Tuesday, 10 March 2015
Oil Prices: The Inevitable Bounce Back?
My recent essay on oil prices relied largely on the economics, but insinuated - if only indirectly through the financial markets' trading of oil-linked instruments - on the role of geopolitics. The Financial Times has an interesting piece that solely argues the geopolitics case, highlighting the dominant role of Saudi Arabia in this 'saga'. We however converge on the fact the the oil prices could be on the rise. I am already seeing evidence to that effect (see Figure).
Monday, 2 March 2015
Pseudo Analysis Part 2: Banks, Idle Capital and the Game of Calvinball
This is my favourite, for it demonstrates the need for financial literacy for those seeking to do reporting that has a technical bearing. The Business Daily tells all that what to hear that banks are now drowning in capital that they don't know how and where to deploy.
This is a good one coming from a publication that devotes lots of staff resources giving an impression that banks have struggled to meet the regulator's capital requirements.
Typically, a sucessful resort to capital markets either to issue a note or seek additional equity is a mark of financial health given the fact that both forms of resource mobilisation are unsecured; therefore the capital markets regulator must be assured of the financial soundness of the issuer.
But as I have pointed out before, the Business Daily reporting has no time for such niceties - any resort to the market is a signal of desperation, they often implicitly argue. The story now suddenly switches to one where bans are portrayed stranded with idle capital.
This is a pefect example of playing a game called Calvinball - the imaginative game where the rules are not known upfront, so they keep changing as the game goes on.
I am really having fun on this subject! Not because somebody is making sense, but because the Business Daily is falling into the typical media temptation of choosing what to see in any situation.
This is a good one coming from a publication that devotes lots of staff resources giving an impression that banks have struggled to meet the regulator's capital requirements.
Typically, a sucessful resort to capital markets either to issue a note or seek additional equity is a mark of financial health given the fact that both forms of resource mobilisation are unsecured; therefore the capital markets regulator must be assured of the financial soundness of the issuer.
But as I have pointed out before, the Business Daily reporting has no time for such niceties - any resort to the market is a signal of desperation, they often implicitly argue. The story now suddenly switches to one where bans are portrayed stranded with idle capital.
This is a pefect example of playing a game called Calvinball - the imaginative game where the rules are not known upfront, so they keep changing as the game goes on.
I am really having fun on this subject! Not because somebody is making sense, but because the Business Daily is falling into the typical media temptation of choosing what to see in any situation.
Pseudo Analysis Part 1: Uchumi and How the Dog Ate My Homework!
I expect the Business Daily to be a bit more curious than to take what it is told. Am I expecting too much? Well, may be yes.
Take the case of a recent story in its pages regarding Uchumi, the struggling supermarket chain. In that story, all of Uchumi's problems are occaioned by expensive bank borrowing. That will be okay of it were true.
I suspect that even the Business Daily knows that that is not true; but I guess the argument will be that the "ingenuous" boss said so - after-all with a honorary doctorate in "turn-around strategy", he must be knowing stuff!
Some sense of history may help here. When Uchumi was literally run down by some individuals - some of whom the gullible media celebrates as serious entrepreneurs - the government and banks were forced to take painful decisions to ensure that the company does not go under.
A few years later, its CEO tells the media that Uchumi's main problem is that its rights issue was delayed 15 months. Over that time, it had to go for expensive working capital from banks.
One could expect the Business Daily to ask a simple question: why was the rights issue delayed? But again I expect too much! Why ask while the boss has already said that - like the kid whose account for not completing home assignment was the "the dog ate my home work - it is the banks.
The delay in the rights issue most likely had to do with financial status being in a bad state. But still Business Daily and the like wants banks to lend to this company at competitive terms.
The last I checked, Uchumi was still listed in the Nairobi Securities Exchange, meaning that it is legally obliged to publish its financial statements and have its Annual Report at the mart. One needs to have even a casual look at the financial statements to see that cost of finance is not the core problem and therefore could not have been the cause of its woes. I expect that one curious analyst to be the Business Daily! But, again I expect too much because in so doing the sexy caption - 'Uchumi loss reveals the price of expensive bank loans' - could be ruined by any analysis.
Meanwhile, nobody is questioning Uchumi's strategy! Great stuff, isn't it?
Take the case of a recent story in its pages regarding Uchumi, the struggling supermarket chain. In that story, all of Uchumi's problems are occaioned by expensive bank borrowing. That will be okay of it were true.
I suspect that even the Business Daily knows that that is not true; but I guess the argument will be that the "ingenuous" boss said so - after-all with a honorary doctorate in "turn-around strategy", he must be knowing stuff!
Some sense of history may help here. When Uchumi was literally run down by some individuals - some of whom the gullible media celebrates as serious entrepreneurs - the government and banks were forced to take painful decisions to ensure that the company does not go under.
A few years later, its CEO tells the media that Uchumi's main problem is that its rights issue was delayed 15 months. Over that time, it had to go for expensive working capital from banks.
One could expect the Business Daily to ask a simple question: why was the rights issue delayed? But again I expect too much! Why ask while the boss has already said that - like the kid whose account for not completing home assignment was the "the dog ate my home work - it is the banks.
The delay in the rights issue most likely had to do with financial status being in a bad state. But still Business Daily and the like wants banks to lend to this company at competitive terms.
The last I checked, Uchumi was still listed in the Nairobi Securities Exchange, meaning that it is legally obliged to publish its financial statements and have its Annual Report at the mart. One needs to have even a casual look at the financial statements to see that cost of finance is not the core problem and therefore could not have been the cause of its woes. I expect that one curious analyst to be the Business Daily! But, again I expect too much because in so doing the sexy caption - 'Uchumi loss reveals the price of expensive bank loans' - could be ruined by any analysis.
Meanwhile, nobody is questioning Uchumi's strategy! Great stuff, isn't it?
Tuesday, 24 February 2015
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!
Tuesday, 3 February 2015
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:
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.
Friday, 16 January 2015
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!
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!
Monday, 5 January 2015
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 :
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.
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"?
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.
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