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Large Nigerian banks have weathered a storm

Thu, 04/25/2019 - 10:48

THE COLLAPSE of the oil price that began in 2014 was bad news for Nigerian banks. A quarter of their lending was to oil and gas firms. Many businesses were left reeling after a currency crisis. The economy stuttered, then plunged into recession. Before the oil slump just 3% of loans were not being paid back. By 2017 some 15% had gone sour.

The oil shock underscored an old truth: in choppy waters, it helps to be a big ship. The country’s large banks made tidy profits and now sit on sufficient capital. But smaller ones look shaky, even as currency problems have eased and the economy has recovered. Last year the central bank revoked the licence of Skye Bank, a struggling midsized lender.

Diamond, another middling bank, was on the rocks before being taken over by Access, a bigger rival. The combined bank began operations this month, becoming Nigeria’s largest bank by assets (see chart). It now boasts more customers than any other in Africa.

Large banks were able to find ways to make money...

Should judges assume that markets are efficient?

Thu, 04/25/2019 - 09:33

ECONOMISTS HAVE long argued about the workings of financial markets. Some, like Eugene Fama, argue that markets adjust swiftly to include all available information, an idea supported by the difficulty of predicting short-term stockmarket moves. Others, like Robert Shiller, posit that psychology has a big effect on market prices, pointing out that share prices fluctuate far more than fundamental variables such as dividends. The pair were jointly awarded the Nobel prize in economics in 2013 (along with Lars Peter Hansen).

The question is puzzling judges (or “chancellors”) in Delaware, where more than half of America’s public companies are listed. Last year the chancery court of Delaware decided that some shareholders of Aruba Networks, a company that Hewlett Packard (HP) acquired in 2015, should be awarded just $17.13 per share—the price before the deal was announced. HP paid $24.67. The judgment deferred entirely to the market, above all other evidence of what Aruba might be worth—including what HP was willing to pay. It was overturned by Delaware’s supreme court on April 16th.

Usually, if investors differ from the market in their opinion of a company’s value, they can buy or sell its shares. The exception is during a takeover. If most shareholders vote to sell at a given price, the rest must sell at that price, too. A...

Political economy suggests that geoengineering is likely to be used

Thu, 04/25/2019 - 09:33

A QUARTER-CENTURY has passed since the first global climate-change treaty, the UN Framework Convention on Climate Change. Humanity’s record of following through on its climate promises is dismal. The concentration of carbon dioxide in the atmosphere has risen by 15% since 1994. The average global temperature, relative to the norm for 1951-80, has gone up by about 0.5°C over that period. And in 2018 annual emissions reached their highest level ever. To have a good chance of stopping global temperatures rising more than 1.5°C relative to the pre-industrial norm, by 2030 annual greenhouse-gas emissions must fall by almost half, relative to levels in 2010, according to the Intergovernmental Panel on Climate Change. They almost certainly will not.

A much warmer and more hostile climate might yet be avoided, however, through geoengineering: tinkering with climate processes to reduce the global temperature. (The possibilities are described at length in “The Planet Remade” by Oliver Morton, a journalist on this newspaper.) The longer climate targets are missed, the more likely geoengineering is to be used—and the more urgent it is that governments understand its tricky political economy.

Earth is warming because carbon dioxide and other greenhouse gases are accumulating in the atmosphere, shifting the balance of energy arriving...

The official impact assessment of NAFTA’s replacement is out

Thu, 04/25/2019 - 09:33

“USMCA WILL boost economic growth and create jobs.” This was the triumphant headline from the White House’s media machine summarising an official assessment of the impact of America’s new trade deal with Mexico and Canada. According to the United States International Trade Commission (USITC), an independent government agency, the deal will increase American GDP by 0.35% and employment by 0.12%.

Since the North American Free Trade Agreement (NAFTA), which the USMCA replaced, had already slashed most tariffs between the three countries, it would be unfair to expect the impact to be large. But two aspects of the analysis offer fairer grounds for scepticism. One concerns trade in cars; the other the way the assessment accounts for policy stability in the future.

New rules of origin for cars were intended to push up wages and bring more production to North America. For a car to move from Mexico to America tariff-free, a much higher share of its parts must now be sourced in the region than had been required under NAFTA. Car manufacturers could have opted to ignore the deal, pay the 2.5% tariff for non-USMCA imports and source parts wherever made business sense. Instead, most seem to be reworking supply chains to meet the new requirements. The USITC predicted that employment in America in car parts would increase by nearly 30,...

America wants to challenge rogue petrostates

Wed, 04/24/2019 - 17:53

AMERICA HAS been a superpower for decades. As a superpower in global energy markets, however, it is barely an adolescent. As recently as 2015 it was illegal to export oil. Within ten years the shale boom has transformed it into the world’s biggest producer of crude. No longer must it tiptoe around regimes whose policies it detests but whose oil it craves. President Donald Trump touts an age of “energy dominance”. He has put its burgeoning energy prowess to the test with sanctions on Iran and Venezuela. But dreams of dominance are running into the realities of energy markets.

On April 22nd the American administration announced that no further waivers would be granted to countries importing oil from Iran. “We are going to zero,” declared Mike Pompeo, the secretary of state. Waivers to eight countries, granted in November, were due to expire on May 2nd. Even so, investors were shocked that no exceptions were allowed. According to the state department, Saudi Arabia, the United Arab Emirates and America will help meet demand. But Brent crude, the international benchmark, quickly topped $74, the highest level in nearly six months.

The Trump administration is right to make to make a fuss about America’s oil boom. According to the International Energy Agency, by 2021 the country may be a net exporter of oil. This would be a...

Shinzo Abe, Japan’s prime minister, is determined to raise sales taxes

Wed, 04/17/2019 - 14:54

AMONG THE pledges Shinzo Abe made in 2012, as he started his second stint as Japan’s prime minister, was to double the sales-tax rate. At 5% it was low by rich-country standards, and Japan’s public finances, battered by years of deficits, needed shoring up. But having gone part-way, to 8%, in 2014, he has twice put off finishing the job for fear of choking off a tentative economic recovery. That increase is now scheduled for October, and he is loth to delay a third time—so much so that he has said that only “an event with the magnitude of the Lehman Brothers shock” would deter him.

Everyone agrees that a higher sales tax is needed, but they differ on the wisdom of a speedy move. The previous hike provoked a sharp downturn. Now fresh signs of economic weakness are leading to fears of a repetition.

Just a few months ago the government was congratulating itself on having overseen Japan’s longest economic expansion since the second world war (as judged by a panel of experts appointed by the cabinet office). But last month the cabinet office downgraded its headline economic assessment for the first time in three years, blaming foreign factors, including China’s slowing economy. Their gloominess is widely shared. Freya Beamish of Pantheon Macroeconomics, a consultancy, points to the purchasing managers’ index and machine...

Bond maturities are the result of a tug-of-war

Wed, 04/17/2019 - 14:54

IMAGINE TWO countries that differ only in the scale of public debt. In Vulgaria it is 50% of GDP; in Freedonia it is 5%. Vulgaria used the proceeds of its extra debt-raising to buy land for public parks. Because of these assets, it is regarded as being as good a credit risk as Freedonia. Taxes do not affect incentives to work or save in either place (they are a bit higher in Vulgaria). Inflation is low and stable.

How should each country manage its debts? Specifically, how much should it raise by selling short-term bills, and how much by selling long-term bonds? A strain of public-finance theory, developed by Robert Barro of Harvard University, says it does not matter. Debt is deferred taxation. A dollar of debt will cut today’s tax bill by a dollar, but at the cost of raising it by a dollar tomorrow. If the debt is a one-year bond, the tax bill will come sooner. If it is a ten-year bond, it will come later. In this frictionless world the maturity of public debt is irrelevant.

The real world is messier. The economy fluctuates, and so do interest rates. Taxes affect how willing people are to work. In such conditions, the maturity of debt is a tug-of-war between two influences. The government wants to keep today’s taxes low: that pulls it towards short-term bonds, the cheapest to issue. But it is wary of sudden increases...

Is the world economy still slowbalising?

Wed, 04/17/2019 - 14:54

PROTONS POP up in every atom. Proton cars are not quite so ubiquitous. Founded in 1983 by Malaysia’s government, the Proton company strove to build a truly “national car”, but its parent lost over 1bn ringgit ($280m) in the two financial years before it sold a stake to Geely, a Chinese carmaker, in 2017. Neighbouring Thailand, in contrast, lacks a national car, but boasts a thriving car industry. Carmaking took off in the late 1980s after Japanese multinationals flocked to the country, importing whatever they could not make or buy within its borders. Foreign parts still account for 56% of the value of Thailand’s car exports, according to the most recent data from the World Trade Organisation (WTO). But the remaining home-grown value exceeds the total worth of Malaysia’s car exports several times over.

Thailand’s cosmopolitan car industry illustrates the potential of “global value chains”, which link several countries in the production of a good or service. Unfortunately, these chains declined relative to world GDP between 2011 and 2016, contributing to what has been dubbed “slowbalisation”. But a new report by the WTO (and a long chain of partners, including the University of International Business and Economics in Beijing and the China Development Research Foundation, a Chinese government think-tank) finds that value chains recovered...

A new era at Goldman Sachs starts in the shadow of a scandal

Wed, 04/17/2019 - 14:54

NO ONE IS more aware of the value of a brand than Goldman Sachs. The investment bank, founded in 1869, has advised the biggest and best American companies on the value of theirs for the past 150 years. It helped F.W. Woolworth, a pioneering department store, with its initial public offering in 1912. It took Ford and Disney public in the 1950s, helped Amazon buy Whole Foods in 2017 and will take Uber public later this year. Yet these are troubled times for its own brand, tarnished by association with a fraud-ridden Malaysian state-run fund, 1MDB, and hurt by the bank’s failure to adapt after the global financial crisis.

These issues were echoed in its first-quarter results, released on April 15th. Revenues came in below expectations—13% lower than for the first quarter of 2018—largely as a result of lower trading revenues. The share price fell by more than 3% and the earnings call was peppered with analysts asking questions about1MDB.

The first task for David Solomon, who took over as chief executive last October, is to clean up Goldman’s reputation. In 2012 and 2013 it helped 1MDB raise $6.5bn across three bond offerings, earning $600m in fees—far above the norm for such work. American and Malaysian authorities have alleged that much of the money raised was stolen in a scheme masterminded by Jho Low, a Malaysian...

American banks’ earnings are boosted by retail business

Wed, 04/17/2019 - 14:54

AMERICA’S FINANCIAL markets made a stunning start to 2019. The S&P 500 stockmarket index climbed by 13.1% in the first quarter, its best beginning since 1998. But that was little use to Wall Street banks. Trading revenues depend on volumes, not prices. Quarterly earnings, reported in recent days, have confirmed that they were markedly lower than a year earlier. Never mind. The retail divisions of America’s mightiest banks did well enough to boost profits overall. The giants’ retail heft is likely to keep serving them well.

Start, though, with the grim stuff. Share-trading revenues fell by 24%, year on year, at Citigroup and Goldman Sachs; by 22% at Bank of America (BofA); and by 13% at JPMorgan Chase. (Morgan Stanley, the remaining bulge-bracket Wall Street firm, was due to report earnings after The Economist went to press on April 17th.) New share issues were delayed by a 35-day government shutdown that lasted until late January, holding up approvals at the Securities and Exchange Commission; equity-underwriting revenues tumbled by 20% at Citi, 23% at JPMorgan Chase, 29% at BofA and 34% at Goldman. But debt underwriting was perkier at Citi and JPMorgan Chase, and advisory fees rose across the board.

Yet JPMorgan Chase, America’s biggest bank by assets, still reported a 5.4% rise in net...

China’s growth is set to perk up after a decade low

Wed, 04/17/2019 - 08:46

JUST OVER 25 years ago Shanghai launched its metro with a single, stubby line. Since then it has added 15 lines and some 700km, making it the world’s longest metro system. It is far from done. The city recently unveiled plans for another 300km, including overland rail, within five years. Much of the work proceeds unseen as machines bore tunnels beneath the surface. But excavation holes around the city offer clues about the activity deep underground.

They are part of a nationwide push. The Chinese government has, in the words of state media, hit the “fast-forward button” on infrastructure spending, a tried and tested way to pep up the economy. In the first quarter China’s GDP grew by 6.4% compared with a year earlier, level with the final quarter of 2018—its slowest in a decade. That would still be enviably fast for most countries. But Chinese officials have been unnerved by the possibility that it could herald the start of a steeper slide.

Last year such fears were widely heard. The trade war with America seemed destined to...

Where growth is concerned, is population destiny?

Tue, 04/16/2019 - 18:44

FOR CENTURIES prior to the Industrial Revolution, Asia’s massively populous societies made the continent the world’s centre of economic gravity. Industrialisation in Europe and North America in the 19th century briefly knocked it from its perch. But now their collective economic might, measured in real output on a purchasing-power-parity basis, is forecast to account for more than half of global production by 2020. Was the West’s period of dominance an anomaly, which could only ever have been short-lived? Is population destiny?

It stands to reason that countries with larger populations might enjoy long-run economic advantages. People are the raw material of economic growth, after all. The more there are, the greater the likelihood that one becomes a Gutenberg or a Watt. In a world without much international trade, populous countries offer the largest markets, and comparatively more opportunity to boost economic output through specialisation and trade. Projecting economic growth rates is fantastically hard even over very short time horizons; over centuries, it is as good as impossible. But there are worse strategies than betting on the places with the most people.

Klaus Desmet of Southern Methodist University, Dávid Krisztián Nagy of CREI, a research institute, and Esteban Rossi-Hansberg of Princeton University...

How HDFC breaks the dismal pattern of Indian banking

Thu, 04/11/2019 - 14:40

INDIA’S BANKS have a poor reputation—and for good reason. The state-controlled ones offer cheap credit to the well-connected, have piles of bad loans and are barely accountable. Nor are the private ones flawless. In the past year the bosses of two of the biggest left after concerns were expressed by the Reserve Bank of India: at Axis Bank because of credit problems and at Yes Bank because of governance worries. The head of the second-largest, ICICI, stepped down because of a scandal involving loans to a firm whose shareholder had dealings with her husband.

In this dismal scene one bank, HDFC, consistently shines. In the coming days it is expected to announce the latest in a series of stellar performances. Profits are expected to be around 20% higher than last year. Return on assets is 1.8% and return on equity is around 17%—excellent for a bank. The share price is 286 times what it was in 1995, when the firm went public—and 132 times its 1995 level in dollars. The bank’s market value is over $90bn, and Goldman Sachs thinks that it could exceed $200bn by 2024. That would gain HDFC admittance to a global elite now made up of American and Chinese behemoths.

HDFC Bank is an offshoot of a mortgage company of the same name (the initials stand for “housing development finance corporation”), which was set up in 1977 by Hasmukh...

The World Bank’s new boss will struggle to impose himself

Thu, 04/11/2019 - 14:40

WHEN HE WAS nominated to lead the World Bank by President Donald Trump, David Malpass, a former Treasury official, faced no rival for the position. He was approved unanimously by the bank’s board, which represents its 189 member governments, and began work promptly this week. The process could not have been easier. But stiffer resistance lies ahead. Chances are that nothing in the job will become him like the entering it.

The institution he now leads is dedicated to eradicating poverty and fighting inequality. By its estimates, 10% of the world’s population (736m people) lived below the global poverty line in 2015 and perhaps 8.6% did in 2018. It aims to lower that share to 3% by 2030.

Because poverty is falling quickly in India and Bangladesh, most of the people living so uncomfortably now reside in sub-Saharan Africa, especially Nigeria and the Democratic Republic of Congo. They are harder to reach, concentrated in “fragile” regions, afflicted by violence. They would benefit greatly from sound economic policies and rapid GDP growth. But in these settings, the bank cannot always count on governments using its money and advice well. It therefore tends to back tightly monitored projects that benefit the poor directly. A big initiative in Congo, for example, helps women giving birth and vaccinates children against...

Cross-border credit reporting is at last becoming a reality

Thu, 04/11/2019 - 14:40

THE WINDOW to submit applications for an H1B visa, a golden ticket for foreigners wishing to work in America, closed on April 5th. Soon the 85,000 winners will take up new jobs in the land of fresh starts. But those lucky few, most of them highly qualified, and many handsomely paid, will leave their credit histories at home, rendering them invisible to financial institutions. They will find it almost impossible to get a credit card, mortgage or any other type of loan.

It is a difficulty that affects millions worldwide. In 2017 immigrants made up 17% of America’s civilian workforce. Despite having free movement of labour as one of its core principles, the European Union has no system for transferring credit records across its internal borders. Banks suffer, too, missing out on potentially lucrative customers.

Building a new credit profile from scratch takes time. But what if you could use a credit report from your home country when applying for a loan abroad? That is the idea behind Nova Credit, a financial-technology startup in San Francisco. It requests data from international credit bureaus such as Experian and Equifax (with the individual’s consent), paying a fee for the service. It then packages the information to be usable by American banks and landlords. Mpower, a student-loan company, is already using Nova Credit...

Mario Draghi’s successor at the ECB has plenty to do

Thu, 04/11/2019 - 09:03

THE HEADQUARTERS of the European Central Bank (ECB) tower over the river Main. The institution has been equally imposing in the life of Europe’s monetary union. As its only policymaker, it rescued the euro from financial and sovereign-debt crises, and powered a recovery in 2015-17.

But it cannot rest on its laurels. This year promises to be one of high drama. Three of its six-strong executive board will depart, notably its president, Mario Draghi, and its chief economist, Peter Praet (see graphic). By the end of the year eight of the 19 national central-bank governors on its rate-setting body will have stepped down. The end of Mr Draghi’s eight-year tenure coincides with European elections and the top jobs in Brussels coming up for grabs. That makes the choice to replace him unusually political. Should their quest for the commission or council presidencies fail, the French or Germans could seek to put a compatriot—or in the Germans’ case another hawkish northerner—into the ECB job as a consolation prize.

All this could alter the course of monetary policy. Poor choices could mean blunders in dealing with a slowing economy or too-low inflation. The bank’s hard-won credibility as the guardian of the euro could come under threat.


How not to weaken central banks’ independence

Thu, 04/11/2019 - 08:33

THERE ARE more than a few echoes of the Nixon era in the presidency of Donald Trump. Monetary reverberations are among them. Facing re-election in 1972, Richard Nixon felt he needed a strong economy at his back, and made a habit of haranguing Arthur Burns, the chairman of the Federal Reserve at the time. Burns recounted the meetings in his diaries: “The president looked wild; talked like a desperate man; fulminated with hatred against the press; took some of us to task…” Historians reckon Burns was too accommodating of Nixon’s demands, and so helped launch the inflation of the 1970s. Mr Trump is now waging his own assault on the Fed’s independence. He has repeatedly complained about the central bank’s decisions and urged it to take a more doveish stance.

More strikingly Mr Trump, who has already chosen three of the five sitting members of the Fed’s board of governors, has named Stephen Moore and Herman Cain to fill the remaining two vacancies. In contrast to candidates who have come before, both are political activists. But the parallel with the 1970s is less apt than it seems. There are different ways to politicise monetary policy, and Mr Trump’s is particularly poisonous.

Nixon’s inflation helped inform modern ideas of central-bank independence. In 1977 Finn Kydland and Edward Prescott, who won the Nobel prize...

Reserve managers’ relationship with the dollar is unhealthy

Wed, 04/10/2019 - 15:20

JAMES M. CAIN’S novel “The Postman Always Rings Twice” portrays a violent love affair between Frank Chambers, a drifter, and Cora Papadakis, a former beauty queen now married to a man she despises. Their romance is doomed from the beginning. Every attempt to find happiness fails. Any attempt at being apart is equally hopeless. “Why did you have to come back?” she hisses after one break-up. “I had to, that’s all,” he replies.

The story comes to mind when contemplating the fate of the managers of the world’s $11trn-worth of foreign-exchange reserves. This is not to say they are obsessives wracked with guilt and paranoia (though a few might be). But rather that, like Frank and Cora, it has probably occurred to them that their dominant relationship, which is with the dollar, may not be entirely good for them.

The latest figures from the IMF show that the share of dollars in global reserves fell to 62% at the end of last year. Reserve managers seem to be for a cooler, less intense affair with the dollar. But eventually, they will find that it is hard to break free. That is not so much because the alternatives to the dollar have flaws (though they do); rather, it is because the pain of a weaker dollar will become too much to bear.

The dollar is the closest thing to a world currency. Commodities that are traded globally...

Fintech takes aim at the steep cost of international money transfers

Tue, 04/09/2019 - 18:20

FOR MIGRANT workers, sending money home is an expensive chore. They send plenty: remittances to developing countries are set to reach $550bn this year, beating foreign direct investment, the World Bank said on April 8th. Total cross-border transfers to and from individuals and small businesses come to $10trn a year. But a hefty chunk is taken in fees along the way.

American high-street banks can charge over 5% for smallish transfers between major currencies. MoneyGram, an established money-transfer giant, levies 5% for the hop from Britain (sterling) to Ireland (euros). Fees for minor currencies are swingeing. Wiring $200 from South Africa to Nigeria can take days, and costs over 25%. Cash transfers are even worse value.

Now some fintechs are trying to disrupt the cosy status quo. In a world made smaller by Skype and instant messaging, “why does money still go on a donkey?” asks Taavet Hinrikus of TransferWise, a London-based fintech that typically charges a tenth as much as British banks. As yet the newcomers have merely nibbled around the edges. But as incumbents abandon tricky markets, technology improves and financial regulators take aim at unclear pricing, they look set to take a bigger bite.

To send money across borders, banks use “correspondent” accounts they open with each other. When Anna at Bank A wants...

The gloom hanging over the world economy is confined to manufacturing

Thu, 04/04/2019 - 14:45

PESSIMISM ABOUT the world economy has grown throughout 2019. Disappointing data, tumbling bond yields, the trade war between China and America and political crisis in Britain have all played a part. The only bright spot has been mostly buoyant stockmarkets. On April 9th the IMF will probably report a downgrade to its forecast for global growth this year, which in January stood at 3.5%. But there has so far been only a deceleration, not a downturn, because economic weakness has been contained mostly to manufacturing, rather than afflicting the service sector (see chart). And a manufacturing rebound might soon lift the global mood.

Manufacturing’s woes can be blamed primarily on falling global trade growth. That is down partly to the trade war, and partly to Chinese policymakers’ attempts to reduce leverage, which slowed domestic growth late last year, curtailing demand for imports. The pain has been felt most in Europe, which is more exposed than America to emerging markets. It has been particularly acute in Germany. On April 1st a survey of German manufacturers, a preview of which buffeted bond markets in March, turned out even worse than expected. Industrial production has slowed even more sharply in Germany than in Italy, which is in recession, note economists at Goldman Sachs, a bank. Yet Germany’s service sector appears to be...