PUBLISHED | SEPTEMBER 24, 2012
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What's the state of global finance?
The eurozone is still struggling and Africa is suffering with high food prices but the number of tourists coming to Australia is growing and the credit rating of some Asian countries is rising, according to EFIC's latest newsletter. Looking back over the past month, EFIC's World Risk Developments newsletter continues its update on the eurozone, Australia continues to attract millions of Chinese tourists, South Africa continues to experience economic turmoil, food price hikes impact African and Middle Eastern countries, Turkey's exports to core European countries dramatically fall and Vietnam's bad debt in the banking system hits an all time high. Eurozone The recent unveiling of the Outright Monetary Transaction (OMT) program by the European Central Bank (ECB) was highly welcomed by European Markets, however Roger Donnelly from EFIC questions whether the ECB’s introduction of the OMTs will actually ease Europe’s debt crisis. According to Donnelly, he explains the program intends to allow the ECB to buy sovereign bonds off countries with the purpose to level the playing field between the banks and economies that want to reform. Since the introduction of the OMT, Spanish and Italian bonds have risen, driving optimism levels up that the "program would seem to be a big step towards resolving the eurozone crisis," said Donnelly, however "the transactions are an important step, but won't by themselves fix the eurozone," he added. Donnelly warns there is a catch and difficulty remains if weak eurozone economies cannot "boost competitiveness and growth, and promote rebalancing." "The ECB is saying that it can act as a lender of last resort...[but] there will be strings attached that governments might baulk at. Or if a government backslides in meeting its conditions, the ECB will withdraw its support. So governments will remain prone to debt rollover difficulties and to the temptation to default on their debt, even to leave the euro area." Donnelly noted "the OMTs will do nothing to fix the underlying imbalances in the euro area - in particular the big external imbalance that sees core countries "ship too much and shop too little" and Peripheral countries "shop too much and ship too little." He recommends "area-wide demand needs to be rebalanced, and that is a matter for other economic policy instruments beyond monetary policy." South Africa According to Donnelly, South Africa’s investment and regulatory climate needs improvement, as deteriorated ore grades, lack of labour, poor infrastructure, and continued unrest in its mining industry "highlights the country’s broader economic problems." Its recent deadly protests have affected production where 44 percent of Australian mining equipment and technology services companies have operations in South Africa. Australia currently sponsors 134 mining projects in South Africa. Africa and the Middle-East Donnelly reported that the Food and Agricultural Organization’s food index has noted "high food prices are causing hardship in Africa and the Middle East," which he predicts may possibly "lead to political instability." He believes the United State’s drought has also contributed to the recent price hikes in corn and soyabean produce. The summer heatwave has reportedly "destroyed 45 percent of the corn and 35 percent of the soybean crop," contributing to the 2008, 2010-11 and 2012 price hikes. Turkey Turkey's automotive products, textiles and clothing exports to core European countries have seen a dramatic fall notes Donnelly, where he asserts, is heavily impacted by the euro-zone crisis, resulting a slowdown in the country's economy." However, Donnelly noted the slowdown was welcome as "expansion was built on shaky foundations, notably surging domestic demand," but global rating agency Fitch Ratings has upgraded its outlook on Turkey's economic climate suggesting a "soft landing" is predicted, which will see Turkey making solid progress. Vietnam Donnelly has highlighted Vietnam's desperate need to help restore its banking sector that is struggling under large stock of bad debt. Weakened assest prices, tightening of credit conditions due years of rapid credit expansion has dramatically affected the banking system noted Donnelly. The frality of Vietnam's financial system was further highlighted by the arrest of the county's banking tycoon Nguyen Duc Kien. Consolidating the sector, writing off bad debts and boosting capital levels is required if Vietnam wants to regain its vigour, Donnelly said, recommending the country to encourage private capital into the banking sector or fund private capital by borrowing due to its low external debt. However, Donnelly noted Vietnam has no intention to request International Monetary Funding (IMF) aid if the country has not exhausted all recovery options. Korea The Korean financial market has seen the country's sovereign credit rating boosted to Aa3 from A1 last month, Donnelly reported. This upgrade, Donnelly asserts to Korea's "strong fiscal position and the declining reliance of banks on offshore funding." However, Donnelly noted an economic slowdown is underway as industrial production and exports have fallen by five percent over the past year and as Australia's third largest export market - primarily iron ore, coal, fuels, and agricultural products - he predicted Australia will experience implications. Donnelly reported an alarming increase in lending of non-strict loans by the non-bank sectors to low income earners, which he notes is a concern for household debt, but he believes "the overall financial position of households remains relatively strong, with debt to financial assets just under 50 percent and debt-to-liquid assets just over 100 percent." Australia As China's middle-class continues to grow, so too is Australia's inbound tourism. Donnelly says Chinese visitors to Australia are growing in numbers, double to that of Japan visitors. He noted from January 2009, Australia has seen an increase of more than 60 percent in Chinese visitors despite the high Australian dollar. According to the latest figures released by the World Tourism Organization, Chinese tourists have spent US$73 billion on international tourism.