The pound is tumbling on fears of a no-deal Brexit

Every time it seems more likely that Britain will leave the EU without a deal, sterling falls against the dollar. Boris Johnson, who became prime minister on July 24th, has talked up his willingness to countenance a no-deal exit at the end of October. Since he moved into Downing Street, sterling has lost about 2% of its value on a trade-weighted basis. It is now at a two-year low against the dollar. Expect further declines as exit day approaches.

In truth, the twists and turns of the Brexit saga are not the only reason for sterling’s downward slide over the past few months. In April and May traders began to panic about the effect of a trade war between America and China on global economic growth. That prompted “derisking”—moving money out of countries that are highly reliant on inflows of foreign capital. Britain, which runs a large current-account deficit, saw its currency depreciate. So did Australia and New Zealand, both of which also have large current-account deficits.

In June worries about the trade war eased—only to be replaced by a fresh concern, the health of Britain’s economy. That month the statistics office alarmed analysts by revealing that GDP had fallen in April by 0.4%. Other survey data suggest that Britain registered no economic growth in the second quarter of the year. Together with a series of data releases showing that measures of domestically generated inflation are soft, that makes it less likely that the Bank of England will raise interest rates.

The apparently growing risk of no-deal, however, is driving the most recent bout of depreciation. The strength of this link can be measured statistically. On March 23rd a market opened on Betfair Exchange, a betting website, on whether Britain will leave without an agreement. Punters have so far bet £1m ($1.22m). Since the start of April (when the original Brexit deadline expired), a ten-percentage-point rise in the probability of no-deal on Betfair has been associated with the pound losing $0.03.

This correlation is robust enough to allow for educated guesses about where the pound might land if Britain does end up crashing out. If the same relationship were to hold, the most likely exchange rate against the dollar in the event of a no-deal is $1.06—which would be the lowest value ever recorded.

Yet even that estimate might be too optimistic. In the past fortnight, the correlation has changed: sterling has tumbled even faster as the probability of no-deal has risen on Betfair. That might be because Mr Johnson, who is refusing to meet European leaders unless they agree to scrap the Irish backstop, is risking a particularly acrimonious version of Brexit. If sterling were to keep following this steeper downward trajectory, then the most likely exchange rate in the event of no-deal would be $1.00.

Follow the link below to read the article in full

https://www.economist.com/graphic-detail/2019/07/30/the-pound-is-tumbling-on-fears-of-a-no-deal-brexit

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Donald Trump's tax reforms may encourage private-equity partnerships to become companies

In the political cacophony surrounding America’s new tax law, the voice of the private-equity industry has been muted. This is perhaps unsurprising. The industry has managed in large measure to retain its favourable tax treatment, despite a threat from President Donald Trump to close the “carried interest” loophole on which it had grown fat.

Tax has always been central to private-equity business models. The industry uses large amounts of debt, interest on which is tax-deductible, to acquire companies. So it has long been adept at minimising tax, both by making full use of deductions, and through the careful choice of corporate structure. Historically, private-equity firms have been partnerships, also known as “pass-throughs”, because profits pass through them untaxed (to beneficiaries who then pay income tax). Indeed, carried interest, whereby private-equity firms’ profits are taxed at the rate imposed on capital gains, rather than that on income, only applies to partnerships. But the firms that private equity acquires (“portfolio companies”) have been a mix of partnerships and C corporations.

The new law upsets some of these arrangements. The reform restricts carried-interest rules to assets held for more than three years. It limits deductions for losses. And it caps interest deductibility at 30% of gross earnings, making debt less attractive.

But the windfalls are bigger. The law, for instance, allows generous deductions for capital expenditure and foreign dividends. And, most important, the headline corporate-tax rate is lowered from 35% to 21%. This alone should raise the value of American portfolio companies by 3-17%, reckons Hamilton Lane, an investment firm.

Becoming a corporation therefore suddenly looks more attractive. For the largest, publicly listed private-equity firms, the main motive is valuation. Shares of partnerships are excluded from financial-market indices; holders of such shares also face onerous tax-reporting requirements. That reduces investor demand, so their shares trade at a stiff discount to those of similar firms that are C corporations. Analysts at Credit Suisse reckon conversion could raise valuations by up to 60%, more than compensating for those firms’ new corporate tax bill. The move would make particular sense for firms such as Ares and KKR, which already earn a large proportion of revenue in management fees rather than in carried interest. Other large firms, such as Blackstone and Carlyle, have played down the prospect of converting.

The vast majority of private-equity firms, however, are privately held partnerships. For them conversion may make sense only where state and local income taxes are high, says Robert Phillpott of Baker Botts, a law firm. New deductions, however, make the conversion of the funds those firms run more attractive, especially ones meant mainly for (tax-exempt) institutional or foreign investors.

But the case for conversion is most compelling for some of the portfolio companies in those funds. That does not apply to those that qualify for a new 20% deduction for pass-throughs, which excludes professional-services firms and favours job-rich, capital-intensive industries over capital-light and job-poor ones. For those that do not, however, an end-investor in private equity would already face a slightly lower effective tax rate if portfolio companies were structured as corporations rather than partnerships. In industries where it makes sense to reinvest retained earnings, the gap is much greater still. A corporation can reinvest after paying 21% on its profits, whereas the beneficiaries of a partnership would have to pay the full effective income-tax rate of around 40% before putting any of that money back in.

Of course, conversion does entail some risks. As Keith Mannor of BDO, an accounting firm, points out, the new corporate-tax rate is “only as ‘permanent’ as Congress and the presidency”. Converting a partnership into a corporation is easy and basically free; converting back requires paying one-off corporate tax on the entire value of the enterprise, at whatever tax rate is in place at the time. Even so, many private-equity firms are sure to change their tune and opt for some form of variation in C.

(The Economist)

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Forex reserves gain $455M in one week amid intervention

The nation's foreign exchange reserves sustained a 13-month weekly winning streak, adding $455 million in one week despite interventions in the market, shoring it up to $34.82 billion. The development signals an assurance of Nigeria's ability to honour its international obligations and a boost to foreign investors, who took a flight to safety in the wake of the country's foreign currency earning crisis caused by oil price volatility. 

It is also renewing confidence that the 2018 forex reserves target of the Central Bank of Nigeria (CBN) put at $40 billion is achievable, as the apex bank steps up its management of forex earnings. This is coming just as the country expects the inflow of proceeds of the $3 billion Eurobond that was oversubscribed by about $11 billion and split across 10-year and 30-year tranches at issuance yield of 6.5 per cent and 7.625 per cent, respectively. 

The rise in the stock of foreign reserves' was recorded despite series of interventions by CBN in recent times to support the local currency, especially as it auctioned $210 million last one week. Consequently, the naira has maintained stability against the major currencies as data showed that the exchange rates across segments have oscillated between N359.98 and N364 in all trading days. At the popular investor's platform (I&E Window), the rate closed at N360.65 per dollar, while turnover averaged $114.07 million daily, according to data from the FMDQ OTC Securities. 

(Guardian)

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If Italian bureaucrats had been efficient, they could have claimed an extra €2.2bn over the past four years

As Italy's budget for 2018 wends its way through parliament, the European Union and the Italian government have been trading barbs in what has become an annual ritual. The Commission’s vice-president, Jyrki Katainen, recently in effect accused Prime Minister Paolo Gentiloni’s coalition of lying about the true state of the economy; its finance minister, Pier Carlo Padoan, called that “intolerable”.

True, Italy’s new budget is mildly expansionary: it aims for a deficit of 1.6% of GDP whereas the government had estimated that, if nothing were changed, it would shrink to 1.0%. But Italian ministers stress that the revised figure is still well below the EU’s ceiling of 3%. The Commission, though, worries that Italy is not doing enough to cut its huge public debt (133% of GDP at the end of last year).

Curiously, while protesting at Brussels’ refusal to let them spend more of their taxpayers’ money, the Italian authorities persistently fail to claim billions of euros from the Commission. Excluding the cash Brussels had paid up front, by November 15th, more than halfway through the period of the EU’s current budget (2014-20), Italy had received barely 1.2% of what was due to it from the Commission’s regional development funds. Apart from Austria and the Netherlands, rich members that get very little aid, Italy had the worst take-up rate of any country bar Croatia, which is new to the EU’s mechanisms. Italy’s rate was below the EU average of 5.3%, but even further below that of poorer southern European states including Greece (6.0%) and Portugal (10.6%). If Italian bureaucrats had been as efficient as the Portuguese in devising suitable projects, they could have pumped an extra €2.2bn ($2.6bn) into the economy over the past four years.

The bulk of that money would have gone to the south, where investment is most needed. According to Svimez, a government body, income per head in the Mezzogiorno, comprising the southern mainland, Sicily and Sardinia, is 11.3% lower than in 2007.

There are several reasons for the low figures; for a start, the commission’s schemes tend to be highly back-loaded, with payments spread over a long period. But much of the blame for the low take-up of funds should also be laid at the door of inefficient southern Italian regional administrations. Also, most of the programmes require additional funds from a country’s central government. Combining all the funding on offer from Brussels with the top-up money Rome has to provide, the Mezzogiorno is due around €50bn from the EU’s current seven-year budget. A study published last month by Vision, an Italian think-tank, calculated that if the money were just handed over to the inhabitants of the south, their incomes would currently be growing by 1.7 percentage points more than those of their fellow Italians.

(The Economist)

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British-born economist Angus Deaton wins 2015 Nobel Prize for Economics

British-born economist Angus Deaton won the 2015 economics Nobel Prize for "his analysis of consumption, poverty and welfare", the Royal Swedish Academy of Sciences said on Monday.

The academy said that Deaton's work had been a major influence on policy making, helping for example to determine which social groups are affected by an increase of value-added tax on food.

"To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices," the award-giving body said on announcing the 8 million Swedish crown ($978,000) prize.

"More than anyone else, Angus Deaton has enhanced this understanding," it said.

Deaton also spearheaded the use of household survey data in developing countries, especially data on consumption, to measure living standards and poverty, the academy said.

The economics prize, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was established in 1968. It was not part of the original group of awards set out in dynamite tycoon Nobel's 1895 will.

Deaton, who was born in Edinburgh and holds both British and U.S. citizenship, is professor of Economics and International Affairs at Princeton University in the United States.

$1 = 8.1803 Swedish crowns)

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World Bank economist proves Pythagorean theorem (2,600 Years Late)

World Bank economist Kaushik Basu has proved that when it comes to right triangles, a² + b² = c². This merits the briefest of footnotes in the annals of mathematics, because the Greek mathematician Pythagoras proved the same theorem around 500 B.C. Every kid in geometry class learns that the sum of the squares of the lengths of the sides of a right triangle equals the square of the length of the hypotenuse. This is no Fermat's Last Theorem.

It's kind of impressive nonetheless. Basu now belongs to an august tradition of people who have found new ways of proving something we have known for 2,600 years. Amazingly, a U.S. president was one of the provers. James Garfield completed his proof of the Pythagorean theorem in 1876, four years before being elected president. (This Khan Academy video gives the presidential derivation.) 

Basu, a Cornell University economist, demonstrated his proof in a paper entitled "A New and Very Long Proof of the Pythagoras Theorem By Way of a Proposition on Isosceles Triangles." 

"I treat this as my hobby. I do it for fun," Basu said in an interview. Has he told World Bank President Jim Kim about his achievement? Not yet. "I'll have to send him a note assuring him that this was weekend work," Basu laughs. 

In deriving the proof Basu discovered some new things about the properties of isosceles triangles — ones with at least two sides of equal length. Right triangles are ones with one square (90-degree) angle. The length of the proof is special, too, he wrote in his paper:

"How then can one justify presenting a new and longer proof of Pythagoras’ theorem? The only way to answer this is to invoke another Greek, Constantine Cavafy and his classic poem, Ithaca, which describes the long journey to Odysseus’ home island. When you reach the island, the poet warns the reader, you are likely to be disappointed, for it will have little new to offer. But do not be disappointed, Cavafy tells the reader, for Ithaca’s charm is the journey itself."

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Corruption in China: Tiger caged

Had it been held in public, the trial of Zhou Yongkang, who was once in charge of China’s vast security apparatus, might have been the most sensational since Madame Mao and her fellow members of the “Gang of Four” were sentenced for “anti-party” activities in 1981. But the authorities were clearly worried about what might be revealed: the trial was held in utter secrecy in the port city of Tianjin, about 120km (75 miles) south-east of Beijing, rather than in the capital itself. No news of it was released until after Mr Zhou received a life sentence for bribery, abuse of power and the leaking of state secrets.

Nor was any hint given in the official account of the trial of what many observers believe was the main reason for the case being lodged against Mr Zhou—that he had been a key ally of Bo Xilai, a former member of the Politburo who was himself jailed for life in 2013 for abusing his power. Mr Bo, it is widely thought, was a rival of President Xi Jinping. The sentencing of both men was probably an attempt by Mr Xi to crush political resistance.

By going after Mr Zhou, Mr Xi certainly broke with precedent. Never before had a serving or former member of the Communist Party’s most powerful body, the Politburo Standing Committee, been formally accused of corruption. Ordinary members of the Politburo were fair game: Chen Xitong, a former party-chief of Beijing, was sentenced in 1998 for corruption. Chen Liangyu, who was party chief of Shanghai, was jailed a decade later, also on corruption charges. But for years it had been thought that politicians of Mr Zhou’s rank enjoyed an undeclared immunity. After taking over as China’s leader in 2012 Mr Xi launched a sweeping campaign against corruption, saying it was aimed at “tigers” as well as “flies”. Rumours soon spread that Mr Zhou was the principal tiger that he had in mind.

The bare details of the trial that have been revealed by state media add little to what had been widely leaked about the case. The official news agency, Xinhua, said Mr Zhou was found guilty of accepting a bribe worth 731,100 yuan ($117,750) from Jiang Jiemin, a former oil executive who was later put in charge of overseeing the state’s assets. Mr Zhou was said to have asked Mr Jiang to help arrange business opportunities for friends and relatives. (Mr Jiang was tried in April; his sentencing is awaited.) The court in Tianjin also ruled that Mr Zhou’s son, Zhou Bin, and his wife, Jia Xiaoye, had received bribes (about which they later told Mr Zhou) worth nearly $21m. No details have been given of the secrets Mr Zhou leaked. But the recipient was identified as Cao Yongzheng, an entrepreneur who gained fame in the 1990s because of reports that he had supernatural healing powers.

Mr Zhou is reported to have accepted these charges and to have expressed his regret for the “serious impact” his crimes had had on society, and the “damage” he had caused to “the party’s cause”. It is unlikely that many ordinary Chinese will be especially surprised by these revelations of high-level wrongdoing: cases involving numerous lesser officials in recent months have already made clear how widespread corruption is among the elite. There will be much speculation, however, about whether the sentencing of Mr Zhou will strengthen Mr Xi. It is possible that the jailing of such a big tiger will fuel resentment of him among families of the powerful who—before Mr Xi took over—had benefited from lax supervision of their business dealings. By jailing Mr Zhou, Mr Xi has changed China’s political rules.


(Economist.com)

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World Bank: Dimmer 2015 for Developing Countries

The World Bank projects developing countries will grow by 4.4 percent this year, instead of the earlier forecast of 4.8 percent.

Ayhan Kose, Director of the bank’s Development Prospects Group, gives a major reason why prospects dimmed this year.

“Developing countries as a group have been slowing down since 2010," he said. "It’s fair to say that. But what happened in 2014 and a part of this year [was] a significant drop in oil prices started weighing on activity, especially in oil exporting economies.”

The World Bank’s Global Economic Prospects report outlined problems in the so-called emerging economies.

Kose said, “Brazil, now we’re expecting, is going to have a recession. Russia is going through a painful recession. Both of those are big emerging market economies. And you look at the emerging market economies, for example, China is going through an orderly slowdown. South Africa has serious structural bottlenecks. All of these when you put them together led to a forecast revision.”
Bad news for developing oil-exporting countries, he said, is good news for importers.

“It is a windfall for the global economy. And we still think that the benefits of oil price decline will be materialized during the next 12 to 18 months. For oil exporting economies it’s a painful adjustment. But for oil importing economies there’s no question it’s a positive development.”
The decline in oil prices is causing a global economic shift.

“Ultimately, with the decline in oil price what you see is a real income transfer from oil-exporting economies to oil-importing economies – the consumers, the spenders,” he said.

The World Bank official said, however, consumers are still hesitant to use their savings from lower oil prices to buy things. Spending spurs economies, but there’s still a lack of consumer confidence.
So what about those oil exporting developing counties – like Nigeria and Angola -- that pinned their hopes on their oil reserves?

 “For this year, we reduced our growth forecast for Nigeria and Angola. And in both countries you see policy adjustment as well. Nigeria reduced their expenditures, the fiscal spending. Angola, they reduced the fiscal spending. They are taking measures to adjust to this new environment. At the same time, over the medium term, we expect them to think about diversification -- to think about more investment in infrastructure -- investment in human capital,” Kose said.

He said that while diversification may be a painful process for Nigeria and Angola, in the long-term it could help them weather future economic shocks. For example, investing in non-oil sectors could allow them to have more trading partners.

The bank’s forecast for the turmoil-plagued Middle East and North Africa is just 2.2 percent this year. Officials are monitoring the various crises, saying they could trigger a rise in oil prices.
Another factor expected to negatively affect many developing nations is the predicted rise in U.S. interest rates.

Kose said, “The U.S. interest rates are the reference interest rates. When the U.S. short-term policy rate increases that has an impact for the cost of borrowing at different maturities. So it can have a widespread effect across the different interest rates [for] consumers and firms at which they are borrowing. And it will have an impact on the cost of international borrowing, as well.”
A region that’s the exception to the World Bank forecast for developing nations is South Asia. It has a projected growth rate of 7.1 percent this year.

“South Asia is becoming the fastest growing region. The main driver of that is India with [a] strong monetary policy framework, willingness to undertake reforms. All of these send a very strong signal that medium term growth prospects are going to get stronger,” he said.

The World Bank Global Economic prospects report is more optimistic for 2016 and 2017. Growth forecasts for developing countries for those two years are 5.2 percent and 5.4 percent respectively.

(Voanews)

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Greek contagion risks underestimated: World Bank

The risks of turmoil from a cash-strapped Greece should not be underestimated by markets, World Bank President Jim Yong Kim warned on Tuesday.


Talks between Greece and its international lenders for further cash in exchange for reforms have been deadlocked for months, raising concerns about a default and Greece's possible exit from the euro zone.


"Some of the commentary I'm hearing from people who have been through many of these crises is that there are always surprises," Kim told CNBC in an interview aired on Tuesday.


"You think that the market has already calculated the impact of a problem in Greece but you never know, so I would urge everyone at the table to come do as much as they can to come to an agreement that is good for Greece, is good for Europe and will of course be good for the world," he said.

Greece Tuesday submitted a new reform plan to its international creditors, a European official told CNBC, as hopes of a deal pushed Greek shares as much as 2 percent higher.

Jitters about the future of Greece have weighed on sentiment in global equity markets, undermined the euro and pushed government bond yields in Greece higher in recent weeks.


"I'm watching very carefully the possible spill-over effects," said Kim. "Some of the countries we work with closely in eastern Europe for example could have a direct impact (from Greece).


Analysts at Capital Economics said in a note last week that while links between local banks in Hungary and Western Europe have declined in recent years, they remained exposed to a "disruptive Greek euro exit."


Turmoil in Greece could also hurt Romania and Slovakia, Capital Economics said.

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Measuring inflation: What price is right?

Checking prices online could produce more accurate statistics

BRITISH consumers increasingly live in an online world. Price-comparison websites abound and flash sales are common. This dynamic market makes the traditional method of collecting price data, which involves sending researchers out to shops and markets once a month, seem archaic. On June 8th the Office for National Statistics (ONS) published the results of a year-long trial in which prices were collected every day from three large supermarkets’ websites, to explore the potential benefits of “web scraping” price data. Using this method the ONS collected over 1.5m price quotes from 35 grocery product groups, covering 2,886 items.

The web-scraped inflation index dropped by significantly more than the index based on traditionally collected price data (see chart). But the new method is a work in progress. After cleaning the data to account for product-description changes, replacements and missing items, the initial basket of 2,886 items was reduced by almost half. With just three retailers, compared with the traditional measure’s wide coverage (which includes outdoor markets and convenience stores, as well as supermarkets), differences were inevitable. Still, the ONS is confident that it can refine the methodology to produce a robust, high-frequency index, which covers a larger basket of goods at a reduced cost.

(Economist.com)

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IMF Unveils New Way of Assessing Country Reserves

The IMF has developed a new framework for determining the appropriate level of international reserves held by its member countries, emphasizing the need to take account of the specific needs of different types of economies.

Reserves—the assets denominated in foreign currency, plus gold, held by a central bank—occupy an important place in the policy toolkit of most economies. Together with sound policies, they can help reduce the likelihood of balance of payment crises and preserve economic and financial stability. In addition to these important benefits, reserves also have costs.

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Spain's recovery: Not doing the job

(Economist.com) - “THEY are good figures, we should celebrate,” said Mariano Rajoy, Spain’s prime minister, after data released on April 23rd showed the country’s recovering economy had created close to half a million jobs over the past year. Many Spaniards were feeling less than festive. Since the euro crisis hit in 2010, Spain’s astronomical unemployment rates have vied with Greece's for first place in Europe; they have fallen from a high of 27% in 2013, but slowly. Indeed, the unemployment rate increased slightly in the first quarter, to 23.8%. And in the working-class Madrid neighbourhood of Vallecas the figures did nothing to lift the gloom.

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Africa and commodity prices: No longer the kiss of death

(Economist) - IN 2014 commodity prices tumbled. Many economists feared the worst for Africa. For decades the continent has been hopelessly dependent on commodities to power economic growth. When prices crashed, economies would go into tailspin. This time around, though, things seem different. The continent is holding up well.

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The Economist: Everything you want to know about falling oil prices

Why is the oil price falling?
Mostly because of increased supply from America—up by 4m barrels a day since 2009. Although most crude exports are still banned, American imports have plummeted, contributing to a glut on world markets. Other producers have decided not to try to curb their production and keep the price up.

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France, Germany and Italy Say They’ll Join China-Led Bank in Rebuff to U.S.

BRUSSELS — Tilting toward China in a blow to Washington’s domination of international financial institutions, Europe’s biggest economies have declared their desire to become founding members of a new Chinese-led Asian investment bank that the United States views as rival to existing lenders set up at the height of American power following World War II.

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Free exchange: The bigger, the less fair

The growing size of firms may help to explain rising inequality

 

SINCE its publication last year, Thomas Piketty’s “Capital in the Twenty-First Century” has ignited a furious debate about inequality in the rich world. He focuses on the increasingly unequal distribution of wealth, and pays less attention to the growing disparity in wages over the past three decades. Yet that disparity is ballooning, too: in America, for instance, the best-paid 1% of workers earned 191% more in real (ie, inflation-adjusted) terms in 2011 than they did in 1980, whereas the wages of the middle fifth fell by 5%. Similar trends can be observed all over the world, despite widely varying policies on tax, the minimum wage and corporate pay.

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