Sunday, February 8, 2015

Will India’s Economic Growth Overtake China’s By 2016?

It may sound like an opening chapter of Gene Roddenberry’s Sino Indian War, but will India’s economic growth eventually overtake China’s by 2016 according to the IMF? 

By: Ringo Bones 

Sorry China, but it is time to step aside. By next year, India could be the world’s fastest-growing large economy. This is the view adopted by a growing number of economists, many of whom think that China’s economy will continue to slow down this year and the next, while India continues to reap the benefits of lower crude oil prices and policy reforms. 

The International Monetary Fund became the latest organization to make the call on Tuesday, January 21, 2015 projecting that India’s economy will grow by 6.5 percent in 2016, faster than China’s predicted 6.3 percent expansion. The IMF said it expects Beijing to tolerate weaker growth as policymakers push through much needed structural reforms. India, meanwhile, will power ahead. “In India… weaker external demand is offset by the boost to the terms of trade from lower crude oil prices and a pickup in industrial and investment activity after policy reforms,” the IMF said in its report. 

Earlier in January, the World Bank made a similar prediction – although its economists think India will need an additional year to overtake China. The World Bank is also predicting 7 percent growth for both countries in 2016, but a 0.1 percentage point advantage for India the following year. 

Even if it posts a faster growth rate, India will not approach China in terms of raw economic power. India’s economic potential was once mentioned in the same breath as that of China, but the world’s biggest democracy has failed to deliver and India’s economy is roughly a fifth the size of China. Another giant grain of salt, economic predictions of this nature are very difficult to make, especially as they are expected to monitor economic trends that are yet to happen several years into the future. 

TransferWise: Money Transfer Scheme For The Masses?

Given the relatively high-cost of most cross-border / international money transfer schemes, is TransferWise the “cheapest” one out there? 

By: Ringo Bones 

Like they say in those cold medicine adverts – “there is a better way” – and in the world of cross-border / international money transfer schemes, TransferWise is set up to be the better ones out there due to its lower transaction costs in comparison to the competition. But is TransferWise really is the better alternative out there? 

TransferWise is a UK based peer to peer money transfer service launched in January 2011 by Kristo Käärmann and Taavet Hinrikus with headquarters in London. The commission charged is usually 0.5 pecent and money is converted at interbank rate – i.e. also called overnight rate if the term of the loan is overnight – in contrast other companies setting a premium rate. In a peer to peer business model, the money a user is sending from their own country is rather swapped with money someone else in the same country is receiving – i.e. the local currency.  

The creation of TransferWise was inspired by the personal experience of one of its founders – Taavet Hinrikus and Skype’s first employee and financial consultant Kristo Käärmann. As Estonians working between their native country and the UK, they felt the “pain of international money transfer” due to bank charges on the amount they had to convert from Euros to pounds and vice-versa. In the words of Hinrikus, “I was losing five percent of the money each time I moved it. At the same time my co-founder Kristo Käärmann (also from Estonia) was starting to get paid in the UK and was losing a lot of money transferring cash back home to pay for his own mortgage. 

Exorbitant money transfer fees of conventional money transfer service providers inspired the two Estonians to make private arrangements, with Hinrikus – who was paid in Euros – putting this currency directly into Käärmann’s Estonian account so that he could pay his mortgage without having to convert pounds to Euros, while Käärmann returned the favor by putting pounds into Hinrikus’ UK account. This inspired them to develop a “crowd sourced currency exchange service” to offer a cheaper alternative to established institutions. 

From the customer’s point of view, money transfers via TransferWise are not essentially different from conventional money transfers. The customer chooses a recipient and a currency, the money to be transferred is taken from his or her account, the transferring company charges the service and some time later the recipient receives the payment in the chosen currency. 

The difference lies in how TransferWise routes the payment. Instead of transferring the sender’s money directly to the recipient, it is redirected to the recipient of an equivalent transfer going in the opposite direction. Likewise the recipient of the transfer receives a payment not from the sender initiating the transfer, but from the sender of the equivalent transfer. This process avoids costly currency conversion and transfers crossing international borders. 

Friday, February 6, 2015

Perpetual Bonds: An Economically Viable Solution To The Big Fat Greek Debt Crisis?

Even though the last time economists heard of it was probably in their history courses back in college, are perpetual bonds an economically viable solution to the current Greek debt crisis? 

By: Ringo Bones 

When the “radical left-wing” SYRIZA Party won a majority of seats during the January 25, 2015 Greek Legislative Election, the European Union powers-that-be at Brussels got scared given that SYRIZA’s party leader Alexis Tsipras was a well-known left-leaning politician running on an anti austerity platform that got him elected with an overwhelming majority. Several days after the January 26 swearing in of Tsipras as the new Greek Prime Minister, fears of a “Greek Eurozone Exit” died down after the new Greek prime minister decided to cooperate with the EU to pay its debts but in a manner that would lessen the current austerity measures imposed on the country by Brussels, could perpetual bonds provide an economically viable – and a less austere option for Greece to pay off its debts? 

Perpetual bonds are a kind of bond with no maturity date therefore it may be treated as equity, not as debt. Perpetual bonds are not redeemable but pay a steady stream of interest forever. Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars back in 1814 – hence the college history class connection of when might current tenured economist had last heard of such bonds. Some top economists in the United States believe that it would be more efficient for the government to issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates. A perpetual bond is also known as “consol”, “perpetual” or just “perp”. 

Since perpetual bond payments are similar to stock dividend payments – as they both offer some sort of return for an indefinite period of time – it is logical that they would be priced the same way. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some discount rate, which represents the speed at which money loses value over time – partly due to inflation. The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time eventually making this value equal to zero. As such perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price. In exchange for the loans, the issuer agrees to make interest payments to the bond buyer for a specific time period. 

A variety of risks are associated with perpetual bonds. Perhaps the most notable is that a perpetual period is a long time to carry on credit risks. As time passes, bond issuers, including both governments and corporations, can get into financial trouble and even fail. Perpetual bonds may also be subject to “call risk”, which means that the issuer can recall them.