To learn from ABuDhabi - Dubai experience

The bailout package for Dubai during the height of financial crisis helps us appreciate few aspects of Indian government establishment.

Although the emirates are united under one nation, but it does seem to be mainly for namesake. There is infighting amongst the emirates in United Arab Emirates to gain the upper hand in the nation dominance. The king of each of these emirates is working to benefit for himself and his emirate. Now this is useful to make us Indians proud for the way the Indian democracy is organised to make every state to be responsible and answerable to the central government.

To read in detail follow this blog which brings in more insights to this issue.

Chi-Merican seesaw

This is a tussle for power worth mentioning. It is a seesaw which requires players on either side, America and China, such that neither player can evolve into a world power single handed. China had recently disclosed its decision to acquire nearly a 3 trillion dollar worth of natural resources majorly in crude oil, gold, natural gas, copper, iron ore, etc. On the face of it, there seems to be working on in securing the nation’s supply of raw materials for the nation’s growth. Due to China’s huge demand the copper prices are pushed up. Also the natural resources too are not left alone in the Bull Run. But when the purchase is viewed from the point of view that these are the resources most fought for and with limited supply, the issue becomes severe. It becomes more severe when the acquirer is the biggest holder of dollars outside USA.

It is the making of the perfect battle of supremacy. The Chinese are looking forward to two things by this purchase. Firstly they wish to reduce their US dollar dependency as a reserve currency. Keeping these reserves with very high dependency will be detrimental to their growth of international power because of the volatile world political environment. It is a double edged sword with China. While it gives China a good leverage and a say on the American policy decisions, but a prejudicial step taken by any nation to reduce the utility power of USD will reduce the value of Chinese foreign reserves. America on the other hand needs the utility value of USD to decrease to pay off its mounting debts and also help its exports to be more competitive. And here is the making of the first centre for power struggle between the two nations.

But China wishes to use the devaluation for its own benefit. How?

New York Stock Exchange & Deutsche Boerse Merger

The following article was written by me for my magazine "FOCUS" by club ECOBIZZ of IBS, Hyderabad (ICFAI Business School, Hyderabad)

New York Stock Exchange Euronext (NYSE-E) and Deutsch Börse (DB) are amongst the biggest stock exchange companies in the world. They have recently gone into the decision to merge creating the world’s biggest stock exchange firm having presence in more than 7 countries. Indeed a super power like situation.

What are these companies? And what is it about companies running the stock exchanges? Well NYSE is the most renowned stock market in the world, tracked by millions of traders for speculating the world sentiments. Many exchanges feel the effects of the movements on this exchange. It’s the biggest market for equity trading. Listing on this bourse signifies an Indian company as a blue chip for the Indian investors. This is the might of the greatest stock exchange in the world. It has its presence in pan Europe too along with dominance in American markets. DB on the other hand is the biggest player in the derivatives market having its presence in many countries in Europe. NYSE had in 2006 beaten DB in a bid to purchase Euronext the pan European stock exchange (covering many European countries) creating a behemoth of stock exchange company. Now with the news of NYSE-E & DB merger creating the world’s biggest, largest stock exchange entity.

The $10 Billion merger controlling a $20 Trillion has all the eyes of the world markets. This merger for exchanges means a convergence of technologies and processes, improving the performance of the exchanges and reduction in costs to investors. It shall also increase the investment choices for an individual investor after the consolidation of the investment avenues. The acquisition will broaden the trading avenues by increasing access to companies listed on foreign exchanges, access to foreign markets to tap money.

Exchanges, the world over, earn money by charging a small margin on trade volume and earn profits by charging margins on huge volumes. In this world of slim margins,

The Japanese Recovery – The Strategic view

The March 11 earthquake in Japan, the 5th largest in world, has affected the world economy in more ways than just economics. So while looking at this major natural disaster the two criteria discussed in the article are Economics & Politics.

The Economics: A classic case of “supply side disruption” fueled by the unpredictable and dangerous cocktail of earthquake, tsunami and nuclear disaster. Japan is amongst the major producers of capital goods and creates 10% of the world economic output. The good exported by Japan, consisting mostly of machinery and transport equipment was in 2010 worth about $470bn. This natural disaster wrecked havoc on the factories producing the goods heavily demanded by the whole world. This was visible in major reduction in production & sales figures of auto majors sourcing from Japan. Their May 2011 sales figures declined nearly 23%. Japan provides nearly 60% of the world’s computer chips and the calamity resulted in closure of 2 companies for repairs reducing the output by 25%. The nations round the world hence need an early recovery for the smoothening of the supply chain and depreciation of Yen.

The fund flowed into the nation for the reconstruction and there was a high appreciation of Yen. The bond market in Japan was also gathering pace. This proved one major point – Investor confidence in Japan’s recovery and repayment capability. The Japanese showed this capability and capacity. They have restored the infrastructure destroyed with great speed. An example of this would be the case of the Tohoku Shinkansen, a high-speed rail line connecting Tokyo and northeastern Japan. It recommenced operations 49 days after the earthquake.

A stable growth in country’s production with stable government in Japan will be beneficial for the whole world. Stability at power is one of the major criteria which will change the credit rating of a nation (recent case being the USA). Japan has seen already seen 5 leaders change guard and the sixth was due, all within the span of 5 years. Moody’s for this purpose has downgraded the credit rating from AA3 to AA2. But investor sentiment does not shake much due to this downgrade. Japan has been a customer of lower rating for more than a decade, but yet its borrowing cost hasn’t increased much.

Sports and A Nation's Crisis

This article was published in my magazine - The Focus - September 2010 Edition - For IBS, Hyderabad

Do the sporting events create a crisis situation for the host countries? Are the sporting events actually deliver the "social benefits"?

South Africans are already feeling the heat of hosting the World Cup tournament. When the initial estimate of World Cup stadium costs was made by South Africa, it was set at some 2-3 billion Rand. Based on current visitor estimates, there seems no way for the SA Government to recoup that investment; to top it up, over the last few months officials have been predicting the final bill will come in around 13 billion Rand. It is a staggering increase, but also a typical example of the insane enthusiasm that every country gets when asked to stage anything to do with big-money sport. These mega events are organized with the hope of generating vast revenues and gain more businesses and tourists. Organizing countries highlight the advertising revenues and international exposure (social benefit) as the benefits that follow.

The 1990 World Cup cost Italy £550 million. The economic benefit has been variously described since then as neutral to negative. In 2002 the host country Japan made a whopping loss: ticket sales were £1.4 billion, and FIFA gave the country £100 million - but the all up cost was £4.7 billion. Even the Germans made only a measly £56.4 million on their staging of the World Cup in 2006: and if Germany can't make money out of something, then it just isn't possible. (Versus the cost of staging the thing, this represented a net profit margin of 0.4%). When the UK won the 'right' to stage the Olympics in 2005, the nation went crazy. The total expenditure which started at £4.8 billion has crept up to £8 billion by 2010.

The EU has estimates that when soccer World Cup tournament is played on another continent, the loss to economic output is £.8.1 billion -either through people watching at a late/early hour and then calling in sick, or just calling sick for the whole two weeks to see the finals in person. Last week, Britain's new coalition government announced $38 million in Olympic budget cuts as part of efforts to slash the nation's budget deficit.

Even the current Greece crisis has got its heritage linked back to the Olympic Games. While many factors are behind the crippling debt crisis, the 2004 Summer Olympics in Athens has drawn particular attention. If not the sole reason for the nation's financial mess, it scores some point to the games as an illustration of what's gone wrong in Greece. Greece had been overspending. Governments in the Greek were not able to balance a budget in nearly 40 years, and the country narrowly averted bankruptcy in May before panicky European partners grudgingly put up massive rescue loans. As a result recently the Greece's Finance Minister George Papakonstantinou had to outline harsh spending cuts and tax increases to free up billions of Euros in a joint International Monetary Fund and Eurozone rescue. Greece will receive about $135 billion in bailout loans through 2012 from IMF and EU governments worried about the Greek crisis. This crisis could also damage the Euro.

There are more than a dozen Olympic venues - the start of Greece's irresponsible spending binge - now vacant, fenced off and patrolled by private security guards. Money loaned on short term, was spent on long term assets. The 2004 Athens Olympics cost nearly $11 billion by current exchange rates, double the initial budget, which does not include major infrastructure projects rushed to completion at inflated costs. In the months before the games, construction crews worked around the clock, using floodlights to keep the work going at night. In addition, the tab for security alone was more than $1.2 billion. Six years later, more than half of Athens' Olympic sites are barely used or empty.

So finally the question that prevails for us Indians is; are we heading for the same fate with the CWG? With the current media publicity of the in-appropriations in CWG purchases and more than `30,000 crore expenditure, do we still expect the tourists to come and watch the events at incomplete stadia? Would we even break-even?

Induced Spending

The buzz word doing the rounds from the advent of "recession" is how to induce the consumer spending when they are quite skeptical about the future security. America is the leading example in this. America has brought in various fiscal and monetary policies which induce the people to spend more and save less. Policies are reducing the borrowing rate, reducing the value of the currency so that more money is spent constructively. But how much of it is actually done? American investors are sending their money to overseas markets where there are more returns on investments. How much is actually been spent to improve the economy?

As a parallel to this, India in the ancient times was very rich. Most of the population was wealthy and had some occupation to perform. There was no urgency in spending the money to buy items of desire. They had enough liquidity with them to spend as and when required. Also the people believed in savings and longevity of material goods.

This situation can be seen as an issue to the country's financial circulation. If people do not spend much and there is no consistent demand, then how can enterprises define their raw material pipeline? And as raw material for enterprise A is the output product of enterprise B, with this vicious circle there can be a devastating crumble of the system. With this crumble citizens tend to save more and spend less as there is no future security.

With this situation in mind and the recent festivities doing the round, I was amazed at the rituals which were formulated for all the festivals of our nation. There are numerous festivals, effectively making someone celebrate a festival or occasion everyday. All these occasions require people to invite guests and also give some money as "shagun". Now with this kind of raw money changing hands, the system is finally able to run the mill. People are spending during the festive seasons and saving during the odd seasons. These festivals are an imbibed feature of us Indians. We cannot live without it. Its our culture.

So without blaming any culture, I will say that if the festivities are made about such that people are compelled to spend, then you have your financial machinery running smoothly. There won't be any need of fiscal or monetary policies to Induce Spending.