Tag Archives: Emerging markets

The Bank of Facebook

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Ever feel as if Facebook is taking over our lives? We use the social media website to publicize photos from memorable moments of our lives, rant about our deepest emotions and affirm our social bonds with likes and hashtags. Well it looks as if Mark Zuckerberg has decided to plunge us further in to the Matrix by entering into the financial services industry. Last week, Facebook applied to the banking regulatory agencies in Ireland, where its non-US business is based, to permit electronic transfer of funds for its members in Europe, Africa and the Middle East. If Facebook’s application is approved, users in those regions will now be able to send each other money just like the way my relatives keep sending me Candy Crush requests.

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A few years ago, Facebook attempted a similar move by creating Facebook Credits which would allow users to spend money on virtual items such as that one cute cow you were dying to buy on Farmville. However, the system was a flop and was shut down in 2012. Facebook’s new endeavor into the banking sector is different. This time around, Zuckerberg appears to be taking on money transfer companies such as Western Union and PayPal. Remittances, or the transfer of funds from expat workers to their home countries, is a large part of the economies of many developing nations. For example, China, India and the Philippines each received over $20 billion in remittances over the last year. Because of the low standard of living in these nations, many of its citizens are forced to work abroad to be able to make a living. I spent a majority of my life in Saudi Arabia and I can tell you from firsthand experience that almost a quarter of the country’s population is expat workers. Go out on to the streets and at times you may have a hard time finding a Saudi citizen. Because expat workers in these nations may not have access to traditional banking, they rely on money transfer companies such as Western Union and PayPal. With Facebook’s potential entry into this market, it could soon replace traditional money transfer firms.

The question then becomes, how much further can Facebook or other tech companies such as Google go in the banking industry? In the past several years, large traditional banks have lost consumer confidence due to outdated mobile interfaces and countless lawsuits over its past actions. People feel much more comfortable using Facebook and Twitter than they do using their online banking websites. With over a billion users, Facebook could build on its money transfer mechanism to provide even more banking services. Here is an energetic panel on CNBC discussing this issue.

As the panel mentions, Facebook has still a long way to go before we can consider it actually becoming a bank and taking on Bank of America or JP Morgan. You’re not going to be able to receive complex banking services, such as a car loan, from Facebook anytime soon. However, the banking industry is definitely evolving and with the familiarity and dependence consumers have in using social media websites, Facebook could be a threat to traditional banks in the future if they choose to go down that path. If Facebook pushes deeper into the banking sector by for example giving loans, I find it much more probable that it will partner with a traditional bank rather than becoming a bank itself. As the contributors on the CNBC panel described, being a banking entity would bring Facebook into a new realm of regulations and restrictions; a headache that I assume Zuckerberg would want to avoid.

There is one issue that makes me doubt if Facebook will be able to pull of being a financial services company, and that is privacy. The company is notorious for having shady privacy laws that its users still do not fully understand. One of the ways Facebook makes money is by selling the information of its users to advertisers and marketing companies. If you also add in the fact that Facebook is flooded with fake accounts, then its users might not trust the site to transfer funds or receive banking services from it. Despite the tarnished reputation of traditional banks, I’m probably not the only person to think that transferring funds over a bank feels safer than doing it over Facebook.

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Fake accounts are a serious issue for Facebook.

Over the past year, Facebook has acquired Instagram, Whatsapp, and Oculus VR, a virtual reality gaming company. In my opinion, these acquisitions show that  Facebook is trying to become much more than just a social media website and is actually attempting to have a larger presence in our lives. Thus, banks should ignore Facebook’s new move at their own peril.

“Payment schemes are the equivalent to credit cards in emerging markets and here is where Facebook can make progress … especially in those places where banking infrastructure is not as mature as it is in Europe or the US.”
-Brian Blau, Director at Gartner Inc.

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Emerging Markets in Emergency Mode

Despite how much we prayed for a peaceful and prosperous year, 2014 has started off with a crisis; this time in the Emerging Markets. In a previous Economy in Digits post, I had discussed how India and Turkey had responded to large losses in the value of their currencies by raising interest rates. In the following days, the sell-off in stocks and currencies extended to other Emerging Markets. If you’d like to get a better understanding of Emerging Markets, feel free to check out one of my earlier posts regarding upcoming Emerging Market elections, which I will touch on shortly. As you can see from the following graph provided by Bloomberg, the MSCI has been performing very poorly. Lets take a look at what is causing all this mess in the countries that not so long ago were deemed to lead the world out of the global economic crisis.

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The first reason for the rapid sell off of Emerging Market stocks is a topic that my regular readers might be getting sick of hearing, but its tapering. The main reason why most Emerging Markets fared so well after the economic crisis of 2008 was that central banks in developed nations pushed interest rates to almost 0%. Seeing as how they would make almost no money on investing in developed countries, investors sent their money to do its magic in Emerging Markets where interest rates are higher. Combined with an increase in price of global commodities, which is an important source of income for many Emerging Markets, the inflow of foreign funds caused Emerging Market economies to skyrocket. However, in the last week of January, the FED decided to continue tapering by reducing its bond purchase program by another $10 billion. This is causing interest rates to rise in developed markets, especially in the United States. Thus, investors are now doing the opposite of what they did in 2008 and are now pulling their money away from Emerging Markets and are putting their cash back in developed markets such as the US and the UK.

Another reason why Emerging Markets are in trouble is because of China. China had been the poster child of Emerging Market success in the past several years. However, as the country reaches a limit on urbanization and its population transitions from rural to middle class, the government has had to enact reforms that inevitably slow down the Chinese economy. Combined with the fact that the Chinese government has also tried to reduce credit in the Chinese economy due to fears of a credit bubble, some investors now fear of a “hard landing” for the Chinese economy. These fears were strengthened in the final week of January as Chinese officials announced that the country’s Purchasing Mangers Index (PMI), a monthly manufacturing report that surveys private manufacturers, contracted for the first time since 2008.The reason why China is so crucial to other Emerging Market nations is that China is one of the world’s largest importer of commodities. On the other hand, most Emerging Markets are net exporters of commodities. Thus a slowdown in China would mean less demand for commodities from other Emerging Markets, causing a chained slow down across all Emerging Market nations. Here is a video that further breaks down whats going on in China.

Finally, we have the isolated incidents across individual Emerging Markets. In an earlier post, I discussed the political crisis created from a corruption probe in Turkey and rampant inflation in India. However, other Emerging Markets have also had their own troubles. Thailand has been in social and political turmoil since November of last year. Protesters have taken to the streets across Thailand to force Prime Minister Yingluck Shinawatra to resign and postpone the elections that was supposed to occur in the beginning of this month. Protesters see Mrs. Yingluck’s regime as corrupt and wishes her to reform the Thai political structure before elections are held again. In fact protesters managed to postpone the elections which were planned on February 2nd. To learn more about the events in Thailand, feel free to read more about it on the BBC.

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To make matters a tad bit worse, as if it wasn’t bad enough already, the Argentinian economy is rapidly deteriorating. On February 13, Argentinian inflation was announced to be at 44%. That is at levels where one would call it hyperinflation. Argentina had once been a prosperous nation. But a crisis in 2001 has left it with naively populist governments that have slowly shut itself out of global capital markets. The gradual downfall of the Argentinian economy is an issue I will cover in another post but for now check out this post by the Economist to get a better understanding.

So what happens now? Are Emerging Markets doomed for eternal decline? First of all, even though most people like to lump all Emerging Markets together, not all countries are the same and not all have suffered greatly over the past couple of months. In fact, in January, shares in the MSCI Indonesia rose by 4.6% while the market in the Philippines gained 2.4%. These countries have done well to turn the money that was invested in their economies into long term growth opportunities that improve their trade balances over the long run and increase the education and productivity of their population. However, many of the Emerging Markets  that experienced rapid economic growth in 2010 and 2010 were fueled by short term foreign investments and increasing consumer demand which required constant to satisfy. As foreign investors pull out and domestic demand cools, these economies will start looking back to 2010 and 2011 as the glory years of the past. Countries such as Turkey, India and Brazil, which were on the verge of double digit growth back in those years will now find it difficult to reach 4% let alone 5% growth. Even though Emerging Markets may not collapse and fall out of favor with all investors, I think the markets in these nations will revert to a new normal which is slower growth.

“So much of what happened to India late last year and early into 2011 is the same story we’ve seen with other big emerging markets, and that is that investors started to realize that the growth trajectory in India would have to get moderated by tightening policy.”
-Jerrry A. Webman

Video of the Week – Taper Continues

This video does a great job to explain what I wanted to talk about from the previous week. However, I know you’d be devastated if you didn’t get a taste of my elegant writing. Have no fear.

As he passed the torch to Janet Yellen, Ben Bernanke announced in his last FOMC meeting that the FED would continue tapering QE by decreasing the bond buying program by another $10 billion. This brings the total of the program down to $65 billion of treasury bonds and mortgage-backed securities. FED officials decided that the American economy is strong enough for a second round of tapering, despite recent mediocre data including a weak jobs report.

Once again, this second step of tapering will end up lowering US stock markets, raising interest rates in the United States and appreciating the US Dollar in value against other currencies. This is having a profound on effect on Emerging Markets such as Turkey and South Africa where a devaluing currency and a rise in American interest rates is causing investors to flee those markets. In response, Emerging Markets have resorted to raising interest rates but so far they have not been able to regain the losses to the value of their currencies. In response to the effects that tapering is having on foreign countries, FED officials have stated that their priority is to maintain the strength of the American economy and tthat if they succeed, then Emerging Markets would fare better off as well.

“Most projects start out slowly – and then sort of taper off.”
-Norman Ralph Augustine

Upcoming Emerging Market Elections

The geopolitical stage is typically divided into two camps: the Developed Markets (such as USA, the EU, Japan, England) and the Emerging Markets (such as China, Russia, Brazil, India, Turkey). Developed Markets are countries that have stable financial markets and political systems. Their economies are powerful but have developed to the point where they can now only grow at a slow and steady pace. On the other hand, Emerging Markets are the new players on the global stage. Their economies have grown rapidly over the past several years and they appear to have promising futures. However, their financial systems still need improvement and their political systems are still unstable. If the two groups could be visualized as Hollywood actors, the Developed Markets would be Liam Neeson.

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No matter what movie it is, you know for a fact that if Liam Neeson is in it, he is going to dominate that role and he is going to be a total badass as he trains Batman, saves his daughter, releases the Kraken, etc. Much like Liam Neeson, Developed Markets shape the context of the globe and have established themselves as the leaders of the world. On the other hand, Emerging Markets are James Franco.

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You can tell James has a lot of potential. He’s had some great movies such as 127 Hours, the Spiderman series and Pineapple Express. But let’s be honest, he’s been in some lousy movies too. Have you seen Your Highness? No you haven’t; and neither has anyone else. So you know Franco is a great actor but you can’t tell if his next movie is going to break box office records or totally fall flat and bomb. Similar to Franco, Emerging Markets have potential and may even become one of the world’s leading nations in the future. However, they are unstable and have their internal problems, much like Franco’s problem to keep his eyes fully open.

After the financial crisis of 2008, Developed Markets suffered greatly. Their economies were in shambles. These nations responded by lowering interest rates to stimulate demand. Thus, investors moved their money to Emerging Markets to seek higher returns on higher interest rates. After 2009, Emerging Market economies skyrocketed. From 2010 to the end of 2011, most Emerging Market economies grew somewhere between 6-11%. For example, in 2011, the Chinese economy grew by 9.2% and the Turkish economy grew by 8.5%. Following these developments, everyone believed that the time of Emerging Markets had come and that they would lead the world out from pits of the financial crisis.

However, in 2013, as central banks around the world such as the FED started talking of taking their foot of the pedal and slowing their support of their economies, interest rates rose in the developed world. 2013 was also the year when political upheaval broke out in certain Emerging Market countries, the US economy continued to recover at a steady pace and the EU saw the worst of its crisis pass. All of these factors caused investors to put their money back into the Developed Markets. As the cheap money was pulled away from Emerging Markets, their economies slowed down and their currencies lost value against Developed Market currencies.

In case you don’t believe me, here is a finance professor from George Washington University discussing how Emerging Markets fared in 2013.

Now in 2014, many Emerging Markets will go to the polls and determine their leaders in elections. These elections will shape the political sphere in those nations for the next several years and will definitely effect not only their national economies but ultimately the global economy. So, along with a graphic from the Wall Street Journal, here is a breakdown of upcoming Emerging Market elections in 2014.

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Brazil

Brazil’s economy is highly dependent on commodity exports. Thus, a fall in commodity prices, excessive government spending and a social upheaval against the government in the summer all proved troublesome for the Brazilian economy. The general election in October will decide if President Dilma retains her position or replaced by the opposition.

South Africa

In South Africa, the African National Congress party has won every election after the apartheid era. But they are now being challenged by the Democratic Alliance which won 16% of the votes in the 2009 elections and has grown in popularity ever since. Come election time in April, the ANC’s hegemony over South African politics may come to an end.

Turkey

Recep Tayyip Erdogan and his AK Party have dominated every local and national election since they first came to office in 2002. During their term in power, they have further liberalized and grown the Turkish economy and have also increased Turkey’s influence on the global stage. However, resentment against Erdogan’s authoritarian tendencies and his party’s encroachment on personal freedoms exploded this year during the nationwide Gezi Park protests. Furthermore, a recent corruption scandal charged against several AK ministers have led to their resignation and has made the AK Party lose even more of its influence. The AK Party is still highly popular throughout Turkey, but it will be interesting to see the effect of recent events on the local elections in March.

India

The Indian economy currently faces stagflation as it is stuck in a state of high inflation and below average growth. Incumbent president Manmohan Singh has stated that even if his United Progressive Alliance party wins, he will not be president for a third term. Investors are hoping for a victory by pro-reformist Bharatiya Janata Party. Only time will tell the outcome of the general elections in May.

Indonesia

In July, whoever wins the Indonesian general election to replace outgoing two-term president Susilo Bambang Yudhoyono will have a full plate. Growth has slowed, politically popular fuel subsidies are draining the treasury and corruption remains rife.

All of these countries require the implementation of unpopular but important reforms to aid their economies and remedy social issues. However, because of upcoming elections, ruling parties are unfortunately likely to delay these reforms till after the elections are over.

“Emerging markets are hugely important.”
-James Dyson