Globalisation and the spread of free market capitalism opened the world to the flow of people, information, money, products and services. Companies expanded their operations across cultures and continents and investment banks followed. Markets trading currencies, government bonds and company shares now transcend borders. Infrastructure projects in Africa are often funded by loans from British investment banks. The same banks have made huge loans to flailing eurozone economies, by purchasing their governments’ bonds. Never before has the banking sector been so heavily exposed to even the slightest ripple – positive or negative – in the global economy. It’s impossible, then, to become a successful investment banker without having knowledge of and a strong interest in international economics news. In this map, we’ve summarised some of the issues we expect to affect the sector the most over the coming year – and how bankers are responding.
Poor corn harvest to hit food security
There are fears that America’s worst drought in 50 years will have a disastrous impact on the poorest people across the world. America is the world’s largest exporter of corn and this summer’s drought led to farmers abandoning corn fields spanning an area larger than Belgium and Luxembourg combined. Crop shortages combined with increased demand due to population rises have led to food prices hitting record levels. Those in the poorest countries, in which food accounts for a larger chunk of household spend, are likely to be hit hardest.
Banker’s thoughts: What impact will the drought have on commodity prices?
Economy key in race for the White House
Republican candidate Mitt Romney has announced that his running partner (and potential vice-president) will be Paul Ryan. Ryan’s controversial, libertarian economic stance has made him the darling of the right-wing Tea Party movement. His economic plan (billed Ryanomics) includes tax cuts amounting to $4.3 trillion (£2.7 trillion) over ten years, cuts in medical spending amounting to $800 billion and cuts to food stamps totalling $130 billion. The appointment led US commentators to pronounce the economy as the single most important issue in this year’s election.
Banker’s thoughts: How would Ryanomics affect banking regulation?
Mexico looks to diversify as economy slows
Sluggish economic growth in neighbouring America, which accounts for 80 per cent of its exports, has slowed the expansion of Mexico’s economy. Growth for the third quarter of 2012 is expected to slow to 2.9 per cent, down from 3.5 per cent in the second. Mexico has been trying to diversify its export routes, which have been heavily concentrated to the US since the North American Free Trade Agreement (NAFTA) came into force in 1994. In recent years, it has increased trade with the BRIC economies, with particular emphasis being placed on building relationships with Brazil and China.
Banker’s thoughts: Which Mexican exports should I encourage clients to invest in?
Government to stimulate flagging economy
After years of exponential growth, the Brazilian economy is looking at a GDP rise of just 2 per cent this year (in 2010, the figure was 7.5 per cent). In response, the government has announced a massive public spending programme, which it hopes will create thousands of jobs and boost consumer demand. Over £38 billion is to be invested in infrastructure over 25 years, half of which will be spent before 2017. With the country due to host the 2014 World Cup and 2016 Olympics, thousands of miles of new roads and railways will be constructed to accommodate the extra visitors.
Banker’s thoughts: Are there any infrastructure projects which my bank can get involved in financing?
Chavez boosts spending as election nears
Ahead of October’s election, Venezuelan president Hugo Chavez has announced a series of public spending programmes. The most notable is a housing subsidy for middle class citizens. Oil-rich Venezuela has grown by 5 per cent so far this year and last year had the top performing stock exchange in the world. Since coming to power in 1999, socialist Chavez has led a group of South American nations (known as the "pink tide") that have distanced themselves from the previously influential USA, focusing instead on local trade and repatriating resources.
How would a Chavez re-election affect oil prices around the world?
Government under pressure to stop austerity
The UK’s chancellor George Osborne is coming under increasing pressure to pull a U-turn on austerity. The economy entered a double-dip recession this year, meaning it contracted for two successive quarters, for a second time. Despite this, the coalition has said it remains committed to cutting the UK’s budget deficit. Some influential economists that initially supported spending cuts have now called for Osborne to increase government spending in order to create jobs and stimulate the economy.
Banker’s thoughts: More government spending might mean fewer opportunities for banks to make loans. How likely is this U-turn?
British investment bank mooted
Calls for the government to create a public-owned investment bank are growing. The bank would make loans to small and medium-sized businesses and also provide money for public infrastructure projects. The UK is currently the only member of the G8 without such an institution and, with private banks failing to lend sufficiently to small and medium enterprises (SMEs), it’s hoped that a public bank would plug the gap, thereby ensuring SMEs can invest in the kind of expansion that’s vital for economic recovery.
Banker’s thoughts: What would a government investment bank mean for our business?
Fears grow over Spanish bailout
The Spanish economy, the fourth largest in the eurozone, is predicted to become the latest in the struggling union to need a national bailout. Spanish private sector banks have already received €100 billion (£80 billion) in bailouts from European institutions, but despite scything budget cuts and tax hikes, prime minister Mariano Rajoy has failed to deflate one of the region’s largest public budget deficits. The country is likely to require an injection of €300 billion before the end of the year in order to stay solvent.
Banker’s thoughts: How heavily exposed is my bank to the Spanish economy?
Libya Militia stand in the way of economic growth
Despite the spectre of civil war continuing to loom large, Libya’s economy has shown signs of recovering strongly. The country’s economy shrunk by over 40 per cent last year, but is expected to grow by 14.8 per cent in 2012. Oil production is expected to return to pre-war production levels by October, but conditions for international workers are still considered unsafe. Iran, for instance, has been forced to appeal for the release of seven Iranian aid workers kidnapped by armed militia in Benghazi in August.
Banker’s thoughts: Is my oil trading position protected in the event that production doesn’t return to pre-war levels that soon?
China continues to invest in resources
Chinese influence on the continent continues to grow, with state-owned China National Gold expected to purchase Barrick Gold’s (the largest pure gold mining company in the world) majority stake in African Barrick, a billion dollar company with massive gold reserves in Tanzania. China is already the world’s largest producer of gold, but with domestic demand for luxury goods rising, it continues to strengthen its hand in resource-rich Africa. China became Africa’s biggest continent-wide trading partner in 2009.
Banker’s thoughts: Are Chinese firms seeking external investment in their mining and infrastructure projects?
Youth unemployment the biggest barrier to development
High fertility, low literacy and few opportunities means that widespread unemployment among Sub-Saharan youths is expected to continue. In Zimbabwe, for instance, the total unemployment rate is 70 per cent, and the majority of the figure is made up of under-25s. More than 60 per cent of Africa’s population is aged between 15 and 25, and over 50 per cent of them (about 133 million) are illiterate. A report by African Economic Outlook has urged governments to invest more in vocational training.
Banker’s thoughts: How could a better educated youth make Sub-Saharan Africa a more attractive investment option?
Beijing moves to deflate property bubble
As well as minimising exposure to the eurozone crisis (China is reliant on exports to the region), addressing the boom in the property market is one of the main issues on the Chinese government’s agenda. Real estate prices have been rising across the country, as internal wealth and demand increase. Beijing has introduced restrictions designed to limit speculation, which drives up prices and could result in the creation of a property bubble. The IMF, however, warned that too much intervention could be detrimental to industries like construction and energy.
Banker’s thoughts: Is the Chinese growth miracle about to grind to a halt, and how will this affect the nation’s erstwhile insatiable appetite for commodities and resources?
Mongolia’s open for business
The fastest growing economy in Asia last year was Mongolia’s, which grew by a massive 17.3 per cent. Last year the world’s biggest supply of coking coal, an ore which is used to make steel, was discovered in the southern Gobi desert and Mongolia’s mining sector will see it grow by a further third before 2019. Neighbouring China and Russia have long been ploughing money into the world’s most sparsely populated country, but the likes of America and Britain have been investing more recently. This year, the American Nova Mining Corporation announced its intention to build a railway line to transport Mongolian lithium to the eastern Chinese coast, where it’s needed for the production of Apple’s iPhones among other technological goods.
Banker’s thoughts: What investment options do we have in Mongolia?
Japan threatens to cut economic ties over territorial dispute
Tiny islands known as Takeshima to the Japanese and Dokdo to South Koreans have derailed a potential economic partnership between the two neighbours. Both nations lay claim to the islands, which lie in rich fishing grounds and may contain large deposits of natural gas. Japan threatened to suspend plans to buy South Korean government bonds, after Korean president Lee Myung-Bak made a surprise visit to the disputed rocks. The countries – which boast Asia’s second and fifth largest economies, respectively – were recently close to agreeing a free-trade agreement.
Banker’s thoughts: A free trade agreement would have boosted share prices for Japanese and Korean companies. Is the deal dead?
Chinese influence in Australia grows
Having surpassed Japan as its biggest trading partner in 2007, China has expressed an interest in negotiating a free-trade agreement with Australia. Ties between the two nations have grown tighter in recent years, with China taking interest in Australia’s huge reserves of natural resources. Last year, in a move which commentators suggested was designed to re-exert America’s authority in Asia-Pacific, Barack Obama stationed 2,500 troops in Darwin, highlighting Australia’s strategic importance in the region.
Banker’s thoughts: With China and America vying for control of the Pacific region, how might this affect shipping routes?
In July of this year, Australia introduced a carbon pricing scheme, which requires businesses emitting over 25,000 tonnes of carbon dioxide annually to purchase permits. Australia is the highest emitter of all developed countries per capita, contributing 1.5 per cent of total global emissions, despite having only 22.7 million citizens. The move has caused much controversy, with the powerful mining lobby particularly vocal in their opposition and airlines like Qantas and Virgin Australia bumping up ticket prices in response.
Banker’s thoughts: How much value is this move likely to wipe off the share prices of large emitters?
"Pacific solution" continues to divide
The Australian government has proposed reintroducing the "Pacific solution", whereby asylum seekers would be transported to detention centres on the tiny Pacific island of Nauru and Papua New Guinea’s Manus Island to have their applications processed. Australia’s immigration policy has divided voters, with some seeing immigrants as being key to plugging the nation’s skills shortages. Nauru stands to earn £1.3 billion (almost four times its total annual exports) from the arrangement, with Papua New Guinea pocketing £600 million.
Banker’s thoughts: Can the Aussie economy maintain a strict immigration policy and continue to grow?
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