WORLD ECONOMIC NEWS
World Grain Stocks, of All Types, Decline for 2002/03
World grain stocks are being depleted from their already inadequate levels, according to the latest surveys released from the U.S. Department of Agriculture (USDA) and the UN Food and Agriculture Organization (FAO). The decline reflects both the worsening economic conditions for farmingas in Argentina, traditionally, one of the top six grain exportersas well as the impact of drought affecting Canada, the United States, and Australia, three more of the major world grain exporters.
The total grains output (all types) for the world for the crop year 2002/03 is expected to be, at best, 1,814 million metric tons (mmt), down from each of the last two crop years1,863 mmt (2001/02), and 1,842 mmt (2000/2001).
World grain stocks are going down accordingly, as use of grain (directly for human consumption, or indirectly through the livestock chain) continues to risealthough not nearly at the rate it would rise if decent nutrition were being provided, or even attempted, for millions of people now going hungry. The world ending stock (carry-over at the end of the crop year) has been falling dramatically:
Year |
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World ending stocks of all grains, in million metric tons: |
2000/2001 |
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501 |
2001/2002 |
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461 |
2002/2003 |
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371 |
Stocks of all three major grain typeswheat, rice and coarse grains (corn, sorghum, etc.)have declined.
Roach: 'Tectonic Changes' in World Economy; U.S. Headed for Japan-Style Crash?
The world economy and financial markets are now "at the most dangerous point in 70 years," stated Morgan Stanley chief economist Stephen Roach at the end of October. There are two powerful forces hitting the world economy and financial markets at the same time, he said: the repercussions of globalization, and the bursting of a speculative stock-market bubble. Tectonic changes are taking place and there is now the risk of a worldwide deflationary spiral, Roach added. In particular, the U.S. economy is at risk of undergoing a Japanese-style dynamic, due to excesses such as the low savings rate, a possible balance-of-payments crisis, and the record-high debt among corporations and consumers. Unfortunately, said Roach, those responsible for economic and monetary policyand investors as wellhave not yet recognized what is going on. If this doesn't change very soon, the world economy and financial markets are heading into a very dangerous final drama.
Roach obviously has no idea of how to overcome the crisis (apart from pumping in even more liquidity), as he presents the "capacity overhang" due to globalization and the Internet as one of the main problems of the world economy. But his remarks are quite telling about the degree of desperation in certain financial quarters.
Berlin State Government Declares 'Extreme Fiscal Emergency'
The state government of Germany's capital, Berlin, announced Nov. 5 that very soon it will no longer be able to meet its debt service on an official debt pile-up of 46 billion euro (projected for year-end 2002), and about 60 billion euro by 2006, unless there is a Federal bailout. Berlin State Finance Minister Thilo Sarrazin said: "The state has lost the ability to shoulder a giant, excessive debt burden on its own," Handelsblatt reported Nov. 6.
As the Federal governmentitself in the midst of a fiscal disasterrefuses to step in, the Berlin state government will bring a lawsuit to the Federal Constitutional Court. A precondition for this move is the formal declaration of an "extreme fiscal emergency," which the Berlin state government has now issued.
Manufacturing Employment Plummets in Mexico's Maquiladoras
Manufacturing employment in Mexico fell by 4.3% in August from the same month a year earlier. Much of what is called "manufacturing" in Mexico is, however, not productive manufactures, but the cancerous maquiladora assembly plants, which produce for export only. Employment in these labor camps alonefor more than a decade the only growth "industry" in Mexicowas 7% less in August 2002 than in August 2001. Worst hit were the electronic and clothing components of the maquiladoras, where 43% of the workforce is employed. Employment in electronics assembly fell nationally by over 17%, and in textiles and clothing, by 10.5%. These hit nine states, in particular, really hardamong the worst being the states of Baja California Sur and the State of Mexico, where maquiladora employment fell by about 40%; and Sinoloa and Aguascalientes, by 20%.
Sinaloa State Takes Mexican Government to Court for Funds Owed
The Mexican state of Sinaloa sued Mexico's Federal government in the Supreme Court to force the release of funds owed to the states, the Mexican daily Reforma reported Oct. 31. The suit charges the Federal government with cutting back revenues which it must legally send to the states, through the use of "wrongful, incorrect, and illegal calculations" of what is owed the states. The Finance Ministry has 30 days to respond.
The suit is the latest escalation in one of the hottest political brawls the Administration of President Vicente Fox has yet faced. The crisis is similar to the revenue-sharing brawls which have set the Argentine provinces and Federal government at each other's throats. The state governments in Mexico are responsible for collecting most taxes, which they send to the Federal governmentwhich, in turn, is required to return a certain percentage of its overall revenue to the states to cover their operating costs, education, and so on. As happened in Argentina, the Federal government is attempting to increase the amount it can pay on its debts, by gouging monies allocated to the states.
The Secretaries of Finance of 22 states pummelled Treasury Secretary Francisco Gil Diaz at a meeting Oct. 22, seeking restitution of 40 billion pesos (around $4 billion) which they charge the government has wrongfully withheld. Led by the PRI Governor of the State of Mexico, Arturo Montiel Rojas, a group of governors then refused to attend a meeting between President Vicente Fox and the governors. On Oct. 24, the PRI Governor of Coahuila, Enrique Martinez y Martinez, another outspoken leader in this battle, pointed out the idiocy of withholding 40 billion pesos, when the economy has a zero growth rate, and Federal investment should be used to reactivate the economy. The state government is practically bankrupt, he announced the next day, with only enough to cover one month's worth of required public spending.
In coordination with various governors, the PRI faction in Congress is submitting legislation to reform the Budget Law, which would prohibit the Executive from implementing unilateral budget cuts henceforth. The Federal government's accounting office has also begun an audit of Federal government revenues, at the request of six states and the PRI Congressional faction.
Under the thumb of University of Chicago fanatic Gil Diaz, the Fox government is taking a hard line, claiming the missing 40 billion pesos never existed, and offering only to provide the states with new loans to cover their needs. The World Bank director for Mexico, Oliver Lafourcade, weighed in on the side of Gil Diaz on Oct. 19, issuing a statement warning that Mexico's finances would be put at risk if the President yielded to the governors' demands. It would be too risky to "break the rules of the game" by increasing the fiscal deficit, he said.
Mexico's Fox Agrees To Pay Debts as Economy Sinks
Despite the dire state of the Mexican economy (see above), Mexico will lower its budget deficit even further in 2003, in order to channel more money to pay debts, President Vicente Fox announced on Nov. 7. Even as European countries break with Maastricht's 3% deficit limit, Fox has announced that his government will cut its deficit from 0.65% of GDP, to 0.50%! Fox argued that the public finances of the country required this, because his government could not expect to bring in the 55 billion pesos "made" in 2002 through privatizations, and it faced new pension costs of nearly 20 billion pesos.
According to press leaks of the preliminary 2003 budget plan which the government is to present to Congress soon, the budgets of the Federal government's departments are to be cut by 6.6% overall. Among the more vicious of the cuts, are the cuts in the budget of the Secretary of Public Security by a whopping 17%in spite of a continuing crime wave, a flourishing kidnapping industry, and increased activity by the drug cartels; in the Ministry of Agriculture, Rural Development and Food, by over 10% (Agrarian Reform, a separate ministry, is getting a 12.8% increase); in Social Development, by 8%; in Communications and Transportation, by 7.2%; and in the Departments of Health and Public Education, by 6% each.
What the government will not cut, are debt payments. Approximately $49.5 billion is budgeted in the 2003 Federal budget for payment on debts (including the costs of the government's bailout of the private highways and banks which went bust).
Meanwhile, budget cuts are threatening to bankrupt Mexico's Social Security agency, IMSS, whose Director General Santiago Levy told the Senate Health Commission on Oct. 30, that IMSS needs to start charging its users co-pays on medicines, because otherwise its current shortage of medicines, resulting from lack of money, will only get worse. He described monstrous cuts in service which have been forced upon them by budget reductions, including the firing of 17% of its personnel, and a drop in the number of beds available per user from 2.3 two years ago, to only one today. The situation in the clinics is no different, he said. IMSS's 2002 budget was lower than in 2001.
Sao Paulo Defaults on 350-Billion-Real Payment to Federal Government
The failure of the city of Sao Paulo to make a 350-billion-real debt payment to the Federal government reflects the problem that the incoming government of President-elect Luiz Inacio "Lula" da Silva will face: Any commitment to maintaining IMF austerity dictates, particularly the primary surplus goal of 3.75% of GDP, or higher, will have an immediate impact on funding to highly indebted states and municipalities. The Argentine example is staring everyone in the face: To pay the debt, the government squeezed the provinces, demanding deep austerity, while restricting allocations of Federal revenue-sharing funds. The provinces collapsed financially, but also rebelled against the Federal government, and the IMF still blames the "unruly" provinces for much of Argentina's crisis today.
In Brazil, state governments, burdened with a total state and municipal debt of 244.5 billion reals, say they urgently need to renegotiate this debt, which Lula's top economic advisers have said will be impossible to do, because of the necessity of attaining the IMF-dictated primary surplus. Although media portray Sao Paulo's non-payment as simply the city's decision to resort to a contractual clause allowing it to skip one installment of a debt payment, if it lacks funds, as a city financial official told Bloomberg last week, "If we pay, it would paralyze the city." Bloomberg nervously warns that the Sao Paulo incident raises questions about the Federal government's ability to find the funds needed to pay the foreign debt, adding that the government can, by law, withhold disbursement of revenues to states and cities, should the latter fail to make debt payments.
Argentine President Duhalde Warns Against Using Reserves To Pay Debt
Using Argentine reserves to pay $800 million due to the World Bank Nov. 14 would risk throwing the country into chaos, warned President Eduardo Duhalde in a Nov. 5 press conference. Duhalde, who was joined at the news conference by Finance Minister Roberto Lavagna and Chief of Cabinet Alfred Atanasof, said that getting international financial support is important, "but the price cannot be returning to live in a climate of absolute uncertainty." The only way that use of reserves might be contemplated, he said, is if the Fund were to give "concrete signals" of its willingness to sign an agreement to refinance all loans coming due between now and the end of 2003$16 billion. An announcement by the Fund that there is a "pre-agreement" would constitute such a "signal," he stated. Otherwise, reserves will not be used, he repeated.
Argentina is willing to do what it can to tighten up its fiscal situation, he added, but absolutely not through an increase in taxes. "We don't want to repeat the experience of the Alianza," he said, referring to the government of Fernando de la Rua, whose January 2000 tax increase threw the country's finances into chaos. Duhalde, in fact, confirmed that his government had just reduced the VAT tax from 21% to 19%.
The Argentine President also revealed that, in a third draft of a letter of intent, just sent by the IMF, there are 60 issues yet to be resolved.
Islamic Financial Institution Founded in Malaysia
In a move that reflects the increasing importance of the Islamic financial market, the central banks from seven Muslim countries Nov. 3 inaugurated the Islamic Financial Services Board (IFSB). Founding members of the new regulatory body are Malaysia, Saudi Arabia, Indonesia, Iran, Kuwait, Pakistan, Sudan, plus the Islamic Development Bank.
IFSBan association of central banks, monetary authorities, and other institutions responsible for supervising and regulating Islamic bankingwas formed in response to the growing significance of the Islamic financial services industry.
It is the culmination of two years of work by the founding members, with support from the International Monetary Fund and the Accounting and Auditing Organization for Islamic Financial Institutions.
The Islamic financial market worldwide is estimated to be worth $200 billion and is growing 15% per year. Economists say there has been a boom in the aftermath of the Sept. 11 terror attacks, as investors pulled funds out of the West.
Malaysian Prime Minister Mahathir Mohamad, speaking at the opening ceremonies, said that the option to use the Islamic financial system must be open and voluntary so as not to cause turmoil and economic regression. The system combines Islamic laws against interest payments with modern banking principles. Mahathir said an international financial system that was fair and rewarded hard work was needed, rather than speculative activities that took advantage of the weak and ill-informed.
Indonesia Declares De Facto Debt Moratorium
Indonesia played the "debt card" last year, telling the Paris Club of creditor nations that they simply couldn't pay their debt, neither principle nor interest, after two years of principle rollover only. The de facto debt moratorium was granted, partially by necessity, but also due to the fact that Asia was being treated gingerly while the push for war on Iraq was being promoted. Now, according to Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti: "Despite what has happened in Bali, our commitment that we will not seek a fourth edition of debt relief from the Paris Club remains." The assumption that the country would experience a zero deficit in its budget for the 2004 fiscal year has been blown away, so to speak, and they now expect the deficit to be 2% of GDP, while state debt still sits at 90% of GDP, or $131 billion.
Finance Minister Budiono announced that the IMF, World Bank, and the Asian Development Bank have withheld a total of $925.8 million in pledged loans since 1999, complaining that they have not met "reform" targets (i.e., selling off the state sector for a fraction of its worth).
Chinese Renminbi Becomes Convertible in Neighboring Countries
The Chinese currency is becoming "virtually fully convertible" in some regions, and "increasingly accepted as a hard currency" in Russia, Vietnam, Malaysia, and Singapore, stated a commentary published in the official China Daily Nov. 4. China's fast-growing economy is "quietly bolstering the popularity of its currency, the renminbi [the form of the currency used for foreign transactions], in neighboring countries" and making it "virtually fully convertible" there.
While this process is being "watched," due to China's strict exchange-control policy, it should be allowed to "brew," the commentary noted. Despite pressure from the IMF, China has set no timetable to make its currency fully convertible.
The amount of cash circulating is very small, as yet, but the trend is important.
"The renminbi has become something like a hard currency that's only second to the U.S. dollar in some neighboring nations," said Qin Chijiang, Deputy Secretary General of the China Society of Finance (CSF). Renminbi banknotes in bordering areas, are facilitating border trade. With Vietnam, over 90% of border trade deals are settled in renminbi. "That the renminbi is being increasingly used as a settlement currency in border trade reflects its reputation and the recognition of its strength," China Daily quoted Zhao Jinping of the State Council Development Research Center. "It's in the direction of renminbi's internationalization and renminbi becoming a mature currency."
According to the State Administration of Foreign Exchange (SAFE), some 99.5 million yuan ($11.9 million) are circulating in Russia, especially in the area adjacent to China's border province of Heilongjiang. "As for renminbi's circulation and use in border regions of Russia, the benefits outweigh the disadvantages," said a SAFE official in Heilongjiang. This reduces China's foreign-exchange spending and facilitates trade.
The Chinese government has issued a statement calling on Chinese commercial banks to set up correspondent arrangements with banks in Russia and other CIS nations. This will eventually replace the local money-changers.
China Telecom Delays IPO on Wall Street, Fearing Market Meltdown
China Telecom has delayed its $3.68-billion IPO on Wall Street and in Hong Kong, due to the weakness of the market. It is likely that China Telecom, the country's telephone-service provider, will cut the initial public offering (IPO) by up to 50%. It would have been the third-biggest IPO this year. The IPO was to "float" about 20% of China Telecom to raise funds, and was to have been part of the Chinese privatization policy. No new timetable for trading the shares has been set.
Japan, China, South Korea Discuss 'Free-Trade' Zone at ASEAN Summit
The leaders of Japan, China, and South Korea discussed a "free-trade" area, during talks "on the sidelines" during the ASEAN Summit in Phnom Penh Nov. 4-5, the Business Times of Singapore reported Nov. 6.
"Something big is building up on the sidelines of the ASEAN summit in Phnom Penh," the Business Times reported. "China, Japan, and South Koreadespite their historical suspicions of each otherhave taken cautious, but significant, steps towards creating their own free-trade area."
At a press conference yesterday after the summit, Japanese Prime Minister Junichiro Koizumi stated: "The population of East AsiaASEAN, Japan, China, and Koreamake up a third of the global economy and 20% of global trade. So the region can indeed be a major driving force for the economic development of the world. It is more than necessary now to deepen the economic exchanges between Japan, Korea, China, and ASEAN."
Koizumi said he has emphasized that he sees China neither as a threat nor a rival, and a Chinese-ASEAN Free Trade Area would be a stimulus for the Japanese economy.
On Jan. 4, the first day of the summit, a Japanese official told a media briefing that Japan, China, and Korea were already in the process of jointly studying a Northeast Asian Free Trade Area among the three countries.
The official told the media that the three sides had agreed to study jointly a "possible FTA" as early as 1999, when they met over breakfast at the ASEAN summit in Manila that year. The study was carried out by government policy institutes, and the results were reported to the leaders
last year. Then, this year in Phnom Penh, the three Northeast Asian Prime Ministers agreed to go ahead with the second phase of the study, to assess the economic impact of an FTA on the three economies and on the region. Japan itself, the Business Times reported, wants to create an East Asian FTA by 2010, integrating ASEAN "plus five"Japan, China, Korea, as well as Hong Kong and Taiwan.
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