Wednesday, April 15, 2015

15/4/15: Global Information Technology Report 2015: Who's the Best? Not We...


We have Silicon Docks and all the ICT IP stuffed into 'knowledge development boxes' and shipped via this country across the world that one can dream about, we have European HQs of dozens of ICT firms that are here solely for the reason of Ireland having the best workforce and skills in the world, and we have policymakers that cut ribbons on 'future jobs' reports on a monthly basis, promising tens of thousands of ICT sector employees 'in your neighbourhood near you' in the next 5-10-15-20... years… or sometime after the tenure of the Government of the day.

And we rank 25th in the world in the Global Information Technology Report 2015, right between the Digital/ICT Powerhouses of Belgium and France. Yes, that is right - we rank the lowest of all English-speaking advanced economies in the world: big, small, oil and natural resources rich and poor, small and large.

Don't believe me? Well, here: http://reports.weforum.org/global-information-technology-report-2015/network-readiness-index/.


In regulatory frameworks sub-index - the so-called "Environment Sub-index", Ireland ranks 12th. Which is, basically a bunch of political tosh. We rank 14th in "political and regulatory environment pillar (nine variables) [which] assesses the extent to which the national legal framework facilitates ICT penetration and a safe development of business activities, taking into account general features of the regulatory environment (including the protection afforded to property rights, the independence of the judiciary and the efficiency of the law making process) as well as more ICT-specific dimension (the passing of laws relating ICT or the software piracy rates)." Doh!

In laws relating to ICT we rank 23rd. Where it matters more… things are slipping and sliding and slipping again.

In IP protection, we do better - 14th place. Because someone needs to guard the prevailing interest of MNCs more than creating legal system to support general ICT sector.

We do better in Business and Innovation Environment - scoring 13th place, just ahead of Chile and Israel. But when it comes to availability of latest technologies - the cutting edge 'innovation' stuff - we are 22nd. Below Puerto Rico and New Zealand…

Capital of VCs is Dublin. And we have all the cash disbursed by state innovation funds and enterprise funds and entrepreneurship funds… but… we rank 46th in the world in Venture Capital Availability.

Tax rankings? Well, we do well-ish - ranked 26th. You see, many newcomers to the zero sum game of beggar thy neighbour tax competition are ahead of is, but majority of them are developing countries. Majority, but not all.

We rank 27th in the world in terms of time it takes to start a new business and 23rd in terms of number of procedures it takes to start a new business. That is pretty dire for a country aiming to be an entrepreneurship powerhouse. But then again, the report is not even looking at self-employment and sole traders. My guess, in that early stage entrepreneurship area we would be closer to 50th place.

Want a real wallop? Take Government procurement of advanced technologies - a proxy for how advanced is the public sector in ICT adoption and deployment… we rank dis-respectable 62nd. So our mandarins and ministers presiding over the digital strategies and ICT development and policies are working in an environment that is worse than many African countries when it comes to procuring advanced technologies for their own use. Never mind, abacus is fine for computing economic impacts and jobs potential for all those white papers on Innovation Ireland.

Per report, "The readiness subindex measures the degree of preparation of a society to make good use of an affordable ICT infrastructure and digital content, with a total of twelve variables." In readiness we are… 29th in the World (Ukraine is ranked 28th and Poland 30th). Like the 'neighbourhood'?

"The infrastructure and digital content pillar captures the development of ICT infrastructure" which ranks Ireland 26th in the world, below Slovenia and ahead of UAE. How? Well, our mobile networks coverage puts us into 66th place, between Georgia and Tunisia. Our electricity production environment is ranked 35th, our international internet bandwidth is ranked 20th, and in secure internet servers we rank 21st.

Here's a good one: "The affordability pillar assesses the cost of accessing ICT, either via mobile telephony or fixed broadband internet, as well as the level of competition in the internet and telephony sectors that determine this cost." Why is it good? Because we spent many years talking about cost competitiveness. And here Ireland ranks 87th in the world. Mobile tariffs here are so expensive, we rank 125th in this area in terms of affordability. Fixed broadband tariffs? Better - at 59th in the world. Level of competition index for Internet services, international long distance services, and mobile telephone services puts us at the top tier, ranked 1st with a long list of other 61 countries with the same ranking.

Now, wait a second: in a regulated sector with high degree of competition, prices are still dear. How can that be? Why, of course, only if the regulator is fixing them in excess of what the market would set them. Happy times all around, unless you are a consumer. Oh, and do note - our politicians endlessly talk about the need for 'labour cost competitiveness', but where we really lack competitiveness, it turns out is in the old fashioned regulated services that politicians and public sector regulate and/or legislate.

Finally - skills. The report measures these quite esoterically. "The skills pillar (four variables) gauges the ability of a society to make an effective use of ICT thanks to the existence of basic educational skills captured by the quality of the educational system, the level of adult literacy and the rate of secondary education enrolment."

So this is about basic skills, not specific ones. And here we rank well: 8th in the world overall, 5th in how well does the educational system in your country meet the needs of a competitive economy, but only 24th in the quality of math and science education in schools. This, by the way is the stuff of secondary education, not real level of ICT skills present in the economy (those require tertiary as an entry level and fourth and higher levels education for serious engagement). But, when it comes to high school enrolments (secondary education) we are tops of pops, ranked 6th.


So with all these 'skills' achievements, you would expect that we are heavy users of ICT and new technologies - skilled, savvy, early adopters... but, when it comes to actual usage of ICT in real life, Ireland ranks 28th in the world.

Stop and pause, again: for all the achievements of our Docks and Valleys, Centres of Excellence and Start Ups programmes, Innovation Academies and FDI, incubators and accelerators, hubs and labs, summits and venues relating to tech… Ireland's actual usage of real ICT is just a notch worse than Belgium's (ranked 27th) and a notch better than Saudi Arabia's (29th).


You really don't need to go any further than that to either throw the report into a bin or bring the Government policy papers on ICT sector strategies into your local recycling centre. Because either one spoofs or the other. The two are simply not compatible.

Unless, of course, you remember that we are the land of FDI… where everything is possible: technologically weak domestic economy, government and society can coexist with technologically advanced foreign/exporting economy and society; technologically un-enabled ministers and officials can write eloquent papers about technologically enabled economy… Ah, there, all good now... we are the best... there...


Update: h/t to @prfnv for the following link: http://www.shanghairanking.com/SubjectCS2014.html which lists top 200 universities in Computer Sciences... of which none are from Ireland.

15/4/15: In Case You've Missed it: Google Reply to EU Commission


Google reply to the EU Commission charges: http://googleblog.blogspot.be/2015/04/the-search-for-harm.html. From people who created one of the most successful platforms for innovation (predominantly - innovation by others), a response to the accusations levelled by the people who never succeeded in creating anything innovative.

Still wondering why Europe is celebrating the prospect of reaching 1.2-1.4 percent growth this year as an achievement?...

15/4/15: Ruble Trades Below 50 to USD


Russian Ruble has crossed an important marker today, closing below 50 to USD for the first time since the end (28th to be precise) of November, effectively erasing all of the losses sustained during the speculative run of December 2014.


There has been more volatility in euro markets, so a bit less of an event today there:



Longer-term chart shows Ruble dramatic gains in both Euro and Dollar terms from around February


As I said before, these gains can prove to be temporary, so stay long with care, if you are long...

15/4/15: S&P Ukraine Ratings and Reality Check on IMF Programme


S&P Ratings Services cut long-term foreign currency sovereign credit rating on Ukraine to CC from CCC- with negative outlook and held unchanged the long-term local currency sovereign credit ratings at CCC+.

Per S&P release: "The downgrade reflects our expectation that a default on foreign currency central government debt is a virtual certainty." S&P also warned that any 'exchange offer' - an offer mandated under the IMF latest loan package to Ukraine (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) - will constitute default. "Once the distressed exchange offer has been confirmed, we would likely lower the foreign currency ratings on Ukraine to SD and the affected issue rating(s) to D".

Per S&P: "The Ukraine ministry of finance’s debt operation is guided by the following objectives: (i) generate $15 billion in public-sector financing during the program period; (ii) bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025… The treatment of the eurobond owed to Russia (maturing in December 2015) is likely to complicate matters. The Ukrainian government insists it will be part of the talks, while the Russian government insists that the bond, although issued under international law, should be classified as "official" rather than "commercial" debt given the favorable interest rate and the fact that it was purchased by a government entity. …if Ukraine has to pay the $3 billion in debt redemption this year, it will make it very difficult for Ukraine to find the $5 billion in expected debt relief in 2015 that underpins the IMF’s 2015 external financing assumptions."

Forbes labeled the new rating for Ukraine as "super-duper junk" (http://www.forbes.com/sites/kenrapoza/2015/04/10/ukraine-debt-rating-now-super-duper-junk/)

Beyond the restructuring threat, there is economic performance that is not yielding much consolation: "The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,”

S&P forecast is for the economy to shrink 7.5% in 2015, following the decline of 6.8% in 2014. The S&P forecasts Ukrainian GDP to grow by 2% in 2016, 3.5% in 2017 and 4% in 2018. Inflation is expected to peak at 35% this year from 12.2% in 2014 and fall to 12% in 2016 and 8% in 2017. Government debt is set to rise from 40.2% of GDP in 2013 to 70.7% of GDP in 2015 and to 93% of GDP this year, declining to 82.6% in 2018.

Meanwhile, ever cheerful IMF is projecting Ukrainian GDP to shrink by 'only' 5.5% in 2015, and grow at the rates similar to those forecast by S&P between 2016 and 2018. IMF sees inflation rising to 33.5% this year. Government debt projections by the IMF are only marginally more conservative than those by the S&P.

Meanwhile, lenders to Ukraine have already pushed out a tough position on talks with the Government: http://www.bloomberg.com/news/articles/2015-04-09/ukraine-creditors-fire-opening-salvos-before-restructuring-talks

As I noted before, this an extraordinary 10th IMF-assisted lending programme to Ukraine since 1991. None of the previous nine programmes achieved any significant reforms or delivered a sustainable economic growth path. In fact, the IMF presided, prior to the current programme over nine restrcturings of the Ukrainian economy that produced more oligarchs, more corruption at the top of the political food chain and less economic prosperity, time after time.

Meanwhile, over the same period of time, world's worst defaulter, Argentina, has managed to have just three IMF-supported lending programmes. Argentine bag of reforms has been mixed, but generally-speaking, the country is now in a better shape than it was in the 1990s and is most certainly better off than Ukraine, as the relative performance chart of two economies over time, based on IMF WEO (April 2015) data, indicates:


Somewhere, probably in the basement of the 700 19th St NW, Washington DC, there exists a data wonk that truly believes that Ukrainian debt is 'sustainable' and that this time, things with 'structural reforms' will be different from the previous nine times. I would not be surprised if the lad collects Area 51 newspapers clippings for a hobby. He's free to do so, of course. But the Ukrainian economy is not free when it comes to paying for the IMF's bouts of optimism. And with it, neither are the Ukrainian people.

What the Ukrainian economy really needs right now is a combination of pragmatic political reforms to bring about real stabilisation, root-and-branch clearing out of corrupt elites, including business elites and not withstanding the currently empowered elites, assistance to genuine (as opposed to corrupt rent-seeking) entrepreneurs, all supported by assisted and properly structured FDI, direct development aid and a real debt writedown. The IMF-led package does not deliver much on any of these objectives. If anything, by passing the cost of reforms onto ordinary residents, it does the opposite - drains investment, saving and demand capacity from the economy, imperilling its ability to create new growth and enterprises.

15/4/15: Russian Foreign Exchange Reserves


Few weeks ago, based on the three weeks data from the Central Bank, I noted an improvement in Russian Forex reserves, while warning that this requires a number of weekly observations to the upside to confirm any reversal in the downward trend.

Now, with monthly data available for the full month of March, my concerns about temporary nature of improvements have been confirmed. Full month of March data shows a decline, not a rise, in forex reserves. Specifically, total reserves dipped from USD360.221 billion at the end of February to USD356.365 billion at the end of March - a m/m decline of USD3.856 billion.


Now, in monthly terms, March decline was the smallest since October 2014 and the second smallest (after September 2014) in 17 months. Nonetheless, forex reserves are now down to the levels of March-April 2007, having fallen USD129.766 billion y/y (-26.7%). Over the period of sanctions, total reserves are down USD136.961 billion (-27.8%). Over Q1 2015 the reserves are down USD29.095 billion.

Month on month, foreign exchange reserves (combining foreign exchange, SDRs and reserve position in the iMF) are down USD4.338 billion, with USD3.646 billion of this decline coming from foreign exchange alone. Gold holdings are up USD482 million month on month.

Gold, as percentage of total reserves, currently stands at 13.265%, the highest since November 2000. Gold holdings performed well for Russia over the period of this crisis, rising USD3.917 billion year on year through March 2015 (+9%) and up USD2.684 million since the start of the sanctions.

In terms of liquid cash reserves, foreign exchange holdings are down at USD298.665 billion at the end of March 2015, a level comparable to January-February 2007. end of March figure represents a decline of USD131.024 billion y/y (-30.5%) and the decline during the period of the sanctions is even steeper at USD136.9 billion (-31.4%).




Good news: Russian economy is past the 2015 peak of external debt redemptions (see: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html).

Bad news: there is another USD54 billion worth of external debt that will need repaying (net of easy inter-company roll overs) in Q2-Q4 2015. Worse news: Q1 declines in foreign reserves comes with CBR not intervening in the Ruble markets.

Good news: capital flight is slowing down.

Bad news: capital flight is still at USD32.6 billion over Q1 2015 (http://www.themoscowtimes.com/business/article/russian-capital-flight-slows-sharply-in-first-quarter/518927.html) although much of that is down to debt redemptions.

Which means there is little room for manoeuvre anywhere in sight - should the macroeconomic conditions deteriorate or a run on the Ruble return, there is a very much diminishing amount of reserves available to deploy. Enough for now, but declining…

As I said before: watch incoming risks.

Tuesday, April 14, 2015

14/4/15: Russian external Debt Redemptions: Q1 2015 - Q3 2016


With Q1 out of the way, Russia passed a significant milestone in terms of 2015 external debt redemptions.

In total USD36.647 billion of external debt matured in Q1 2015, the highest peak for the period of Q1 2015 - Q3 2016. Even controlling for inter-company loans and equity positions, the figure was around USD24 billion for Q1 2015, again, the highest for the entire 2015 and the first three quarters of 2016.

Here is the breakdown of maturing external debts:


All in, over the last 3 quarters alone, Russia has managed to repay and roll over USD156.23 billion worth of external debt, with net repayment estimated at around USD96.5 billion.

Painful in the short run, this is not exactly weakening Russian economy in terms of forward debt/GDP and other debt-linked ratios.

Monday, April 13, 2015

13/4/15: Greek Deposits: Worse Run than in the Previous Iterations


Couple of interesting graphs on the Greek crisis via @FGoria

First, the ECB supports vs ELA for Greek banks: 

Notable trend above is for support switching. At the rise of first round of Greek crisis (post PSI), ECB funding was displaced by the ELA. The same pattern is now replaying once again.

Next: Greek banks deposits:


Again, the above shows the re-amplification of the crisis and continued decline in deposits levels, with acceleration in the rate of deposits flight. Outflows are now present across all maturities of deposits, and there is a strong increase in outflows for deposits with maturity in excess of 1 year.

The above charts are dire: covering the period for January-February 2015, we are witnessing a full-scale deposits flight (a funders' run on the banks) that is more extreme (in volume and composition of deposits outflows) than during the previous iterations of the crisis.

13/4/15: Dublin Port Shipments at New Record in Q1 2015


Some strong growth numbers for Dublin Port volumes in Q1 2015:

Per Dublin Port, the volume shipped now 3% ahead of previous record set in 2007.

13/4/15: That Utilitarian Logic of EU Tax Probes...


Yet another international publication, this time The Economist, is going off the Irish Government 'reservation' with an article on how Apple is being 'helped' to tax avoidance: http://www.economist.com/news/business/21621810-multinationals-deals-tax-friendly-countries-are-coming-under-fire-bit-too-cosy?fsrc=scn/tw_ec/a_bit_too_cosy_. The farce is, it is the very same State that enabled this practice which now stands to gain from the unwinding of the practice.

Ah, the logic of the European Union... it is, rather, err... relativist in nature...

13/4/15: Bonds Traders: Give Us a Shake, Cause We So Sleepy...


Recently, I have been highlighting some of the problems relating to the Central Bank's driving up the valuations of government bonds across the advanced economies. In the negative-yield environment, the victims of Central Banks' activism are numerous - from banks to long-hold investors, to corporates, to capex, to savers, to... well... the fabled bonds trades(wo)men... the poor chaps (and chapettes) aren't even showing up for work nowadays: http://www.bloomberg.com/news/articles/2015-04-10/take-off-friday-and-monday-because-most-bond-traders-already-are because Sig. Mario is making their lives sheer misery with his euro bonds acrobatics.

Apparently, there is just not that big of a demand out there for the idea of giving money to the Governments on top of paying taxes and trading volumes are now where the rates are - in the zero corner. So the 'industry' solution is, predictably, for the Fed to raise rates. When was the last time you heard the car manufacturers begging regulators for a safety recall of their vehicles 'to jolt the complacent consumers a bit'?

Sunday, April 12, 2015

12/4/15: Economic Divergence: U.S. v Europe


Recently, I have highlighted couple of signs of emerging weaknesses in the U.S. economy relative to the positive news momentum in the euro area. You can see Manufacturing Sector evidence here and Business Activity evidence here. Meanwhile, economic surprise indices have also been pointing to the same: here.

An interesting chart from Pictet summarising the trend by plotting Economic Surprise Indices for euro area and the U.S. side by side:

Source: Pictet

The above shows divergence in the two series from Q4 2014 on.

And the overall markets valuations heat map showing stronger over-valuation (lighter colouring) in Q1 2015 in the euro area core compared to the US:


Source: BBVA Research

In cyclical terms, the above reinforces the view that the U.S. economy is settling into the growth range around 3.1% of GDP, while the euro area economy is moving closer to 1.1-1.4% growth. The divergence in two economies' core signals of future activity is in part driven by the differences in the monetary policies expectations, with ECB driving deeper into its QE programme, while the Fed is now shifting toward tighter stance.

In particular, recent statements from the Fed are fuelling uncertainty about the dollar and the U.S. interest rates environment. Median analysts outlook suggests a 50bps hike by the end of 2015 on the Fed side, with my own view that the Fed is most likely to hike around September. This outlook is highly uncertain, due to divergent signals coming from the Fed. Another point of uncertainty is what will follow the initial hike in U.S. rates. My view is that we can see a relatively long period of time over which the Fed will do nothing, before hiking the rates for the second time. The reason for this is that the Fed is fully aware of the risk of making a policy error on its first hike size and timing, and it will leave a wide enough period to collect evidence on the effects of its first intervention before moving again.

Meanwhile, the ECB has delivered twin push on its expansionary monetary policy in March, completing EUR60 billion in purchases of bonds and also deploying EUR97.8 billion TLTRO lending. The balancesheet of the ECB is growing, finally, and with it, Frankfurt has delivered a big stimulus to the euro area financial markets. This pushed bond yields to record lows: German yields are negative out to 6 year maturity, with 10 year Bunds trading at around 0.2% yields, and UST-Bund 10 year spread widening to 180 bps. It also shifted liquidity into risk assets, such as stocks and corporate bonds. Stock markets rallied: Germany up 25% in 2015 so far, France up 22%, Portugal up 31%, Spain up 14% and so on. Virtually none of these gains can be attributed to improved corporate balancesheets or companies' performance.

Here is a neat summary by Pictet of markets moves over Q1 2015:
Source: Pictet

The above highlights two things:
  1. European equities outperformance over Q1 2015 is massive and is completely unjustified by the macroeconomic fundamentals and companies' performance; and
  2. European equities outperformance accelerated in March
As Pictet notes, virtually all of the above outperformance is down to monetary policy-induced revaluation of the exchange rates: "Shares, in local currency terms and with dividends reinvested, are up by 16.8% in Europe, well ahead of the S&P 500’s 1.0% gain. However, European investors who

had invested in US equities will have benefited from a 13.7% rise in the S&P 500 when translated into euros, considerably reducing Wall Street’s underperformance in the year to date. Japanese shares have been the top performers though, advancing by 10.5%. If we add in the euro’s fall in value against the yen, that translates into a rise of just over 24.5%." 

Excluding energy sectors, corporate earnings growth forecasts currently put expected earnings uplift of 9.0% in the U.S. against 15.8% in the euro area over 2015, again predominantly on the back of currency valuations changes.

All in, the worrying trend of economic performance fully dependent on unorthodox monetary policies and relatively unanchored in the real economy remains. Rising divergence between the U.S. - euro area signals shows inherent weaknesses and risks present in such  environment.

Saturday, April 11, 2015

11/4/15: 2014 European Labour Costs Comparatives


Ireland's manufacturing is booming, services exploding, unemployment falling, and wages... well, wages...

Here is the latest data for full year 2014 from Eurostat providing some comparatives:


Ireland ranks on par with Italy and below all high income euro area states (ahead of just 'Southern' or 'peripheral' Europe) in terms of hourly labour costs. For the 'most productive' (if measured by returns on FDI booked via Ireland) country, we are amazingly labour cost-competitive. Which, of course, only highlights the questionable nature of our labour productivity, plus lower non-wage costs of labour (such as employer taxation).

Now, recall - Ireland has been aggressively rebuilding its 'competitiveness' by reducing costs of labour. The internal devaluation meme and so on.... Right? Almost:


Over 2008-2014 our labour costs actually rose. Of course, our favourite 'competitiveness' metric - the unit labour costs (cost of labour required to produce a unit of output) fell. But that decline has nothing to do with our gained labour cost 'competitiveness'. Instead, it has to do with increased output 'units' booked per hour of work. Which is, primarily, down to two factors:

  • MNCs pushing more and more tax optimising 'activities' via Ireland (superficially increasing units of output per hour of work); and
  • Destroying hundreds of thousands jobs in less productive sectors (the unemployment effect).
Hence a paradox: Irish labour costs rose last time in 2012 - not a great year for our economic performance. They stayed static since then, through the stagnation of 2013 and the roaring GDP & GNP growth in 2014. 

And another paradox, the one yet to come: once construction industry and retail sector employment and activity pick up, the unit labour costs in the economy will rise solely due to output in less productive sectors picking up. If wages inflation returns, they will rise even faster, proving again that all this competitiveness story is largely a figment of tax-optimisation-induced imagination.