The Business Solution: March 2009

Monday, March 16, 2009

AIG to pay US$450m in bonuses despite bailout

AIG plans to pay 450 million dollars in bonuses to finance executives who led the US insurance giant to a 99.3-billion dollar loss last year, US media reported Sunday.

The payments have dismayed the US government as AIG has received 170 billion dollars in federal aid.

The bonuses are for staff at the London subsidiary AIG Financial Products, which helped trigger the collapse and then the nationalization of the former world number one insurer, The Wall Street Journal reported.

American International Group CEO Edward Liddy told Treasury Secretary Timothy Geithner bonuses could not be cancelled due to a risk of lawsuits for breaching employment contracts, The Washington Post said.

In a letter to Geithner, Liddy also indicated a refusal to pay bonuses worth tens of millions of dollars would prompt an exodus of senior employees.

"We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses -- which are now being operated principally on behalf of the American taxpayers -- if employees believe that their compensation is subject to continued and arbitrary adjustment by the US treasury," Liddy wrote, according to the Post.

Some of the bonuses are as samll as 1,000 dollars but seven executives at AIG Financial Products were to receive more than three million dollars in bonuses, The New York Times reported.

For the fourth quarter, AIG announced a loss of 61.7 billion dollars -- the biggest ever for a US firm in one quarter -- pushing up its net loss for 2008 to 99.3 billion dollars.

G20 bridges differences before key finance summit

Before a key summit on tackling the economic crisis, rich and emerging nations have agreed common ground on hiking IMF funds and stricter market regulation but remain split on stimulus measures.

G20 finance ministers on Saturday vowed to take "whatever action is necessary" on the world economic slowdown, after talks preparing for a London summit of world leaders on April 2.

They played down signs of division between the United States and Europe on how best to boost the global economy, insisting the road to the summit next month was smooth.

"We're prepared to take whatever action is necessary to ensure growth is restored and we're committed to do that for however long it takes," British finance minister Alistair Darling said Saturday after hosting the G20 talks.

"I believe that this does provide a very clear sense of direction."

The politicians managed to reach agreement on the need for an "urgent" and substantial funding boost for the International Monetary Fund (IMF), although a communique issued afterwards did not state a figure.

They also agreed to some tougher regulation of the financial system.

But the meeting failed to reach consensus on a new stimulus package, despite controversial calls from the US, the world's largest economy, for coordinated international pump-priming in recent days.

US President Barack Obama, who will attend the London summit in April, denied there were divisions on how to tackle the financial crisis, deriding such a notion as a "phony" story drummed up by the media.

"I don't know where this notion has emerged that somehow there are sides developing with respect to the G20," Obama told reporters after meeting Brazil's President Luiz Inacio Lula da Silva at the White House.

Agreement on IMF funding came after the United States recently suggested that its lending capacity should be trebled to 750 billion dollars (580 billion euros).

European leaders want to double the figure to 500 billion dollars.

The G20 on Saturday stated its key priority was restoring bank lending to help ease the effects of the crisis.

But Germany and France are opposed to US calls for new stimulus, instead favouring tougher regulation to tackle the crisis.

French Finance Minister Christine Lagarde said she was "delighted" that the G20 was closer on agreeing tighter regulation of markets.

The United States, eurozone, Japan and Britain are all in recession as the global economy struggles to recover from the worldwide credit crunch that erupted in late 2007.

Commercial banks are lending less cash amid fears about their exposure to the collapsed US sub-prime property market.

Also Saturday, British Prime Minister Gordon Brown, who will host the G20 summit, and German Chancellor Angela Merkel talked up the prospect of agreement on April 2.

"I'm very positive, I'm very optimistic that we will be able to... come to an agreement together with the United States, with emerging economies such as China and India," said Merkel after meeting Brown.

Brown, meanwhile, highlighted US support for changes in regulations for hedge funds and other "shadow banking" operations.

Highly speculative and lightly regulated hedge funds have been blamed for fuelling instability in financial markets.

Measures agreed at the G20 talks in Horsham, near London, included regulatory oversight of all credit agencies, blamed for being too slow to alert investors to high-risk instruments, as well as a need for "sufficient supervision and regulation of hedge funds".

US Treasury Secretary Timothy Geithner on Saturday said there was unprecedented unity among the G20 on the economy, insisting: "The world is with us" when asked about stimulus.

"We are seeing the world move together at a speed and on a scale without precedent in modern times," he said.

"We have a very broad basis consensus globally now on the need to act aggressively to restore growth."

The G20, whose members also include Canada, India, Italy, Russia and South Korea, also pledged Saturday to "fight all forms of protectionism and maintain open trade" and stressed commitment to helping developing economies.

OPEC holds oil output until May

The OPEC oil exporters' cartel on Sunday agreed to keep current production levels unchanged until May, Iraqi oil minister Hussein al-Shahristani said.

"It's a rollover until May," al-Shahristani said after a key production meeting in the Austrian capital.

Qatar's energy minister Abdullah bin Hamad Al Attiyah added that the cartel would meet again on May 28 in Vienna to assess the market situation.

OPEC's official daily output quota currently stands at 24.84 million barrels after the cartel agreed to slash 4.2 million barrels late last year in an attempt to energise weak oil prices -- but questions remain about compliance.

The cartel has slashed its output three times since September as crude prices slumped in the face of a worldwide economic slowdown.

Algerian energy minister Chakib Khelil added Sunday that the May meeting would allow the Group of 20 (G20) richest nations time to respond to the global economic crisis at a London summit of world leaders on April 2.

"I think it was a responsible position (to hold output) and also to give the chance to the G20 to do its job on April 2. In light of the decision they will make, we'll make our decision on May 28."

He added: "All of us will have to make an extra effort to be at 100 percent" in terms of compliance with last year's output cuts. "And then (in May) we will have a chance to review compliance."

Malaysia cuts foreign worker permits by 70%

Malaysia has slashed its work permit approvals for foreign workers by almost 70 per cent so far this year, faced with the twin threat of layoffs and recession, according to a report Sunday.

In January and February, an average of 250 permits were approved daily compared to 800 last year, following a more stringent vetting process by the authorities, a Home Ministry official told the Star newspaper.

"Those requesting for foreign labour have to prove that they have made the effort to employ locals," the ministry's senior deputy secretary-general Raja Azahar Raja Abdul Manap was quoted as saying.

"If they can prove it, then they will get the clearance," he said.

A ministry spokesman was not immediately available to confirm the report.

In January, Malaysia banned the hiring of new foreigners in the manufacturing and services sectors after a report forecast 45,000 Malaysians would lose their jobs in the next few months.

And last week, the government cancelled work visas issued to 55,000 Bangladeshi workers after unions said the situation for Malaysians was bleak enough without additional foreign manpower being brought in.

Malaysia is one of Asia's largest importers of labour and has an estimated 2.2 million foreign workers, who are the mainstay of the plantation and manufacturing sectors.

However, the government has become concerned about the ramifications of having such a large migrant workforce and periodically tries to reduce it.

Taiwan to allow up to two casino resorts

Taiwan has taken another step forward in a move to lift a decades-old ban on casinos after it was decided no more than two gambling resorts would be licensed at the beginning, it was reported Sunday.

The ruling Kuomintang (KMT), who control the legislature, pushed through a controversial bill in Parliament in January to lift the ban on casinos despite fears it could lead to more crime and damage morality.

The bill allows offshore islands to build casinos only if they are approved by residents in referendums.

Developers who win a licence would be required to build a hotel with a minimum of 1,000 rooms according to the result arrived at Saturday during a meeting of government agencies, the Chinese-language China Times reported.

The agencies also decided that the government would not issue the third licence within 10 years of licensing the second one to "avoid competition and reduce possible social impacts," the report said.

Officials say it may take a year for government agencies to amend the existing law and complete investment requirements and screening procedures.

Hundreds of activists from religious and environmental protection groups took to the Taipei streets Sunday to demonstrate against casinos.

"President Ma Ying-jeou, who has distinguished himself as a politician of high moral standards, should have a second thought on the matter," Ho Tsung-hsun, one of the protest leaders, told AFP.

"The experience of other countries introducing casinos indicated that they would boost the domestic crime rates," he said.

British developer AMZ Holdings Plc and Taiwan's Penghu Bay Development Co., have been preparing land for casino projects in Penghu, the archipelago located in the middle of the Taiwan Strait, the Penghu county government said earlier.

Penghu hopes to attract half a million tourist visits each year, generating 100 billion Taiwan dollars' worth of revenue annually in gambling and tourism, and creating up to 50,000 jobs.

Local media has speculated that the world's casino giants would pour money into Penghu having suffered a hammering elsewhere in the global financial crisis.

Hong Kong's air cargo traffic drops

Hong Kong's air cargo traffic dropped nearly 20 per cent year-on-year in February as overseas demand for Chinese goods continued to shrink, the airport authority said Sunday.

Hong Kong International Airport (HKIA) said it handled 198,000 tonnes of cargo in February, 19.7 per cent less than the same month last year, as the global economic downturn took its toll.

February's fall was despite this year's Chinese New Year celebrations falling earlier than in 2008, which meant that manufacturing activities in China had resumed.

HKIA also reported a 13.7 per cent fall in passenger volume to 3.4 million.

The city's air cargo volume has seen double-digit year-on-year declines in recent months as the US, Europe and other major buyers of Chinese manufactured goods cut their orders after being badly hit by the financial crisis.

"It is unlikely that this downward trend (in cargo traffic volume) will reverse in the short term when the world's major economies remain in recession," said Stanley Hui, chief executive officer of HKIA, in a statement.

Kuwait to scrap new refinery project

Kuwait will scrap a 15-billion dollar project to build a new oil refinery after an independent watchdog said the project was not feasible, the prime minister said in comments published Sunday.

"The government is committed to the Audit Bureau report, and the council of ministers will officially halt the project at its next meeting," which takes place on Monday, Sheikh Nasser Mohammad al-Ahmad al-Sabah told Al-Watan daily.

Kuwait in May awarded contracts to build the 630,000-barrels per day refinery to four South Korean companies and a Japanese firm and later signed letters of intent with them.

The deals prompted a dispute between the government and opposition MPs who alleged the bidding process and awarding of contracts involved flawed procedures.

MPs said the contracts should have been awarded through the state-run Central Tenders Committee (CTC) to ensure transparency, and vowed they would quiz the oil minister if the contracts were signed.

The Gulf state's government in August bowed to political pressure and referred the project to the Audit Bureau for an investigation.

Though the outcome of the report was not published, local media and MPs said the Bureau concluded that the project was technically and economically not feasible and should go through the CTC.

In December, Kuwait scrapped a 7.5-billion dollar partnership with US Dow Chemical after pressure from MPs, citing high cost amid the global economic downturn.

Macau still worth a gamble

Half-finished casinos and dropping revenues have fuelled fears that Macau's staggering growth has faltered, but analysts insist the gaming haven remains a sure long-term bet.

The former Portuguese colony has transformed itself from a sleepy backwater to a dazzling entertainment centre in the last five years, with foreign and Chinese-owned casinos sprouting up across the territory.

The city of just 550,000 now takes in more gaming revenue than Las Vegas and Atlantic City combined, thanks to the voracious gambling of Chinese visitors who have poured in from the mainland.

But worries over corruption, problem-gambling and foreign companies grabbing the spoils from China's recent economic boom led Chinese authorities to stem the flow of visitors last summer.

The tougher visa restrictions caused a sharp drop in revenue growth sparking a slew of negative stories, plummeting casino stocks and a hiatus in the city's construction boom.

But some analysts are adamant fears about Macau's demise are premature.

"Macau has been used to more than 40-percent growth -- that cannot be sustainable and a slowdown is natural," said Zeng Zhonglu, a professor in gaming economies at Macau Polytechnic Institute.

"My impression is that the economy generally is healthy."

Jonathan Galaviz, an analyst with Las Vegas-based consultancy Globalysis, said any disruption to economic growth will be temporary with Macau's short-term performance expected to fluctuate along with the Asian economy.

While gaming revenues dipped sharply over the second half of 2008, the city still raked in a total of 13.5 billion US dollars for the year, a 31 percent increase year-on-year. Revenues rose 46 percent in 2007.

Meanwhile, employment held steady in the three months to January and retail sales rose 34 percent in 2008. Gaming is a central part of the economy.

During a recent visit, there were lengthy queues at the immigration counter and the city centre jewellery and watch stores were humming with shoppers.

The tables at the Grand Lisboa, the flagship casino of local tycoon Stanley Ho, were three deep with heavy-smoking Chinese gamblers playing their favourite game of Baccarat.

But it is in the hidden world of the VIP gaming rooms where the city has suffered.

VIP revenues have played a central role in the success of Macau's economy with top casinos tussling with each other to attract high-rollers.

But many of the heaviest gamblers were Chinese government officials and the heads of state-owned companies, whose frittering away of public cash in Macau's private rooms has become a national scandal.

Unsurprisingly, official figures are not collated, but Zeng has combed through mainland media reports to establish a clearer picture.

Of the 99 cases he uncovered, he said each official or businessman lost an average of 20 million yuan (2.9 million US dollars) on the tables.

One official lost 100 million yuan in one day in 2007, while another had to be carried out of a Macau casino as he was too weak to walk after six days and nights of constant gambling.

"The central government is highly concerned that so much money is disappearing in Macau," Zeng said.

"It leads to bribes and the theft of public funds, all of which greatly damages the government's reputation."

Glenn McCartney, a tourism academic at Macau University and local businessman, said the city had to change its business focus from VIPs to a genuine mass-market entertainment, attracting visitors from across Asia.

"I am very confident about Macau. The market is not anywhere near maturity level yet," he said.

"But Macau is not Las Vegas. If I was sitting in the marketing department of a casino firm, I would be asking what changes we have to make so we can attract more people from the mainland."

US firm Las Vegas Sands in particular is hoping China will allow more visitors in.

The most aggressive foreign investor in the city, it opened the world's biggest casino, The Venetian, in 2008.

But worsening credit markets have stalled its ventures across the world, and last November it was forced to sack 11,000 workers and halt work on a huge complex of new hotels opposite the gargantuan Venetian.

Four months later, the quiet building site remains the most potent symbol both of Macau's risks for investors and its potential.

British PM promises tougher financial watchdog

Prime Minister Gordon Brown promised on Sunday to strengthen Britain's financial watchdog, giving it more power and resources to supervise the country's financial sector.

Brown's remarks come just a day after finance ministers from the G20 group of industrialised and developing countries vowed to take "whatever action is necessary" on the world economic slowdown, after talks preparing for a key summit on fighting the crisis next month.

"The world has changed beyond recognition not just in the past 10 years, but in the past 10 months too," the premier, himself a former finance minister for a decade, wrote in the Sunday Telegraph newspaper.

"Our system for financial regulation must change with it. This means a new tougher approach, addressing the new challenges, with a reformed, tougher and better-resourced Financial Services Authority (FSA) at its core."

Brown said other measures that needed to be taken included bringing hedge funds and other investment funds under the FSA's supervision, holding board-room directors to account, greater international co-operation and a new pay and bonus structure.

He said there also needed to be better monitoring of the effect of an institution and its assets on the financial system, and stronger cross-border supervision.

"While the 1997 supervisory system was right for the circumstances we faced then, it is now clear that the detailed regulation of financial markets across the world did not keep up with the pace of change in the global economy," he wrote.

Switzerland risks OECD tax blacklisting

Switzerland said the OECD economic grouping threatened to blacklist it as a tax haven and it risked being punished with economic sanctions, according to comments published on Saturday.

The comments by Swiss Finance Minister Hans-Rudolf Merz came a day after Switzerland and other states said they would relax their bank secrecy laws, within strict limits, amid global pressure to stamp out tax havens.

"The secretariat general of the Organisation for Economic Cooperation and Development (OECD), without informing us, drew up a proposal for a new blacklist on March 5. I have learned that Switzerland was on it," Merz was quoted as saying by the daily Le Temps.

He said the list was drawn up at the request of the Group of 20 (G20) rich and emerging countries, whose finance ministers were meeting in England on Saturday ahead of a full summit of its leaders on April 2.

The G20 has made the fight against tax havens one of its top priorities, with Germany and France pushing particularly hard.

"For the moment it's just a threat," Merz said of the blacklist proposal. "But if this threat becomes a reality during the G20 on April 2, it could entail economic sanctions for the countries targeted."

Switzerland joined Luxembourg, Austria and Monaco on Friday in saying it would relax bank secrecy laws. Merz said the decision came in response to pressure from the G20.

"We cannot run such a risk" of being blacklisted and suffering sanctions, he said.

Friday's announcements followed similar moves Thursday by Belgium, Liechtenstein and Andorra. The latter two are already on an OECD list of uncooperative tax havens.

G20 agrees to 'regulatory oversight' of credit rating agencies

The G20 agreed here on Saturday to "regulatory oversight" of all credit ratings agencies, which are under fire for being too slow to alert investors to the dangers of high-risk investments.

The G20 group of rich and emerging economies has agreed to "regulatory oversight, including registration, of all credit rating agencies whose ratings are used for regulatory purposes," said a final communique following talks.

Saturday's meeting of finance ministers and central bankers also recommended that a G20 summit on April 2 agrees to "an appropriate degree of regulation and oversight" of "important financial institutions, markets and instruments."

It also wants to see that "hedge funds or their managers are registered and disclose appropriate information to assess the risks they pose."

Highly speculative and lightly regulated hedge funds have been blamed for fuelling instability in financial markets.

Obama soothes China on US debt

President Barack Obama has said that China could have "absolute confidence" in the American economy, after Beijing pointedly questioned the safety of its huge haul of US government debt.

Obama took up comments by China's Premier Wen Jiabao on Friday, which represented a rare assessment by Beijing on the health of the US economy and the prospects for China's hundreds of billions of dollars in Treasury bonds.

"Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States," Obama said after meeting Brazilian President Luiz Inacio Lula da Silva at the White House.

"There is a reason why even in the midst of this economic crisis you have seen actual increases in investment flows here in the US."

"I think it is a recognition that the stability not only of our economic system but also our political system is extraordinary."

Obama said that his comments were applicable to both US Treasury instruments and investments in the US private and industrial sectors.

Wen told reporters in Beijing on Friday that he was concerned about China's huge stake in the US economy as it endures the worst crisis in generations.

"We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets," Wen said.

"To be honest, I am a little bit worried and I would like to ... call on the United States to honour its word and remain a credible nation and ensure the safety of Chinese assets."

Wen's comments caused a stir in global markets, and were the latest disturbance to the critical US-Chinese relationship early in Obama's administration.

Last week, military tensions rose after the United States said Chinese boats harassed the US Navy surveillance vessel Impeccable in the South China Sea, forcing the ship to take emergency action to avoid a collision.

Beijing said the vessel was on a spying mission.

China also balked at US comments on the human rights situation in Tibet -- but both sides tried to smooth over the row with Foreign Minister Yang Jiechi's visit to the White House on Thursday.

Beijing held 727.4 billion dollars in US Treasury bonds at the end of last year, just ahead of Japan, the holder of 626 billion dollars in bonds, according to US government data.

As the largest creditor to the United States, China is "extremely interested in developments in the US economy," Wen said.

Analysts say a loss of confidence in US Treasury securities could cause a dramatic drop in the dollar and force Washington to pay higher interest rates.

In February, Secretary of State Hillary Clinton asked China to keep on buying US debt, saying it could help jumpstart the flagging US economy and stimulate imports of Chinese goods.

"By continuing to support American Treasury instruments the Chinese are recognizing our interconnection. We are truly going to rise or fall together," Clinton said.

Most of China's foreign exchange reserves, which reached 1.95 trillion dollars by the end of 2008, is believed to be held in the greenback.

White House spokesman Robert Gibbs said Friday that "there's no safer investment in the world than in the United States."

Obama rolled out an audacious 3.55-trillion-dollar budget proposal last month that bristles with economic reforms and spending on healthcare, climate change and education.

The budget forecasts a 1.750 trillion dollar deficit in fiscal 2009, but foresees that figure falling to 1.171 trillion dollars in 2010.

The Chinese reportedly are concerned about the enormous amount of borrowed money, including Obama's nearly 800-billion-dollar stimulus, being used to boost US growth.

Concerns are flaring in China that the stimulus plan could hurt dollar-denominated assets, with some observers urging China to cut US Treasury holdings, the official Xinhua news agency said last month.

Domestic critics have charged that, as a developing country, China should be investing at home instead of subsidizing the world's richest country, or else diversifying into other foreign assets.

Iran, China firms sign US$3b LNG deal

Iran's state-owned gas company and a Chinese consortium Saturday signed a multi-billion dollar deal to produce liquefied natural gas in the Islamic republic's South Pars field, a report said.

The deal, worth 3.39 billion dollars, was signed by Iran LNG company with the Chinese consortium for an annual production of 10.5 million tonnes of LNG, the state broadcaster reported.

It did not reveal the name or give any details of the Chinese consortium.

"According to this contract, building gas liquefying lines in phase 12 and another block of South Pars gas field will be handed to the Chinese consortium," the television said. The gas field is located in the Gulf.

It added that the project would be implemented in three years and that an unnamed European firm would join the Chinese consortium in three months.

In January, Iran and China signed a separate 1.76 billion dollar contract for the initial development of the North Azadegan oil field in western Iran.

Western oil companies have refused to invest in Iran because of the controversy over its nuclear energy programme and Tehran has increasingly turned to Asian companies.

Iran holds the world's second-largest gas reserves and has significant economic ties with China -- a veto-wielding member of the UN Security Council, which has imposed sanctions against Tehran over its refusal to halt sensitive nuclear work.

Iran said on Wednesday that French energy giant Total would have no "active role" in developing phase 11 of the offshore South Pars gas field and that a new partner had been found for the project.

The development of South Pars field, which holds about eight percent of world reserves, has been delayed amid a lack of investment in a country faced with severe gas needs of its own in winter.

G20 to take 'whatever action necessary' on slowdown

G20 finance ministers vowed Saturday to take "whatever action is necessary" to curb the global slowdown, after talks preparing for a crunch summit next month.

Downplaying signs of division between Europe and the United States, they agreed that there was an "urgent need to increase IMF resources very substantially" although no figure was given.

"We're prepared to take whatever action is necessary to ensure growth is restored and we're committed to do that for however long it takes to do that," said British finance minister Alistair Darling, who hosted the talks.

The G20 would ensure there was "sufficient supervision and regulation" of hedge funds, he added. "In addition to that, we agreed that stronger regulation... was necessary to prevent the build-up of systemic risk.

"We also agreed that we need to do more both to strengthen banks in the good times so they can face the downturn should that occur", including measures that would see regulators stop banks from overextending themselves, he said.

Politicians from the United States, China and Japan plus wealthy European nations and emerging powers had held a day of talks to pave the way for the April 2 London G20 summit on tackling the downturn.

The run-up to Saturday's meeting was marked by splits between the United States and Europe, particularly on whether to launch a new economic stimulus plan or concentrate on tightening market regulation to fight recession.

But Darling said the finance ministers had agreed on a common line.

"Taken together, I believe that this does provide a very clear sense of direction as we move towards the conference of leaders and finance ministers to be held in London on April 2," he said.

"We agreed a significant amount of progress, there was a great deal of consensus both about the urgency of the problems we face and the steps that we ought to be taking."

He said the meeting had also agreed to fight protectionism and protect free trade.

In a separate meeting Saturday Britain Prime Minister Gordon Brown, who will host the G20 summit, and German Chancellor Angela Merkel talked up the prospect of agreement at the much-vaunted London summit in about three weeks.

"I'm very positive, I'm very optimistic that we will be able to... come to an agreement together with the United States, with emerging economies such as China and India," said Merkel.

Brown added that key power-broker the US was ready to support changes in regulations for hedge funds and other "shadow banking" operations.

Highly speculative and lightly regulated hedge funds have been blamed for fuelling instability in financial markets.

The run-up to Saturday's meeting saw splits open up between the United States and Europe after Larry Summers, US President Barack Obama's top economic adviser, this week urged world leaders to take coordinated steps to pump money into the global economy.

That has been rejected by countries including France and Germany, which instead favour tougher regulation to tackle the crisis.

A US stimulus package of 787 billion dollars (615 billion euros), signed into law last month, compares to 400 billion euros committed by 27 EU countries.

The two total economies are of comparable size, but the EU has not forged an integrated response.

The United States, eurozone, Japan and Britain are all in recession as the global economy struggles to recover from the worldwide credit crunch that erupted in late 2007.

Commercial banks are lending less cash amid fears about their exposure to the collapsed US subprime property market.

The agreement on the IMF came after the United States suggested this week that its lending capacity should be trebled to 750 billion dollars (580 billion euros).

G20 emerging powers Brazil, Russia, India and China (BRIC) meanwhile said in a communique Saturday that IMF resources were "clearly inadequate and should be very significantly increased".

It called for new, more flexible facilities to help countries facing financial problems, strengthened IMF surveillance and "urgent action" to ensure that emerging economies play a bigger role within the Fund.

The BRIC nations also warned against protectionism, describing it as "an increasingly real threat to the global economy".

Thursday, March 5, 2009

US dollar higher in Asia

The US dollar rose against other major currencies in Asia on Thursday, approaching four-month highs against the yen, after Washington unveiled a new plan to shore up the troubled US housing sector.

European currencies were weighed down by expectations that the European Central Bank and the Bank of England will reduce their key lending rates when they meet later in the day.

The dollar gained to 99.21 yen in Tokyo morning trade, up from 98.98 in New York late Wednesday, when the greenback hit 99.49 at one point, the highest level since early November.

The euro fell to 1.2619 dollars from 1.2657 and to 125.22 yen from 125.29.

"The dollar continues to be supported by the view that the United States is taking stimulus measures faster than other economies," Hachijuni Bank chief forex strategist Masatsugu Miyata said.

Investors were encouraged by Washington's launch of a 75-billion-dollar scheme to stem rising home foreclosures.

Traders were monitoring the start of China's annual session of parliament, where Premier Wen Jiabao said China would weather the global economic crisis with eight per cent economic growth this year.

Wen struck an upbeat tone but he did not unveil any new stimulus package in addition to the one outlined in November.

Players were also focused on central bank meetings in Europe. The ECB was expected to cut its key lending rate by 50 basis points to 1.5 per cent, the lowest level in the bank's 10-year history, while the Bank of England was expected to trim interest rates by half a percentage point to 0.5 per cent.

Investors will be closely watching whether the central banks will announce a set of unorthodox tools to fight the credit crunch and boost the money supply, dealers said. The pound dropped to 1.4157 dollars from 1.4195.

Markets are also fearful of a particularly bad US labour report on Friday, after a private sector survey showed 697,000 job losses in February.

Oil prices higher in Asian trade

Oil prices rose in Asian trade Thursday, building on overnight gains on signs that demand in the United States and China could strengthen, analysts said.

New York's main futures contract, light sweet crude for delivery in April, gained 12 cents to 45.50 dollars a barrel.

Brent North Sea crude for April rose 19 cents to 46.31 dollars.

An increase in gasoline demand in the United States as shown in the Department of Energy's weekly report helped pull prices up, analysts said.

"The latest US weekly data show the strongest February week for gasoline demand ever and a further significant improvement in gasoline fundamentals," Barclays Capital analysts said.

While US crude stockpiles dropped by 700,000 barrels during the week ending February 27, they remained 16 per cent above their level a year ago.

US dollar weakens as market fears ease

The US dollar swung lower against the euro but rose against the yen as financial markets brightened on signs of a big Chinese economic stimulus that capped the greenback's recent fear-driven gains.

The euro rose to 1.2657 dollars at 2200 GMT against 1.2556 dollars on Tuesday after falling at one point to 1.2457 dollars, a three-month low.

The dollar meanwhile edged up to 98.98 yen from 98.15 on Tuesday.

The recent gains for the dollar as well as the yen have been largely driven by worries about a deeper economic slide that has prompted a move into safe-haven assets.

Sacha Tihanyi at Scotia Capital said news of a likely Chinese economic stimulus that could help the global economy "has helped set a more positive tone" in the market.

Analysts largely looked past a report that the US private sector shed a greater-than-expected 697,000 jobs in February as employers slashed payrolls to cope with the shrinking economy. Also having little impact was a grim Federal Reserve Beige Book survey on the US economy through February.

"The US dollar is continuing to give up ground against most major and emerging currencies as tensions continue to ease on encouraging economic news from China and a possible enlargement of the Chinese stimulus package," said analysts at Brown Brothers Harriman.

"The weak US ADP jobs report and a dismal Beige Book pointing to broad-based economic deterioration with temp staffing dismal, a sign Friday's US jobs data could be even worse than the 650,000 loss expected, have not boosted tensions."

The euro began the day on the back foot as investors, rattled by gloomy global economic prospects and crumbling stock prices, bought the dollar, seen as a refuge currency in times of trouble.

In addition, the single currency suffered from widespread forecasts of another eurozone rate cut on Thursday by the European Central Bank.

The ECB is expected to lower its benchmark interest rate by half a point to an all-time low of 1.50 percent as it struggles to remedy a crippling recession in the 16-member eurozone.

Investors are also looking for a rate cut by the Bank of England.

The yen's fall against the dollar came as Japan's opposition leader Ichiro Ozawa, seen as a potential future prime minister, dismissed calls to resign after a close aide was arrested in a fundraising scandal.

In late New York trade, the dollar stood at 1.1683 Swiss francs after 1.1758 on Tuesday.

The pound was at 1.4195 dollars after 1.4050.

"Sterling is one of the better performers today," according to Scotia Capital's Tihanyi, who nonetheless cautioned that the currency could be volatile if the Bank of England takes extraordinary moves such as quantitative easing to boost its economy.

"With the BoE likely to drop the quantitative easing bomb tomorrow, we would be nervous if sterling got too far ahead," the analyst said.

Oil prices leap on US, Chinese demand hopes

Oil prices rose sharply on Wednesday on signs that demand could strengthen in the United States and China, the world's leading energy consumers.

New York's main futures contract, light sweet crude for April, finished at 45.38 dollars a barrel, a gain of 3.73 dollars from Tuesday's close.

In London, Brent North Sea crude for delivery in April rallied 2.42 dollars to settle at 46.12 dollars a barrel.

The New York contract, which opened higher, built upward momentum after the US government's weekly report on crude reserves in the world's largest oil consumer.

The US Department of Energy said US stockpiles of crude oil dropped 700,000 barrels during the week ending February 27, instead of the rise of one million barrels forecasted by most analysts.

The increase mainly was led by a pickup in refining activity.

But US crude inventories remained high, 16 percent above their level a year ago.

The DoE data revealed gasoline demand once again climbed over the past four weeks compared with a year ago, further underpinning prices.

"The latest US weekly data show the strongest February week for gasoline demand ever and a further significant improvement in gasoline fundamentals relative to the weakness in the middle of the barrel," Barclays Capital analysts said.

Less encouraging for prices was a rise in stockpiles of gasoline, diesel and heating fuel.

"A mixed report - not really supportive for crude as inventories remained at pretty high levels, clearly bearish for heating oil and diesel, but bullish again for gasoline on demand revival," Michael Wittner at Societe Generale summed up.

Crude prices also found support on hopes of greater demand from China, stoked in part by reports that China will soon announce new additional stimulus actions to boost its sluggish economy.

"Crude prices were higher on increased optimism the Chinese economy would recover swiftly from the current downturn following some positive economic news," Sucden analyst Nimit Khamar said.

The Chinese government said manufacturing activity contracted for a fifth straight month in February but the decline slowed, with the data falling just short of the boom-bust line.

The Purchasing Managers Index (PMI) for China's manufacturing sector rose to 49 in February from 45.3 in January, the China Federation of Logistics and Purchasing said.

"The Chinese PMI (showed) a marked improvement from the record low of 38.8 in November 2008," Khamar noted. "However, a reading of below 50 still indicates contraction."

PM Wen says China faces "unprecedented" challenges over crisis

Premier Wen Jiabao confidently declared Thursday that China would be able to ride out the unprecedented challenges of a worsening global crisis and achieve eight per cent economic growth this year.

In his annual "state of the nation" address to open parliament, Wen gave the most detailed blueprint yet of a four trillion yuan (585 billion dollar) stimulus plan aimed at steering China through the downturn.

However he did not unveil any new stimulus package in addition to the one outlined in November. Stock markets around the world soared Wednesday on expectations of another massive round of spending to boost China's economy.

"We are fully confident that we will overcome difficulties and challenges, and we have the conditions and ability to do so," Wen told the 3,000 delegates gathered for the Communist Party's showpiece political event of the year.

The premier made it clear China's economy, the third biggest in the world, was hurting from the crisis and that the environment was not expected to get better soon.

"We face unprecedented difficulties and challenges. The global financial crisis continues to spread and get worse," he said.

"Demand continues to shrink on international markets. The trend for global deflation is obvious and trade protectionism is resurgent."

Wen acknowledged fundamental problems in China exacerbated by the crisis, such as an inadequate social safety net and incomplete health care, as well as a wealth gap.

Nevertheless, he sought to reassure China's 1.3 billion people that major reforms were being planned and that there was no need for panic.

"Our confidence and strength comes from many sources," he said.

China's economic growth had slumped to 6.8 per cent in the final quarter of last year, worrying figures for a government long used to double-digit expansions and marking a dramatic slowdown from 13.0 per cent growth in 2007.

But he said China's gross domestic product (GDP) will grow by 8.0 per cent in 2009.

"It needs to be stressed that in projecting the economic growth target of about 8.0 per cent, we have taken into consideration both our need and ability to sustain growth," Wen said.

And amid deflation concerns, he said the government had set an inflation target of 4.0 per cent for the year.

Wen outlined a wide-ranging plan for the four trillion yuan package, which is to be spent over two years and which will contribute to a record budget deficit of 950 billion yuan (140 billion dollars) in 2009.

This included plans to boost domestic spending, improve the social safety net, raise incomes for the nation's roughly 800 million people living in the countryside and give support for key industries such as steel and auto.

China's leaders had previously indicated that improving the plight of the nation's least well off would be a top focus for the annual parliamentary session, which will last nine days.

This has become a greater concern due to the economic slowdown, as rising unemployment fuelled fears of further social unrest in a country that sees tens of thousands of protests each year.

Adding to the sense of unease are tensions surrounding China's 58-year rule of Tibet, as an ultra-sensitive 50th anniversary of a failed uprising against Chinese rule falls during the parliament sessions, on March 10.

US economy fell further in February, says Beige Book report

US economic activity "deteriorated further" through February, dampening prospects for a quick recovery from recession, the Federal Reserve said in its Beige Book report on Wednesday.

The report, to be used at the upcoming meeting of Fed policymakers March 17-18, said the troubles were broad-based, citing weak consumer spending, tight credit and further declines in the factory sector.

"Looking ahead, contacts from various districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010," the report said.

The Beige Book said consumer spending, a key driver of the economy, "remained sluggish on net, although many districts noted some improvement in January and February compared with a dismal holiday spending season."

It cited declines in travel and tourist activity and "a wide range" of services, amid "substantial job cuts."

In manufacturing, most Fed districts reported "steep declines in activity in some sectors and pronounced declines overall."

The real estate market, which set off the economic slide, was "largely stagnant, with only minimal and scattered signs of stabilisation emerging in some areas, while demand for commercial real estate weakened significantly."

In the financial sector, which has been struggling with massive losses, many banks saw "further drops in business loan demand, a slight deterioration in credit quality for businesses and households, and continued tight credit availability," the Beige Book said.

The US economy contracted at a whopping 6.2 percent pace in the fourth quarter of 2008, based on the most recent government estimate. Some analysts say the downturn may be even worse in the first quarter of 2009, with the crisis easing late this year or early 2010.

Obama aims to save billions in federal contracts

US President Barack Obama on Wednesday outlined a plan to save tens of billion dollars a year in wasteful government spending, especially targeting bloated defence contracting.

"We are spending money on things we don't need, and we are paying more than we need to pay. That's completely unacceptable," Obama said at the White House.

The US leader signed a presidential memorandum reforming the contracting system across the entire government, in line with a vow to cut unnecessary waste.

The president was flanked by Democratic Senator Carl Levin, head of the Senate Armed Services Committee, and his onetime Republican rival for the presidency, Senator John McCain, along with other US legislators and officials.

Obama said it was time to end "an era of fiscal irresponsibility so that we can sustain our recovery, enhance accountability, and avoid leaving our children a mountain of debt."

He homed in on runaway Pentagon spending, vowing that "the days of giving defence contractors a blank check are over," and highlighted steps being taken by Defence Secretary Robert Gates to overhaul military procurement at the Pentagon.

"It's time to end the extra costs and long delays that are all too common in our defence contracting," the president said, vowing to "strengthen oversight to maximise transparency and accountability."

The cost overruns were especially apparent during the war in Iraq, where "too much money has been paid out for services that were never performed, buildings that were never completed, companies that skimmed off the top."

The reforms require the White House budget director to work with cabinet members and agency heads to frame tough new guidelines on contracting work by the end of September.

Obama aims to save 40 billion dollars each year by halting outsourcing in some government jobs, and by ending "no-bid" contracts for favoured companies which proliferated in US operations in Iraq.

Last month, the US leader ordered a review into huge cost overruns on a new fleet of presidential helicopters, as McCain complained at the skyrocketing cost, raising concerns about how many military projects tend to come in well over budget.

"I don't think that there's any more graphic demonstration of how good ideas have cost taxpayers an enormous amount of money," McCain said at the time. Read more ...

Japan's business investment drops at record pace

Japanese companies are slashing their investment in plants and equipment at a record pace to cope with a worsening recession in Asia's biggest economy, data showed Thursday.

Investment dropped by 17.3 percent in the three months to December from a year earlier, led by automakers and other manufacturers, the finance ministry said. It was the biggest fall since comparable records began in 2002.

Excluding spending on software, investment declined by 18.1 percent.

"The result confirmed that the Japanese economy is worsening rapidly and going though a very tough phase," a finance ministry official told reporters.

Companies suffered an 11.6 percent drop in sales in the quarter from a year earlier and a 64 percent slump in pretax profits.

Manufacturers were hardest hit, with earnings diving 94 percent.

Before the current downturn, Japan's corporate sector had been a key driver of a recovery in Asia's largest economy following the recessions of the 1990s.

But firms are now cutting back their investment in response to slumping demand and profits, raising fears that the current recession will be deeper and longer than previously feared.

Companies from Sony to Toyota Motor have been slashing jobs to cope with the slump.

Japan's economy shrank 3.3 percent in the fourth quarter of 2008 -- 12.7 percent on an annualised basis -- logging its worst performance since 1974, an initial estimate showed last month.

The business investment figures will be used to calculate revised gross domestic product figures due on March 12.

Taiwan cuts taxes to boost sagging economy

Taiwan moved to reduce corporate and personal income tax Thursday, as part of the government's efforts to help lift the sagging economy, officials said.

The government plans to lower the corporate income tax rate from 25 to 20 percent, effective 2010, the cabinet said after it approved the cuts during a meeting.

"The tax cuts will strengthen Taiwan's competitiveness, attract investments, and immensely help small- to medium-sized companies," deputy finance minister Chang Sheng-ford told reporters.

The tax cuts, pending parliament's final approval, will lead to an estimated loss of 80.8 billion Taiwan dollars (2.3 billion US dollars) in annual tax revenue, the cabinet said.

However, the move comes as the majority of tax benefits extended to companies, especially those in the electronics sector, are scheduled to expire at the end of 2009, boosting annual tax revenue by 148.3 billion Taiwan dollars.

Taiwan plunged into recession as the economy contracted a record 8.36 percent in the three months to December due to the global economic meltdown, and the economy was forecast to contract 2.97 percent in 2009, the government said.

Philippines' inflation rises to 7.3% in Feb

Philippine inflation rose to 7.3 per cent in February, up from a year earlier due to price increases in the food, beverage and fuel, light and water sectors, the government said Thursday.

The rise marked an acceleration from the 5.4 per cent rate posted in February 2008 and from the 7.1 per cent rate posted in January this year, the National Statistics Office said.

Excluding the volatile food and energy spaces, the core inflation rate moved at only 6.4 per cent in February, down from 6.9 per cent in January, the office added.

In a statement, central bank deputy governor Diwa Guinigundo said that the inflation rate was within the bank's expectations. The bank had earlier forecast February inflation at 6.6 to 7.5 per cent.

"It is also important to note that core inflation actually slowed down in February versus January," he added.

But he did not say how this would affect the central bank's meeting later in the day to set policy rates.

February marked the first uptick in inflation since September when inflation began to slide down from 17-year highs.

"After slowing in recent months, data in February indicate inflation may move sideways in the coming months. This supports the view that monetary policy will be kept unchanged," Jonathan Ravelas, a market strategist of Banco De Oro told Dow Jones newswires.

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