Turn the Lights Out October 12, 2010 | Shai Oster, The Wall Street Journal

The next few months will be a test of China’s resolve to improve the environment.

China needs to sharply slowdown economic growth if it wants to reach its energy efficiency targets by the end of the year, according to a report by Standard Chartered Bank.

China’s latest five-year plan calls for a 20% reduction in the amount of fuel used per dollar of economic output from 2005 levels by the end of 2010. To achieve that, the report says, China would have to use 6% less electricity per month from September to December than its average consumption in the first eight months of the year. That implies the growth rate of industrial output would fall by half in the second half of the year to 7.4%, according to the bank’s calculations.

China was making good progress on energy efficiency until 2009, when the country’s infrastructure-heavy stimulus package – implemented as a response to the financial crisis - led to surges in cement, steel and other energy-intensive industries, the report says.

Beijing was lauded for setting ambitious energy targets when the five-year plan was released in 2006, but pressure to hit those targets has caused turmoil as local governments struggle to reach their quotas. With the end-of-year deadline looming, there’s no time to install efficiency upgrades. Instead, officials are just rationing electricity, with one city in Hebei Province going so far as to squeeze power supplies to hospitals and shut down any traffic light not powered by solar cells.

In the wake of the uninspiring outcome over the weekend of UN climate talks in Tianjin - which ended with the U.S. saying China needs to step up, and China likening the U.S. to a preening pig - there’s going to be more focus on individual countries’ voluntary actions.

While it still has relatively low per-capita carbon emissions, China is the world’s biggest source of greenhouse gasses, most of which come from the burning of coal to power the economy.

In a report on Friday, China’s official Xinhua news agency quoted Minister of Industry and Information Technology Li Yizhong as saying China would meet its energy intensity target this year, mostly by pushing through efficiency reforms in the industrial sector. The report made no mention of the effects of those reforms on GDP.

What matters more to Chinese leaders? Cutting pollution or maintaining economic growth?

With the deadline approaching, we’ll have an answer soon enough.

The Last Great Hope: Emerging Markets May be the Next Bubble September 30, 2010 | The Economist

THE internet allowed people to pay lower prices for books but also encouraged them to pay stratospheric prices for shares in lossmaking dotcom companies. During the subprime boom Americans believed the illusion that they could get rich by buying each other’s houses.

Those dreams may have been shattered. But hope springs eternal. There is still one great hope left for investors: emerging markets. Fund managers have been making the case for emerging markets on a regular basis over the past 20 years. Developing countries offer higher economic-growth rates, have younger, more dynamic populations and are under-represented in the global stockmarket. Buying a stake in emerging markets is like buying a stake in the future.

Goldman Sachs, for example, reckons that the total capitalisation of emerging markets will rise from $14 trillion today to $80 trillion by 2030, increasing from 31% of the global total to 55% in the process. Even allowing for new equity issuance, that will still translate into an annualised return of 9.3%, Goldman estimates, compared with just 4% for developed markets. It seems like a no-brainer.

But experience should teach investors to be suspicious of no-brainer decisions. The same arguments were advanced in the early 1990s, after all. But between 1991 and 2000 emerging markets delivered a total return of just 38% and developed markets returned 171%. Outperformance came only in the decade just gone, with emerging markets almost quadrupling investors’ capital since the end of 2000.

A caveat also needs to be applied to the growth case. Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School examined their database of 17 national stockmarkets since 1900. Using a variety of tests, they found virtually no correlation between an individual country’s GDP growth rate per head and the returns to investors.

What is the explanation for this rather counter-intuitive result? One answer is that a stockmarket is not a perfect facsimile of an economy. Many companies are unquoted. Those businesses that have floated on the market may be mature, or slower-growing, or simply overweight in one sector. In 1900 Wall Street was dominated by railroad stocks, for example.

A second answer is that growth countries may behave like growth stocks. A period of strong performance leads to overvaluation, from which subsequent returns are inevitably disappointing.

Has that stage arrived? The old rule of thumb was that emerging markets were pricey when they traded at a higher multiple of profits than their developed counterparts, as they did in 1999 and 2007 just before sharp falls in prices. At the moment they trade at a modest discount.

But emerging markets are prone to boom-and-bust cycles. They have suffered three 25%-plus losses in the past 20 calendar years, and five years in which annual returns have exceeded 50%. International investors have probably been behind much of the volatility, pushing the markets this way and that as they switch between enthusiasm and risk aversion.

It is quite possible that another boom is on its way. Bubbles, as described by Charles Kindleberger, a financial historian, usually involve an initial displacement, followed by rapid credit creation and then a phase of euphoria.

The displacement may have been the financial crisis of 2007-08 which undermined the solvency of the developed world. As governments propped up their banks, their debts soared. On average emerging-market governments now have much lower debt-to-GDP ratios than their developed peers. Economic power seems to have made a decisive shift.

The crisis was followed by the slashing of interest rates in the developed world. These have had a limited effect in reviving lending in Western economies. But they have encouraged Western investors to buy higher-yielding assets, like emerging-market equities. Emerging-market equity funds have already received inflows of $45 billion this year, according to EPFR Global, a research group. And low rates will also boost credit creation in those developing countries that import American monetary policy via managed exchange rates.

Euphoria will follow as cheap money drives up asset prices—this may have already happened in parts of the Asian property market. Investors probably have no option but to ride the wave, if only because the outlook for developed markets looks so flat. There is, at least, more solidity to emerging markets than there was to dotcom stocks.

Latin America’s new promise—and the need for a new attitude north of the Rio Grande September 09, 2010 | The Economist

THIS year marks the 200th anniversary of the start of Latin America’s struggle for political independence against the Spanish crown. Outsiders might be forgiven for concluding that there is not much to celebrate. In Mexico, which marks its bicentennial next week, drug gangs have met a government crackdown with mayhem on a scale not seen since the country’s revolution of a century ago. The recent discovery of the corpses of 72 would-be migrants, some from as far south as Brazil, in a barn in northern Mexico not only marked a new low in the violence. It was also a reminder that some Latin Americans are still so frustrated by the lack of opportunity in their own countries that they run terrible risks in search of that elusive American dream north of the border.

Democracy may have replaced the dictators of old—everywhere except in the Castros’ Cuba—but other Latin American vices such as corruption and injustice seem as entrenched as ever. And so do caudillos: in Venezuela Hugo Chávez, having squandered a vast oil windfall, is trying to bully his way to an ugly victory in a legislative election later this month.

An economic renaissance

Yet look beyond the headlines, and, as our special report shows, something remarkable is happening in Latin America. In the five years to 2008 the region’s economies grew at an annual average rate of 5.5%, while inflation was in single digits. The financial crisis briefly interrupted this growth, but it was the first in living memory in which Latin America was an innocent bystander, not a protagonist. This year the region’s economy will again expand by more than 5%. Economic growth is going hand in hand with social progress. Tens of millions of Latin Americans have climbed out of poverty and joined a swelling lower-middle class. Although income distribution remains more unequal than anywhere else in the world, it is at least getting less so in most countries. While Latin American squabbling politicians blather on about integration, the region’s businesses are quietly getting on with the job—witness the emerging cohort of multilatinas.

As they face difficulties in an increasingly truculent China, no wonder multinationals from the rich world are starting to look at Latin America with fresh interest. Sir Martin Sorrell, a British adman, talks of the dawn of a “Latin American decade”. Brazil, the region’s powerhouse, is the cause of much of the excitement. But Chile, Colombia and Peru are growing as handsomely and even Mexican society is forging ahead, despite the drug violence and the deeper recession visited on it by its ties to the more sickly economy in the United States.

Two things lie behind Latin America’s renaissance. The first is the appetite of China and India for the raw materials with which the continent is richly endowed. But the second is the improvement in economic management that has brought stability to a region long hobbled by inflation and has fostered a rapid, and so far sustainable, expansion of credit from well-regulated banking systems. Between them, these two things have created a virtuous circle in which rising exports are balanced by a growing domestic market. Because they were more fiscally responsible during the past boom than in previous ones, governments were able to afford stimulus measures during the recession. There is a lesson here for southern Europe: Latin America reacted to its sovereign-debt crisis of the 1980s with radical reform, which eventually paid off.

The danger of complacency

Much has been done; but there is much still to do. Building on this success demands new thinking, both within Latin America and north of the Rio Grande.

The danger for Latin America is complacency. Compared with much of Asia, Latin America continues to suffer from self-inflicted handicaps: except in farming, productivity is growing more slowly than elsewhere. The region neither saves and invests sufficiently, nor educates and innovates enough. Thanks largely to baroque regulation, half the labour force toils in the informal economy, unable to reap the productivity gains that come from technology and greater scale.

Fixing these problems requires Latin America’s political leaders to rediscover an appetite for reform. Democracy has brought a welcome improvement in social policy: governments are spending on the previously neglected poor, partly through conditional cash-transfer schemes, a pioneering Latin American initiative. But more needs to be done, especially to improve schools and health care, if everyone is to have the chance to get ahead. Also needed is a grand bargain to tackle the informal economy, in which labour-market reform is linked to a stronger social safety-net. And, even if some things like infrastructure and research and development plainly need more government spending, the worry is that triumphalism over escaping the financial crisis may prompt a return to a bigger, more old-fashioned state role in the economy—despite the failure of these policies in the region in the past.

Getting these things right will be easier if relations with the United States improve. Latin America needs to shed its old chippiness, manifest in Mr Chávez’s obsession with being in the hated yanqui’s “backyard”. More sensible powers, notably Brazil, should be much louder opponents of this nonsense. As they start to pull their weight on the world stage, working with the United States will become ever more important.

The attitude of the United States needs to change too. Worries about crime and migration—symbolised by the wall it is building across its southern border—are leading it to focus on the risks in its relationship with the neighbours more than on the opportunities. This is both odd, given that Latinos are already the second-largest ethnic group north of the border (see article), and self-defeating: the more open the United States is towards Latin America, the greater the chances of creating the prosperity which in the end is the best protection against conflict and disorder. After two centuries of lagging behind, the southern and central parts of the Americas are at last fulfilling their potential. To help cement that success, their northern cousins should build bridges, not walls.

Panama Debt Raised to Investment Grade by Moody’s June 09, 2010 | Eric Sabo, Bloomberg Businessweek

Panama’s credit rating was raised to investment grade by Moody’s Investors Service, which cited “significant improvement” in the country’s fiscal policies and strong economic growth.

Moody’s upgraded the country’s debt ratings to Baa3 from Ba1, matching moves that Fitch Ratings made in March and Standard & Poor’s made in May. The outlook on Panama’s rating is stable, Moody’s said.

The Central American country plans to cut its public debt to 35 percent of gross domestic product from 45 percent by 2014 as an expansion of the Panama Canal boosts tax revenue and growing investment in the mining industry buoys royalties, Finance Minister Alberto Vallarino said in March. President Ricardo Martinelli said in April the economy may grow more than 6 percent this year, exceeding the International Monetary Fund’s forecast of 5 percent.

“The Panama Canal expansion and an ambitious infrastructure investment program are likely to support strong economic growth in the next few years, boding well for debt dynamics,” Alessandra Alecci, a Moody’s analyst, said in a statement.

The yield on the Panama’s 6.7 percent bonds due in 2036 dropped 35 basis points, or 0.35 percentage point, this year to 5.92 percent, according to JPMorgan Chase & Co. The yield fell three basis points, pushing the price up 0.35 cent on the dollar to 110.25 cents at 1:15 p.m. in New York.

Panama aims to spend $20 billion during the next four years to build ports, expand its main airports and lure international companies to the country, Martinelli has said. The infrastructure spending is not expected “to derail public finances as it will be mostly financed by additional fiscal revenues,” Moody’s said. Martinelli signed a new tax law in March to increase revenue and cut the budget deficit.