A Plunge before A Spike

The global oil prices have been on a plunge. That has implications to both producers and consumers of the stuff. As consumers, we are behaving as if, the plummeting will be for ever. But then we have been in such a state before. As I argue in today's Business Daily, the prices may go up as fast as they came down. So let's enjoy the moment while it lasts!

Never Letting Facts Ruin a Good Story: Business Daily Edition

Whenever the Central Bank of Kenya (CBK) published the quarterly Credit Officer Survey, the expectations is that it is meant to inform in totality the dynamics around the banks core asset that credit is. Trust the business media largely, and those that appear to have a hypothesis to prove that the banking industry will do everything to make 'unjustifiably high profit' even if at the expense of dragging the economy to hell.
I can understand if it is a pedestrian publication printed on an A4 paper. But hey, these Mickey Mouse publications have competition from respectable quarters such as the Business Daily.
I know that there is a newspaper to sell, so the trick is: make it as sexy as possible. So the core message that the Business Daily gets from the latest Credit Officer Survey for the period January - December 2014 is that 'Banks defy new loan pricing tool to rake in Sh141 billion profit'.
The instructive words in this angle of pseudo analysis are: defy - meaning refuse to comply with the regulator's requirement; profit - which all other businesses but banks are supposed to make.
It doesn't matter that the same Business Daily indicates that the profit is as a result of fast growth in credit to the real economy, whose rate of growth for the period under discussion is the fastest in the past four years.
It doesn't matter either that the same edition Business Daily has a story to the effect that Kenyan banks have tough lending conditions, an attribute that speaks to the search for stability in the financial system.
Here is a couple of other facts in the Credit Officer Survey that the CBK prominently puts in the foreword, but with the Business Daily ignores:

• One, deposits grew by almost 18 percent from Shs1.98 trillion to Shs2.33 trillion. This means that banks are furthering the inter-mediation mandate effectively.
• Two, the total shareholders' funds grew by 22.5 percent from Shs431 billion to Shs530.09 billion. This, by the way is faster than the 13.47 percent growth in profit for the corresponding period. This means that investors in the banking industry are staking more resources and therefore the profit that is being portrayed as 'super' may end up being modest is one was to wear an objective hat.
• Three, the growth of interest expenses on deposits by 24.03 percent is faster than the growth in interest income that grew by 16.29 percent. This means that the portrayal of banks as profiteering from the misery of depositors is simply a figment of prejudiced imagination.

 But then, these are mere facts. Whom in the Business Daily will let facts ruin a good story? Well, nobody I presume.

The Guy Who Went to the Wrong School

David Ndii argues in an interesting essay in today's Saturday Nation that for a devolved gorvenance system to yield meaningful development, there has to be accountability; and I fully agree.
Jason Lakin argues in a lazily written essay in last weeks issue of The East African that what matters is auditing - in essence a purely mechanical exercise that audits usually are; and I fully disagree.
David's argument is the closest I have seen in independent replication of the thoughts of William Easterly in his 2014 book The Tirany of Experts: Economists, Dictators and the forgotten Rights of the Poor whose thesis I buy.
Jason must surely have gone to the wrong school!

Think Tank? Well, No; may be More Tank than Think!

Kwame Owino  argues in a recent Op-Ed in the Daily Nation that he doesn't think "issuing economic forecast is good and honest professional practice". By this measure, Mr. Owino fails his own test when he goes a head and issues a "forecast" to Business Daily, a sister publication of the Daily Nation.
Mr. Owino is the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), a Nairobi-based Public Policy Think Tank. That is more the reason why (a) his views on the essense economic forecasting and why he and his colleagues at the Think Tank are reluctant to be forthcoming with their projections (b) his eventual commiting to a forecast represent a careless thought process.
I agree with Mr. Owino that economic forecasting is not fortune-telling. But that is all I agree about insofar as his core thesis in the Daily Nation piece is concerned.Any forecast, e.g. the IMF's World Economic Outlook (WEO), is based on a model. The assumptions of such model are clearly specificed and such models are usually subjected to senstivity tests to ensure that they remain credible.
In the case of WEO, the projections are done twice a year - April and Actober; the reason for that is that the assumptions are reviewed and validated. Therefore these models are not an act of magic, and nobody presents them as such.
Closer home, any serious policy is based on the rigour of macro models. I am not sure whether Mr. Owino knows that the Central Bank of Kenya (CBK) deploys a macro model to enable a forecast. The so-called Taylor-rule, which is the basis for coming up with the policy rate (the Central Bank Rate), necessiates that the CBK projects both economic growth and inflation.
Indeed the Taylo-rule is based on the gap between actual GDP growth and potential growth, and actual inflation and the target. I actually wonder whether at IEA-Kenya, there is an understanding that monetary policy is not about actual inflation but inflation expectations - which means that policy is foreward looking and thus necessiates some forecasting.
Even fiscal policy is based on some projection - we may have a discussion as to whether we agree on the forecast, but there has to be one. If at all Mr. Owino knows that the KIPPRA-Treasury macro model is a useful tool is not known to me; I however have my doubts whether if he is aware of such model, he knows the underlying mechanics.
On this account alone, I would have my doubts on the ability to rigorously critique any outlook based on some well thought out model. If  such abililty was evident, then statements like "if an individual firm had a model or one professional capable of knowing about the performance of Kenya’s economy for three years in advance, that knowledge would be so valuable for profit generation that it would not be provided casually" will have no room in the argument.
Surely Mr. Owino should know that the further the period from the time of projection, the higher the likelihood of the outlook departing from the actual outcome. That is why, the IMF - while giving a five year outlook  in the WEO is reviewed twice a year.
Then there is the "small" matter of intellectual honesty. The true measure of such honesty is the consistency in the thought process. Mr. Owino makes one interesting assertion that :

"For instance, the IEA-Kenya has, in the last four days, received nearly a half-dozen requests for a formal declaration of interest rates, GDP growth rates and the exchange rate for Kenya and regional countries for 2015, from media houses and other professionals. Most of these very polite and diligent enquirers were surprised that while we think we are very capable and understand selected countries and Kenya very well, we do not think that issuing economic forecasts is good and honest professional practice."

I think that the capability that Mr. Owino is talking about is all in his mind. As an economist, I will simply ask him one question if he has to demonstrate such capacity: where is the model?

But then, Mr. Owino is not done. He asserts thus:

"What the gush of business and economic forecasts tells you is that professional economists and business advisors have forgotten the three golden words that are the mark of wisdom: I don't know."

So where does Mr. Owino get the number 4% - 5% outlook that he gives the Business Daily as his forecast for 2015 if his answer to any querry on economic forecast is: "I don't know"?

I think I know where; it is through guess work! And Mr. Owino signs off the Daily Nation  Op-Ed by the bold indication that he is the CEO of the IEA-Kenya, a Think Tank!
Such comedy makes me agree with Prof. Jagdish Bhagwati - one of my favourite economists - when he characterises such entities as being more about Tank than Think.

Just Another Vocation for Ndemo

Bitange Ndemo's piece on inclusive growth indicates that GDP "has not been a good measure of inclusivity". I didn't know that GDP had such a role in the first place; even a first year economcs student can tell you it doesn't. But trust Bitange who, in his other vocation of pseudo economic punditry, is keen to sound profound. I take no risk in the bet that Bitange has not read Thomas Piketty's Capital in the Twenty-First Century (I'd be happy to lend a copy). Otherwise he could have been persuaded to take a different approach - underpinned by the sources and consequences of inequality. So here we are celebrating the dubious Forbes Magazine's ranking of Africa's richest and then we turn the corner and cry about lack of inclusivity in ther GDP numbers!

Financial Illiteracy: History Repeating Itself

They say that history often repeats itself. I didn't imagine it will be that soon at the Daily Nation business desk. It consistently gets one story wrong while her sister, the Business Daily, initially gets it right but subsequently gets recruited into the bad habit of being sensational. Recall a little while back when I pointed out that whenever a bank borrows - either locally (bond issuance) or internationally (line of credit from an international lender), it is an indication that it has adequate capital to leverage and expand its balance sheet.
On the other hand though, whenever a bank seeks to increase its capital - either through a rights issue or by listing at the stock mart, it is seeking to growth its balance sheet through increasing a liability called capital that will translate into an equivalent asset called credit (loan book); it could also be a move towards meeting some regulatory requirement.
These two actions on the liability side (one, borrowing, and the other, injecting capital) have the the same effect when it comes to the effect on the balance sheet - for they lead to growth. However, they mean different things when one is looking at what they mean with regards to the regulatory requirements. When one is able to borrow, it is an indication that one has met the requisite regulatory  requirement with regard to capital, and not the opposite as the Daily Nation and Business Daily will want you to believe - that one is borrowing to meet capital requirements! Nothing, at least to me, reflects financial  illiteracy than such lazy thought process.
So when the Daily Nation fronts such argument, as it does in today's edition, and the Business Daily gives the same story but taking a more 'reporting' line before they inject some "analysis" about how such move entails "injecting more resources" is linked to capital adequacy, you'd better go by the story of neither.
But I know where the Daily Nation and Business Daily are coming from: no story is juicier that pretending to analyse that a bank is in trouble and so is rushing for a rescue. As I have indicated before, it is akin to seeing a thief behind every bush!   

Correlation or Causation?

This is interesting. Agriculture is doing badly - low international prices for produce, low productivity, bad weather, etc; but listed stocks in this market segment are doing just fine. Why? Somebody is looking at the land potential - not for agriculture or agri-business; a speculator; a real estate speculator. This story in today's the Business Daily motivates the question: is this a case of correlation or causation? Well, seems to me that it is the the latter!