Capital Flight: An Economic Indicator

If the locals are getting out, it is probably not a good idea for foreigners to get in. Capital flight, like bad debts, is also one of the principal indications of the end of a credit bubble

At first hunters rarely actually spot their quarry. They usually track them following various other signs, like disturbed underbrush or the animal’s spoor. To determine the health and safety of any given market investors have literally hundreds of economic indicators. Part of the problem with these statistics is that they are usually compiled by some branch of the government. Their accuracy varies widely from country to country. Then, interpreting these statistics can be a challenge. Different economists and analysts can read totally divergent meanings into the same numbers.
Perhaps a better alternative would be to consult local investors. Wealthy people from any given country usually have an excellent pulse on the local economy. Either they actually run businesses or they have connections. In either case they have specific relevant information that will never be available to foreign investors. Much of this information will never be known, because the locals have absolutely no wish to make their activities known to the authorities. But they do leave tracks.
One of the most interesting indications has to do with capital flight. If the locals are getting out, it is probably not a good idea for foreigners to get in. Capital flight, like bad debts, is also one of the principal indications of the end of a credit bubble.
Sometimes the signs of capital flight are quite predictable and obvious. With the default of Greek sovereign debt and its membership in the Euro probably only a matter of time, it is hardly a surprise that money is flowing out of that country to safer havens. According to the most recent statistics, Greek banks have seen deposit outflows of about 65 billion euro, or about one-third of the total, over the past two years.
Nor would it be a surprise that certain unstable Latin American countries are haemorrhaging money. In Argentina capital flight is estimated to be at about $3 billion in recent months. This has led the government to institute ever more stringent controls. Citizens must now justify every purchase of foreign currency.
Hugo Chavez’s policies in Venezuela have nationalized hundreds of companies, which has slashed non oil exports. The capital flight is estimated at $28 billion a month. The cost of this capital flight together with $11 billion in debt service and $100 billion worth of imports has made it difficult for Venezuela to service its debts unless oil remains high.
One would think that with the price of oil relatively high—Russia—a BRIC country might be a good place to invest. Not so according to the flight capital statistics. Capital flight in 2011 totalled $84 billion, two-and-a-half times the money that left in 2010. Even with the high price of oil, the rouble has weakened by 5%. According to one of the local billionaires, Mikhail Fridman, Russia’s poor investment climate and lack of protection of investor rights has made the developed world, specifically the US, a much better place to invest.
Brazil, until recently was considered a good place to invest money, but things have changed. Brazilians and other Latin America nationals have helped put a floor under the high-end condo market in Miami. The price per square foot bottomed at $200 and thanks to flight capital it has risen to $300. The sellers in Miami are particularly pleased to see the foreign buyers, because 85% of the Brazilians pay in cash.
Earlier this week markets improved substantially because of what was considered positive numbers coming out of China. The Chinese GDP grew at 8.9%, which was widely interpreted as evidence that China was slowing gradually and that the Chinese authorities had engineered a soft landing for their booming economy. The gaming tables of Macau tell a different story.
Many wealthy Chinese cannot directly move money out of the country or change their yuan into another currency, so they use other methods. The success of the former Portuguese colony of Macau is built not on the love of gambling, but upon the flood of nervous money leaving China. Macau is already four times bigger than its closest competitor, Las Vegas. More than 13.2 million mainlanders visited Macau in the first ten months of 2011. Awaiting them were many different ways to launder money, according to a local professor, “more than we can think of”.
It is not only gambling. In November Chinese purchases of gold increased by 20%. Analysts suggested the increase was due to the slight fall in price or that jewellery consumption had risen in expectation of gifts for the New Year celebrations. But the real explanation might have been protection from a failing economy.
In each of these markets it is important to consider the economic indicators, but the best one might simply be to see how the locals vote with their feet.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])


PAC slams Air India for acquiring planes through debt

The PAC grilling was based on a recent CAG report on civil aviation which had said that the decision to acquire 111 planes by Air India through debt was “a recipe for disaster” and should have raised an alarm in the government

New Delhi: Questioning the timing of merger and fleet acquisition when Air India was under heavy debt, the Parliament’s Public Accounts Committee (PAC) has asked the airline to submit all documents related to the issue within a week, reports PTI.

Top officials of Air India and erstwhile Indian Airlines faced some tough questioning by the Parliamentary panel which also slammed them over complaints of poor passenger services.

The grilling was based on a recent CAG report on civil aviation which had said that the decision to acquire 111 planes by Air India through debt was “a recipe for disaster” and should have raised an alarm in the government.

Air India officials told the PAC that it was their idea to merge the two carriers as the ‘open sky’ policy had increased competition in the aviation sector.

They also said that since their fleet at that time was ageing, they had thought of acquiring new planes and believed that merger will provide them greater strength to compete in the new environment.

“They have been asked to submit all documents on merger and fleet acquisition from the conceptual stage onwards to the committee,” a member said.

The officials were grilled on their plan to acquire 50 aircraft which quickly got the government's nod recently while their earlier plan to buy 18 additional planes could not materialise even after six years.

The officials are learnt to have told the committee that the proposal to purchase 18 aircraft was a short-term move whereas the proposal to induct 50 planes was a long-term plan which had the approval of the board.

“They said the file went from bottom to top and got cleared,” a committee member said quoting the officials.

Air India officials refuted suggestions that they had shut down profitable routes and assured the Committee to provide it with details to support their claim.

Officials of the erstwhile Indian Airlines were grilled by the PAC members for their ‘poor’ passenger service.

The AI officials included KM Unni, S Venkat and FJ Vaz dealing with airframe, finance and commercial operations respectively besides representatives of erstwhile IA—Vipin Sharma, Deepak Brara and V Bhandari.

In its latest report tabled in Parliament in September, the public audit body also called the merger of two erstwhile state-run carriers—Air India and Indian Airlines—‘ill-timed’ and said that “the financial case for the merger was not adequately validated prior to the merger”.

The report also dealt with several aspects of the ailing national carrier’s losses, fleet acquisition, merger, huge debt burden, delay in joining the global airline grouping Star Alliance and its financial and operational performance.




5 years ago

The PAC and the CAG are chained and toothless guard dogs that can bark as much as they please, but can't deter the thieves, who know the helplessness of these constitutional bodies very well, through long experience. In fact, a huge amount of corruption and reckless procurement in the government sector will be checked, the day these institutions are given teeth. All politicians know this, but are frightened of the consequences of really empowering the CAG and PAC, instead of treating them as the anguished conscience of the nation, that may be ritually heard but never heeded in practice.

RBI likely to maintain status quo in its policy review

According to Indian Overseas Bank chairman and managing director M Narendra, the central bank is likely to keep policy rates unchanged for a while

New Delhi: Overlooking the demand of India Inc to lower interest rates, the Reserve Bank of India (RBI) in its policy review may refrain from cutting policy rate as the inflation of manufactured goods is still high, reports PTI.

“I don't see moderation in the interest rate (in the coming policy). CRR (Cash Reserve Ratio) cut I am not hopeful,” State Bank of India (SBI) chairman Pratip Chaudhuri said.

“I think there would be strong measures to indicate that RBI wants inflation to be stamped out totally,” he said.

Headline inflation fell to a two-year low of 7.47% in December, 2011. Food inflation entered the negative zone in mid-December and stood at (-)0.42% as of 7th January, as per the latest numbers released by the government.

The RBI will unveil its third quarterly review of monetary policy on 24th January.

Industry has been demanding cut in interest rate to prop up the economy. In the second quarter (July-September) of the current fiscal, the economy recorded a growth of 6.9%, the lowest level in over two years.

In its last review in December, the RBI pressed the pause button on its monetary tightening measures and said it might go for rate cuts in the future depending on moderation in inflation.

“From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” RBI governor Subbarao had said in the last policy review.

According to Indian Overseas Bank chairman and managing director M Narendra, the central bank is likely to keep policy rates unchanged for a while.

There is a little possibility of changing the CRR in the coming policy review, Mr Narendra added.

Presently, CRR is 6%. CRR is that portion of deposits which commercial banks keep with the central bank.

The central bank had hiked interest rates by 375 basis points between March 2010 and October 2011 to deal with the persistently high inflation, including rising prices of food items.

Canara Bank chairman and managing director S Raman said there is some possibility of the RBI slashing CRR by 25 basis points to infuse liquidity in the light of moderation in industrial activity.

The government has already revised downwards the gross domestic product (GDP) growth forecast for the current fiscal. GDP is expected to clock a growth rate of about 7% against 9% projected earlier.

Kotak Mahindra Bank managing director Uday Kotak said: “Domestic liquidity is tight as you can see at numbers ... at the most the market can hope something on CRR to correct the domestic liquidity situation”.

Banks are drawing over Rs1,00,000 crore from the repo window everyday even though RBI is carrying on Open Market Operation (OMO) on weekly basis to ease liquidity pressure.




5 years ago

The RBI has badly misjudged the causes of inflation and hence has been administering the wrong remedy of higher interest rates. This has resulted in a completely needless slowdown of the economy as well as govt tax revenues, without checking the inflation at all. RBI should immediately reduce the interest rates and give a badly needed push to the economy it has wrongly, even unjustly held back.
Causes of inflation are to be found not in the growth of industry or housing or agriculture, all of which have been badly hit by the high interest rates and consequential increase in cost of production, but more likely in
1. NREGA which has suddenly pumped in high liquidity into the rural areas.
2. Sixth wage bill and related frequent inflation adjusted hikes for government employees.
3. High cost of oil and impact on downstream products and transportation costs.
RBI has hit out blindly at the wrong target and has ended up scoring self goals. It must rectify its mistake without delay and reduce the rate.

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