As in previous years, participants at the World Economic Forum 2008 are discussing a wide range of economic and political issues. My favorite so far is the panel discussion on the increasing role of Sovereign Wealth Funds (SWFs) in global finance. As the name indicates, SWFs belong to governments and at present the main sources of SWFs are Asian and Middle East countries, whose economies are experiencing large balance-of-payments surpluses.
The rise of SWFs has attracted attention because, unlike traditional foreign reserves, which are typically invested in financial assets with low but safe returns (e.g. foreign government bonds, mainly the US treasuries), they are directly channeled to foreign private companies, in the form of equities and bonds. The argument in the panel discussion is between SWFs managers, who see themselves as purely profit driven (searching for higher rates of returns), and officials from the countries on the receiving end, who suspect the funds might as well be politicized in one way or another. Not surprisingly, there is a bit of truth in both positions.
In its issue of January 19th-25th, 2008, The Economist devoted its cover story to the Invasion of the sovereign-wealth funds.
Friday, January 25, 2008
Sunday, January 20, 2008
Globalization, Inflation and Currency Pegs
In recent years headline inflation rates around the world have accelerated mainly due to double-digit increases in food and energy prices. On the other hand, core inflation, which excludes food and energy prices, has remained more or less stable. See The Economist.
The divergence in the headline and core inflation represents a terms-of-trade improvement for commodity-exporting countries, especially oil-exporters.
If globalization, and the accompanying expansion of trade between developed and developing countries, had contributed to the moderation of global inflation in the1990s and early 2000s, then it is also part of the equation in the recent surge of inflation around the world. There is a demand-pull aspect to the story, especially as developing countries' continued growth has driven the demands and prices for resources higher. On the other hand, the surge in inflation in the US comes at a time when its economy is facing a recession. Thus the possibility of a stagflation--a name for the uncomfortable combination of an economic slow down and higher inflation.
Countries who peg their currencies to the US dollar (such as the Gulf states) will be affected by higher US inflation and the declining exchange rate of dollar, since the peg forces their monetary policymakers to cut interest rates and expand domestic money supplies. Thats why, in a move to combat the inflationary effects of a weaker dollar, Kuwait has recently ended its dollar peg. However, for many least developed countries, including Eritrea, whose inflation rates are higher than that in the US, ending their dollar pegs would not help solve their problems.
The divergence in the headline and core inflation represents a terms-of-trade improvement for commodity-exporting countries, especially oil-exporters.
If globalization, and the accompanying expansion of trade between developed and developing countries, had contributed to the moderation of global inflation in the1990s and early 2000s, then it is also part of the equation in the recent surge of inflation around the world. There is a demand-pull aspect to the story, especially as developing countries' continued growth has driven the demands and prices for resources higher. On the other hand, the surge in inflation in the US comes at a time when its economy is facing a recession. Thus the possibility of a stagflation--a name for the uncomfortable combination of an economic slow down and higher inflation.
Countries who peg their currencies to the US dollar (such as the Gulf states) will be affected by higher US inflation and the declining exchange rate of dollar, since the peg forces their monetary policymakers to cut interest rates and expand domestic money supplies. Thats why, in a move to combat the inflationary effects of a weaker dollar, Kuwait has recently ended its dollar peg. However, for many least developed countries, including Eritrea, whose inflation rates are higher than that in the US, ending their dollar pegs would not help solve their problems.
Saturday, January 12, 2008
Migration and Remittances
According to The Economist's special report on migration and remittances (January 5-11 issue), in 2006 Eritrea was the third biggest recipient of remittances in the world by percentage of GDP (around 37 percent).
The report argues that while remittances help augment incomes of poor countries, they are not a "cure-all". It is hard to disagree.
Interestingly, mobile phones have proved to be useful for requesting and transferring money. The mechanism is simple: A donor sends a text message with a code that a recipient uses to collect his/her money from a money transfer agency. Text messaging has become so popular that a friend or relative in need of help simply pleads "Send me a number!".
The report argues that while remittances help augment incomes of poor countries, they are not a "cure-all". It is hard to disagree.
Interestingly, mobile phones have proved to be useful for requesting and transferring money. The mechanism is simple: A donor sends a text message with a code that a recipient uses to collect his/her money from a money transfer agency. Text messaging has become so popular that a friend or relative in need of help simply pleads "Send me a number!".
How Fit is Eritrea for Doing Business?
How easy is it to do business in Eritrea from the perspective of business regulations? The World Bank's latest report Doing Business 2008 gives an overview.
One observed pattern is that, while Eritrea does better than the regional average (taken as a benchmark) in terms of the direct financial costs involved in doing business, it does worse in terms of the number of paper work and the time needed to get things done, for instance, the time it takes to deliver goods to international customers.
One observed pattern is that, while Eritrea does better than the regional average (taken as a benchmark) in terms of the direct financial costs involved in doing business, it does worse in terms of the number of paper work and the time needed to get things done, for instance, the time it takes to deliver goods to international customers.
Friday, January 11, 2008
Will Bisha be different from Tabakoto?
Eritrea has given mining license to Nevsun, reports mineweb. Previously mineweb reported
"Construction is expected to take two years with actual mining expected to commence in 2010. The feasibility study completed in Q4 2006 deems the project to be profitable throughout its entire mine life because of the low operational costs."
This upbeat assessment comes against the background of the loss-making Tabakoto mine in Mali that is also owned by Nevsun. Tabakoto's woes are attributed in part to unexpected increases in costs. Thus, one may wonder if anything has changed since Q4 2006, which might necessitate a reassessment of future costs and revenues of the Bisha project. Of course, this depends on accurate forecasts of future developments in world markets. What would be the likely path of capital costs in the period 2008-2010? And operational costs and commodity prices beyond 2010? All theses are affected by world-wide events, beyond the control of Eritrea's economy. For instance oil and commodity prices have increased in recent years due to strong demand from emerging markets, especially China and India, owing to their fast growing economies. The good thing is with modern financial engineering, it is possible to hedge inputs and outputs against price volatilities, if one wants to. Volatilities in the US dollar against other major currencies would probably not matter much, as long as imports of capital and materials for the project and mineral exports are all invoiced in dollar terms.
"Construction is expected to take two years with actual mining expected to commence in 2010. The feasibility study completed in Q4 2006 deems the project to be profitable throughout its entire mine life because of the low operational costs."
This upbeat assessment comes against the background of the loss-making Tabakoto mine in Mali that is also owned by Nevsun. Tabakoto's woes are attributed in part to unexpected increases in costs. Thus, one may wonder if anything has changed since Q4 2006, which might necessitate a reassessment of future costs and revenues of the Bisha project. Of course, this depends on accurate forecasts of future developments in world markets. What would be the likely path of capital costs in the period 2008-2010? And operational costs and commodity prices beyond 2010? All theses are affected by world-wide events, beyond the control of Eritrea's economy. For instance oil and commodity prices have increased in recent years due to strong demand from emerging markets, especially China and India, owing to their fast growing economies. The good thing is with modern financial engineering, it is possible to hedge inputs and outputs against price volatilities, if one wants to. Volatilities in the US dollar against other major currencies would probably not matter much, as long as imports of capital and materials for the project and mineral exports are all invoiced in dollar terms.
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