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Thursday, 20 February 2014

The Wall Street Journal interview: ‘Pleased’ with slow but steady turnaround

“I am quite happy and satisfied that things are moving the way they should be. We are right on track,” says Finance Minister Ishaq Dar. PHOTO: ONLINE/FILE

NEW YORK: The Pakistan government expects to complete a series of large privatisation transactions this spring, which will raise much-needed foreign exchange and dispel concerns about the slow pace of reforms, said Finance Minister Ishaq Dar in an interview with a leading American business and financial newspaper.

In addition to billions in revenue from sales of state assets, the government is also looking for as much as $5 billion from the spectrum auction, Dar told The Wall Street Journal.

Another plan in the works is to split into two companies the loss-making flag carrier, Pakistan International Airlines (PIA), ahead of selling a stake, he said.

In a dispatch from Islamabad published Tuesday, the newspaper noted that Prime Minister Nawaz Sharif inherited a troubled economy.

Since then, it said the government took major steps to cut subsidies and eliminate debt in the electricity sector, reducing blackouts. It also negotiated a $6.6 billion deal with the International Monetary Fund (IMF), staving off default.

The economy has since shown signs of reviving, even though growth barely keeps up with the birthrate, the Journal said, noting IMF’s acknowledgement this month of the tentative turnaround, especially in the large-scale manufacturing and services sectors, and raised its forecast for gross domestic product growth this fiscal year to 3.1% from the previous estimate of 2.8%.

The government is much more optimistic, expecting growth of around 4.4%.

“I am quite happy and satisfied that things are moving the way they should be. We are right on track,” Dar was quoted as saying by the Journal. “We are pursuing and taking the most difficult decisions, a few of which are politically unpopular. But, to fix the economy, those stabilising measures as well as structural reforms were necessary.”

Soon after taking office, the Journal noted, the government pledged to sell stakes in 31 state-owned companies. “Many of these, however, are still in the process of selecting new management teams,” it said.

Dar said in the Journal interview first on the block would be government stakes in petroleum companies and in lenders such as Habib Bank Ltd., Allied Bank Ltd. and United Bank Ltd.

Meanwhile, as part of the restructuring, PIA is likely to be split into two companies, with a holding group retaining some Rs250 billion in debt and excess personnel, and a “new” PIA holding the lucrative landing rights and the new aircraft. Then, the government plans to sell a 26% stake in that “new” PIA to a strategic partner, Dar told the Journal.

Alarming: Current account deficit widens, SBP data reveals

January alone witnessed a current account deficit of $464 million as opposed to a surplus of $283 million in the preceding month. DESIGN: ESSA MALIK

KARACHI:

Pakistan’s current account deficit widened to over $2 billion in the first seven months of 2013-14 as opposed to a deficit of $441 million in the corresponding period of 2012-13, according to data released by the State Bank of Pakistan (SBP) on Wednesday.

Shown as a percentage of the gross domestic product (GDP), the current account deficit widened to 1.4% in July-January as opposed to 0.3% in the same period last year.

January alone witnessed a current account deficit of $464 million as opposed to a surplus of $283 million in the preceding month.

Speaking to The Express Tribune, Standard Chartered Bank Senior Economist Sayem Ali said the country’s balance of payment (BoP) position remains ‘extremely vulnerable’ with the SBP-held foreign exchange reserves declining to a critical level of $2.8 billion, which provides less than one month of import cover.

“Despite disbursement of $1.1 billion from the International Monetary Fund (IMF) under the new three-year facility, foreign exchange reserves continue to decline due to a rising import bill and declining foreign investment flows,” he said.

Pakistan exported goods worth $2.1 billion in January as opposed to exports totalling $2.3 billion in the preceding month, reflecting a month-on-month decrease of 8.2%. For the July-January period, however, exports increased to $14.7 billion, up 3.3% compared to the corresponding seven-month period in fiscal 2013.

“The rise in the current account deficit is primarily due to an increase in the import bill and a decline in US Coalition Support Fund (CSF) payments from last year,” Ali said, adding the full-year current account deficit is likely to be significantly higher than the government’s target of $1.6 billion for fiscal 2014, putting further strain on the weak foreign exchange reserves position.

Workers’ remittances remained $1.2 billion in January as opposed to $1.3 billion in November, which shows a monthly decrease of 10.2%. Workers’ remittances in July-January increased to $9 billion, registering an increase of 10% over the corresponding seven-month period in the preceding fiscal year.

Ali said foreign investment flows have slowed down due to the worsening security environment and delays in the formulation of government policies on energy, privatisation and the expected spectrum auction.

Pakistan received foreign direct investment (FDI) of $523 million in the first seven months of 2013-14, which is 1% lower than the amount the country received in the corresponding seven months of the preceding fiscal year.

Although foreign exchange reserves have continued to decline, the rupee has gained strength to Rs104.9 a dollar by February 13, Ali said, noting that it stood at Rs108.5 a dollar at the end of November. “This has been done through SBP interventions in the interbank market as well as the swaps and forwards market. The government has also moved the big oil payments — accounting for nearly 40% of all dollar demand in the interbank — away from the interbank,” he said.

Ali observed that the misalignment of the rupee is leading to a sharper drawdown of foreign exchange reserves, as these interventions have strengthened the rupee in the short term only.

As exports decreased over 8% month-on-month and imports increased 1% over the same period, the trade gap widened to 21% on a monthly basis to $1.4 billion in January.

“The widening trade gap is leading to a sharper drawdown of foreign exchange reserves,” he said.

The dollar damage done – time to blame the Fed?

'The Fed has renationailsed the international function of being US dollar lender of last resort.' Photograph: Piet Mall/Getty Images

The US Federal Reserve is being widely blamed for the recent eruption of volatility in emerging markets. But is the Fed just a convenient whipping boy?

It is easier to blame the Fed for today's global economic problems than it is to blame China's secular slowdown, which reflects Chinese officials' laudable efforts to rebalance their economy. Likewise, though Japan's "Abenomics", by depressing the yen, complicates policymaking for the country's neighbours, it also constitutes a commendable effort to bring deflation to a long-overdue end. So, again, it is easier to blame the Fed.

And, for the affected emerging economies, the Fed's tapering of its massive monthly purchases of long-term assets – so-called quantitative easing (QE) – is certainly easier to blame than their own failure to move faster on economic reform.

Still, the Fed should not be absolved of all guilt. The prospect of higher interest rates in the US weakens the incentive for investors to pour capital into emerging economies indiscriminately. Though a confluence of factors may have combined to upset the emerging-market applecart, Fed tapering is certainly one of them.

It is striking, therefore, that the Fed has made no effort to take into account the impact of its policies on emerging economies or the blowback from emerging markets on the US. Emerging markets comprise more than a third of global GDP. They have contributed considerably more than a third of global growth in recent years. What happens in emerging markets does not stay in emerging markets. Increasingly, what happens there has the capacity to affect the US.

Yet Fed officials, while commenting copiously about their motives for tapering QE, have said nothing about the impact of doing so on emerging markets. They have given no indication of being aware that US monetary policy can affect events outside of their narrow corner of the world.

This silence is all the more remarkable in view of two other recent developments in Washington, DC. First, the US Congress, as part of the government's recent budget deal, refused to authorize an increase in America's quota subscription to the International Monetary Fund. The financial commitment was essentially symbolic, but it was part of a larger agreement reached at the Seoul Summit of G20 leaders to regularize the IMF's resources and enhance the representation of emerging economies.

This failure to follow through reopens old wounds and raises troubling questions about the legitimacy of an institution that, reflecting the long shadow of history, is dominated by a handful of advanced countries. Emerging-market officials have been increasingly reluctant to turn to the IMF for advice and assistance, undermining its ability to play an effective global role.

The other development was the decision to make permanent the dollarswap arrangements put in place during the financial crisis by the Fed, the European Central Bank, and the central banks of Canada, the United Kingdom, Switzerland, and Japan. Under these arrangements, the Fed stands ready to provide dollars to this handful of favoured foreign central banks – an acknowledgment of the dollar's unique role in international financial markets. Because international banks, wherever they are located, tend to borrow in dollars, the swap arrangements allow foreign central banks to lend dollars to their local banks in times of emergency.

Put these three events – the tapering of QE, the torpedoing of IMF reform, and the entrenchment of dollar swaps – together and what you get is a US that has renationalised the international lender-of-last-resort function. Simply put, the Fed is the only emergency source of dollar liquidity still standing.

But the US has offered to provide dollars only to a privileged few. And in its policy statements and actions, it has refused to acknowledge its broader responsibility for the stability of the world economy.

So what should the Fed do differently? First, it should immediately negotiate permanent dollar swap lines with countries such as South Korea, Chile, Mexico, India, and Brazil.

Second, the Fed should adjust its rhetoric and, if necessary, its policies to reflect the fact that its actions disproportionately affect other countries, with repercussions on the US economy. Might this mean that the Fed should slow the pace of its tapering of QE? Yes, it might.

The Fed may hesitate to extend additional swap lines, because to do so could expose it to losses on foreign currencies. Moreover, it may worry about antagonizing countries that are not offered such facilities; and it may fear criticism from Congress for overstepping the bounds of its mandate if its talk and policies acknowledge its global responsibilities.

If US policymakers are worried about these issues, their only option is to agree to quota increases for the IMF, thereby allowing responsibility for international financial stability to migrate back to where it belongs: the hands of a legitimate international organization.

Housing starts up by 23% in 2013

Though starts were up, the number of completions fell, with the figure for the last quarter of 2013 down 41% on pre-financial crisis levels. Photograph: Getty Images

The number of new homes started in England rose by almost a quarter in 2013, but experts said the pace of construction remains well below that needed to tackle the country's housing crisis.

The Department for Communities and Local Government said construction was started on 122,590 new homes during 2013, a 23% increase on the previous year.

The number of completions, however, fell by 5% to 109,370.

The 2013 figure represents less than half of the estimated 250,000 new homes a year needed to meet the demand for housing in England, and is still below the peak reached before the 2008 financial crisis.

At 28,510, the number of homes completed in the last quarter of 2013 was 41% lower than in the first quarter of 2007.

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Housing developers have been buoyed by the first part of the government's Help to Buy scheme, which offers buyers an interest-free loan of up to 20% of the purchase price of a new-build property, but the figures showed starts by private builders dropped by 1% in the last quarter of 2013. Housing association starts were up by 3%.

An estimated 32,320 homes were started during the quarter, 1% fewer than in the previous three months.

The communities secretary, Eric Pickles, said the figures showed that Britain was building again.

"This government is fixing the broken housing market we inherited in 2010," he said. "Last year we built the most homes since 2007, and even the appalling weather conditions this winter have not stopped our hardy builders from getting the job done. That means an increase in small firms benefiting from the surge in construction orders, and more business confidence in the economy."

Economists and housing groups, however, said that building was still below the level needed to meet demand and keep the lid on prices.

The housing charity Shelter said there was a "woeful gap" between the number of homes available and the number needed, which "spells disaster for future generations".

The Chartered Institute of Housing's chief executive, Grainia Long, said: "These figures are further confirmation that we are nowhere near tackling our national housing crisis, which means that millions of people are being denied access to a decent home at a price they can afford."

Matthew Pointon, a property economist at Capital Economics, said that despite the increase in building in 2013, it was likely to be the end of the decade before figures returned to pre-crisis levels.

"We have doubts that such a breakneck pace in starts can be maintained. After all, the current pace of growth has meant that builders have already found themselves coming up against shortages of materials and labour," he said.

"There are other, longer-term factors that will prevent a rapid return to pre-crisis levels of building. If demand is overly dependent on the Help to Buy scheme, builders will be understandably nervous about ramping up production when it is due to end in early 2016 – which is also likely to coincide with rising interest rates.

"Coupled with the long-standing issues of land availability and planning delays, we expect it won't be until around 2019 that the level of housebuilding returns to pre-crisis levels."

The figures came as the Council of Mortgage Lenders reported a drop in gross lending in January, in keeping with the traditionally quiet start to the year in the property market.

It said its members had advanced about £15.5bn over the month, an 8% drop on December's figure. The figure was up by a third on the previous year, however, and the organisation said housing market indicators in the UK continued to be positive.

An average of 70,000 mortgages a month were approved for house purchases in the final three months of 2013, and price data from lenders suggests that January was a strong month for the market.

The Bank of England has suggested that approvals may climb to 90,000 a month in the second and third quarters of 2014.

The CML's chief economist, Bob Pannell, said he was sceptical about the Bank's prediction.

"This would seem to imply property transactions running at an annualised rate of 1.5m or so. We think this may be over-optimistic given the growing anecdotal reports of a shortage of prospective sellers," he said.

UK productivity gap with developed nations now widest for 20 years

Britain's productivity deficit is most pronounced in comparison with the US, Germany and France. Photograph: Blend Images/Alamy

Britain's productivity gap with its main developed country rivals is at its widest in 20 years, following the flat-lining of the economy after the deep recession of 2008-09.

International comparisons released by the Office for National Statistics(ONS) show that output per hour worked in the UK is 21% lower than the average for the other six members of the G7 – the US, Germany, France, Italy, Japan and Canada.

The ONS said this was the biggest productivity shortfall since 1992, and that on an alternative measure – output per worker – the gap was 25%.

Poor productivity has been blamed for the lack of earnings growth and the squeeze on real incomes in Britain over the past five years, though the Bank of England is expecting output per worker to pick up during 2014. John Philpott, director of the consultancy the Jobs Economist, said: "We know UK labour productivity has been dire since the start of the recession. We now know our relative performance is even direr than first thought."

During the 1990s and 2000s, Britain closed the gap with the other G7 nations to less than 10%, but in the years since the 2007 financial crisis weak output and a smaller loss of jobs than in previous recessions has led to a marked worsening in Britain's productivity record.

The ONS said the UK productivity deficit was most pronounced in comparison with the US, Germany and France, where the gap was now more than 30%. By contrast, British workers produced 11% more per hour than their Japanese counterparts and lagged behind those in Canada and Italy by five and 11 points respectively.

Productivity tends to increase over time as new technology and better skills make economies more efficient. But the ONS said output per worker in 2012 was 3% lower than it had been five years earlier and 16% below the level that might have been expected, had its previous upward trend not been interrupted by the most severe slump of the postwar era.

Moreover, even though the UK economy has recovered since 2012, there is no evidence to suggest that the productivity gap is likely to have narrowed, leaving the UK still staring up the international productivity league table.

Philpott said that some of the productivity improvements during the pre-recession period may have been illusory because they were the result of an unsustainable boom. He added: "The UK economy clearly needs, in particular, a strong resurgence of business investment in order to both start closing the productivity gap and to trigger a rise in real wages for people in work."

The Bank of England has cited improved productivity as a key factor in whether wage growth surpasses inflation in the second half of the year, which would ease the pressure on household budgets. Last week the Bank governor, Mark Carney, said: "We are not complacent about this recovery at all. We are serene but not complacent. We need to see productivity come in to validate wage expectations."

Data published this week shows that wage growth rose from 0.9% to 1% in January, narrowing the gap with the CPI rate of inflation, which dipped from 2% to 1.9%. Some economists said the latest inflation figures indicated a downward trend in prices that could mean above-inflation wage growth for the first time since 2010. "This should enable real earnings to rise," said Samuel Tombs of Capital Economics.

According to ONS figures published last month, living standards have suffered their most prolonged decline since 1964. Productivity was again cited as an important component of the consistent fall in real wages since 2010. "It seems likely that a key driver is the response to the fall in productivity in 2008 and 2009, and its subsequent weakness," the ONS said.

Describing a series of "step-changes" in annual real wage growth, the ONS pointed to average growth of 2.9% in the 1970s and 1980s, then growth of 1.5% in the 1990s, 1.2% in the 2000s, and then -2.2% since the beginning of this decade.

Nationwide wins current account customers from rivals

Building society says 20% more accounts opened in the nine months to December than in the same period in 2012

Nationwide reports net mortgage lending of £8.4bn in the nine months to December, taking its share of that market to 75%. Photograph: Fiona Hanson/PA

Nationwide snatched current account customers from rivals in the first nine months of its financial year and also lent more to mortgage customers than the whole of the previous year.

Issuing a quarterly update on its performance for the first time, the UK's largest building society said it had been a "net beneficiary" of the seven-day switching service for current accounts which was launched in September.

But Nationwide's share of current accounts remained at 6%, below its target of 10% of a market regarded as a crucial area for competition on the high street.

In the nine months to the end of December 20% more current accounts were opened at Nationwide than the same period the previous year amid anecdotal evidence that it has benefited from the problems at the Co-operative Bank. The bank is no longer majority-owned by the Co-operative Group after being rescued by bondholders, including US hedge funds.

The switching service is intended to bolster competition in the retail banking sector, dominated by the big four – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays.

The society, based in Swindon, Wiltshire, reported net mortgage lending – which strips out loans being repaid – of £8.4bn, the same amount as the whole of the previous financial year.

This meant it took a 75% share of the net lending market for mortgages, where activity in general has been bolstered by the help to buy and funding for lending schemes.

"We are punching above our weight in all of our principal marketplaces. We're more than holding our own against the established banking models," the society's chief executive, Graham Beale, told Reuters. "Through the current account transfer process, we are gaining three times more customers than we are losing."

The trading update was required from Nationwide after it issued a new type of financial instrument known as core capital deferred shares (CCDS) to bolster its financial strength as an alternative to shares that banks are able to sell to investors.

As a result of the issue, the society is on track to hit a target for its leverage ratio (a measure of financial risks and capital strength) of 3% before the end of 2015 deadline set by the Bank of England's prudential regulation authority (PRA). Since the issue of the CCDS in November the leverage ratio has improved from 2.3% to 2.6%.

Barclays was forced to tap its shareholders for £5.8bn of cash last year after being set the leverage target.

Beale said: "This trading performance translates into a strong set of financial results with underlying profit up 105% to £539. Retained earnings, together with the successful issuance of capital in December 2013, have further strengthened our capital ratios and we are significantly ahead of the plans agreed with the PRA last year."

Check your change! 50p coin worth £24

The Royal Mint says the coin is likely to disappear fast now that it has been declared the rarest in general circulation.

A 50p coin produced just five years ago has shot to rarity value, with the Royal Mint urging the public to check their change and dealers on eBay asking as much as £24 for the Kew Gardens coin issued in 2009.

Just 210,000 of the coins were minted to mark the 250th anniversary of the Royal Botanic Gardens, compared with 22.7m with the shield of the Royal Arms in 2008 and 7.5m of the Girlguiding 50p in 2010.

Around one in every 300 people is likely to have a Kew Gardens 50p, but the Royal Mint said it was likely to disappear fast now that it had declared the coin as the rarest in general circulation.

A spokesman said: "We're urging everyone to check their change to see whether they could have one of these exceptional coins in their pockets."

The coin featuresthe Royal Botanic Gardens pagoda encircled by a vine, the dates 1759 and 2009, and the word Kew at the base of the pagoda.

There are numerous bids for the coin on eBay, with Buy it Now dealers asking up to £23.95. The London Coin Company is asking £54.95 for an uncirculated example in its original sealed plastic case.

Other Royal Mint commemoratives are unlikely to see such a hike in value, given the vast numbers of coins produced. A spokesman for the numismatic dealer Spink and Co said the 50p coin struck to commemorate the 2012 Olympics was still worth just 50p.