The Need for Risk Taking Appetite and New Risk Takers 0 77

By Dr. Kenneth De Zilwa, Business Cycle Economist and Financial Markets Expert

Business Cycle of Over Production is Coming to an End:

The global economy is now witnessing its second correction in the business cycle, post the 2008 financial crisis, thereby ending the short juglar business cycle. What is important and mostly missed is what the juglar business cycle brought about. It paved the way for two important outcomes; namely, new risk-takers and new production capacities. This means that we will see new global economic leadership, change hands from the USA to China. It is a common secret that this will be a difficult transition for the world to adjust to from a structural point of view; nevertheless, the past decade of trade and investment flows has made this transition relatively easier.  And this is now the new reality. The change in economic leadership would usher in new markets and with it, new consumer segments are bound to emerge. In other words, the business cycle of ‘over-production’ is complete and the legacy of consumer goods and services is at its end.

The brief economic rebound during the period from 2009 to 2019 was problematic as it was mired by the lack of fixed capital formation in many countries and was an indication that the global economy would run into trouble. Once again many Banks and Central Banks of countries refused to accept the reality that balance sheets had not really recovered and continued monetary easing, resulting in inflation rapidly declining. Part of the monetary easing process was the injection of significant amounts of cash i.e. money liquidity, by Central Banks across the world and the reduction of monetary policy rates. During the 2009 period, alone global broad money supply increased from 100.33pct of GDP to 128.11pct of GDP recoding a 11 year high as at 2019. The rush to stimulate the developed world’s economies underscored the rise in global money supply.

The flush of money saw the  global top 1000 banks’ asset base increase from USD 95 trillion in 2009 to 124 trillion in 2018. Since the financial crisis in 2009, the asset base of the USA banking sector had doubled from USD 11.2 trillion in 2009 to 20.3 trillion in 2020 while China’s banking sector assets alone grew four fold from USD 10.3 trillion to USD 41.7 trillion by 2020. It was believed that in order to overcome the financial crisis, as in the past monetary stimulus, there was dire needed to ensure the global economy had the legs to continue. In order to do so it was injected with sufficient steroids (i.e. monetary and fiscal) to overcome the 2009 recession.

As in the case of the USA and China, many other economies too found that their growth in banking sector assets were not matched by commensurate economic growth rates. Central Banks’ multiple monetary and fiscal tools found limited success in stimulating aggregate demand and it did not materialize despite the low-interest rates and wall of money. The global 11-year average of gross fixed capital formation, for 2009-2019, declined to 23.23pct of GDP from 23.89pct of GDP witnessed in 1998-2008. The splurges of cash only limited the scope for any global balance sheet led capital formation expansion and output growth, as overproduction still i.e. excesses, persisted.

The end result was that market was awash with low cost funding that was channeled back into Central Banks and the rest into financial assets i.e. stock markets, as banks provided highly toxic liquidity which saw stock buy back fueling stock market rallies and delighted beneficiaries of such a monetary policy. Not surprisingly we find that the US and Japan stock markets have had their best performance since the 2009 crisis with the US S&P 500 recording a compounded annual growth of 13pct and 12pct respectively, over the past 11 years.

Covid-19 Made the World Playing Field Flat:

Two forms of events are visible in any business cycle that has peaked. The first being, systemic events which are unpredictable but unquestionably negative and can short-circuit expansionary plans. These include wars, commodity price shocks and asset bubbles. The second category, balance sheet events, is to do with the real economy or financial imbalance and eventual financial crisis that is unsustainable and requires adjustment. Excess production based inventory swings can negatively impact growth in the short term. However, these have rarely caused recessions at least in the last few decades. Excesses in production i.e. inventory, need to be large and the associated adjustments needs to impact a broad section of the global economy.  In March this year, the World Health Organization (WHO) announced the Covid-19 virus had reached pandemic status and the world must brace itself for unforetold events of disruption from both the supply side and demand side.

This global dislodgment saw both the systemic and balance sheet events unfold in markets as never seen before. The world economy saw its worst GDP decline since the Great depression, contracting by 4.5pct.  The downward adjustment of global GDP soon meant that corporate balance sheets would deflate, stock markets fall and global commodities follow in this same direction and they did. Stocks across Europe were down on average by 14pct, Japanese stocks by 14pct and UK by 21pct. Crude oil too fell to negative 20.0 USD per barrel as storage capacities were fully utilized and crude oil companies were unable to manage the excess inventory, created due to the lack of demand, and were forced to pay higher prices for storage than their revenue per barrel.

The unravelling of the ‘new normal’ and post Covid recovery started in China by mid April 2020. It had an undeniable effect on both global and domestic growth and balance sheets, particularly for more open economies exposed to trade; while closed economies proved to be more resilient. Self-sufficiency, import-substitution, cashless settlements and cost savings were back on the table.  World economies have been forced to re-examine and re-design new business models as new winners and losers were emerging, with the resilience clocks for economies being re-set and the playing field made flat by the Covid-19 global shut down.  A fresh re-start has now dawned and a new business cycle is rapidly unfolding, with an Asian focus taking center stage.

The Emergence of New Risk-Takers:

As with all unsustainable outcomes, the eventuality would be a steeper and more painful correction as balance sheets need to be leaner and debt reduced for a new start to emerge.  Post the financial crisis of 2009, banks in Europe and US had written down more than USD 2.1trn of assets by the end of 2010 alone. The figure was far less for Asian banks which were just $115bn. Since then, globally banks have been engaged in restructuring corporate balance sheets in order to create the needed space for resurgence in aggregate demand. Chinese banks have already made arrangements to write off USD 490 billion in 2020 accelerating the non-performing asset disposals. U.S. banks too will set aside up to USD 320 billion to cover potential credit losses in 2020 due to the financial strain of the pandemic, according to a new report from Accenture. Therefore, banks in emerging markets are now well-capitalized and well-funded and big enough to be able to compete directly against their western counterparts in the global marketplace.

In fact as the financial crisis (i.e. business cycle) of 2008 took its toll on the US banking system, systematically dislodging many US Banks from the Top 10 list of Global banks by 2020. US Banks such as Citi Bank, JP Morgan, Bank of America and Wells Fargo have been relegated to the bottom of the pile of the Global Top 10 Banks. The top four slots have been secured by Chinese Banks, namely, ICBC, China Construction Bank, Agricultural Bank of China and Bank of China who are placed as the new leaders of the prestigious Global Banking list. Therefore, we are now witnessing greater equalization across the world as never seen before. If the past century of development rested with the USA (as it was indeed the leading economy and accounted for much of the global demand), with the emerging new business cycle the leadership shifts to China as it replaces the US in many key strategic areas such as trade, resources, banking and finance and patents of technology.

Asia with 48 countries, accounting for 30pct of the Earth’s land area, 60pct of world population, average per capita of USD 7,500, accounting for 50pct of the world fishing catch, producing 90pct of the world’s aquaculture-raised fish, home to 65pct of the world’s total IP with regard to industrial design patents and enjoying an average growth rate of 5.7pct; is positioned to capture the ‘new normal era’.  As the global economy looks toward a ‘V shape’ recovery in 2021, it will also be the dawn of a new business cycle: global growth likely to be 5.1pct.  The new Asian risk-takers, namely, China, India and Indonesia are expected to lead the new growth story, growing by 8.1pct, 10.8pct and 5.6pct respectively in 2021 providing the rest of Asia the launching pad. As with all growth stories the entrepreneurial class stands out and by 2020, China and India were collectively home to 430 Dollar billionaires (China 324, India 106). In fact, according to the World Economic Forum, by 2030 Asia is expected to contribute roughly 60% of global growth.

Sri Lankan Bankers and Businesses Must Adopt or Perish:

It is believed that the banking sector mirrors the real economic activity. The recent chain of negative events, both locally and globally, which lead to the economic contraction has prompted bankers to become risk averse as they see their scope narrowly, focusing on 10pct of their non-performing assets. With considerable amounts of time and resources invested in the area of recovery, and understandably so, as it is depositors’ funds. However, depositors are also customers on the asset side of the balance sheet and bank CEO’s seem to be missing out on this aspect. The bigger picture details must be considered by Sri Lankan banks as with their many foreign counterparts. Global banks are busy re-structuring, writing off bad loans, looking at mergers and acquisitions and re-positioning their and customer balance sheets for the next phase in the business cycle. With the emerging Asian take off, Sri Lanka cannot afford to remain complacent or live in disdain.

As witnessed with each new business cycle there always comes an upsurge with the change in the adopted technology, and in this case, energy efficient GT technology, (i.e. we are seeing the unfolding of green tech revolution) and with it new consumer markets, new products that require a new management ethos, and also new risk management tools for doing business. To cater to this journey Sri Lankan CEO’s and Treasurers both in banks and in the private sector have to adopt or will surely perish.

The recent business cycle events have opened up discussions on the ability of Sri Lankan bankers to look beyond the cyclical annual budgeting outcomes and position their banks balance sheets to capture the ensuing global trends and business cycles.  For the 10-year correction phase will soon come to an end by 2020 and would provide a wide range of opportunities to the brave who have understood the nature of business cycles, and positioned themselves to be risk-takers and market-makers instead of being passive players in order to maximize the national potential of the growth phase.

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The Rise of the Indian Rupee 0 650

  • India’s economy will overtake the US by 2030. And will be the world’s youngest major economy.
  • In just 12 years, India will undergo a startling transformation…
  • By 2030, around 77% of Indians will be under the age of 44… and most of those will be under 25. The country will also have more than 1 billion internet users…
  • Every second, three or more Indians go online for the first time. And by 2030 India will be a middle-class Nation. Consumer spending will quadruple. Rising to nearly $5.7 trillion in 2030.
  • But the economy still faces major challenges. By 2022, more than half of Indian workers will need reskilling. And it still has some of the most polluted cities in the world.
  • India will need to ensure its fast-growing economy is inclusive.

Asian giants securely heading to overtake America

A new world economic order is in the making, with today’s emerging markets, including India, at the heart of it.

India is likely to become the world’s second-largest economy by 2030, next only to China and overtaking the US, according to Standard Charted Bank’s long-term forecast released on January 2008. The UK-based multinational bank also predicts that based on nominal GDP using purchasing power parity exchange rates, China will overtake the US by 2020.

Top 10 countries by nominal GDP in 2020.

Current emerging markets will likely make up the majority of the biggest economies by 2030.

Standard Chartered Bank had raised growth forecast for China and India from its projections in 2013. “India will likely be the main mover, with its trend growth accelerating to 7.8% by the 2020s partly due to ongoing reforms, including the introduction of a National Goods and Services Tax (GST) and the Indian bankruptcy code (IBC),” says the report.

Launched in 2017, the GST attempts to simplify India’s cumbersome tax regime, while the IBC, rolled out in 2016 would strengthen the country’s bankruptcy and insolvency laws.

“Our long-term growth forecasts are underpinned by one key principle: countries’ share of world GDP should eventually coverage with their share of the world’s population, driven by the convergence of per-capita GDP between advanced and emerging economies,” the report said.

Jobs, jobs, jobs

Aging populations are likely to weight on global growth, but India, home to the world’s largest group of young people, will remain unfazed, Standard Chartered Bank notes. Half of the country’s population is under the age of 25.

The bank expects “the rising aspirations of a young population to continue to support consumerism in India’s economy.”

But a young demographic also creates a demand for massive employment. About 100 million new jobs must be created in the manufacturing and services sector by 2030, according to the report. To achieve this, it says, the government needs to close a widening skills gap, raise the participation of women in the workforce, and ease labor laws.

“India needs to train circa 10 million people annually, but currently has the capacity to train just 4.5 million,” the report says.

It also calls for reform to boost spending on infrastructure and reduce growing economic inequality in the country.

Are you optimistic for India’s future?

By : Cameron Blake

Source:  Standard Chartered; Based on predicted nominal GDP



Global non – inclusive growth; Extract from article by Christean Lagarde 0 555

IMF Chief Christean Lagarde in her message in the IMF Annual Report 2018 says that countries should promote an open and rule basis multilateral trading system, and should strive to make new technologies work for all – boosting rather than undermining inclusive growth and financial stability.

According to her, the growth momentum of the global economy is under pressure from a slow erosion / weakening of trust in institution due to, a) the lingering effects of the global financial crisis. b) perception that the rewards of economic growth and globalization are not being shared fairly and equitably. c) anxiety over future of jobs and economic opportunity. d) weak governance frameworks that often facilitate corruption. She further emphasizes that population ageing and over-funding of pension schemes are holding back economic momentum. Income disparities are widening and if unaddressed the climate change is likely to severely disrupt economic wellbeing in the decades ahead.

Lagarde urged that European Union (EU) leaders need to redouble their efforts to lift living standards across the continent as populist movements question the merits of integration. The poorer southern countries in the EU have not caught up with their richer northern peers – a gap that has worsened since the global financial crisis. Between 2008 and 2017, the average annual growth in real income per person, was negative in the five southern members of the euro zone, hit hardest by the crisis.

She urged EU countries to reform their labor markets so that firms have greater flexibility in hiring and firing workers and their business climate becoming more welcoming to investment. These developments it is hoped, would increase spending on research and development.

Lagarde’s remarks come amid a turbulent debate over Britain’s exit from the EU, as well as amidst signs of spluttering growth in the world’s biggest economic bloc. The IMF partly blamed softening demand across Europe for having to cut its 2019 forecast for global growth, for the second time in three months.

South Asia to remain fastest growing region in world

The World Bank Global Economic Prospects Report released on 05th February 2019, expects South Asian regional growth to accelerate to 7.1 percent in 2019, under pinned by strengthening investment and robust consumption. India is forecast to grow by 7.3 percent as consumption remains robust and investment growth continues. Bangladesh is expected to grow by 7.0 percent supported by strong construction and infrastructure investments. Nepal growth forecast to moderate to 5.9 percent. Sri Lanka is anticipated to grow by 4.0 percent supported by domestic demand and infrastructure projects. Pakistan is projected to decelerate by 3.3 percent with financial conditions tightening.

By: Econsult