Thursday, June 28, 2018

A few mid-week reading links

1. FT reports of the US decision to suspend Rwanda's access to a preferential trade agreement, African Growth and Opportunity Act (AGOA), in retaliation for that country's decision to restrict the import of used clothes from the US. As a matter of fact, Rwanda's policy on promoting domestic industry follows the much more mercantilist industrial policies adopted by all developed countries during their own growth phases. 

The article also points to the strongly patronising reaction in the UK to Rwanda's decision to promote its tourism potential,
There is a parallel in the harsh reaction Rwanda got when it announced last month it was spending £30m on sponsoring the shirts of Arsenal football club. The Daily Mail, a populist UK tabloid, blustered that what it called a Rwandan dictator was blowing the cash of his impoverished people on a vanity project. Never mind that the sponsorship deal was part of a joined-up strategy to turn Rwanda into a convention and tourism destination. Rwanda has gorillas, a game park with the big five animals, good air links and an impressive new convention centre in Kigali, the well-functioning capital. But, thundered the Mail, it got £62m in British aid and should not be spending its money this way. That message is essentially the same as Washington’s. If we give you any aid or encouragement, we expect to set your policies and your priorities. If you try to lift your country out of poverty, then we will cut you off.
This has resonance with the "evidence-based" belief in international development circles questioning the efficacy that investments in rural roads and rural electrification. 

2. We live in the age of superstar CEOs. Apart from the Wall Street titans, there are the founders of the various technology and other startups who have been endowed with extraordinary abilities and feted by the media and opinion makers. This is despite a very rich body of evidence that disputes this conventional wisdom. So, conditional on the basic entrepreneurial attributes (and smartness, intelligence et al), quite how much of the success of startup CEOs is plain good luck of being at the right place at the right time? I am inclined to think most of it!

FT has this to write about Elon Musk's latest series of outbursts,
The performance has stoked long-simmering questions about whether Tesla has adequate checks and balances to control a chief executive who thrives on shattering convention. One analyst who covers Tesla for a large bank says many observers believe Tesla lacks “grown ups” to rein in Mr Musk’s outbursts, particularly on Twitter, where he goads journalists and promises to “burn” speculators who short the company’s shares. “For a while it was endearing, but he [Mr Musk] has gone full Trump. The pressure, the need for attention — it’s weird, his mental state is deteriorating,” says the analyst, who asked to remain anonymous. An industry executive who knows Mr Musk adds: “If any other CEO on earth exhibited the behaviour he is doing they would be out in an instant.”
As the examples of Travis Kalanick and Mark Zuckerberg shows, much of these reputations vest on plain good fortune.

3. If we are talking of risk appetite and thinking super-big, SoftBank's Masayoshi Son, with his $100 bn Vision Fund, would beat the likes of Elon Musk hands down. Consider this,
SoftBank is shifting the relationship between the tech sector and capital markets. At a time when start-ups are minded to stay private for as long as possible, SoftBank allows its portfolio companies to pursue growth without worrying about burning cash. Some venture capitalists even quip that “SoftBank has replaced the IPO”. Stephen Schwarzman, the billionaire co-founder of private equity firm Blackstone, says Mr Son is redefining technology investing. “No one has ever done that before at this kind of scale,” he says. “It’s unprecedented but it’s meeting a market demand.”

At the least, Son has the $145 bn worth stake in Alibaba from a 2000 investment to show for. More than what can be said about many superstar VC managers from Silicon Valley. 

4. As LIC assumes a controlling stake in IDBI Bank, Bloomberg Quint raises concerns about what it means for LIC's shareholders. Consider this,
LIC currently holds 11 percent in IDBI Bank. Hypothetically, if it were to buy another 40 percent stake to get to 51 percent shareholding, it would cost the insurer Rs 9,600 crore at current market value... India Ratings estimates that IDBI Bank’s total stressed portfolio (including non-fund based faclities) is 35.9 percent of total loans... This means that... in 2018-19, IDBI Bank will need more than the Rs 10,000 crore that it received from the government last fiscal. Even if you take a conservative estimate of Rs 10,000 crore in capital needed, that takes LIC’s immediate capital commitment to IDBI Bank to over Rs 20,000 crore. Is that money well spent by LIC? It’s tough to argue in favor of that given that the bank has reported losses for six consecutive quarters now... Note that no private investor has shown an interest in IDBI Bank even though the government has been wanting to sell equity for over two years now.
And the systemic risk consequences posed by LIC's growing exposure to the banking sector,
As part of its investment activities, LIC has been an active investor in public sector banks. This was particularly true in 2015 and 2016, when LIC bought into preferential share issues of a number of government run banks to cover for the shortage of capital. As a result, LIC’s shareholding in these banks has risen. Shareholding data from stock exchanges shows that LIC holds more than 10 percent in at least six government banks. Apart from holding equity in banks, LIC invested in debt securities issued by banks, including additional tier-1 bonds. As such, its connectedness to the banking system is already significant.
5. Livemint has a two past series on traffic congestion in Indian cities that draws on anonymised Uber data from 2016. It shows that Indians have among the longest commute times and this has been worsening in recent years. As a measure of the congestion, commute times almost doubles during the peak times when compared to off-peak hours. 
6. Paul Krugman has this assessment of the consequences of a global trade war. He estimates tariffs to rise buy 32-60 percentage points (he approximates to 40 percentage points), a 70 per cent decline in global trade, and a permanent reduction in world GDP by 2-3 per cent. In simple terms, the world economy would be back to 1950s in terms of trade.

Don't know whether they have been factored into the studies mentioned by Krugman, there are two important collateral damages likely. Consumers in developed economies will be hurt by the imported inflation arising from higher tariffs. And exporters in developing countries would be hit by costlier imports of intermediate goods which would end up increasing the final prices of their finished products.

7. Businessline has a good article that puts India's low tax base in perspective. Contrary to conventional wisdom it does not find tax compliance to be a major problem. Sample this,
The latest Labour Bureau’s Annual Employment-Unemployment Survey in FY16 covered 1.5 lakh households. It found that over 87 per cent of the households earned less than ₹20,000 a month (₹2.4 lakh a year). This included full-time workers, part-time ones, casual workers, as well as the self-employed. This effectively means that only 13 per cent of the 25 crore Indian households (about 3.2 crore households), may be earning enough to pay income tax. If income tax collections are held back by low income levels, corporate tax collections in India seem to be afflicted by the poor scale and low profits reported by the vast majority of businesses. In India, business is dominated by the 6.3 crore unincorporated enterprises that are mostly run from home. Registered companies number just 17 lakh. Of the registered companies, only about 11 lakh are active and about 7 lakh companies filed their I-T returns in FY17. But again, as many as 5.3 lakh of those companies reported an annual income of less than ₹2.5 lakh! The above data also explain why, as the taxman has trained his guns on evaders in the last three years — tracking down non-filers and issuing a flurry of notices — he has mostly netted only small fish. Between FY14 and FY18, India saw the number of I-T return filers expand by 80 per cent from 3.79 crore to 6.84 crore. But the direct tax kitty grew by a far lower 55 per cent. Nearly a fourth of the current return filers fall in the zero-tax bracket.
This was the central message of Can India Grow?

8. Amidst the uncertainties surrounding debates on peak oil, the oil market is going through the latest cycle of investment contraction. Consider this
In the second half of this decade total capital expenditure by the large oil and gas groups is projected to fall by almost 50 per cent to $443.5bn from $875.1bn between 2010-15, according to Norwegian consultancy Rystad Energy. Although partly offset by a fall in oilfield development costs, the drop also coincides with the big groups ploughing more capital into shorter-term projects, which pay off quickly, as well as renewable energy.
This comes even as prices are experiencing downward pressure due to the convergence of renewables and the falling cost of production itself due to technological advances. 
The article points to oil majors preferring renewables and short-cycle shale projects rather than long-gestation conventional projects.

9. Finally, the Times points to the flattening yield curve in the US, a portend for recession. The flattening yield curve sets the stage for its inversion, wherein the long-term rates fall lower than the short-term ones. All but one of the nine recessions since 1955 have been preceded by an inversion of the yield curve.
In normal times, markets expect long terms rates to be higher than short-term ones, a reflection of the inflation expectations over the longer term. However, an inverted curve points to market expectations about weaker economic growth prospects and consequent lower rates.

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