Wednesday, October 15, 2014

Future Fund boss David Neal says RBA comments about a "violent" market correction are overstated. Unless the Fed "makes a mistake".

The head of the Future Fund has played down comments from the Reserve Bank that financial markets are heading towards a "violent correction".

The Fund's managing director David Neal says there would only be a crisis if the US Federal Reserve makes a mistake when it eventually starts moving interest rates from the current level of close to zero percent.

Mr Neal says the Fund is also paying attention to the outlook for its investments in fossil fuels and the possibility that falling demand for oil could damage traditional energy assets.

Here's my report from The World Today.

Ireland calls time on "double Irish" tax dodge; G20 leaders under greater pressure to deliver real reforms in Brisbane next month

Ireland says it will phase out a well-worn loophole that allows multinationals to avoid paying billions of dollars in tax.

The avoidance scheme known as "the double Irish" is exploited by corporate giants including Google, Apple, Facebook, Linkedin and PayPal.

The move by Ireland comes as G20 leaders who'll meet in Brisbane next month face renewed pressure to rein in corporate tax dodgers with consistent global reform.

The announcement by Ireland's Finance Minister Michael Noonan comes as Ireland begins to recover from the global financial crisis which saw it bailed out by the European Union and the International Monetary Fund.

 "I want to make sure that the slur of the "Double Irish" is no longer attached to Ireland's reputation. it had become something that was thrown at us internationally" Mr Noonan said. 

"There's a big advantage I believe for Ireland to be the first mover. Our competitor countries, if you were investing there tomorrow you would still be uncertain about what the regime might be in two years time."

Ireland slashed its corporate tax rate in the late 1990s to 12.5 percent to attract investment by global companies.

But the "double Irish" allows corporations to use complex structure where untaxed revenues are funnelled to a subsidiary company in a tax haven like the Cayman Islands or Bermuda.

The loophole means multinationals end up paying very little tax or no tax at all.

Throughout the year, G20 finance ministers have been ramping up pressure to end corporate tax dodging so that more revenue can go into government treasury coffers.

However, a G20 committment to reform global tax rules is reliant on individual members such as Ireland to tighten up laws locally.

Ireland is a participant the G20 as a member of the European Union, so the decision by Ireland's Finance Minister Michael Noonan to end "the double Irish" is significant.

As part of the phased-in reforms, multinationals currently using the "double Irish" will be able to keep exploiting it until 2020 when the loophole will be closed.

New participants will be blocked from minimising or avoiding tax.

However, analysts expect tax lawyers for the corporate giants using the "double Irish"  will be working on a response and most likely new ways to minimise their tax.

The move to rein in multinationals poses a big risk for Ireland's soft economy as it recovers from the financial crisis.

Around 160,000 workers are paid by the hundreds of foreign firms incorporated in Ireland and any threat to relocate to another tax haven is an ever-present threat.

Monday, October 6, 2014

RBA cash rate on hold tomorrow - but tea leave readers will scrutinise statement for subtle changes

To most outsiders, it all sounds a bit ho mum.

But tomorrow's meeting of the Reserve Bank board is shaping up as anything but a dull affair.

While almost every market economist thinks the RBA will leave rates steady, all eyes will be on any changed language that could signal the start of a softening up period for a rate rise next year.

The anticipation for even subtle changes or the removal of key phrases is against the background of 2.5 percent cash rate for the past 13 months - one of the longest period of rates stability since 1990.

In statements throughout the year, RBA governor Glenn Stevens has been at pains to signal that the cash rate would remain low for an extended period and that any change in policy would be flagged well ahead.

In his September rates statement, Mr Stevens once again said "the most prudent course" was "likely to be a period of stability in interest rates".

Source: Reserve Bank of Australia September rates statement
Tea leave readers who scrutinise the RBA musings, including economist Annette Beacher of TD Securities, think the RBA is on the brink of preparing the market for an eventual cash rate increase.

"While we're not there yet, I think the time is coming where 'period of stability' of interest rates will be dropped from the statement," Ms Beacher said.

"I think from hereon in with all the discussion of the hot housing sector, we're wondering how long this period of stability will be in the statement."

The RBA has also noted that commodity prices " in historical terms remain high" but this is also likely to change with the iron ore price down dramatically from mining boom highs at US$79.60 a tonne  

"So tomorrow we expect to see 'historically high levels' and 'period of stability'. Technically that is a cut and paste from recent months but the risk is that one of those statements is not there," Ms Beacher said.

"So that makes tomorrow's RBA board meeting a must see event."

Source: Reserve Bank of Australia September rates statement

 Economists will also be watching for commentary on the slowdown in China's economy, the outlook for earlier than expected rate rises from the US Federal Reserve and a landscape of geopolitical flashpoints in Syria, Iraq, Ukraine and Hong Kong.

The steady decline of the Australian dollar - forced in part by rate cuts of 2.25 percentage points since November 2011 - could also feature tomorrow.

This morning it was buying 86.63 US cents after hitting a year high of 95.04 in July.

In September, Glenn Stevens said the dollar "remains above most estimates of its fundamental value".

While the RBA will take comfort from the recent falls in the currency, economists are expecting the RBA to maintain its jawboning to force the Australian dollar even lower.

The ramped up interest in the RBA's statement tomorrow comes amid positive private data out today on inflation and employment.

The monthly inflation gauge from TD Securities and the Melbourne Institute shows inflation rose just 0.1 percent in September after two months of flat results, making 2.2 percent over the year.

The survey  says underlying inflation probably rose 0.5 percent in the September quarter and 2.6 percent over the year - at the midpoint of the RBA's comfort zone of 2 to 3 percent.

The closely watched ANZ Job Advertisements series shows job ads in newspapers and on the Internet rose almost one percent in September - the fourth consecutive monthly rise.

ANZ believes this indicates that the labour market is gradually improving and that he official jobless rate will stabilise at just above 6 percent for the next few quarters before decreasing.

Wednesday, October 1, 2014

Two million Australians risks defaulting on basic debts, credit bureau warns; 500,000 deliberately lie in credit applications

A report out today warns that more than two million Australians risk defaulting on their basic household debts over the next year.

According to an annual scorecard from the credit reference agency Veda, the bills in the too hard basket include small ones for gas, electricity and mobile phones.

The study also says half a million people have jeopardised their credit-worthiness by lying or intentionally omitting information from the credit applications.

The warning comes amid speculation that the Reserve Bank might introduce tighter lending controls to protect investors from rising interest rates and falling property values.

Economists warn that any associated rise in unemployment could see some overly-indebted borrowers defaulting on their mortgage repayments.

However, Veda spokesman Belinda Diprose says mortgage defaults are not yet problematic and the primary default risk relates to unpaid utility bills, credit cards or personal loans.

"It's those easy to miss bills that come up first - telco bills, utility bills - and then they'll move on to credit cards, personal loans and usually it’s the mortgage that's the last one to go," Ms Diprose said.

The Veda report singles out Generation Y Australians - those born in the 1980s - as having the worst scorecard, despite being the most financially ambitious.

The study found that 22 percent of Gen Ys  are likely to overspend to maintain lifestyles they can't afford and are "keeping up with the Joneses".

"They have this real fear of missing out. They're quite an ambitious group of people and they are not afraid to use credit to fund their lifestyles and to fund their goals," Ms Diprose said.

"One of the key things they need to understand is that if they do default it can really impact their ability to get credit in the future," Ms Diprose said.

However, the Veda study says slightly older Australians - Generation X - are at most risk from damaging their credit profile through late bill payments.

"Gen Xers are those who at the moment have young families and it's really hard to keep up with the daily pressures of bills for childcare and things like that," Ms Diprose said.

"So it's really important for people to understand what's on their credit history, what they can do to influence it and how it can impact them down the track when they really do need to get access to credit."

The scorecard also warns that the 500,000 Australians who have lied about their credit history need to be aware of new privacy rules where financial institutions can now view both positive and negative credit behaviour.

"It's certainly fraud. But as part of the new comprehensive credit reporting laws there's more information available for banks and lenders when they're assessing you on your credit application," Ms Diprose said.

"So if you omit for example that you have three credit cards and you only put two on it, they can see that information so it's probably best to tell the truth on your application form."

Monday, September 29, 2014

Australian shares fall on China economy concerns; Australian dollar slides to 87.1 US cents

There have been more heavy falls on the Australian sharemarket this morning in reaction to continuing concerns about China's economy.

The uncertainty has also helped take the Australian dollar to 87.1 US cents - its lowest level in seven months.

And shares in the world's biggest wine company, Treasury Wines, have been hammered as much as 15 percent  this morning after it called off $3.4 billion takeover talks with private equity firms.

Jobs to go as energy prices surge without gas reservation policy, AWU warns

A national campaign is being launched today for greater controls over Australia's natural gas exports.

The union-backed campaign wants the federal government to enact laws to ensure a certain percentage of Australian gas is kept for domestic use rather than being exported.

A study by BIS Shrapnel warns that one in five manufacturers could shut down over the next five years because of spiralling gas prices.

The "Reserve Our Gas" campaign, headed by the Australian Workers Union, comes amid fears that Australian gas prices will triple from July next year as LNG exports ramp up.

AWU national secretary Scott McDine told AM that Australia is out of step with other major nations such as the United States that reserve a percentage of gas for domestic use.

"Australians have a right to know their rapidly rising gas bills are actually completely preventable. We just need to do what every other gas-exporting nation does and bring in laws to look after the local population. Australians should pay the Australian price for gas - not the global price - because it's our gas," Mr McDine said.

"We currently have a situation in which our abundant gas reserves are hurting Australian jobs and households instead of helping them. That's crazy and it's no wonder no other gas-exporting nation allows it.

"We are throwing away hundreds of thousands of jobs, and our national competitive advantage, simply so gas exporters can squeeze a little extra profit out of what is already a spectacularly profitable business.

"Of course our abundant natural gas can and should be exported to the world. But a portion of it also needs to be providing a competitive advantage to our local industry, and a cost of living benefit to Australian consumers. We can have both, just like every other gas exporting nation."

The AWU campaign is being supported by major Australian manufacturers exposed to rising energy prices including Alcoa and Australian Paper.

The study by BIS Shrapnel, commissioned by the AWU, finds that rising gas prices will have significant impacts on the economy:

* One in five heavy manufacturers will shut down within five years

* Total manufacturing production will be reduced by 15.4 per cent by 2023

* 91,3000 jobs will be lost in this period as a direct result of manufacturing shutdowns, with 235,000 jobs to go economy-wide

The BIS Shrapnel report also notes a high profit ratio of 66 percent compared to 32 percent for iron ore producers.

While there is no national gas reservation policy, Western Australia mandates the reservation of 15 per cent of the state's gas.

The report says the WA policy has not damaged gas investment or create sovereign risk, with $88 billion invested in WA gas production since reservation was introduced in 2006.

Wednesday, September 24, 2014

RBA warns property investment is "unbalanced" and that speculation raises risk of price falls

The Reserve Bank has warned that investment in Australia property is becoming unbalanced and that speculation increases the potential for the current stellar prices to fall.

In its latest Financial Stability Review, the RBA says recent house price growth in Sydney and Melbourne has encouraged more lending and construction activity by investors.

But the central bank has signalled that the boom in rising prices could unravel if there is "a significant reassessment of risk" lead to a "sharp reprising of assets".

The RBA cites revised expectations for monetary policy - in other words, rate rises sooner than expected - that could derail investors overburdened with debt.

The RBA says "additional speculative demand" could amplify the property price cycle with a subsequent fall in prices hurting household wealth and spending.

"The apparent use of interest only loans for both owners and occupies and investors might also be consistent with increasingly speculative motives behind current housing demand."

And in a stark warning, the Review signals that the dynamics of a fall in asset prices would not only hurt those who fuelled to the speculation.

"The households most effected by the declines in wealth would not necessarily be those who contributed to the heightened activity."

While not directly suggesting the need for tighter lending standards through macroprudential regulation, the RBA said recent measures announced by the Australian Prudential Regulation Authority (APRA) "should promote stronger risk management by lenders".

The RBA says it is now discussing what it calls "additional steps" that might be taken to reinforce sound lending practices to property investors.

The Review has also raised concerns about Australia's commercial property sector which has also been the focus of strong demand from both domestic and foreign investors.

The RBA warns: "any significant reversal of demand could expose the market to a sharp repricing."

The RBA gives Australia's financial system a tick, saying it is underpinned by the strong performance of the banking system.

It says while some households have taken on more debt, lower interest rates for now allow them to service the debt load.

Follow Peter Ryan on Twitter @peter_f_ryan

A third of Australian listed companies risk financial catastrophe, CPA Australia warns

A report out today on the health of Australia's listed companies says nearly a third are confronting the risk of a financial catastrophe.

Analysis of almost 16,000 annual reports by the professional accounting body CPA Australia, shows there are more alarm bells ringing now than during the depths of the global financial crisis in early 2009.

Listen to my extended interview with CPA Australia chief executive Alex Malley from this morning's edition of AM on ABC Radio.

The research, conducted between 2005 and 2013, says the red-flagged companies are exposed to the dual risks of end of the mining investment boom and an unexpected slowdown in China.

The CPA study is based on the snowballing of "going concern" warnings from auditors which are used to flag "significant uncertainty" in a company's ability to survive.

CPA Australia chief executive Alex Malley says the findings are a sobering reality check that many Australian companies are fragile.

"We've been talking about the potential impacts of the slow-down in China, the strength of the Australian dollar and the effects of the tapering mining boom on the economy for some time," Mr Malley said.

"Now, this report, compiled based on virtually all companies listed on the ASX, shows these economic factors are being felt across the market and are putting almost a third of ASX listed companies at risk of 
financial catastrophe.

"It really begs the question how our economy would be placed were we to face another shock like the GFC?" 

According to the research, the "going concern" warnings has risen significantly in the energy and mining sectors with more than 40 percent of companies feared to be at risk in 2013.

The report comes as evidence mounts that China's economy is slowing faster than expected and that the official growth target of 7.5 percent might not be achieved this year.

Australian miners are exposed with the iron ore price now at a fresh five year low of US$79.80 per tonne.

However, the CPA report says non-mining sectors sych as consumer staples, industrials, healthcare and utilities are also facing concerns about their financial health and how they would fare in another global shock.