the largest financial institutions declined today. Morgan Stanley slumped 5.3 percent to $13.25. The New York-based company reported a 50 percent drop in earnings and said it will cut more jobs as revenue from trading stocks and bonds declined the most among Wall Street banks.
Bank of America Corp. (BAC) dropped 3.6 percent to $7.26. Citigroup Inc. (C) lost 1.9 percent to $26.59. JPMorgan Chase & Co. (JPM) retreated 1.4 percent to $34.46.
Phone shares had the biggest decline among 10 groups in the S&P 500, falling 1.8 percent.
Verizon (VZ) Communications Inc., the second-largest U.S. phone company, dropped 2.9 percent to $44.54. Second-quarter net income attributable to Verizon rose to $4.29 billion, or 64 cents a share, from $3.6 billion, or 57 cents, a year earlier. That matched the average estimate of analysts, according to data compiled by Bloomberg.
Johnson Controls Inc. dropped 7.9 percent to $26.07. The largest U.S. auto supplier lowered its forecast for profit for the fourth quarter because of softness in global markets.
UnitedHealth Group Inc. (UNH) slipped 2.4 percent to $54.99. Chief Executive Officer Stephen Hemsley said profit margins are being squeezed in its Medicare and Medicaid plans.
Safeway Inc. (SWY) slid 4.2 percent to $15.80. The second-largest U.S. grocer reported a 17 percent decline in quarterly profit from continuing operations.
Greenhill & Co. retreated 3.5 percent to $36.36. The advisory firm founded by Robert Greenhill reported a 90 percent drop in second-quarter net income.
Millionaires added U.S. stocks more than any other asset in the latest year as average investors fled to bonds, according to a survey by Fidelity Investments.
Twenty percent of the 1,020 households surveyed said they bought individual domestic equities in the 12 months ended in March, the Boston-based mutual fund firm said. Cash ranked second, with 13 percent saying they added to that asset class. Eleven percent purchased exchange-traded funds, and 10 percent each added individual U.S. bonds or domestic stock funds.
The broader investing public has sought refuge in fixed income since the global credit crisis sent the S&P 500 down 38 percent in 2008, eight years after the meltdown in technology stocks. U.S. equity mutual funds suffered net withdrawals of $130 billion in the 12 months ended March 31, according to Chicago-based research firm Morningstar Inc. Bond funds attracted $191 billion. The S&P 500 gained 9.2 percent this year through yesterday.
“They’re probably ahead of the average investor in how they view opportunities,” Bob Oros, executive vice president in Fidelity’s institutional wealth services group, said of millionaires in an interview. “They’re becoming less and less risk-averse.”
Greece’s Highways Are Smoother Than Its Finances
By Marc Champion Jul 18, 2012 4:33 AM GMT+0700
Driving across Europe, the roads tell you a lot about the continent and its crisis.
Cross the border to Greece from Bulgaria or Turkey — as I recently did on a 2,800 mile road-trip from Istanbul to London — and you move from narrow, potholed, lethal truck runs onto the wide and empty magic carpets of Greece’s freeways. The financial crisis is global, but it’s Greece that’s a mess, despite (or maybe because of) its wealth of infrastructure.
Having highways is good. They support commerce and reduce road fatalities. They connect Europeans again, like Roman roads did when Thessaloniki in northern Greece was an important center for the empire. If you need to get your car across the continent, as I did, they’re a godsend.
Highway networks are also part of the trappings and signals of having made it in Europe. Greece, which joined the European Union in 1981, now has plenty of motorways. Its neighbors still aspire.
The Greek highways were rolled out thanks in large part to EU development funds. In the 2000-2006 budget period, Greece spent 5.3 billion euros of its 11.6 billion euros of EU development aid on transport. That accounted for 19 percent of the total EU funds spent on the sector, second only to Spain, at 35 percent.
So two countries representing 11 percent of the EU’s population accounted for 54 percent of the bloc’s transport funds. And within that, Greece spent by far the largest proportion on motorways. This was part of a gusher of cash that helped float the Greek economy and made a number of people rather wealthy. At the peak in 2008, Greece received an annual net payment from the EU of more than 6 billion euros, or 2 percent of the country’s GDP.
All those fast and smooth roads should help Greece export goods. But even in 2008, before the crisis, Greece didn’t export that much: 24 percent of GDP, compared with Bulgaria’s nearly 60 percent. The remainder of Greek’s EU money could have been spent developing other infrastructure, such as its judicial system or its universities. Instead, what the free cash mainly did was to release other Greek government money for misspending on the public sector, jobs-for-votes merry-go-round that collapsed under pressure from the global financial crisis. Greece’s best university still ranks only a little better than 300th in the world.
Now Thessaloniki, a Greek city with a glamorous Byzantine history is a depressed scene of shuttered stores and unemployed youth. The main export growth in the area lately has been of companies, especially international ones, which over the past two years have chosen to relocate operations to cheaper Bulgaria.
Greek exports as a whole rose by a miraculous 37 percent last year. But that was almost entirely due to rising oil prices, which increased the value (not the volume) of Greek oil product exports. Exports of manufactured goods, agricultural products and commodities that might create jobs and growth were all flat or down. Greek businessmen are breathing a sigh of relief after the recent elections produced a rational government and, at the very least, a stay of execution.
“OK, we made mistakes, but Greece did not cause the euro catastrophe,” says Dimitrios Lakasas, chief executive of Olympia Electronics, a manufacturer of fire security systems and chairman of SEVE, an exporters association in Northern Greece. Greece’s troubles were, he thinks, created first by Germany and international creditors, such as the International Monetary Fund and the EU, which thought growth could come from austerity alone. Now, he thinks the political climate has changed, and there may be money to help oil the process.
Where will the money come from? Lakasas is hopeful it won’t have to involve large sums of further aid but can come instead from trimming the bureaucracy and EU development funds. The same funds that built those empty highways.
(Marc Champion is a member of the Bloomberg View editorial board. This is the first in a series of posts chronicling his trip across Europe, from Istanbul to London. Follow him on Twitter.)
Global Economy: Crash or Gradual Slowdown?
CNBC By Catherine Boyle | CNBC – 1 hour 15 minutes ago
The debate over whether the world’s economy is facing a dramatic crash has gained traction in recent weeks, as the euro zone debt crisis continued to dominate headlines and worries about other major economies like the U.S. and China grew.
Bearish forecasts from people like hedge fund manager Hugh Hendry and The New Depression author Richard Duncan have grabbed attention. But there are still many who believe that the world is facing gradual change rather than the rapid tumble of a crash.
“This isn’t a crash in a conventional sense, but a structural down-move in global growth. It’s a new and lower trend,” Paul Donovan, deputy head of global economics at UBS Investment Bank, told CNBC’s “Squawk Box Europe” Wednesday.
“We are going through one of the biggest structural changes that we have seen in the global economy since the 1971-73 process.”
The return of risk to the agenda – Donovan believes we are in the highest-risk environment for two decades – has led to fundamental changes in the way companies operate, he said.
“Right now, what we’re seeing is the rise in the cost of capital globally. That means we have to change expectations. We’re going through that now – look at cash on corporate balance sheets,” he said.
“We’ve got a generation of corporate treasurers scarred by 2008-09 thinking they don’t want to rely on banks for short-term funding and trade finance. That creates a very different relationship. It creates a less leveraged but also less dynamic economy with lower trend growth going forward.”
Since the credit crisis and the collapse of Lehman Brothers, companies and banks have gradually restored more cash to their balance sheets (related: 15 Companies With Zero Debt), and been reluctant to get into more debt (related: World’s Biggest Debtor Nations) despite historically low interest rates.
The notoriously inexact science of economic predictions will become even more difficult as the world evolved, Donovan argued.
“It’s a far more complex work to try and predict in the future,” he said. “We are changing expectations and the way that markets work. The idea of global capital is over. We’re regionalizing. The problem is predicting the outcomes from this.”
Ini Permintaan Khusus Sri Mulyani ke SBY
Luhur Hertanto – detikfinance
Jumat, 13/07/2012 13:13 WIB
Jakarta – Direktur Bank Dunia (World Bank) Sri Mulyani hari ini bertemu dengan mantan bosnya yaitu Presiden SBY. Ada permintaan khusus Sri Mulyani kepada SBY. Apa itu?
Usai pertemuan itu, Sri Mulyani menyatakan, Bank Dunia meminta Indonesia meningkatkan perannya untuk penyelesaian krisis dunia.
“Inti dari pembicaraan kami tadi adalah bagaimana Indonesia di samping menangani masalah nasional dan regional, perannya di tingkat global amat diharapkan oleh negara-negara lain dunia. Pandangan Indonesia sebagai stakeholder penting Bank Dunia diharapkan bisa ikut menyampaikan pemecahan masalah krisis yang ada,” tutur Sri Mulyani di Istana Negara, Jakarta, Jumat (13/7/2012).
Mantan menteri keuangan dan menko perekonomian ini menyatakan, peran Indonesia di dunia semakin berkembang. Peranan negara berkembang seperti Indonesia terus meningkat pada krisis saat ini.
“Meski peran negara-negara middle income itu hanya 30 persen dari ekonomi dunia, tapi kontribusinya terhadap pertumbuhan dunia 60 persen. Apa yang mereka lakukan menentukan kesehatan ekonomi global,” tegas Sri Mulyani.
Dia mengatakan, peran Indonesia sangat penting dalam membagi pengalaman dan pengetahuan untuk pembangunan.
“Di sini ada banyak dengan pembangunan, baik yang amat berhasil dan kurang berhasil, pengetahuan itu juga penting dibagikan. Kami akan menfasilitasi Indonesia dalam memainkan peran global,” katanya.
Menurutnya World Bank melihat Indonesia bisa membagikan pengalamannya dan pengetahuannya melaksanakan pembangunan. Menurutnya Indonesia memiliki pengalaman dalam proses pembangunan, baik yang amat berhasil dan kurang berhasil, sehingga pengetahuan itu juga penting dibagikan.
“Kami akan menfasilitasi Indonesia dalam memainkan peran global,” kata Sri Mulyani.
‘Tersengat’ Krisis, Ekonomi China Turun ke Level Terendah
Wahyu Daniel – detikfinance
Jumat, 13/07/2012 12:22 WIB
Jakarta – Pertumbuhan ekonomi China pada kuartal II-2012 mencapai 7,6%, ini merupakan yang terendah sejak krisis keuangan global tiga tahun lalu atau di 2008.
Hasil ini membuat negara dengan ekonomi kedua terbesar di dunia ini, mencapai pertumbuhan 7,8% di semester I-2012.
Juru Bicara Biro Statistik Nasional China Sheng Laiyun mengatakan, pertumbuhan ekonomi 7,6% di kuartal II-2012 ini merupakan yang terendah. Ekonomi China saat ini terkoreksi oleh tantangan ekonomi global selama semester pertama.
“Hasilnya, ekonomi nasional secara keseluruhan tumbuh sangat moderat atau tipis,” kata Laiyun dikutip dari AFP, Jumat (13/7/2012).
Dia mengatakan, China harus melakukan usaha keras untuk membuat ekonominya terus tumbuh berkelanjutan dan kuat, serta mengubah regulasi makro ekonominya sehingga ekonomi tumbuh cepat. Tahun ini, pemerintah China menargetkan pertumbuhan ekonomi 7,5%.
Pertumbuhan penjualan di sektor ritel melemah sepanjang Juni, yaitu 13,7% dibandingkan Mei yang mencapai 13,8%. Produksi dari pabrik-pabrik di China juga melambat, akibat menurunnya permintaan.
Cracks emerge in Yudhoyono’s facade
By Gary LaMoshi
DENPASAR – Indonesia has been running its own version of the China bargain. In exchange for economic growth, Indonesians have largely agreed to overlook the government’s failure to deal with other pressing issues.
Now, with the prospect of slowing growth, President Susilo Bambang Yudhoyono’s administration needs either to find new ways to boost the economy or show some long overdue leadership.
Last year, Indonesia’s gross domestic product (GDP) rose 6.4%, the fastest since 1996, the year before the Asian financial crisis hit. Last year’s fourth-quarter growth rate of 6.5% marked five straight quarters of economic growth above 6%.
The country won international kudos for producing such solid
results in a shaky global economic climate, countering slowing exports to Western destinations with a rise in consumer spending, infrastructure spending and foreign investment.
The local currency, the rupiah, has advanced 1% against the US dollar after gaining 4.4% in 2010. Inflation fell to a controllable 3.8%. Credit agencies Moody’s Investors Service and Fitch Ratings both recently raised Indonesia’s debt to investment grade, which makes government borrowing cheaper.
This year, however, poses greater challenges as the slump in Europe seems more likely to spread than subside. First-quarter figures show Indonesia’s growth continued at 6.3%.
At first glance, that’s a good start toward the government’s forecast of 6.5%, but it was the slowest growth figure registered since 2010, and so far the second-quarter has brought more troubling news. Inflation has climbed toward 4.5%. Exports in April fell 3.5% to US$15.6 billion, leading to a trade deficit of $641 million, Indonesia’s first month in the red since June 2010.
The trade deficit is particularly ominous because foreign reserve outflows could add to pressure on the value of the rupiah, which on May 31 fell to its lowest since November 2009. The Indonesian currency is down more than 3% in 2012 and off 10% from its high in August last year.
Each 1% drop in the rupiah lifts inflation by up to 0.1%, according to economists. A falling rupiah also makes holding Indonesian equities and bonds less attractive to foreign investors. The Jakarta Stock Exchange’s benchmark index is down nearly 10% during the past month.
President Yudhoyono’s administration is trying to fight back. Last Friday, Finance Minister Agus Martowardojo said the government plans an economic stimulus package to boost domestic consumption. Consumer spending accounted for 55% of Indonesia’s GDP last year, while exports made up 32%.
To keep wallets open, Martowardojo said the government will raise the threshold on taxable income by almost two-thirds, to 24 million rupiahs (US$2,553). That’s a first step to encourage more household spending; or it would be, if another government agency wasn’t working simultaneously to counter its impact.
At nearly the same time as Martowardojo announced the stimulus plan, the country’s central bank said it will go ahead with its plans to restrict credit and thus reduce consumption. Bank Indonesia’s new credit rules. which take effect next week, require a minimum 30% down payment for property mortgages and private cars, 25% for motorcycles, and 20% for commercial vehicles.
Those down payment rates are approximately double prevailing norms. Industry officials suggest that under the new rules, sales of cars and motorcycles will fall short of forecasts by more than 10%, tumbling below 2011 figures.
Similarly, Martowardojo said the stimulus program would also include incentives for investment through accelerated infrastructure financing. The government, however, has not established the required regulations to actually spend more on infrastructure faster.
It is difficult to determine whether Yudhoyono and his administration are the villains or the victims in this round of policy incoherence. But it has arguably become the unfortunate norm during his second-term government.
Ducking the mandate
On many fronts, Yudhoyono has squandered the overwhelming electoral mandate for reform he won three years ago. Rather than acting boldly to press for the changes his supporters sought, Yudhoyono has gone out of his way to compromise, in effect asking the opposition to run the government, and to duck the big issues.
Some argue that Indonesia has just run into an overdue sour patch after a couple of years of nothing but sweet spots. But the current troubles highlight how hollow Indonesia’s economic boom has been, and how little its leaders have done to build on it.
In exports, for instance, shipments have focused on the low-hanging fruit of natural resources, leveraging into a global commodity price upswing. In value terms, nearly all of Indonesia’s exports are non-renewable resources, including coal, petroleum products and precious metals.
Investors, however, tend to take Indonesia’s commodities and run to process them elsewhere. Even the rock from the Freeport-McMoRan’s giant Grasberg mine in West Papua is sent to Singapore for processing.
Despite its labor-cost advantages over China and Vietnam, a large relatively open domestic market, and duty-free access to the rest of Southeast Asia and China through Association of Southeast Asian Nations (ASEAN) trade pacts, Indonesia has been unable to attract significant manufacturing investment.
Manufacturers that have tried Indonesia as an alternative to China often complain that its logistics are inferior due to poor infrastructure. China’s government has poured comparative billions into roads, ports and other big-ticket projects.
Only now, with its newly won investment grade credit rating, can Indonesia borrow the funds to undertake similar infrastructure improvements. At the same time, the country still has a difficult time attracting non-portfolio investment.
That is mainly because the government hasn’t tackled the big issues facing the country, most notably corruption and a dysfunctional judicial system. Nobody wants to invest in a factory or bridge built on legal quicksand.
Foreigners are rightfully leery of a system where tycoons play by a different set of rules, and Indonesians who are successful are more interested in getting their money out of the country – into a Singapore condo, for example – than investing at home.
To its credit, Yudhoyono and his team have tried to fight corruption. They’ve supported the surprisingly effective Corruption Eradication Commission (KPK by its Indonesian acronym).
But convictions and jail terms always seem to stop with the little guys, tax officials like Gayus Tambunan, rather than following the chain to the big businesses that Tambunan alleges paid him off to fix their taxes. You can see the glass as half-empty or half-full, but at least there is a glass.
What you won’t see is Yudhoyono getting out in front on any issue. He has consistently let hot-button issues percolate and generally adopts a consensus position with the backing of allies. He often lets others do the talking for him.
That leads many observers to believe that Yudhoyono doesn’t really know what he wants, doesn’t really care, or doesn’t really mean what he says, and thus his pronouncements are often ignored.
No way to treat a lady
The recent cancelation of a concert by American singer and songrwriter Lady Gaga would be a comic footnote if it didn’t perfectly illustrate how Yudhoyono’s weak leadership hurts Indonesia, domestically and internationally.
Last month, a sell-out crowd of 52,000 paid from US$50 to more than $200 to see Lady Gaga perform at Jakarta’s Bung Karno Stadium. But hardline Muslim groups, including the Islamic Defenders Front (FPI) that specializes in mob violence, threatened to attack the airport when the pop diva arrived and to disrupt the show.
The police, notoriously reluctant to stand up to Islamist and other religious extremists without explicit instructions from politicians, balked at issuing permits for the concert. When no one in government or the mainstream religious establishment dared to stand up against the hardliners, promoters canceled the show.
“FPI is grateful that she has decided not to come. Indonesians will be protected from sin brought about by this Mother Monster, the destroyer of morals,” FPI Jakarta chairman Habib Salim Alatas told a wire service. “Lady Gaga fans, stop complaining. Repent and stop worshipping the devil. Do you want your lives taken away by God as infidels?”
While Yudhoyono remained hunkered in his bunker, for good measure his government’s Religious Affairs Minister Suryadharma Ali sided with FPI, saying, “I strongly believe this cancellation will benefit the country.”
The opposite is more likely true. Foreign companies looking to invest in Indonesia will see that Yudhoyono’s government lacks the fortitude to stand up to fringe groups with the same level of support and credibility as Florida’s Koran burning pastor Terry Jones. Instead, Indonesian authorities will let extremists threaten violence against innocent people without consequence and scuttle a multi-million dollar international enterprise.
Lady Gaga had the last word when she said, “There’s nothing holy about hatred.” And, she probably knows, it’s bad for business, too. As the economic squeeze tightens, perhaps Yudhoyono will realize he has to act decisively and get his government in line to promote economic growth. As the clock ticks down on his final two years in office, he may realize a healthy economy is the lone positive legacy he can hope to leave.
Longtime editor of award-winning investor rights advocate eRaider.com, Gary LaMoshihas written for Slate and Salon.com, and works an adviser to Writing Camp (www.writingcamp.net). He first visited Indonesia in 1994 and has been watching ever since