I was confident that the Fed had already begun printing. That seemed quite evident by the overall action in the commodity markets, the dollar, and the fact that stocks were unable to correct in the normal timing band for a daily cycle low. However, I didn’t really expect Ben would come out and publicly admit it. That one took me by surprise Thursday. I guess Bernanke wants to get full value for his attack on the dollar and make sure that markets are rising into the election.

At this point all the pieces are in place for the inflationary spike and currency crisis I’ve been predicting for 2014. We now have open ended QE that is tied to economic output and unemployment. But since debasing currencies has historically never been the cure for the bursting of a credit bubble, all the Fed is going to produce is spiraling inflation. So as this progresses we are going to see the Fed printing faster and faster as the result they are looking for never materializes. This is what will ultimately drive the currency crisis at the dollar’s next three year cycle low in 2014.

At this point, watch the price of oil if you want to know when the next recession is going to begin. As I’ve pointed out many times in the past, recessions (well, at least since World War II) have all been preceded by a sharp spike in the price of energy. Any move of 100% or more in a year or less, has historically been the straw that breaks the camel's back. Modern economies cannot survive that kind of shock. It invariably triggers the collapse of consumer discretionary spending and economic activity comes to a grinding halt.

In 2007 oil surged out of the 3 year cycle low into a parabolic advance as Bernanke trashed the dollar in the vain attempt to halt the sub-prime collapse. That 200% spike in oil is what tipped the economy over into recession, which was then magnified in the fall of `08 as the financial bubble and debt markets imploded.

I think it’s safe to say that Bernanke doesn’t understand his role in causing the recession of 08/09 as he is now making the same mistake again. I think he believes the recession was solely triggered by the financial meltdown. That was the icing on the cake, but not the initial trigger that caused the recession.

Despite the complete inability of QE to heal the economy or job market, and since he really has no other tool, Bernanke just keeps doing the same thing over and over expecting a different result, but never getting it.

Commodities are the check that prevents  Keynesian economic policies from healing the global economy. Keynesian academics either don’t understand this, or refuse to acknowledge it. Until they do, or we install Austrian economic advisers in the government, we are destined to continue making the same mistakes over and over.

So we will watch the price of oil as it rises out of its three year cycle low. If it hits $160 by next summer that will probably be enough to start the economy on the next downward spiral. If politicians get involved (and I’m sure they will) and try to impose price controls, they will multiply the damage and probably guarantee that the next economic downturn escalates into a truly catastrophic depression.

Until we see the spike in oil and the corresponding damage to the economy, no one has any business try to short anything, well maybe bonds, but even that will be risky because the Fed is going to be actively trying to prop the bond market up and keep interest rates artificially low.

All in all there is going to be so much money to be made on the long side, especially in precious metals, that no one needs to fool around with puny little gains on the short side, especially in a market that is going to be hell to trade from the short side. The time to sell short will be in 2014 after the dollar’s next three year cycle low. The dollar’s rally out of that bottom will correspond with the next global economic collapse, ultimately caused by the decisions made by the ECB and the Fed this past week. I dare say if they could see the damage their decisions are going to inflict upon the world and the dire unintended consequences, maybe they would finally stop kicking the can down the road and let the economy heal naturally. Of course that would entail several years of severe pain and politicians, as we all know, are extremely allergic to that.

2014-2015 is when we are going to see the stock market drop 60-75% and the next great leg down in this secular bear market. But until then there’s probably a pretty good chance we are going to see the S&P at new all time-highs in the next 6 months – 12 months.


Posted by Mr Thx Tuesday, September 18, 2012 0 comments

Anthony Migchels – Real Currencies August 25, 2012

How do we know this?

Consider a mortgage. We borrow $200k, and after 30 years we will have payed about $500k. So we pay $300 thousand dollars interest over the loan.

What would happen with our purchasing power, if we only needed to repay the principal? It would mean we would have 10.000 per year more purchasing power during the 30 years we repay the mortgage.

Our credit would greatly improve, because our liabilities would be much smaller.

Interest is payed to those who have money, and payed by those who don’t, and therefore need to borrow.

Interest is therefore a wealth transfer from poor to rich. Margrit Kennedy, a German monetarist, has quantified this wealth transfer in Germany. Her conclusions: the 80% poorest Germans pay 1 billion euros per day (365 billion per year) in interest to the richest 10%. The next richest 10% pay about as much interest as they receive.

Also, with in the 10% brackets the same wealth transfer is happening: so the poorest 8% of the richest 10% pay interest to the richest 1%.

It stands to reason that the situation is more or less the same everywhere. This means, that the poorest 80% Americans pay about 1,5 trillion dollars per year to the richest 10 percent.

This is the key driver centralizing wealth in the hands of the plutocracy.

Another problem with interest is, that it is not transparent who pays what. The strange thing is, that even if you don’t have any debts at all, you will still lose up to 45% of your disposable income through interest.
Producers incur ‘capital costs’. They pass these costs on to their customers. The amount of interest they pay on the loans to finance their production differs per sector. But it transpires that on average 45% of the prices we pay can be related to cost for capital.

Now, back to the debt.

Is it reasonable that one should be able to get a mortgage? Is their something intrinsically wrong with the debt?

It is probably quite useful for the large majority of the people to be able to get a mortgage. Most people would not be able to buy their own homes if they were not able to go into debt.

Another important aspect is, that in the case of a mortgage the creditor incurs no risk at all: he has the house as collateral.

And who is the creditor? In most cases a bank. A bank basically is a credit facility. However, the bank has made us believe that it is their credit, that we are borrowing their money.

This is not the case. Credit is the result of collateral and future income. A person has about 30 to 40 productive years and it that timespan an average American will make about 1 or 2 million dollars.

This future income is what makes the bank provide the credit.

But this future income is not the Bank’s, it’s the individual’s income. It is therefore their credit.

So banks capitalize the credit of the population.

We know that in the current construct all this interest is being raked in by the banks by creating the money at the time the money is loaned out. Through Fractional Reserve Banking.

We consider it unfair that the bank has the right to create money. Therefore a full reserve gold standard is propagated. Not only taking away the iniquity of money creation, but also the nasty habits of banks going broke by overleveraging themselves.

But if we take out a mortgage in a full reserve gold bank, we would still pay 500k for a 200k home. We would still lose 45% of our disposable income through interest passed on in prices.

To further the above points I’ll leave you with a little thought experiment.

What would happen if………

We would nationalize all banks. This would not be unfair, they are all busted and they already needed 16 trillion in Federal Reserve handouts. They are still all under water.

We would weed out all the BS. Derivatives would all be canceled, all the funny financial products gone.

We would maintain real debts by businesses and consumers, mortgages, and the national debt.

But we would cancel all interest payments from now on. Of course, savers would also no longer receive interest, but keep in mind that the average American loses far more in debt service than he gains in interest on his savings.

If debts are repaid, the money supply deflates, to maintain a stable money supply we would give out as much new credit as there are loans being payed off.

What would this mean? A direct end to the depression, because enormous purchasing power in the economy would be released. Consumers would be twice as rich, prices would collapse because capital costs are gone.
The credit of the people borrowing from the banks would massively improve, immediately putting an end to solvency problems of these banks. There would be no more bailouts.

The Government would have an immediate windfall of 700 billion per year, which is what it currently loses on debt service. But the Government, too, loses half of it’s disposable income to capital costs through prices. Not to mention the increased tax income from an exploding economy. So it is likely that without any austerity the deficit would disappear quite soon.

The banks would be reorganized, many people, especially the expensive ‘traders’ and ‘investment bankers’ would all be gone. All that would remain are the people running day to day banking services. Therefore the costs of these banks would be much lower. These costs can (and must) be passed on to debtors, but they would be low.

I believe that managing a risk free loan like a mortgage should cost no more than max. 10% over thirty years, so you would pay maybe 220k for 200k home.

There would be no more bailouts, no more bonuses. The wealth transfer from poor to rich would end over night.

All these benefits would go to Main Street. It would imply a major decentralization of economic power, which is also a key point.

Of course, it would disown the Trillionaires, but hey, I say enough is enough.

Now, I’m not saying that this what we should do at this point. This is just a thought experiment.

It shows it is not debt that is the problem, but interest. It shows that it is not a full reserve gold banking system we need, but interest free credit.

Of course, with this analysis we have not addressed inflation, which is strongly on the minds of most proposing full reserve Gold backed currency. We will deal with that next time.


Posted by Mr Thx Tuesday, August 28, 2012 0 comments

Aug 06, 2012 - 03:38 PM

By: Graham_Summers


Best Financial Markets Analysis ArticleMany people have been writing in to ask me, “why are you focusing on Europe so much? Who cares about Spain?”

The short answer is that everyone should care about Spain. Spain could potentially take down the banking system in Europe, which would mean the US facing a Financial Crisis at least on par with 2008.

How would this unfold?

To understand this, you need to understand how the European banking system works. By now everyone knows that many European countries have massive debt problems: Portugal, Italy, Ireland, Greece, and Spain, the infamous PIIGS.

Well, when these countries issue debt, it is mainly the European banks that buy it. So let’s say Spain issues €5 billion in new debt. Most of that will be snatched up by Spanish banks or some other European financial entity.

This bank will then park this debt on its balance sheet as a “senior asset” or an asset that has the least amount of risk (I realize this sounds insane given how bad Spain’s finances are, but this is how the banking system’s “risk models” work).

The bank will then use this Spanish bond to backstop loans to Spanish businesses, developers (not so much any more) even student loans: pretty much every other type of loan the bank might make.

On top of this, the bank will also use this Spanish bond to backstop hundreds of billions of Euros worth of trades.

Do you see the problem with this? If Spain defaults, one of the most important “assets” used to backstop its loan and trade portfolio goes up in smoke. At that point the bank is essentially insolvent and would have to liquidate its loan portfolio while trying to stave off a bank run (as you’ve likely noticed, Spain is facing bank runs galore).

So what? Who cares? This is Spain’s problem right?

Wrong. This is Europe’s problem as European banks across the board are sitting on Spanish debt: Spain’s sovereign bond market is €2.1 trillion in size.

So if Spain defaults, then a heck of a lot of EU banks (and some US banks for that matter) will see some of their “Senior Assets” go up in smoke, rendering them insolvent. This in turn could spread like wildfire throughout Europe’s banking system.

This is why the Spanish bank bailout was so rapid (it took only one weekend). EU officials know that if Spain’s banking system goes down, most of Europe will as well. This is also why EU officials continue to give money to Greece despite the clear fact that Greece is completely and totally bankrupt and has failed to meet fiscal demands placed on it throughout the EU Crisis.

Indeed, I wager most people at some point have asked themselves, “what’s the big deal about Greece? It represents only 2% of the EU economy. How is it that a country this small is still an issue after TWO YEARS!?!”

Now you know. By some estimates, Greece’s true debt exposure is north of $1 trillion. Lehman brothers had $649 billion in assets when it collapsed. Can you imagine the impact that a $1 trillion vacuum would have on the EU’s banking system (a banking system which backstops well over €200 trillion in derivative trades by the way).

How would the debt implosion of Spain’s $2.2 trillion in sovereign bonds affect the financial system? What about the effect of Europe’s $46 TRILLION banking system collapsing?

It would be Lehman by a factor of ten, easily.

So what does this have to do with the US?

The US banking system is $12 trillion in size. And this backstops over $220 trillion in derivative trades. Of this $220 trillion, 85% are based on interest rates. So…

If Spain, or any of the other PIIGS default, and Europe’s banking system (which is $46 trillion in size by the way) crumbles, interest rates across Europe will spike as the EU sovereign crisis spreads.

At the same time, Treasuries will spike pushing interest rates close to ZERO in the US, if not into negative territory (this happened when Lehman went under).

This in turn would very likely trigger an implosion of all those derivative trades based on interest rates. This blows up Wall Street and likely results in bank holidays and the stock market even being closed down for a period.

This is why Europe matters. This is why Spain could wipe out your 401(K). This is why European leaders are so frantic NOT to let a default occur in Greece or Spain (remember, the Spanish bailout was rushed through in less than a weekend).

In simple terms Europe is a HUGE deal for everyone. We’re not talking about some distant region far off in the distance that we will watch go down from our decks. We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.

This is why I keep talking about Europe so much. And it’s why I’m more concerned now than I was in early


Posted by Mr Thx Tuesday, August 7, 2012 0 comments

SONGKLA (Thailand), July 9 (Bernama) -- Yayasan Pembangunan Islam Malaysia (YaPEIM) or Foundation for Islamic Development Malaysia, will be raising the funds for Ar-Rahnu financing to RM1 billion next year from RM800 million this year.

Its Director General, Datuk Dr. Abd. Malek Awang Kechil, said the move to increase funds was based on the rising demand from traders for the Islamic based mortgage product, particularly from operators of small enterprises.

"YaPEIM's Ar-Rahnu has received encouraging response due to its much lower mortage rates compared with other financial institutions.

"Besides that, the speedier processing time of 15 minutes has also contributed to the rising demand," he said following the launch of a corporate social responsibility programme at the Wittiya San Suksa Religious School here today.

Also present at the event was the founder of the school, Hasan Ali and Principal, Toha Cinda.

A total of RM108,000 in contribution was also given to help upgrade the school's infrastructures and its cooperative business to beef up the school's economic resources.

The contribution was in line with the resolution taken at the 2012 Regional Ar-Rahnu Secretariat Conference, which concluded in Pattani last night, to actively carry out CSR activities towards the well being of the Muslim community.

On the expansion of YaPEIM's Ar-Rahnu branches this year, Abd Malek said the foundation was aiming to open up 24 new branches this year involving an investment of about RM8 million per branch.

However, this would depend on the situation and if there are old branch offices in need of upgrading, they would be given priority rather than opening a new one, he said.

"The cost of investment needed for upgrading a branch would be about the same to building a new branch," he said.

Abd Malek said several franchise outlets will be also opened this year and that the foundation had already identified suitable locations for this.

YaPEIM currently has 256 Ar-Rahnu branches nationwide.


Posted by Mr Thx Tuesday, July 10, 2012 0 comments

KUALA LUMPUR: Malayan Banking Bhd (Maybank) aims to attract RM32 million in the first year for its new product that allows investors to invest in silver.

The banking group is the first in the country to offer a silver investment passbook account, which allows deposits and withdrawals in the precious metal to be made at a daily price in ringgit.

Maybank said in a statement yesterday that this could be done at any of its branches, without the hassle of keeping the physical silver.

The product, known as the Maybank Investment Silver Account, comes as Maybank diversifies its offerings on previous metals.

Many banks in the country, including Maybank, already have a similar product for investment in gold.

Maybank's deputy president and head of community financial services, Lim Hong Tat, said investing in silver was appealing since it was highly valued for jewellery and industrial practices.

"In addition, silver will always be valuable regardless of the economic climate.

"The returns on customers' investment are dependent on the silver price fluctuations and the transactions would be recorded in the customer's passbook for easy record and maintenance," he said.

Lim said the new product would address increasing demand from those who had been investing in international grade silver bars.

The minimum investment for the product is 20 grammes.

Purchases of silver will be based on Maybank's current silver selling price quoted in ringgit per gramme. It was priced at RM2.95 per gram as at July 3.

"With this innovative option, we are targeting 20,000 customers in one year," Lim said.

In 1997, Maybank introduced the Maybank Gold Investment Account (MGIA) that enables customers to invest in gold.

The MGIA now has a portfolio of more than 66,000 accounts with investments totaling more than RM650 million.


Posted by Mr Thx 0 comments

Pos Malaysia Bhd (Pos Malaysia) and Bank Muamalat Malaysia Bhd (BMMB) today signed a strategic partnership agreement
to offer Islamic pawn broking (Ar-Rahnu) services to the public at selected Pos Malaysia outlets nationwide.

Its chief executive Khalid Abdol Rahman said the ArRahnu@POS service would initially commence operations at Pos Malaysia Bandar Baru Bangi and the Kuala Terengganu General Post Office next month.

The services would be expanded gradually to 50 Pos Malaysia outlets within a year, he said, adding that the Islamic pawnshop system would be managed by Pos Malaysia subsidiary, Pos Ar-Rahnu Sdn Bhd.

"In view of the growing demand for Ar-Rahnu services, Pos Malaysia outlets which are strategically located would provide customers the convenience of accessing and performing Ar-Rahnu transactions," he said in a statement.

The existence of ArRahnu@POS would enhance the product offering at Pos Malaysia outlets besides offering an alternative micro-credit convenience to the public and small time entrepreneurs who may have difficulty in obtaining financing from a bank, he added.

Meanwhile, the statement also said Koperasi Pos Nasional Bhd has granted Pos Ar-Rahnu Sdn Bhd its Islamic pawn broking rights under a cooperation agreement signed between both parties.

Under the agreement, Ar-Rahnu services would be made available at selected Pos Malaysia outlets for three years. -- BERNAMA

Posted by Mr Thx Monday, July 2, 2012 0 comments

"The crash is over", says an economist. "Housing can only go up," says another. "I think the market has bottomed out," says one builder. "It appears we have turned the proverbial corner," says a second.

After hitting a low with stocks in March 2009, U.S. single family building permits rallied in three waves into March 2012. The latest high is more than 65% below the September 2005 peak. A MarketWatch commentary insists, "Permits Push Signals U.S. Housing Boom." These assessments are flooding in even though many home buyers from 2010 and 2011 are already underwater! According to CoreLogic, more than one millions U.S. home buyers who have taken out low-money-down FHA mortgages over the last two years already owe more on their loan than their homes are worth. The FHA's policy of accepting almost no money down is deadly when..... continues in the May issue of EWI's Financial Forecast 10 page report available for FREE.
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Posted by Mr Thx Monday, May 28, 2012 0 comments

Spain is a catastrophe on such a level that few analysts even grasp it.
Indeed, to fully understand just why Spain is such a catastrophe, we need to understand Spain in the context of both the EU and the global financial system.

The headline economic data points for Spain are the following:
  • Spain’s economy (roughly €1 trillion) is the fourth largest in Europe and the 12th largest in the world.
  • Spain sports an official Debt to GDP of 68% and a Federal Deficit between 5.3-5.8% (as we’ll soon find out the official number)
  • Spain’s unemployment is currently 24%: the highest in the industrialized world.
  • Unemployment for Spanish youth is 50%+: on par with that of Greece
On the surface, Spain’s debt load and deficits aren’t too bad. So we have to ask ourselves, “Why is unemployment so high and why are Spanish ten year bills approaching the dreaded 7%?” (the level at which Greece and Portugal began requesting bailouts).
The answer to these questions lies within the dirty details of Spain’s economic “boom” of the 2000s as well as its banking system.
For starters, the Spanish economic boom was a housing bubble fueled by Spain lowering its interest rates in order to enter the EU, not organic economic growth.
Moreover, Spain’s wasn’t just any old housing bubble; it was a mountain of a property bubble (blue line below) that made the US’s (gray line below) look like a small hill in comparison.

continue here

Posted by Mr Thx Tuesday, May 1, 2012 0 comments

Malaysia - Exchange Rate Policy - Nov 10 2011


Ave-11 Ave-12
MYR/US$ 3.1200
3.1100 3.1800
MYR/EUR 4.2714
4.4500 4.3800
Overnight Policy Rate (%) 3.00
3.00 3.00
Source: BMI, November 10 2011

Short-Term Outlook

We see increasing risks that the Malaysian ringgit could experience further selling pressures over the coming weeks due to resurfacing troubles in the eurozone. Following a sell-off across regional currencies in September, the Malaysian ringgit depreciated by around 7.5% before finding support at MYR3.2048/US$. Further negative developments in the eurozone could see the ringgit retesting its recent low of MYR3.2048. A break below this level would present significant downside risks to our year-end target of MYR3.1500/US$ for the currency.
External Headwinds Remain
Malaysia - Malaysian Ringgit Spot, MYR/US$
Source: Bloomberg, BMI

Core View

Global economic headwinds, including the sovereign debt crisis in the eurozone and growing concerns of a hard-landing in China, should spell further weakness for risk-on currencies including the Malaysian ringgit over the coming months. However, despite these downside risks to the Malaysian ringgit's outlook in the short term, we expect the country's robust current account dynamics to provide support for a steady appreciation in the currency over the medium term. Furthermore, a positive economic outlook should underpin strong foreign direct investment (FDI) inflows and fuel demand for the ringgit over the coming quarters. Nonetheless, we expect further weakness in the currency in H112 before the ringgit resumes its bullish uptrend in H212. This means that the ringgit should average at around MYR3.1800/US$ in 2012 before strengthening to MYR2.8500/US$ by end-2013.

Despite cooling external demand, Malaysian exports have remained resilient in recent months. Trade exports grew 10.8% year-on-year (y-o-y) in August (up from 6.9% y-o-y in July) while outpacing that of imports at 6.8%, resulting in a healthy trade surplus of US$3.7bn. Although we expect the trade balance to narrow over the coming months, a surplus would nonetheless be positive for the ringgit. Meanwhile, FDI inflows are likely to remain strong in 2011 due to a positive response from foreign investors towards the government's ambitious Economic Transformation Plan (ETP). In fact, we have already seen compelling evidence that investor optimism over the ETP has been a key factor behind the surge in capital inflows into Malaysia in 2011. According to a survey conducted by the International Trade and Industry Ministry, local and foreign private sector companies are expected to commit MYR50.6bn (US$16.8) worth of investments in 2011. We are optimistic that these FDI inflows should provide further support for the currency over the coming quarters.

Strong Cushion Of Reserves
Malaysia - Foreign Reserves, US$mn
Source: Bloomberg, BMI
According to figures published by Bank Negara Malaysia (BNM), the recent wave of selling pressure in the foreign exchange market drained the country's foreign reserves by 4.1% from US$134.5bn in August to US$129.1bn by the end of September. However, it is worth noting that the central bank's intervention in the foreign exchange market is largely aimed at limiting short-term volatility in the exchange rate, rather than an attempt to defend against a balance of payments deficit. As the accompanying chart shows, despite the central bank's intervention, the country's foreign reserves remain above its pre-crisis peak. Our view that Malaysia's trade balance will remain in surplus while FDI inflows will continue to grow over the coming quarters means that we should see a continued accumulation of reserves.

We note that movements in the Malaysian ringgit and the Chinese yuan are highly correlated as a result of BNM's conscious efforts to keep Malaysian exports competitive. Given that we expect external demand to remain relatively subdued in 2012, export growth should continue to slow over the coming months. This poses a risk that the BNM may seek to limit any significant gains for the ringgit in order to prop up exports.

Catching Up With The Yuan ?
Asia - Spot MYR/US$ (LHS) & 12-Month CNY/USD NDF outright (RHS)
Source: Bloomberg, BMI

Risk To Outlook

FDI inflows will play a major role in sustaining a steady appreciation in the Malaysian ringgit over the coming quarters. To a great extent, this is heavily dependent on the successful implementation of the government's ETP. We warn that Malaysia's deteriorating fiscal position, which we expect to amount to a deficit of 5.6% of GDP in 2012, represents a significant risk to the government's ability to implement the ETP. Should investor sentiment start to wane on the back of growing concerns that the government could face difficulties in financing the ETP, a slowdown in FDI inflows would mean that the currency could see limited gains in H212.


Posted by Mr Thx Wednesday, April 11, 2012 0 comments

Myanmar - Economic Activity - Dec 06 2011

BMI View: On the heels of recent surprisingly fast-paced reforms, potential opportunities for Myanmar's economy are perhaps the highest they have been in over five decades. Moving forward, the economy could be set for a boom period in real estate, tourism, construction, and exports, but much will depend on the government's continued push towards reform and the eventual lifting of stifling US and EU sanctions. We see the Myanmar economy growing by 5.0% in 2012 following a 6.0% performance in 2011 even as growth in the rest of the world falls more sharply given the country's unique prospects of economic liberalisation.
One of Asia's best educated and wealthiest states prior to a military coup in 1962, Myanmar is now bereft with a cumbersome dual-rate exchange system, a major infrastructure deficit, and heavy sanctions from the US and EU following almost five decades of failed economic policy. However, on the heels of an election that was widely derided as a rigged handover of power from the military to its own factions in 2010, change may finally be coming in earnest to the beleaguered resource-rich state. 

The culmination of recent (and surprisingly strong) reform efforts was US Secretary of State Hillary Clinton's November 30 visit to Myanmar, during which she met with President Thein Sein and political activist Aung San Suu Kyi. The visit represented the first time such a high level official from the US had visited Myanmar since 1955 and heralded a major thaw in relations between the two countries. Following such an extended period in isolation, the recent pace of change has been relatively breakneck and could open up myriad opportunities for Myanmar's struggling economy. 

Dependence On China To Wane

Myanmar's sudden shift towards political reform is highly indicative of its intentions to stem its growing reliance on giant neighbour China. Over the past 18 months, Myanmar has received 20% more foreign direct investment inflows than it had over the preceding 20 years combined, with China responsible for 70%. President Thein Sein's September decision to halt the China-backed US$3.6bn Myitsone dam project signalled that the new government is serious about balancing the playing field with China, and to do so, Naypyidaw has now turned towards the West.

Shooting Higher
Myanmar - Stock Of Foreign Direct Investment, US$mn
Shooting Higher - Myanmar - Foreign Direct Investment, US$mn

Source: BMI, UNCTAD, Myanmar CSO

This is not to say that Myanmar's relationship with China is likely to deteriorate precipitously. Given China's thirst for Myanmar's natural gas and copper resources, and Myanmar's continued need for Chinese investment, the two countries' mutual interests promise to keep relations close. Moving forward, China is very likely to remain Myanmar's closest ally and largest investor as was indicated by head of Myanmar's armed forces General Min Aung Hlaing's auspicious visit with putative future Chinese president Xi Jinping just days before Clinton's arrival. 

Lifting Of Sanctions Could Usher In New Era

Still, d├ętente with the US in particular could present monumental economic opportunities for Myanmar. Since 1997, the US has forbidden all new investment by American companies into Myanmar as well as most Myanmar exports to the US. While the US has repeatedly stated that Myanmar's government will have to show considerably more progress on the political reform front before it can consider reducing or lifting sanctions, Clinton's visit is a major step forward, indicating that the US is likely to reward Myanmar further if the reform process moves ahead. 

The lifting of sanctions by the US and EU would solidify Myanmar's re-emergence into the international economy and could eventually set the stage for the country to build its own economic miracle. Rich in natural gas, timber, gems, metals, and myriad other valuable natural resources, Myanmar could potentially become a resource exporting powerhouse. Furthermore, with a literacy rate near 85% and at least 5mn English speakers nationally (most of whom live in Yangon) out of a total population near 60mn, Myanmar possesses considerable human capital.

Secondary Axis Required
Asia - Annual Exports Of Goods, US$bn (Myanmar RHS)
Secondary Axis Required - Asia - Annual Exports Of Goods, US$bn (Myanmar RHS)

Source: BMI

Still, it should be noted that corruption remains extremely widespread across Myanmar and will continue to plague its poor business environment for an extended period despite even swift wide-ranging reform. Myanmar's current state is underscored by Transparency International's most recent Corruption Perceptions Index rankings, which place the country second worst in the world, tied with Afghanistan and above only Somalia. 

Real Estate, Tourism Set To Boom?

In the short term, Myanmar's real estate and tourism sectors stand to gain immensely from an opening of the economy. In stark contrast to just one year ago, when struggling local hoteliers were converting chronically vacant rooms to office space, room shortages are already cropping up in the country's largest and most economically active city, Yangon, as businessmen and tourists alike are drawn towards the country's rapidly changing atmosphere.
In the real estate sector, even though prices have risen for every year for the past 20 years (according to media and anecdotal reports), the hopes that reform will lead to reduced limitations on foreign ownership should keep already lofty prices underpinned through 2012. 

With cash being far too risky for most wealthy Burmese to hold and foreign banking not an option for almost anyone holding a substantial amount of wealth, rich Burmese have plunged their capital into real estate, sending the market surging over the past few years. Prices have been reported as high as US$1,245 per square foot in the most sought after locations in Yangon, with properties in some upscale neighbourhoods hovering around US$375 to US$625. 

Still, if and when serious economic reforms take place, foreign demand could lead to massive speculation in the market, driving prices even further skywards over the medium term in what remains an exceedingly underdeveloped market. Furthermore, whereas booming property prices have thus far been restricted to a very limited section of Yangon, they could begin to spread rapidly should economic reforms move ahead as hoped. In such a scenario, a lack of office space in Yangon (where there is only 540,000 square feet of office space, or the equivalent of one New York skyscraper) and across the country is also likely to portend a construction boom. 

Kyat Could See Further Strength

Despite having the brightest outlook in nearly six decades, the Myanmar economy still faces major challenges before it can enter the pantheon of South East Asian miracle countries like Vietnam and Thailand. Standing in its way is a dilapidated exchange rate mechanism, where the black market rate of the Myanmar kyat to the US dollar is more than 120 times greater than the official government rate. As the official government rate of MMK6.4355/US$ is rarely (if ever) used to settle transactions, the black market rate, currently at MMK776.00/US$, is the effective exchange rate. 

Although the government is working with the IMF in order to move towards a single-rate mechanism, it lacks the ability to control the currency in a meaningful way. In light of the suddenly reform-minded government, as well as historic communication with the US, we now see the possibility of continued strength in the kyat despite it having appreciated more than 20% over the past two years. As the economy opens up, foreign demand for the kyat will surge, underpinning the currency's already strong historical price. 

Significant Upside Risks To Growth Forecast

Despite the growing chance of renewed recession in the US and EU, Myanmar's starting position as a nearly completely isolated economy means that it bears little exposure to the global economy's woes. As a result, risks to our growth forecast of 5.0% for 2012 are weighted heavily to the upside. Should either the US or EU ease sanctions considerably, we would consider revising our forecast upwards. 


2011 2012 2013 2014 2015 2016
Nominal GDP, MMKbn 1 45,024.2 f 51,648.3 f 59,247.1 f 67,963.8 f 77,963.0 f 89,433.3 f
Nominal GDP, US$bn 1 55.5 f 60.9 f 67.1 f 74.0 f 81.6 f 90.0 f
Real GDP growth, % change y-o-y 1 6.0 f 5.0 f 5.0 f 5.0 f 5.0 f 5.0 f
GDP per capita, US$ 1 890 f 956 f 1,033 f 1,117 f 1,207 f 1,305 f
Population, mn 2 62.4 f 63.7 f 65.0 f 66.3 f 67.6 f 68.9 f

Notes: f BMI forecasts. Sources: 1 Asian Development Bank. 2 World Bank/UN/BMI.

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Iraq - Fiscal Policy - Nov 10 2011

BMI View: Iraqi Finance Minister Rafi al-Eisawi's plan to reduce the budget deficit by two-thirds, which relies on increasing oil exports and privatising state-owned enterprises, is feasible but will require a significant degree of political will in order to reform the business environment. Given our view that political instability will retard the pace of reforms, we maintain our budget deficit forecasts of 2.7% and 2.6% of GDP in 2012 and 2013 respectively.
The Iraqi government's goal of reducing its budget deficit by two-thirds by the end of 2014 is achievable, though will require a high degree of political will. On October 22, media sources quoted Finance Minister Rafi al-Eisawi as stating that the government planned to reduce the budget shortfall by increasing oil production and privatising state-owned enterprises (SOEs). Given the high degree of political instability in the country, we expect the business environment reforms necessary to attract foreign investment into SOEs will take a significant amount of time to enact (and therefore lead to but a few acquisitions, if any, over the medium term). Therefore, we maintain our budget deficit forecasts of 2.7% and 2.6% of GDP in 2012 and 2013 respectively. 

Hydrocarbons Are The Easier Route

Fiscal revenues are set to increase dramatically over the coming years, mostly due to advances in hydrocarbon production that will allow for greater exports. Our Oil and Gas research team projects oil production to rise from an average of 2.8mn barrels per day (b/d) in 2011 to 7.5mn b/d by 2016, with export volumes rising from 2.0mn b/d to 6.6mn b/d over the same period. Although we foresee declining international energy prices over the medium term, from an average OPEC basket price of US$102 per barrel (/bbl) in 2011 to US$99/bbl in 2012 and US$97/bbl in 2013, the effect of rapidly rising oil production, and in turn exports, will cause oil revenues to rise sharply (see accompanying chart). 

Hydrocarbon Revenues To Pour In
Iraq - Forecasts For Value Of Petroleum Exports
Hydrocarbon Revenues To Pour In - Iraq - Forecasts For Value Of Petroleum Exports, US$mn

Source: BMI

Privatisations Entail Greater Complexity

Privatisation is another potential source of revenues, according to Eisawi, but we see several obstacles to successful sales of SOEs. Reforming the economy from a state-centric system to a market-based one is a high priority for the government, and there is certainly a large pool of potential assets available for privatisation (with 177 state-owned firms in the country). Approximately 43% of all Iraqi state-owned firms (a total of 76 enterprises) fall under the authority and supervision of the Ministry of Industry and Minerals (MIM), with ownership of 250 factories. Sectors span the areas of agriculture, transportation, telecommunications, utilities, construction, hydrocarbons, and financial services, among others, and given the high rates of growth that the country is projected to see (see our online service, November 8, 'Double-Digit Growth Ahead'), many of these could be attractive targets for investors. 

A Large Pool Of Potential Assets For Sale
Iraq - Breakdown Of Number Of SOEs By Ministry
A Large Pool Of Potential Assets For Sale - Iraq - Breakdown Of SOEs By Ministry

Source: BMI, Iraq Task Force For Economic Reforms/UN/World Bank

That said, we note that there a number of obstacles to the privatisation plans, and a high degree of political will would be required to ensure that the business environment is attractive enough for investors to bid. The lack of a favourable environment has proven to be a decisive factor in previous failed attempts by the MIM to establish public-private partnerships (PPPs) between SOEs under its authority and investors, according to the US Special Inspector General For Iraq Reconstruction (SIGIR). 

A series of laws have yet to be updated in order to address potential legal issues of privatisation, and while an Economic Reform Law is currently being developed, changes also need to be made to the country's Companies Law and Investment Law. Furthermore, investors would need assurances that they would not receive any legal backlash from laying off workers (as many SOEs have excessively large payrolls). However, there are significant concerns regarding political stability in the country, which will slow down the pace of reforms and dampen investor interest (see our online service, October 19, 'Mounting Challenges To Stability'). 

Success Would Help On P&L

Should Baghdad succeed in spinning off even a few of its SOEs, we would expect to see substantial benefits. First, the government would see a large (albeit temporary) source of new revenue. Second, and more importantly, fiscal expenditures related to maintaining state-owned firms would decrease, boding well for the budget. Many SOEs have suffered heavy damage to their assets, rendering the firms inoperable and therefore unable to earn revenues, yet workers are kept on payrolls and paid from government coffers. Others are able to function but have a bloated workforce. These firms collectively employ over 633,000 workers, and employee compensation expenses took up 41.5% of total fiscal expenditures (US$22.8bn out of total expenses of US$55.0bn) in 2010. Thus, privatisations would have a major impact on both revenues and expenses. 


2008 2009 2010 2011 2012 2013 2014 2015 2016
Fiscal revenue, IQDbn 2 80,252.0
69,521.0 e 104,192.9 f 139,873.7 f 187,050.4 f 220,897.2 f 258,395.4 f 304,708.9 f
Revenue, % of GDP 2 51.6
45.0 e 51.2 f 56.8 f 62.5 f 64.7 f 66.7 f 68.8 f
Fiscal expenditure, IQDbn 2 59,403.0
64,351.0 e 104,425.2 f 146,436.1 f 194,760.0 f 228,577.7 f 261,439.3 f 291,748.0 f
Expenditure, % of GDP 2 38.2
41.7 e 51.3 f 59.5 f 65.1 f 66.9 f 67.4 f 65.9 f
Budget balance, IQDbn 2 20,849.0
5,170.0 e -232.3 f -6,562.4 f -7,709.6 f -7,680.5 f -3,043.9 f 12,960.9 f
Budget balance, % of GDP 2 13.4
3.3 e -0.1 f -2.7 f -2.6 f -2.2 f -0.8 f 2.9 f
Primary balance IQDbn 1,2 21,757.0
5,988.3 e 3,745.7 f -2,584.4 f -2,912.6 f -2,680.5 f 1,956.1 f 17,960.9 f
Primary balance % of GDP 1,2 14.0
3.9 e 1.8 f -1.0 f -1.0 f -0.8 f 0.5 f 4.1 f

Notes: e BMI estimates. f BMI forecasts. 1 Fiscal balance stripping out interest payments on government debt; Sources: 2 CBI/BMI.

Posted by Mr Thx Tuesday, April 10, 2012 0 comments

Iraq - Exchange Rate Policy - Nov 10 2011

BMI View: There is a strong case to be made in support of the argument for a devaluation of the Iraqi dinar, including improved fiscal dynamics, greater reserve accumulation, and export competitiveness. However, we believe political and other considerations in support of the current peg of IQD1,170/US$, including inflation and social stability, will prevail over the medium term.
We do not foresee a major change in the country's exchange rate policy going forward (apart from a potential redenomination - see our online service, April 15, 'Redenomination Of Dinar Will Have Negligible Impact). Local media sources reported that the Central Bank of Iraq (CBI) had sold US$205mn on October 31, above the prior week's sale of US$154mn, whilst it had consistently sold similar sums in recent quarters. 

This peg, which is being set at an artificially high level, is costing the country billions of dollars per year in foreign exchange and reducing the government's revenues in local terms. However, it appears that Baghdad has continued this policy in order to limit imported inflationary pressures and to promote economic stability in the country, and we believe the policy will continue over the medium term. 

The Case For Devaluation 
Devaluation of the dinar would bring several benefits, most notably related to fiscal revenues. The government relies heavily on oil exports for its revenues, and a weaker dinar would allow each dollar of hydrocarbon receipts to go further in paying dinar-denominated expenses. Baghdad has been eager to invest in capital projects, particularly those related to electricity, energy, and housing, and also increased current expenditures on items such as subsidies and a larger payroll. A devalued dinar would go a long way towards setting the country on a path towards greater fiscal stability (see accompanying chart).
Depreciation Would Improve Fiscal Accounts Dramatically
Iraq - Budget Balance Under Two Scenarios
Depreciation Would Improve Fiscal Accounts Dramatically - Iraq - Budget Balance Under Two Scenarios

Source: BMI

A weaker local currency would also allow the government to accumulate reserves at a faster rate. As stated earlier, the current peg is causing the CBI to sell millions of dollars every week, and those funds could instead be used to build up foreign reserves even more. While Iraq's reserves, which amounted to US$55.2bn at the end of September, are far from being depleted, continued sales of foreign exchange may not be sustainable over the long term. 

Cashing In On Higher Energy Prices
Iraq - Net Foreign Reserves, US$bn
Cashing In On Higher Energy Prices - Iraq - Net Foreign Reserves, US$bn

Iraq - Net Foreign Reserves, US$bn

Similar to many countries across the Middle East, Iraq is seeking to diversify its economy away from oil, and a devaluation would make its exports more competitive in the global marketplace. With hydrocarbons making up over 90% of all exports and over half of GDP, along with double-digit rates of unemployment, a competitive export sector would facilitate greater investment in sectors other than energy and, in turn, create more employment opportunities. 

Sticking With The Status Quo

While the aforementioned arguments suggest strong economic cases for a devaluation, we believe other factors will outweigh them over the medium term. Iraq is a major importer of food items, being among the world's top ten importers of wheat. Food also takes up a large portion of Iraqis' disposable income (as evidenced by the fact that food makes up over 60% of the consumer price basket). Thus, the importance of maintaining low food prices cannot be discounted, particularly at a time when price shocks have sparked large-scale unrest across the region. 

Stronger Exchange Rate Has Contributed To Lower Inflation
Iraq - IQD/US$ Exchange Rate (LHS) And Inflation, % chg y-o-y (RHS)
Stronger Exchange Rate Has Contributed To Lower Inflation - Iraq - IQD/US$ Exchange Rate (LHS) And Inflation, % chg y-o-y (RHS)

Source: BMI, Bloomberg, COSIT

Higher food prices due to a devaluation would not only have an impact on the country's political risk profile, they would also force higher government spending. Baghdad currently runs a costly Public Distribution System, which provides a ten-item food basket to the large majority of households every month. This programme is intended to limit the impact of food prices rises on the public, and the government has allocated US$3.4bn of its 2011 budget (approximately 6%) to paying for all the goods. Thus, while a devaluation would make every petrodollar more valuable in local currency terms, there may be unintended consequences such as a larger food bill. 

Projecting a sense of stability is a major goal of the government, as it would increase investor appetite for foreign direct investment (FDI), and the current peg to the dollar gives the impression of contributing to macroeconomic stability in our view. By relegating monetary policy to the management of the Federal Reserve, Baghdad is allaying investor fears that a mistake in monetary policy could send the economy crashing in the medium term. As a result, while export competitiveness is a major consideration, we believe the aim of building investor sentiment by linking Iraqi monetary policy to that of the US is an even more decisive factor and will continue to be over the medium term.


2008 2009 2010 2011 2012 2013 2014 2015 2016
Exchange rate IQD/US$, ave 1 1,193.18
1,170.00 f 1,170.00 f 1,170.00 f 1,170.00 f 1,170.00 f 1,170.00 f
IQD/US$, ave % change y-o-y 1 -4.9
0.1 f 0.0 f 0.0 f 0.0 f 0.0 f 0.0 f
Exchange rate IQD/EUR, ave 1 1,746.36
1,673.10 f 1,614.60 f 1,521.00 f 1,462.50 f 1,462.50 f 1,462.50 f
IQD/GBP, ave 1 2,200.53
1,907.10 f 1,942.20 f 1,989.00 f 2,047.50 f 2,047.50 f 2,047.50 f
IQD/AUD, ave 1 1,012.37
1,224.99 f 1,053.00 f 877.50 f 877.50 f 877.50 f 877.50 f
JPY/IQD, ave 1 0.08
0.07 f 0.07 f 0.08 f 0.08 f 0.08 f 0.09 f
IQD/CNY, ave 1 171.04
180.69 f 182.96 f 184.81 f 188.58 f 192.43 f 196.36 f

Notes: f BMI forecasts. Sources: 1 BMI.


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