Thursday, 14 June 2012

Banking crisis over, Iceland's economy

In this small Icelandic village, sailors are making double their pre-crisis pay, haddock sales to places like Boston and Brussels are booming and unemployment is almost zero - signs of this island's surprisingly rapid rise from the ashes of banking ruin.
While much of Europe wallows in recession, the economy of this volcanic island in the mid Atlantic is growing at a clip that has surprised many people, thanks to a currency fall - in which the crown lost almost half its value to the euro - an export and tourism boom as well as growing consumer confidence.
"This is probably one of our best years," said Arnthor Einarsson, a fisherman readying his boat for his next catch as seagulls circle huge piles of fishing nets on a rocky peninsula about one hour south of the capital Reykjavik.
Only a few years ago, a banking boom in which the sector's assets grew to 10 times the country's GDP lured many of Iceland's 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate.
Those heady days have gone. Gas-guzzling Land Rovers have been replaced with fuel-efficient Volkswagens, a sign perhaps of a more sober consumer mood in which economic growth is based on a steady expansion of exports rather than flash-in-the-pan speculation.
The wounds that sparked massive street protests against the financial elite are slowly healing. Even the then prime minister has been tried by a special court, closing one chapter.
Granted, there is still a long way to go, but many see Iceland as offering a lesson particularly to European countries such as Greece and Spain, stuck with shrinking economies and lacking the option of devaluing to boost their international competitiveness.

Iceland's GDP growth estimated at some 2.6 percent this year will outshine even powerhouses like Sweden.
"These are among the highest numbers in Europe," said Finance Minister Steingrimur Sigfusson. "Sometimes it is easier to turn a small boat around than a big ship."
Currency depreciation though is only part of the picture.
Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.
Iceland also did what other parts of Europe haven't dared to do - let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.
Lauded by some economists for taking unorthodox measures to fix its broken economy, others see it as a one-off example that would be hard to replicate.
"The lessons don't transfer directly because of the relative size of the old banks in relation to the economy. What we were left with was quite manageable," said Jon Bentsson, senior economist at Islandsbanki.

Back to basics 
Three years after its near meltdown, Iceland looks healthy on many measures. It successfully finished an IMF bailout program and has already made one early repayment. It expects the sale of assets from failed bank Landsbanki to cover its $5 billion in debts to Britain and the Netherlands.
In February, Iceland recovered its investment-grade rating from Fitch, which praised the country for restoring macroeconomic stability, adding to investment-grade ratings from Standard and Poor's and Moody's Investors Service.
Icelanders are getting work, going shopping and their house prices are rising again.
And while the penthouse of a gleaming new skyscraper in downtown Reykjavik sits empty, Icelanders are piling into a hip new restaurant on the ground floor called the Hamburger Factory.
Car sales doubled in the first quarter. Jon Olafsson, who runs an auto dealership on the outskirts of Reykjavik, expects to sell almost 1,000 cars this year, having sold less than 100 cars in 2009.

"This is a high volume day for us," he says, pointing at a shiny row of cars just rolled out on his lot. His customers are back en masse, hunting for leaner, greener cars, and he is recruiting staff to meet demand.
While signs point to recovery, many remain cautious about the future and bitter over the past.
Household debt exceeds 200 percent of GDP. The government must deal with the issue of capital controls, imposed after the crisis but which are seen by some economists as denting foreign investment confidence.
There is little trust in government three years after the fall of ex-Prime Minister Geir Haarde. Parliament has the support of only 10 percent of the public, polls show.
Pall Matthiasson, chief executive of mental health services at the National University Hospital of Iceland, flips through slides on his iPad showing the five stages of grief.
He says Icelanders remain in a state of depression.
"There is cohesive guilt, because only so much anger can be directed at the bankers," he said. "It's like looking in the mirror and asking 'did I do that'? It comes back to haunt us."
Close the trenches 
Many just want a clean slate.
That can be seen no more clearly than in recent polls which show a surprisingly strong lead for presidential candidate Thora Arnorsdottir, a fresh-faced mother who is due to give birth to her third child at the end of May.
In an election due at the end of June, the 37-year-old goes up against President Olafur Grimsson, who is running for a fifth four-year term having a few years back cheered on those who drove the country's banking expansion.
Haarde's trial, she says, was difficult for the nation.
"Instead of being a step towards reconciliation, it has been more an opening up of wounds," she told Reuters, curled up on a sofa in her suburban home and peeking out of her window every few minutes to check on her children.

People told her they couldn't bear to watch the news anymore.
"I feel that we can get through this without taking out the daggers," said Arnorsdottir, a journalist who also has her own quiz show. "My hope is to use the influence of the presidency to close the trenches."
Haarde, the world's only political leader to be tried for crimes related to the global crisis, was found innocent of major charges of gross negligence but guilty of failing to hold dedicated cabinet meetings ahead of the collapse.
In the months ahead, Iceland will bring former banking executives to stand trial, so the pain is not over.
Icelanders will meanwhile get on with their recovery.
"Did Icelanders have an identity crisis? Yes," said Egill Helgason, one of Iceland's best-known television commentators. "They thought they were financial wizards, but it was all an illusion ... Now it's back to books, music, and well, fish."

Icelandic Economy Bounces Back From Brink

Iceland’s economy suffered a meltdown in 2008, with its banks defaulting on $85 billion. In 2009 its citizens took to the streets and demanded action from the government against those they saw as responsible for the crisis. The government responded, putting people before markets, and now Iceland’s economy is outgrowing the euro one and, on average, the developed world.

Bloomberg reported that after it was determined in October 2008 that the banks could not be saved, the government intervened. It ring-fenced domestic accounts and shut out international creditors. Iceland’s central bank prevented the sell off of krona through capital controls, and new banks were created that were controlled by the state. Then the government and the state-controlled banks agreed that amounts in excess of 110% of home values would be forgiven on mortgages.

The country’s supreme court also ruled in 2010 that debts indexed to foreign currencies were illegal, which saved households from having to cover losses resulting from drops in the value of the krona.

An Icelandic Financial Services Association report cited by Bloomberg pointed out that the country’s banks have forgiven loans amounting to 13% of Iceland’s GDP. That lessened the debt load of the population.

In addition, the government is investigating, and prosecuting, numerous prominent figures from the meltdown. Currently more than 200 face criminal charges and a special prosecutor has said as many as 90 may be indicted.

Lars Christensen, chief emerging markets economist at Danske Bank in Copenhagen, was quoted saying, “You could safely say that Iceland holds the world record in household debt relief. Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”

The result? According to the Organization for Economic Cooperation and Development, Iceland’s economy is in line to expand 2.4% both this year and next, after growth of 2.9% last year and in the wake of shrinkage of 6.7% in 2009. In contrast, the OECD estimated in November that the euro area will only expand by 0.2% and the OECD area by 1.6% in 2012.

Not only that, but the cost to insure against an Icelandic default is about the same as to insure against a credit event in Belgium. And Icelanders are no longer eager to join the eurozone. Most would rather stay solo. Housing as an element of the consumer price index is only down about 3% from what it was in September 2008, just prior to the collapse.

Fitch Ratings just last week also conceded that Iceland’s approach has worked, raising the country’s rating to investment grade with a stable outlook. At the time it said that Iceland’s “unorthodox crisis policy response has succeeded.”

Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, was quoted saying, “The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110% agreement was here. It’s the broadest agreement that’s been undertaken.”

According to Christensen at Danske Bank, “the bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.”

Central African Republic Economy

The Central African Republic’s economic freedom score is 50.3, making its economy the 145th freest in the 2012 Index. Its overall score is 1.0 point higher than last year, primarily because of improvements in monetary and investment freedoms. The CAR is ranked 31st out of 46 countries in the Sub-Saharan Africa region, and its overall score is lower than the regional average.

The Central African Republic has pulled itself out of the “repressed economy” category. However, the country performs poorly in many of the four pillars of economic freedom and needs to build stronger momentum for reform. In particular, the foundations of economic freedom remain fragile because of pervasive corruption and a deficient judicial system, which undermine equity and erode the effectiveness of government.

Despite overall progress this year, regulatory efficiency continues to be poor and unfavorable to the development of a more dynamic climate for entrepreneurial activity. The informal economy provides a large number of jobs for relatively unskilled labor. Existing policies aimed at promoting and sustaining open markets have been undercut considerably by a lack of determined implementation.

A December 2008 agreement between General François Bozizé (who overthrew the civilian government in 2003), opposition leaders, and some rebel groups established a consensus government. Elections scheduled for April 2010 were postponed, and Bozizé and parliament remained in office beyond the expiration of their terms. These elections were completed in March 2011. Bozizé was re-elected to a second term, and his party won 61 out of the 100 available legislative seats. Rebel groups remain active, and unrest in Sudan and the Democratic Republic of Congo continues to affect the CAR’s security. Despite abundant timber, diamonds, gold, and uranium, the CAR is one of the world’s least-developed countries. The majority of the population is engaged in subsistence farming. China is preparing to explore for oil.


Protection of property rights is weak. Most of the country’s territory is not under central government control, and there is a high risk of renewed violence in rebel-controlled areas. The judiciary is subject to executive interference. Because of inefficient administration, the courts barely function. Misappropriation of public funds and corruption are widespread.


The top income tax rate is 50 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT), with the overall tax burden amounting to 8.7 percent of total domestic income. Government spending is equivalent to 15.4 percent of total domestic output. The budget balance has been in deficit in recent years, and public debt stands at 41.9 percent of GDP.


Establishing a business has become less time-consuming, but other regulatory requirements remain burdensome and opaque, increasing the cost of conducting business. The minimum capital required to start a business is over four times average annual income. The underdeveloped labor market continues to hinder employment growth. The government influences most prices through the public sector, subsidies, and price controls.


The trade weighted tariff rate is 13.6 percent. Myriad non-tariff barriers add to the cost of trade. Foreign and domestic investors are treated equally, and all sectors of the economy, including real estate, are open to foreign investment, typically without screening. The financial system is underdeveloped, and access to financing for businesses remains very limited. Less than 1 percent of the population has access to banking services.

Wednesday, 13 June 2012

Bermuda Economy and Industries

People in Bermuda get one of the highest pay scales in the world. Yes that's true. Bermuda economy still enjoys one of the highest per capita earning in the world. 

In 2009, the average annual salary of a serviceman in Bermuda was over $56,000. And many earn much much more than that. So happy to know this? Thinking of a job in Bermuda?

Now hear this out. Bermudians have world's one of the highest cost of living. Yes, they have to spend a lot to survive.
That's because virtually everything in Bermuda is imported. Bermuda has no natural resources like oil, gas, gold or anything. Due to lack of adequate farming land, agriculture in Bermuda is also very limited. Almost 80% of the food has to be imported. And there is heavy import duty levied on all goods that are imported. So prices are often quite scary. 

In spite of that, Bermudians earn enough to have a healthier life style compared to people in many other countries.

Living Standards in Bermuda 
Although there is no sales or income tax in Bermuda, the cost of goods including food is pretty high. It forces Bermudians to earn a minimum pay which is far higher than anywhere in the world. Although there is hardly any poverty in Bermuda, the low income line is around $27,000 per year. If one is below this earning line, one is said to be poor in Bermuda and will struggle to survive without an aid. Check out cost of living to know what it takes to be living in Bermuda. 

In 2007, only 11% of the Bermudians were below the low income line. This band mainly consist of single parents with no full time job, senior citizens or the disabled persons. By the way, Bermuda unlike other countries in the world, makes no concession for the disabled or the senior citizens, and life is quite hard for them. UPDATE June 2011: Senior Citizens to get a three per cent pension increase from August 2011.

Many of the Bermudians hold more than one jobs in the island to maintain their living standards and to pay off their home loans. See Life in Bermuda to know what one of my friends in Bermuda had to say on her own life. She by the way runs a well known boating tours in Bermuda along with her husband. 

Real estate in Bermuda 
If you hear the average price of a house in Bermuda, you will think that they are only meant for the millionaires. While that's largely true, many average Bermudians still make it by slogging out their initial life with more than one jobs. An average house costs close to a million dollar in Bermuda. 

While there is no sales or income tax in Bermuda, there does exist a fairly heavy property or real estate tax. So if you look at an average Bermudian life style, a couple would typically take up two jobs each. They will save every penny they can to buy a land over a period of few years. Once they have the land, they will get good loans by mortgaging their land property and start building their own house while still living in a rented apartment.

Finally when the house is built, they will rent that out so that the loan liabilities can be paid off from the rentals itself. In about 15 years or so, they will clear out all their loans and shift into their own proud home. Looks simple? No, it's a lot of hard work!! 

Bermuda Industries 

So what are the main industries in Bermuda? The two top industries that continue to control economy of Bermuda are the International Business and the Tourism Industry. 

While the international business in Bermuda has been on the rise with over 15,000 international companies having set up their operations in Bermuda, the tourism industry has been going through some rough patches over the last few years. Tourism had always remained the second most important industry in Bermuda. Between International business and Tourism, Bermuda receives over 70% of its total foreign currency earnings.

The international business is mainly around insurance, re-insurance (i.e. insuring another insurance company), captive insurance, and fund and trust management. Bermuda runs the third largest re-insurance in the world and second largest captive insurance domicile. To know more about the this sector, checkout Bermuda's Insurance Industry. 

This sector has spent an estimated $2 billion in Bermuda and provided large number of jobs. International business contributes 24% of the total GDP of Bermuda as per 2009 reports.

Over the years, prudent financial management of Bermuda has made it a global magnet for the international business. An independent body called the Bermuda Monitory Authority (BMA) has gained control of all the supervisory and regulatory rights from the Bermuda Government. BMA oversees the international business with complete transparency, coordinates with US and international community, and ensures that there is no money laundering, fraud or other financial crimes. 

A recent report from KPMG has stated that the island's legislative framework is almost fully compliant with international standards. Bermuda has recently received a Sovereign rating of AA+ from Fitch which a global credit rating agency. Check out Bermuda Sovereign Ratings for details.

Coming to Tourism in Bermuda, it has shown some declining trends, mostly compounded by the global recession. A little over 550,000 tourists arrived in 2009, a decline of over 100,000 people compared to 2007. Hotel occupancy rates have also decreased in 2009 to close to 51%, down from 59% in 2008. See Bermuda Hotel Occupancy Rate in 2009/2010 for more updates. 

Visitors contributed an estimated $330 million to the economy of Bermuda in 2009, down from $402 million in 2008.

Jobs in Bermuda 
Bermuda had always followed the trend of US economy as well as the global economy.

For example, in early 1990s due to economic downturn, about 2000 people lost their jobs in Bermuda because many work permits were not renewed. There was a similar impact in 2001-02 as well, although to a far lesser degree.

Although International Business used to be the top employment provider in Bermuda, it's no longer so.
Estimated jobs in 2009 in International Business has been about 4,400, down from about 4,750 in 2008. Whereas wholesale, retail and repair services provided about 4,750 jobs and Hotels & Restaurants about 4,700 jobs in 2009. Bermuda Government is the largest employer in the island. As per 2009 estimates, average job salary in Bermuda was $56,000 per year and an annual pay of less than $27,000 means that one is below the poverty line. 

2012 Update on Bermuda Jobs: Department of Statistics in Bermuda released the Labor Market Index (LMI) report. As per the report, in 2011 there were a total of 37,399 job holders compared to 40,213 in 2008. The average annual gross earning in 2011 is $59,364 which shows an increasing trend over the previous years.

2011 Update on Bermuda Jobs: The economy has been harsh on the People of Bermuda. A study showed that around 3,000 jobs have been lost between 2009 and January 2011. The most affected sectors are telecommunications, construction, international business and retail. The age bracket between 55-64 have been most impacted. Despite such figures, the insurance and reinsurance sectors are offering average annual salaries ranging to $200,000 per annum even in such economic conditions. Additionally the 22 major companies in the insurance/reinsurance sector have pumped in close to $1 billion into Bermuda's local economy. This sector employs about 1,700 people out of which 34% are non-Bermudians or expats. 

Bermuda Import and Export of goods 
Bermuda virtually has no natural resources. Almost all the manufactured goods and foodstuff are imported. In 2009, import was to the tune of $1 billion. Items that Bermuda imports includes food, clothing, household goods, machinery, transport, chemicals, live animals and miscellaneous items. 

Much of the import is from US (about $800 million). The other major supplying countries to Bermuda includes UK, Canada and some parts of the Caribbean Islands.

Import in Bermuda has been rising over the years. Duties on import has been a major source of revenue for Bermuda. In financial year 2009-2010, the import duty constituted 24% of the revenue amounting to about $225 million.

Such heavy import duty has its impact on the prices of the goods in the island. Although there is no additional sales tax, you will still find the prices fairly high in Bermuda compared to the other countries like US or even UK. 

Bermuda's exports has been quite limited and has been shrinking over the years. In 2009, only $25 million worth of exports has been done. One of the major items of Bermuda export is the fragrance from Easter Lilies that are used in making perfumes. Other items of export includes pharmaceuticals, semitropical produce and light manufactures.

Other areas of economy in Bermuda 

Bermuda Agriculture products 
Agriculture, which was a major industry in 1920s, was given up slowly. Fertile land for cultivation in this already tiny little island was becoming rare to get. However, agriculture does exist in Bermuda in a small form and includes mainly bananas, vegetables, citrus, flowers, dairy products and honey.

Bermuda GDP 
Know about the Gross Domestic Product (GDP) of Bermuda, the sectors that contributed to the economy, the major economic trends and more: Bermuda GDP

Immigrants to Bermuda 
Over the years, many people from different countries have migrated to Bermuda to take advantage of best of both the worlds - great economy and fabulous place to stay. As per the 2000 census, 79% of the population are Bermuda born. Here is the breakup for the rest:
28% U.K. immigrants
20% from US
15% Canada,
12% Caribbean, and
10% Portugal/Azores
15% from various other countries

Bermuda Budget 2011 
In February 2011, Premier Paula Cox announced the 2011 financial budget of Bermuda. Here is a snapshot with the salient points: 2011 Bermuda Budget

Annual inflation rate (January 2010): 3.2%.
Natural resource: Limestone, used mainly for building.

Regeneration of Bermuda’s economy


Government’s current and near-term financial position has a strong and direct impact on Bermuda’s national economy. Government certainly must continue acquiring revenue. However Government’s need for revenue must be very carefully balanced against the more pressing need to avoid further damage and to regenerate Bermuda’s national economy. Wrong handling of Government finances can push the economy to the third hourglass consequence. Bermuda needs the fourth hourglass outcome.

Government’s Financial Policy

In layman’s terms, and consistently using $100 as the typical revenue, this was the generic situation ten years ago in 2002/03:

Government ‘s revenue $100

Government spent this on personnel $46

Spent this on Debt Service Costs ($0.126b Debt) $2

Government had this left over for everything else $52 (actual spending out of what was available was $48, and Government was paying down Debt out of this)

No borrowing. Government was paying down Debt $0

Government actually spent $96 on everything while Government took in $100. Government ended that year with a generic $4 surplus.

That pattern of Government spending held until 2004. In 2004 it changed. This is what has been budgeted to happen in 2012/13. Take note of the major impact that the huge increases in Debt Service and Personnel costs have had:

Government ‘s revenue $100

Government plans to spend on personnel $57 (no pension payment)

Must spend more on Debt Service Costs ($1.4bn Debt) $13 (six times higher!)

So Government will have this left over for everything else $30

But this is not enough so Government will borrow $19 (total of $49 spent on everything else, but this is actually less than in 2002)

In 2012/13 Government plans to spend $119 even though it expects to take in only $100 in revenue. Government is planning to end the year with $19 more Debt.

This pattern of overspending and borrowing commenced in 2004. It is now in its ninth consecutive year. It must change. We have said and we have shown what will happen if this pattern of Government overspending does not change. What, exactly can and must change? For 2012/13, here is what we believe should have happened and still should happen immediately:

Government‘s revenue $100

Government spending on personnel (reduced 25%) $43 (real personnel cost cut)

Must still spend on Debt Service Costs ($1.4bn Debt) $13 (cannot be cut)

Cutting 18% here means this is left over for everything else $44 (total spent on everything else and still much less than in 2002)

No Government borrowing at all. $0

Meaning that this time Government will spend $100 after taking in only $100. Government will end with a ‘balanced budget’ where spending = revenue.

This is the “X” point that must be reached if the debt service cost is to stop steadily eating its way up into revenue as it has been doing every year in the nine years since 2004. After the “X” point, debt service cost can either be maintained at today’s level, and increased revenue can provide funding to pay down Debt, thereby allowing for an increase in spending on everything else.

The key issue? Government must cut spending. The first real cut should have been made sooner and could have been much smaller. Since a real cut has still not been made, the first cut must now be far deeper and much harsher.

If cuts are not made, and if Government revenue continues to flatline or decrease, the third hourglass consequence is inevitable.

Call to Action

What must be done? How can Government (and Quango) personnel costs be cut? Here are five options:

1. Cut all Government (and Quango) salaries/wages by 25 percent or cut all working hours by 25 percent, going from a 35hr/37.5hr paid work week to a 26.25hr/28.25hr paid work week

2. Cut all pay:

— persons paid over $120k a year get a 30 percent reduction

persons between $70k — $119k take a 25 percent reduction

persons paid under $70 receive a 20 percent reduction

3. All personnel work four days and take every fifth day off, unpaid or all personnel work four weeks and take the fifth week off, unpaid.

4. Every person who is eligible to retire must retire, thus coming off the Consolidated Fund and going onto the Public Service Superannuation Fund (PSSF)

5. For now, retain all Government employees who wish to stay. Once the economy regenerates, encourage Government employees to consider migrating to the private sector; thus reducing the overall size of the Civil Service, while getting the Civil Service/Quangos back to optimum size — probably around 6,000. This 6,000 will be about 24 percent down from the current 7,855. It will free 1,855 Bermudians to take jobs in an expanding private sector. It will take a lot of the pressure off the underfunded PSSF.

Personnel cost cuts of the magnitude recommended will result in taking at least $120m off the current need to spend. Cuts made in the ‘spending on everything else’ category should provide savings of another $70m — $75m making overall cuts up to approximately $190m of real cutbacks. These overall cuts of $190m will move spending down to the “X” point.

Many businesses and operations in the private sector have already made deep and harsh cuts of this magnitude, and the private sector began cutting back, and has been cutting back, since 2007. Several private sector operations have gone out of business.

Without a dramatic rise or regeneration in the economy, cuts of this kind — or harsher — will inevitably occur.

By not cutting now, and thereby delaying the first real cut, we believe that Government spending policy is actively pushing the national economy towards the third hourglass consequence.

If you disagree with this call for action, then just as clearly and just as precisely, dealing with this call, get involved and say what the alternative or different action should be. Let us know what you see as the alternative or action that will avoid the oncoming reality and that will move Bermuda forward.

Discuss this with your family, friends, workmates, and MPs until a clear national decision is reached and implemented; after which Bermuda can start moving forward again. Saying nothing or dissolving into a massive public shouting match is the same as taking no action. But to take no action will ensure the outcome shown by the third hourglass. Bermuda needs the outcome shown in the fourth hourglass, it is what we owe to this and future generations.

Belgium is world’s fourth most open economy

In Ernst & Young’s Globalization Index 2011, Belgium ranks in an excellent 4th place. Only Hong Kong, Ireland and Singapore perform better.
The annual Globalization Index examines the world’s 60 biggest economies, considering factors like trade, investments and capital flows, technology, foreign employees and cultural integration. Compared with the 2010 Index, Belgium moved up two spots.

Belgium scores particularly well for its export-driven economy and investment attractiveness. According to Ernst & Young, its small size and limited internal markets are the main factors behind the strong export culture in Belgium. Moreover, due to its well-developed infrastructure, good living standards, central location and highly-skilled workforce, Belgium is also praised by foreign investors. “These two indicators have always had a key impact on Belgium’s high scores in the Globalization Index,’ says Rudi Braes, partner with Ernst & Young Belgium.
An open economy also means a great reliance on global economic and trade networks. However, small, well-concentrated and export-dependant economies, being highly connected with the world’s markets, are also much more susceptible to the global economic situation, slowdowns and crises included. Belgium is no exception. The government has recently revised Belgium’s expected economic growth forecasts in 2012 from 0.8% to 0.2%. Moreover, Belgium’s economic decision-making remains strongly influenced by external forces such as the European Union or rating bureaus, both of which impact national policy-making processes.
Compared with 2008 and 2009, when the globalization of the world economy seemed to be slowing down, since 2010 onwards, it has been once more in full swing. It means that the world’s biggest economies are again becoming gradually more interconnected. Yet, more than 50% of CEOs are expecting a new wave of recession – a second economic shock (‘double dip’) – at the end of 2012, as reported in Ernst & Young’s survey on the 1,000 company leaders worldwide.
Such a crisis would inexorably oblige both governments and companies to introduce more efficient operational strategies in order to better secure national economies and markets respectively. Nonetheless, around 90% of respondents claim that when the double dip occurs, world governments will introduce more protectionist measures designed both to maintain sound budgetary policies and put rising national debts on hold. At any price.

AmCham Belgium’s position
AmCham Belgium welcomes Ernst & Young’s Globalization Index 2012, which once more confirms Belgium’s strong position in the global economy. Notwithstanding its small size, Belgium was and remains one of the key economic players worldwide, being very well connected with global business and commercial networks. Yet, there is still room for better performance, particularly in the area of public finances and wage policies, where automatic indexation, high social charges and a low employment rate are the main obstacles for companies to invest and create jobs. If Belgium addresses these issues, it can use its extraordinary strengths and easily regain a leading position in foreign investments. More on foreign investment trends and forecasts in Belgium can be found in the Chamber’s US Direct Investment Report in Belgium 2011.

Monday, 11 June 2012

Albania showing critical signs of economic crisis

Though the government largely refuses to acknowledge it, a number of economic indicators are showing critical signs of decline in the Albanian economy for the first quarter of 2012, following a slowdown in economic growth over the past two years.

Inflation reached 0.6% during February, according to INSTAT, marking the very limits of deflation, also confirming serious hits in both demand and consumption. There are declines in private and public investment. The construction and industry sectors , in particular have been among the hardest hit.

Albanians consumed less, as imports fell for a number of categories and exports fell by 21% during the two first months of the year according to INSTAT.

Remittances, one of the main sources of income in the Albanian economy from emigrants working abroad, were down by 9% last year compared to 2010.

Shkelqim Cani, former governor of Central Bank of Albania, says the government should have accepted the crisis a long time ago. "The government did not take any measure and now we are suffering the consequences of their lack of knowledge, manipulation of reality, and their inaction," Cani told SETimes.

He predicts this year will be even more difficult. "The debt cost was extremely high and has now reached disturbing limits." He added that with 2013 being an election year, debt levels will soar further. Debt levels reached the maximum limit of round 60 % of GDP.

Gjergji Filipi, director of research at the Agenda Institute, a think tank, is also concerned.

"Consumers and the biggest investor in the country, the government, visibly spent less in 2010 and 2011, and data from these first months of 2012 confirmed that the country is immersed into crisis," he told SETimes.

But Sherefedin Shehu, an MP representing the ruling Democratic Party, has a different take on the matter. A member of parliament's Committee for Economy and Finance, he told SETimes "Consumption setbacks are caused by another direction, the saving trend," suggesting saving is a psychological response to international crises.

"The crisis is not caused by Albanian factors. Albania is only influenced by the crises; we are having growth deceleration, not a drop in economic growth," he stressed.

The Central Bank has been lowering several time the interest rate for Lek, to the actual lowest historic rate of 4. 25% in attempts to increase consumption, but the market reaction was quite weak. "Monetary policy could have been more aggressive. Central Bank could have realized an aggressive reduction of interest rates, within a trimester with 1 %," said former Central Bank Governor Cani.

In terms of solutions, Shehu suggests one way out of economic slowdown would be "government partnership with the private sector" to boost investment and employment.

Cani thinks reforms aimed at institutions, public administration, infrastructure, human capital, and good governance would offer a way out, as well as support for small and medium enterprises and agriculture.

Filipi says structural problems must be addressed, as opposed to "cosmetic" interventions. He acknowledged however that "Deep reforms might be painful and unpopular, but their delay enlarges the problem."

The IMF is projecting an economic growth rate of 0.5 % for Albania this year, slightly lower than the regional level of 0.7 %. Ever optimistic, the Albanian government projection remains 4.3 %.

Saturday, 9 June 2012

The Netherlands economic overview

According to the Macro Economic Outlook 2012 (MEV 2012), published by CPB Netherlands Bureau for Economic Policy Analysis today, the Dutch economy is projected to grow by 1½% during 2011 and by 1% during 2012. The economic growth is largely attributable to exports. At this moderate rate of growth, unemployment will not decrease any further and is projected to stabilize at an average of 4¼%. Purchasing power will decrease in both forecast years. The forecasted budget deficit is diminishing rapidly, from 5.1% of gross domestic product (GDP) in 2010 to 2.9% of GDP next year. This relatively gloomy picture is considered the most likely scenario based on current information, and hence the picture on the basis of which the budget has been prepared (the ‘baseline’).

These figures have taken into account the recent turmoil in financial markets, although not the possibility of a new financial crisis. The risk of a new financial crisis is nonetheless very real. The turbulence in financial markets indicates the existence of great uncertainty and the likelihood of a negative outcome is considerable. The Macro Economic Outlook 2012 therefore includes an alternative scenario in which the possible effects of a new financial crisis are illustrated. The uncertainties are too great and diverse for this to constitute a detailed scenario, however. It does give an indication nonetheless of the possible outcomes in the event a new shock, which has not yet been factored in at this moment, is delivered to the financial markets - whether in Europe, the United States or elsewhere.

The signals are flashing red for the global economy. In the highly developed economies, the slowdown of the growth rate was most pronounced in the first half of 2011 due to the increased uncertainty on the financial markets, budgetary reorganisation, the high oil price and the earthquake in Japan. These are compounded by the fact that the growth in imports in emerging markets is declining due to monetary tightening and capacity bottlenecks. Global GDP is projected to grow by 3½% during 2011 and 2012, compared with 4¾% during 2010. This will result in a substantial slowing down of the export growth rate for the Netherlands.

The Dutch economy
The most recent insights suggest that GDP in the Netherlands will grow by 1½% during 2011 and by 1% during 2012, significantly below the average of the previous 20 years (2¼%) and also below the potential growth rate of 1¾% forecast in the Economic Outlook 2011-2015. GDP in the Netherlands will not return to pre-credit crisis levels until the second half of 2012, meaning that the economy has merely been marking time for a period of almost four years. Dutch economic growth is dampened somewhat by the austerity measures and tax increases introduced by the cabinet (in particular in 2012), but is affected chiefly by the impact of the worldwide slowdown in growth that commenced in early 2011. The estimate has taken into account the impact of the substantial turbulence in financial markets that erupted at the beginning of August. The possibility of a new financial crisis has not been taken into account in the baseline, although such a scenario certainly cannot be ruled out.

Growth comes from exports
Economic growth in the Netherlands will come largely from exports in 2011 and 2012, with domestic expenditure only making a limited positive contribution to growth of ¼ to ½% point per year. Dutch consumers are feeling the after-effects of the crisis (loss of purchasing power, lost assets) and overall will not make any contribution to economic growth during 2011 and 2012. Public spending will inhibit the GDP growth rate next year. In the past four decades, public spending has only made a negative contribution to growth on one previous occasion, in 2004. The negative impact of public spending is not surprising given the extensive austerity measures introduced by the cabinet. Following a sharp decline in 2009 and a further decrease in 2010, business investments are projected to recover well in 2011, with a growth rate of 9¼%. This will not go all the way to offsetting the loss sustained in the previous years, however. Due to the fall off in economic activity in 2012, a decline in the growth of investments to 3¼% is once again anticipated for the coming year.

Government finances are improving, partly due to policy.....
In spite of a renewed slowing of growth, the public deficit will diminish further next year, chiefly due to austerity measures and tax increases. The deficit will decrease from 5.1% of GDP in 2010 to a projected 2.9% of GDP in 2012. This means that the deficit will have halved compared with the level in 2009 and will be below the ‘Maastricht’ ceiling of 3% of GDP for the first time since 2008. A relatively large part of the austerity measures will affect social security expenditure next year. Healthcare costs will continue to increase, albeit at a lower rate than in previous years. The tax and premium burden will increase in the projection period, from 38.8% of GDP in 2010 to 39.2% in 2012. This increase is entirely due to the effects of government policy and contributes to the reduction of the deficit.

The European debt crisis does not have any noticeable direct impact (for the time being) on the public deficit in the projection period. The bilateral loan to Greece is financed by the issuing of Dutch government bonds, thereby resulting in more interest payments for the Dutch Treasury. However, these additional interest payments are more than compensated by the interest payments made by the Greek government on the bilateral loan. Indirectly there are effects, both positive and negative, on the public deficit. The turbulence in Europe has led to investors taking refuge in bonds of strong eurozone countries, such as Germany and the Netherlands. This has resulted in downward pressure on the interest payments by the government and hence to a reduction of the public deficit. The increased uncertainty also puts pressure on economic growth, however, which is bad for government finances.

.... purchasing power in 2012 is deteriorating due to policy
Inflation, which at 1.3% was still limited in 2010, is projected to be 2¼% in 2011 and 2% in 2012. The increase in inflation during 2011 is largely due to higher import prices. In 2012 domestic factors, such as rising housing rents, gas prices, indirect taxation and unit labour costs, in particular will push up the general price level. The increase in contract wages in the private sector is forecast to rise from 1.0% during 2010 to 1½% in 2011 and to 2% in 2012. Contractual wages develop with a lagged response to the increase in inflation and the reduction in unemployment.

During 2011, purchasing power will decrease by an average of 1%, mainly because wages lag behind price movements. As a result of austerity measures and tax increases (and in the case of pensioners, the non-indexation of supplementary pensions), purchasing power will deteriorate during 2012 by an average of 1%. A change of -0.4% in 2010 means that the median purchasing power will then have decreased by roughly 2½% since 2009. This is the first time since the early 1980s that purchasing power has decreased in several successive years.
Source: Macro Economic Outlook 2012; CPB Netherlands Bureau for Economic Policy Analysis

Saturday, 19 May 2012

Finland Economy

Economy - overview

Finland has a highly industrialized, largely free-market economy with per capita output roughly that of Austria, Belgium, the Netherlands, and Sweden. Trade is important with exports accounting for over one third of GDP in recent years. Finland is strongly competitive in manufacturing - principally the wood, metals, engineering, telecommunications, and electronics industries. Finland excels in high-tech exports such as mobile phones. Except for timber and several minerals, Finland depends on imports of raw materials, energy, and some components for manufactured goods. Because of the climate, agricultural development is limited to maintaining self-sufficiency in basic products. Forestry, an important export earner, provides a secondary occupation for the rural population. Finland had been one of the best performing economies within the EU in recent years and its banks and financial markets avoided the worst of global financial crisis. However, the world slowdown hit exports and domestic demand hard in 2009, with Finland experiencing one of the deepest contractions in the euro zone. A recovery of exports, domestic trade, and household consumption stimulated economic growth in 2010. The recession left a deep mark on general government finances and the debt ratio, turning previously strong budget surpluses into deficits. Despite good growth prospects, general government finances will remain in deficit during the next few years. The great challenge of economic policy will be to implement a post-recession exit strategy in which measures supporting growth will be combined with general government adjustment measures. Longer-term, Finland must address a rapidly aging population and decreasing productivity that threaten competitiveness, fiscal sustainability, and economic growth.

GDP (purchasing power parity)

$186 billion (2010 est.)
$180.3 billion (2009 est.)
$196.5 billion (2008 est.)
note: data are in 2010 US dollars

GDP (official exchange rate)

$239.2 billion (2010 est.)

GDP - real growth rate

3.1% (2010 est.)
-8.2% (2009 est.)
0.9% (2008 est.)

GDP - per capita (PPP)

$35,400 (2010 est.)
$34,400 (2009 est.)
$37,500 (2008 est.)
note: data are in 2010 US dollars

GDP - composition by sector

agriculture: 2.9%
industry: 29%
services: 68.1% (2010 est.)

Population below poverty line

Labor Market

Labor force

2.672 million (2010 est.)

Labor force - by occupation

agriculture and forestry: 4.9%
industry: 16.7%
construction: 7.1%
commerce: 19.4%
finance, insurance, and business services: 12.8%
transport and communications: 6.3%
public services: 32.8% (2009)

Unemployment rate

8.4% (2010 est.)
8.2% (2009 est.)

Unemployment, youth ages 15-24

total: 20.5%
male: 22%
female: 18.8% (2009)

Household income or consumption by percentage share

lowest 10%: 3.6%
highest 10%: 24.7% (2007)

Distribution of family income - Gini index

26.8 (2008)
25.6 (1991)

Investment (gross fixed)

18.8% of GDP (2010 est.)


revenues: $125.2 billion
expenditures: $131.9 billion
note: Central Government Budget (2010 est.)

Taxes and other revenues

52.4% of GDP (2010 est.)

Budget surplus (+) or deficit (-)

-2.8% of GDP (2010 est.)

Public debt

48.4% of GDP (2010 est.)
43.8% of GDP (2009 est.)

Inflation rate (consumer prices)

1.7% (2010 est.)
1.6% (2009 est.)

Central bank discount rate

1.75% (31 December 2010)
1.75% (31 December 2009)
note: this is the European Central Bank's rate on the marginal lending facility, which offers overnight credit to banks in the euro area

Commercial bank prime lending rate

2.267% (31 December 2010 est.)
2.552% (31 December 2009 est.)

Stock of money

note: see entry for the European Union for money supply in the euro area; the European Central Bank (ECB) controls monetary policy for the 16 members of the Economic and Monetary Union (EMU); individual members of the EMU do not control the quantity of money and quasi money circulating within their own borders

Stock of narrow money

$113 billion (31 December 2010 est.)
$113.6 billion (31 December 2009 est.)
note: see entry for the European Union for money supply in the euro area; the European Central Bank (ECB) controls monetary policy for the 17 members of the Economic and Monetary Union (EMU); individual members of the EMU do not control the quantity of money circulating within their own borders

Stock of broad money

$172.9 billion (31 December 2010 est.)
$173.4 billion (31 December 2009 est.)

Stock of quasi money


Stock of domestic credit

$242.6 billion (31 December 2010 est.)
$242.2 billion (31 December 2009 est.)

Market value of publicly traded shares

$118.2 billion (31 December 2010)
$91.02 billion (31 December 2009)
$154.4 billion (31 December 2008)

Agriculture - products

barley, wheat, sugar beets, potatoes; dairy cattle; fish
Industrial Production


metals and metal products, electronics, machinery and scientific instruments, shipbuilding, pulp and paper, foodstuffs, chemicals, textiles, clothing

Industrial production growth rate

5.1% (2010 est.)

Electricity - production

67.94 billion kWh (2009 est.)

Electricity - production by source

fossil fuel: 39%
hydro: 18.7%
nuclear: 30.4%
other: 11.8% (2001)

Electricity - consumption

83.09 billion kWh (2008 est.)

Electricity - exports

3.375 billion kWh (2009 est.)

Electricity - imports

12.09 billion kWh (2009 est.)

Oil - production

8,718 bbl/day (2010 est.)

Oil - consumption

217,400 bbl/day (2010 est.)

Oil - exports

133,600 bbl/day (2009 est.)

Oil - imports

318,100 bbl/day (2009 est.)

Oil - proved reserves

0 bbl (1 January 2011 est.)

Natural gas - production

0 cu m (2010 est.)

Natural gas - consumption

4.782 billion cu m (2010 est.)

Natural gas - exports

0 cu m (2010 est.)

Natural gas - imports

4.782 billion cu m (2010 est.)

Natural gas - proved reserves

0 cu m (1 January 2011 est.)

Current Account Balance

$7.561 billion (2010 est.)
$5.892 billion (2009)


$69.4 billion (2010 est.)
$62.91 billion (2009 est.)

Exports - commodities

electrical and optical equipment, machinery, transport equipment, paper and pulp, chemicals, basic metals; timber

Exports - partners

Sweden 11.6%, Germany 10.2%, Russia 8.5%, US 7%, Netherlands 6.9%, China 5%, UK 4.9% (2010)


$65 billion (2010 est.)
$58.12 billion (2009 est.)

Imports - commodities

foodstuffs, petroleum and petroleum products, chemicals, transport equipment, iron and steel, machinery, textile yarn and fabrics, grains

Imports - partners

Russia 17.4%, Germany 14.7%, Sweden 14.5%, Netherlands 8.2%, China 4.4% (2010)
Retail Sales

Reserves of foreign exchange and gold

$9.555 billion (31 December 2010 est.)
$11.46 billion (31 December 2009 est.)

Debt - external

$518 billion (30 June 2011)
$370.8 billion (30 June 2010)

Stock of direct foreign investment - at home

$82.71 billion (31 December 2010 est.)
$84.44 billion (31 December 2009 est.)

Stock of direct foreign investment - abroad

$130.6 billion (31 December 2010 est.)
$126.8 billion (31 December 2009 est.)

Exchange rates

euros (EUR) per US dollar -
0.755 (2010)
0.7198 (2009)
0.6827 (2008)
0.7345 (2007)
0.7964 (2006)

Wednesday, 16 May 2012

Venezuela Economy

AN UPPER-MIDDLE INCOME, oil-producing country, Venezuela enjoyed the highest standard of living in Latin America. The country's gross domestic product ( GDP) in 1988 was approximately US$58 billion, or roughly US$3,100 per capita. Although the petroleum industry has dominated the Venezuelan economy since the 1920s, aluminum, steel, and petrochemicals diversified the economy's industrial base during the 1980s. Agriculture activity was relatively minor and shrinking, whereas services were expanding.
Venezuela possessed enormous natural resources. The country was the world's third largest exporter of oil, its ninth largest producer of oil, and accounted for more oil reserves than any other nation in the Western Hemisphere. The national petroleum company, Venezuelan Petroleum Corporation (Petróleos de Venezuela, S.A.--PDVSA), was also the third largest international oil conglomerate. Because of its immense mineral wealth, Venezuela in 1990 was also poised to become an international leader in the export of coal, iron, steel, and aluminum.
Despite bountiful natural resources and significant advances in some economic areas, Venezuela in 1990 continued to suffer from the debilitating effects of political patronage, corruption, and poor economic management. The country's political and economic structures often allowed a small elite to benefit at the expense of the masses. As a result, Venezuela's income distribution was uneven, and its social indicators were lower than the expected level for a country with Venezuela's level of per capita income. Many economic institutions were also weak relative to the country's international stature. The efforts of the administration of Carlos Andrés Pérez (president, 1974-79, 1989- ) to reform the economy, especially if coupled with political and institutional reforms, would likely determine whether the country would reach its extraordinary potential.



Spanish expeditionary arrived in what is present-day Venezuela in 1498, but generally neglected the area because of its apparent lack of mineral wealth. The Spaniards who remained pursued rumored deposits of precious metals in the wilderness, raised cattle, or worked the pearl beds on the islands off the western end of the Península de Paria. Colonial authorities organized the local Indian into an encomienda system to grow tobacco, cotton, indigo, and cocoa. The Spanish crown officially ended the encomienda system in 1687, and enslaved Africans replaced most Indian labor. As a result, Venezuela's colonial economic history, dominated by a plantation culture, often more closely resembled that of a Caribbean island than a South American territory.

Cocoa, coffee, and independence from Spain dominated the Venezuelan economy in the eighteenth and nineteenth centuries. Cocoa eclipsed tobacco as the most important crop in the 1700s; coffee surpassed cocoa in the 1800s. Although the war of independence devastated the economy in the early nineteenth century, a coffee boom in the 1830s made Venezuela the world's third largest exporter of coffee. Fluctuations in the international coffee market, however, created wide swings in the economy throughout the 1800s.

The first commercial drilling of oil in 1917 and the oil boom of the 1920s brought to a close the coffee era and eventually transformed the nation from a relatively poor agrarian society into Latin America's wealthiest state. By 1928 Venezuela was the world's leading exporter of oil and its second in total petroleum production. Venezuela remained the world's leading oil exporter until 1970, the year of its peak oil production. As early as the 1930s, oil represented over 90 percent of total exports, and national debate increasingly centered on better working conditions for oil workers and increased taxation of the scores of multinational oil companies on the shores of Lago de Maracaibo. In 1936 the government embarked on its now-famous policy of sembrar el petróleo, or "sowing the oil." This policy entailed using oil revenues to stimulate agriculture, and later, industry. After years of negotiations, in 1943 the government achieved a landmark 50 percent tax on the oil profits of the foreign oil companies. Although Venezuela reaped greater benefits from its generous oil endowment after 1943, widespread corruption and deceit by foreign companies and indifferent military dictators still flourished to the detriment of economic development. Nevertheless, despite unenlightened policies, economic growth in the 1950s was robust because of unprecedented world economic growth and a firm demand for oil. As a result, physical infrastructure, agriculture, and industry all expanded swiftly.

With the arrival of democracy in 1958, Venezuela's new leaders concentrated on the oil industry as the main source of financing for their reformist economic and social policies. Using oil revenues, the government intervened significantly in the economy. In 1958 the new government founded a new noncabinet ministry, the Central Office of Coordination and Planning (Oficina Central de Coordinación y Planificación--Cordiplan) in the Office of the President. Cordiplan issued multiyear plans with broad economic development objectives. The government in 1960 embarked on a land reform program in response to peasant land seizures. In 1960 policy makers also began to create regional development corporations to encourage more decentralized planning in industry. The first such regional organization was the Venezuelan Corporation of Guayana (Corporación Venezolana de Guayana--CVG), which eventually oversaw nearly all major mining ventures. The year 1960 also marked the country's entrance as a founding member into the Organization of Petroleum Exporting Countries (OPEC), which set the stage for the economy's rapid expansion in the 1970s. Throughout the 1960s, the government addressed general social reform by spending large sums of money on education, health, electricity, potable water, and other basic projects. Rapid economic growth accompanied these reformist policies, and from 1960 to 1973 the country's real per capita output increased by 25 percent.
The quadrupling of crude oil prices in 1973 spawned an oil euphoria and a spree of public and private consumption unprecedented in Venezuelan history. The government spent more money (in absolute terms) from 1974 to 1979 than in its entire independent history dating back to 1830. Increased public outlays manifested themselves most prominently in the expansion of the bureaucracy. During the 1970s, the government established hundreds of new state-owned enterprises and decentralized agencies as the public sector assumed the role of primary engine of economic growth. The Venezuelan Investment Fund (Fondo de Inversiones de Venezuela--FIV), responsible for allocating huge oil revenues to other government entities, served as the hub of these institutions. In addition to establishing new enterprises in such areas as mining, petrochemicals, and hydroelectricity, the government purchased previously private ones. In 1975 the government nationalized the steel industry; nationalization of the oil industry followed in 1976. Many private citizens also reaped great wealth from the oil bonanza, and weekend shopping trips to Miami typified upper-middle-class life in this period.
A growing acknowledgment of the unsustainable pace of public and private expansion became the focus of the 1978-79 electoral campaign. Because of renewed surges in the price of oil from 1978 to 1982, however, the government of Luis Herrera Campins (president, 1979-84) scrapped plans to downgrade government activities, and the spiral of government spending resumed. In 1983, however, the price of oil fell and soaring interest rates caused the national debt to multiply. Oil revenues could no longer support the array of government subsidies, price controls, exchange-rate losses, and the operations of more than 400 public institutions. Widespread corruption and political patronage only exacerbated the situation.
The government of Jaime Lusinchi (president, 1984-89) attempted to reverse the 1983 economic crisis through devaluations of the currency, a multi-tier exchange-rate system, greater import protection, increased attention to agriculture and food self-sufficiency, and generous use of producer and consumer subsidies. These 1983 reforms stimulated a recovery from the negative growth rates of 1980-81 and the stagnation of 1982 with sustained modest growth from 1985 to 1988. By 1989, however, the economy could no longer support the high rates of subsidies and the increasing foreign debt burden, particularly in light of the nearly 50 percent reduction of the price of oil during 1986.
In 1989 the second Pérez administration launched profound policy reforms with the support of structural adjustment loans from the International Monetary Fund ( IMF) and the World Bank. In February 1989, price increases directly related to these reforms sparked several days of rioting and looting that left hundreds dead in the country's worst violence since its return to democracy in 1958. Ironically, Pérez, who oversaw much of the government's expansion beginning in the 1970s, spearheaded the structural reforms of 1989 with the goal of reducing the role of government in the economy, orienting economic activities toward the free market, and stimulating foreign investment. The most fundamental of the 1989 adjustments, however, was the massive devaluation of the bolívar from its highly overvalued rate to a market rate. Other related policies sought to eliminate budget deficits by 1991 through the sale of scores of state-owned enterprises, to restructure the financial sector and restore positive real interest rates, to liberalize trade through tariff reduction and exchange-rate adjustment, and to abolish most subsidies and price controls. The government also aggressively pursued debt reduction schemes with its commercial creditors in an effort to lower its enervating foreign debt repayments.


Fiscal Policy

The government's fiscal accounts generally showed surpluses until the mid-1980s because of the immense oil income. In 1986, however, the drop in oil prices triggered a fiscal deficit of 4 percent; the deficit exceeded 6 percent in 1988.
The major actors in fiscal policy were Cordiplan, which was responsible for long-term economic planning, and the Budget Office of the Ministry of Finance, which oversaw expenditures and revenues for each fiscal year ( FY). Cordiplan also oversaw the fiscal status of the FIV, PDVSA, the social security system, regional and municipal governments, the foreign exchange authority, state-owned enterprises, and other autonomous agencies. But economic planning and budgeting suffered from a serious lack of inter agency cooperation, and five-year plans and annual public-sector investments often lacked cohesiveness.
Total government spending reached about 23 percent of GDP in 1988. Current expenditures accounted for 70 percent of overall outlays, compared with 30 percent for capital expenditures. Capital investments, after a decline in the mid-1980s, expanded slowly during the late 1980s. Interest payments, two-thirds of which serviced foreign debt, represented 11 percent of total expenditures in 1988, a typical figure for most of the decade.
The revenue structure in the late 1980s remained excessively dependent on oil income. In 1988 petroleum revenues, both income taxes and royalties, provided 55 percent of total revenue. Although oil's contribution to total revenue had declined in the 1980s, most economists felt that it had not declined sufficiently. Overall, taxes contributed 80 percent of total revenue in 1988, with the remaining 20 percent derived from such nontax sources as royalties and administrative fees. Tax exemptions, deductions, allowances, and outright evasion greatly reduced the effectiveness of fiscal policy. Officials planned to inaugurate a value-added tax in 1990 as another means to widen the revenue base.

Monetary and Exchange Rate Policies

The Central Bank of Venezuela (Banco Central de Venezuela-- BCV) performed all typical central bank functions, such as managing the money supply, issuing bank notes, and allocating credit. As part of the country's overall financial sector reform, the BCV embarked in 1989 on numerous revisions of monetary policy aimed at improving the bank's control over the money supply. The most important policy change was the government's decision to allow the interest rate to fluctuate with market rates. Despite its initial inflationary effect, the policy created incentives for savings and investment, thereby attracting and retaining capital. Deposits swelled noticeably during 1989. In 1990, however, the Venezuelan Supreme Court declared that the BCV was legally responsible for setting interest rates. The BCV hoped to rescind the law in the early 1990s.
Venezuela traditionally enjoyed general price stability; inflation averaged a mere 3 percent from 1930 to 1970. Annual price increases did not exceed 25 percent until the mid-1980s. During the 1970s, many economists credited the FIV with successfully managing and investing overseas the country's oil windfalls in a way that prevented inordinate price instability. By the 1980s, however, financial deterioration, weakening BCV authority, numerous devaluations, and fiscal deficits had combined to push consumer prices and inflation up dramatically in the late 1980s. The average consumer price index rose by an unprecedented 85 percent in 1989. Some price increases were associated with the 1989 structural adjustment program, and thus represented what some economists refer to as "correctionary inflation," the trade-off for eliminating previous distortions in prices. By 1990 only a handful of price controls remained in effect.
The bolívar was traditionally a very stable currency, pegged to the United States dollar at a value of B4.29=US$1 from 1976 to 1983. The bolívar experienced several devaluations from 1983 to 1988, when monetary authorities implemented a complicated fourtier exchange-rate system that provided special subsidized rates for certain priority activities. The multiple exchange-rate system, however, proved to be only a stopgap measure, eventually giving way to a 150 percent devaluation at the market rate in 1989. The 1989 devaluation unified all rates from the official B14=US$1 rate to the new B36=US$1 rate, which was a floating rate subject to the supply and demand of the market. By late 1990, the value of the bolívar had crept down to B43=US$1.
In a related matter, the Differential Exchange System Office (Régimen de Cambio de Dinero--Recadi), the organization that oversaw the various exchange rates, became the focus of one of the largest scandals in the decade. Between 1983 and 1988, businessmen bribed Recadi officials in return for access to halfpriced United States dollars to funnel an alleged US$8 billion overseas. When the scandal broke in 1989, law enforcement agents investigated as many as 2,800 businesses, and more than 100 executives from leading multinational enterprises fled the country in fear of prosecution.

France Economy


Actual: 0.0% • Previous: 0.2%Next Release: N/A
French real GDP was unchanged on a quarter-ago basis in the three months to March, following a revised 0.1% increase in the previous stanza. The outcome was better than Moody’s Analytic and the Bloomberg market consensus had expected. Domestic demand contributed to GDP, while net foreign trade was a drag. On a year-ago basis, GDP growth slowed to 0.3% from a revised 1.2% in the fourth quarter. The economy will go into a mild recession in coming quarters as fiscal tightening in France and its key European trading partners, combined with uncertainty about the sovereign debt crisis weigh, on activity.

Employment Situation

Actual: 9.4% • Previous: 9.3%Next Release: N/A
The seasonally adjusted unemployment rate for mainland France rose to 9.4%, the highest in nearly two years, in the fourth quarter from 9.3% in the previous stanza. Weak public and private sector hiring will put upward pressure on the unemployment rate in the coming quarters.

Industrial Production

Actual: -0.9% • Previous: 0.3%Next Release: N/A
French industrial production fell 0.9% m/m in March, following a revised 0.9% rise in the previous month. On a year-ago basis, production contracted 0.9%, less than a 1.4% decline in February. Production will remain under pressure in the coming months because of fiscal tightening at home and in key European trading partners and uncertainty about the economic program of France’s new president weighing on the demand for local goods.

Trade balance

Actual: -€ 5.7 bil • Previous: -€ 6.4 bilNext Release: N/A
France’s seasonally adjusted foreign trade deficit narrowed to €5.7 billion in March from a shortfall of €6.4 billion in the previous month. The trade balance will remain under pressure in the coming months because Moody’s Analytics believes that the euro zone has gone into a mild recession, which will weigh on demand for French exports.

Monday, 14 May 2012

Taiwan economy 2012

Despite various negative factors affecting the international economic situation in the first half of 2011, the continuation of the global economy is still revived, and the domestic economy to grow steadily with a 5.54% rate. But from the second half of the year, the European debt crisis suddenly become a major factor threatening the world economy. Major forecasting agencies recently revised down the growth of the global economy in 2011 and 2012. With regard to the domestic economy, leading indicators continue to decline, due to the slow growth of economic activities. We estimate that 2011 real GDP growth to be 4.38%. The deteriorating global economic environment will continue to keep Taiwan's economy grow 3.81% in 2012.

With regard to private consumption, the slow growth in the domestic economy affected consumer confidence. The negative impact of lower equity prices and reduce work hours, it is estimated that the domestic annual growth rate of real private consumption will be adjusted downward from 3.38% in 2011 to 2.72% in 2012. Because of the negative effects of the international economic situation, business investment is expected to decline, as private investment. But with government efforts to increase investment and private participation in public construction to stimulate investment is expected to increase. Therefore, it is estimated that the annual growth of private investment will continue to grow steadily, reaching 1.91% in 2012 of -2.36% in 2011.

With regard to foreign trade, the European debt crisis still a negative impact on the global requirements, and therefore exports to China, Japan, and Europe fell in November 2011. But with more than 90% zero products ECFA early harvest list starting next year, the export momentum is expected to be larger. It is estimated that the annual growth of Taiwan of real goods and services exports will be 5.15% in 2012. Regarding the imports, because of the negative effects of the recession on business investment, the annual growth of real goods and services imports are expected to fall to 2.2%.

Regarding the price, with the slow growth in the global economy, the prices of international crude oil and raw materials declined. Meanwhile, as the European countries still tight fiscal policy to control the deficit, global demand is expected to decline, the expected inflation remains within reasonable limits. The annual growth rate for Consumer Price Index of Taiwan in 2012 is expected to decrease slightly from 1.35% to 1.16%. Moreover, the annual growth of the Wholesale Price Index expected to decrease from 4.25% to 2.35%. As for money, with sufficient domestic equity funds is the annual growth rate of monetary expansion is expected to grow steadily in 2012 with 5.98% of narrow money supply (M1B) and 5.24% of broad money (M2).

In short, the European debt crisis had a significant influence on the dynamics of foreign claims on Taiwan. Fortunately, the U.S. economy is expected to continue growing, albeit slowly and with the leading Chinese emerging economies in Asia will likely continue to perform relatively well in 2012. Taiwan is estimated that GDP growth will remain at 3.81% next year. Looking ahead, the credit problems of issuers of government bonds in Europe, the possibility of a hard landing for the Chinese economy, the fragile economic recovery in the U.S. and the uncertain situation in Iran is worth noting that in the near future. Is the expected errors and uncertainties into account that 50% of GDP forecast is between 2.07% and 5.64%.

Friday, 11 May 2012

Russia's Economy Enters 2012

Economic growth in Russia should stay dynamic in the first half of this year, but we anticipate that the economy will lose some steam in the second part of the year. Following 4.2% growth in 2011, we think the slowdown will lead to GDP growth of about 3.5% for the full year. Initially, we expect that consumption will be boosted by the increase in military salaries and pensions. Inflation, too, should remain moderate in the first half of the year because the government has postponed regulated tariff hikes on electricity and gas prices to July, allowing inflation to stay below 5%. Consumer lending, which reached an expected double-digit rate last year, should also continue to underpin consumer demand in the first part of 2012.
Later in the year, though, we see growth moderating for several reasons. The Central Bank of Russia (CBR) is likely to curb credit growth in the second part of the year. This is because inflation will likely accelerate again on the back of the July electricity and gas tariff hikes, which in turn will slow growth in consumer demand. The fixed capital investment outlook is equally uncertain. Investment growth accelerated in the second part of 2011 on the back of a rise in corporate profits and bank lending. This trend will continue in the first part of 2012, but is likely to slow in the following 12 months as bank lending becomes tighter and somewhat more expensive.
Russia's external sector will remain highly dependent on the outlook for commodity prices. In our baseline scenario for the world economy, we anticipate that growth in developed markets will bounce back in the second part of 2012 on the back of a recovery in emerging markets, in particular China and Brazil. This would be supportive of Brent oil prices staying above $115 per barrel (/bbl) through the beginning of 2013. We note, however, that the so-called breakeven point for Ural oil prices (the price associated with a balanced budget) has risen every year and currently stands above $120/bbl.
Overall we anticipate that real GDP growth will stabilize at about 3.5% this year before experiencing some acceleration on the back of a more dynamic world economy in 2013 (see chart 1).

Chart 1

Momentum From Last Year Carries The Economy Forward

Russia's economy is entering 2012 on a good footing, after 2011 turned out to be a reasonably strong year on balance, with GDP and industrial production up and unemployment down. GDP reached 4.3%, the same as in 2010, on the back of strong credit growth and a rebound in incomes. The industrial production index (IPI) gained 3.3% in manufacturing and 1.8% in mining and quarrying in December 2011 on the same month of the previous year. Both these IPIs had shown upbeat movement during 2010 and 2011, reflecting the recovery from the slump in 2009. Meanwhile, the unemployment rate declined to 6.1% in December, its lowest level since mid-2008. The federal budget recorded a surplus equal to 0.8% of GDP (after minus 4.0% a year earlier), with an average oil price of $109 per barrel.
Buoyant consumer demand also helped drive strong GDP growth. Retail sales accelerated to a record high for the year, rising 9.5% in the 12 months to December. Meanwhile, retail lending rose by 36% over the 12 months to December. Consumption was underpinned by lower inflation. The Consumer Price Index (CPI) dropped to a record low of 6.1% in the 12 months to December, near the floor of the 6%–7% target band set by the Central Bank of Russia (CBR). Between 2004 and 2010, Russia had the highest inflation rate among the so-called BRIC countries (Brazil, Russia, India, China), but this was no longer the case in 2011, as Russia's inflation ran slightly below that of Brazil. This decrease is due in part to the shift in the CBR's monetary policy to a more flexible exchange rate. This has allowed the CBR to reduce its interventions on foreign exchange markets, which used to be an important driver of money supply growth prior to 2008. Money supply growth declined to about 20% in 2011 (chart 2).

Chart 2

A partial recovery in investment and construction also supported the economy overall in 2011, but in our view will not be sufficient to ease the capacity constraints in Russia's important natural-resource extraction sector. Capital spending in December 2011 was 9% up on the previous December, while construction was up 6.7%. Natural resource extraction currently represents 25% of the entire economy. Exports of fuels and metals typically account for three-quarters of total Russian exports, and the gas and oil sector is responsible for as much as 60% of federal budget receipts. Oil and gas faces significant capacity constraints because of an extended period of insufficient investment following the post-soviet economic transition. Moreover, capacity needed to replace depleted older deposits is typically associated with more difficult geological, logistical, and climatic conditions and hence is far more capital intensive to develop and exploit. Capital expenditures remain heavily concentrated: The total capital expenditures of OAO Gazprom, Russian Railways (JSC), OAO AK Transneft, as well as electric utilities reached 4.1% of GDP in 2011. Investment by those very large companies is also heavily dependent on growth in tariffs set by the government. Year on year, these tariffs can increase at a more or less rapid rate depending on the overall economic and political context: Electricity prices rose 13% in 2011, gas prices 15%, but further hikes in 2012 have been postponed to the second half of the year.
Russia's external sector benefitted from the rise in commodity prices during 2011. Merchandise exports grew at 32.2% year on year to reach $380.1 billion. Of this amount, 65.5% were exports of oil and gas, up from 63.5% in the same period of 2010. While merchandise imports grew at an even faster pace of 34.8% to reach $232.3 billion, this was from a much lower base than exports, so that the merchandise trade surplus widened compared with a year earlier to $147.7 billion, an increase of $32.4 billion. At the same time, the physical volume of energy exports from Russia was apparently little changed from a year earlier. According to data published by RosStat for the first 10 months of 2011, the physical volume of crude oil exports was actually down 4.0%, refined product exports were 1.9% lower, and natural gas exports were up 7.4%. But the received price for crude oil in October was 36.7% higher than in the same month a year earlier, and the price of natural gas was up 25.2%

Capital Outflows Have Intensified On Investment Constraints And Political Uncertainty

In spite of these economic achievements, CBR estimates suggest that the best part of Russia's current account surplus of $101 billion (5.8% of GDP) in 2011 was absorbed by $84 billion of capital outflows. This is the second-largest outflow in the history of modern Russia (chart 3).

Chart 3

This sharp rise in capital outflows is the result of a combination of factors, in our view. First, the global financial crisis and the decrease in risk appetite by international investors has made the refinancing of foreign debt and new borrowings abroad more difficult, putting a cap on capital inflows. Additionally, the increased flexibility of the ruble exchange rate has made portfolio inflows based on carry trade less attractive. Second, outbound investments by Russian banks have been a key contributor to capital outflows since the middle of 2010. According to balance-of-payment data, on a cumulative basis by the end of the second quarter of 2011 foreign banking assets had reached $201 billion (12% of GDP). Of these, about $78 billion were parked in the EU: 34% in the U.K., 18% in Germany, 13% in Austria, and 13% in Cyprus. But interestingly, a good part of the increase in banks' foreign assets corresponds to loans made to Russian corporate borrowers. This is because many large Russian companies (and almost all of the publicly listed ones) have part of their holding structures registered in foreign jurisdictions for legal reasons.
According to VTB Capital, a Russian bank, offshore loans by Russian banks stood at $60 billion as of November 2011. Yet, this observation leads, in turn, to another: that large corporate entities borrow through their foreign entities but decline to repatriate those funds. If they did, it would offset the outflows in the capital account. More generally, this also shows that funds generated by Russian exports are not fully reinvested at home, which seems to reflect a perceived lack of investment opportunities in the domestic economy. Institutional limitations can be seen by investors as disincentives, as the central government continues to influence significantly infrastructure developments via the large state-owned companies. In addition, political uncertainties have increased in the past year as the presidential elections, due in March, were approaching, while more anti-government protests were taking place in Moscow.
Looking forward, it is difficult in our opinion to see what would slow this rise in capital outflows in 2012. The continued increase in net foreign assets could be compensated by higher external borrowing on the back of higher lending rates in the domestic economy. However, we only anticipate a very gradual return to financing conditions more favorable to borrowers on international capital markets. This is because we believe that the sovereign crisis in Europe and the associated hike in bond yields will take time to resolve. Meanwhile, political uncertainties at home will not necessarily disappear immediately after the presidential elections. There will still be many questions relative to the pace at which the new government will be ready to undertake structural reforms.