Author: Ben Debski

Though this industrialisation
usually brings benefits to city dwellers, it has caused some concerns about the
rural communities swept up in its wake.

“China alone has 25 percent of the cities with at
least half a million inhabitants,” the UN reported. “The country is undergoing a major
transformation of its urban structure,” that has been on a steady incline since
the 1990s, the report said.

“In 1980, China had only 51 cities of that size,” the
report indicated. “Between 1980 and 1995,
another 51 were added to the group and, between 1995 and 2010, 134 additional
cities in China crossed the half a million threshold.”

The UN expects China to add another 107 cities to that
category by 2025.

Problems for rural populations

One Chinese scholar warns that rapid urbanisation
could harm the welfare of rural populations and create slums in urban areas.

Professor He Xuefeng, a sociologist at Huazhong
University of Science and Technology in the Hubei Province, says that if
China’s urban shift moves too fast cities would not be able to provide adequate
public services for citizens forced to move in from rural areas.

Since 1958, China has maintained a residency system
called ‘hukou,’ which divides citizens into two groups.

“If they lose their land, these families will have no
other choice but to become urban poor”

Urban citizens typically have better health and
medical care, and educational services, but rural populations have access to
more land for housing and farming. It is
very difficult to change a rural hukou to an urban one. Though the hukou system has long been blamed
for creating an ever-widening gap between people in cities and in the country,
Professor He claims there have been some benefits for rural farmers.

“If rural residents do not find a good job and cannot
afford the expensive life in cities, they can still go back home for
farming. There is enough room for them
to turn around,” he explained.

Still, He doubts the success of some plans which call
for encouraging more farmers to transfer their land for industrial projects or
to other farmers and move into cities.
Farmers need money in order to achieve a decent life in the city; hukou
is not the heart of the issue.

China’s economy is driven by cheap manufacturing
labour, and many rural citizens who move into cities can only find work as
unskilled labourers in factories for low wages. 
They aren’t able to afford a decent standard of living in an urban
setting and available public services aren’t adequate to ease the adjustment.

He also warns that if farmers are forced into urban
areas with no recourse to return to their rural hometowns, the results could be
disastrous.

“If they lose their land, these families will have no
other choice but to become urban poor,” He said. “This is as bad as a widening gap between
urban and rural areas.”

He suggests a more gradual shift toward urbanisation,
with more efforts to improve public services both in cities and in the country.

Policymakers want low lending rates to increase credit to businesses in order to accelerate economic growth. To press the point home, they cut the bank’s lending rate by 75 basis points to six percent at their last meeting.

Average base lending rates for all commercial banks stood at 14.61 percent in June, down from 15.17 percent in March, compared with deposit rates of around two percent.

“It is early days… all things equal this year, you could see the banks probably responding with low rates probably in the course of next year,” said Robert Shaw, a Nairobi-economist, referring to benign inflation and good weather, which has led to a recovery in the key agriculture sector.

Businesses complain the spread between the deposit and lending rates is too wide and it reduces the manufacturing sector’s competitiveness.

“The spread between deposit rates and the lending rates is so large that it is actually hurting industrial growth and manufacturing growth in this country,” said Jaswinder Bedi, chairman of Kenya Association of Manufacturers.

Bank executives told a recent forum on lending rates that costs of credit would fall after they clear expensive deposits, taken in before rates tumbled, from their books.

James Mwangi, chief executive of Equity Bank said some deposits on bank’s books were attracting a yield of eight percent while Treasury bill yields are under two percent.

“When you look at the funding side of the bank, it (yield) is up there. We will not be asking for too much by saying you hold your expectations until next June and then we will see,” Mwangi said.

Yields have fallen more than 300 basis points across the curve this year, leaving banks flush with cash, as executives get discouraged by the low yields from government securities.

“They are now going to start looking for borrowers but they are assuming (the funds) are going to get borrowed at 13/14 percent, what they have been getting in the past,” said Bedi.

A nine-year, amortised infrastructure bond by the government for 31.6 billion Kenya shillings is offering a return of 6 percent.

Risk factor
But bankers who look around for other lending opportunities should be compelled to lend at lower rates, said Wilfred Onono, the managing consultant of Interest Rates Advisory Centre, an organisation that works with distressed borrowers.

“In my view the central bank should do a little more instead of appearing to be totally helpless… they can bring some instruments that can regulate these interest rates,” Onono said.

Lynette Oyugi, an economist and researcher at the Nairobi-based Institute of Policy Analysis and Research disagrees with Onono, saying the banks’ business model differs from that of the central bank, making it difficult for them to follow its signals.

“The bank’s response is slow because central bank has no risks. It holds banks’ money and it lends to banks. There is no risk between central bank and the banking fraternity but the banks lend to individuals or to institutions who go to business and the risk is very high,” she said.

“As much as the central bank wants to see rates come down substantially, the risk factor has not gone down.”

Banks like Barclays Bank of Kenya raised their provisions for bad debts during the first-half of this year.

The central bank, together with the banks, have established a credit reference bureau, aimed at providing an information-sharing platform for banks on potential borrowers, to weed out those with dodgy credit records.

Still, Standard Chartered Bank of Kenya’s chief executive, Richard Etemesi said there were other factors that went into consideration while pricing loans, including the cost of securing collateral and banks’ infrastructure.

“You can’t defy the market in the end and if there is almost a universal resistance by banks to reduce their rates further, then I don’t think it is because they are being greedy, they have looked at all their factors and done their costs and are being cautious,” said Shaw.

Securities and Exchange
Commission Chairman Mary Schapiro, the leaders of major stock and
option exchanges, and broker-dealer watchdog, the Financial Industry
Regulatory Authority, met in Washington to discuss the causes of the
market free fall on May 6 and possible reforms.

“As a first
step, the parties agreed on a structural framework, to be refined over
the next day, for strengthening circuit breakers and handling erroneous
trades,” Schapiro said in a statement.

The SEC did not provide details on what the fixes would look like.

A
source familiar with regulators’ talks said they have still not
pinpointed the exact cause of the 20-minute market roller coaster, when
stocks usually regarded as safe dropped precipitously for several
minutes before recovering most of their losses.

Despite not
knowing the cause, regulators have reached a general agreement on a
three-part revamp of market safety valves, including a circuit breaker
that applies across markets if individual stocks fall precipitously.

The
agreement also covers the need for clear rules on dealing with
erroneous trades, and on the need to update existing market-wide
circuit breakers for severe market declines, the source said. The
source spoke on condition of anonymity because the talks are private.

Currently,
if the market falls more than 10 percent in a day before 2pm local
time, a circuit breaker is triggered and shuts the market down for one
hour. If the market falls more than 20 percent after 2.30pm, a circuit
breaker is triggered, shutting down the market for the rest of the day.

Both
the Dow Jones Industrial Average and Standard & Poor’s 500 Index
never reached the crucial trigger point on May 6. The Dow fell as much
as 9.2 percent and the S&P was off as much as 8.6 percent during
the latter half of the trading day.

Schapiro held a two-hour
meeting with the leaders of the New York Stock Exchange, the Nasdaq
Stock Market, BATS, Direct Edge, the International Securities Exchange
and Chicago Board Options Exchange.

NYSE Euronext Chief
Executive Duncan Niederauer, Finra CEO Richard Ketchum and others told
reporters afterward that the discussions were constructive, without
providing  details.

The exchange heads also met at the Treasury
Department with Treasury Secretary Timothy Geithner, along with
Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler.

Continuing to gather data
Four
days after the market plunge and quick rebound, regulators are still
scrambling for answers. The Dow Jones Industrial Average briefly went
into a 1,000-point tailspin on May 6, rattling investors worldwide.

But
a massive $1trn rescue package to safeguard indebted European nations
cheered investors on the day of the meeting, with US stocks racking up
their best one-day gain in over a year.

The CBOE VIX volatility
index, known as Wall Street’s fear gauge, fell 29.6 percent – the
largest percentage drop in its history – to end at 28.84 after leaping
to its highest level in more than a year on May 7.

One
prevailing theory is that the sharp fragmentation of the US stock
marketplace and the accompanying patchwork of circuit breakers and
safeguards exacerbated the market swoon.

That fragmentation is
also slowing down regulators’ ability to piece together what happened,
two sources familiar with the matter said.

The SEC continues to
aggregate data from the 50 electronic trading venues, one source said,
suggesting the fragmentation is hampering the ongoing investigation.

Senator
Charles Schumer, a Democrat from New York, called for new systemwide
circuit breakers that would put the brakes on free-falling individual
stocks when a circuit breaker on one of the major exchanges is
triggered.

NYSE curbs as template?
The
NYSE introduced a trading curb on its floor May 6 that forced most
trading to all-electronic exchanges such as the Nasdaq Stock Market and
NYSE Euronext’s electronic Arca venue, which did not have similar curbs
– a lack of uniformity seen as having worsened the wider market’s drop.

Now, regulators and the industry appear to be eyeing something like NYSE’s system as a template for the whole marketplace.

Trading
speeds and volumes have ramped up over the last decade as regulators
encouraged the proliferation of new trading venues to challenge the
NYSE’s and Nasdaq’s near monopoly.

About five years ago, the
NYSE executed more than 80 percent of trading in its listed securities.
Now, parent company NYSE Euronext executes about 34 percent.

The
SEC recently raised some red flags about the fragmented marketplace,
proposing rules late last year that would shine more light on so-called
dark pools, which are alternative trading venues that keep investors’
intentions anonymous.

With their jobs at risk in a protracted dispute with Brussels over state aid, workers in the union that played a crucial role in the struggle for democracy feel angry and betrayed by their own government and the EU.

“The EU says it must protect European jobs – so why does it want us to close and to order ships from Asia?” said Roman Galezewski, head of the Solidarity branch at the sprawling Gdansk shipyard.

“There is a real will to fight here now… Shipyard workers here fought against tanks in the 1970s with their bare hands. You can’t mess with people like this.”

The workers now number about 3,000, down from 12,000 in Solidarity’s heyday in the 1980s, and represent a fraction of the city’s workforce. But their symbolic force is considerable.

Lech Walesa, the shipyard electrician who led Solidarity to victory in 1989 and became Poland’s first post-communist president in 1990, recently appealed to the EU to save the Gdansk shipyard, saying it was part of Europe’s heritage.

“Our people are furious with Brussels for subsidising some industries while forbidding aid to us,” said Galezewski.

Strife has long dogged Poland’s shipyards. The state aid that triggered the EU probes was the result of inefficient work practices at the yards, which have not made a profit on a single ship since 2004.

ISD Polska, a unit of Ukrainian group Donbass, bought a majority stake in the Gdansk shipyard in 2007, saving it from bankruptcy, but is now awaiting a European Commission ruling on whether more than €157m of aid paid to the yard over many years was illegal and must be repaid. Solidarity says the aid totalled only €6.7m.

Repaying aid
The Commission has already ordered the state-owned shipyards of nearby Gdynia and of Szczecin to repay billions of euros of aid. Those yards are now in the process of being sold to another investor, United International Trust.

Polish officials have suggested United International Trust represents a Gulf-based buyer, but neither the Trust nor ISD were available for comment on their plans for the Polish yards.

Politically, the timing is awkward. Poland’s once-booming economy is slowing fast and Poles are also keenly aware that western European governments have been spending billions of euros of taxpayers’ money to support banks and carmakers as the Commission stands by.

Warsaw has offered one-off pay cheques for shipyard workers who lose their jobs in the restructuring of firms and has also offered retraining to some. Solidarity, opposing any job losses, says employers should instead be recruiting more people to safeguard the future of shipbuilding. Galezewski was also dismissive of plans to retrain workers for an increasingly service-oriented economy.

“Which sector is now able to employ more people in such a crisis?” he said. “We will just spend money on creating new jobless. An unemployed welder or unemployed barber, it is the same thing.”

Mohammed Aref Hassani, acting director of Invest in Morocco, said a more likely figure was $3-3.5 billion, although it was hard to give a precise estimate.

“It’s the direct impact of the delay or even cancellation of certain projects due to the crisis, but that does not mean there won’t be a comeback in 2009,” Hassani said in an interview.

Companies such as auto part makers that have shifted work to Morocco in recent years and that tightly manage production levels could cut back output or even close some units, he said.

However, he said firms unable to finance growth at home because of poor access to credit would be drawn to countries like Morocco where banks are robust and operating costs low.

“Companies will look to countries with a strong investment climate, attractive financing, a competitive workforce and logistics. We in Morocco are in this situation,” Hassani said.

SKILLS BOOST

The north African kingdom is betting on investment-friendly reforms, road, port and rail projects and tax cuts to boost job creation and lift swathes of the country out of poverty.

Business parks in the cities of Tangier, Casablanca and Rabat are aimed at turning Morocco into a low-cost manufacturing and services platform on Europe’s southern doorstep.

The government has beefed up skills and training to provide more engineers and Hassani said it now planned to create training institutes dedicated to target industries such as automobiles and aerospace.

Companies would also be helped to reimburse the cost of training their employees, he said.

The government is aiming for 10 million tourists by 2010, up from 7.4 million last year, and developers are building a chain of resorts along Morocco’s its coastline under a “Plan Azur”.

Hassani said that, despite recessions in Europe, there was nothing to suggest a wave of cancellations of tourism projects.

“We will continue to develop our tourist sites and we are still seeing a lot of interest from European, American and Asian groups,” he said.

He expected Prime Minister Abbas el Fassi to approve several new hotel projects shortly. Plan Azur projects were already being modified and adjusted before the crisis struck, he said, which was natural due to their complexity.

He said France’s Societe du Louvre, which is owned by U.S. financial firm Starwood Capital, planned to build a chain of up to 20 mid-range hotels in Morocco between 2010 and 2014.

“Project delays occur even in periods of normal growth. Despite the real impact of the crisis, interest is still there today,” said Hassani.

Foreign accents fill the lunchtime air at a beachfront restaurant while diners clad in Ralph Lauren and Prada sunglasses knock back succulent tiger prawns and chilled white wine.

It is the scene the Seychelles archipelago has built its image on. But for locals, who had been enjoying one of Africa’s highest standards of living, the good life is on ice.

The Indian Ocean islands are in the midst of a severe economic crisis, prompted by the global financial downturn on top of years of unsustainable borrowing.

A raft of painful economic reforms demanded by the International Monetary Fund in return for emergency funding have seen the local rupee lose half its value against the dollar since floating in November. That has pushed inflation beyond 60 percent — the highest rate in Africa after Zimbabwe.

“It was like a fever, everything just shot up at once,” lamented a local taxi driver, David, who didn’t give his surname, saying he feared authorities would revoke his licence.

“Fuel, food and cooking gas, they’ve all at least doubled in the last three months. The shock has been too big,” he said.

The timing hurts too.

This year, the Seychelles economy is predicted to shrink by at least 0.5 percent according to the country’s central bank, compared to 3.1 percent growth in 2008.

Tourism revenues are expected to fall by 10 percent — roughly $32 million — over the next year. A deepening sense of uncertainty prevails across the visitor-dependent archipelago.

“I just have no confidence,” said an anxious Captain Philip Hoareau, as his catamaran shuttle service made a steady 26 knots en route to Praslin island’s turquoise bays.

“If tourism slumps, then the economy will collapse. We do not earn much from anything else.”

EXCESSIVE SPENDING HABIT

For more than 20 years, the Seychelles has consistently over-run its budgets, borrowing heavily from foreign governments and commercial creditors to invest in health, education and housing, as well as tourism and fisheries.

After defaulting on a payment towards a $230 million sovereign bond last October, the country accepts it had been borrowing beyond its means. President James Michel, who intends to stand for re-election in 2011, told Reuters there was now a need to “tailor our clothes in accordance to the cloth we have”.

The government has already moved to cut spending, downsizing the public sector, scrapping subsidies and freezing pending investment projects while increasing its tax revenues.

With external debt topping $800 million, Michel is calling for half of it to be cancelled.

“The global credit crunch may not have been the direct cause of the Seychelles’ crisis, but it has certainly been a catalyst,” wrote Christopher Eads, of the Economist Intelligence Unit (EIU), in a December 2008 country report.

PAINFUL PATH

The question now is: how quickly will the economy recover?

The Seychelles is not the first small, fragile economy exposed to external shocks to extend itself too far.

In recent years, Belize, Jamaica and Cape Verde have all implemented austerity reforms to rein in public debt.

But with the current world economic climate shattering consumer confidence, observers say much will depend on how the recession in Europe impacts tourism.

“The financial crisis means the Seychelles is unlikely to recover as quickly as hoped,” said Richard Segal of the Africa-focused investment bank, UBA Capital.

The devaluation of the currency would soften the blow as the price of travel to the Seychelles decreases.

“The early signs are good, but the reforms have to be carried through for a year at least,” said Segal. “We’ve seen it before where reforms are encouraging, but after six months sentiment is high and they relax.”

If the absence of a lunchtime queue at the once popular Andrew’s Hotdog and Burger van is an indicator of consumer sentiment, then the Seychellois are bracing for a bumpy road.

“These reforms are necessary but should have been done in small doses over time,” said office-worker Noella Frederick, standing alone at the counter. “Let us get on with these reforms and be done with them.”

France’s Socialist party launched a no confidence motion against the government’s economic policies on Tuesday, looking to pile pressure on President Nicolas Sarkozy ahead of a national strike later this week.

Sarkozy’s allies have a sizeable parliamentary majority and the Socialist motion has virtually no chance of success, but it will enable opposition forces to shine the spotlight on the government’s record at a time of marked economic slowdown.

Unions will pick up the baton on Thursday with nationwide protests likely to bring hundreds of thousands of strikers onto the streets to demand more action to protect jobs and wages.

“The economic, social and political situation justifies a censure motion and the removal of the government,” said senior Socialist lawmaker, Arnaud Montebourg.

“Faced by the threat of a heart attack, France needs real electro-shock treatment,” he told Le Parisien daily on Tuesday.

Sarkozy last year unveiled a 26-billion-euro ($34 billion) stimulus plan that focused heavily on encouraging investment. Unions and Socialists say not enough is being done to help the consumer and warn of a backlash if more aid is not provided.

Ministers are clearly concerned about the possibility of social unrest in a country where street protests have regularly built unstoppable momentum, forcing governments into retreat.

Earlier this month, unions staged a wildcat strike at a major Paris commuter station, closing it for most of the day and sending social tensions spiralling higher.

Although France does not face the sort of banking woes that have hobbled countries such as Britain and Ireland, its unemployment rate rose steadily in the second half of 2008, hitting 2.07 million in November, up 8.5 percent on the year.

Sarkozy riled the unions last July when he said “these days, when there is a strike, nobody notices”, but soon afterwards the economy hit turbulence tied to the financial meltdown and labour relations deteriorated.

His ministers are being less provocative ahead of Thursday’s strike, which has the backing of France’s eight main unions and the support of 69 percent of voters, according to opinion polls.

“I’m not shocked that there are going to be rallies. Why is that a surprise? We are in a very difficult situation,” said Labour Minister Brice Hortefeux.

Public transport strikes have been called in 77 of France’s 137 cities on Thursday, including Paris, with stoppages also expected to hit air travel, banks, hospitals, schools, power companies and the magistrature.

“Those who think there is no longer a union movement here are going to see that isn’t the case,” said Bernard Thibault, head of the powerful CGT union.