14/12/19: Governance and Government Debt

What I am reading this week: a new paper via EFMA, titled "Governance and Government Debt" by João Imaginário and Maria João Guedes, available here: https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2019-Azores/papers/EFMA2019_0184_fullpaper.pdf.

The paper looks at "the relationship between Worldwide Governance Indicators [a proxy for governance quality] and Government Debt in 164 countries for the period between 2002 and 2015." Using fixed effects (FE) and generalized method of moments (GMM) models the authors show that "governance quality is negatively and statistically related with government debt. For Low Income countries was found evidence that better governance environment is associated with lower public debt levels."

More specifically, "for a set of 164 countries on a period between 2002 and 2015, ... estimation results for FE model suggest that Control of Corruption (CC) and Voice and Accountability (VA) indexes are negative and statistically significant on influencing government debt. In part, this result confirms our Hypothesis 1 that better governance quality is associated with lower levels of public
debt." But the study also shows that these 'global' effects are predominantly driven by the presence of low income countries in the full sample. The authors find that "the link between good governance quality and government debt reduction is more evident for Low Income countries."

As a caveat, the authors do find that overall higher score in the World Governance Indicators Index (as opposed to specific sub scores) has a negative and statistically significant impact on the levels of government debt, so that overall higher measure of governance quality is associated with lower government debt for the High Income economies. The magnitude of this effect was reasonably large, as well.

13/12/19: World Bank and WEF reports highlight relatively poor competitiveness rankings for Ireland

The latest World Bank "Doing Business" report rankings and the WEF's "Global Competitiveness Report" rankings show Ireland in a mid-tier 1 position (24th ranked in both tables) in terms of competitiveness - hardly an enviable position.

Ireland's position marks a deterioration from 23rd rank in WEF table, driven by relatively poor performance in ICT adoption (hmmm... Silicon Docks economy is ranked 49th in the World), macroeconomic stability (ranked 34th), product markets competitiveness (35th), and financial system (42nd).

Full WEF report here: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf and full WB report here: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf WB country profile for Ireland: https://www.doingbusiness.org/content/dam/doingBusiness/country/i/ireland/IRL.pdf.

A summary chart for Ireland from WB report:

Which, again shows poor performance in the area of credit supply, as well as trading across the border (correlated to the effective market size),  but also in access to electricity, registering property, dealing with construction permits, and enforcing contracts.

13/12/19: UK Vote and Younger Voters

On foot of the UK General Elections results, here is a telling sign of the changing generational effects on voting with some questions for the U.S. 2020 election:

Given the above numbers, the 'younger voters tide of change' expected in 2020 in the U.S. elections is a function of two factors: turnouts and demographic concentrations. We are, of course, yet to get this data from the UK polls.

Worth thinking about these, if you are a political analyst.

Note: some data on voter turnout as of 627 MPs elections completed.

• Turnout was about 67%; circa two-points lower than in 2017, signalling no upswell in political activism by the voters. Given that younger cohorts of eligible voters increased in numbers, while older cohorts diminished due to time lapse, this suggests that younger voters were not as energised to show up at the polls as media hype suggested.
• Per Brunel University analysis: "youth turnout lagged well behind that of their elders. If we look at the 20 constituencies with the highest proportion of 18-35 year olds, the average turnout yesterday was 63%; the turnout for the 20 constituencies with the fewest 18-35 year olds was 72%." See: https://www.brunel.ac.uk/news-and-events/news/articles/Labour's-car-crash-result-by-age-group. Again, evidence that the younger, more 'Remain', voters were not sufficiently fired up to show up at the polls. 
• Per same source: "The decline in turnout since 2017 was also slightly greater – at 1.5 points lower – in those constituencies with more young adults than those with the fewest – where it was 0.8 points lower." Again, a signal of younger voter apathy?
• Younger voters did go for Labour: "Labour held onto every one of the constituencies with the highest number of 18-35 year olds that it won in 2017."

Here is a really damning conclusion, emphasis mine: "What is clear is that, once again, claims of a youthquake – a sharp rise in turnout among young voters that would benefit the Labour party – have proven well short of the mark. At no point in the campaign have the opinion polls suggested that a youth turnout surge would materialise, but there was a great deal of excitement surrounding the surge in voter registrations among the under-35s – 2.8 million between October and December of this year, more than half a million more than in the same period before the 2017 election – which fuelled claims that a youthquake was on the horizon."

12/12/19: Ireland's Jobs Creation Track Record: Raising Some Questions

Doing some research on the state of precariat in modern labor markets, I came across some interesting data from the 'poster country' of the post-GFC recovery: Ireland.

Ireland's economy and its recovery from the crisis are both characterised by the huge role played by the internationally-trading multinational corporations. In recent years, these companies have been gearing up for the upcoming OECD-led BEPS reforms (more on this coming up next month in my usual contribution to the Manning Financial publication, but you can read academic-level analysis o the BEPS here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406260). The strategic shift this entails involves MNCs domiciling into Ireland intangible property and new business functions to create a larger 'footprint' in the economy. With this, employment in MNCs operations in Dublin and elsewhere boomed.

Why is this important? Because the main story of the Celtic Tiger revival has been about the aforementioned jobs creation and accompanying dramatic drop in official unemployment. Less covered in the media and politicians' statements, over the same period of time as 'jobs creation' was allegedly booming, Irish labour force participation remained well below pre-crisis levels (meaning there were more discouraged unemployed who stopped being counted as unemployed). Even less attention has been paid to the quality of jobs creation.

The above chart partially reflects the latter concern. It shows that full-time employment as a a share of total working age population has improved from the bottom of the series at the peak of the recession, but the rebound has been largely incomplete. Similarly (not shown in the chart) the percentage of those in part-time employment as a share of total number of those in employment has remained above pre-crisis levels. Over 1998 through the first half of 2008 (the pre-crisis period), that share averaged 17.5 percent. This rose to above 23 percent in the years of the crisis (2H 2008 - 2013). It remained at around 23 percent through 4Q 2016, and has declined to around 20.3-20.5 percent since then. This too signals that the quality of jobs being added even in the mature stage of the recovery is still lagging the quality of jobs in the pre-crisis period.

Now, imagine what these figures would have been were it not for the MNCs latest tax shenanigans...

11/12/19: Private Sector Leads Electrification of Transport in Ireland

Ireland's uptake of electric vehicles has risen dramatically in 2019 (to-date, data through November), according to the data release from CSO.

Based on annualized numbers, Ireland is on track to add 3,790 new electric vehicles in 2019, of which 3,998 are expected to be private vehicles. In general, across all years we have data for, private sector (households) leads uptake of electric vehicles, with public sector lagging.

In 2019, new electric vehicles will account for ca 3% of the total new vehicles registered in Ireland. In the private sector, electric vehicles will account for 2.53% and in the public sector the share of electric vehicles in all new vehicles registered will rise to 1.07%. This marks major increases over 2015-2018 cumulative additions share of 0.44% total, 0.53% private and 0.32% public.

10/12/19: Irish Banks: Part 2

Continuing with the coverage of the Irish banks, in the second article for The Currency, available here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks, I cover the assets side of the banks' balancesheets.

The article argues that "The banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what does not make sense to investors does not make sense to society at large." In other words, strategic errors that have been forced onto the banks by deleveraging post-crisis have resulted in the Irish banks becoming a de facto peripheral play within the Euro area financial system, making them unattractive - from growth potential - to international markets.

The key conclusions are: "From investors’ perspective, neither of these parts of the Irish lenders’ story makes much sense as a long term investment proposition. From the Irish economy’s point of view, the banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what doesn’t make sense to investors doesn’t make sense to the society at large."

10/12/19: Irish Banks: Part 1

Returning back to the blog after a break, some updates on recent published work.

In the first article on Irish banking for The Currency, titled "Culture wars and poor financial performance: examining Ireland’s dysfunctional, beleaguered banking system", I argued that "The financial performance of the Irish banks has been abysmal. Not for the lack of profit margins, but due to strategic decisions to withdraw from lending in the potential growth segments of the domestic and European economies." The article shows the funding side of the Irish banks and the explicit subsidy they receive from the ECB through monetary easing policies - a subsidy not passed to the end credit users.

In simple terms, high profit margins are underpinned - in Irish banks case - by low cost of funding.

Conclusions: "The implications of the lower cost of banks equity, interbank loans, as well as deposits for the Irish banking sector are clear cut: since the start of the economic recovery, Irish banks have enjoyed an effectively free ride through the funding markets courtesy of the ECB and the blind eye of the Irish consumer protection regulators. Yet, despite sky-high profit margins extracted by the banks from the households and businesses, the Irish banking sector remains the weakest link in the entire Eurozone’s financial services sector, save for Greece and Cyprus. If the funding side of the equation is not the culprit for this woeful record of recovery, the other two sides of the banking business, namely assets and regulatory costs, must be."

Read the full article here: https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks. 

16/10/19: Recalling the Celtic Tiger

Recalling the Celtic Tiger, edited by Brian Lucey, Eamon Maher and Eugene O’Brien is coming out this week from the series of Reimagining Ireland Volume 93, published by Peter Lang, DOI 10.3726/b16190, ISBN 978-1-78997-286-3.

The book includes 12 mini-chapters by myself and multitude of contributions from some top-level contributors. Wroth buying and reading... and can be ordered here: https://www.peterlang.com/view/title/71254.

16/10/19: Euromoney Risk Survey Q3 2019 Results

Euromoney analysis of Q3 2019 results for country risk surveys and risk outlook forward, with lots of comments from myself and others: https://www.euromoney.com/article/b1hjf7xr90tdkj/ecr-survey-results-q3-2019-us-china-canada-mexico-punished-by-tariffs.

16/10/19: Ireland and the Global Trade Wars

My first column for The Currency covering "Ireland, global trade wars and economic growth: Why Ireland’s economic future needs to be re-imagined": https://www.thecurrency.news/articles/1151/ireland-global-trade-wars-and-economic-growth-why-irelands-economic-future-needs-to-be-re-imagined.

Synopsis: “Trade conflicts sweeping across the globe today are making these types of narrower bilateral agreements the new reality for our producers and policymakers.”

16/10/2019:Corporate Bond Markets are Primed for a Blowout

My this week's column for The Currency is covering the build up of systemic risks in the global corporate bond markets: https://www.thecurrency.news/articles/1962/constantin-gurdgiev-corporate-bond-markets-are-primed-for-a-blowout.

Synopsis: "Individual firms can be sensitive to the periodic repricing of risk by the investors. But collectively, the entire global corporate bond market is sitting on a powder keg of ultra-low government bond yields, with a risk-off fuse lit by the strengthening worries about global economic growth prospects. Currently, over USD 16 trillion worth of government bonds are traded at negative yields. This implies that in the longer run, market pricing is forcing accumulation of significant losses on balance sheets of all institutional investors holding government securities. Even a small correction in these markets can trigger investors to start offloading higher-risk corporate debt to pre-empt contagion from sovereign bonds markets and liquidate liquidity risk exposures."

7/10/19: Bitcoin, ethereum and ripple: a fractal and wavelet analysis

Myself and Professor Shaen Corbet of DCU have a new article on the LSE Business Review site covering our latest published research into cryptocurrencies valuations and dynamics: https://blogs.lse.ac.uk/businessreview/2019/10/07/bitcoin-ethereum-and-ripple-a-fractal-and-wavelet-analysis/.

The article profiles in non-technical terms our paper "Fractal dynamics and wavelet analysis: Deep volatility and return properties of Bitcoin, Ethereum and Ripple" currently in the process of publication with the The Quarterly Review of Economics and Finance (link here).