Et tu Brute!!!

Bits and Pieces

There may be some sense in the theatricals of the Directors of our prestigious Central Bank (CB) — making their show on the pavements of our Wall Street. But with a Deputy Governor leading it, it was much more than third-grade street drama. Et tu Brute, you seem to be leading the wrong flock of monetary policy neophytes who have morphed into potential sources of conflicts and giving rise to substantial governance issues — the very ones who supported by their high-command are convinced that they have enough of angst to display it publicly. The former governor of the Reserve Bank of South Africa Tito Mboweni disagrees and he reminds us that “central banks are special institutions, almost as special as the judiciary, and their independence must almost be elevated to the same level as that of the judiciary.”

Et tu Brute, you stand the risk of falling between two stools and became an easy target for assertions that your position lacks coherence. Meanwhile our preoccupied, but more aggressive Caesar, is calling the shots and emerges unbruised as an institution-builder sparing no efforts in “making the institution more visible and understood”, striving to “uphold the Bank’s credibility” and permitting himself to advise others, who should be lending their ears, that it is time to bring in measures to counter the low and falling savings rate. Second fiddles are an interesting breed: they spend too much of their valuable time trying to see through the fog that seem to cloud their minds. Instead of indulging in such gimmicks, they…

Yellow Fever

The yellow metal’s magical and mythical qualities were on full display last week. Our Bank of Mauritius joined the central banks of China, India, Mexico, Russia, Sri Lanka, Kazakhstan, Venezuela and the Philippines, among others, in choosing to boost its reserves of gold in preference to the dollar-denominated securities. Because risk aversion has returned and worries about banks solvency and the volatility of the dollar have resurfaced, physical gold is the safest haven of all. A veritable chorus of policymakers in countries running current account surpluses has declared that the reserve currency role of the dollar is unsustainable. Gold is a good anchor and hedge to have in these volatile circumstances.

Gold has jumped 27 percent this year in Dollars and Yuan, 31 percent in Roubles and 22 percent in Euros as investors sought to diversify their holdings. Since the yellow metal has been on a tear since end November last year, central banks which typically buy U.S. dollars to store their foreign exchange reserves have had a growing taste for gold which can be seen as the latest sign that the greenback’s status as the world’s sole reserve currency is in jeopardy.

It is true that gold accounts for just 3-4% of the central banks’ total foreign exchange reserves. Why? Whereas stock markets and commercial banks hate gold because it represents competition for your investment dollars and savings and because they can’t make any money on it, it is more logical for central banks to shift toward holding a basket of currencies in their reserves, including currencies of some emerging markets — i.e. to diversify into some tradable currency. The choice by central banks to diversify away from the dollar by using gold rather than other currencies is partly a bet that interest rates around the world will stay low for a long time. But it also reflects central bankers’ growing distrust of all paper currencies, not just the dollar. “The growing anxiety about all paper currencies is a reaction to the enormous amounts of debt that many countries have assumed in order to recapitalize their banking systems and pull their economies out of recession.” But as soon as there are signs of economic normalcy – which would include credit markets starting to function more smoothly, somewhat healthy economic growth, and labour markets starting to tighten — gold prices will be coming down.

But before the return to greater stability worldwide, our flirtation with gold at $1,200 would have been a fruitful one even if we would have been a wee bit wiser had we opted for Palladium not Platinum. The loss of investor faith in the paper currency is adding to the rise in gold prices. The dollar’s fate is predicted to get worse as the U.S. continues on its borrowing binge bringing its total liabilities close to about $60 trillion. Gold meanwhile will continue to be the favourite.

Central banks are not known for their investment acumen but the new kids on the block have grown wiser. Bloomberg of the 16th December notes that “central banks, holding about 18 percent of all gold ever mined, are expanding their reserves for the first time in a generation as a nine-year bull market drives prices to a record”. Exceptional times need exceptional measures. And our CB against all odds has chosen to stand up to be counted among the exceptional ones, the new kids on the block.

Joint Management of Tromelin

Instead of a Franco-Mauritian agreement (a proposal from Edouard Balladur to Sir Anerood Jugnauth in 1994 – courtesy of Week-end dated 13 Dec 09) on Tromelin we have now the new proposal of an agreement for the joint management of Tromelin.

Tromelin has an Exclusive Economic Zone (EEZ) of 280,000 square kilometres (110,000 sq miles), contiguous with that of Réunion and such joint management allows France to claim an Exclusive Economic Zone (EEZ) of more than 200 nautical miles around each of the small islands in the Îles Éparses, which together with the EEZ claims for the islands of Réunion and Mayotte a total more than one million square kilometers in the western Indian Ocean. Is that all part of our strategy and concomitant “windfall gains” of our quiet diplomacy? Our Big Brother of the IO-Rim countries who is watchful to the strategic moves in the Indian Ocean is not so happy about this. What about our comrades on the left, especially the MMM Foreign Affairs Spokesperson who was so voluble on the Bank of all banks’ saga but strangely quiet on this important issue that will see the visit on Tuesday of Mouchel-Blaisot, administrator of the Terres Australes et Antartiques Francaises (TAAF)?

By then, there should be some solid reactions from our comrades.

Stimulus Package Demystified

The rap on the Stimulus Package has come from the recent report released by the Mauritius Employers Federation on the impact of the global economic crisis on the local enterprises confirming what we had been saying in these very columns – it seems that we have administered the wrong medicine to the wrong persons. We were also doubtful on the quantum that has been doled out to the sunset industries and the big companies. In the midst of the crisis, requests for funds had already stopped and whatever had been dished out were being used mostly for recurrent expenditure, and barely Rs 150 millions have been spent from the Savings and Recovery Fund. The MEF’s survey confirms that only 11.7% of enterprises have sought financial help from government and banks. In fact the Stimulus contribution has been relatively modest if not insignificant and crediting it for having preserved that many jobs is not serious.

How can we know for sure whether a job would have disappeared were it for Stimulus money? How to distinguish or strip out jobs that could have continued to resist anyway? What was the methodology used to come with the figures on the amount of jobs saved ? Both in terms of fiscal and monetary policies we have shown that they were not expansionary but contractionary. The budget deficits without the creative accounting that was masking the dismal performance of investment in physical and social infrastructure had come down from -4.3% of GDP in 2006/07 to -1.2% in 2007/08 and 2.1% in 2008/09. The actual figures of public sector investment as a % of total investment and as a % of GDP show a marked decrease.

%

2006

2007

2008

Public Sector investment to total investment

31.7

20.5

15.5

Public Sector Investment to GDP

7.7

5.5

4.2

 

As for the monetary policy stance, credit to the private sector has been comatose especially for the credit-starved small businesses. They were many who did not have much faith in the Stimulus Package and doubted the claims that it will shore up our economic performance by 1.5% given the absence of any transparency on the methodology used to arrive at such a figure. Both the IMF and the Economist Intelligence Unit (EIU) believed that the Stimulus Package was a big futile gamble. “There is the danger that the measures will not be effective in protecting a small open economy from the effects of global slowdown.” Thank God, as confirmed by the MEF’s survey, our local enterprises were spared the full brunt of the crisis.

 

% Growth

Q3-08

Q4-08

Q1-09

Q2-09

Credit to Private Sector

4.1

7.9

0.1

1.5

Purchasing power –Rs 420

Resilient Mauritius promised a theoretical trickle to the teeming base of a bent cone – the famous trickle down theory. But very little seeped down. The public has seen through it and they do not like it and they are saying so, they say it is 420-Char Sau Bees! Some prices are already going through the roof and the poor cannot afford them; there is a complete disconnect between the leaders and their flock. Beware of the fury of the patient man! His purchasing power is continuously being eroded. Over the past four years, the inflation rate cumulatively added up to around 35% and workers have been compensated cumulatively by only 17 %, resulting in a loss of purchasing power of around 19%. The loss of purchasing power is drastically hurting all classes.

Both the indicators on savings and consumption reflect to some extent this deterioration in households’ standard of living. Gross Domestic Savings has remained at 10% of GDP while the growth of consumption by households has continued to decline from 7.8% in 2004 to the estimated 3.0% in 2009. Even imports of goods are being affected with an estimated negative growth of -13% in 2009 compared to a + 5.5% growth in 2005. In terms of the distribution of the national cake, we are not surprised that workers are getting a lower share and the situation is even worse for the lower strata of our society given the meagre salary compensation awarded to them. And moreover the debts of households have increased without a consequent improvement in their standard of living.


% of GDP

2005

2008

Compensation of Employees

37.2

36.0

Gross profits

49.5

51.4

 

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