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MONDAY, JANUARY 9, 2012
business
Investors demanding bolder policy moves NBK WEEKLY MONEY MARKETS REPORT KUWAIT: European sovereign debt crisis continues to dominate the headlines and currencies continue to slide during the first trading week despite the French auction results and the better German manufacturing data, which were received positively. Indeed, concerns over the euro-zone banking system in multiple countries have weighed on sentiment, and the news flow over the past few days has put the euro-zone’s governance, financial and fiscal problems back to the fore of investors’ attention. Nevertheless, January may prove harder for investors especially with ratings risk still looming in the background for all euro-zone countries and large bond issuance scheduled for early February. Data wise, retail sales in Germany disappointed sharply to the downside, along with downward revisions of past figures. On the other hand, the US data continue to impress and remains relatively stronger than its European counterparts with ADP employment much higher than expected and jobless claims settling below the 400k figure. The most recent commentary from the Fed minutes suggests that the housing market remains a source of concern and there are fresh calls for government action via the agencies for a comprehensive solution. In summary, after starting the year on a good note, markets suffered after reports, later denied, that Spain was seeking IMF and EU help for its banking system. Even though the Spanish national balance sheet appears to be robust, contingent liabilities from the banking sector and regions may weigh on sentiment, and could exercise more pressure on the euro. The euro started the week on a strong note reaching 1.3077, however the sale accelerated and the currency closed the week near the low of 1.2698. On the other hand, commodity currencies outperformed the euro although lost ground against the US dollar. Despite a rough end of 2011, gold gained over $60 dollars in the first week of trading on the upcoming Chinese holidays and oil reached a new eight month high of 103.74 to settle the week at $101.56.
US job data Companies in the US added 325k workers in December, the highest on records since 2001 according to ADP employer Services, while estimates were for an average increase of 178k. According to some analysts, the December ADP number may have reflected the so-called purge effect.
Workers, regardless of when they are dismissed or quit, sometimes remain on company records until December, when businesses update, or purge, their figures with ADP. On another front, the Department of Labor said jobless claims came at 372k in the week ended December 31. That was a decline of 15k from the previous week and an encouraging sign for many analysts, who claim the figure must get below 400k and stay there to indicate any real progress is being made in the US job market. ISM Manufacturing US manufacturing expanded in December at the fastest pace in 6 months. The ISM manufacturing index climbed to 53.9 from 52.7 in November, and has grown for 28 straight months. A reading above 42.5 generally indicates an expansion in the overall economy according to analysts. The New Orders Index increased 0.9% from November to 57.6%, reflecting the third consecutive month of growth after 3 months of contraction. Manufacturing is finishing out the year on a positive note, with new
orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012. Fed eyes inflation target According to a top Federal Reserve official, James Bullard, the Fed may get
an inflation target this year. He mentioned this week that the Fed may be close to making a collective statement about what level of unemployment is the natural rate, below which inflation pressures tend to rise. According to Bullard, starting at the end of the month, the Fed will begin making public its forecasts of future Fed interest rate policy, joining the projections it already makes available on growth, employment and inflation. An explicit numeric inflation objective would mark another step in Bernanke’s unprecedented campaign to open the Fed’s policy process to public view to in effort boost accountability and effectiveness. The Fed chairman has also introduced regular press conferences and will publish the central bank’s own forecasts for the benchmark lending rate this month. Europe, UK Germany registered an encouraging unemployment report, which showed that the German unemployment rate retreated to 6.8% from the previous 6.9%. The drop in unemployment was
driven by the drop in the number of people seeking jobs, where unemployment dropped further in December by 22k jobs from the previous drop of 23k jobs, beating estimates of 10k drop. Over 41 million people in Germany were employed in 2011, a record high since the country’s unification in 1990, according to figures published Monday
by the Federal Statistics Office. Eurozone PMI rose slightly in December to 46.9 from November’s 46.4, but marked its fifth month below the 50 mark that divides growth from contraction. Despite the rate of decline easing slightly in December, production appears to have been collapsing across the Euro area at a quarterly rate of approximately 1.5% in the final quarter of 2011. The new orders component of the December PMI survey also picked up slightly, to 43.5 in December from 42.4 the previous month, but remained weak. Spanish banks face as much as 50 billion Euros of additional provisions as the government wants to minimize the cost to taxpayers of overhauling the system, Economy Minister Luis de Guindos told newspapers. Most banks can provide the provisions from their earnings and it could be done over several years, de Guindos said. Lenders already made provisions of 105 billion Euros, equivalent to 10% of Spanish Gross Domestic Product, in the three years through June 2011, according to the Bank of Spain. The Spanish government said it will
launch a new plan to crack down on tax fraud as part of its effort to slash the budget deficit. A government spokesperson said the government would recover Euro 8.17 billion a year in undeclared taxes by beefing up workplace inspections and limiting cash payments for certain transactions. UK Services PMI rose to 54.0 in December from 52.1 in November to hit a fivemonth high. A reading of more than 50 indicates growth in activity. Economists had forecast a reading of 51.6. Asia Analysts observed that iron ore and coal exports, Australia’s two main exports, fell sharply. This provides the first tangible evidence that softening external conditions are beginning to have a negative impact on the domestic economy. Australia’s trade surplus unexpectedly narrowed in November missing economists’ estimates. The global slowdown and the decelerating Chinese growth are pushing the reserve Bank of Australia to cut its interest rate twice in a row to avoid a hard landing in the Australian economy. China’s PMI surprisingly rebounded in December on a boost from holiday orders, strengthening hopes that the slowdown in the world’s second-largest economy may be stabilizing. The index rose 1.3 points in December to 50.3 from 49 in November while analysts had predicted a reading of 49 on average. Concerns have been growing about China’s economy in recent months, especially over its factory output, weaker demand from the US and Europe. The Chinese government has attempted to boost domestic consumption this year in order to diversify and change China’s dependence on the western world consumption. In parallel, The People’s Bank of China cut the required reserve ratio for the first time in 33-months at the end of November by 50 basis points from a record high of 21.5%. Kuwait Kuwaiti dinar at 0.27920 The USDKWD opened at 0.27920 yesterday morning.
China local government debt threatens economy It’s a different picture outside capital
TOKYO: Former President and Chief Executive of Olympus Corp Michael Woodford speaks during a press conference at the National Press Club of Japan in Tokyo. — AP
Olympus mulls suing executives TOKYO: Scandal-hit Olympus said yesterday it was considering lodging law suits against current and former executives for damages caused by their decision to hide massive investment losses. The statement came after the firm’s inhouse panel investigated the responsibility of its board members in the scandal that rocked the 92-year-old camera maker and undermined public trust in Japanese corporate governance. “Upon receiving the report (on Saturday), we are currently discussing filing law suits against the current and former board members,” the company said in the brief announcement. The company said it would disclose the report and discuss its plans tomorrow, after a national holiday today. The combined damage claims could total hundreds of millions of dollars against more than 10 Olympus officers, the Nikkei said before the company issued the statement. The cases will focus on three former executives who allegedly played major roles in the scandal, ex-president Tsuyoshi Kikukawa, former vice president Hisashi Mori and auditor Hideo Yamada, the business daily said. Current president Shuichi Takayama will step down this month after the panel named him among those responsible for the scandal, Kyodo News and the Mainichi Shimbun said. Kyodo said the panel recommended
Olympus seek damages of more than 90 billion yen ($1.17 billion). The panel of three lawyers was tasked to investigate the exact responsibility of the Olympus board members in the scandal. The group was set up after a separate committee of former judges and outside experts, commissioned by the company, condemned Olympus’ top management as “rotten”. The Nikkei said a court case against Takayama was a possibility but said his early resignation could damage the company’s ongoing efforts to rebuild itself, including a planned capital increase. Kyodo said Olympus was likely to pick Takayama’s successor from among three board members the panel thinks were not responsible for concealing the losses. Olympus has admitted that a small group of top executives hid at least 134.9 billion yen ($1.75 billion) in losses from bad investments in the 1990s. The scandal came to light after its first foreign president Michael Woodford exposed the matter last year by talking to the international media and authorities, as Olympus’ old guard quickly sacked him from the top post. Despite months of campaigning to clean up the Olympus board, Woodford has given up his efforts to return to and lead the company due to lack of support from major Japanese institutional shareholders. — AFP
BEIJING: Local governments across China have borrowed billions of dollars to build bridges, apartments and shopping malls, leaving many insolvent and endangering the country’s financial system, analysts say. While the central government in Beijing is in good financial shape-it has a relatively small budget deficit, a huge trade surplus and the world’s largest foreign exchange reservesit is a different picture outside the capital. Local governments had borrowed 10.7 trillion yuan ($1.7 trillion) — 27 percent of GDPby late 2010, according to official data, though ratings agency Moody’s believes the figure is underestimated by 3.5 trillion yuan. Several provinces have since published reports showing their debt-to-GDP ratio was higher than the national figure. Moody’s believes that between eight and 10 percent of loans made by Chinese banks will never be recouped. “Debt across the board is rising very quickly,” weakening the banking system, said Michael Pettis, a specialist in Chinese financial markets at Peking University. “But any attempts to slow its growth results in a rapid reduction of investment and (economic) growth.” China’s total public debt-including the central and local governments-stands at 68 percent of GDP, well below Italy’s ratio of 120 percent or Japan’s which stands at more than 200 percent. But when it comes to local authorities the key concern is repayment. To meet their commitments local governments need to generate income from land sales, which is fuelling unrest in the world’s second largest economy as residents increasingly complain that land is being unlawfully seized. Such corruption allegations have culminated in protests, such as the one in Wukan in the southern province of Guangdong last month, where villagers staged a revolt against authorities they said had been stealing their land for years. Another source of income is from infrastructure projects, many of which are not
profitable or legal. Investment in highways, shopping malls and apartment buildings has been a key driver of the economy in recent years, especially since the 2008 global crisis when Beijing ordered banks to open the credit valves to spur activity. “Over the past couple of years, more than half of Chinese GDP has been generated by investment in fixed assets” such as factories and roads, said Patrick Chovanec, an economics professor at Beijing’s
used, including illegally diverted to property and the capital markets, and “fake” investments, the National Audit Office said last week. Ultimately if the loans cannot be repaid, the banks will have to be bailed out by Beijing, meaning the central bank will have to print money, which will in turn create inflation-already a major headache for policymakers. A recent downturn in China’s housing market will also weigh on the finances of
BEIJING: A hawker sells scorpions, star fish, sea horses and silkworm cocoons for adventurous customers to eat at a market stall in Beijing yesterday. China’s retail sales rose an estimated 17 percent year-on-year to 18 trillion yuan ($2.86 trillion) in 2011 as the government sought to boost domestic consumption. — AFP Tsinghua University. There are “things that make economic sense but are not commercially viable” such as roads or hospitals which should have been funded by taxpayer money, he said. An audit of local government debt in 2010 found that 530.9 billion yuan has been mis-
cities and provinces that had planned to pay off debt by selling land at high prices. With apartment prices beginning to fall, development plots are struggling to find buyers: in 2011, more than 900 sites offered to developers went unsold, compared with only 280 in 2010, the Beijing News said on Friday. — AFP
China bank lending higher in December BEIJING: Chinese banks ramped up lending at the end of 2011, official data showed yesterday, after Beijing relaxed credit restrictions and ordered banks to boost support for small businesses. China’s state-owned lenders issued 640.5 billion yuan ($101.5 billion) in new loans in December, compared with 562.2 billion yuan in November, the People’s Bank of China said in a statement. The late surge in lending takes the total value of new loans handed out last year to 7.47 tril-
lion yuan, the central bank said. The full-year figure was below the 7.95 trillion yuan in 2010 as Beijing hiked interest rates and increased the amount of money banks must keep in reserve as it battled to rein in inflation and soaring property prices. The broadest measure of money supply, M2, rose 13.6 percent yearon-year in December, accelerating from 12.7 percent in November. The value of new loans beat analysts’ expectations for 580 bil-
lion yuan, according to a Dow Jones Newswires forecast, and came after policymakers in November cut the amount of money banks must keep in reserve. Authorities have also ordered banks to boost lending to small businesses which have been forced to borrow money at very high interest rates from informal lenders after being snubbed by major banks. Many are now facing bankruptcy as they struggle to cope with rising wages, inflation and
high commodity prices even as demand for their products in China and overseas weakens. Authorities are expected to further relax restrictions on lending in the coming months to prevent a painful hard landing in the world’s second largest economy. There is mounting evidence that the Asian powerhouse is losing steam as demand for its exports in Europe and the United States deteriorates, and proper t y prices and sales fall across the country. — AFP