By David Jessop

The Doha Round at the World Trade Organisation (WTO) is deadlocked. Although officials and Ambassadors continue behind the scenes to negotiate building blocks for an eventual agreement, there is sense that the political will required to re-energise the process does not exist.

So much so that in Geneva there is a view that so radically has the international trade landscape changed in the nine years since the process was launched,  that  the shape of any final deal will now require many if not all states to reconsider the effect of the offers they were prepared to make previously.

Since the Round began in Doha in 2001 world trading patterns have changed. The economies of advanced developing nations have been growing rapidly while in contrast those of the developed world that came close to systemic collapse in 2008,have since only slowly come out of recession.

Across this period China, India and Brazil have continued to industrialise, grow and trade. They have become members of the G20 and have penetrated developed and developing markets alike. As a consequence many of the eventual trade-offs envisaged by the US, Europe and others to achieve a trade round may no longer be sound, requiring it is suggested the developed world to examine the political implications of this structural change in the global balance of trade and economic power before proceeding; and for Washington and Beijing in particular to first consider when and how it might be possible to move forward again.

The result is that the focus in trade liberalisation is now shifting rapidly to bi-lateral and bi-regional deals such as those that Europe has recently struck with Central America and with Andean nations, or that which the Caribbean is negotiating with Canada. These are likely to multiply, leaving some trade officials to wonder whether a whole new negotiating arena may have to emerge to reconcile such arrangements before any global deal can take place.

At the same time it also seems that many developing nations that were previously comfortable with the general thrust of the Round, if not with its fine detail, may also be having concerns about the rise of China, India and Brazil and the impact they as opposed to the developed world will have as their tariffs are reduced. All of which leads to a privately held view in some parts of the WTO that the only way forwards multilaterally may be through limiting ambition and going for less than a full round.

As for the Caribbean, its position, like that of many developing nations, is to wait and see.

On the whole, the Caribbean’s experience of the way the WTO system works has not been that positive.

The WTO process has been bruising. Other nations, notably in Latin America, have sought to challenge the region’s established preferential arrangements with Europe in respect of bananas, sugar, rum rice and other products; and Caribbean Ministers have until relatively recently found themselves effectively excluded from the key political decisions which  are dominated by OECD nations and more recently the emerging economies of Brazil, China and India.

The one important victory that the region has been able to achieve was the WTO’s decision in 2004 to rule in favour of Antigua and against the United States in a dispute over the provision of internet gaming services. In outline this involved the WTO accepting on appeal Antigua’s claim that the US had damaged its interests by adopting measures which affected its cross-border supply of gambling and betting services. Following a ruling in early 2007 that the US had done nothing to abide by its judgement, Antigua filed a claim at the WTO for US$3.4billion in trade sanctions linked to a request for authorization for the island to ignore US patent and copyright laws.

However, since that time there has been no final resolution of the issue. Speaking recently to the Caribbean media, Antigua’s Prime Minister, Baldwin Spencer, expressed  serious concerns about Washington’s non-compliance, and indicated that it was his intentions that the island would impose sanctions on the US and that he would take the matter to Caricom Heads of Government.

However, Caribbean Heads while expressing ‘strong solidarity’ and concern about the negative economic impact non-resolution was having, coupled this with language that seemingly implied that the region was concerned that any such response might bring the region into conflict with the US Congress in relation to the ten-year extension of the Caribbean Basin Trade Partnership Act to 2020 or the recently launched Caribbean Basin Security Initiative.

What such sanctions might consist of or how they could be imposed without hurting Antigua economically is unclear, but the failure of the WTO process to be able to bring the issue to a conclusion with the US has consequences that go far beyond Antigua’s heated internal politics.

Bringing the case to a successful end is important not just for Antigua but for all small states. If the US requires adherence to a rules based system but then fails to meet its commitments at the WTO it brings the whole concept into disrepute. Worse it means that the Caribbean and other nations are participating in WTO proceedings on a false premise.

If, as seems to be happening, the dynamics of world trade have changed, small states have even more need of proof that that the body’s rules have teeth. While a less ambitious round may be a way forwards in the interim, small states require assurances that cases of the kind Antigua has brought, or that others in the region may be considering, result not in delay but in a just outcome.

David Jessop is the Director of the Caribbean Council and can be contacted at david.jessop@caribbean-council.org

Previous columns can be found at www.caribbean-council.org

July 9^th, 2010

(Courtesy CMMB vangie.bhagoo@mycmmb.com)

Over the past two years, the world witnessed a truly Keynesian approach to the economic crisis, as government expenditure ballooned in a valiant effort to shore up economic activity and to prevent a protracted global recession.

Arguably, expansionary fiscal policy was the primary reason for the relatively quick rebound in economic growth, since it seemed as though the crisis was unresponsive to the aggressive easing of monetary policy which was actually the first line of defense for several countries. One of the major reasons for that was waning consumer and business confidence, so that  even though interest rates fell to record low levels, spending and investments were held back, simply because expectations dictated that the economic situation would get worse. For this reason, governments throughout the world were forced to boost expenditure to help anchor short term expectations and improve sentiment.

Consumer spending in the US accounts for approximately 70% of that economy, and with about 8.5 million people losing their jobs since the crisis began, the Obama administration quickly implemented policies to stem further job losses and to create new jobs. China and Japan as well as some of the European countries and the larger emerging markets also followed this approach, spending billions of dollars to resuscitate their fragile economies. Even though there may be some long term consequences of these policies in terms of higher debt and inflationary pressures, the expansionary fiscal policies seem to have taken some (short term) effect as we continue to see gradual signs of recovery in those countries. In contrast to the outlook for the global economy, the prospect for the Caribbean region remains subdued.

The Caribbean region has definitely not been spared from the global economic downturn, with all of the sample countries estimated to have recorded economic contractions in 2009. Antigua and Barbuda is expected to haveshrunk the most, given the impact of the Stanford failure upon various facets of that economy. While the downturn is not assevere as in 2009, 2010 is expected to remain difficult for the Caribbean. With the exception of Trinidad & Tobago, every bcountry is likely to further contract/ remain stagnant and this compares to a relatively strong rebound in the US, expected to record growth in excess of 2% in 2010. As mentioned previously, this difference in prospects can partly be attributed to the expansionary fiscal policy adopted by the US over the last two years.

 Even though many have called for the Caribbean region to pursue fiscal stimulus to offset the contraction in private demand, most of these countries are unable to actively implement such counter-cyclical fiscal policies. Indeed, the region has historically faced inherent limitations in terms of the structure of their economies as well as their already constrained fiscal flexibility.

The average level of public sector debt to GDP is in excess of 90% in the Caribbean, with some of the countries exceeding 100% and some being the world’s most indebted emerging markets. The public sector debt in St Kitts and Nevis is currently equivalent to just about 180% of the country’s GDP, while Jamaica is around 120% of GDP.

Even though the debt ratio is at a comfortable level in Trinidad and Tobago, the issue lies in the country’s reliance onenergy prices and demand internationally. Indeed, the collapse in natural gas and oil prices would have impacted directly upon public finances and the government’s ability to provide fiscal stimulus. In fact, energy sector revenue accounts for more than 50% of government revenue. Further to this, the collapse of CL Financial would have put extra pressure on the fiscal accounts, as the government led the bailout of the largest conglomerate in the country. The government will have a deficit of around 5% of GDP in the fiscal year 2010, which it will need to finance. On the positive side though, with an investment grade credit rating, the government has the ability to tap the domestic and international capital market to finance this deficit and because the current debt level is around 40% of GDP, increasing this moderately would not significantly damage the country’s debt profile. This puts Trinidad and Tobago in a better position than the rest of its Caribbean counterparts.

The other Caribbean countries have been traditionally plagued by high indebtedness and very weak and narrow economies. In this context, financing a growing fiscal deficit becomes increasingly challenging in an environment where the regional governments’ revenue base is quite narrow as well. In addition, interest payments usually account for asubstantial chunk of government revenue for many Caribbean countries, particularly Jamaica when in 2009, interest payments accounted for 63% of general government revenue, which significantly inhibits fiscal flexibility. Further to this, with the exception of Barbados (who is also rated investment grade); the other Caribbean countries are either rated as junk, (also called speculative grade) or not rated at all. This poses another major challenge in terms of accessing theinternational capital markets to raise funds to fill the shortfalls in the fiscal accounts.

Despite these challenges and limited options to finance fiscal deficits in the Caribbean, many governments have been able to come to market successfully, and issue mainly domestic debt, which in my opinion is a better long run solution. While this increases the debt load, the proportion of external debt will not rise, which reduces vulnerabilities in terms of interest rate and foreign exchange fluctuations. Additionally, with interest rates at relatively low levels, governments were able to borrow at a cheaper cost to them. Demand is still high for some of the stronger government paper, like in the case of Trinidad and Tobago, where many of the bonds were issued at a premium due to excessive demand.

As the dust settles in the global economy, it is clear that the Caribbean region will stumble a bit longer, largely as a result of the region’s inability to respond to the same extent as the rest of the world. Fiscal deficits are already high in the region, and there is little that can be done to improve the situation. These deficits can either be reduced through increasing the revenue base, or reducing expenditure. In a time when expansionary fiscal policy may be necessary to bolster economic activity alongside limited options in terms of enhancing the revenue base, higher fiscal deficits and increased financing requirements for the region is a real possibility. Governments however must be prudent in its conduct of fiscal policy so that the region’s legacy of debt should not be aggravated further, as this can threaten to undermine the economic stability of the Caribbean region.

 

 

 

 

By Diana Ramroop (Courtesy Caribbean Money Market Brokers CMMB)

It’s that time of the year again, when the Christmas tree is up, our homes are decorated, the malls are filled with lavish

Christmas decorations, radio stations fill the air with happy and joyous Christmas songs and we are probably all bus y making

preparations for the holidays. It is at this time of the year, we tend to appreciate our families more than usual and we take

stock of how our year was spent and we think about the resolutions that we would like to make for the upcoming year. For

some of us, this year may have brought us happiness, sorrow, disappointment, maybe some transition in our lives or it may

have been uneventful, just another year gone by.

The year 2009, started off in turmoil as the manufacturing sector globally had declined. According to JP Morgan’s global

manufacturing index, there was a ‘severe’ 17% annualized contraction in global activity. Manufacturers around the world had

already begun to cut job in an effort to conserve cash. Steel companies like ArcelorMittal, US Steel Corp and AK Steel were

working at 43% capacity. The S&P 500 Index was down about 34.5% for 2008. The Volatility Index (VIX) had increased from

26.2 at the start of January 2008 to 40 as at the end of 2008. Globally, central banks were desperately slashing interest rates

and using stimulus packages to prevent their economies from sliding into further recession. Policy interest rates in the US

were slashed from 3% at the start of the 2008 to a mere 0.25% by the end of 2008 while in Europe rates were cut from 4.5%

to 1% by the start of 2009. The outlook for 2009 looked grim. Let us recollect some of the major events that affected the

international market for 2009 thus far:

Stimulus packages and government bailouts

TARP

The TARP (Troubled Asset Relief Programme) was initiated by the US government in October 2008 in order to loan

emergency funds to banks with ‘troubled assets’, such as, loans on real estate and other mortgage-related assets and

securities based on these assets, saw financial institutions receiving about $700 billion in such funds. For 2009, we would

have seen companies such as Citibank and Bank of America each receiving an additional $20 billion in TARP funding

bringing their total receipt to $45 billion each. Due to restrictions placed on executives’ compensation, equity purchase

option and compliance policies, companies such as Bank of America, JP Morgan Chase, and American Express quickly

sought to repay their TARP funds.

Cash for Clunkers

This was ran by the US government between July 01 2009 to 26 August 2009 at a cost of $3 billion dollars. The aim of this

programme was to get US consumers to purchase more fuel efficient cars while trading in less fuel efficient ones, thereby

promoting auto sales and ultimately stimulating the economy. This programmed led to a 19.4% increase in sales for Toyota,

17.6% for General Motors, 14.4% for Ford, 13% for Honda and 8.7% for Honda. This initiative was not very successful as its

costs vastly outweighed the benefits by $1.4billion and it was the Japanese and Korean manufacturers that increased their

market share at the expense of US manufacturers.

Fall of the US Dollar?

To fund these stimulus packages, the US government, through the Federal Reserve, has been increasing its money supply.

It is estimated that the money supply (notes, coins and central bank reserves less dollars held abroad) grew by 14.3% from

Sept. 08 to Sept. 09. At the same time, the debt-to-GDP level has risen from 51% in 1988 to currently about 73.6% of GDP.

It is projected that the debt level will continue to increase to about $13 trillion by 2013.As result of this; there have been

concerns about the ability of the US to fulfill its interest payment obligations. This has been causing pressure on the US dollar

as investors are seeking alternative investments like gold, copper or a basket of currencies as opposed to just one main

currency. This year we would have seen that US dollar’s value which can be measured by Bloomberg’s Dollar Bullish

Sentiment Index had fallen to 30.8 as at 18 September 2009 from a high of 68.86 a year ago. The lowest level this index

reached was in March 2008 when it fell to 30.3. In stark contrast to the dollar, gold reached a record high of $1133/oz on 16

Nov. 2009 as investors sought a hedge against the dollar.

Healthcare Reform

In some quarters, the present healthcare system in the US was deemed inadequate, in that it failed to address the needs of

everyone and it was too costly to the average citizen, thereby excluding citizens from accessing this vital service. It was

estimated that healthcare spending accounts for about 17% of GDP and any reform of this sector would have a major impact

on the economy. To transform the health sector it would cost an already debt -laden US government about $1 trillion over a

decade. Proposals made thus far, places insurance mandates on employers and employers, sets prices and coverage,

establishes an option to be run or subsidized by the state, and to pay for all of this taxes would have to be increased. The

increase in taxes, which should take effect in 2011 and may range from 1% - 5.4%, depends on the income level of the

insured. These are substantial changes that would affect the type of insurance products purchased, kind of service provided

and the cost to companies and individuals. Subsequently, all of this would affect the earnings of companies in this sector.

This is why Fitch rating agency has a negative outlook for this sector in 2010.

As the year draws to a close, the US economy has shown small signs of recovery. Credit Suisse raised their GDP forecast

for this quarter to an annualized rate of 4.5% up from 3.5%. In addition to that, unemployment fell slightly by 0.2%, the trade

gap closed by 7.6% in October, export levels were up 2.6% and sales of US retailers climbed by 1.3% in November. We

would have also seen that the S&P 500 index is up about 33%, the VIX is down to 22.32. If these trends continue, it is our

expectation that 2010 would be a better year for investors.

TAX ALERT

On Wednesday, December 9, the UK government announced a one-off, 50 percent tax on discretionary bonuses awarded or paid by the financial services industry during the period December 9, 2009, to April 5, 2010. The draft legislative language is potentially subject to change and is unlikely to be voted on by Parliament before the first quarter of 2010. In all events, the UK government intends to have the legislation in place by the due date for the tax’s collection (August 31, 2010).

This tax is on the financial services entity and is not deductible for purposes of UK corporation tax (it would not appear to be an income tax for purposes of the US foreign tax credit); it is not an additional income tax on the recipient. Performance-based remuneration, whether paid in cash, benefits, or most equity-based compensation, in excess of 25,000 sterling generally is subject to the tax. The tax applies to performance-based remuneration awarded or paid to UK-resident employees, independent contractors, and non-UK residents who performs relevant financial service duties in the UK during the period April 6, 2009, to April 5, 2010. The tax does not reach non-variable pay that is not subject to performance conditions.

The tax will apply to UK-resident entities which are licensed by the Financial Services Authority (the FSA) and conduct “relevant regulated activities” including: (a) deposit-taking; (b) dealing in securities as principal or agent; (c) arranging deals in securities; (d) acting as custodian; and (e) retail mortgage lending. It will also reach UK-resident investment companies or financial trading companies which are affiliated with an FSA-regulated entity.

For non-UK resident businesses, the tax will apply to the UK branch of a non-UK bank, provided that the bank is authorized by the FSA and accepts deposits or “wholly or mainly” conducts relevant regulated activities through a UK permanent establishment. Also, the UK branch of a non-UK “relevant foreign financial trading company,” which includes a securities dealer, is subject to the tax. Non-UK entities engaged in insurance, sponsoring venture capital trusts or OEICs and friendly or building society services are exempt.

Complicated rules govern the treatment of a UK permanent establishment which is itself not FSA-licensed, but affiliated with an FSA-licensed person. While the language is not completely clear, it appears that sponsors of private equity and other alternative investment funds operating in the UK are exempt from this tax unless they are affiliated with a bank or other financial institution that is FSA-licensed.

For a non-UK resident financial services business, the questions to ask are:

1. Is your UK permanent establishment, parent entity, or other affiliate licensed by the FSA?

2. If so, do your activities wholly or mainly consist of “relevant regulated activities”?

The draft legislation anticipates many standard approaches to sidestepping its coverage. For example, neither delaying the payment of an award that has arisen contractually during the period, nor shifting the obligation to pay from a UK permanent establishment to the non-UK parent entity, will avoid this tax.

· 

The Dow Jones industrial average yesterday fell below 8,000, shedding 4 percent, its bleakest performance on any Inauguration Day since the index was started 124 years ago. Nasdaq and the Standard & Poor’s 500-stock index both plunged more than 5 percent.

Disillusioned investors fled financial companies as fresh evidence mounted that the industry’s problems are larger than previously understood, larger than the response so far mustered by the government and perhaps larger than the resources remaining in its rescue program.

The possibility of bank nationalizations, in which governments take direct control of financial institutions, is being debated in Britain and elsewhere, as some of the world’s biggest banks report surprisingly dire results. The industry’s plight, tightly intertwined with the ongoing recession, is among the great challenges confronting President Obama.

Problems have spread to companies that investors considered conservative and safe. Institutions including German giant Deutsche Bank, money managers State Street and Bank of New York Mellon, and even several members of the Federal Home Loan Banks system have revealed unexpected and significant problems, leaving almost no part of the financial industry untouched.

Losses at companies already tarred by the crisis also have been deeper than analysts expected. Regions Financial, a large southeastern bank, yesterday reported a fourth-quarter loss of $6.2 billion, greater than its total profits in the past five years. Citigroup said it lost $19 billion last year.

The Royal Bank of Scotland disclosed this week it may have lost $41 billion last year, leading the British government to announce a second bailout for the company that increases the government’s stake in one of Britain’s largest banks

The federal government’s promise to prevent the failure of large U.S. banks may be exacerbating their problems. As banks sink, financial analysts increasingly are warning that government intervention is inevitable and could come at the expense of shareholders, perhaps in the form of nationalization. This appears to be driving away investors and hastening the intervention. As with the government’s summer promise to save Fannie Mae and Freddie Mac, but only if necessary, the last resort has become the expected outcome.

Until banks can attract fresh capital from debt or equity investors, it will be difficult to stabilize and jump-start lending, said Binky Chadha, chief U.S. equity strategist at Deutsche Bank in New York. But the government’s patchwork approach to the bailout has would-be investors sitting on the sidelines, he said.

“In each episode of financial intervention, the rules have been a little different,” Chadha said. “Hopefully [the new administration] will lay out the rules, and it will be a lot clearer. In the meantime, the textbook model of wiping out the equity holders is clearly a concern, and should be a concern.”

The basic problem facing the financial industry, and the new administration, is that banks lack the money to cover their losses. The capital reserves that banks are required by regulators to maintain against losses have been badly eroded.

The banking industry has acknowledged losses of roughly $1 trillion since the start of the financial crisis. Goldman Sachs last week projected that this total could more than double. Nouriel Roubini, a professor at New York University’s Stern School of Business noted for his pessimism, said yesterday that losses could hit $3.6 trillion.

The Bush administration pumped almost $300 billion into U.S. banks, but the scale of investment is dwarfed by the still-emerging problem. The government’s actions stemmed the market’s panic in the fall, but it did not succeed in stabilizing the industry.

Investors now appear to be stampeding again. Shares of Wells Fargo have lost roughly half their value since the start of the year. Bank of America is down 64 percent. J.P. Morgan Chase is down 43 percent. Citigroup is down 58 percent. Those are the four largest U.S. banks.

Obama administration officials are considering several approaches focused on the troubled loans and other assets that are the source of the losses, including the creation of a government-owned “bad bank” that would buy troubled assets from financial firms, quarantine them and then sell them, generally at a substantial loss. The aim is to revitalize lending. Bad banks have been created by countries including Sweden, but the idea has never been tried on a comparable scale.

It is increasingly likely that any approach will require more than the roughly $320 billion remaining in the financial rescue program approved by Congress in the fall, several officials said.

The problems continue to grow.

A number of banks once considered healthy have been hobbled by the acquisitions of troubled institutions, often in deals urged by the U.S. and European governments. Investors are increasingly fearful of losses at Wells Fargo, which they viewed as the healthiest of large U.S. banks before it swallowed Wachovia. Bank of America needed more than $20 billion in additional government assistance in part to help it swallow the troubled investment bank Merrill Lynch.

Meanwhile, banks that specialize in managing money for large institutions have become the latest quiet corner of the financial industry infected by the crisis. Bank of New York Mellon reported yesterday it earned $28 million in the fourth quarter, less than a tenth of the amount Wall Street had expected.

State Street said that it had unrealized losses of about $9 billion as of the end of 2008, a massive figure that surprised analysts who previously regarded the company as relatively sheltered from the crisis. The company’s shares fell by 59 percent yesterday as several financial analysts said State Street could be forced to raise capital.

Problems in Europe also grew. The Irish parliament voted yesterday to complete the nationalization of Anglo Irish Bank, the country’s third-largest bank. It is the second round of government bailouts for the Irish banking industry.

The action in the markets underscored the need for Obama to set his sights on repairing the banking system before turning his attention to a broader economic stimulus package, said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods.

“What gets at the core economic issues of the day is fixing the financial system,” Gardner said. “This all started from a crisis in the financial system, and it’s going to be solved by fixing the financial system.”

An Extract from the Washington Post, Wednesday January 21, 2009

By Binyamin Appelbaum and Heather Landy

Washington Post Staff Writers