Saturday, November 23, 2013

Bluff or not, Indonesia's live cattle ban threat hurts Australia's reputation

The latest threat from Indonesia to freeze Australia's live cattle trade takes the fallout from the spying scandal to a disturbing new level.

So far this been a war of words and tense diplomatic exchanges, some of which have been conducted over social media and retweeted around the world.

Now the sabre-rattling poses both a perceived and real threat to Australia's live cattle exports which is estimated to be worth around $174 million a year.

Regardless of whether the latest salvo is a bluff, the damage to Australia's reputation as an honest broker in the world of trade and diplomacy is being harmed by the day.

Live cattle is one area where Indonesia could apply pressure and tensions look set to ramp up unless the Prime Minister comes forward with the sort of face saving apology President Susilo Bambang Yudhoyono appears to be seeking.

Indonesia is a powerful G20 member so at the very least, the diplomatic arm twisting could grow more intense given that G20 meetings are billed as opportunities to foster and strengthen trade relations.

It's likely that Indonesia could flag the option of boycotting future G20 talks as part of the protest.

Australia hosts the G20 leaders summit in Brisbane next November and in the meantime, organisers from the Department of Prime Minister & Cabinet will be in damage control mode to neutralise fallout from the spying revelations.

And there'll be more scrutiny on intelligence and communications security than usual given claims that G20 meetings have been bugged by foreign governments in the past.

Friday, November 22, 2013

Words as bullets - Glenn Stevens mouths "intervention" option and dollar falls

The overnight fall in the Australian dollar shows - once again - that just a few carefully targeted words from Glenn Stevens have the power to move markets.

While Mr Stevens didn't say the Reserve Bank was about to intervene to pull the dollar down, his comment that the option was in the monetary policy "toolkit" proves that words from central bank governor can be timely bullets.

And the impact-laden comments show the Reserve Bank's frustration in its attempts to lower the dollar, despite 2.25 percentage points in cash rate cuts since late 2011.

The dollar's fall accelerated as Mr Stevens rolled out  the "intervention" word, even though he has used this type of language before in keeping the option open and refusing to rule anything in or out.

But speaking to an audience of dollar-focused market economists and journalists, Mr Stevens knew his comments would hit the newswires immediately and take the stubbornly high dollar even a bit lower.

"Our position has long been and it remains that intervention can, in the right circumstances, judiciously used, be effective and useful," Mr Stevens told the Australian Business Economists annual dinner in Sydney last night.

"It can't make up for policy weaknesses in other areas and it can't really stand against fundamentals but subject to those conditions, if it works with fundamentals, it can be effective and so it remains part of our toolkit."

"That doesn't mean we will always eschew intervention."

While the wording was calm and measured, there was no doubt about the Glenn Stevens' intentions.

Mr Stevens knows even light-hearted comments about Reserve Bank deliberations can set blood pressures racing.

Back in July, Mr Stevens said that the RBA board had “deliberated for a very long time” when it decided to keep the cash rate on hold.

Market economists took that to mean that a rate cut was on the agenda and revised their forecasts accordingly.

Mr Steven’s deputy Philip Lowe was forced to clarify the next day that the comments were part of “a very light-hearted introduction” that the media had misinterpreted.

But even before Glenn Stevens started speaking last night, the Australian dollar had been gradually falling.

It was well-telegraphed that Mr Stevens was the keynote speaker at the dinner so the decline was partly in anticipation of Mr Stevens' likely "jawboning".

Much earlier on Thursday morning the dollar fell from a high of 94.05 US cents after the US Federal Reserve said it might reduce its massive stimulus program "in the coming months".

The decline continued until the dollar bottomed at 91.98 US cents at 5.24 AEDT in what appears to be partly via the Stevens "intervention" comments and heavy selling of the Australian dollar from the United States.

Taking all factors into account, the Australia dollar fell by more than two US cents over that period.

But this morning as reality about the Reserve Bank's task of taming the dollar returned, the dollar recovered to as high as 92.66 US cents.

The Australian dollar has rocketed in the recent years to a peak of 110.61 US cents in August  2011 after Australia sidestepped the global financial crisis and China-led mining investment boom spurred growth.

But manufacturers and exporters have been squeezed,  prompting changes on the industrial landscape including the decision by Ford to exit Australia in 2016.

With a cash rate of 2.5 percent and concerns about rising property prices, the Reserve Bank will be reluctant to cut rates again.

So with the rates cut instrument likely to remain idle in the monetary policy toolbox, talk of currency intervention in the right circumstances is likely to become louder especially if the US Federal Reserve delays its stimulus windback.

Thursday, November 21, 2013

IMF urges caution on potential property price "overshoot" - but not worried yet about "bubble"

The International Monetary Fund has cautioned that the recent surge in Australian property prices and rising investor expectations could cause values to "overshoot".

While the IMF does not point to a property bubble in the hot markets of Sydney, Melbourne and Brisbane, it is urging regulators to scrutinise property investment to ensure banks maintain strict lending standards.

"Attention should be paid to the risk - as in any situation where asset price inflation accelerates - that a prolonged period of rapid price growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting," the IMF said in a statement.

"A sudden house price decline, were it to occur - possibly triggered by a shock to household incomes and borrowing costs - could reduce consumer confidence and impact overall economic activity.

"The authorities would need to be prepared to take preventative actions if household credit growth, transactions volume, and prices accelerate."

Source: IMF Article IV Consultation with Australia
The advice comes in the IMF's latest report card on the Australian economy, which says it has "performed favourably" compared with other advanced economies.

Listen to my interview with IMF deputy managing director Min Zhu broadcast on AM

However, the IMF says the Reserve Bank is well equipped to manage any potential price bubble, as it did in the early 2002 when the cash rate increased from 4.5 per cent to cool property speculation.

The IMF also believes Australian households are also better prepared having "built up large mortgage buffers" because of lower interest rates and consumer caution.

The IMF's deputy managing director Min Zhu, who is visiting Australia, told AM that while there is no sign of a housing bubble, regulators need to ensure strict lending standards are maintained.

"The real risk is a financial risk," Dr Zhu said.

"You have to see the qualifications of borrowers, you want to see the quality of the mortgage loan. I think this is the most important things. We need to carefully manage it.

"Particularly if expectation driven investments, you got to be very careful. So once again, the financial sector play a very important role to make sure the quality for long, to make sure the lending standards is there."

Dr Zhu repeated warning from regulators, including the RBA governor Glenn Stevens, that investors should not expect instant capital gains from property.

"No, you don't want to jump into the market and expect to see a huge return. It will never happen," he said.

The IMF has also endorsed the strength and stability of Australia's "big four" banks, but warned that "vulnerabilities remain".

"The four major banks are systemic with broadly similar business models and their reliance on wholesale offshore funding, although falling, still represents a risk," the statement says.

The IMF says that while stress tests show Australian banks "could withstand a number of sizeable shocks", the effects would "make major inroads into their capital buffers."

The IMF says that in the event of an shock - similar to a Lehman Brothers collapse - banks would possibly require intervention from the Reserve Bank.

"Banks would also likely require RBA help to withstand an extreme funding shock," the IMF says.

"Banking sector vulnerabilities should be assessed on an ongoing basis to manage the risk that systemically important banks pose to the economy."

Dr Zhu says while the reliance on offshore funding by banks is declining, it still poses a risk but one that can be managed.

"The whole banking sector still relies on the offshore funding. The one thing is that Australian banks have a good reputation and good quality ratings so they will be able to maintain a sustainable funding flow." 

Tuesday, November 19, 2013

Indonesian spying scandal could overshadow Australia's G20 chairmanship

By Business editor Peter Ryan - analysis

The revelation that Australia has been spying on Indonesia is likely to cast a diplomatic shadow over preparations for the next G20 summit.

The eavesdropping on the phones of President Susilo Bambang Yudhoyono, his wife and cabinet ministers comes as Australia prepares to assume the G20 chairmanship from Russia next month.

The next G20 leaders summit will be held in Brisbane in November next year and is being billed on the Prime Minister's website as "the most significant meeting of world leaders Australia has hosted".

The G20 summit is also being trumpeted as "Australia's opportunity to influence the global economic agenda" and to "strengthen engagement with the world's major economies".

But as the Indonesian spying scandal escalates, the big picture global issues and Australia’s moment in the global limelight risks being clouded or diverted.

With as many as four thousand delegates including heads of government, finance ministers and central bank governors set to attend, the pressure to ensure secure communications will be more intense and complex than usual.

It's also anticipated that around three thousand journalists will also be attending and some will be gripped by recent spying scandals and wondering if intelligence agencies will have a covert seat at the G20 table.

Australia's growing impasse with Indonesia comes amid more evidence - if needed - that eavesdropping on foreign leaders is a common practice even between friendly nations.

An earlier diplomatic flashpoint was the revelation that US intelligence broke through three levels of encryption to intercept mobile telephone calls made by the German chancellor Angela Merkel.

And in the past, there have been unsubstantiated allegations that G20 meetings have been frequently bugged by foreign governments.

Just last week, the former cybersecurity adviser to Presidents Obama and George W Bush expressed concern that cybersecurity was not on the G20 agenda.

Melissa Hathaway, now an advisor to thetechnology giant Cisco, told AM the episode showed how widespread surveillance has become around the world.

But without confirming or denying whether such eavesdropping activity takes place, Ms Hathaway signaled it was common practice.

"Citizens should expect that our governments are doing everything in their power to enable a productive and safe lifestyle," Mr Hathaway told me.

"Each of our governments approach that differently."

There's no doubt that the G20 Taskforce set up by the Department of Prime Minister and Cabinet will be in damage control mode to ensure the Brisbane G20 runs smoothly and that unhelpful issues such as spying are neutralised as quickly as possible.

Monday, November 18, 2013

Turnbull warns of "daunting challenge" in getting NBN back on track

The Communications Minister Malcolm Turnbull has warned it will be a "daunting challenge" to get the National Broadband Network back on track.

Mr Turnbull was speaking at a conference in Sydney to update the telecommunications industry on whether the NBN would be delivered on time and on budget.

Listen to my analysis from The World Today.

The NBN Company is currently in the middle of a 60 day review ordered shortly after the Coalition was elected.

But the outcome is becoming a headache not just for Mr Turnbull but the entire telecommunications industry which is looking for certainty after the instability of the Labor years.

When the review ends on December 31, industry stakeholders will want a clear answer on whether the NBN will be delivered in a fashion that works not just for the Coalition but for them.

While Labor's fibre to the home version was costed at $44 billion, the Coalition's fibre to the street corner using Telstra's copper wire to home is more modest at around $29 billion.

But anything is possible given Mr Turnbull's comments earlier this year that all options will be assessed during the review.

Mr Turnbull made the point this morning that the Labor government had no business in undertaking such a massive financial project with underwriting from the private sector.

Political issues to one side, Mr Turnbull is now warning of "bumps in the road" in the rollout of "a colossal undertaking" which is now "a daunting challenge".

It's easy to get the impression that Mr Turnbull is carefully managing expectations about how and when the NBN will eventually be rolled out.

"Make no mistake. To get this project back on track and completed in a reasonable time frame at a reasonable cost is a daunting challenge," Mr Turnbull said.

Participants at "The NBN Rebooted" conference hosted by the Communications Alliance would have been disappointed at the "no show" of NBN executive chairman Ziggy Switkowski who was billed earlier as keynote speaker.

However a spokesman for Mr Turnbull said Dr Switskowski had never accepted the invitation to speak and that his listing on the conference agenda was mischievous.

It's understood the Dr Switskowski - in the past accessible to journalists including this reporter - has agreed to keep a low profile in line with the communications strategy of the Coalition.

And on the theme of public commentary in relation to the NBN (which was almost daily during the Rudd/Gillard governments) Mr Turnbull said he had ordered the NBN Company and anyone related to the project to "tell it as it is".

"There is no longer any room at the NBN Co for spin or for telling the minister what people imagine he wants to hear," Mr Turnbull said.

"In short, I expect the team, management, the board at the NBN Co to regard every forecast and every decision as something they would be prepared to defend in the prospectus for a public listed company."

In ordering the elimination of "spin" in NBN communications, Mr Turnbull is raising the bar for all government projects.

Mining industry "sharing the wealth" says report - but Mitch Hooke says "laggards" need to do better

The mining industry's chief lobbyist says there are still corporate "laggards" when it comes to ensuring that mining communities get a fair share of benefits from the resources boom.

The comments by the Minerals Council's chief executive Mitch Hooke come as a study shows the resources industry spent $35 billion on community infrastructure, indigenous contractors and local suppliers in the 2011 - 2012 financial year.

That is $14 billion more that the $21 billion dollars the the industry is estimated to have paid in company tax and royalty payments in the same year.

The research by the corporate social responsibility consultants Banarra has been released as the political debate over the proposed repeal of the Mineral Resource Rent Tax (MRRT) hots up.

Mitch Hooke told AM that despite the massive spending there are still gaps in communities that need to be filled where the mining industry needs to do a better job.

"Yeah, I think so. Communities are voting with their feet. And they're actually picking on the companies, and identifying the companies that they'd like to be a part of their community. So if you extrapolate that across the industry as a whole, you'd come to the conclusion that we've got some laggards and they need to pick up their act if they're going to be part of the new equation," Mr Hooke said.

The Banarra study, based on a survey of 25 Australian mining companies, found that $34.7 billion was spent on community infrastructure, Indigenous contractors and local suppliers.

According to research by Deloitte Access Economics, the spending exceeds the projected returns from the MRRT and company tax and royalty payments from mining companies.

Infrastructure projects funded by mining companies include health care centres, education and training, sporting clubs, swimming pools and transport services.

But Mitch Hooke said the spending was not a "philanthropic exercise" to appease critics of the mining industry.

"There still has to be a business case to it. But the benefits of that community investment and that community contribution, they extend beyond the direct benefits of the company. And so therefore there's knock on effect to the community as a whole," Mr Hooke said.

And Mr Hooke said the mining industy was committed to assessing infrastructure spending despite concerns that the investment phase of the mining boom is peaking.

"There's a correlation between the extent of economic activity and the level of investment. But it's not going to fall off the edge of a cliff.  It's coming off down the other side

"I think you've got to have the social license. You've got to have the confidence of the communities in which you're operating and the business case for investing in those communities, not only as a source of skills and as a source of goods and services and supplies,  but also confidence that the mining industry is part of their local community and therefore part of their quality of life."

Mr Hooke also had a sharp response to critics who believe spending on social infrastructure is something the mining industry should be doing anyway.

"Well I agree. We agree wholeheartedly. The argument is, from the former government, was that we weren't doing it. So we agree that we should be investing in those communities. We agree that a social license to operate is a fundamental platform for the manner of our business. And we agree there's a very strong business case for having vibrant and strong communities."

And Mr Hooke agreed that attitudes to community spending had changed in mining company boardroom during the resources boom.

"Yes. It's been a transformation. It's almost been a renaissance over the last decade or so. They had a bit of an epiphany. Even our harshest critics will tell you that there's been a massive transformation in the way the industry operates. The cheer squad of enthusiasts will always keep prompting us to do better and that's a good thing."

The Labor Party and the Greens have pledged to oppose the repeal of the MRRT which replaced the more controversial Super Mining Profits Tax introduced by the former Prime Minister Kevin Rudd.