European deflation risks not deflating

The UK Telegraph (and other sources) are highlighting the rising panic about Euro area deflation. For those Austrian / hard money / gold standard / bitcoin / generally poorly informed amongst you, it’s not that deflation is itself a problem, but that it creates scenarios of debt spirals increasing the real value of debt obligations and decreases demand and economic growth through increasing the real cost of labour through downwards sticky prices (most especially wages).

European five year inflation expectations

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

Sanral with blinkers on and no imagination

I read Nazir Alli’s opinion piece on BDLive this morning. Unsurprisingly, he talks up tolling as the best way to fund roads.

Now, I don’t have as strong a view as some that etolls are Universally Bad. Frankly, I also feel that many people who complain about etolls are still complaining about having to pay. The arguments against etolls have become more sophisticated over time, but I can’t shake the suspicion that many of those who support fuel levies would have been almost equally outraged if an increased fuel levy had been used instead of etolls.

Let’s take a look at some of the more egregious comments from Mr Alli:

There should be agreement that the fuel levy is not an option, especially in the context of reducing inequality, though that is what the populists and dissenters keep punting. That leaves us with three options.

Starting with the end in mind? It’s a bold claim that “there should be agreement that the fuel levy is not an option”. As far as I can tell, there is no justification for this in the piece.  The plea to reduce inequality is also vague – I can think of several mechanisms that could be used to mitigate the increased burden on the poor. There are more complex, more subtle interventions than the simple, single-lever ideas Mr Alli imagines.

Then there is the capacity-related backlog in and around our metropolitan areas. These are the roads that are reaching their maximum capacity during peak hour, resulting in increased congestion, which in turn contributes to driver frustration, decreased safety and negative economic consequences. To alleviate congestion, additional lanes or new roads need to be built. For this, Sanral needs a further R120bn.

This is a separate point for Mr Alli and for me. The need for funding doesn’t talk to how that funding should be raised. This paragraph does provide a fascinating insight into the 20th century mindset on dealing with road congestion. Congestion? More roads! The answer to congestion is actually fewer parking spaces and increased public transport. Think about it, if you have nowhere to park your vehicle, you won’t drive to work. If there are a range of efficient, reliable, safe and cost-effective public transport options available, then you have the carrot as well.

It gets better:

These are huge sums of money but if one takes into account that about 87% of all goods and services move by road, it is really important to keep road traffic moving. In light of the needs elsewhere in the economy, it is unlikely such funding will be forthcoming.

Yes, roads are used, overused, for transport in South Africa. One can hardly blame Sanral for the decline in our rail network, but the 87% needs to be decreased as part of a coherent national transport and logistics plan.

Mr Alli says “it is unlikely such funding will be forthcoming”.  All the funding comes from South African citizens and corporations. If Mr Alli believes that the only way to raise funds is via etolling, then it’s hardly surprising that he is so fixated on etolls as the “right answer”. There are other options, even if Mr Alli can’t conceive of them.

The growth in the length of roads Sanral has to manage is not matched by an increased allocation from the Treasury, which means the agency must be innovative, smart and prudent with allocated funds.

I’m waiting for a recognition that the etolling infrastructure is extremely expensive and doesn’t really talk to “prudent” at all.

Keeping in mind the large sums required for road construction and maintenance, it is obvious that the levy would have to rise by between R1.35/l and R2.80/l, depending on the time frames in which the backlogs should be addressed

I would like to see the analysis behind this – and get a view on how these compares to the etolls in terms of their ability to deal with backlogs of funding.

That will hit the poor really hard, given the long distances people have to travel to get to work. In Gauteng, nearly 64% of commuters rely on minibus taxis — the preferred mode of the poor — which receive no transport subsidy at present, yet are exempt from e-tolling. Increasing the fuel levy may result in increasing pressure from the taxi industry for a transport subsidy.

There is nothing inherently pro-poor about etolls. The exemption for taxis is pro-poor. A taxi transport subsidy would be pro-poor.  What exactly is the point being made here?

An important toll principle is that those who use a road should directly pay for it — the direct user-pays principle.

My Alli apparently believes this principle, but it is not a natural law of the universe. It is one principle out of many. And ironically, isn’t particularly pro-poor which seems to be so important to Mr Alli. It also doesn’t talk to the complications of who ultimately pays for the etolls – business will increase prices to be born by consumers so it’s not only those individuals who happen to be driving who will bear the cost anyway.

In simple terms, if you live in Springbok, you will not pay for the road between Johannesburg and Pretoria if it is a toll road. Also, a cost-benefit study has shown that those in the higher income brackets will be paying about 94% of the passenger vehicle toll — in other words, those who can afford it.

There are two points here. The first is that individuals who don’t personally use a road don’t benefit from it. I am happy to pay for a road network, as we have all done in this country and other countries for decades. On the 94%, it is an interesting number. I’m curious to know which income brackets have been used, what the comparable number would be for the fuel levy AND what the number would be without the exemptions factored into current etolls.

We need to understand that the e-tolling system enables different tariffs to be charged for time of day and day of the week, providing a mechanism to reduce demand during peak hours and thus for costly capacity upgrades — which is not possible with the fuel levy.

Finally, an excellent and valid point. I’m also a fan of using etags more broadly – paying for parking automatically amongst others.

Going the fuel levy route or waiting for the Treasury to find the considerable sums needed would have a simple and often overlooked consequence: it would be virtually impossible to deliver large infrastructure projects in short time periods when they are needed — due to the very high fuel levy that would be required to achieve this. It would also encourage people not to use public transport.

Alternative funding mechanisms are possible. Sanral could be permitted to borrow to repay the borrowings out of future income, amongst others.  The second point is more ridiculous – Mr Alli is comparing etolls with exemptions for public transport to fuel levies without subsidies for public transport. That is not a fair comparison.

With the fuel levy, the present generation needs to pay in full for infrastructure that has a 20-or 30-year life expectancy, which may result in less infrastructure being built than needed.

No, it doesn’t. Again, alternative funding mechanism are possible with the fuel levy performing the same function as the etolls in providing income to finance the roads over time.

Where is the mention of the relative efficiency of collecting money via etolls and the fuel levy? The saved costs of etolling infrastructure, call centres, debt collectors an advertising? Where is the imagination to see how other options might work (or at least, might have worked)? Where is the discussion of the forex expenditure and trade deficit implications of paying significant money to foreign companies?

Mr Alli has a position to argue and he’s done it narrowly and with a single-mindedness that is terrifying.

The debate over etolls is a complex one. This doesn’t help.

 

Argentina in default for second time in 13 years

S&P declares Argentina to be in default for the second time in 13 years and the third in 25. Inflation is likely to hit 40% this year and the Peso has already lost a quarter of its value this year, measured against the US Dollar.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

Argentina teetering towards default

I’ve been working with a few insurers and reinsurers on credit risk recently. We’ve had plenty of reasons to think about it, what with new regulations (SAM, Basel III) and South African government downgrades. However, sometimes I get the impression that credit risk is viewed as an academic risk, as something that happens to others, micro lenders and maybe banks.

In South Africa, we’ve had incredibly few corporate bond defaults and most market participants don’t even know that the South African government “restructured” some of its debt in 1984 and so has, in fact, defaulted on contractual bond obligations.

In a recent credit risk and capital workshop, I raised the issue of Russia defaulting on Ruble-denominated debt in 1998, a big part of what led to the collapse of LTCM. Again, these events are often figured as “exceptionally unlikely” and not even worth holding capital.

Well, in the news, Argentina is about to default. Again. They have been one of the most regular defaulters on sovereign debt in the last couple of centuries. They’re also an example I often use of “currency pegs” doing precious little to mitigate currency risk except on a day to day basis.

More on that in another post (yes, I’m hoping to post a little more regularly in the coming months.)

Progress on tax free savings vehicles, but scathing words for life insurers

Read the latest (14 March 2014) document from National Treasury on tax free savings vehicles for South Africa. I think it’s a fantastic idea – both from a policy perspective with carefully designed incentives to promote long-term savings and from a personal perspective. I’m definitely going to use one for my own savings. However, one paragraph stuck out as a pretty clear message from National Treasury on their views of life insurers – and views on current product offerings rather than any historical sins:

Insurance products

Products must permit flexible contributions and may not bind individuals into any future contribution schedules. Many insurance investment policies would currently not match these criteria. Government is not open to providing a tax incentive for products that have high charges and may have an adverse impact on household welfare at the point at which the household is increasingly vulnerable. In this regard some savings products, for example endowment policies and any similar investments that include excessively high penalties in the case of early termination of the policy, pose a policy challenge from a market conduct perspective and will not be allowed in these accounts.
As discussed, National Treasury will engage with the FSB and industry in determining a reasonable approach to charges and early termination.

 

Wow. I know there are many bad insurance products around and probably some still being sold. I also know of many insurance executives who strive for value for money and are reinventing products and distribution channels to this end.
Seems to me NT isn’t yet on board.

Paris bans half all of all cars

Ok, only temporarily and the (almost) half that are banned change from day to day. A temporary increase in pollution levels has sparked the emergency measure.

I’m fortunate enough to live close to where I work with the wonderful MyCiti bus available as a genuine alternative to get to work. Imagine a world where I was paid (subsidised) not to use my car on particular days. Perhaps a combination of local government and employer-sponsored initiatives, with a scorecard and recognition or prizes or tiers of benefits for better green behaviour.

There’s so much more than can be done in this space and so much more that must be done in the coming years and decades. What would it take you to not drive your car to work?

Chinese debt a serious worry?

I’m not really that close to developments in the Chinese economy. It is a large, complicated beast that is quite different from our own. Over the last year or so I’ve heard more and more from people who generally speak sense that the debt levels in China and the awful investment projects used to show the appearance of a strongly growing economy form a worrying pair of forces.

House of Debt (a newish blog, seems interesting) has a post covering some of these risks to the Chinese and therefore global economy, with charts! I may post on these issues from time to time as it’s beginning to feel more and more relevant.