The Butterfly Effect

Unusual suspects top the growth tables

It’s pop quiz time. So which country do you think will grow the fastest in the next five year period? China? A close call but no. India!? Not really. It is actually Liberia, followed by Turkmenistan and a bunch of other equally unusual suspects.

According to data crunched by The Conference Board, a New York-based policy and research think tank, Liberia could beat all others in the pecking order of world’s fastest growing economies between 2010 and 2014.

The aftermath of the global financial meltdown has been a leveller of sorts, creating unexpected winners.

The tiny country on the western fringe of Africa that derives nearly two-thirds of its GDP (Gross Domestic Product) from agriculture, forest and fisheries, is expected to clock growth rates of 13.4% in 2013. Turkmenistan, with its sizeable oil and gas resources, is second. With oil prices hardening, it could expect dividends trickling in.

Here’s how they stack up:

            Real GDP (annual % change)

 

	2010	2012	2014	Average 2010-2014
Liberia	6.3	12.8	12.9	10.9
Turkmenistan	15.3	8.6	8.0	9.8
China	9.9	9.8	9.5	9.6
Mongolia	3.0	15.0	0.9	9.6
Ghana	5.0	7.1	5.1	9.0
Qatar	18.5	3.4	3.3	8.4
Timor-Leste	7.9	7.6	7.8	7.7
India	8.0	7.6	8.1	7.5
Botswana	4.1	13.8	2.1	7.5
Ethiopia	7.5	7.5	7.7	7.5

Source: The Conference Board, IMF

China is third but that’s hardly surprising. In fact, it has been storied to the point of being a global obsession. Its blistering rate of growth in the last few years, on the contrary, could have pulled along many of the other smaller nations, through several backward and forward trade linkages.

The other eye-poppers in the list are Mongolia – China’s northern neighbour that is growing just as fast during this period – Ghana, Timor-Leste and Botswana.

Forecasts for Mongolia and Ghana predict GDP of 22.5-23% in 2013 and 2011 respectively – spikes that are pulling up their average.

Meanwhile, world’s largest economy, US is plodding through a slow, tough recovery with an expected average growth of 2.3 in this period.

Kenneth Goldstein, economist with The Conference Board outlines three factors that could be driving these growth newbies: “demand for raw materials that drives up prices for material producing countries” although this trend is now softening; “export driven growth…and infrastructure development”.

Of these, infrastructure development is the fillip that is “most likely to sustain and extend their growth,” Goldstein explained.

Numbers alone, however, should be viewed with caution. Most of these countries have nascent-to-poor infrastructure and get large chunks of their national income from agriculture. Their growth is usually fuelled by some exogenous stimuli and fluctuates in a wide bracket. Secondly, a low GDP base in these economies could be propping up the overall percent change, even when the growth in actual terms is much smaller.

Some of these countries could lose steam in their growth tracks over time while others ride the wave and quicken their pace. But here and now, they are the fastest of them all.

 

China’s growing clout sends US in huddles with other Asian countries

A September 22 story by ‘The Wall Street Journal’ discusses how US is aligning with some Asian countries, boosting security ties and taking “robust positions” in regional disputes to counter China’s increasing global clout.

There’s good reason for US and other countries to feel the heat. China has been crashing its way into so many league tables that it is impossible to ignore.

In August 2010, it surpassed Japan to become the second largest economy after US. China’s gross domestic product for the second quarter touched $1.34 trillion, more than Japan’s $1.29 trillion.

A month before in July, International Energy Agency had reported that it had become the world’s biggest energy consumer, edging out US which had held the top spot since early 1900s. And it did this at break-neck speed – 10 years back, China’s total consumption was half of US’. This, in turn, could mark interesting strategy shifts in the way oil companies position themselves in and around China.

There’s more. Earlier this year, it had beaten Germany to become the world’s largest exporter and US, to emerge as the largest automobile market for 2009. China is already the biggest buyer of copper, iron ore and the second largest importer of crude oil.

 Source: Bloomberg

Now that’s a lot of economic gunpowder. And China knows it.

While the Asian dragon has no doubt been making strides, US’ long slog to economic recovery has only given a double advantage to China, by hastening this reshuffle in the ranking of global indicators. Even if some of these numbers coming from the Chinese government are taken with a tiny speck of salt, it will not change the overall picture.

China’s growing assertiveness and the hardening tone of its diplomacy, stems from the resilience its economy showed in the global economic meltdown two years ago.

And that resilience is here to stay. China reported blistering growth rates of 11.6% in 2006 and 13% in 2007, forcing its policymakers to sweat over ways to cool their over-heated economy.

The growth rate is now hovering around the 10% mark and could average around 9.6% for 2010-2014, according to a forecast by New York-based economic research body, The Conference Board. Simply put, China will continue to fuel growth for a number of commodity-producing countries.

US, by comparison, could be growing around 2.3% annually in the same period.

The implications of having China as a growth engine have already begun to play out. The question now is how far can China ride on economic dominance if it is repeatedly countered with geo-political alienation? Can one bite factor into the other?

 May be, may be not. With China, I wouldn’t hazard a guess.

Surging bank failures to undercut US economy’s slow crawl to recovery?

Even as the US economy plods its way to a slow creeping recovery with occasional spurts of good news, its financial underpinnings are still in turmoil and could create fetters to its growth.

Data put out by Federal Deposit Insurance Corporation or FDIC, the federal risk monitoring agency for financial institutions, shows that 125 banks have failed in US in the first nine months of 2010. And an August 31 second quarter statement by FDIC points to another 829 institutions being on its “problem list” – the highest on radar since March 31, 1993. This figure is a clear step-up from 775 struggling institutions in the first quarter, signalling more pain in the offing.

The agency doesn’t specify the nature of these “problems” or how far out on the edge these institutions could be but such a large number of failing banks – and several more in danger of going under – are enough to prick any notion of a quick, painless turnaround.

To boot, this year’s tally is expected to exceed last year’s figure of 140 bank failures. There have been 317 bank failures in all in US since 2000, of which over four-fifths have occurred in 2009 and 2010 alone.

The economy for now is a mixed bag of news. Those seeking unemployment benefits, for the week ended September 11, unexpectedly dropped by 3,000 to 450,000 -- the lowest level in two months – according to a Labor Department report on Sept. 16. It was widely anticipated to increase. Also, automobile sales have improved as economy steadied.

 But those could well have been outliers. A September 21 report by U.S Department of Labor, noted that for the month of August, 26 states and the District of Columbia posted unemployment rate decreases from a year earlier, 21 states reported increases and 3 states had no change (see here). The national jobless rate was nearly unchanged in August at 9.6 %, from a year back. A wobbly banking system then could just make it harder for the economy to crawl out of its hole.

There are clear benefits to this financial Darwinism. The clean-up will eventually create fewer, safer and more stable financial entities.

The downside: pain of cleansing. Bank failures could create more job losses and erode confidence of the investing public in the short term, which is anyway drawing rock-bottom 0.05-0.5 % interest on their deposits.

 Is there a silver lining to any of this? Well, yes. FDIC says the total assets of “problem” institutions have declined from $431 billion to $403 billion.

So while more could be on the brink, they are at least smaller.

“Not yet” but may be not-too-far

Days before Indian commerce minister Anand Sharma flies in to Chicago to discuss thorny issues of visa fee hikes and an outsourcing ban, rating agency Moody’s Investors Service has downplayed fears. It said such “protectionist sentiment” were “not yet a threat” for the Indian outsourcer.

US’ efforts to spruce up protection along its porous border with Mexico have ruffled more than a few feathers half way across the globe, amongst the heavy weights of the Indian Information Technology (IT) sector. On August 10, the U.S House of Representatives approved pulling up security along its southwest border by enhancing fencing, infrastructure, law enforcement and deployment of unmanned aircraft systems.

 The big question: who picks the tab?

According to the industry lobby Nasscom, Indian IT firms could be forking out $250 million to make US' borders safer – by paying roughly $2000 more for each H1B and L-1 visa. This will fund about 40% of the overall $600 million provisioned.

The protests have been loud and clear, with the Indian government calling such non-tariff trade barriers “highly discriminatory” and are considering lodging complaints with the World Trade Organization. (http://www.ft.com/cms/s/0/5a186610-a487-11df-abf7-00144feabdc0.html)

Sharma will be raising this along with a foreign outsourcing ban last month by Ohio of government-funded, back-office and IT projects when he meets his counterpart US Trade Representative Ron Kirk during his September 20-23 visit. (http://economictimes.indiatimes.com/news/news-by-industry/services/travel/visa-power/Anand-Sharma-to-raise-US-outsourcing-ban-visa-fee-issue/articleshow/6580314.cms)The talks – and here's why they are crucial -- will prepare the ground for US president Barack Obama’s early November visit to India when the Indian Prime Minister Manmohan Singh will likely bring it up again.

Moody’s September 16 report said that while the “recent protectionist sentiment in the U.S. has potentially negative credit implications for Tata Consultancy Services (TCS) and…other major outsourcing firms” such as Wipro and Infosys, it was “not to the extent of threatening TCS’s rating or outlook”.

Analysts Ken Chan, Gary Lau and Philipp Lotter, authors of the Moody’s note, are drawing this comfort from two arguments: TCS’ annual revenues last year touched $6.3 billion, implying “the added costs will not have a material impact on the firm’s profitability or rating”.

Secondly, even if the Ohio sentiment spreads to other US states, the note explains, “the share of such governmental revenue for Indian outsourcers remains negligible” compared to huge sums paid out by the private banking and financial sector. The risk rating agency views much of this as election rhetoric which will not dent the long-term growth in outsourcing to low-cost countries.

This doesn’t fly. Not for long at least. Certainly not by looking at it as a miniscule peck in the overall revenue pie right now.  That will be a myopic view because these barriers, once placed, can be scaled up easily.

It is true that India earned nearly $50 billion in exports in 2009-2010 and over half of it from US. This tax of $250 million will then constitute about one-hundredth of its revenues just from US. But that's just math.

The larger question is how far will the Indian government and its IT companies fight to keep these allegedly discriminatory walls down? For once erected, it takes very little to raise them a bit every now and then. And that’s when the shoe may begin to pinch, even if it doesn’t now.

BP's asset sale to open doors for Asian energy cos

One man’s misery is often another’s gain, in unintended ways. The beleaguered British energy major BP Plc is depending on a big ticket asset sale, reportedly worth $40 billion, to pick the tab of its “oily” spill over in the Gulf of Mexico and guess, who could be looking through its booty?

 “…the cash-rich Chinese/Indian E&P names looking to grow overseas”, said a Goldman Sachs report as early as June this year. The reasons seem plausible, now more than ever.

Nearly five months after a BP deepwater drilling rig exploded in Macondo and caused the largest accidental marine oil spill in the history of energy industry, the company is still doing the math on how much more they need to provision for the disaster. 

According to a 4 September report by UK’s The Sunday Times daily, the energy firm has stepped up its target from asset disposals by a third, from $30 billion in July this year to $40 billion. (See http://www.marketwatch.com/story/bp-reportedly-stepping-up-asset-disposal-plans-2010-09-06)

This could open more than a few doors for some of the Asian oil names. Latecomers in the energy exploration game,these firms found far fewer natural assets left worldwide to chase. Now, they are sitting on a cash pile and combing the globe for investment opportunities.

A risk-lowering exit for some US and European energy explorers could thereby, spell a portfolio-diversifying, entry plank for others.

Goldman Sach’s analysts Nilesh Banerjee, Arjun N Murti, Michele della Vigna and Nishant Baranwal, in their June 21 report had stated: “The market’s concerns about the ultimate cost of the Macondo oil spill, likelihood of greater regulatory scrutiny in the Gulf of Mexico (GOM) and possibility of further extension of the moratorium on deepwater drilling in GOM beyond six months…..will lead the E&P (exploration and production) operators in the region to consider divesting some of their assets to reduce/diversify their GOM exposure.”

The analysts pinpointed six such assets and noted that “most of these are assets are owned by BP, which has announced…(looking) at disposing some assets” while the Asian companies will be “screening for profitable, oily assets”.

The Asian companies, on the other hand, are bullish. Chinese oil refiners and explorers such as Sinopec, Petrochina, CNOOC and Sinochem alone have bought offshore assets worth nearly $15 billion in the last one year – signalling their “focus on the deepwater learning curve”,  the report added.                                      

India’s most valuable company, Reliance Industries Ltd. too is aiming for a global E&P footprint. The oil-to-yarn and consumer retail conglomerate, in a span of five months this year, bought stakes in three shale gas assets in US spending $3.44 billion. And it still has room for more.

Shale rocks are an unconventional source of natural gas found trapped in fine-grained sedimentary rocks and have attracted widespread interests from explorers in the recent months.

Moreover, RIL has soaked its feet in deepwater exploration in the Krishna-Godavari basin on the east coast of India and did it in six and a half years – clocking the world’s fastest deepwater discovery-to-production project.

These companies have the appetite and the deep pockets to pay for it. And they know BP may have just what they need.