Making Sense of Irrational Markets and Conflicting Data

This is how an economy is destroyed: ignore small businesses because small isn’t beautiful but complicated, cumbersome, risky, and a nuisance.

US commercial banks charged with the distribution of the $349 billion federal credit line earmarked for troubled companies under the Paycheck Protection Program apparently have allowed larger businesses to jump the queue. Though legally mandated to process applications on a first-come-first-served basis, a number of banks chose to first complete larger loans that earn them more in commission and fees.

Four banks are now being sued in federal court by clients who allege that the processing of their applications was unlawfully delayed. To prove their case, the plaintiffs submitted data released by the Small Business Administration (SBA), the agency charged with coordinating the emergency loan programme. In the two progress reports published so far, the SBA shows that its largest lender - identified only as ‘Lender 1’ - requested guarantees on some $14 billion in business loans with an average size just north of $500,000.

In a remarkable coincidence, JP Morgan Chase on Sunday reported that it had processed the exact same volume of emergency loans with a similarly sized average. Chase is one of the banks now being sued over unfair practices. It denies the charge and says that no businesses ‘large or small’ have been prioritised. Since the lawsuits were filed on Tuesday last week, the SBA reported a sudden increase in the number of smaller loans submitted to the agency.

However, late last week the federal credit line maxed out. Lawmakers in Washington now consider adding another $300 billion to the programme. The urgency of a Congressional deal became clear after the Bureau of Labour Statics reported that another 5.5 million American filed for unemployment benefits, pushing the tally of jobs lost to the pandemic since 14 March to well over 22 million. The federal programme to protect paycheques does not seem to have much of an impact. Or, even more worrisome, the corona recession is much deeper than can be seen from the surface.

It is the lack of sensible hard data about the present state of the economy that keeps the stock market in suspended animation. Dwelling in a barren no man’s land between bulls and bears, investors have almost nothing to go on as they mull future moves. Thankfully the market is no longer in free fall and has even clawed back some of its earlier losses. Stock prices have ‘bottomed’ and veered back even as bad new kept coming. Investors now wonder to what degree the rally of the last few weeks can be trusted.

Quarterly earnings reports, due to trickle in over the next few weeks, seem to indicate that the market is out of tune with corporate reality. Rising share prices do not square with plunging profits, leading investors to believe that the market is overvalued, if not outrageously expensive. A product of what may be dubbed the ‘ultimate externality’, depressed corporate earnings and the likewise sorry condition of the overall economy give analysts few clues about the direction of the market. Good news, such as early signs that the infection’s curve seems to be flattening, is immediately offset by bad news such as the unprecedented rise in unemployment numbers.

Given the that profits have shrunk considerably, pushing price-to-earnings ratios to highs not seen in twenty years, investors are understandably reluctant to tiptoe into a market that has plenty of downside exposure. Just two weeks ago, profits at companies listed on the S&P 500 index were expected to shrink by 10 percent on average. That number has now been revised to 25 percent. Adding to the conundrum is the fact that the first quarter also includes a good five to six weeks of ‘normal’ pre-pandemic corporate performance. This may hide the true depth of the recession.

Then again, given the trillions of dollars being pumped into the economy, exiting the market altogether may well mean losing out when the bulls stage a comeback. However, set against this dark backdrop, the tentative market rally of the past few weeks makes little sense and could well represent a triumph of will over reason.

History does, again, provide a few pointers. Big market collapses such as those of 1987 and 2008 adhere to a roughly sketched playbook: an initial crash is followed by a fairly strong rebound that fizzles out when previous lows are put to the test before the market finally ‘washes out’. This dynamic is driven to a rather unsettling degree by investor psychology, in particular the lure of ‘revenge trading’ which moves the rebound before reason prevails.

A scarce commodity in even the best of times, reason is hard to come by during this pandemic as illustrated by the price of oil. As reported here last week, wellhead prices in landlocked fields dipped below zero for the first time in recorded history, forcing producers to actually pay ‘buyers’ for every barrel of oil delivered. The topsy-turvy world of negative interest rates, another ludicrous feature of present times, just got another dimension.

The predicament of oil producers is caused by an acute shortage of storage capacity as tank farms are topped up whilst demand for fuel evaporated. Due to the high cost of the logistics involved, inland producers such as those operating fields in Alberta and North Dakota are shut off from floating storage platforms and have nowhere to ship their oil. West Texas Intermediate (WTI) futures that expire in May dropped to an astonishing minus $37.63 on Monday. WTI futures are usually set for delivery at Cushing.

That small Oklahoma town sits at the junction of several important pipelines and is home to the world’s largest tank farm with a capacity to store 76 million barrels of crude. Cushing is now nearing the point at which operators can no longer accept any additional oil. Meanwhile, an armada of close to a hundred tankers holding an estimated 160 million barrels of oil rides at anchor off the Texas Gulf Coast. Ships continue to arrive daily, adding an average 2 million barrels of crude to the offshore inventory.

Though WTI futures today crossed back into positive territory in early trading, wellhead prices for more obscure grades of crude at distant inland terminals have not. The oil market now eagerly awaits the reduction in supply agreed to by OPEC and Russia early last week and slated to begin early next month. According to the organisation, its decision will reduce global oil supply by 9.7 million barrels per day (bpd).

However, some analysts fear that the reduced pumping rate is not nearly enough to compensate for the 25 percent slump in global demand which equates to roughly 20 million bpd. Moreover, in a barely noted addendum to the agreement, OPEC and Russia used an October 2018 baseline for their calculations. At that time, production volumes were some 3.5 million bpd higher than those reported in March. This implies that the cutbacks amount to only about 6 million bpd. Not only is the present oil glut here to stay, it will likely swell significantly over the coming months.

If investors can derive any guidance at all from the first concrete economic indicators to come out after the sudden start of the Corona Recession, it points to continued uncertainty and the absence of wider trends. The statistics and numbers are, in fact, almost meaningless. The laws that underpin the functioning of markets and economies seem to have been suspended as the almost surreal dimension of the crisis, and the equally unprecedented scale of the official response, become clear. The cliché of navigating unchartered waters gains a whole new meaning that is perhaps more menacing than anyone could have dared guess.


PwC Nigeria: Nigeria’s Finance Act Gets a Facelift to Attract Business and Investment

[caption id="attachment_14974" align="alignright" width="300"] Author: Folajimi Akinla[/caption]

Earlier this year, Nigerian president Muhammadu Buhari signed the Finance Bill 2019 into law as the Finance Act of 2019 — the first amendment to the country’s tax laws since 1999.

The Act, which comprises 57 sections, seeks to amend seven major federal tax laws: the Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), Value Added Tax Act (VATA), Customs and Excise Tariff (Consolidation) Act (CETA) and Stamp Duties Act (SDA).

The Act brings substantial changes to the tax landscape in Nigeria. Among other things, it seeks to protect the most vulnerable sectors of society, create favourable tax regimes for SMEs, and make Nigeria a more attractive business destination.

One of the core objectives of the Act is to bring the laws into line with the federal government’s policies and to generate short-term revenue to fund the 2020 Budget. It is expected that, as pre-1999, a finance bill will be passed annually.

Favourable tax regime for SMEs

The Act gives SMEs more favourable tax regimes. Under the old law all companies were subject to income tax at a single rate of 30 percent. The Act creates exemptions for SMEs with a gross turnover is less than NGN25m (£52,000), even though they are expected to file annual returns.

A medium-sized company is defined as one whose gross turnover exceeds NGN25m but is less than NGN100m (£210,000). Such companies are subject to income tax at the rate of 20 percent.

"Among other things, it seeks to protect the most vulnerable sectors of society, create favourable tax regimes for SMEs, and make Nigeria a more attractive business destination."

The Act also introduces special regimes under the Value Added Tax (VAT) Act. Companies with a turnover of less than NGN25m do not have to register or charge VAT on their supplies. However, they are expected to pay VAT on their purchases.

Holding-company jurisdiction

Prior to the Act, there was a provision — section 19 — in the Companies Income Tax Act (CITA) that, in effect, penalised groups with Nigerian holding companies by subjecting them, in certain circumstances, to tax at the rate of at least 62 percent, instead of the standard rate of 30 percent.

Section 19 deems as profit any dividends paid by holding companies in excess of their total profits. The law then imposes an additional tax of 30 percent on such excess dividends as though they were profits. The provision is informally referred to as Excess Dividend Tax.

Given the nature of holding companies — which ordinarily do not carry out any business activities and by extension do not have taxable profits — such companies are often susceptible to the Excess Dividend Tax.

Besides holding companies, section 19 also had an adverse effect on companies which earned exempt income, and therefore had no taxable profits or taxable profits that were lower than the dividends they paid. It also affected companies that paid dividends from retained earnings where such dividends exceeded the companies’ taxable profits in the year the dividends were paid. Such companies were, in addition to income tax of 30 percent, also subject to Excess Dividend Tax at 30 percent on the excess of dividends over their taxable profits — even though the retained earnings from which the dividends were paid had been subject to tax in previous years.

Section 19 was seen as a disincentive to many multinationals considering holding companies in Nigeria. The loss of foreign investment caused by section 19 cannot be quantified. The section also prevented Nigerian companies from investing in their own country. The effect of Section 19 becomes even more onerous when one considers that dividends paid by multinationals and Nigerian companies were also subject to a withholding tax (WHT) of 10 percent or 7.5 percent (where the recipient is resident in a country that has a Double Tax Agreement with Nigeria) in the hands of the shareholders / investors.

The Act now provides that no additional tax is imposed on dividends that exceed total profits in any of these circumstances. That is, companies distributing excess dividends from retained earnings which had been taxed in prior years, exempt income and franked investment income would no longer suffer Excess Dividend Tax.

The result of the amendment is that, from a tax perspective, Nigeria becomes a more attractive destination for holding company structures.

Incentives for the real estate sector

Nigeria has a relatively youthful population of about 200 million people — and a housing deficit estimated at 20 million units. Only 100,000 housing units are developed each year. The major challenges to the real estate sector are difficulties in registering properties and obtaining construction permits, which in turn create obstacles to securitisation of property. It also increased the cost of investing in the sector.

These challenges are responsible for the significant amount of “dead” capital in the sector which — estimated to be in the region of $900bn. The luxury real estate market is estimated to hold between $230bn to $750bn in value, while the middle market carries between $60bn and $170bn in value.

Real estate investment companies (REICs), are arguably liable to corporate income tax at 30 percent of their profits and a further two percent Tertiary Education Tax (TET). In addition, distributions to shareholders could be liable to WHT at 10 percent. This is a deviation from the treatment of real estate investment trusts (REITs) globally as tax-neutral vehicles. The reason for the difference in practice is lack of specific provisions in the current tax laws. Under the old law, the tax treatment of an REIC made it unattractive to investors (although in practice, the FIRS sometimes did not strictly apply the law).

The difference in law, and in practise, creates inequity in the taxation of different REICs and uncertainty around using such a vehicle to attract investments in the real estate sector. The proposed changes to the taxation of REICs seek to align the tax treatments with global best practices.

Definition of an REIC

The Act defines an REIC as a company approved by the SEC to operate as a Real Estate Investment Scheme in Nigeria. The SEC rules have a clear definition of the scope and regulatory requirements for an REIC.

Dividends and income now exempt

The Act exempts dividend and rental income received by REICs on behalf of unit-holders from income tax, provided that a minimum of 75 percent of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income was earned. Should the REIC fail to distribute the dividend or rental income within the stipulated 12-month period, the income would be subject to income tax and TET. However, the Act does not exempt the income (such management fees, profits or any other income) of the REIC from income tax and TET.

As an additional safeguard, the Act treats dividends and mandatory distributions by REICs as tax-deductible expenses. This would not create a double dip since the Act also has a general rule that expenses would be tax deductible only to the extent that they relate to the production of taxable profit. Also, as mentioned earlier, dividends paid by REICs are excluded from the ambit of Excess Dividend tax.

Distributions to REICS to be exempt

Under the Act, dividends or distributions to a REIC would not be subject to WHT. Therefore, where a REIC is a shareholder in a company, the company must pay gross dividends to the REIC without deducting WHT. However, the Act assumes that the REIC would then be responsible for deducting WHT when distributions are made to its unit-holders. This ensures that there is only one layer of WHT on investments made through REICs and such taxes are remitted to the appropriate authorities especially for individual unitholders liable to State’s Internal Revenue Services.

The proposed tax changes are geared towards making REICs tax-transparent investment vehicles in respect of dividends and rental income, placing the obligation for tax on the respective shareholders subject to meeting the minimum distribution threshold and timing. This would make REICs even more attractive than REITs.

Taxation of profits

Before now, Nigerian tax laws did not recognise or impose any tax on income earned from regulated securities lending transactions, even though the Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC) recognise and regulate transactions involving securities lending.

Typically, in a securities lending transaction, one party (“lender”), in exchange for collateral (cash or other security) transfers securities (stocks, shares) to another (“borrower”) through an agent (“lending agent”). It is expected that Lender and Borrower earn income (“compensating payments”) on the collateral and securities transferred.

The Act now expands the definition of “interests” and “dividends” to include compensating payments made by a lender to a borrower, and by a borrower to a lender, respectively. Prior to the amendment, there was little or no clarity on the taxation of such income. Now, profits arising from such transactions, other than the compensating payments, are now subject to tax.

Changes in VAT regime

One of the biggest and most discussed changes by the Act is the increase of the VAT rate from five percent to 7.5 percent. Since the introduction of VAT in Nigeria in 1993, the rate had remained at five percent until the recent amendment, making Nigeria one of the countries with the lowest VAT rates in the world. In Africa, the average rate ranges between 15 percent and 17.5 percent.

While there is some concern that the increase in the rate will result in a corresponding increase in the cost of living, the rate remains one of the lowest globally. On the flip side, it is expected that states’ income would increase given that they get the bulk of VAT revenue under a revenue-sharing formula. One of the arguments for an increase in VAT was to enable states meet their obligations under the recent increase in the national minimum wage.

The Act provides clarity to ambiguous provisions in the VAT Act, which now allow FIRS impose VAT on supply by non-residents of goods and services to Nigerian consumers even when the non-residents do not include VAT on their invoices. This procedure is usually referred to, in international VAT context, as reverse-charge mechanism.

Other amendments include introducing a list of basic food items which are VAT-exempt. To alleviate the increase in the VAT rate, a list of basic food items comprising 16 categories of over 150 basic food items was introduced. Under the old VAT Act, “basic food item” was not defined.

Dividends from Petroleum Tax profits

Before the advent of the Act, dividends arising from petroleum profits were exempt from any further tax, including withholding tax. The intention was to grant investors in the petroleum companies palliatives given the high tax rates (85 percent for Joint Venture arrangements, reduced to 65.75 percent for companies in their first five years of production, and 50 percent for Production Sharing Contract arrangements) under the Petroleum Profits Tax regime.

This exemption has now been deleted, with the effect that all dividends arising from petroleum profits would now be subject to WHT at the applicable rate: 10 percent or 7.5 percent if the recipient of dividend is resident in a country which has a Double Tax Agreement with Nigeria.

Digital economy significant economic presence

Generally, a non-resident company is only subject to tax in Nigeria if it has a fixed base (FB) in Nigeria and only the profits attributable to the fixed base would be taxable in Nigeria. Prior to the Act, a non-resident company would create a FB in Nigeria if it had a physical presence in Nigeria.

Non-resident companies providing services remotely to Nigerian consumers were not subject to Nigerian tax. However, they were subject to WHT of 10 percent or 7.5 percent (where the non-resident is resident of a country that has a Double Tax Agreement with Nigeria) on passive income (dividends, interest, rents and royalties) earned from Nigeria.

To address modern business realities, the Act proposes certain amendments.

Taxation of e-commerce activities

Under the Act, a non-resident company would be deemed to be taxable in Nigeria where it transmits, emits signals, sounds, or images by electronic or wireless means in respect of any e-commerce activity, provided it has a significant economic presence in Nigeria and profits are attributable to such activities.

The intention is to broaden the tax base by capturing profits arising from e-commerce that have previously escaped tax. It is expected that all non-resident companies earning income from advertising, marketing and social media platforms would be subject to tax on profits derived from such activities provided they have significant presence in Nigeria.

Remote provision of services

A non-resident company would be deemed to be taxable in Nigeria where it provides technical, management, consultancy or professional services to persons resident in Nigeria, provided it has a significant economic presence in the country and profits can be attributed to such activities. The amendment seeks to expand the tax base to capture activities where non-resident companies provide services to persons in Nigeria without being physically present in Nigeria.

New ministerial powers

The Act now gives the Finance Minister new powers to determine, by order, what constitutes “significant economic presence” in Nigeria for the purpose of subjecting non-residents to tax. This gives the minister the discretion and flexibility to define (and redefine) the term to reflect changing business and economic circumstances.

Conclusion

The Act is a step in the right direction. It is expected that there will be annual Finance Acts to address outdated provisions and create revenue streams to implement annual budgets. To achieve the ultimate ends — making Nigeria a more attractive place for business and investment — the Act must be complemented by other actions.

Citizens demand more accountability and transparency from public officers on how the Budget is implemented, and how tax revenue and resources are allocated. Government officials must earn the people’s trust as stewards of Nigeria’s resources. There is also room for improvement in areas of tax administration, the judicial system, security, respect for freedom of expression, and other fundamental rights.


Tinkering with a Spanish Proposal

[caption id="attachment_14979" align="alignright" width="300"] The famous Cibeles fountain in Madrid, Spain[/caption]

It is an idea that just refuses to die. Mere days after a Dutch-led cabal of northern Eurozone finance ministers swept the concept of debt mutualisation off the negotiating table, the prime minister of Spain ups the ante by proposing the European Union issue €1.5 trillion in perpetual bonds (‘consols’) to underwrite the post-corona economic recovery. Even his normally outspoken Italian colleague has not dared broach the topic so soon after the resounding ‘neen’ and ‘nein’ from the EU’s paymasters.

Presiding over a rickety coalition of his own Socialist Workers’ Party and the far-left Unidas Podemos party, Prime Minister Sanchez is no stranger to courage and ambition. On the domestic scene, Mr Sanchez is engaged in a delicate balancing act that allows him to hone his skills as a political operator and survivalist to near perfection. Adversaries now know better than to underestimate the socialist leader. Even though he carries no big stick, Prime Minister Sanchez still manages to talk softly and get his way.

In Europe’s increasingly dissonant concert of nations, the Spanish leader displays a sense of pragmatism that is appreciated by most of his counterparts and contrasts rather sharply with the emotionally charged appeals, demands, and diatribes of Prime Minister Guiseppe Conte of Italy. In Berlin, Vienna, Helsinki, and The Hague, Mr Conte’s theatrics only serve to reaffirm stereotypes.

As a staunch europhile, the Spanish prime minister has impeccable credentials in Brussels and is usually listened to with more than just a polite bobbing of heads. His idea to launch consol bonds, whilst unlikely to see the light of day in the form proposed, is not entirely without merit and could, in fact, help catalyse a discussion about the need for a monetary approach to the Corona Recession.

The consol (consolidated stock) is a Dutch invention of 1648 when the Rhineland Waterboard issued the first-ever perpetual bond to finance the construction of a system of levees and dikes to protect central parts of the country against seasonal flooding. One of those bonds was preserved and wound up in the collection of the Beinecke Rare Book and Manuscript Library at Yale University. In 2015, the library’s curator travelled to Amsterdam to collect interest on this relic of the Dutch Golden Age. The waterboard, still in existence but since renamed, duly paid €136.20 in back interest.

In the mid-1700s, the British government took to this early example of financial engineering and issued perpetual bonds to find its way out of a cash crunch. Prime Minister Sir Henry Pelham instructed his chancellor of the exchequer to roll all outstanding government debt into a single consol with a uniform coupon of 3.5 percent. This changeover not only simplified bookkeeping but also reduced the interest rate and freed the government from the obligation to periodically pay off its bondholders.

The UK government redeemed the last outstanding batch of consols only in July 2015. Between 1870 and 1930, the US government also made extensive use of perpetual bonds to meet its financing needs and lower the cost of debt. More recently, the Dutch rediscovered the joy of consols and issued a small number of perpetual notes to cash in on the country’s stellar sovereign credit rating. These curious notes currently yield around 0.9 percent.

A consol has no due date and is only redeemed at the discretion of its issuer. Prime Minister Sanchez argues that the current low interest environment is an ideal one to place a large issue of perpetual bonds. He suspects that even a €1.5 trillion placement, representing 10 percent of the European Union’s GDP, may be oversubscribed. Assuming that an EU consol would yield some 30 basis points above the Dutch note, its coupon would hover around the 1.2 percent mark, representing a manageable €18 billion in added expense. Payment of the coupon could quite easily be financed by shifting a few line items in the €168 billion annual EU budget with no need to increase the contributions of member states.

Essentially, Mr Sanchez has found an appealing way to raise cash without overly burdening member states. Predictably, Dutch Finance Minister Wopke Hoekstra, always quick to detect and denounce scheming by cash-strapped southern EU member states, was less than enthused and dismissed the Spanish plan out of hand as another form of debt pooling and risk mutualisation.

However, economists in Germany, The Netherlands, and elsewhere are not so sure. They took the time to study Mr Sanchez’ proposal in more detail and concluded that, whilst it may not meet the approval of fiscally prudish northern governments, the idea does point to a direction worth exploring.

Considering that inflation is stuck at near-record lows and shows few signs of life even after the European Central Bank (ECB) flooded the financial system with untold billions of euros, it may be a good idea to let go of all pretence and inject freshly-minted cash - as opposed to cheap credit - into the economy.

This monetary solution represents, perhaps, the biggest ‘bazooka’ of all. Old-school monetarists who warn of hyperinflation and the wholesale erosion of confidence in the medium of exchange, sound positively hysterical when nearly everybody has been clamouring for a modicum of inflation to help spur spending. In fact, the ECB has made no secret of its desire to push average Eurozone inflation to at least 2 percent - tripe its current (March) rate of 0.7 percent.

Though perhaps not recommended for the faint of heart, boosting the M1 ‘narrow’ money supply, which includes only the most liquid instruments such as cash and demand deposits but excludes bonds and other financial assets such as savings and investments, offers a possibly painless way to get the economy back on track once the pandemic is over.

Thus, the timing is right for a monetary approach. Also, the recalcitrant Dutch Finance Minister Hoekstra may perhaps want to revisit his country’s own past for a lesson on how not to tackle a major economic crisis.

In the early 1930s, the stoic refusal of then-Prime Minister Hendrik Colijn to let go of the gold standard and increase the money supply caused The Netherlands to suffer a much deeper, longer, and more painful recession than those that damaged countries less dedicated to fiscal rectitude.

At the height of the depression, Mr Colijn famously reminded the nation that counterfeiting remained a serious offensive - ‘until recently punishable by death’ - and proudly declared that the Dutch state does not engage in criminal activity. By 1936, that position had become untenable and Mr Colijn was forced to concede defeat: the gold standard was abandoned, and the pristine guilder suffered its first devaluation in well over a century.

According to the International Monetary Fund, the Corona Recession may eventually rival the Great Depression of the early 1930s unless concerted action is undertaken to prevent a complete economic meltdown. The IMF expects global GDP to recede by 3 percent this year and predicts a rebound for 2021. However, the fund admits that its numbers are tentative given the proliferation of uncertainty.

To paraphrase the ancient Greek physician Hippocrates, desperate times call for desperate measures. Though the fiscally stronger countries of northern Europe may manage to scrape by on their own, they need unfettered access to now ailing southern markets to survive - and prosper. The suggestion that the stresses introduced by the pandemic could cause the euro to fail, ignores the fact - plain to see but harder to acknowledge - that Germany, The Netherlands, and many other northern EU member states have fared exceptionally well by a relatively weak euro. That weakness, courtesy of the Eurozone’s Club Med, has proved a great advantage in accumulating the vast current account surpluses which allow its beneficiaries to significantly increase the global footprint of their economies.

In a sort of twisted yin-yang way, the destiny of the 19 individual Eurozone member states is interlocked. This financial equivalent of the Gordian knot requires solutions other than seeking domination by the sword. And it just so happens that the Prime Minister of Spain has found a way to collectively untangle the knot without the need for dramatic gestures. With only a few minor modifications to please the northern masters of the coin, that solution may be acceptable to all and provide the relief needed.


Waterloo or Austerlitz: EU Nears Moment of Truth

The European Union approaches a now-or-never moment when leaders of the 27-strong bloc meet in a video conference to discuss ways out of the pandemic quagmire that bogs down the continent’s economy and threatens to escalate the present recession into a full-blown depression.

[caption id="attachment_14987" align="aligncenter" width="900"] President of the European Council: Charles Michel[/caption]

All participants of today’s virtual summit have promised to be on their best behaviour and recognise the severity of the crisis - and the need for decisive concerted action. The EU’s more traditional kick-the-can-down-the-road attitude, that usually includes ineffective half-baked compromises, can no longer delay the arrival of doomsday. The latest batch of horrifying economic data seems to indicate that the day of judgment has already dawned.

EU President Charles Michel, who chairs the meeting of the European Council, pleaded with participants to leave their ‘hand grenades’ at home. He wants to avoid a major clash between northern and southern member states such as the one that took place when the bloc’s finance ministers met online two weeks ago. A former prime minister of Belgium who managed to stay in power for five years, Mr Michel is exceptionally skilled in bridging divides and defusing tensions. He will need to draw heavily on his vast experience in bringing together warring factions in order to pave the road to post-corona recovery.

Though the EU may not yet face a choice between Waterloo and Austerlitz - there is always a tomorrow in the union - the bloc must agree on a common set of policy instruments lest sceptical markets throw down the gauntlet and decide to test Brussels’ resolve. The European Central Bank (ECB) is already now feeling the heat of market forces that doubt the institution’s ability to provide the required amounts of cash to struggling Eurozone member states such as Italy and Spain.

A month after her bold ‘no limits’ statement, ECB President Christine Lagarde is back at square one and apparently powerless to avoid a sharp increase in European bond spreads that take the 10-year German federal ‘bund’ as the benchmark against which other euro sovereigns are measured. Earlier this week, the yield on Italian bonds crossed a Rubicon of sorts when it broke the 2 percent barrier, pushing the spread to 2.6 percent, thus revisiting the heights of the mid-March selloff that sparked Ms Lagarde’s comment.

Quoted in the Financial Times, John Taylor of investment manager AllianceBernstein warned that markets could ‘very quickly’ lose confidence should spreads continue to rise. For now, Mr Taylor is holding on to his Italian government bonds as are most of his peers. They expect the central bank to intervene and boost the rate of its asset purchases in order to push down spreads.

However, perception - arguably the largest mover of markets - is failing Ms Lagarde. The ECB president is almost continuously being compared, both unfavourably and unfairly, to her predecessor Mario Draghi, aka Super Mario, whose stern and often even overbearing demeanour left no doubt about who was in charge and calling the shots. Whilst Mr Draghi managed to cower markets into submission, Ms Lagarde has not yet succeeded in doing so.

It has now transpired that the ECB Governing Council was wrecked by dissent in the days leading up to Ms Lagarde’s ‘no limits’ statement. Since then, subgroups have coalesced within the council that undermine the institution’s ability to intervene with the forcefulness required by the moment. Though Dutch-led Hanseatic 2.0 subgroup of monetary hawks has awarded Ms Lagarde considerable leeway, the collective also drew a few lines that are not to be crossed. One of those lines involves a taboo on the expansion of the M1 ‘narrow’ money supply - i.e. the minting of fresh euros.

The attempt by Ms Lagarde to rule by consensus seems to have backfired. In a rare moment of candour, Dutch Central Bank President Klaas Knot deplored Ms Lagarde’s decision to replace the oval meeting table used by the council whilst Mr Draghi chaired its meetings, with a round one that is meant to emphasise the equal status of ECB members and executives. Some traders interpreted this office furniture swap as a sign of weakness and an invitation to dissent.

Perhaps not quite cornered yet, but certainly embattled, the ECB president must also navigate the present crisis without explicit political support. In 2012, as the banking crisis neared its climax, German Chancellor Angela Merkel and French President Francois Hollande immediately backed up the ‘whatever-it-takes’ statement that epitomised the Draghi era. In contrast, Ms Lagarde is largely being left to her own devices. She also faces a more hostile global setting with a US president who, unlike his predecessor, seems to consider the entire European project a hostile attempt to deprive his country of the ‘greatness’ it aspires to.

Reduced to a backstop for its members’ individual efforts at limiting the economic fallout of the pandemic, Ms Lagarde’s ECB now has to avert a possible debt crisis of an almost unprecedented size. Already creaking and buckling under the comparatively light stresses induced by the 2012 Greek financial crisis, the euro may well give out completely should key Eurozone economies such as Italy and Spain get into serious trouble. Still, few analysts expect the currency to fail. As Ms Lagarde emphasised in het March pronouncements, the Corona Recession requires first and foremost a fiscal response. This is precisely what Eurozone member states have been working on, albeit in an uncoordinated and mostly haphazard fashion.

Today’s meeting of the European Council, the body that sets the overall policy of the union, is to sketch the outlines of a large-scale economic recovery programme. Going into the meeting, the Frugal Four (Austria, Denmark, Sweden, and The Netherlands) warned that they will not want to discuss any form of debt pooling. The quartet argues that expressions of intra-union solidarity do not equate to mindlessly throwing money at the problem and calls for more sophisticated solutions.

Dutch Prime Minister Mark Rutte promised to show his softer side in today’s meeting and earlier this week apologised profusely for the behaviour of Finance Minister Wopke Hoekstra whose monumental bluntness in rejecting Italian and Spanish pleads for debt mutualisation caused even the Germans a bout of vicarious embarrassment. Mr Rutte ensured that his country stands ready to offer help and suggested the European Commission first map the actual needs of individual member states before committing funds over and above those already earmarked for emergency support.

The Frugal Four and their hangers-on are not expected to object to the €540 billion support package agreed to by EU finance ministers on 9 April which includes an extra €200 billion for the European Investment Bank (EIB), €240 billion in budget support from the European Stability Mechanism (ESM), and €100 billion to help meet the added cost of unemployment benefits throughout the union. The council will also discuss improved coordination between member states in the loosening of corona restrictions.

The most explosive topic that the 27 leaders of government will broach involves the setting up of a post-pandemic reconstruction fund. Though there is broad agreement over the need for such a fund, member states differ sharply on its size and shape. Spanish Prime Minister Pedro Sánchez proposes the creation of a €1.5 trillion pool of cash that is to disburse grants - not credits - to troubled countries. He suggests an issue of one-time perpetual bonds as a relatively painless way to obtain the necessary cash. Italian Prime Minister Guiseppe Conte wants to present a similar plan at today’s meeting.

To better appreciate the challenge faced by EU President Charles Michel, contrast the Spanish and Italian proposals to the one presented by the Frugal Four: a €25 billion fund to help with added public healthcare expenses.

The council will not just stage a north-south confrontation but must also consider the feelings of East European member states that object to raising free cash for Spain and Italy. The Frugal Four may yet find unexpected allies in Bulgaria and Romania, countries that are troubled by the demands for big money of significantly richer member states. Mr Michel is about to enter a political minefield that stretches to the horizon. He may expect a few detonations along the way.


Robed Culprits and the Struggles of Corporate America

Blame the US Supreme Court. The oftentimes maddingly short-sighted behaviour of Corporate America does not necessarily spring from the narcissism of CEOs but stems from unambiguous case law. Almost invariably, US courts have upheld, clarified, and tightened the fiduciary duty of corporate executives as the expert stand-ins for shareholders.

Reduced to its most basic form, a fiduciary relationship is deemed to exist when one party entrusts another with the management of its affairs. This is different from, say, a transactional relationship in which parties may reasonably be expected to act in ways that further their own interest.

It is not the job of judges to instruct CEOs on how to run a publicly traded company. With their rulings on fiduciary duty, the courts merely seek to clarify the responsibilities of the parties to a fiduciary relationship. Though legal rulings are open to interpretation in much the same way that statistics may be used to prove almost any point, the consensus is that corporate management must keep its eye trained on the bottom line and work tirelessly to maximise the return on the capital invested by shareholders. Any deviation from this principle offers fodder to lawyers eager to argue a breach of trust.

This helps explain why most US corporates are reluctant to include sustainability and environmental concerns in their operational processes. Any long-term planning, or the consideration of interests other than those of shareholders, distracts from the duty to maximise profits. This is, in a nutshell, how the ‘next quarter’ came to rule supreme - and why a great many otherwise admirable companies have come to hollow out their finances by showering shareholders with cash.

Many of those corporations are now teetering on the brink of insolvency and demand the taxpayer come to the rescue. The sorry plight of Corporate America in times of corona has resulted in a form of ‘involuntary blackmail’: the taxpayer is being told that without his/her money, businesses will fail, and the economy will tank even deeper than it already has. Without a sufficiently large bailout, the pandemic will rage with the destructive force of a tornado across the corporate landscape.

A major disaster is, of course, not the moment to remind victims of past errors in judgment. In 2008, few people professed a deep-seated love for the financial services industry, yet nearly all agreed that banks needed to be rescued in order to prevent an even greater catastrophe. The pandemic is no different, though it cannot hurt to remember why only a very few large corporations have enough ready cash available to weather the present near perfect storm.

Berkshire Hathaway, Facebook, and Apple are amongst the select few US companies that have managed to resist the clamour of shareholders for large payouts. Both kept large cash reserves that not only allows these companies to survive the pandemic without appealing to the government for help, but also enables them to seize any opportunity arising out of the rubble.

Pundits often point to Berkshire Hathaway CEO Warren Buffett as the posterchild of stock buybacks, a cause he has championed for close to fifty years. Less well advertised are Mr Buffett’s warnings that the repurchase of stocks is only admissible when the company keeps sufficient cash on hand to cover its operational and liquidity needs.

In his 2011 letter to shareholders, Mr Buffett added that buybacks should only take place at a time when the company’s stock is trading at a ‘material discount’ to the intrinsic value of the business, ‘conservatively estimated’. The following year, Mr Buffett expanded on the latter bit of his advice by explaining the obvious: “It's hard to go wrong when you’re buying dollar bills for 80¢ or less.”

As usual, there is little anyone could argue against the lessons in business logic and pure reasoning broadcast annually from Omaha, Nebraska. However, a fair number of stock buyback initiatives ultimately went awry. Buyers’ remorse is now reaching an all-time high. Once the unexpected happened, as it was bound to do at some point, the party ended in tears. That is because the hosts didn’t listen to the sage.

According to data gathered by S&P CapitalIQ, a global financial intelligence bureau part of McGraw-Hill, companies included in the S&P 500 index increased their repurchases of stock between 2016 and 2019 by 30 percent to about $2 trillion. Including dividends, these companies returned some $3.5 trillion to shareholders - an amount roughly equal to their combined net income over the period. An often-overlooked indicator, the net debt to gross earnings (EBITDA, earnings before interest, tax, depreciation, and amortisation) ratio also deteriorated significantly during the last three years for which data are available. That number now stands at 1.8, indicating that corporates took on an exceptionally high level of debt – all the while forking large amounts of cash over to shareholders.

Whilst Mr Buffett’s Berkshire Hathaway always maintains a famously large pile of readily deployable cash, many others pushed stock buyback programmes to far beyond the point of reason. Both Boeing ($53 billion) and American Airlines ($13 billion) would now love to have some of the capital they released to shareholders. The companies, in line for large federal bailouts, represent but two of the more egregious examples of irresponsible buyback schemes.

Another one is Yum Brands, parent to the KFC and Taco Bell fast-food chains, which actually borrowed heavily to buy back its own stock. Over the last five years, Yum Brands spent an estimated $15 billion to reward shareholders whilst its debt load soared from the equivalence of 40 percent of company assets to well over 200 percent. Earlier this month, the company was forced to raise cash via an emergency bond issue. It managed to place some $600 million at a yield almost double that of previous issues. Whilst Yum Brands proudly announced that it has not requested government support, the company said that its thousands of franchise holders could apply for federal aid. An initiative of the highly lucrative fast-food industry to claim up to $145 billion in relief was quietly shelved after eyebrows were raised in Congress.

Over the years, chief executive Laurence Fink of BlackRock, the world’s largest asset manager, repeatedly warned about the dangers of ‘short-termism’, a phenomenon he detected in the upper echelons of management at many large companies. Mr Fink worried that the fascination of CEOs with the next quarter’s results undermines not only research and development efforts but also dampens future growth prospects.

However, most CEOs have little choice and must operate in a restricted environment: at listed companies, management must act first and foremost on behalf of shareholders and only after their interests have been secured can they look at what’s best for the company. Though both interests - those of the company and its shareholders - often seem perfectly aligned, in practice they are not as stock prices are determined mostly by corporate performance in the here and now, and only to the most minute degree by concerns over long-term profitability.

Thank the US Supreme Court for the ‘short-termism’ that defines Corporate America and now has come back to bite it. Once the pandemic is over, the time may be right to revisit the principle of fiduciary duty as it applies to the relationship between management and shareholders.


Turbulence in African Skies

Not all airlines are dropping like flies. Whilst Ethiopian Airlines suffered a loss of about $550 million in the first four months of the year and was forced to ground airplanes and furlough workers, the company moved quickly to expand cargo operations in order to keep its fleet partially aloft. Earlier this month, Ethiopian inaugurated a new direct route between Kilimanjaro and Brussels to deliver up to 90 tonnes weekly of fresh produce from Tanzania to European markets. The company mobilised its cargo fleet to deliver medical supplies across Africa and Europe. Ethiopian also organised hundreds of charter flights to repatriate people caught abroad as the world went into lockdown.

CEO Tewolde GebreMariam announced that his airline now plans to convert some of its 23 Boeing 787 Dreamliners into freighters. Ethiopian’s current cargo fleet of 10 widebody B777Fs and 2 smaller B737Fs, the largest and most modern of the continent, is unable to keep up with demand. However, Mr GebreMariam said that the company is not only banking on its cargo operations to survive the pandemic but also seeks to expand the aircraft and engine maintenance part of the business.

Africa’s largest and most successful flag carrier, Ethiopian Airlines invested wisely in the diversification of its business, branching out into real estate and the hospitality sector. Ethiopian’s Addis Ababa Skylight Hotel received its first guest late last year and is set to become the largest 5-star hotel in Africa with over 1,000 rooms. Though a state-owned company, Ethiopian has remained nimble and responsive to the dynamics of the market, shifting gears with a speed and precision that keeps surprising industry watchers.

The company has suspended - but not scrapped - plans to build a $5 billion airport near Bishoftu, a town 48 kilometres southeast of Addis Ababa, capable of handling 100 million passengers annually - more than gateways such as Charles de Gaulle or Schiphol. The 28 check-in counters and 7 gates of the new $225 million terminal at Addis Ababa’s Bole International Airport, built with help from China, has barely managed to reduce the congestion for which the airport is (in)famous. Ethiopian expects passenger volumes to recover early next year and grow at an annual clip of 18 percent thereafter. Mr GebreMariam remains confident that air travel will rebound before long and is convinced that Africa will be the industry’s next frontier.

That message is lost on South African Airways (SAA) which may be grounded for good after the government last week refused to release $526 million (R10 billion) in emergency funding to support the troubled airline. A hotbed of nepotism, corruption, and other forms of institutionalised mismanagement, SAA racked up an estimated $1.7 billion in net losses since 2008. The pandemic may yet turn into a coup de grâce for the state-owned airline which in early December went into voluntary receivership at the order of President Cyril Ramaphosa. The government tries to avoid a liquidation of the company which would instantly trigger close to $900 million in state-backed loan guarantees.

The plight of SAA is illustrated by dwindling passenger numbers. Whilst between 2007 and 2019, Ethiopian Airlines managed to increase its volume of passengers carried six-fold to 12 million, SAA saw its traffic shrink by a quarter to just 6 million. “In its current format, SAA has already collapsed,” says Adrian Saville of Cannon Asset Management in Johannesburg: “As it stands, it is very difficult to come to any conclusion other than its days are done.”

With its fleet grounded, no money to meet next month’s payroll, and now apparently cut off from funds, SAA’s predicament indeed looks hopeless. Whilst the administrators have yet to present a viable business case for the company, the President Ramaphosa seems determined to stop SAA from raiding the treasury. The privatisation of the airline is one of the options under consideration but clashes with the country’s archaic laws on the sale of state-owned enterprises and the reluctance of the ruling ANC to cede control over parts of the economy to outside investors. The point may be moot as foreign investors are unlikely to show much interest in the politically charged company.

Another option is to divest SAA Group assets such as low-cost carrier Mango which briefly flirted with profitability. However, the group’s subsidiaries have already been earmarked for sale to generate the cash needed to pay for the legally mandated severance packages of its 4,700 workers. The proposed sale of SAA’s 9 aging Airbus A340 planes is not expected to offer much relief as there are few, if any, takers for the uneconomical liners. The lion’s share of the SAA fleet is made up of leased aeroplanes which dwell on the liability side of the company’s books. The only assets worth anything of note are SAA’s two night slots at Heathrow Airport, valued at £30 million each.

An added complication is that no South African carrier can supplant SAA should the carrier collapse. Just before the weekend, private carrier Comair, a franchisee of British Airways, and its low-cost subsidiary Kulula, announced that the company can no longer afford to pay the salaries of its staff; not even the 40 percent agreed with the unions at the start of the lockdown. Already before the pandemic struck, Comair had initiated a delicate and painful corporate restructuring process in an attempt to restore profitability.

Airlink, a former SAA partner airline, seems best poised to pick up the bits and pieces of the crumbling flag carrier. The company’s fleet of 53 smaller aeroplanes carrying between 30 and 98 passengers is well suited to exploit the country’s domestic network, including the Cape Town - Johannesburg route, the continent’s busiest air corridor with over 50 daily flights in normal times. However, this route has long suffered from exceptionally thin operating margins, adding to the losses of SAA - the main operator linking the two cities. By sticking to its core business as a regional and feeder airline, Airlink has avoided the debt trap and may survive the pandemic relatively unscathed.

As South African Airways approaches its moment of truth, and quite possibly, liquidation, concerns mount to save a few valuable assets of the group such as SAA Technical, a repository of aviation knowhow and deemed of crucial importance to the national interest.

Under pressure from the ANC, the Ministry of Public Enterprises has quietly floated the idea of re-founding a national carrier that would see SAA emerge from its corporate ashes in a different, albeit suspiciously similar, guise. This would help preserve jobs and expertise but would not necessarily stop the financial bleeding as the ministry envisions not a regional carrier, but a full featured airline exploiting SAA’s current long-haul route network. Essentially, the idea is for a potentially much more expensive company to replace the current one.

That is not so much a plan as a suggestion to keep the flag carrier on life support. SAA’s final destiny is, yet again, in the hands of politicians. Their ultimate decision does not only determine the flightpath of the airline, but also the direction of the country. SAA represents a testcase for the reform-minded President Ramaphosa who seems inclined to liquidate the company but also has to contend with opposing forces less susceptible to pragmatism.


Real Cutting Edge in Cancer Care is Centred on Radiation Therapy

Swedish company Elekta brings together science, technology and clinical intelligence to revolutionise cancer care.

[caption id="attachment_15056" align="aligncenter" width="1000"] The University Medical Center (UMC) Utrecht, Netherlands treated the world’s first patient with Elekta Unity MR-Linac.[/caption]

For almost five decades, Elekta has been a leader in precision radiation medicine. Radiation therapy is a critical cancer treatment, used on its own or in combination with surgery, chemotherapy and immunotherapy. More than 50 percent of patients are judged suitable to receive radiotherapy. The methods used today are based on decades of global research, development and innovation – largely driven by Elekta.

More than 140,000 patients around the world are treated with the company’s solutions every day. But 95 percent of all radiotherapy equipment is available to only 20 percent of the world’s population. “We work hard to increase the global access to this critical and lifesaving treatment,” says CEO Richard Hausmann, “by innovating and deploying novel solutions that make precision radiation medicine accessible and sustainable.”

"Radiation therapy is a critical cancer treatment, used on its own or in combination with surgery, chemotherapy and immunotherapy. More than 50 percent of patients are judged suitable to receive radiotherapy. The methods used today are based on decades of global research, development and innovation – largely driven by Elekta."

Most recently, Elekta announced its support of the International Atomic Energy Agency partnership initiative to increase access to diagnostics and treatment of women’s cancers in low- and middle-income countries. That support will be provided in the form of a brachytherapy training module through Elekta BrachyAcademy, a peer-to-peer educational platform.

Elekta remains committed to improving global access to cutting-edge, precision-made radiation solutions. It prides itself in creating and developing new products that are “right sized for developing healthcare economies”.

[gallery columns="4" link="none" size="medium" ids="15057,15058,15059,15060"]

Elekta’s novel radiation delivery technologies and software solutions include:

Elekta Unity integrates high-field MR imaging with an advanced linear accelerator. This enables unprecedented precision and accuracy and allows adaptive radiation therapy to be used to treat more patients, and a broader array of cancer indications. For the first time the doctors can see live MR images before, during and after treatment, dramatically improving the precision of the treatment.

Leksell Gamma Knife® stereotactic radiosurgery system has positioned Elekta at the forefront of precision radiation medicine for the treatment of a wide range of intracranial diseases. With its advanced imaging and motion management technologies, the latest generation radiosurgery platform – Leksell Gamma Knife® Icon™ – delivers treatment to healthy tissue at a reduced dose. Each year, more than 80,000 patients with intracranial tumours and brain disorders benefit from Gamma Knife radiosurgery.

Elekta’s line of high-definition digital accelerators includes the latest generation Versa HD™ – a system designed to treat a spectrum of tumours throughout the body using conventional and emerging techniques – as well as the clinically-proven Elekta Synergy® and Elekta Infinity™ linacs.

MOSAIQ® Plaza is a comprehensive suite of digital tools that works seamlessly with Elekta radiotherapy systems to provide the foundation for intelligence-driven, value-based healthcare. MOSAIQ Plaza’s smart data centre connects healthcare professionals to patients through every step of their journey to ensure efficient, standardised daily practice.

Elekta Brachytherapy Solutions involve an indispensable and evolving radiation therapy technique that employs sophisticated tools to irradiate tumours. It can be used to treat a range of gynecological, prostate and breast cancers. Elekta brachytherapy solutions include remote afterloaders, applicators, imaging and planning systems.


Breakthrough Cancer Treatment Technology Established on All Continents

[caption id="attachment_15066" align="alignright" width="300"] CEO: Richard Hausmann[/caption]

Richard Hausmann, PhD, took over as CEO of Elekta in June 2016, and has taken bold steps to introduce paradigm-shifting technologies into radiation oncology.

Dr. Hausmann was instrumental in the final development, launch and commercial success of Elekta Unity, the world’s first high-field magnetic resonance imaging radiation therapy (MRgRT) system. Elekta Unity devices have since been sold and installed in medical centres around the world following its 2018 certification in the US and Europe.

“Our ambition is to offer solutions with greater precision to save lives and improve the quality of life of people with cancer. No imaging method is more precise than high field magnetic resonance – that is the basis of our Elekta Unity,” says Hausmann. “By working in close collaboration with our customers we continue to push the boundaries to create a future where all patients, no matter where they live, can benefit from precise and individually tailored radiotherapy treatments.”

He continued the development and visionary work of a global research consortium to speed up clinical research and establish guidelines on how to best use this new technology.

Under Hausmann’s leadership, Elekta has advanced its position as a leader in the digital health technology that is crucial to improving cancer survival. An example is MOSAIQ Plaza, a patient-centric, integrative ecosystem introduced in 2019. It is designed to manage a connected workflow for every moment of each patient’s journey, enhancing the experience, increasing the effectiveness of care delivery, and reducing physician burnout – a significant and growing challenge.

Despite the current challenges presented by COVID-19, Dr Hausmann says Elekta is committed to ensuring that business continues so that people can receive the radiation treatment they need, regardless of where in the world they live. “Indeed, our cloud-based and mobile software solutions enable our customers to perform critical tasks even during an essential complete lock down,” he says.

Richard Hausmann has a doctorate in theoretical nuclear physics from the University of Regensburg and, with almost three decades of global experience in the industry, has a solid track record of bringing clinical innovations to the market. He is known for his insights into customer and patient needs, creativity and strong implementation management with a focus on outcomes.


The Reassertion of National Self-Interest

[caption id="attachment_15069" align="alignright" width="300"] Brussels, Belgium: EU flag waving in front of European Parliament building.[/caption]

The Great Society is making a comeback with Big Brother possibly in attendance. After a decades-long retreat from public life, the state is firmly back in control of society – and the economy. Private interests, sacrosanct until weeks ago, no longer take precedence over the collective.

An enemy both invisible and implacable claimed laissez faire as its first victim and went on to bury the neoliberalism that had reigned supreme since the 1980s. As the full and terrifying scope of the pandemic slowly emerged, so did the realisation that only the state could direct the fight against corona, putting paid to the notion that free markets offer a cure for every conceivable ill. This abrupt reset of national priorities represents a tectonic shift in attitude. It will likely reverberate for years to come.

Barely one month into the pandemic, the European Union shelved its state-aid rules, until then rigorously applied, and allowed national governments to throw troubled industries a lifeline. Not that anyone was waiting for a green light from Brussels: almost immediately after the pandemic struck, governments reasserted their full sovereign powers including those prerogatives that, at least in theory, had been transferred to the EU.

Ryanair’s chief executive Michael O’Leary is fighting a hopeless rear-guard action when he threatens to sue the union over its newfound tolerance of state aid to keep corporate ‘dinosaurs’ in business. In a letter to EU Commissioner for Competition Margrethe Verstager, the buccaneering airline exec strongly objects to ‘countries selectively gifting billions to their inefficient flag carriers’.

Though he clearly has a valid case, Mr O’Leary has failed to read the memo: for now, mean and lean are out. The inadequacy of business models that depend on zero-hour contracts and other flexible labour practices has been laid bare as unemployment skyrocketed to dizzying heights within days of the lockdown. Suddenly, hordes of idled self-employed workers discovered that they fall outside the purview of safety nets. The rickety nature of its jobs is not a bug of the gig economy, but a feature. Governments were forced to quickly patch up social security provisions to keep untold millions from descending into abject poverty.

As the trillions in emergency cash permeate the economy, politicians are demanding that corporations of all sizes clean up their act and join a wider social compact as they do so. Mass firings, management bonuses, dividend payouts, stock buybacks, production offshoring, and many other tenets of the contemporary corporate culture will no longer be tolerated at companies that accept state support. In return for their money, governments claim a seat on the board. A plan to double the compensation of KLM managing director Pieter Elbers, hatched before the corona outbreak, was quickly shelved after an angry phone call from Dutch Finance Minister Wopke Hoekstra who has earmarked €4 billion for the airline.

Guntram Wolff of the Bruegel Institute, a Brussels-based economic think tank, fears that by relaxing state aid rules the European Union may prolong the agony of companies with outdated business models: “Subsidies for dinosaurs might mean that money for new and dynamic sectors could be missing.”

Before the pandemic, the EU had been busily discussing ways to promote the rise of European champions. It bothers the union that Europe has so far been unable to create a nurturing environment for innovation and disruption on a truly grand scale. Significant sums were set aside to find an Old-World answer to Google, Amazon, and Facebook.

Ironically, analysts almost unanimously pointed to Commissioner Verstager as the main obstacle to European industrial leadership. Her insistence on enforcing strict competition rules has stopped the emergence of a few corporate powerhouses of note. In 2019, she vetoed the merger between Alstom and Siemens which would have allowed both train manufacturers to compete more successfully with CRRC, the dominant Chinese maker of rolling stock. Citing consumer protection, Ms Verstager’s decision provoked anger in France and Germany, and calls for a thorough overhaul of competition rules.

However, European governments are quite selective in the battles they choose to fight. Again in 2019, French President Emmanuel Macron, a passionate advocate of European champions, blocked the $33 billion merger of Italian American carmaker Fiat-Chrysler Automobiles (FCA) and homegrown Renault which would have created the world’s third-largest automotive conglomerate with synergies ‘made in heaven’, according to industry watchers. Though the French government did not forbid the merger outright, it laid down so many red lines that the deal fell through.

Thus, it transpired that the creation of champions was perhaps not so much thwarted by the presumed rigidity of the European Commission as by the remnants of national industrial policy. However, a trend towards increased economic nationalism, already faintly detectable before the pandemic, appears to have been reinforced by the emergency.

Attitudes in Germany and The Netherlands, two stalwarts of free trade, free markets, and free enterprise, have shifted dramatically. Both Berlin and The Hague left little room for doubt as they moved decisively to shield iconic corporations from the pandemic’s fallout. Any pretence of cooperation and coordination went out the window as the Dutch government rushed to the rescue of national flag carrier KLM, ignoring the fact that the airline in 2004 merged with Air France. The French, in turn, unveiled a €7 billion package for their part of the company. Both governments made sure that the cash only benefits their national carrier with no spill over to the ‘enemy’. In The Netherlands, politicians now debate tearing KLM out of the marriage, long considered convenient and unfortunate in equal degrees.

The Great Society, that has a moderately corporativist state as its booster engine, rose out of the rubble left by the Great Depression of the early 1930s. That script is being revisited as the Corona Recession takes hold and cuts through the very fabric of society. This happens not by choice but is powered by the force of logic: governments that spend untold billions to underpin sagging economies and markets will demand a much greater say in their running. This need not worry big business: whilst its operational premises and the rules of competition may change, its ability to make money will not. However, shareholders may not be so lucky and can expect to see their influence - and income - curtailed.

Should they manage to survive the pandemic, small- and medium-sized businesses in Europe and North America may also expect to benefit from more localised supply chains and the onshoring of production processes previously exported to low-wage economies. This is more than just wishful thinking: the staggering rise in unemployment levels, a source of significant political tension, will force governments to leverage their new say and sway in the management of private business affairs to create jobs. The confidence in the ability of markets to do so has taken a severe hit in nearly all countries.

From Italy and Spain to Denmark and Germany, politicians seem determined to intervene and spark a quick and formidable post-corona economic rebound. Interestingly, this shared resolve also reinforces the importance of the European Union and its common market. Once the first scare has receded, the realisation will undoubtedly set in that no single member state is able to rebuild its shattered economy alone. That provides the union with a much-needed raison d’être. Solidarity may have gone missing when pandemic panic took hold, but it will likely return when dictated by national self-interest. In fact, not some higher ideal but plain national self-interest is the reason why the EU exists to begin with.


Otaviano Canuto: Channels of Transmission of Coronavirus to Developing Economies from Abroad

In a previous article, we highlighted how developing economies have faced simultaneous shocks from their external environment, as pandemic and recession curves have unfolded abroad (Canuto, 2020a). In addition to financial shocks, there have been declines in remittances, tourism receipts, and commodity prices (Canuto, 2020b). The combination of these shocks with the hardships related to flattening domestic infection curves has configured what we have called a ‘perfect storm’ for developing countries, brought by COVID-19 (Canuto, 2020c).

[embed]https://youtu.be/iBi-Y5Z3AtM[/embed]

Recent World Bank and United Nations World Tourism Organization reports have given us a view of how serious these shocks have been. We assess here the falls in remittances, tourism receipts, and commodity prices, particularly in oil markets.

Remittances, Foreign Capital and Aid Flows

On April 22, the World Bank (2020a) published its Migration and Development Brief 32. The World Bank estimates that in 2019 there were 272 million international migrants—including 26 million refugees.

Foreign workers are often the first to lose their jobs in times of crisis and remittance flows around the world sent by migrants to their home countries are forecast to shrink by more than US$100 billion this year. The global economic lockdown, which has provoked steep job losses across the world, is expected to lead to a 20% decline in remittance flows to low- and middle-income nations. That equals a fall from a record US$554 billion last year to US$445 billion in 2020.

[embed]https://youtu.be/ECOkn67zN0Y[/embed]

Last year, remittances amounted to about 8.9% of GDP in poorer countries. For the first time, they overtook foreign direct investment (FDI) as a source of money inflows to low- and middle-income countries (Figure 1). FDI is expected to decline by even more than remittances, reflecting local recessions and disruption of international trade. The World Bank report estimates that FDI into low- and middle-income countries could fall by more than 35%. Private portfolio flows through stock and bond markets could shrink by over 80%, while official development assistance (ODA) will maintain its steady evolution.

[caption id="attachment_15087" align="aligncenter" width="999"] Figure 1: Remittances, foreign capital and aid flows[/caption]

Among remittance-dependent countries, vulnerable to the ongoing decline, there are fragile states including Somalia, Haiti, and South Sudan, as well as small island nations such as Tonga, with remittances accounting for more than a third of GDP in some countries. Larger countries including India, Pakistan, Egypt, Nigeria, Mexico, and the Philippines, will also be hit because remittances have become a major source of external financing for them.

Migrant remittances are a fundamental source of income of poor households in many countries and the drop in flows this year will increase poverty. Remittances to Europe and central Asia are expected to fall most, crashing about 28% this year, while remittances to sub-Saharan Africa are forecast to diminish 23.1%. But all regions will face steep declines.

International Tourism Receipts

On March 26, the United Nations World Tourism Organization (UNWTO, 2020) announced estimates of decline of 20% to 30% in 2020 of international tourist arrivals, compared to 2019 figures. This would translate into a loss of international tourism receipts of between US$300 billion to $450 billion, almost one third of the US$1.5 trillion generated in 2019 (Figure 2). According to World Bank data, low- and middle-income countries recorded over US$420 billion of international tourism receipts as exports last year and will be heavily affected by the decline in 2020.

[caption id="attachment_15074" align="aligncenter" width="999"] Figure 2: International tourism receipts, world (real change, %)[/caption]

Commodity Prices

The World Bank (2020b)’s April Commodity Markets Outlook pictured how the global economic shock of the pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020. Because of the halt in economic activities, the world’s commodity markets are likely to continue to be downbeat for months to come. Commodity-dependent emerging market and developing economies will be among the most vulnerable to the economic impacts of the pandemic.

Energy is most affected, and agriculture least. Most metal prices fell in the first quarter of 2020, reflecting the collapse in global industrial demand because of the COVID-19 pandemic. Although average declines in metals prices are—for now, at least—less severe than in the global financial crisis, the sudden economic stops have taken a toll on industrial commodities such as copper and zinc, and metal prices overall are expected to fall this year. The deceleration of economic growth in China—which accounts for half of global metal demand—has weighed on industrial metal prices.

[embed]https://youtu.be/CBuUC5aAijY[/embed]

Most food commodity prices have declined in response to mitigation measures to contain the spread of COVID-19, even though part of that price decline can be attributed to the previous record production for some grains, and favorable weather conditions in key producing regions. Rice prices are the only major exception, as they rose after announcements of export restrictions by some East Asian producers.

The greatest impact of the outbreak of COVID-19 has been on the crude oil market, as two-thirds of oil is used for transport. According to the World Bank report, because of travel restrictions and declining demand, crude oil demand is expected to be almost 10% lower this year than in 2019. That will be more than twice as much as any previous fall (Figure 3).

[caption id="attachment_15075" align="aligncenter" width="974"] Figure 3: Current drop in oil demand outpaces previous global recessions[/caption]

Crude oil prices are forecast to average US$35 a barrel in 2020, reflecting the unprecedented collapse in oil demand. Brent crude oil prices have declined 70% from their January peak. The large production cut by OPEC and other oil producers failed to lift prices in April. Natural rubber and platinum are also heavily used by the transportation industry, and their prices have tumbled.

All crude oil benchmarks have seen sharp falls, with some briefly dropping to negative levels—as we saw on April 20, the day buyers were paid to accept oil! New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) crude oil front-month futures prices fell below zero dollars per barrel—at one point, trading at minus $40.32 per barrel—and remained below zero for part of the following trading day. It was the first time the price for the WTI futures contract fell below zero since trading began in 1983 (Figure 4, obtained from Richter, 2020).

[caption id="attachment_15076" align="aligncenter" width="999"] Figure 4: The day you were paid to buy oil[/caption]

The WTI front-month futures contract was for May 2020 delivery, and contracts were set to expire on April 21, 2020. Market participants that hold WTI futures contracts to expiration must take physical delivery of the crude oil in Cushing, Oklahoma. As a result of the extreme demand shock, excess imported and domestically-produced crude oil has been placed into storage. The increased demand for storage has placed significant upward pressure on crude-oil storage costs.

The inability of some market participants to take physical delivery meant they had to settle the May 2020 WTI contract financially by selling the contract to another market participant. As a result, owners of the May 2020 WTI futures contract most likely had to sell at lower prices to exit their contracts and avoid physical settlement obligations. In this extreme market situation, several participants had to sell at negative prices—that is, pay the other party to take over the contract before expiration. That was obviously an extraordinary and temporary state of things, but it was an omen regarding how bad the picture remains in oil markets.

Bottom Line

Given the magnitude of the multiple negative shocks that COVID-19 has brought to developing countries, including domestic coronavirus infection and recession curves, international support will be needed as developing country governments see their revenues drop, their access to financial markets dry up, and remittance-dependent poor households are impacted.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

First appeared at the Policy Center for the New South


European Commission Warns Banks

There is money in the bank - and that is where it mostly stays. The credit facilities that are meant to help households and businesses finically survive the pandemic are being approved at an alarmingly relaxed rate by banks struggling to grasp the urgency of the moment and adjust their loan assessment criteria accordingly. Though governments and central banks acted swiftly to prevent the collapse of business and support households, most commercial banks have so far displayed no such sense of urgency.

Yesterday, the European Central Bank (ECB) reported that credit take up has slowed due to tightened credit standards. Though commercial banks have gained more regulatory freedom and benefited from lower reserve requirements, the allocation of credit has not kept pace with developments. The loosening of standards has freed up an estimated €1.8 trillion of capital.

The European Commission has now clarified the easing of the union’s prudential and accounting framework in an attempt to encourage lenders to make better use of ‘flexibility’ introduced into the system. In an ‘interpretative communication’, the commission stresses the importance of discounting the current crisis when assessing a loan applicant’s SICR (significant increase in credit risk).

The commission also wants banks to largely ignore the impact of private or statutory moratoria on the customer’s risk profile, using instead their own ‘qualitative and quantitative’ judgment to draw conclusions. The commission emphasises that moratoria - the temporary suspension of loan repayments - are an ‘important tool’ for the preservation of liquidity when normal business operations have been upended by the pandemic.

The commission has sent draft legislation to the European Parliament that includes €450 billion in provisions to cover eventual losses on the credit portfolio of commercial banks that can be attributed to more tolerant lending criteria. Commission Executive Vice President Valdis Dombrovskis said that the EU will engage with the financial sector to iron out any differences and spell out the new best practices. Consumer and business groups have been invited to join the discussion.

Mr Dombrovskis seemed not best pleased with banks and criticised the disjointed implementation of the new rules. In particular, the Latvian commissioner was irked by reports that lenders in some countries raised interest rates, added extra fees, shortened maturities, and demand additional collateral: “Since we are currently dealing with a symmetrical shock which is hitting all EU member state economies, it is important that the banking sector’s response is more uniform.”

Policymakers have reminded bankers that the pandemic offers them a ‘chance at redemption’ after their sector loomed large in the last financial crisis. Mr Dombrovskis said that the commission will not fail to act should lenders continue their foot dragging in providing timely financial relief and may even decree a formal moratorium if the scheduled talks break down. He also warned that in the meantime the European Commission will closely monitor how banks deploy the freed-up capital and treat customers in their time of need.

However, the ECB expects commercial banks to adjust operations and processes to the new reality before long and loosen their purse strings once the full extent of government guarantees is properly internalised. In the UK, Bank of England Governor Andrew Bailey told lenders to ‘put their back into it’.

The apparently slow response from the financial sector to the Corona Recession has fuelled the debate on the need for a digital currency as a way to manage the flow of money. The central banks of France and The Netherlands have signalled their readiness to start pilot projects. Central Bank Digital Currency (CBDC) differs in fundamental ways from cryptocurrencies such as bitcoin that are not issued by governments and do not add to the M1 ‘narrow’ money supply.

An ongoing topic of discussion that has gained significantly in both relevance and urgency, e-money is being proposed as a relatively easy way to quickly get funds to where the need is highest - and do so with pinpoint accuracy. CBDC bypasses banks and does not require overly complex financial technology.

In its most-effective form, e-money would reach households and businesses via an account at the central bank into which ‘helicopter money’ is dropped for a specific set of purposes such as the payment of bills, wages, and/or operational (living) expenses. Such e-money accounts do not accept deposits of ‘old-school currency’ and may not be used to park savings - the whole point of the exercise is to inject liquidity into a moribund economy. Deposits that remain unused vanish in the same way that they magically appeared - at the convenience of the issuer.

The spending of e-money can be easily tracked with a unique identifier attached to each ‘virtual’ euro. Its use for unintended purposes, say the payout of bonusses to management or the acquisition of luxuries by households, can either be blocked or flagged.

As talk amongst economists shifts to formerly taboo topics such as expanding the narrow money supply, the e-money debate slowly moves centre stage. Most European central banks have dabbled with the novelty, assessed the pros and cons, and concluded that digital currency may offer significant advantages as long as the resource-intensive and self-imposed (deflationary) limitations of cryptocurrencies are avoided.

According to Rémi Bourgeot, chief economist at the French think tank IRIS, digital money allows central banks to formulate a much more targeted response to exogenous shocks without the need to rely on traditional ‘financial transmission channels’, i.e. commercial banks. Mr Bourgeot argues that the vast volumes of money currently being injected into the European economy reach the intended recipients in a roundabout way which significantly decreases the effectiveness of the intervention. The economist emphasises that CBDC looks nothing at all like the cryptocurrency since anonymity would be absent. Although a number of central banks mull CBDC as a way to simplify some transactions and settlements, none seems willing to develop the concept a few steps further. “It remains unlikely that Europe will take the lead in financial innovation,” says Mr Bourgeot.

Meanwhile, the fiscal response to the recession is slowly gathering steam, albeit in an uncoordinated manner with each European country tracing its own unique path to salvation. Though in the works, a coordinated post-corona reconstruction effort is not expected for some months. It takes time to chisel away at northern resistance to the pooling of debt and risk. However, in one way or another, the estimated €1.5 trillion cost of the pandemic will be shared by member states. The waiting is on a politically palatable solution that enables politicians to cross their red lines whilst appearing to stand firm.

The debate, perhaps no longer as acerbic as three weeks ago, moves into the direction of prodding the nominally independent ECB into drifting even further away than it already has from its mission to preserve monetary stability. This is the path of least resistance: the taboo on tinkering with the status of the central bank is not nearly as strong as the one that rests on fiscal solidarity. The thinking is that the Eurozone can use a little bit of inflation to kickstart its economy and encourage households and businesses to embark on a spending spree. However, the ability of commercial banks to adjust their credit assessment criteria and speed up internal processes to match the urgency of the moment remain key. For what it’s worth: the European Commission is now on their case.


The Primacy of Politics Returns

[caption id="attachment_15091" align="alignright" width="300"] Nouriel Roubini[/caption]

A celebrated political economist who received fifteen years of fame for identifying the housing bubble and predicting banking crisis of 2008-9 now seems to have lost hope. In a recent article, Nouriel Roubini presents ten reasons why he thinks the Corona Recession will morph into a depression later on in the decade. Mr Roubini spent the better part of his career analysing the boom and bust cycles of emerging markets. He earned his ‘Dr Doom’ nickname for a slightly pessimistic slant when dissecting events and detecting trends.

Though Mr Roubini is not one of those dark economists who adhere to a mantra of doom and gloom for years on end only to proudly claim exceptional prescient powers when at long last proved right, he does tend to emphasise the downside. Mr Roubini worries that policymakers will yet again fail to address the structural imbalances that lessen the resilience of economies to exogenous shocks and sees them nosedive at the first sign of trouble.

Given the current meltdown, which occurred only days after the World Health Organisation called a pandemic, he has a point: the recovery that followed the Great Recession of the late 2000s was not just feeble but artificial as well. Quantitative easing in Europe and large tax cuts in the United States kept the economic ball rolling, albeit without much inertia.

However, the Corona Recession is a much different beast than any of the previous downturns. It struck suddenly and with a ferocity seldom seen before. One day in March, the world woke up to a nightmare and found that the global economy had come to an almost full stop. Just as terminally ill patients realise that in the face of death, yesterday’s problems seem frivolous, policymakers discovered that their old agendas had become irrelevant.

Going into the pandemic, many countries already carried high debt loads and sustained gaping fiscal deficits. Though banks have been shored up since the last crisis, most governments have not. Only a few oft-ridiculed frugal nations addicted to austerity and other forms of self-flagellation have used the mini-boom of the last seven years to pay down debts and eliminate deficits. Whilst these holier-than-thou countries now enjoy a marginal advantage over less prudent others, worries about national debt burdens are likely misplaced. It helps to remember a bankers’ adage that only small debtors can be taken to the cleaners whereas those that owe billions can easily turn the table and hold their lender to ransom.

This is why Greece could be tossed and bossed around by its creditors in a way that Italy and Spain cannot. In any case, Italy’s predicament is much less dire than reported by most. The country’s current account is fairly balanced, deficit spending has been curbed to a commendable -1.6% of GDP, whilst its foreign assets neatly match national liabilities resulting in a reasonable net international investment position (NIIP) of just -1.9 percent of GDP. This helps explain why the Banca d’Italia maintains that any spread higher than 1 percent over the German ‘bund’ does the country a grave injustice. The picture presented by Spain and France just before the onset of the pandemic was significantly less rosy.

However, all that matters less now. The old parameters used to gauge the structural integrity of economies have become next to meaningless since the entire structure has been reshaped by the pandemic. Not only were rulebooks binned in a rather unceremonious fashion, entire laws of economics seem have been suspended for the ‘duration’.

The day of reckoning is not when debts come due but is already upon us. The European Central Bank (ECB) removed any and all restrictions from its already outsized asset buying programme whilst the European Commission, the executive branch of the EU, scrapped the Stability and Growth Pact that imposed a measure of fiscal discipline on Eurozone member states.

National governments, even those of a more frugal disposition, have not just released the brakes, but removed them altogether. In Northern Europe, fiscal deficits surpassing the 12 percent mark have become the new normal. Central bank bond desks, until a few short weeks ago departments in hibernation, have turned into hives of frantic activity, bringing in billions by the truck load.

The pandemic has sparked a political response that merely harbours an economic component. The primacy of politics has been firmly re-established, and markets will have to toe the line. This massive shift in national priorities - taking power away from the market - sets the tone for the post-corona future.

Perhaps failing to recognise the momentous nature of this abrupt and profound change, Mr Roubini and many other economists insist on applying yesterday’s criteria to today’s problems. Inasmuch as the basic rules of accounting and economic science still hold, they are, of course, quite right. Even a major pandemic does not change the laws of nature. However, once all the political posturing is removed, the reality of what is left still inspires a degree of confidence.

The difference between then and now is a fundamental one: previous crises saw the body politic act and react to appease and please markets. The current recession sees governments take charge, break taboos, and ditch orthodoxy in an attempt to preserve the fabric of the entire society - not that of just the economy. Exceptions, well known to all, apply. Interestingly, market forces seem to appreciate the bold initiative and shrug off the seemingly unending stream of bad news, trusting that the state will muster sufficient power to fend off the worse.

One tool government has is to monetise the deficit, i.e. expand the ‘narrow’ money supply as opposed to the issue of debt instruments. This is an option considered in the Eurozone as well. In a world of ‘big bazookas’, the monetisation of deficits equates a hydrogen bomb. As Brazil, Argentina, and Zimbabwe know from recent experience, printing money and other heterodox approaches to national bookkeeping results in an inflationary spiral not easily tamed. Even today, Germans still suffer a collective trauma from the hyperinflation that defined the Weimar Republic - and the national psyche.

Couple inflation to a recession and stagflation rears its (ugly) head: no growth, high unemployment, and high inflation. However, contemporary political reality is polarised to such a degree that no western government is able to tolerate a prolonged low-growth environment.

Different from the 1970s, the last time when stagflation appeared, today’s political arena in Europe and the United States is inhabited by a multitude of ultra-nationalist forces up to and including borderline fascists. The menace to societal peace, well-being, and prosperity posed by politicians exploiting the extremes of the ideological spectrum force their more reasonable peers into a careful choreographed departure from the liberal orthodoxy that went unquestioned since Ronald Reagan and Margaret Thatcher decreed the ‘end of history’.

As such, the extremists serve a purpose as they question the conventional wisdom that has led to complacency - and a certain form of pragmatic fatalism amongst mainstream politicians: ‘the world is obviously far from ideal and we’re working at it, but in the meantime that’s just the way it is’. If anything, the pandemic has reminded governments of all stripes of their reason for being. The crisis has also focussed the mind to what really matters - and that does not include debts and deficits.

Post-corona, governments will want to rebuild fast, providing jobs to the tens of millions of newly unemployed and opportunity to the businesses that managed to survive. Then as now, money will not be a determining factor: it will be found, created, or otherwise called into existence. Besides, even inflation when taken in moderation has its uses.

It is a brave new world indeed where politicians take the lead and shape the future.


KC Li’s Career Started High… And Then It Took Off Big Time

[caption id="attachment_16050" align="alignright" width="300"] Kee Chong LI KWONG WING, G.O.S.K. (K.C. LI) SBM[/caption]

KC Li, economist and chairman of SBM, wears many hats.

He has an enviable career history. After attaining a BSc (Econ) from the LSE and an LLM in international tax law, he started his career as a lecturer in public finance at the University of Mauritius.

He has held prominent positions in the public sector, including advisor to the Minister of Finance and chairman of the Stock Exchange Commission. In 1989, he launched the first unit trust and property fund in Mauritius.

LI was board member of the State Trading Corporation, the National Remuneration Board, and the National Economic and Social Council. He also sat on the councils of the Financial Services Consultative and the University of Mauritius.

LI was an external lecturer for the University of Surrey School of Management (UK) and has published reports and articles on co-operative banking, project management, development finance, structural adjustment and fiscal planning issues.

In 1992, Li started his own private consulting firm and served the United Nations Economic Commission for Africa (UNECA) and the UN Industrial Development Organisation (UNIDO). In 1993, he founded the Mauritius International Trust Co. Ltd (MITCO), one of the first firms in the country licensed to provide international tax and investment advisory services.

He was also a Member of the Parliament of Mauritius (2010-2014) and sat on the Public Accounts Committee. In 2015, KC Li was awarded the national honour of Grand Officer of the Star and Key (GOSK) of the Indian Ocean by the Republic of Mauritius for distinguished services in the economic, social and political fields.

In May 2018, he was granted the Lifetime Achievement Award by The Banker Africa for his outstanding contribution to the financial sector in the region.

He sits on the board of directors of several emerging markets funds and Asia hedge funds, including private equity, infrastructure and real estate funds in Africa and Asia.

KC Li is also a board director of the State Insurance Company of Mauritius (SICOM) and Cairo-based Afreximbank, and chairman of SBM Bank (Kenya) Ltd, and Banque SBM Madagascar SA.

Li is the independent non-executive chairman of SBM Holdings Ltd (SBM Group). He was awarded the Magnolia Award by the Shanghai Municipal People’s Government in 2014.

In September 2018, at the Forum on China-Africa Co-operation (FOCAC) Summit in Beijing, the Inter-Bank Association between China and African countries, a consortium of major African banks and China Development Bank, was launched. KC Li is a founder council member.

He has been chairman of the UnionPay Africa Regional Council since June 2019, and member of the Kisumu Economic and Social Council in Kenya since January 2020.