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Capital Market Reforms Needed To Boost Colombia’s Growth

MD Staff

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A new World Economic Forum white paper highlights the key obstacles that prevent the further development of deep and liquid capital markets in Colombia, and defines measures to help overcome these challenges and boost economic growth.

Recent gains in Colombia’s capital market development have come under significant pressure in the new macroeconomic environment. The size of the Colombian equity market as a share of GDP has declined by almost half in two years and liquidity in the local equity market has declined over time, placing Colombia’s turnover ratio among the lowest in emerging markets. Colombia has only 74 companies listed on the stock exchange and has a low free float at less than 30%.

“Colombia’s capital markets have developed significantly over the past decade, and we believe there remains great potential for further development,” said Michael Drexler, Head of Investors Industries, World Economic Forum. “However, given today’s challenging macroeconomic environment, the job is often easier said than done. This white paper reflects the views of all key stakeholder groups on how Colombia can further develop its equity market, helping create both the necessary conditions for sustained economic growth as well as providing a roadmap on how to unlock new pools of investment capital to finance economic development imperatives, such as the next generation of infrastructure.”

The white paper identifies four key areas of action – encouraging greater issuer participation, improving the investor value proposition, enhancing market efficiency and transparency, and attracting global interest – as key steps that must be taken to develop Colombia’s capital markets in the near term. Within these areas, the report specifically points to several areas that Colombia must tackle in the short term to develop its equity market:

Creating additional investment opportunities by encouraging increased issuer participation: the report points to the limited number of investment opportunities as a primary barrier to deepening and developing the Colombian equity market. As of December 2015, Colombia has only 74 companies listed on its stock exchange, which is dominated by only a few companies, including Ecopetrol, the state-run oil company that accounts for nearly 45% of the total market capitalization.Furthermore, compared to peer economies, the Colombian equity market has a very low level of free float, at only 29% as of 2014, which can threaten the market’s liquidity and discourage investor participation. In contrast, its closest peers in Latin America are ahead – Mexico has 159, Chile 230, and Peru 275. The average free float at the end of 2014 was 39% in Chile, Peru 43%, Brazil 53%, and Mexico 59%. Promoting greater issuer education, addressing the burden and cost of issuance versus bank funding, and improving corporate governance were the areas identified as short-term priorities to reverse this recent decline.

Broadening the investor base by improving the investor value proposition: Tax regimes that align with financial development objectives, robust regulatory and legal frameworks that protect investors, strong corporate governance standards, and regulatory changes that encourage greater risk-taking were identified to help attract investors across all segments. While Colombia has made significant progress in developing a local investor base – especially pension funds – the equity market could benefit from a larger and broader investment base and specifically, from additional shorter-term investors with more speculative strategy. Insurers, mutual funds, hedge funds and family offices were identified as key groups to lead to a more liquid market with a wider range of investors and a broader suite of professionally managed capital market products.

Improving market access and efficiency: Despite significant development over the past decade, some operational and regulatory challenges still constrain access and efficiency in the Colombian equity market. For the market to continue growing in the future, Colombia’s risk culture needs to evolve, recognizing that risk is inherent in capital market activities. Therefore, all market stakeholders need to strengthen risk management practices rather than create restrictions that can stymie further development. Further developing repurchase agreements, securities lending and derivative markets, increasing transparency and flexibility in the foreign exchange market, and encouraging access for foreign investors were the key areas identified that needed to be addressed.

Latin America’s capital markets grew rapidly in recent years. The total stock market capitalization more than quadrupled in the decade before 2012, with Brazil, Mexico, Chile and Colombia representing the largest markets for equities. Similarly, bond markets have grown steadily across the region, with government bonds making up the majority of the market. However, since the end of the commodities boom in 2012, all markets have faced headwinds, and Colombia has fallen behind its emerging market peers in several areas. Given the complexity of capital market development, this white paper reflects the views of multiple stakeholders that policies must continue to be put in place now that will allow capital markets to flourish far into the future. Additional measures could improve Colombia’s long-term economic growth prospects, particularly if key issues, such as the underdevelopment of the country’s infrastructure, are addressed.

This white paper also defines a set of recommendations in the context of further development of the corporate bond market in Indonesia.

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Asia-Pacific Business Environment Improves 7.3%

MD Staff

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Doing business in APEC member economies continues to get easier, according to a new report, helping to open up trade and growth opportunities in the Asia-Pacific against the backdrop of rising uncertainty.

An analysis of business conditions in APEC economies by the APEC Policy Support Unit reveals a 7.3 per cent improvement over the last two years, boosted by their ambitious ease of doing business initiative being taken forward by economic officials in Port Moresby.

The initiative is focused on five priority areas: 1) Getting credit; 2) starting a business; 3) dealing with construction permits; 4) enforcing contracts; and 5) trading across borders.

“APEC region officials’ efforts to raise the quality of their regulations are steadily making it cheaper and more efficient to do business in the Asia-Pacific,” explained Carlos Kuriyama, a Senior Analyst with the APEC Policy Support Unit and report co-author.

“Getting credit is the area where APEC has had the biggest business environment breakthrough, driven by stronger legal rights and credit information systems,” Kuriyama noted. “The average availability of credit information in the region increased from about 74 per cent to over 77 per cent of adults.”

Starting a new business meanwhile improved 11.8 per cent, taking nearly three fewer days and with all but one APEC economy eliminating minimum capital requirements.

Other measures employed in select instances which contributed to this trend included halting the need for a company seal to register a business as well as the introduction of an e-platform to expedite business permit applications.

Progress in trading across borders was marked by a 6.5 per cent reduction in the average time it takes businesses in APEC economies to export, from 70 to just over 65 hours. Dealing with construction permits took one less day to obtain.

“The move in the APEC region towards smarter, more modernized regulations is timely as digital development creates new avenues for businesses to engage in cross-border trade, including small and micro enterprises with limited resources,” said Kuriyama.

APEC economies are targeting a 10 per cent improvement in the region’s business environment by the end of 2019, based on 2015 levels in the five APEC Ease of Doing Business initiative priority areas. The initiative is inspired by the World Bank’s Doing Business program.

The exchange of good regulatory practices and implementation guidance, drawing upon experiences and recommendations garnered from public-private sector engagement in APEC, is at the center of the initiative’s work.

“Collaboration across APEC economies to improve their ease of doing business has achieved good results so far,” said Kuriyama. “The area with the most room for improvement is in enforcing contracts, with gains mostly stemming from higher quality of judicial processes.”

“Sustained reform and capacity building activities in APEC that focus on qualitative aspects of regulation like sustainability are critical to ensuring the momentum of business development and trade in the region at this challenging juncture,” Kuriyama concluded.

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Strong wage policies are key to promote inclusive growth in India

MD Staff

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While India’s economy in the past two decades has seen an annual average GDP rate of 7 % — low pay and inequality persist according to the India Wage Report: Wage policies for decent work and inclusive growth , published by the International Labour Organization.

The NSSO estimates also indicate that the real average daily wage has doubled between 1993—94 and 2011—12. Wages have seen a faster growth for the most vulnerable categories including workers in rural areas, informal employment, casual workers, female workers and low-paid occupations. Nevertheless, there remain huge disparities.

As per the Employment and Unemployment Survey (EUS) of National Sample Survey Office (NSSO), in 2011–12, the average wage in India was about 247 rupees (INR) per day, and the average wage of casual workers was an estimated INR 143 per day. Only a limited number of regular/salaried workers, mostly in the urban areas, and the highly-skilled professionals earned higher average wages.

Casual rural female worker earns the least, pervasive inequality

India’s economic growth has resulted in fall in poverty, moderate change in employment patterns with a growing proportion of workers in services and industry. However, a substantial proportion of workers (47%), continue to be employed in the agricultural sector. The economy still faces informality and segmentation.  More than 51 % of the total employed in India, as per 2011—12 data, were self-employed and 62 % of wage earners are employed as casual workers. While the organized sector has seen a rise in employment, many jobs in this sector too have been of casual or informal nature.

Though the overall wage inequality in India has declined somewhat since 2004—05, it continues to remain high. The decline in overall wage inequality has been largely due to the doubling of the wages of casual workers between 1993-94 and 2011-12. Nonetheless, the sharp increase in wage inequality for regular workers between 1993-94 and 2004-05 has stabilized in 2011-12.

The gender wage gap however is still steep, as per international standards, despite having declined from 48% in 1993—94 to 34% in 2011—12. The wage gap exists for all kind of workers – regular and casual, urban and rural. The women employed as casual workers in the rural economy earn the lowest in India, which is 22% of what urban regular male workers earn.

Although, the average labour productivity (as measured by the GDP per worker has increased), the labour share, which is the proportion of national income that goes into labour compensation has declined from 38.5% in 1981 to 35.4% in 2013.

Wage policies for decent work and inclusive growth

Though India was one of the first countries to introduce minimum wages through the Minimum Wages Act in 1948, there exist challenges in providing a universal wage floor for all workers. The minimum wage system in India is quite complex. The minimum wages are set by state governments for employees in selected ‘scheduled’ employment and this has led to 1709 different rates across the country. As the coverage is not complete these rates are applicable for an estimated of 66 % of wage workers.

A national minimum wage floor was introduced in the 1990s which has progressively increased to INR 176 per day in 2017 but this wage floor is not legally binding, in spite of a recurrent discussion since the 1970s. In 2009—10, nearly 15 % of salaried workers and 41% of casual workers earned less than this indicative national minimum wage. About 62 million workers are still paid less than the indicative national minimum wage with the rate of low pay being higher for women than for men.

The report calls for several recommendations to improve the current minimum wage system. Some of these are – extending legal coverage to all workers in an employment relationship, ensuring full consultation with social partners on minimum wage systems, undertaking regular evidence-based adjustments, progressively consolidating and simplifying minimum wage structures, and taking stronger measures to ensure a more effective application of minimum wage law. It also calls for collection of statistical data on a timely and regular basis.

The report also recommends other complementary actions to comprehensively address how to achieve decent work and inclusive growth. These include, fostering accumulation of skills to boost labour productivity and growth for sustainable enterprises, promoting equal pay for work of equal value, formalizing the informal economy and strengthening social protection for workers.

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Turkey’s financial crisis raises questions about China’s debt-driven development model

Dr. James M. Dorsey

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Financial injections by Qatar and possibly China may resolve Turkey’s immediate economic crisis, aggravated by a politics-driven trade war with the United States, but are unlikely to resolve the country’s structural problems, fuelled by President Recep Tayyip Erdogan’s counterintuitive interest rate theories.

The latest crisis in Turkey’s boom-bust economy raises questions about a development model in which countries like China and Turkey witness moves towards populist rule of one man who encourages massive borrowing to drive economic growth.

It’s a model minus the one-man rule that could be repeated in Pakistan as newly sworn-in prime minister Imran Khan, confronted with a financial crisis, decides whether to turn to the International Monetary Fund (IMF) or rely on China and Saudi Arabia for relief.

Pakistan, like Turkey, has over the years frequently knocked on the IMF’s doors, failing to have turned crisis into an opportunity for sustained restructuring and reform of the economy. Pakistan could in the next weeks be turning to the IMF for the 13th time, Turkey, another serial returnee, has been there 18 times.

In Turkey and China, the debt-driven approach sparked remarkable economic growth with living standards being significantly boosted and huge numbers of people being lifted out of poverty. Yet, both countries with Turkey more exposed, given its greater vulnerability to the swings and sensitivities of international financial markets, are witnessing the limitations of the approach.

So are, countries along China’s Belt and Road, including Pakistan, that leaped head over shoulder into the funding opportunities made available to them and now see themselves locked into debt traps that in the case of Sri Lanka and Djibouti have forced them to effectively turn over to China control of critical national infrastructure or like Laos that have become almost wholly dependent on China because it owns the bulk of their unsustainable debt.

The fact that China may be more prepared to deal with the downside of debt-driven development does little to make its model sustainable or for that matter one that other countries would want to emulate unabridged and has sent some like Malaysia and Myanmar scrambling to resolve or avert an economic crisis.

Malaysian Prime Minister Mahathir Mohamad is in China after suspending US$20 billion worth of Beijing-linked infrastructure contracts, including a high-speed rail line to Singapore, concluded by his predecessor, Najib Razak, who is fighting corruption charges.

Mr. Mahathir won elections in May on a campaign that asserted that Mr. Razak had ceded sovereignty to China by agreeing to Chinese investments that failed to benefit the country and threaten to drown it in debt.

Myanmar is negotiating a significant scaling back of a Chinese-funded port project on the Bay of Bengal from one that would cost US$ 7.3 billion to a more modest development that would cost US$1.3 billion in a bid to avoid shouldering an unsustainable debt.

Debt-driven growth could also prove to be a double-edged sword for China itself even if it is far less dependent than others on imports, does not run a chronic trade deficit, and doesn’t have to borrow heavily in dollars.

With more than half the increase in global debt over the past decade having been issued as domestic loans in China, China’s risk, said Ruchir Sharma, Morgan Stanley’s Chief Global Strategist and head of Emerging Markets Equity, is capital fleeing to benefit from higher interest rates abroad.

“Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further,” Mr. Sharma said referring to the US Federal Reserve.

Mr. Erdogan has charged that the United States abetted by traitors and foreigners are waging economic warfare against Turkey, using a strong dollar as ”the bullets, cannonballs and missiles.”

Rejecting economic theory and wisdom, Mr. Erdogan has sought for years to fight an alleged ‘interest rate lobby’ that includes an ever-expanding number of financiers and foreign powers seeking to drive Turkish interest rates artificially high to damage the economy by insisting that low interest rates and borrowing costs would contain price hikes.

In doing so, he is harking back to an approach that was popular in Latin America in the 1960s and 1970s that may not be wholly wrong but similarly may also not be universally applicable.

The European Bank for Reconstruction and Development (EBRD) warned late last year that Turkey’s “gross external financing needs to cover the current account deficit and external debt repayments due within a year are estimated at around 25 per cent of GDP in 2017, leaving the country exposed to global liquidity conditions.”

With two international credit rating agencies reducing Turkish debt to junk status in the wake of Turkey’s economically fought disputes with the United States, the government risks its access to foreign credits being curtailed, which could force it to extract more money from ordinary Turks through increased taxes. That in turn would raise the spectre of recession.

“Turkey’s troubles are homegrown, and the economic war against it is a figment of Mr. Erdogan’s conspiratorial imagination. But he does have a point about the impact of a surging dollar, which has a long history of inflicting damage on developing nations,” Mr. Sharma said.

Nevertheless, as The Wall Street Journal concluded, the vulnerability of Turkey’s debt-driven growth was such that it only took two tweets by US President Donald J. Trump announcing sanctions against two Turkish ministers and the doubling of some tariffs to accelerate the Turkish lira’s tailspin.

Mr. Erdogan may not immediately draw the same conclusion, but it is certainly one that is likely to serve as a cautionary note for countries that see debt, whether domestic or associated with China’s infrastructure-driven Belt and Road initiative, as a main driver of growth.

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