Last week, I read two interesting reports. The first is how UK government plans to solve its financial and economic woes. It comes up with an unprecedented insurance plan to underwrite mortgage-backed debt and toxic assets.
The UK Treasury will also increase its stake in Royal Bank of Scotland Group Plc as it converts the 5 billion pounds ($7.4 billion) of preferred shares it bought last year to ordinary stock. The government will extend a Bank of England program to inject money into the financial system.
The new measures would add at least 100 billion pounds ($149 billion) to the 250 billion pounds committed by Prime Minister Gordon Brown in October to underwrite a financial system choked with bad debt and reeling under the first recession in two decades. They increase the government’s grip on consumer and corporate banking and expose taxpayers to hundreds of billions in losses.
This is tantamount to a slow process of nationalization. The insurance schemes help, but they deal with the symptoms rather than the causes of this crisis.
Moreover, the UK government will authorize the Bank of England to set up a 50 billion-pound asset-purchase program funded through the issue of Treasury bills. Starting Feb. 2, the central bank will buy assets including corporate bonds, commercial paper and syndicated loans.
Secondly, foreign direct investment in developing nations will drop by $180 billion, or 31 percent, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank. It is estimated that foreign direct investment in developing countries will shrink to $400 billion this year from an estimated $580 billion in 2008 and $500 billion in 2007.
Foreign direct investment fell an estimated 10 percent in the developing world in 2008 and will cool further this year. FDI, which typically involves spending on plant and machinery or the purchase of a controlling interest, accounted for 38 percent of inflows into emerging markets in recent years, compared with 10 percent for investment by funds and 54 percent for loans.
Rio, the third-largest mining company, this month postponed a $2.15 billion expansion of an iron-ore mine in Brazil. Honda, Japan’s No. 2 automaker, delayed construction of a $100 million factory in Argentina and has shelved expansion plans in Turkey and India. Hitachi Construction Machinery Co., the world’s largest maker of giant excavators, froze a $1 billion plan to expand production in China and other emerging markets.
Investment in China, the largest developing economy, fell 5.7 percent from a year earlier to $5.98 billion in December, sliding for a third straight month.
Net flows to Brazil, the second-biggest, slid 14 percent to $2.18 billion in November and the country’s central bank last month cut its 2009 estimate for foreign direct investment to $30 billion from $33 billion.
Some $ 67 billion was pulled out of emerging-market equities and bonds funds in 2008, after net inflows of $62 billion the previous year. Moreover, government-led bailouts of finance companies in the U.S. and Europe are forcing lenders there to pull funds back from emerging markets.
Royal bank of Scotland, the biggest government- controlled bank in the U.K., sold its $2.3 billion stake in Bank of China Ltd. last week to replenish capital and Zurich-based UBS AG raised some $900 million by selling shares in the Chinese lender. Bank of America Corp., the largest U.S. lender by assets, this month sold part of its stake in China Construction Bank Corp. for $2.8 billion.
The flow of money and the cross-border flows will slow. The world’s economic output will decline this year for the first time since World War II.
By Chodechai Suwanaporn
Source: Fiscal Policy Office / www.fpo.go.th