Archive for August 14th, 2018

India vs Indonesia: Comparing the two economies

August 14, 2018

Interesting piece by Rajeev Malik. It is always useful to compare economies as it helps get a better picture (could also be a case of comparing apple with an orange).

Both India and Indonesia elected leaders in 2014 amidst new hope and change:

India and Indonesia experienced positive tectonic political change in their national elections in 2014. The actual delivery by Prime Minister Narendra Modi in India and President Joko Widodo (“Jokowi”) in Indonesia has been positive, but less than the hyped-up investor expectations. The two countries are scheduled to have elections in 2019, and an important differentiation between them is inflation: It eased in both countries, but Indonesia is the clear winner. 

Malik points to similarities and differences between the two economies in recent years.

The central banks have hiked rates in both the economies. But for Indonesia it is to defend against the so called currency war and in India for inflation:

India has better managed food inflation than Indonesia. Food inflation declined this year, to 3.2% year-on-year in June, while it increased in Indonesia, to 5.4% in July. The Modi government deserves credit for ensuring lower food inflation. However, it hasn’t implemented any new institutional framework that inspires confidence that stability in food inflation will be sustained and isn’t just a propitious outcome of good luck and ad-hoc policy steps. A key concern is that with core inflation already firming in the early stages of recovery, any increase in food inflation from an unanticipated supply shock will further complicate inflation management for the infant  monetary policy committee (MPC).

The motivation for monetary tightening this year was different in the two economies, which have significantly improved their macroeconomic landscape compared to the “taper tantrums” in 2013 when they were included in the Fragile 5 economies. BI has been more aggressive, hiking its policy rate by a cumulative 100 basis points (bps) in three steps to 5.25%. The Reserve Bank of India’s (RBI) monetary policy committee (MPC) raised interest rates 50bps to 6.5% in two consecutive hikes. 

In Indonesia’s case, higher rates were necessary mainly to defend the currency from destabilizing depreciation. India’s MPC, on the other hand, emphasized inflation concerns rather than currency defence as its main goal when it unexpectedly raised the repo rate in June. It hiked again in August and announced its inflation forecast for early 2019-20 at an elevated 5%. 

Additional monetary tightening is in store for both economies, but the use of interest rates to defend the currency is a bigger risk for Indonesia than India. It will also be subject to external triggers. Inflation risk, however, is more underappreciated in India.

He does not add that perhaps the hike in Indonesia was also due to the suffering of the economy in SE Asian crisis. They are just being cautious this time having learnt the lessons (perhaps)…

 

How a Swiss bank was toppled by a financial scandal in Malaysia – and what can be learned from it

August 14, 2018

Salvatore Cantale and Ivy Buche of IMD Business School in this piece write about the misadventures of BSI Bank in the Malaysian 1MDB scam:

The 143-year-old bank was one of the oldest in Switzerland and the sixth largest, having expanded overseas during the 2000s into the high-growth markets of Asia, Eastern Europe, the Middle East and Latin America. As a strategically important financial centre, the bank opened a Singapore subsidiary in 2005. Under chief executive Hanspeter Brunner it grew rapidly. Among its clients were high net-worth individuals, family-owned companies, and several state-owned wealth and development funds – including 1MDB.

Storm clouds were gathering. In 2011, the Monetary Authority of Singapore, the state bank and financial regulator, inspected the bank for the first time, finding policy and process lapses and weak enforcement and control. A second inspection in 2014 uncovered serious shortcomings in BSI Singapore’s due diligence conducted on assets supposedly underlying the investment funds. The bank became embroiled in regulatory investigations related to 1MDB – now BSI Singapore’s largest and most profitable client.

A subsequent intensive on-site inspection of BSI Singapore revealed multiple breaches of anti-money laundering regulations, a pervasive pattern of non-compliance, poor and ineffective oversight from senior management and numerous acts of gross misconduct. The bank’s licence was withdrawn in May 2016, and the names of BSI Singapore employees, including Brunner’s, were passed to authorities to determine whether they had committed any criminal offence. Investigations into Brunner and other executives continue, although Brunner recently won back a confiscated passport.

On the same day, the Swiss Financial Market Supervisory Authority (Finma) started criminal proceedings against the BSI group for failing to prevent suspected money laundering and bribery in its dealings with 1MDB. The BSI group was fined 95m Swiss francs (US$96m), the amount the bank had generated in illegal profits. The group’s chief executive Stefano Coduri stepped down, and subsequently BSI was taken over by private banking group Zurich-based EFG International, on Finma’s condition that the BSI group would be dissolved within the next 12 months.

The US Department of Justice also filed civil forfeiture complaints in 2016 and 2017 seeking to recover about US$1.7 billion tied to 1MDB – the largest action brought under the US Kleptocracy Asset Recovery Initiative.

Lessons?

There will always be tension between the demands of business and regulations controlling a bank’s exposure to risk, especially when directives are given to achieve high growth targets. This scenario plays out in banks all over the world – but which should prevail? BSI appears to have prioritised customer demands in its pursuit of growth and profit, at the expense of compliance and internal controls. The outcome, as it was during the financial crash of 2007-08, is plain to see.

The failure of senior management to provide any effective oversight of non-compliance or misconduct of bank employees ultimately points to a dereliction of duty. Did BSI staff not notice that 1MDB had 100 accounts at the same bank? Such high numbers of accounts are considered a sign of “layering”, a method that makes it more difficult to detect money laundering activity. While precisely what happened has yet to be established, it seems clear that BSI failed to perform its due diligence or to monitor transactions.

In a globalised world economy, the risks associated with compliance breaches and management failures in one region can have far-reaching implications in others. All chief officers in banks like to say that compliance and risk management is their key priority. But most participate only at the strategic level, and other departments such as legal, IT and project management must implement it. A common vision of strategy and compliance across all levels of all departments of a company’s global operations is required to ensure that management oversight is consistent throughout the comany.

Not every different from similar banking troubles across time and space…

Heat: the next big inequality issue

August 14, 2018

Likes of Piketty might soon have to look at a different kind of inequality – heat inequality. This means some places being hotter than others leading to all kinds of issues.

Guardian reports:

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Politicization and compromising integrity of official macroeconomics statistics: Lessons from Greece

August 14, 2018

Greece (along with Italy and Argentina) never fails to surprise.

Edwin M. Truman and Nicolas Véron of Peterson Institute write about Andreas Georgiou who was the chief statistical officer in Greece from 2010-15. Apparently, he did not give overstated GDP figures during the Greece crisis leading to all kinds of career problems for the person:

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Aadhaar must to buy Mysore Silk saris during sale in Karnataka

August 14, 2018

One is not sure how to react to such news.

Aadhaar will be must to buy Mysore Silk saris during the special sale organised by the Karnataka Silk Industries Corporation Ltd (KSIC) on August 15 and August 24 to mark Independence Day and Varamahalakshmi respectively.

Sa Ra Mahesh, state Tourism and Sericulture Minister, told The New Indian Express that the special sale is organised for women, who are fond of Mysore Silk, but cannot afford the same due to the price range.
“On Independence Day (August 15), we are selling the saris worth Rs 7,000 for  Rs 4,000, and on Varamahalakshmi festival (August 24), the saris worth Rs 15,000 will be sold at Rs 4000,” the minister said.

To keep middlemen away from this and to ensure the saris at discounted rates reach the intended beneficiaries, the KSIC has made it mandatory for the customers to produce Aadhaar cards while buying the saris during the special sale at the respective showrooms or outlets. This mandatory  submission of Aadhaar while purchasing Mysore Silk saris is also to ensure that the person who buys a sari in this special sale will not be eligible to buy the same for the next five years in the same offer.

Sa Ra Mahesh said, “We made Aadhaar compulsory to buy the saris to avoid misuse of the scheme.”

Not sure whether this was needed.

One just has to ensure enough supply at different price points. Then let people take a call whether they want to buy and at which price level.

What will the financial world look like in 2028?

August 14, 2018

Ravi Menon, Managing Director of the Monetary Authority of Singapore, engages in this so scenario planning for financial sector in 2028.

The speech is titled:  Financial regulation – 20 years after the Global Financial Crisis. Mr. Menon says in these 20 years we have also seen another crisis in 2023 which he terms as  Global Cyber Crisis of 2023!

Mr Mark Gould, Acting President, Federal Reserve Bank of San Francisco, Ladies and gentlemen, friends and colleagues, good morning. And welcome to the Symposium on Asian Banking and Finance 2028. 

It was 13 years ago, in 2015, that the Federal Reserve Bank of San Francisco and the Monetary Authority of Singapore (MAS) began this collaborative journey of organising this Symposium.

  • Let me, on behalf of MAS, thank Mark and his colleagues at the San Francisco Fed for the fruitful partnership and warm relationship over the years.

This Symposium began in 2007 to consider the lessons learned from the 1997 Asian Financial Crisis.

  • Since then, we have lived through two other major crises – the Global Financial Crisis of 2008 and the Global Cyber Crisis of 2023.

Today, I would like to take stock of the evolution of financial regulation over the last 20 years, since the Global Financial Crisis.  I think three broad themes characterise this journey:

  • first, fixing the fault lines that led to the Global Financial Crisis;
  • second, managing the risks posed by FinTech while harnessing its benefits;
  • third, defending against systemic cyber risk.

He looks at several ongoing and futuristic themes. One actually feels it is more a speech on technology than finance

For instance on DLTs:

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Why the Bank of England Should Target Growth

August 14, 2018

Monetary policy keeps going in circles.

Prof Linda Yueh of LBS in this piece argues that Bank of England should also target growth. The Bank of England recently raised its interest rates after a long pause at 0.5%. The reason behind rate hike is both normalisation of policy rates and expected inflation rising in future.

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