73 i chronicle

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Cover Story Can Abenomics put Japan back on track?
Outlook Crude Oil
Stats FII in India
Emerging Country Mexico
In Focus Is price control of drugs the right solution?

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73 i chronicle

  1. 1. Investeurs Chronicle June 2013, Volume: 73
  2. 2. Cover Story With five recessions since 1990 and a two-decade run of subpar growth, Japan hasn’t exactly been a model of economic dynamism. Nor is Shinzo Abe—the scion of one of Japan’s most prominent political families who started his second stint as prime minister in late December—anybody’s idea of a revolutionary. Yet since taking office, Abe has unleashed a barrage of deregulation initiatives, extreme monetary easing, a 2 percent inflation target, and $102 billion in stimulus. Abenomics, as the program is known, has sent the Nikkei up 25 percent this year. Japan’s economy grew 3.5 percent in the first quarter, outpacing that of the U.S. The yen has weakened sharply and, after years of shrinking, the Japanese economy has finally shown signs of growth. Abenomics, Japanese Prime Minister Shinzo Abe's plan to awaken the "animal spirits" trapped inside Japan's economy, is moving full speed ahead. Fiscal stimulus and monetary easing continue, and work to roll out a "Growth Strategy" to promote structural and regulatory reforms is moving forward. The prime minister and his reforms continue to benefit from both the high hopes generated by early successes and the low expectations that follow two decades of tepid growth — and by the prime minister's willingness to invest so much of his own political credibility in the plan's results. Abenomics explained Abenomics of the Abe plan has three parts or arrows to use the prime minister's term. These are aggressive quantitative easing (QE) linked aimed at creating inflation (or at least at halting deflation) and devaluing the yen; increased stimulus through infra-structure and other government spending; and broad structural reform aimed at removing major roadblocks to growth. Infact the BOJ moves and the fiscal package are the politically painless parts of Abenomics. The third part, concerning structural reforms is a more challenging one. It is a broad deregulatory effort that includes revamping the agricultural sector; promoting more innovation in the nation’s energy, pharmaceutical, and medical- device businesses; and opening up Japanese industries to more competition by having Japan join a U.S.-led regional trade pact called the Trans-Pacific Partnership. So it was third ‘arrow’ of structural reform that markets were really waiting for to convince them that ‘Abenomics’ will work. Challenges And it is here, at the third step/ arrow that things do not appear moving, which has led market to think that Abenomicsis not quite the vehicle of recovery it was once thought to be. Initially, the QE did, indeed, result in a fall of the yen, a rise in exports, a rise in the stock market, and some hint of a possible change in consumer expectations. But then the impact of rising interest rates on the Japanese government's already high debt service obligations (about 25 percent of the total government budget) and U.S. Federal Reserve Chairman Ben Bernanke's hint of possible less future U.S. QE gave rise to second thoughts and the markets tanked. Japan’s stock market, which had staged the largest six-month rally in its history, started to collapse two weeks ago, with the Nikkei index losing nearly 20% of its value from the peak since then.And now it looks like that slide in the yen, which has been so key to the success of Mr. Abe’s policies, may also now be over. Can Abenomics put Japan back on track?
  3. 3. Cover Story Already, volatility has increased in the Japanese debt market, with yield on the benchmark 10-year Japanese Government Bond (JGB) approaching the 1 percent mark in May before dropping back. That’s low by international standards, but as rates creep up, so do the government’s considerable debt-servicing costs, which consume 24 percent of its budget, according to the Finance Ministry. The more important question is whether Abenomics will succeed in restoring Japan's dynamism and self-confidence. Here the challenges are more daunting. First, there is the problem of the debt and the timing of efforts to reduce it. If Abe cuts spending too quickly or raises taxes too soon, it may well undermine his effort to spur inflation. But if the government moves too slowly or does too little to address investor worries over Japan's debt, it will erode confidence in the government bond market and drive up the cost of servicing Japan's debt. More worrisome than the sheer size of the debt is the ongoing debate in Japan over whether it matters. It does, and policymakers ignore this at the country's peril. Abe understands that stimulus must come first and that belt-tightening can wait. But it can't wait forever if his government is to maintain investor confidence. Then there are challenges on demographics front. Given Japan's relatively low birth rate and aging population, immigration reform is vitally important as new workers are needed to sustain the size of Japan's workforce over time. And though Abe has acknowledged the urgent need to welcome more young women into the workplace, success will require cultural as well as political change—and is therefore beyond the control of any prime minister. Most important, Abe will have to avoid the nationalism trap he fell into during his previous term as prime minister in 2006-2007. Restoring national confidence is important for a traditional power that has endured two decades of economic stagnation, and Japan will one day change its constitution and develop a normal standing army. Perhaps one day soon. But there are those in Japan who want a more assertive, even confrontational, approach to foreign policy that is bound to sharply increase tensions with China and South Korea. Japan's strength comes from the power of its economy, its innovations, its companies, workers, and consumers, not from a surge in its military capacity or a more defiant international posture. Of course, the problems of ‘Abenomics’ are not all Japan’s or Mr. Abe’s own doing.Speculation that the U.S. could start unwinding its program of bond buying sooner rather than later has injected fresh uncertainty into global markets, and raised the yen’s profile as a safe haven at just the wrong time.All this means is that the decline of the yen, which is key to a recovery in Japanese export earnings and a rise in inflation to the 2% level targeted by the Bank of Japan, will be that much more difficult to achieve and leave the success of ‘Abenomics’ that much more in doubt. Japan’s share of the world economy is projected to fall by more than half, from 7 percent as of 2011 to 3 percent by 2060, according to the Organisation for Economic Co-operation and Development. The task for Abe and his team is to demonstrate that a diminished Japan can still remain influential, maintaining high living standards and a strong voice in international affairs. Transporting Japan back to the 1970s and 1980s, probably isn’t possible. Ultimately, Japan may be destined to become the Switzerland of Asia—a small but rich country punching above its weight class and boasting a quality of life the rest of the world envies. That’s a more modest goal for Abenomics than its many admirers might prefer. But it might be more attainable for Japan.
  4. 4. Through much of the world, oil commodity pricing is based on the Brent crude price -- the price paid for a sweet light crude oil produced from Europe's North Sea fields. The global benchmark Brent Crude average ended the year 2012 at about $112 adding 3.5 percent annually, down from the 13.3 percent jump in 2011. The American benchmark index, West Texas Intermediate (WTI) fell $7.01 or 7.1 per cent over the year. After increasing to $119 per barrel in early February 2013, the Brent crude oil spot price fell to a low of $97 per barrel in mid-April and then recovered to an average of $103 per barrel in May. Crude oil prices are likely to exhibit a sideways-to-bearish trend in the second half of 2013, as domestic demand relatively soft and the global economy still shows signs of weakness, keeping prices on the weak side. Brent crude oil spot price is expected to fall from an average of $112 per barrel in 2012 to annual averages of $105 per barrel in 2013 and $100 per barrel in 2014, reflecting the increasing supply of liquid fuels from non-OPEC countries. After averaging $94 per barrel in 2012, the forecast WTI crude oil spot price averages $93 per barrel in 2013 and $92 per barrel in 2014. By 2014, several pipeline projects from the midcontinent to the Gulf Coast refining centers are expected to come on line, reducing the cost of transporting crude oil to refiners, which is reflected in a narrowing in the price discount of WTI to Brent. Stats Outlook-CrudeOil Gloss Fiscal Stimulus An increase in public spending or a reduction in the level of taxation that might be performed by a government in order to encourage and support economic growth.
  5. 5. Emerging Country- Mexico Mexico officially the United Mexican States, is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of Mexico.Mexico is the fifth largest country in the America by total area and the 13th largest independent nation in the world. Mexico’s economic freedom score is 67.0, making its economy the 50thfreest in the 2013 Index. Its score is 1.7 points better than last year, reflecting notable improvements in investment freedom, trade freedom, and monetary freedom. Mexico is ranked 3rd out of three countries in the North America region, but its score is well above the world average. Mexico has a huge potential for accelerating economic growth. Mexico’s economy grew at a modest pace during the first months of 2013, but signs of slowing abound. The country has maintained a strong growth of 3.9% during 2012. This has been supported by both external and internal demand, with a firmer expansion in services. GDP is expected to grow 3.5% during 2013 with a recovery in 2014.However, inflation continues to pose a problem for the economy with the Current inflation rate at 4.63% (May2013) which is above the Central Bank´s target limit of 3 %. Mexico recorded a trade deficit of 1226.89 USD Million in April of 2013. Mexico´s exports were worth $32,863 million of which $28,403 million accounted for oil exports. On a year over year basis, exports increased 6.4 % mostly due to a rise in shipments of mining and agricultural products, 51.6% and 16.5% respectively. Manufacturing exports increased 6.8% to $26,669 million, with automotive exports rising 8.7% and non-automotive exports increasing 6.1%. On the other hand, shipments of oil declined 1.7%.In April, Mexico´s imports were worth $34088 million, a rise of 11.8% from April of 2012. Imports of oil increased 14.3% and non-oil imports 11.5 %. By commodity, imports of consumer goods rose 17.5%, intermediate goods 10.1% and capital goods 16.3%. In 2012, the FDI received in Mexico totaled $12.66 billion, 34.9% less than what was originally reported in the same period of 2011 ($19.43 billion). Of this total, 55.7% was channeled to the manufacturing industry, 20% to retail, 12.9% to the construction sector and the rest to other sectors. The FDI came mainly from the United States (58.5%), Japan (13.1%), Canada (8.2%), Germany (5.9%), Netherlands (5.7%) and France (2.6%). The bilateral trade between India and Mexico is expected to surge from $4 billion to $10 billion by 2015 The current level of bilateral trade between the two countries is close to $4 billion and the rise in trade will be led by economic reforms in the respective countries. Vital Economic Statistics of MexicoEconomy Particulars Details GDP (nominal) $1.177 trillion (2012est.) GDP growth rate 3.1% (2013 est. ) Currency Peso Credit Rating BBB + - Fitch Baa1-Moody’s BBB -S&P Fiscal Deficit 0.60% Current account deficit 5532.20 USD Million (2013)
  6. 6. In FocusForex Is price control of drugs the right solution? In May 2013, India notified new norms that will bring down prices of essential medicines, increase the number of drugs under price control, and alter the way the government regulates prices in the 72,000-crore domestic market.The new regime has replaced an 18- year-old price control order. The then prevalent method of fixing prices on a cost-plus basis was replaced by market price-linked cap for each drug. Acting on the policy, the National Pharmaceutical Pricing has notified (on 17th June 2013) the prices of 150 medicines that have been deemed essential by various internationally recognised lists. These new notified prices will be determined on the basis of the Drug Price Control Order of 2013, which says that 348 essential medicines must have a price cap determined by the arithmetical average of all those variants that have a market share of more than one per cent. There is little doubt that medicines in India are too expensive for most of the population. For the poorest 20 per cent of Indians, the expenditure on medicines alone is 85 per cent of what they spend on their health. A World Bank study on the subject found that just out-of-pocket medical costs push 2.2 per cent of the population below the poverty line every year, a major countervailing force to economic growth and rising incomes. Further it is observed that many private sector drug makers price their brand name variant significantly higher than other identical pills, and then get doctors to prescribe them by brand name - patients don't know the difference, and are forced to pay extra. However, the order is likely to be counterproductive with adverse consequences, and the thinking behind it may still be faulty, however severe the problem. Firstly, the pharmacompanies may choose to just stop making the price-controlled drugs in wake of reduced profitability. Indeed, it is inevitable that manufacturing and marketing substitutes for those medicines on the essential drugs list will begin; doctors will be incentivized to prescribe those; and the problem will recur in a few years. The real answer, of course, lies in the revival of the public sector in public health. Medicine manufacturers in the public sector, sick for years, must be revived. And the public health system needs to become the dispenser of medicines, rather than private suppliers. Sensex Nifty 19,441 .07 18,774 .24 5878. 00 5667. 65 Gold (10 gm) Silver (1 Kg) 27950 26952 44037 41559 Crude Oil ($/barrel) Dollar/INR 103.91 100.91 57.78 59.35
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance TeamChronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Shagun Khivsara shagun@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com

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