World
Drought: A natural disaster made worse

The economic impact of the drought will be more severe in emerging markets. With the global economy slowing, the bad harvests could not have come at a worse time. India has had trouble taming its inflation and now it will get worse

The world’s food supply is in danger. Droughts around the world have slashed harvest forecasts. This time the problem is especially severe in the United States. Two consecutive La Niñas, cooler than average water temperatures in the eastern equatorial Pacific, have pushed the polar jet stream to the north opening up a large sections of the agricultural rich Midwestern US to temperatures in excess of 37°C and little rain. It has been the warmest 12-month period in the continental US since record keeping began in 1895. The effect on crops has been a disaster.

It is the worst drought in 55 years. As of late July nearly two-thirds of the US is experiencing some precipitation deficit. As of this week, the American Agriculture Department (USDA) declared 1,369 counties in 31 states as disasters. The designation is important because it allows the local farmers to qualify for aid. This is the largest number in the history of the program. The USDA also reported that 45% of US corn fields were in ‘poor’ or “very poor” condition up from 38% a week before. While 35% of the soyabean crop was in ‘poor’ or “very poor” condition, up from 30% a week ago.

Of course, the markets have reacted. The price of corn has hit a record high at $339 per metric tonne, 6% above its previous high in March 2011. Soyabean is not far behind. It is now selling at $662 per metric tonne, 20% above its all-time high reached in June 2008.

But the drought is not just a problem for the US. American corn represents 52% of the global exports in that commodity and 43% of the exports for soyabean. And the weather is not just bad in the US. Droughts and sometimes floods have also hit the Chernozem, the black earth belt that includes parts of Serbia, Bulgaria, Romania, Ukraine and Russia all the way into western Siberia. In Kazakhstan the world’s sixth largest export, the crop will be only 48% of last year’s record harvest. The price of wheat has risen 35% from May and is now selling for $356 a metric tonne. While this is still 18% below the record price of $439 reached in February 2008, it is certainly not really good news. 

 
The weather is also bad in India. Two months into the monsoon and the season rainfall is 22% below normal. In the significant agricultural areas of Maharashtra and Punjab it is only 30% to 40% of average. Brazil’s soyabean crop was hit by dry conditions and was 13% below prediction. Western Australia, its biggest wheat growing region, had below average rain in April to June and an exceptionally dry July. Only France and Germany expect good harvests.

The economic impact of the drought will be wide spread. With the global economy slowing, the bad harvests could not have come at a worse time. Food inflation will complicate stimulus efforts. The US is expecting food prices to rise by 4% to 5%. The impact on emerging markets will be far more severe. Food makes up a far greater part of the budgets for the poorer populations in emerging markets. India has had trouble taming inflation and now it will get worse. Inflation was slowing in China, but the rise of global food prices and recent efforts to prevent a hard landing may reverse that trend. In addition, many more people are dependent upon agriculture for their incomes. In India half of the population is dependent upon agriculture for their income. Although urban populations are rising, even in China, 49% still live on farm incomes.

Government planning for famine has been common since the Egyptians, but more recent well meaning efforts have exacerbated the problem rather than solving it. Almost all countries have some sort of subsidy programme in place. They subsidize cheaper food or inputs like fertilizers. Some countries subsidize agricultural prices. Other countries use more drastic means like price controls or export bans. Often farmers’ profits are restricted to benefit the urban poor, who are more likely to riot and possibly overthrow governments. The result is often the same. These attempts to manipulate the market do not encourage farmers to grow more food. Often they simply bankrupt governments’ budgets.

Another more destructive form of subsidy has been the use of crops to create bio-fuels. Food margins are quite narrow and the difference between a surplus and shortfalls are small. In the US 40% of the corn crop has been artificially diverted for the production of ethanol. The reason for these programmes is all the same. Although economically inefficient, they are politically useful.

Government planning for disaster is certainly well within the purview of good policy. Perpetuation of a particular party by distorting the market is simply the recipe for more disaster.

(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 william@emergingmarketstrategies.com or w.gamble@alrroya.com.)
 

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Mistakes emerging market investors make: The case of Poland and Turkey

Profits and growth depend on good management. Yet investors have the habit of lumping countries into categories based on vague criteria and assuming correlation across the class, a sure recipe for disaster in any language

Recently I read several articles on a popular US financial website owned by the Wall Street Journal which were on emerging markets in general and in particular the markets of Poland and Turkey. I found all of these articles rather troubling. They made two of the worst mistakes that investors and analysts make when considering investing in emerging markets. 

 
The first mistake involves using the tools that investors have created for developed markets on emerging markets without considering that emerging markets might be very different. This is especially egregious when the tools really don’t work for developed markets in the first place. 
 
One of these tools is the Dow Theory also known as technical analysis or chart reading. The Dow Theory was constructed from the writings of Charles Dow, the founder of Dow Jones. The theory became credible because it purportedly predicted the crash of 1929. Since then its results have been mixed. Since 1920, there have been 43 sell signals predicting a fall in the market of more than 20%. Of these, less than half, 17, actually resulted in such falls. Perhaps the real value of the Dow Theory is not that it actually predicts anything, but hoards of investors think it does. 
 
However, those hoards may live over the hill and far away, so their opinions may only affect a local market. For example Chinese investors correctly react more to pronouncements of the government than to any real economic or corporate news for the simple reason that the government dominates the economy. A similar situation is developing in the US and Europe. 
 
Markets are now less of a measure of corporate or economic health. Instead they are more attuned to pronouncements from the US Federal Reserve or the European Central bank as their unorthodox stimulus methods dominate economies. Yet the discrepancy between countries does not prevent prognosticators from making predictions using charts indicating obscure patterns all of which are basically meaningless.
 
Other tools have a better pedigree and are perhaps more accurate, but that does not necessarily mean that they can be translated. Analysts are quite fond of taking take historical trends and projecting them into the future. For example the combined amount of the BRIC (acronym for Brazil, Russia, India and China) contribution to global GDP is 20%, while the capital invested in their stock market is equal only to 16% of total equities, a spread of 4%. This observation is supposed to be helpful because the last time this happened, in 2005, the BRIC index rose 53%.The assumption is that the present valuation of the emerging markets is far too low and that eventually there will be some reversion to a more normal situation where market valuation equals GDP contribution. This is absurd. Stock market valuation reflects risk. Anyone remotely knowledgeable about emerging market understands that they are far more volatile and risky than markets with better information and better rules. 
 
Another large mistake that investors and analysts make with emerging markets is to assume that basic facts about demographics, infrastructure and debt will automatically convert into sustained economic growth. Then they automatically assume that growth will translate into profits for foreign investors. 
 
For example the articles about Poland and Turkey pointed to their youthful populations, low debt levels and expanding middle class as evidence that the countries were good places to invest. It suggested that any improvement in basic infrastructure would have a large impact on their economies.
 
Certainly these things are helpful for economic growth, but a youthful population and new middle class don’t always result in increased productivity or demand. For these things to translate into sustainable economic growth you need to educate the population and attract foreign investment. Many of the Arab countries have an educated youthful population that has been stymied by crony capitalism.
 
Besides, economic growth is subject to business cycles. Before the crash US consumers piled up debt worth 133% of GDP (gross domestic product). Now Chinese private sector debt is 127% of GDP. In Turkey and Poland private sector credit has risen by 20% in the last year. 
 
Foreign capital and good exports can be a double-edged sword. In Turkey 78% of all financing flows are short-term. So the country is exposed to fickle foreign investors. Poland has increased its export sector by 40%, but its largest trading partner is Germany and the rest of the EU. Germany in turn is dependent upon exports to its southern neighbours and especially to China. Turkey is in the same position as Poland in that it is dependent upon exports to the EU.
 
It is ingrained in every analyst that all companies are different. Profits and growth depend on good management. Yet investors have developed the habit of lumping countries into categories based on vague criteria and assuming correlation across the class, a sure recipe for disaster in any language.
 
(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 william@emergingmarketstrategies.com or w.gamble@alrroya.com.)

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HSBC exposed US to terror fund, money laundering says a panel

The US Senate's Permanent Sub-committee on Investigations, said HSBC was found to be doing business with Al Rajhi Bank, whose key founder was an early financial benefactor of al Qaeda, and also have provided US dollars and services to some banks in Saudi Arabia and Bangladesh despite their links to terrorist financing

Washington: A US Senate panel has accused global banking giant HSBC of exposing the country's financial system to various terror financing, money laundering and drug trafficking activities with transactions worth billions of dollars, due to poor risk control systems at the bank, reports PTI.

 

Among others, HSBC was found to be doing business with Saudi Arabia's Al Rajhi Bank, whose key founder "was an early financial benefactor of al Qaeda," the US Senate's Permanent Sub-committee on Investigations has said after a year-long probe into the affairs of the global banking major.

 

The bank has also been accused of indulging in various questionable transactions with entities from countries like Mexico, Iran, North Korea, Saudi Arabia, Bangladesh, Syria, Cuba, Sudan, Burma, Cayman Islands, Japan and Russia.

 

Specifically, the bank has been alleged to have provided US dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.

 

Reacting to the report from the Senate Sub-Committee, HSBC said in a statement that it would apologise for failing to meet regulatory and customer standards in the past.

 

The bank said it recognises that its "controls could and should have been stronger and more effective in order to spot and deal with unacceptable behaviour."

 

The Senate Sub-Committee last night released a 17-page summary report of its probe. The entire 330-page report, prepared after a year-long investigation into HSBC, along with more than 100 other documents including bank records and internal emails, is being released at a hearing here today.

 

The hearing would include testimony from HSBC officials and federal regulators, the sub-committee Chairman and Senator Carl Levin said in a statement.

 

The bank operates in many jurisdictions with weak Anti-Money Laundering (AML) controls, high risk clients, and high risk financial activities, including in Asia, the Middle East, and Africa, the Senate sub-committee said.

 

The sub-committee said that HSBC used its US bank (HBUS) as a gateway into the US financial system for some HSBC affiliates around the world to provide dollar-denominated services to clients "while playing fast and loose with US banking rules".

 

"For decades, HSBC has been one of the most active global banks in the Middle East, Asia, and Africa, despite being aware of the terrorist financing risks in those regions.

 

"In particular, HSBC has been active in Saudi Arabia, conducting substantial banking activities through affiliates as well as doing business with Saudi Arabia's largest private financial institution, Al Rajhi Bank," the report said.

 

"After the 9-11 terrorist attack in 2001, evidence began to emerge that Al Rajhi Bank and some of its owners had links to financing organisations associated with terrorism, including evidence that the bank's key founder was an early financial benefactor of al Qaeda.

 

"In 2005, HSBC announced internally that its affiliates should sever ties with Al Rajhi Bank, but then reversed itself four months later, leaving the decision up to each affiliate.

 

HSBC Middle East, among other HSBC affiliates, continued to do business with the bank," it added.

 

The probe further said that "due to poor AML controls, HBUS exposed the US to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions."

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COMMENTS

captainjohann

5 years ago

HSBC also procured Indian rupees and gave it to Habib Bank of Pakistan and transferred some rupee funds to bangladesh

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