International Herald Tribune:UN urges global action on U.S. debt

UN urges global action on U.S. debt
By Elizabeth Becker The New York Times
Thursday, January 27, 2005

WASHINGTON The United Nations has urged all major industrial countries, especially Europe and Japan, to help the United States reduce its twin deficits by spurring their own economies to grow faster.

In its report, World Economic Situation and Prospects 2005, the world body said on Tuesday that the twin budget and trade deficits of the United States were throwing the global economy off balance.

It echoed warnings already issued by the International Monetary Fund and other financial institutions in saying that the United States cannot continue to maintain such huge debts.

"What we really need is a major advancement in cooperation among the advanced economies to help the U.S. get out of this problem," said José Antonio Ocampo, the UN under secretary general for economic and social affairs.

The U.S. deficit is a global problem in part because it is the fastest-growing economy among the leading industrial nations and, together with China, is largely responsible for helping pull the world economy out of doldrums.

But whereas China has become an economic engine through its huge growth in manufacturing and exports, the United States has pushed growth by consuming far more goods than it exports, raising concerns about sustainability.

The report said that the world economy grew at a healthy 4 percent rate in 2004 but that the cyclical recovery was now past its peak. Gross world product will grow by 3.25 percent this year, it predicted.

Over all, developing economies including those of China and India are doing better than the industrialized nations, the report said.

That, Ocampo said, is the case despite a "peculiar mix" of high commodity prices, high oil prices and a lack of major disturbances in financial markets.

The U.S. trade deficit is expected to come in at a record $600 billion for 2004. The Bush administration has promised to reduce spending in its new budget and has called on Beijing to revalue the yuan against the dollar to make Chinese exports more expensive, which in turn would help shave the U.S. trade deficit.

But the UN report said the problem was more complicated. Letting the dollar fall could spur U.S. growth and lead to more consumer spending there on foreign goods; but a greater drop in the dollar's value could hurt the economies of Europe and Japan that need to grow in order to buy U.S. exports and help right the trade imbalance.

The U.S. Treasury secretary, John Snow, already plans to ask for immediate help from the wealthiest U.S. trading partners at a meeting next week in London of the finance ministers and central bank governors of the Group of 7 leading industrialized democracies. Snow has said he will tell these countries that if they are concerned about the U.S. deficit, they should purchase more American goods and services.

For their part, the Europeans will argue, instead, that the countries should make a coordinated effort to stop the drop in the dollar, a move that would help spur their own growth but one the administration opposes.

The report urges the major industrial countries to work out a solution that will help the United States reduce its deficits by spurring their own economies to grow faster, especially Japan and the countries of Europe.

Most of the wealthiest European countries have trade surpluses, though not as large as those of China and Japan. The exceptions are Britain, which has a current-account deficit equivalent to 2 percent of its gross domestic product, and Italy, with a deficit of 1.1 percent of GDP.

"The message of our report is that the industrialized countries all have their own problems that will hurt growth," Ocampo said.

"The U.S. has its deficits, while Europe and Japan are slow in recovering. But the most challenging is the U.S. twin deficits."

Forbes.com: "Economist: China Loses Faith in Dollar"

Economist: China Loses Faith in Dollar
Forbes
01.26.2005, 03:25 PM

China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."

But he stressed that the Chinese government is under no pressure to revalue its currency.

China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to US$1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency.

"The U.S. dollar is no longer - in our opinion is no longer - (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English.

"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars - those kind of more diversified systems," he said.

"If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."

The dollar hit a new low in December against the euro and has been falling against other major currencies on concerns about the ever-growing U.S. trade and budget deficits.

Fan said last year China lost a good opportunity to do revalue its currency, in July and October.

"High pressure, we don't do it. When the pressure's gone, we forgot," Fan said, to laughter from the audience. "But this time, I think Chinese authorities will not forget it. Now people understand the U.S. dollar will not stop devaluating."

Asked how speculation about revaluation could be curbed, he noted that China imposed a 3 percent tariff on Chinese exports.

Some Chinese experts say that perhaps inflation can be reduced this year, "but I'm not that optimistic," Fan said, noting that fuel prices keep rising.

"So maybe China (will) have 4-5 percent inflation in 2005," he said.

Fan, whose nonprofit institute specializes in analyzing the Chinese economy, stressed that the country's development is a long-term process that will take decades, maybe a century.

Since China's economic modernization began over a decade ago, 120 million rural laborers have moved into cities, but another 200 or 300 million people need to move into the cities from the countryside to spur development, he said.

"The income disparity is huge, and income disparity will stay with us for a long time, as long as those 200 to 300 million rural laborers stay in the countryside," Fan said.

Nonetheless, William Parrett, chief executive of Deloitte Touche Tohmatsu, told the panel that Chinese companies are making significant progress in becoming global giants, led by state-owned companies.

"It's probably at least 10 years before the objective of the government of 50 of the largest 500 companies in the world being Chinese" is achieved, he said.

Prudent Investor Says…

Oh no…Don’t you think that the Chinese are getting a little bit more audacious?

Businessworld: Southeast Asia currencies may be next big bet

Southeast Asia currencies may be next big bet

SINGAPORE -- Thailand, Indonesia and the Philippines could see their currencies outperform those of richer Asian neighbors in the coming months as foreign investors fuel a stock market boom on signs of a sustained economic upswing.

The three economies fell off the radar screens of global investors after the 1997 Asian financial crisis. The rise of China and India since the turn of the millennium pushed Southeast Asia further into the shadows.

Not any longer. Leading stock market indices in all three countries have almost doubled in the past two years, even as their currencies weakened or underperformed those of their powerful neighbors South Korea, Taiwan, Singapore and Japan.

Analysts now say it's time for the Southeast Asian currencies to play catch up with, or even outrun, their northern rivals to reflect an improvement in their economies and the confidence investors have shown in the region's companies.

"Our indicators are pointing to an outperformance of the Southeast Asian currencies in the coming months and a stalling of the (north Asian) currencies," said Philip Wee, strategist at Singapore's DBS Bank, Southeast Asia's largest lender.

"Although the dollar looks weak, it's difficult to squeeze out more from north Asian currencies. So the path of least resistance is Southeast Asia. Do the policy makers mind? No!"

The central banks have largely stayed out of the currency markets in the past few months even as their counterparts in South Korea, Taiwan, Singapore and India accumulated tens of billions of dollars -- brought in by foreign investors and local exporters -- to curtail strong gains in their exchange rates.

Some analysts say this intervention could well continue as demand for North Asia's electronics exports slows. That would make currencies of economies boasting resurgent domestic demand -- such as Thailand or Indonesia -- relatively more attractive.

Thailand expects its economy to grow between 5.5% and 6.5% this year. Indonesia is hoping for growth of more than 6%. The Philippine economy, which expanded at its fastest pace in 15 years in 2004, may grow 6.3% this year.

With that kind of growth, Claudio Piron, a currency strategist at JP Morgan Chase, expects the baht to outperform all other Asian currencies, except the Taiwan dollar, in 2005.

"The expected resilience of the baht is explained by two key drivers: an upturn in the domestic investment cycle and continued global growth."

He predicts the baht, already at a 4-1/2-year high, will firm almost 5% to 36.8 per dollar by the end of the year despite losses suffered by Thailand's tourism industry from the Dec. 26 tsunami.

The tsunami wreaked most devastation on Indonesia. In its aftermath, Indonesia attracted billions of dollars in foreign aid and was granted more time to repay government-to-government debt.

The inflows, coupled with the new government's stepped-up efforts to lure back foreign direct investors, are helping to show the rupiah in a new light.

"I particularly like Indonesia; their banks have started lending again," said Wee at DBS Bank.

Doubtless, Southeast Asian nations are far from solving their deep-rooted problems -- widespread poverty, lack of pricing power overseas because of their reliance on low-value-added exports, endemic corruption and bottlenecks to investment.

"I'm long on the baht but I'm not a structural bull for rupiah or the peso," said Bhanu Baweja, a strategist at UBS.

While Baweja agrees that the rupiah and the peso are both undervalued, he does not expect them to outperform because foreign investments are not strong enough. The currencies could get hurt once the United States raises interest rates, he said.

In the case of the Philippines, the government's inability to speed up fiscal reforms led Standard & Poor's this month to cut the country's long-term debt rating by one notch. Yet the government beat its budget deficit target for 2004 and expects to cut the shortfall further this year.

The peso, the best-performing Asian currency so far in 2005, may benefit further from pledges by Chinese firms to invest $1.6 billion in the country's mining industries and from a $1 billion bond that the government plans to price on Wednesday, said Irene Cheung, head of Asian currency strategy at ABN AMRO Bank.

She said stock investors had noted the new optimism about Southeast Asia and it was time currencies reflected that change.

Indonesia's key stock index powered ahead this month to record highs, the Philippine index raced to a five-year high and the Thai stock market benchmark rose to a nine-month high.

"The baht and the peso, two of our favorite currencies, continue to benefit from equity inflows," said Cheung. -- Reuters

The Prudent Investor Says…

I have been writing about this ‘regional currency impetus’ since the last semester of last year. Today, the unfolding developments in favor of the domestic currency are being carried by the mainstream media, which should provide for a psychological boost and reaffirm the emerging trend. And as I have written before, expect capital flows to the domestic economy to accelerate as the trend becomes entrenched.

Financial Times Editorial: Dollar dilemma

Dollar dilemma
Financial Times
Published: January 25 2005 02:00 | Last updated: January 25 2005 02:00

The fate of the dollar rests in the hands of a handful of central bankers in Asia. We have known this for some time. Since the foreign private sector shows insufficient appetite for US assets, the US relies on central bank purchases to fund its current account deficit and the acquisition of foreign assets by US residents. By absorbing the excess supply of dollars these central banks stop their own currencies appreciating against it. This Faustian bargain underpins today's currency prices and trade patterns and sustains global imbalances. Any suggestion that foreign central banks may be losing their hunger for dollars is highly significant.

A new survey suggests that central bankers are beginning to ponder whether it is in their interest to carry on buying dollars. This does not signal a rush for the exits. Much of the rise in the share of reserves held in euros is a valuation effect. Two-thirds say they want to keep the proportion in dollars unchanged this year. Neither Japan nor China - which together hold 40 per cent of the world's reserves - took part in the survey. Yet one-third of those polled did indicate a desire to increase the share of reserves held in euros. Eurozone capital markets are seen as liquid. Not a single respondent wants to hold a greater share in dollars.

It would be surprising if central bankers were not thinking very carefully about what they should be doing. The fall in the dollar has already resulted in big capital losses for those holding large dollar reserves. They risk far bigger losses if the so-far steady decline turns into a rout. The importance of capital loss increases as reserves rise relative to gross domestic product. For example, Malaysia's reserves are now equal to 54 per cent of GDP, up from 34 per cent two years ago.

Could a country with a de facto dollar peg diversify its reserves without appreciating against the dollar? Many assume not. In fact the answer, as so often in international economics, depends on whether the country in question is "small" or "large" in this context. A "small country" with medium-sized reserves, such as Thailand, Malaysia or even India, could continue to absorb surplus dollars on the bilateral currency market, but sell its stock of dollars for euros. The effect would mainly be to push the euro up against the dollar. The central bank's own currency could remain pegged.

A "large country" - Japan or China - could also embark on the same strategy. But the scale of the dollar sales would probably cause a generalised dollar collapse, with private buying disappearing altogether, demanding still greater central bank purchases. The central bank would lose control over domestic money supply, resulting in soaring inflation that would in turn push up the real exchange rate. In practical terms, Japan and China probably cannot diversify to a meaningful extent without letting their currencies rise. So keep an eye on the other Asians. Who will break ranks first?

The Prudent Investor says

This “Armageddon” scenario precisely is what I am afraid of. For the Editorial of the Financial Times, which is a mainstream business outfit, to raise this concern simply reflects the gravity of the imbalances. In other words, in the spectrum of risks, this is not an improbable event. This also implies that in such a case where the Central Bank does ‘lose control over money supply’ means that there could be that risk of a ‘crash’ in the US Dollar based currency system. And as to what money system, in its aftermath, the world will adopt remains virtually uncertain. Yet history has shown that under these circumstances, tangible assets will most likely preside as the transition. Hence precious metals today serve as two purposes, one as commodities and most importantly, as an insurance. Profit from folly and not be a part of it!

Reuters: China Says It Needs Time Before Yuan Adjustment

China Says It Needs Time Before Yuan Adjustment
Tue Jan 25, 2005 11:29 AM ET

BEIJING (Reuters) - China needs more time to prepare for making its currency more flexible, a senior economic official said on Tuesday, pouring cold water on expectations of that long-awaited changes could happen soon.

"China doesn't have conditions to adjust the renminbi (yuan) exchange rate at present," Li Deshui, head of the National Bureau of Statistics, told Reuters in an interview after the bureau's quarterly news conference.

The yen fell 0.5 percent against the dollar and other Asian currencies also were jolted by Li's comments.

Asian currencies have been supported by speculation that the yuan might be revalued early in 2005. Such a move would give Asian currencies more room to rise without making their exports less competitive against China's.

Li is a member of the central bank's monetary policy committee, which plays a vital role in determining interest rates and yuan policy.

He also said there was no immediate need for China to raise interest rates, despite his earlier announcement of faster-than-expected economic growth of 9.5 percent in the year through the fourth quarter.

"Whether we need to raise interest rates will be based on the economic situation. But I can't see any need right now."

In October the central bank raised interest rates by 0.27 percentage point, the first increase in nearly a decade.

A currency change could not happen immediately, Li said.

"Can we achieve such conditions in one or two days? This requires a process," said Li.

"We need a good and feasible plan, and formulating such a plan also needs time."

The comments dented speculation of any imminent policy change, as shown by the Chinese currency derivatives market, where investors bet on the timing and scale of a possible revaluation.

Li's remarks also came ahead of a meeting of the Group of Seven rich nations scheduled for Feb. 4 and 5 that is expected to see officials call for more currency flexibility from China and other Asian countries.

The United States and others have pressed Beijing to allow the yuan, which is pegged near 8.28 to the dollar, to move more freely, saying the current level artificially weak and makes Chinese goods unfairly cheap on world markets.

SPECULATORS WARNED

Li also issued a stern warning to speculators positioned to gain from a possible revaluation.

"Those who hope to make a fortune by speculating on a renminbi revaluation will not succeed in making a profit," he said.

Chinese leaders have insisted they will not embark on reforms as long as speculation is at fever pitch.

Li's comments caused the premium for 1-year non-deliverable yuan forwards to narrow about 6 percent to 3,750 points on Tuesday at 0600 GMT, implying an exchange rate of 7.9 in 12 months' time.

Premier Wen Jiabao said in December that China would move gradually to a flexible currency after taking into account the need for a healthier financial system and economic stability.

Economists have said that the most likely scenario for reform is a slight widening of the yuan's trading band or dropping the dollar peg in favor of a currency basket.

Talk that China may allow the yuan to rise against the dollar has fanned inflows of speculative cash and triggered some Chinese households to convert dollars into yuan.

China's foreign currency reserves rose more than $200 billion last year to nearly $610 billion. But only about $93 billion of that came from the trade surplus and foreign investment. Analysts say the bulk of the remainder was money flowing in from speculators betting Beijing will allow the yuan to rise or re-peg it at a higher level.

Prudent Investor on Mining Misdiagnosis

Prudent Investor says...Caveat!!!

Today, in the business section of the Philippines most prominent broadsheet, a market observer attempted to analyze the mining industry utilizing the traditional financial evaluation tools from where his recommendations where made. I would like to point out that the tools used to evaluate the mining industry abroad have stark nuances to that of the traditional ratios like the frequently used Price-Earnings Ratio. Hence recommendations based on these may be construed as misleading. Find below an excerpt from Investopedia.com on how the Precious Metal industry SHOULD BE evaluated.

Analyst Insight

The price of gold fluctuates on a minute-by-minute basis, so taking a look at the historical price range is the first place you should look. Many factors determine the price of gold, but it really all comes down to supply and demand. Demand typically does not fluctuate too much, but supply shocks can send prices either soaring or into the doldrums.

The difference between production costs and the futures price for gold equals the gross profit margins for mining companies. Therefore, the second place you want to look is the cost of production. The main factors to look at are the following:

*Location - Where is the gold being mined? Political unrest in developing nations has ruined more than one mining company. Developing nations might have cheaper labor and mining costs, but the political risks are huge. If you are adverse to risk (which most of us are) then look for companies with mines in relatively stable areas of the world. The costs might be higher, but at least the company knows what it's getting into.

*Ore Quality - As we mentioned above, ore is mineralized rock that contains metal. Higher quality ore will contain more gold, which is usually reported as ounces of gold per ton of ore. Generally speaking, oxide ores are better because the rock is more porous and therefore easier to remove the gold.

*Mine Type - The type of mine a company uses is a big factor in production costs. Most underground mines are more expensive than open pit mines.

The cost of production is probably the most widely followed measures for analyzing a gold producer. The lower the costs, the greater the operating leverage, which means that earnings are more stable and less volatile to changes in the price of gold. For example, a company that has a cash cost around $175/ounce is, for obvious reasons, in a much better position than one whose cost is $275/ounce. The low-cost producer has much more staying power than the marginal producer. In fact if the price of gold declines below $275/ounce, the higher-cost producer would have to stop producing until the price goes back up. Producers usually publish their cost of production in their annual report; this cost includes everything from site preparation to milling and refining. It, however, doesn't include exploration costs, financing, or any other administrative expenses the company might incur.

Aside from looking at costs, investors should carefully look over revenue growth. Revenue is output times the selling price for gold, so it may fluctuate from year to year. Well-run companies will attempt to hedge against fluctuating gold price through the futures markets. Take a look at the revenue fluctuations over the past several years. Ideally the revenue growth should be smooth. Companies with revenues that fluctuate widely from year to year are very hard to analyze and aren't where the smart money goes.

Investors should keep an eye on debt levels, which are on the balance sheet. High debt puts a strain on credit ratings, weakening the company's ability to purchase new equipment or finance other capital expenditures. Poor credit ratings also make it difficult to acquire new businesses.

As a final caveat (beware), never analyze a precious-metals company based on the price-to-earnings ratio. In general, a high P/E means high projected earnings in the future, but all gold stocks have high P/E ratios. The P/E ratio for a gold stock doesn't really tell us anything because precious metals companies need to be compared by assets, not earnings. Unlike buildings and machinery, gold companies have large amounts of gold in their vaults and in mines throughout the world. Gold on the balance sheet is unlike other capital assets; gold is seen as currency of last resort. Investors are therefore willing to pay more for a gold company because it is the next best thing to physically holding the gold themselves.

There are a few valuation techniques that analysts use when comparing various precious metal companies. The most popular and widely used ratio is market capitalization per ounce of reserves (market cap divided by reserves). This indicates to investors what they are paying for each ounce of reserves--obviously a lower price is better.

Fool.com: Party On, King Coal

Party On, King Coal
By Bill Paul
Fool.com

January 24, 2005

Over the past year, the prices of coal company stocks have surged. Industry leader Peabody Energy (NYSE: BTU) has nearly doubled, while Arch Coal (NYSE: ACI), Consol Energy (NYSE: CNX), and Alliance Resource Partners (Nasdaq: ARLP) have enjoyed nearly as spectacular a run. There have been two successful IPOs -- International Coal and Foundation Coal (NYSE: FCL). Related concerns such as mining equipment manufacturer Joy Global (Nasdaq: JOYG) and Headwaters (Nasdaq: HDWR), a company that turns coal-mining waste into burnable fuel, have also done well.

Coal companies became diamonds in the rough in 2004 because of increasing demand from electric utilities, compounded by forecasts of an impending shortage of natural gas that's expected to put coal in even greater demand. But after a year of such heady stock gains, surely the party's over for old King Coal. Right?

Wrong. Indeed, for some, the party looks to be just getting started.

Street's next catchphrase

Ever heard the phrase "minable coal"? Wall Street loves catchphrases, and I suspect that by year's end, that phrase will be bandied about on Wall Street as shorthand for why coal companies continued to rise in 2005, some by as much as another 50% to 100%.

Minable coal refers to the amount of coal in the ground that is technologically and economically recoverable. While conventional wisdom says that North America still has a 150- to 250-year supply of coal -- making it the so-called Saudi Arabia of coal -- experts say the amount of minable coal is actually a lot less -- perhaps only 50 to 60 years' worth.

America's minable coal reserves are limited in part by the fact that, especially in Appalachia, the remaining coal seams are getting thinner and deeper, making extraction increasingly difficult. Specifically, these thinner, deeper seams can't easily use the giant extraction machines, called longwalls, that have been responsible for rising productivity in underground mines.

Beyond reach

A second major limiting factor is environmental regulations, especially restrictions on disturbing the land, which have effectively put some reserves off-limits. Although the federal government and some state governments are expected this year to impose even harsher regulations on the burning of coal, utilities remain committed to coal for the long term. Given the number of new coal-fired power plants that are expected to be built, America will be consuming coal at a faster and faster rate over the next two decades, and that will further shorten the amount of time our minable coal reserves will last. (Recent forecasts suggest we'll be using about 2.5 to 3 billion tons of coal per year within 15 to 20 years, compared with only about 1.1 billion tons currently.)

To meet this rapidly rising demand in the face of limited minable reserves, prices will have to keep going up -- perhaps to as much as $70 to $80 a ton in Appalachia this year alone, compared with about $50 a ton now. Another positive for coal companies is that some of their minable coal reserves may be grossly undervalued, because they've been on company books for decades. Yet another positive is how electric utilities buy coal. Simply put, utilities have a tendency to leave themselves with too little coal on hand, exposing them to sudden price increases.

Biggest beneficiaries

Not all coal companies will benefit equally this year from the minable-coal story, according to Glenn W. Wattley, an independent financial analyst and coal industry expert. Wattley, whom I used to book to appear on CNBC, says that three companies in particular are poised to rise -- Peabody, Consol, and Arch -- because each has a solid reserve base, plus good contracts and mining capabilities.

Wattley says Consol and Peabody should especially benefit from the mining of more so-called dirty coal, which will occur because utilities are investing heavily in equipment that will enable their power plants to burn dirty coal without polluting the atmosphere. He further adds that Consol looks good also because of its capability for extracting methane gas from coal. Coal-bed methane gas is increasingly being seen as a supplement to America's natural gas reserves.

Asian assistance

As for Joy Global, it stands to benefit because, given the inability of longwalls to reach the thinner, deeper seams, coal companies will likely have to buy more of Joy's other mining equipment to do the same job. Meanwhile, Headwaters should continue to benefit from its technology for recovering and reusing coal waste, which clearly has greater value in a minable coal world.

Peabody, however, could be the best-positioned of all for 2005, in part because of rising demand from Asian steel manufacturers. Nippon Steel's recent announcement that it will buy coking coal for more than $120 a ton from BHP Billiton should help Peabody, which has significant production serving the same Asian market.

Fool contributor Bill Paul, a former Wall Street Journal and CNBC energy reporter, does not own shares in any of the companies mentioned in this commentary. The Motley Fool is investors writing for investors.

***

Prudent Investor says

This is a very timely article on coal. Think Semirara. Hmmm. Expanding GLOBAL demand+ rising coal prices+Local coal MONOPOLY= Ballooning Profits. Semirara offering began yesterday and is slated to relist on February 4. For further coal basics I suggest that you read the link above 'diamonds in the rough'

BBC: Central banks 'shunning dollar'

BBC: Central banks 'shunning dollar'

Many of the world's central banks are starting to look to the euro to fill their currency reserves instead of the dollar, a survey suggests.

The poll carried out by Central Banking Publications found 39 nations of the 65 surveyed raising their euro holdings, with 29 cutting back on the US dollar.

The dollar's sharp fall in the face of huge deficits could be one cause of the switch, the report says.

The survey was sponsored by the UK's Royal Bank of Scotland.

Losing ground

The last three months of 2004 saw the dollar slip by 7% against the euro, taking it to repeated all-time lows of more than $1.30.

The US is running a budget deficit of close to $500bn a year, funded largely by China and Japan buying large amounts of US government bonds.

Some economists have suggested that the two could ease their purchases, making it more difficult for the US to support its borrowing.

Similarly, the current account - the difference between the amount of money going out of the US and coming in - is deeply in the red, the result largely of large trade deficits.

Both factors have helped to push the dollar lower. However, the falling dollar does mean that central bank holdings of dollar reserves are losing value.

"Generally, central banks' approach to reserve management is becoming much more active as they search for higher returns," said the authors of the report.

"The euro seems to have come of age."

William Pesek of Bloomberg: Is the Philippines a Buy? Don't Ask Calpers

Prudent Investor says despite all the woes and the prospects of a Calpers pullout according to Bloomberg's analyst William Pesek the Philippines is a buy!!!!!!!!

Is the Philippines a Buy? Don't Ask Calpers
by William Pesek Jr.

Jan. 21 (Bloomberg) -- The Philippines is a buy!

The California Public Employees' Retirement System, the largest U.S. public pension fund, didn't exactly say that this week. Quite the opposite, according to local press reports. Calpers is said to be mulling dropping Asia's No. 12 economy from the list of places in which it invests.

Yet considering Calpers' track record of calling Asian markets, the Philippines may be about to rebound. After all, some traders here don't consider the fund a giant contrarian indicator in Asian markets for nothing.

In early 2002, for example, Calpers pulled out of Indonesia, Malaysia and Thailand, citing concerns about corporate governance, political instability and labor standards. Odd thing, considering Calpers had no qualms investing in companies like WorldCom Inc. and Enron Corp. that proved to be poster-children of bad corporate governance.

The biggest losers weren't the economies Calpers vacated, but its shareholders. Calpers missed out on a 17 percent rise in Thai stocks in 2002 and 117 percent jump in 2003. It also lost out on an 8 percent rise in Indonesian shares in 2002 and a 63 percent increase in 2003. Malaysian shares rose almost 23 percent in 2003.

In 2004, Morgan Stanley Capital International's Asia-Pacific Index, which tracks more than 900 stocks, gained 16 percent. The Dow Jones Industrial Average gained just 3 percent.

Following Calpers

Calpers did reinstate Malaysia in February 2004, in time to benefit from a 14 percent jump in its stock market. The same is true of Indian stocks, which rose more than 11 percent last year. Calpers isn't in Sri Lanka, though. Even after Asia's Dec. 26 tsunami, Sri Lanka stocks are up over 10 percent so far this year.

Investors following Calpers' market calls in Asia may regret it. Piggybacking the strategies of the ``smart money'' is one of the oldest practices in the investment world, and Asia is hardly an exception. Consider what billionaire Warren Buffett's 2003 investments in PetroChina Co., China's No. 1 oil producer, did for its stock (it's up 140 percent).

Now, Calpers is thinking anew about scrapping its Philippine investments. Admittedly, it's hard to fault its investment committee, especially after Standard and Poor's earlier this week cut the country's junk debt rating.

Argentina of Asia

S&P cut the long-term foreign-currency rating to BB- from BB and the local-currency rating to BB+ from BBB- after President Gloria Arroyo failed to get lawmakers to pass tax increases needed to narrow the budget deficit. The foreign-currency rating is now the lowest since June 1993 and puts the Philippines on a par with Brazil, Turkey and Vietnam.

All this gets at why the Philippines is often regarded at the Argentina of Asia. Budget deficits since 1998 increased government debt, which in September rose 17 percent from a year earlier. S&P expects interest payments to account for about 40 percent of government spending this year, up from 22 percent in 1999.

Arroyo was re-elected last year amid pledges to curb debt. Her failure to do so has investors like Desmond Soon, who manages about $200 million of bonds at Pacific Asset Management Ltd. in Singapore, fearing ``serious fiscal problems'' and avoiding Philippine debt.

Looking for Positives

Convincing markets Philippine debt won't spiral out of control is a challenge in the best of times. They have a funny way of remembering when nations declare a moratorium on foreign debt payments, as the Philippines did 20 years ago and Argentina did in 2001. Some wonder if it could happen again in Manila.

It hardly helps that S&P also lowered its debt ratings for some of the largest Philippine companies, including state-owned National Power Corp. and San Miguel Corp. National Power, San Miguel, Philippine Long Distance Telephone Co., Globe Telecom Inc. and Universal Robina Corp. all had their foreign-currency ratings cut to BB-.

Yes, it's quite a feat to find constructive things to say about one of Asia's most fragile economies. Yet now that Calpers may be pulling out, perhaps the Philippine economy and markets have reached a bottom.

If you really search for it, there are some positive things going on in the Philippines. First, the economy may have reached a 15-year high of 6.2 percent last year thanks to growth in the service sector. Faster growth could boost tax revenue.

Bad Loans

Second, the bad-loan ratio at Philippine commercial banks may drop by almost half by year-end as lenders are expected to more than double the sale of loans not paid in at least 90 days, according to central bank Governor Rafael Buenaventura.

Bad loans may fall to 7.5 percent of total credit from 14.2 percent in October last year, Buenaventura said. Banks are expected to sell as much as 54 billion pesos ($971 million) of bad loans this year, compared with 26 billion pesos in 2004.

None of this detracts from formidable problems like corruption, high poverty and population growth. And for all the talk of going after tax cheats, the Philippines is still home to an amusingly high number of ``middle class'' actors and business people. Tax dodgers are a major cause of the Philippines' budget woes.

Calpers may have ample justification to leave the Philippines. Yet if history is any guide, such a pullout may signal a revival there.

BBC: US retail sales 'to slow' in 2005

US retail sales 'to slow' in 2005

Retail sales growth in the United States will slow in 2005 as consumers are hit by higher energy costs and slower wage growth, a report has said.

According to the National Retail Federation, sales of general merchandise - including clothing and furniture - will rise 3.5% this year.

This compares to 6.7% growth in 2004, the highest figure for five years.

The NRF said the retail sector would be hit by rising interest rates and persistently-high fuel costs.

Slowdown

"This year, consumers will be under increased financial pressure due to higher energy costs and slow wage growth," said Rosalind Wells, the Federation's chief economist.

"Additionally, past stimuli provided by tax cuts and very low interest rates will no longer be there to boost consumer spending."

Consumer spending is closely watched in the US as it accounts for about two thirds of all economic activity.

According to the NRF's figures, the recent Christmas sales season outperformed 2003, with sales rising 5.7% compared to 5.15% the year before.

However, the organisation said that higher interest rates and slowing wage growth would dampen consumer demand in the second half of 2005.

*****

Prudent Investor says

This certainly bodes ill for the US equity markets.

Reuters: Weak dollar sends capital to emerging markets -IIF

Weak dollar sends capital to emerging markets -IIF
Wed Jan 19, 2005 07:40 PM ET
(Adds comments on bubble, U.S. current account in paragraphs 12, 13)

By Lesley Wroughton

WASHINGTON, Jan 19 (Reuters) - Net private capital flows to emerging markets surged by 32 percent last year to $279 billion, the highest level since 1997, a global association of financial institutions said on Wednesday.

The Institute of International Finance said the higher flows were mainly due to a weaker U.S. dollar.

The Washington-based IIF, whose members include most of the world's largest commercial and investment banks, said the rise in 2004 flows was $53 billion higher than its October forecast of $226 billion.

Nearly 60 percent of that extra $53 billion went to China, while Russia accounted for 25 percent.

"The sharp downward movement of the dollar, particularly in October, may have been (the catalyst) in the pickup in flows," Charles Dallara, IIF managing director told a news conference.

Although global growth was likely to slow in 2005, the IIF said it expected the pace of capital flow to emerging markets to continue in the first months of this year. It revised up its 2005 projections for capital flows to emerging markets to $276 billion from an October projection of $230 billion.

The group said Asia is expected to capture about 46 percent of the total net flows for 2005, down from 52 percent in 2004.

Meanwhile, flows to Latin America could exceed $39 billion in 2005, up from $26 billion last year, the IIF noted.

Capital to "emerging Europe" should increase slightly this year to 37 percent of total flows, the IIF said, amid a pickup in interest in Turkey, where flows are the second highest in the region after Russia.

Private flows to Africa and the Middle East are likely to remain small at about 4 percent of the total.

Dallara cautioned, however, there were downside risks to the projections, including a sharper-than-expected rise in U.S. interest rates that could be triggered by shifts in inflation, disruptive currency movements, concerns over global imbalances, and political uncertainty.

He said the surge in private capital to emerging markets "could well be a dimension of a bubble," but noted that 2005 would likely be more challenging for policymakers in developing countries and for investors, amid a widening U.S. current account deficit.

The current account deficit, which is nearly 6 percent of U.S. GDP, is the broadest measure of trade since its includes investment flows.

IIF chief economist Yusuke Horiguchi, a former International Monetary Fund official, said the U.S. Federal Reserve was expected to keep raising interest rates at a measured pace through 2006 toward a neutral range of 3.5 to 4 percent.

Horiguchi said he was more comfortable with a neutral stance of 4 percent by the middle of 2006.

A neutral federal funds rate is defined as one that neither hinders growth by choking off credit nor spurs inflation by failing to keep prices in check.

Federal Reserve chairman Alan Greenspan has declined to specify a precise level for a neutral rate, saying only that Fed policy-makers will know it when they reach a neutral rate.

The IIF forecast that the U.S. economy would grow 3.4 percent in 2005.

It also forecast gross domestic product growth for emerging markets of 5.4 percent in 2005, one percentage point lower than in 2004.

© Reuters 2005. All Rights Reserved.

Prudent Investor says

This is what I’ve been saying all along. Well anyway a rather oxymoronic comment in this news report is that the surge in private to emerging markets ‘could be well a dimension of a bubble’. If the weak dollar is what 'mainly' prompts private capital to emerging markets could this mean the dollar’s fall is likewise exaggerated or ‘bubbly’ in context? Amazing disconnect, huh?

Bloomberg's William Pesek: The Year to Fight Corruption in Indonesia

The Year to Fight Corruption in Indonesia
by William Pesek Jr.

Jan. 19 (Bloomberg) -- ``Our reputation and credibility as a nation is at stake.''

Rarely have truer words been written about Indonesia than those recently by Jakarta Post editor Endy Bayuni. They have great resonance for foreign investors wondering how one of the world's least trusted economies will handle a sudden rush of billions of dollars of aid following last month's tsunami.

The government is worried, too.

``One of the most persistent challenges Indonesia is facing is widespread corruption,'' Coordinating Minister for Economic Affairs Aburizal Bakrie said in Jakarta on Monday.

Even Bakrie harbors doubts that anti-corruption efforts will be enough to eliminate the siphoning of cash that routinely dogs Southeast Asia's biggest economy. That's a big problem for a nation badly in need of more international investment. Corruption is partly behind the slump in overseas investment to $10.3 billion in 2004, a quarter of the amount in 1995.

What's so breathtaking about Indonesia's dodgy dealings is that they aren't a matter or debate, but fact. U.S. Ambassador Lynn Pascoe seemed to speak for many foreigners last week when he said the ``high level of corruption'' in Indonesia is a ``very significant problem.''

Even President Susilo Bambang Yudhoyono lacks trust in his government. Rather than having Indonesian agencies monitor corruption in the tsunami-ravaged Aceh province, he turned to Berlin-based Transparency International for help. The watchdog group ranks Indonesia as one of the 10 most corrupt economies.

Tsunami Funds

The stakes are high. Indonesia's failure to force companies to pay back billions of dollars in debts from the Asian financial crisis continues to taint its standing among investors. It's home to Asia Pulp & Paper Co., for example, which in 2001 reneged on almost $14 billion of debt to become one of Asia's biggest defaulters. It's still wrangling with creditors.

Now, Indonesia is experiencing a huge windfall of foreign money. Of the billions of dollars of aid pledged for tsunami relief, Indonesia is sure to get a sizeable chunk. It was the worst affected by the Dec. 26 tragedy; so far, more than 110,000 died in Indonesia. How it handles the funds will demonstrate to investors how serious President Yudhoyono is about tackling Indonesia's legacy of graft.

President Suharto is gone, ousted by public uprisings in 1998 at the height of the Asian crisis. Yet the political system, and, by extension, the financial one, Suharto created in his 32 years in power lingers. Its vestiges mean few of this nation's 235 million people benefit directly from its 5 percent growth.

`Kleptocracy'

All this hampers the quality of public investment and, ultimately, economic growth. ``Corruption in Indonesia is widespread and costly,'' economists Vernon Henderson of Brown University and Avi Kuncoro of the University of Indonesia concluded in a paper published in July. ``Bribing is a time- intensive activity.''

The nation's ``kleptocracy,'' as observers used to call it, took corruption to highly refined levels -- so much so that it may even involve the evaporation of corporate debt.

Corruption isn't the only reason more investors aren't flocking to Indonesia. Another one: High poverty rates. More than 40 million Indonesians -- more than the population of Argentina -- are unemployed, while more than half of the world's largest Muslim population live on wages of $2 a day.

Some Optimism

Still, it's corruption that most often scares investors away. For one thing, bribes and other hidden costs employers pay to do business lead to paltry wages, perpetuating poverty. For another, the combination of corruption, a weak legal system and a lack of corporate transparency mean debt investors can have a very hard time getting repaid.

The good news is that some local business people are optimistic. ``The political will is there'' to fight corruption, says James Riady, who heads the Lippo group of companies. ``He (Yudhoyono) set very good values.''

Ditto for some foreign observers. ``Indonesia already is a powerhouse for the region,'' says John Merante, a vice president for Lehman Brothers Holdings Ltd. in New York. ``It's just a question of now taking the next steps to get it back into the level you were seeing before the crisis (of 1997/98).''

A Major Test

Yet the sudden rush of tsunami aid is a major test for Yudhoyono. When he took office in October, the world thought he would have time to prove his anti-corruption mettle. That was not to be. Now, Yudhoyono must see to it that aid is delivered to those who need it with a minimum of corruption. If reports of aid siphoning become widespread -- some have already surfaced -- much of the pledged aid may not come.

That's a problem, considering Indonesia needs as much as $150 billion of projects over the next five years, plus an additional $4 billion to rebuild tsunami-ravaged areas.

Here's the bottom line: If lots of money is lost to dodgy dealings, nations offering moratoriums on Indonesia's debt payments may regret it and reverse course. The same goes for investors wondering whether to trust the nation's new leader. For Indonesians, this isn't just the year of living dangerously, it's also the year of fighting corruption.

*****
Prudent Investor says

Corruption, corruption, aaaah it is in the headlines again. Isn't this the chic word to go on government bashing? Corruption hither and thither. Well quite bizarrely and contrary to the common perception, the financial markets for these two (which means including us!) most corrupt countries have been the best performers in the region for the year 2004. Does this indicate that the more the corrupt the better it is for the markets? Hardly. It just reveals that corruption is not the sole determinant for capital flows. For the jackasses who unwaveringly thinks the country would fester mainly due to perceptions is bound to shoot himself/herself in the foot.