Bulent Gökay, Keele University elaborates on how Turkey tries to keep wheels of economy turning despite worsening coronavirus crisis. It, contrary to its neighbours, would not go down the same way. Read on to find out why.
Turkey confirmed its first case of the new coronavirus on March 11, but since then the speed of its infection rate has surpassed that of many other countries with cases doubling every two days. On April 2, Turkey had more than 15,000 confirmed cases and 277 deaths from complications related to the coronavirus, according to data collated by John Hopkins University.
The Turkish government has called for people to stay at home and self-isolate. Mass disinfection has been carried out in all public spaces in cities. To encourage residents to stay at home, all parks, picnic areas and shorelines are closed to pedestrians.
Some airports are closed and all international flights to and from Turkey were banned on March 27. All schools, universities, cafes, restaurants, and mass praying in mosques and other praying spaces has been suspended, and all sporting activities postponed indefinitely.
Manufacturing remains open
Many small businesses in the service sector are closed, and many companies in banking, insurance and R&D have switched to working from home. But in many industrial sectors, such as metal, textile, mining and construction, millions of workers are still forced to go to work or face losing their jobs. In Istanbul, where more than a quarter of Turkey’s GDP is produced, the public transport system still carries over a million people daily.
Recep Tayyip Erdoğan, Turkey’s president, has openly opposed a total lockdown, arguing a stay-at-home order would halt all economic activity. On March 30, he said continuing production and exports was the country’s top priority and that Turkey must keep its “wheels turning”.
But in the short term, many of Turkey’s export markets for minerals, textiles and food, such as Germany, China, Italy, Spain, Iran and Iraq, are already closed due to the virus. This has led to enormous surpluses piling up in warehouses. Even where there are overseas customers, getting the goods delivered has proven difficult. The process of sanitising and disinfecting the trucks and testing the drivers before they travel takes many extra hours, sometime days, after waiting in long lines.
Still, Erdogan’s statements give the impression that he sees this pandemic not only as a serious crisis, but also as an opportunity for Turkish manufacturers. The hope is that, after the Chinese shutdown, European producers which depend on Chinese companies for a range of semi-finished products may consider Turkey as an alternative supplier in the longer term. That’s why the government is still allowing millions of workers to go to factories, mines and construction sites despite the huge health risk.
A bruised economy
The Turkish government announced a 100 billion lira (£12 billion) stimulus package on March 18. It included tax postponement and subsidies directed at domestic consumption, such as reducing VAT on certain items and suspension of national insurance payments in many sectors for six months. But this is an insignificant sum for an economy as big as Turkey’s.
Most of the support will go to medium and large companies that were forced to close, and only a very tiny amount to individual workers. In order to benefit from the scheme, a person must have worked at least 600 days in the past three years (450 days for those in Ankara). Those with most need get the lowest level of help or no help from the state.
The tourism sector, which accounts for about 12% of the economy, has already been decimated. Some 2.5 million workers will not be able to work as they had been expecting to in the peak tourist months between April and September.
Limited room for manoeuvre
Even before the virus hit Turkey the economy was already weak, still trying to recover from the impacts of a 2016 coup attempt and a 2018 currency crisis, both of which caused severe stress to Turkey’s economic and financial systems.
In March, Turkey’s Central Bank reduced its benchmark interest rate by 1%, and several of the country’s largest private banks announced measures to support the economy, such as suspending loan repayments. As a result, the Turkish lira initially held up reasonably well, compared with other emerging market economies, but it fell to an 18-month low on April 1 as the coronavirus death rates accelerated. Official interest rates have fallen below 10%, providing some protection to those holding Turkish lira versus some foreign currencies.
Turkey’s financial options to limit the impact of the crisis are limited. Credit rating agency Moody’s revised its prediction for the country GDP from 3% growth in 2020 to a 1.4% contraction. Still, it may get a reprieve from the low oil price. Turkey imports almost all its energy needs, and with the recent fall in the price of oil and gas, this means Turkey could save about US$12 billion (£9.6 billion) in energy imports.
It is hard to see very far ahead. During the next few months, it’s expected that Turkey, alongside South Africa and Argentina, could be sliding toward insolvency and debt default. After that, everything depends on how this crisis progresses and how long it will take to end.
An IMF blog article by Deniz Igan dated February 12, 2020, holds that Construction Activity Can Signal When Credit Booms Go Wrong. This state of affairs seems to apply almost universally. Indeed, as per the French saying “when the building goes, everything goes,” it appears that it took time for the international financial institution to reach this conclusion, especially with regards to the countries of the MENA region.
In Spain, private sector credit as a share of GDP almost doubled between 2000 and 2007. This increase was accompanied by a boom in housing prices—which doubled in real terms over the same period. The economy as a whole also grew at a record pace.
But then in 2008, Spain’s credit bubble burst, and with it came loan defaults, bank failures, and a prolonged economic slowdown.
A less-noticed development in Spain was in the construction sector, where employment grew by an astounding 47 percent, compared to the economy-wide increase of 27 percent.
New IMF staff research, based on a large sample of advanced and emerging market economies since the 1970s, shows that long-lasting credit booms that featured rapid construction growth never ended well.
New evidence on credit booms
Rapid credit growth—known as “credit booms”—presents a trade-off between immediate, buoyant economic performance and the danger of a future crisis. The risk of a “bad boom”—where a rapid credit growth episode is followed by a financial crisis or subpar economic growth—increases when there is also a boom in house prices.
Long-lasting credit booms that featured rapid construction growth never ended well.
Our research shows that the experience with the dangerous combination of credit booms and rapid expansion in the construction sector goes beyond the Spanish borders and extends to time periods not related to the global financial crisis.
We find that signals from construction activity may help to tell apart the dangerous booms, which need to be controlled, from the episodes of buoyant but healthy credit growth (“good booms”).
Credit booms do not lift all boats alike
During booms, output and employment expand faster. But not all sectors behave the same. Most of the extra growth is concentrated in a few industries—specifically, construction and, at a distant second, finance.
However, the same industries that benefit the most during booms experience the most severe downturns during busts. This implies that credit booms tend to leave few long-term footprints on a country’s industrial composition.
Construction is special
Construction is the only sector that consistently behaves differently between good and bad credit booms. On average, output and employment in the construction sector grow between 2 and 3 percentage points more in bad booms than in good ones. In all other sectors, the difference is smaller and not significant (except trade, but only when it comes to output growth).
What makes construction special? Construction does not have the growth potential of many other industries. In other words, too much investment in construction may divert resources away from more productive activities and result in lower output.
Also, the temporary boost in construction employment and the relatively low level of skills needed may discourage some workers from investing in their education and skills. This may have long-lasting effects on output after the boom ends.
Finally, construction projects have large up-front financing needs, and final consumers of the product (for example, houses or hotels) also tend to borrow to finance their purchases. As a result, debt may increase significantly more during booms led by construction.
The predictive power of construction activity
An unusually rapid expansion of the construction sector helps flag bad credit booms. A 1 percentage point increase in output and employment growth in the construction sector during a boom raises the probability of the boom being bad by 2 and 5 percentage points, respectively.
Construction growth is also a strong predictor of the economic costs of bad booms than other variables. A 1 percentage point increase in output growth in the construction sector during a bad boom corresponds to nearly a 0.1 percentage point drop in aggregate output growth during the bust.
If policymakers observe a rapid expansion in the construction sector during a credit boom, they should consider tightening macroeconomic policies and using macroprudential tools (such as higher down payments for mortgages).
In some cases, policy action will be triggered by other indicators, such as house prices or household mortgages. Sometimes, however, these other indicators may not sound the alarm (for example, because the construction boom is financed by the corporate sector or by foreigners), yet risks accumulate. Then, unusually rapid growth of construction could give a signal, for instance, to impose limits on banks’ exposure to real estate developers and other construction firms.
Finally, given that data on output and employment in the construction sector are often available with a few months’ lag, higher-frequency indicators such as construction permit applications could act as valuable signals. Construction indicators should also be included in models that assess risks to future economic activity.
International collaboration is the only way to defeat it.
Corruption takes many forms. It is often thought of as a problem that mostly affects developing countries. But while the harm it does is magnified in poorer nations, corruption does not concern itself with national boundaries – it can be unearthed anywhere.
1. Across the EMEA region (that’s Europe, the Middle East, and Africa) and India almost half of all workers think bribery and corruption are acceptable if there is an economic downturn.
2. Corruption, bribery, theft and tax evasion, and other illicit financial flows cost developing countries $1.26 trillion per year. That’s roughly the combined size of the economies of Switzerland, South Africa and Belgium, and enough money to lift the 1.4 billion people who get by on less than $1.25 a day above the poverty threshold and keep them there for at least six years.
3. The Transparency International Corruption Perceptions Index scores 178 countries on their degree of corruption – 10 is the cleanest possible, and 0 indicates endemic corruption. In 2010, around three-quarters of all 178 scored lower than five.
4. As much as $132 billion is lost to corruption every year throughout the European Union’s member states, according to the EU Commissioner for Home Affairs.
What’s the World Economic Forum doing about corruption?
It hosts the Partnering Against Corruption Initiative (PACI), the largest global CEO-led anti-corruption initiative.
Realizing that corruption hampers growth and innovation, and increases social inequality, PACI aims to shape the global anti-corruption agenda.
Founded in 2004, it brings together top CEOs, governments and international organizations who develop collective action on corruption, transparency and emerging-marking risks.
PACI uses technology to boost transparency and accountability through its platform, Tech for Integrity. Show
5. Bangladesh is one of the world’s poorer countries. Around one-third of the population say they have been the victims of corruption, and an astonishing 84% of those households who had interacted with different public and private service institutions have been victims of corruption.
6. In war-torn Afghanistan, of the $8 billion donated in recent years, as much as $1 billion has been lost to corruption. Integrity Watch Afghanistan estimates bribe payments — for everything from enrolling in elementary school to getting a permit — exceed $1 billion a year.
7. In one Russian province, if you want to become a police officer you will probably have to pay around $3,000. To get a place in medical school, you will need to part with around $10,000. One consequence of this, according to the International Crisis Group, has been that some people have grown so disaffected that they have become drawn to Islamic extremism.
SMEs in the Middle East and North Africa (MENA) contribute approximately $1 trillion to the region’s economy per year, accounting for 96% of registered companies and employing approximately half of the workforce. Unsurprisingly, these businesses are the backbone on MENA’s rapidly evolving economies and are being recognised as a priority among the region’s governments. However, SMEs face fundamental obstacles to their potential growth, namely stringent regulations and compliance procedures, but chiefly access to finance. Indeed, traditional lenders have typically shied away from smaller and less established businesses in the wake of the financial crisis, instead opting for the assurances of larger companies.
However, as the region’s SMEs grow in importance, opportunities for alternative finance providers are emerging to plug the finance gap. Traditional lenders, including banks, are having to adapt and are increasingly responding to these needs and leveraging technology to ensure SMEs can tap into their full potential.
SMEs emerging as a priority
As the region shifts its economic focus away from oil to economic models that enhance the role of the private sector, governments have recognised the importance of SMEs. The added value of jobs and economic growth offered by these businesses has meant that SME have become a priority. For example, Dubai’s Department of Finance has most recently announced a set of initiatives to boost the UAE’s fledgeling SMEs, which have grown by over 30% in the last decade. Among these initiatives, the government has committed to allocating 5% of the government capital projects to SMEs.
Financial crisis still resonates for banks
With SMEs therefore seen as a catalyst for economic growth, they still face major obstacles that stop them from reaching their potential. Following the financial crash in 2008, access to funding has been more limited in the region and indeed globally.
SMEs face a $260 billion credit gap in the region, with just one in five SMEs benefitting from traditional finance and accounting for only 7% of bank lending. But now, the attitude of lenders, such as banks, is having to catch up as these businesses take on their role as pivotal contributors to economic growth.
Various types of alternative finance emerging
As a result of the credit gap faced by SMEs, innovative alternative financing options have emerged, fuelled by the increasing digitalisation of businesses in the region. Funding models, such as Peer-2-Peer lending are seeing growth increase, from $4.5 million total market volume in 2014 to $32.5 million in 2016. Over the same period, equity-based crowdfunding has enjoyed growth from $62 million to $100.32 million.
However, there are indications that this growth is slowing, where the lack of regulatory clarity and flexibility is making the activity of alternative finance providers more complicated.
Opportunity for traditional lenders fuelled by technology
The lack of regulatory clarity for alternative finance providers has created an opportunity for traditional lenders, such as banks – an opportunity they are beginning to tap into. The increasingly sophisticated digitalisation of finance has also enabled traditional lenders to adopt these processes, allowing them to mitigate risk and broaden their offering, making bank lending more accessible to SMEs.
One example of this is the growth of established models such as asset based financing and factoring. As this form of finance has evolved, the emergence of new technologies has improved its appeal to banks, making a long-established model increasingly effective, efficient and ultimately more attractive. This has resulted in asset based financing growing by 7% in the Middle East in 2018 alone – not far behind the global figure of 9%.
The increased take-up of such technologies by banks means that they can now not only compete with alternative finance providers to provide modern financing to SMEs, but they can also partner with these providers to evolve their offering even further.
MENA is experiencing a period of exceptional growth for SMEs, but in order to realise the true potential of these businesses, we must place greater focus on access to funding. Only with better access to finance can these businesses unlock growth as they navigate supply chains, working capital gaps and encourage innovation. Well established lenders have in recent years shied away from such businesses, but as technology evolves and the popularity of alternative finance providers signal the changing demands of businesses, there is an opportunity for them to tap into this market once again. Banks that recognise the opportunity to seize digitalisation and work to learn from the innovation in alternative finance, will be the ones who are working hand in hand with the region’s governments to ensure that the businesses that form the backbone of their economies reach their full potential.
Iraq’s recent wave of protests against poverty, a lack of basic services, unemployment, and the interference of Iran in the country’s domestic affairs showed a country at the end of its tether. Official figures put the number killed in the violent crackdown of protesters at 157.
The problems for Iraq are deep-rooted and institutional, and if not addressed may yet escalate into a full-scale revolution. What’s needed is reform of the country’s 2005 constitution, which was written during a period of political instability after a war and occupation ridden by conflict. The only way for Iraq to have a chance at prosperity and peace is by addressing its flawed foundations which were heavily influenced by the occupiers.
Iraq’s 2005 constitution, which was influenced by the US, failed to create a unified, representative government. Ambiguities within the document have been abused by those in power and it has exacerbated sectarian divisions within Iraq’s politics. The constitution created a system in which public sector and government roles are allocated based on sect and ethnicity.
Iraq has become a nation that is for the few and not the many, as unrepresentative Iraqi political elites bid to share out its resources. Millions of Iraqis are left unrepresented and without prospects.
While the majority of citizens are discontented and struggling, Iraq’s elites remain fortified and continue to govern through a system known as “wasta”, which involves serving those you favour and hold close, such as friends and family. Divides along ethnic and sectarian lines remain a key theme when identifying the causes of disagreement between competing sects who unite to form political blocs in Iraq’s government.
The lengthy government formation process that takes place after elections is dependent on the division of key state institutions based on ethnic and sectarian identities. To achieve this, political parties form blocs with and against each other to achieve their goals, with the biggest becoming the governing bloc. Although Iraqi elites are divided based on ethnicity, sect and religion, this race for power – and with it the ability to distribute and share the country’s resources – creates a unity between elites.
For example, in three separate parliamentary elections since 2003, the winning candidate has not become prime minister. In the 2014 elections, Nouri al-Maliki, as the head of the State of Law coalition, won the largest number of seats in parliament, yet due to disagreements over government formation and the fight against Islamic State, he was replaced by Haider al-Abadi. In the 2018 elections, Muqtada al-Sadr’s Saairun coalition won a majority, but it was eventually Adil Abdul-Mahdi, an independent, who was chosen as prime minister.
Ministerial fiefdoms where political parties are given ministries in exchange for support to form governing blocs have created a dysfunctional government. It means there is no clear governmental strategy, which in turn severely impedes development.
The mechanics of this power-sharing system are illustrated by coalitions of oligarchs who use public institutions to distribute favours to clients. Political parties control government procurement and reconstruction contracts, who either auction them off or set up shell companies to award contracts to themselves. These contracts are then sub-contracted, or simply never fulfilled, with funds ending up being drained in the process, ultimately benefiting a narrow Iraqi elite. Iraq was ranked 168 out of 180 countries in Transparency International’s 2018 corruption perception index.
In order for Iraq to ever be able to meet the growing demands of its people and the challenges of prospering on the global stage, immediate political reform is needed. The reform process must directly address the rushed and divisive constitution. This needs to be followed by the democratisation of Iraq’s institutions and the re-creation of Iraq’s national identity so the country can escape the worst of its sectarianism and become more unified as a nation.
Without all of these issues addressed with equal importance, the cycle of adversity will continue as Iraq will remain a reactive as opposed to proactive nation.
Lebanon pushed to the brink, faces reckoning over graft after allies, investors, protesters press for change in the country as per Jonathan Spicer, Tom Perry and Samia Nakhoul, Reuters News in this ECONOMY‘s article dated 21 October 2019.
BEIRUT – Lebanon is closer to a financial crisis than at any time since at least the war-torn 1980s as allies, investors and this week nationwide protests pile pressure on the government to tackle a corrupt system and enact long-promised reforms.
Prime Minister Saad al-Hariri‘s government on Thursday hastily reversed a plan, announced hours earlier, to tax WhatsApp voice calls in the face of the biggest public protests in years, with people burning tyres and blocking roads.
The country – among the world’s most indebted and quickly running out of dollar reserves – urgently needs to convince regional allies and Western donors it is finally serious about tackling entrenched problems such as its unreliable and wasteful electricity sector.
Without a foreign funding boost, Lebanon risks a currency devaluation or even defaulting on debts within months, according to interviews with nearly 20 government officials, politicians, bankers and investors.
Foreign Minister Gebran Bassil said in a televised speech on Friday that he gave a paper at an economic crisis meeting in September saying Lebanon needed “an electric shock”.
“I also said that what little remains of the financial balance might not last us longer than the end of the year if we do not adopt the necessary policies,” he said, without describing what he meant by financial balance.
Beirut has repeatedly vowed to maintain the value of the dollar-pegged Lebanese pound and honour its debts on time.
But countries that in the past reliably financed bailouts have run out of patience with its mismanagement and graft, and they are using the deepening economic and social crisis to press for change, the sources told Reuters.
These include Arab Gulf states whose enthusiasm to help Lebanon has been undermined by the growing clout in Beirut of Tehran-backed Hezbollah, and what they see as a need to check Iran’s growing influence across the Middle East.
Western countries have also provided funds that allowed Lebanon to defy gravity for years. But for the first time, they have said no new money would flow until the government takes clear steps toward reforms it has long only promised.
Their hope is to see it move towards fixing a system that sectarian politicians have used to deploy state resources to their own advantage through patronage networks instead of building a functional state.
A crisis could stoke further unrest in a country hosting some 1 million refugees from neighbouring Syria, where a Turkish incursion in the northeast this month has opened a new front in an eight-year war.
“If the situation remains, and there are no radical reforms, a devaluation of the currency is inevitable,” said Toufic Gaspard, a former adviser to Lebanon’s finance ministry and former economist at its central bank and the International Monetary Fund.
“Since September a new era has begun,” he added. “The red flags are large and everywhere, especially with the central bank paying up to 13% to borrow dollars.”
The first reform on Beirut’s agenda is one of the most intractable: fixing chronic power outages that make private generators a costly necessity, a problem many see as the main symbol of corruption that has left services unreliable and infrastructure crumbling.
Hariri, in a televised speech to the nation, said he had been struggling to reform the electricity sector ever since taking office. After “meeting after meeting, committee after committee, proposal after proposal, I got at last to the final step and someone came and said ‘it doesn’t work’,” he said.
Presenting the difficulties of implementing reform more widely, Hariri said every committee required a minimum of nine ministers to keep everyone happy.
“A national unity government OK, we understand that. But committees of national unity The result is that nothing works.”
Underscoring the pressure from abroad, Pierre Duquesne, a French ambassador handling so-called CEDRE funding, is traveling to Lebanon next week to press the government on the use of offshore power barges, a banker familiar with the plan said.
Duquesne wants the barges included in the electricity overhaul plan, the person said, requesting anonymity.
Duquesne could not immediately be reached for comment.
The contents of the 2020 budget will be key to helping unlock some $11 billion conditionally pledged by international donors under last year’s CEDRE conference. But a cabinet meeting on the budget set for Friday was cancelled amid the protests.
Hariri’s government, which includes nearly all of Lebanon’s main parties, had proposed a tax of 20 cents per day on calls via voice-over-internet protocol (VoIP) used by applications including WhatsApp, Facebook FB.O and FaceTime.
In a country fractured along sectarian lines, the protests’ unusually wide geographic reach may be a sign of deepening anger with politicians who have jointly led Lebanon into crisis.
Fires were smoldering in central Beirut, where streets were scattered with glass of several smashed shop-fronts. Tear gas was fired on some demonstrators.
The newspaper an-Nahar described it as “a tax intifada”, or uprising. Another daily, al-Akhbar, declared it “the WhatsApp revolution”.
“With this corrupt authority, our kids have no future,” said protestor Fadi Issa, 51. “We don’t just want a resignation, we want accountability. They should return all the money they stole. We want change.”
As confidence has faded and dollars have grown scarce, new cracks have emerged between Lebanon’s government and its private lenders, according to several of the bankers, investors and officials who spoke to Reuters.
After years of funding the government with the promise of ever higher rates of return, the banks – sensing the country is approaching collapse – are pressing for it to finally deliver reforms to win over donors.
Most said Lebanon would likely feel more economic and financial strain in the months ahead but avoid haircuts on deposits or a worst-case sovereign default.
Yet Beirut’s years of failure to deliver reforms and the new determination among its traditional donors to press for them has left even top officials, bankers and investors divided over whether a devaluation is in store for the Lebanese pound.
“You need a positive shock. But unfortunately the government thinks reforms can happen without touching the structure that benefits them,” said Nassib Ghobril, head of economic research and analysis at Byblos Bank.
Lebanon must promote reforms to increase capital inflows, he said.
“We can’t keep going to the Emirates and Saudis. We need to help ourselves in order for others to help us.”
This month, Moody’s put Lebanon’s Caa1 credit rating under review for a downgrade and estimated the central bank, which has stepped in to cover government debt payments, had only $6 billion-$10 billion in useable dollars left to maintain stability.
That compares with some $6.5 billion in debt maturing by the end of next year.
The central bank says its foreign assets stood at $38.1 billion as of Oct. 15.
An official told Reuters Lebanon has only $10 billion in real reserves. “It is a very dire situation that has five months to correct itself or there will be a collapse, around February,” he said.
Hariri’s government may have only a few months to deliver fiscal reforms to convince France, the World Bank and other parties to the CEDRE agreement to unlock $11 billion in conditional funding.
The head of regional investments for a large U.S. asset manager said Lebanese officials are privately saying a plan that addresses short- and long-term electricity shortages will be announced before year-end, after which the government will raise tariffs.
But critics say no concrete steps have been taken despite energy ministry statements that the plan is on track.
Hariri left Paris last month with no immediate cash commitment after visiting French President Emmanuel Macron. Likewise this month he left Abu Dhabi empty-handed after meeting Crown Prince Sheikh Mohammed bin Zayed al-Nahyan.
Lawmakers in Beirut struggled to explain what happened in Abu Dhabi after Hariri claimed the United Arab Emirates had promised investments following “positive” talks.
EYES ON HEZBOLLAH
Investors, bankers and economists say at least $10 billion is needed to renew confidence among the Lebanese diaspora whom for decades have underpinned the economy by maintaining accounts back home.
But so far this year, deposits have shrunk by about 0.4%.
The government has sought a smaller cushion from Sunni Muslim allies to buy some time. But to secure funding from the UAE or Saudi Arabia, Beirut would likely have to meet conditions meant to weaken Shi’ite Hezbollah’s hand in Lebanon’s government, said several sources.
Hezbollah, which faces U.S. sanctions, is seen to be gaining more control over state resources by naming the health minister in January after last year’s elections brought more of its allies into the legislature.
Some say Saudi Arabia, UAE and the United States are motivated to hold out on Beirut as part of their wider policy seeking to weaken Iran and its allies which have been fighting proxy wars with Gulf Arab states on several fronts.
“Their tolerance of Iran and Hezbollah has lowered significantly. The ‘Lebanese exception’ is gone,” said Sami Nader, Beirut-based director of the Levant Institute for Strategic Affairs.
“The balance has tilted and we are now at odds with our former friends because Hezbollah now has the upper hand politically.”
The former regional head at a major Western bank put it bluntly: “People have lost patience with the corruption in which a frozen Parliament with no authority is simply divvying up the pie among politicians.”
“But at the end of the day the Lebanese political class usually succeeds in convincing allies that they should not let the system collapse and bring civil war again,” he added.
Lebanon, straddling the Middle East’s main sectarian lines, was historically the region’s foreign-exchange hub into which deposits flowed, especially since 1997 when its currency was pegged to the dollar at 1,507.5 pounds.
But after a reckoning in August and September in which the cost of insuring Lebanon’s sovereign debt surged https://tmsnrt.rs/2MORZfM to a record high, things have changed.
Depositors, including the diaspora drawn by rates much higher than in Europe or the United States, are pulling funds in the face of Lebanon’s swelling twin deficits, inability to secure foreign funding, and unorthodox central bank efforts to attract dollar inflows.
Among Lebanon’s 6 million citizens, trust has worn thin.
Depositors can no longer easily withdraw dollars, and most ATMs no longer provide them, forcing people to turn to so-called parallel FX markets where $1 is worth more than the official peg.
“I am with the protesters,” said Walid al-Badawi, 43. “I have three children, I am a taxi driver, I work all day to get food for my kids and I can’t get it.”
Gaspard, the central bank’s former research head, said foreign exchange was easy even through Lebanon’s 15-year civil war. There was also always a balance of payments surplus – until 2011 when deficits began to grow, reaching $12 billion last year.
LOST RESOLVE AT BANKS
Three events precipitated the crisis of confidence that for years seemed inevitable: a series of central bank efforts since 2016 to keep growing deposits with rates of more than 11% on large deposits; a public sector pay hike last year that raised the budget deficit to more than 11% of GDP; low oil prices in recent years that have weakened Gulf allies.
In a report on Thursday, the IMF described Lebanon’s position as “very difficult,” adding “substantial new measures” are needed to protect it and reduce large deficits.
As dollars have dried up, banks have effectively stopped lending and can no longer make basic foreign-exchange transactions for clients, one banker said.
“The whole role of banks is to pour money into the central bank to finance the government and protect the currency,” he said. “Nothing is being done on the fiscal deficit because doing something will disrupt the systems of corruption.”
The resistance from banks has been subtle but telling given their central role in financing the government.
When Beirut proposed a $660 million reduction in debt service costs in its 2019 budget, banks never signed up to the idea. They have also been less enthusiastic about subscribing to Eurobonds including a planned $2-billion issuance later this month, officials said.
Without reform, “banks agree we can no longer support the public sector,” said Byblos Bank’s Ghobril.
(Reporting by Jonathan Spicer, Tom Perry and Samia Nakhoul; Additional reporting by Yara Abi Nader and Ellen Francis in Beirut and John Irish in Paris; Editing by Hugh Lawson) ((firstname.lastname@example.org; Reuters Messaging: email@example.com @jonathanspicer))
The political impasse in which Algeria has been mired for more than seven months would result in a sharp economic slowdown in the short term. This Algeria’s Political deadlock and economic breakdown that the World Bank forecasters have reached is by any means comprehensive but could be read as some sort of alert.
The institution expects non-hydrocarbon sectors, as well as all oil and gas-related activity, to run through an air hole this year; which should have some unavoidable consequences on the country’s GDP growth. In effect, in similar way to other developing countries, it is expected to come down to 1.3% in 2019 from 1.5% the previous year.
“Uncertainty policy is expected to lead to a slowdown in the non-hydrocarbon sector in 2019,” reads a World Bank report released last Thursday. The Bretton Woods institution has not failed to highlight the impact of the arrests of business leaders on investment morality grounds or lack of these, and more generally, on the economy. “Business leaders from various sectors were arrested in connection with corruption investigations, which has disrupted the economy due to sudden changes in the direction and supervision of these companies, as well as uncertainty over investment,” the same report said. Since the beginning of the crisis, a wave of arrests affected the business community, public institutions, banks and social bodies alike. This blocking situation had worsened over the weeks; appropriation sets did not meet, officials at the level of economic administration were careful not to take the slightest risk. That is to say how violent the shock wave was. The impact on the economy could be disastrous as the situation continues to worsen by the day. As such, the World Bank (WB) estimates that “the pre-election period also risks further delaying the fiscal consolidation process scheduled for 2019, increasing the budget deficit to 12.1% of GDP and increasing the risk of a more abrupt adjustment in the future.” For the WB, widening budget and current account deficits is almost inevitable. While the fiscal deficit would be unlikely to be reduced internally, “on the external front, the current account deficit is expected to widen to 8.1% of GDP, mainly due to a significantly larger trade deficit.”
Investment is being impacted
“As the course of political events is expected to have an impact on economic activity, it is also expected that more resources will be allocated to social measures, to the detriment of public investment spending,” the Bank predicts. The report, stating that “private sector activity and investment will be affected by political disruptions and an unfavourable business climate, as well as disruptions caused by delays in payment of workers in several industries.” This is the case, since the draft Finance Bill 2020 foresees a sharp decline in capital expenditure, to the tune of 20.1%, while operating expenses and social transfers are maintained as they are. WB experts are merely saying out loud what Algerian economists and operators are thinking, warning of a situation that could go along if solutions to the political impasse run out. “The delays at the end of the political impasse and political uncertainty could further damage the country’s economy, leading to increased imports and further dwindling foreign exchange reserves,” concludes the WB report. Moreover, macroeconomic indicators are unlikely to improve at any time under current political conditions.
Economic growth to only 1.9% in 2020
Moreover, against a background of falling capital spending and low morale among investors, the growth of the Algerian economy would be only 1.9% in the year 2020. A stagnation is due in particular to the “slow” growth of the hydrocarbons sector, combined with the contraction in economic activity, which has limited growth in non-hydrocarbon sectors, according to the WB’s economic monitoring report released on Thursday. “Growth in the hydrocarbon sector has been slow, with economic activity contracting by 6.5% and 7.7% in 2018 and the first quarter of 2019, respectively, partially off-sparing the effects of the slight increase in non-core growth 3.4% and 3.9% in 2018 and the first quarter of 2019, respectively,” the WB noted. The tiny increase in investment in the first half of the year (4.9%) was driven by public investment in construction, public works and hydraulics, as a result of the expansion of social housing programmes, the WB said. Furthermore, the institution believes that “the recent discovery of a new gas field suggests a rebound in gas production and exports, but only in the medium term, and if and only if the framework for investment in hydrocarbons lends it to it.” The World Bank is merely bringing water to the government’s mill, which has called the enactment of the new hydrocarbon law urgent.
MENA parents are attracted to e-commerce for the “Back to School” shopping, increasing their interests and buying habits at exponential levels between 2017 and 2019.
The buying trends between August 2017 and August 2019 in the Back to School category revealed that traditionally the sales spike around the month of August
In 2019, online sales reached their highest level, measuring a 6 times growth compared with August 2017
With the region opening up more to e-commerce and with the market competitive sellers, the Back to School online sales will stay on a growth pattern
ADMITAD analysts recently released an online sales report that shows Back To School shopping has grown 6 times since 2017. Analysts observed data over the course of 2 years measuring the buying trends in the Back To School categories across different countries in the MENA region.
The buying trends between August 2017 and August 2019 in the Back to School category revealed that traditionally the sales spike around the month of August. However, in 2019, online sales reached their highest level, measuring a 6 times growth compared with August 2017. With the region opening up more to e-commerce and with the market’s competitive sellers, Back to School online sales will stay on a growth pattern, expecting to reach in August 2020 the highest level measured in the past years.
“The growth we’ve seen in 2 years is indicative of MENA region developing into a more mature market in e-commerce, with giants like Amazon, Noon, Namshi creating outstanding value for the customers. Other factors are contributing too, such as the rise of social media influencers and the unparalleled cash value offers online shopping provides. Having said that, this is just the beginning as we estimate the growth to continue at a rapid rate in the next 2 years” said Artem Rudyuk, head of MENA Operations at ADMITAD.
The convenience of fast-delivery, an abundance of offers and eye-catching promotions alongside a wider diversity of the products, are some of the top reasons why MENA region Back-To-School customers’ interest in online shopping is growing.
One of the fastest-growing marketplace for parents, Sprii.com, is confirming the positive climb of the online sales during August, with a growth of 181% in the back to school category. Sarah Jones, CEO, and Founder of Sprii said: “Sprii has seen a 181% increase in sales in its back to school category over the last year. We see traffic fast moving away from your traditional bricks and mortar stores to online platforms as product ranges increase, prices are cheaper and delivery becomes easier. The leading contributor of growth in this category has been kids lunchboxes and healthy snacks, which we see in keeping with the regional movement towards healthy sustainable living, and the site-wide increase in organic product sales.”
The estimated increase in back-to-school spending represents an opportunity for MENA based e-commerce companies to capitalize on this new profit-making shopping season, together with Christmas, Ramadan, and Back Friday. The MENA region players have an unprecedented opportunity to convert customers with competitive advertising, offers, prices and bundles during the online browsing process.
Artem Rudyuk is the Head of MENA Operations for Admitad, heading the Development of affiliate partnerships between e-commerce merchants and online publishers on cost per action basis and bringing affiliate marketing in MENA region to a new level with the most transparent and tech advanced platform.
The IMFBlog, a forum for the views of the International Monetary Fund staff and officials on pressing economic and policy issues produced this article dated September 4, 2019, that suggests that financial and monetary policies in climate change mitigation have a role to play in order to achieve COP21, 22, 23, 24 and eventually the 25th one to be held on December 2 through 13, 2019.
July 2019 was the hottest month ever recorded on earth, with countries across the world experiencing record-breaking temperatures. A prolonged drought is affecting millions of people in East Africa, and in August 2019 Greenland lost 12.5 billion tons of ice in one day.
A review of the literature by IMF staff aims to spur discussion of what policies to mitigate climate change could or should include. The review suggests that, while fiscal tools are first in line, they need to be complemented by financial policy tools such as financial regulation, financial governance, and policies to enhance financial infrastructure and markets, and by monetary policy.
Financial and monetary policy tools can complement fiscal policies and help with mitigation efforts.
The stakes are high. There is a broad scientific consensus that achieving sufficient mitigation requires an unprecedented transition to a low-carbon economy. Limiting global warming to well below 2 degrees Celsius requires reductions of 45 per cent in CO2 emissions by 2030, and reaching net zero by 2050. Despite the 2015 Paris Agreement, greenhouse gas emissions are high and rising, fossil fuels continue to dominate the global energy mix, and the price of carbon, remains defiantly low, reinforcing the need for complementary policies.
The case for policy action beyond carbon pricing
Our review of academic and policy studies suggests that, currently, there are insufficient incentives to encourage investment in green private productive capacity, infrastructure, and R&D. At the same time, investments continue to pour into carbon-intensive activities. These undesirable economic outcomes prevent the needed decarbonization of the global economy. Decarbonization requires a transformation in the underlying structure of financial assets—a transformation that, studies suggest, is hindered by several deficiencies in the way markets function.
First, financial risks may not reflect climate risks or the long-term benefits of mitigation, given many investors’ shorter-term perspectives. Moreover, financial risks are often assessed in ways that do not capture climate risks, which are complex, opaque, and have no historical precedents.
Second, there is a wide gap between the private profitability and the social value of low-carbon investments. High uncertainty around their ability to reduce emissions, as well as the future value of avoided emissions, makes low-carbon investments unattractive to investors, at least in the short run.
Third, corporate governance that favors short-term financial performance may amplify financial “short-termism,” while constraints in capital markets can lead to credit rationing for low-carbon projects.
The above review of previous literature suggests that because they directly influence the behavior of financial institutions and the financial system, financial and monetary policies can play a key role in addressing these issues.
Possible policy tools suggested by studies
The table below summarizes financial and monetary policy options for climate change mitigation, based on the above review of previous studies.
Policies that have been proposed in the literature can be divided into two categories: climate risk-focused and climate finance-promoting.
Climate risk-focused tools aim to correct the lack of accounting for climate risks for individual financial institutions and support mitigation by changing the demand for green and carbon-intensive investments, as well as their relative prices.
On the monetary policy side, examples include developing central banks’ own climate risk assessments, and ensuring that climate risks are appropriately reflected in central banks’ collateral frameworks and asset portfolios. On the financial policy side, tools include reserve, liquidity and capital requirements, loan-to-value ratios, caps on credit growth, climate-related stress tests, disclosure requirements and financial data dissemination to enhance climate risk assessments, corporate governance reforms, and better categorization of green assets by developing a standardized taxonomy.
Climate finance-promoting policies seek to account for externalities and co-benefits of mitigation at the level of society—that is, to account for how economic activity harms the environment but could instead, in addition to mitigating climate change, generate social value through, for example, reduced air pollution or more rapid technological progress. These policies could help shift relative prices and increase investments. However, the fact that they add new goals to existing policies makes them more controversial.
Monetary instruments to promote climate finance include better access to central bank funding schemes for banks that invest in low-carbon projects, central bank purchases of low-carbon bonds issued by development banks, credit allocation operations, and adapting monetary policy frameworks.
Financial policy instruments to actively promote climate finance revolve around “green supporting” and “brown penalizing” factors in banks’ capital requirements, and international requirements of a minimum amount of green assets on banks’ balance sheets.
What’s the bottom line?
More work is needed. The literature remains limited on the desirable package of measures to address climate mitigation. Nonetheless, financial and monetary policy tools can complement fiscal policies and help with mitigation efforts. All hands are needed on deck, for, as Mark Carney of the Bank of England has warned, “the task is large, the window of opportunity is short, and the stakes are existential.”
Economic and Governance Risks came as a no surprise assessment of today’s as well the immediate future of the MENA region. The inefficient state of most countries characterizes all of their public management and related corollaries: i.e., internal violence for some and external dependence for most. Even in the favourable assumption of relatively stable of the latter ones’ authorities, these prove powerless to achieve the objectives they have set themselves, because of the inefficiency of their administration and when these manage to achieve their objectives, it is at a high cost. Here is that Economic and Governance Risks to the MENA Region.
Exogenous factors, such as geo-economic division, climate change and technological threats all pose a particular risk to MENA, but so, too, do hazards that are more regional in nature. According to respondents in the Middle East and North Africa to the World Economic Forum’s Executive Opinion Survey, the top two risks across the region for doing business are “energy price shock” and “unemployment or underemployment.” These risks are largely economic in nature and affected by the health of governance in the region. Similarly, the number five risk, (“fiscal crises”), the number seven risk (“unmanageable inflation”) and the number 10 risk (“failure of financial mechanism or institution”) follow the same pattern of being largely economic in nature and potentially governance-driven.
The top risk, “energy price shock”, comes at a time when some countries have taken steps towards diversification, but the region is still largely a hydrocarbon economy, heavily reliant on revenue from this sector. Oil prices increased substantially between 2017 and 2018, from around USD 50 to USD 75. This represents a significant fillip for the fiscal position of the region’s oil producers, with the IMF estimating that each USD 10 increase in oil prices should feed through to an improvement on the fiscal balance of three percentage points of GDP. However, vulnerabilities to swings in oil prices have not disappeared and are particularly pronounced in countries where government spending is rising. This group includes Saudi Arabia, which the IMF estimated in May 2018 had seen its fiscal breakeven price for oil — that is, the price required to balance the national budget — rise to USD 88, 26 percent above the IMF’s October 2017 estimate and also higher than the country’s medium-term oil price target of USD 70 – USD 80.
It is no surprise, then, that Saudi Arabia remains one of five countries in the region that rank “energy price shock” as the top risk to doing business in the survey, along with Bahrain, Kuwait, Oman and Qatar.
The World Economic Forum in partnership with Marsh & McLennan Companies and Zurich Insurance Group released its Middle East and North Africa Risks Landscape Report, which uses data from the Global Risks Report 2019 and the Regional Risks for Doing Business 2018.
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