Category Archives: Economics

How the Current Slump in Resource Prices is Affecting Remittance

In recent years, the prices of commodities such as oil, gas, sugar, copper, and iron ore have been in a free fall. According to Bloomberg Business, a 46% decline in resource prices has been witnessed since 2011, and we should expect more. With the slowing down Chinese economy, the commodity prices are in for a deeper dive.

As the prices continue to slump, many exporting countries are experiencing financial distress. The decline in commodity prices is eating on their net export revenues, hence pushing them towards a recession. On the other hand, importing countries are experiencing a boom as their disposable income increases with the fall in commodity prices.

How then does the current slump in resource prices affect the exchange market? Even though there is no rule to determine the correlation between currencies and commodities, the relationship cannot be ignored. For instance, the current slump in oil prices has seen the Canadian dollar and the Russian Ruble decline in value. Other currencies affected by the fall in oil prices include the Brazilian Real, Norwegian Krone, and the Colombian Peso.

The decline shows a strong correlation between a country’s major export and the value of its currency in the foreign exchange market. In the case of Canada, as the fourth largest exporter of crude oil, a decline in oil prices is likely to result in the weakening of the Canadian dollar. The decline in revenues from oil will weaken the currency in the exchange markets.

When it comes to importing countries, a slump in resource prices can mean two things. First, the decline in commodity prices means reduced expenses and hence higher profits for companies. With the increased revenues, the importing countries will get a chance to improve their current accounts hence strengthening the value of their currency in the foreign exchange markets.

Among the greatest importers of oil, the Chinese Yuan should be blossoming in the current oil prices, but due the slowing economy, things are different. India, which imports 75% of its oil is expected to ease its current account deficits if the oil prices maintain their low.

On the other hand, a slump in commodity prices can mean deflation to importing countries. A decline in commodity prices results in a decline in related product prices, thus encouraging exports and discouraging imports. In the long run, all factors considered, this leads to the strengthening of the given currency.

As the resource prices continue to tumble, there is a likelihood of a decline in remittances from the affected economies. For instance, in the wake of the falling oil prices, the remittances from Indian citizens working in major oil producing countries has declined. The World Bank warns that if the oil prices are to remain low, the remittance flow from the Gulf Cooperation Council will decline further. Even when India is benefiting from an increase in disposable income, the decline in remittances to the country is a reason to worry.

The main reason for the decline in remittances is the weakening of a currency of the affected economy. When the prices of exports fall, the decline in revenues is likely to weaken the position of a given currency in the global foreign markets.

For instance, the weakening of Russia economy is affecting the economies of neighboring countries as a result of the declining remittances, trade and investments. The areas most affected by the slowing Russia economy include Central Asia and Caucasus. Given that most developing countries depend on remittances from developed nations, the plummeting oil prices have a negative effect on the stability of their currencies.

Even as some countries continue to enjoy the increase in disposable income as a result of the slump in resource prices, there is a reason to worry. As the commodity markets continue to plummet, there is a likelihood of a contagious financial disaster to the global economy. When coupled with other factors as the crumbling China economy, the prices are likely to go down further leading to more trouble.

As analysts continue to encourage investors that this is the best time to buy commodities, there is a reason to be more careful. Unless the Chinese markets stabilize, the commodity prices are likely to crumble further.

The History and Future of the Telegraphic Transfer

The word telegraphic transfer is a nostalgic term in banking and finance because it refers to a time when sending money in any way electronic was unusual. In the early history of banking all bookkeeping was done manually, money transfers were done in cash or cheque and transactions were accounted for on paper ledgers. Then came electricity, cable communication and telegraphic transfers were born.

Telegraphic transfer is when one party remits to another electronically. It was first done using cables and now get used to identify any electronic funds transfer. In many parts of the world, it is said as a form sarcasm toward the reminiscence of aristocratic society, as a sort of snub. Prior to the internet, transferring money electronically was reserved to the elite in large important transactions but today more and more people are accessing it. Electronic payments still being relatively new, we have yet to witness the bulk of it historical societal change. Money was electronic and now is digitizing.

The first idea of electronic money came in 1880 when renown American scientist Edward Bellamy suggested accounting for transactions on a card but technology was not yet mature enough to support the application. It wasn’t until Diners Club International issued the first universal payment card that the movement developed steam. In 1957 came Americard (better known as Visa), then in 1966 came Master Charge (known as MasterCard) and in 1968 came the Electronic Data Interchange (EDI) which allowed for what is known today as EFT (Electronic Funds Transfer).  Up until the mid 1990s, the developed world gradually transitioned over to electronic payment systems. Pop culture started depicting electronic payments as more mainstream and mass adoption to root.

1981 sparked the official beginning of the digital revolution with the first use of internet protocol. Large financial institutions at this time started implementing digital payment networks and international settlement became faster. This is when securitization began, the cabal of large institutions started not only digitizing money but investments and all forms of economic value. In turning these formally illiquid values transactable, the established financial community increased trade and became more interwoven but this did not stop the digitizing of assets.

Despite large regular financial market panics, money has continued to move faster and faster while markets digitized. Long gone are the days of physical stock exchanges and trading is mostly done on computer and often through the use of algorithm (within developed centres). The Internet being peer to peer, one would think that markets would have decentralized with increasing use but we are yet to see this on a large scale. Even today, much of the worlds exchange of money and securities is done on proprietary networks that are centrally owned. Innovations in payment networks has been made and the technology is now existent to start decentralizing financial markets.

Transaction authentication has long been the primary obstacle to removing third parties to individual transactions. By the very nature of a financial exchange you need to confirm that an exchange of value has been made and in early times this was done with a unique and hard to replicate physical token (a currency). When electronic ledgers appeared, a settling agent and clearing house was required to confirm that a unit of trade was not spent twice and was in fact transferred.

Since the introduction of HasCash in 1997 and the latter expansion into Bitcoin in 2009, encryption has successfully solved this issue. No longer do you need any witness to you transactions as they are automatically accounted for in a public ledger and authenticated by the entire network using cryptology. This has sprung a entirely new sub sector within finance that revolves around peer to peer trade based on encryption as enthenticators to trust. Entire markets such as Coinffein have sprung up to exchange digital currencies without a third party.

Many insiders today, are referring to the underlining technology of Bitcoin (the blockchain) in the same light as Linux was viewed. Many suggest that it has the potential to impact financial markets in the very way that many aspects of the Linux OS has impacted electronics. The Linux architecture is present in some way, shape or form in just about every computerized devise and has been built upon to serve a wide variety applications in just about every industry. Linux changed computers forever because it was a base an architecture that could be improved upon. The blockchain shares that commonality with Linux.

Telegraphic transfers are simply electronic transfers. To know where we are going it’s important to know where we have been. We have come from a place exclusive use to a more and more open economy. I would anticipate this continue and the only logical directory would be to have a larger number of people take more control over their units of trade and thus their measurement of wealth. The exchange of value is becoming more peer to peer and this has the potential to empower money people. We are currently witnessing a turning point in our economic history and spotting the opportunity is often half the battle.

Are Swiss Banks Private like in the Movies?

Swiss bank have for a long time been iconic for big wealth and pseudonymous for privacy. Popular movies have long depicted Swiss numbered bank accounts as being no questions asked lock boxes to store your ill gotten gains but Swiss banking has changed.

Remember the days of those James Bond villains carrying the steel briefcase with a telephone in it ready to receive the wire for that big extortion? At one point in history, Switzerland had one the most developed and secretive banking sectors of the world. It’s wasn’t by any means unsupervised but was infamously secretive. During World War 2 Swiss banks were known to carry accounts for both sides of the conflict, to everyone from victims of war to high ranking official and pillagers alike. Parts of high French society were exposed to have made large deposits to evade French taxes when Swiss banks were actively financing the Germans. In 1934 the Swiss government restructured regulation on banking through the Federal Act on Banks and Savings Banks granting account holders privacy from all non-Swiss third parties. Individual accounts were, and still are identified by number and every number corresponds with another number to identify the client. It’s a form of natural encryption which is the basis of many important digital currencies today (encrypted digitally of course). This form of encryption, is only as private as its intermediary settling the transaction which until the 1990s was the bank itself.

Banking in Switzerland today is supervised by the Swiss Financial Market Supervisory Authority (FINMA). Over the last decade due to overwhelming political pressure from many G20 nations, repeals to an important law that was granting much of the privacy were discussed. In 2009, Swiss authorities indicated that changes were to be made to a certain portion of the act, where banks would only reveal private information in cases of serious crimes, tax evasion not being one of them. In 2013, authorities further indicated that they were going to align with standard G20 banking practices but no material change has been made since.

The loophole mentioned by many G20 economic pundits relies on the fact that in Switzerland the act of not reporting earned income is considered tax evasion and not tax fraud. Authorities simply don’t view tax evasion as a serious enough offence to breech privacy. From a Swiss stand point, its makes economic sense because they are earning domestic deposits while reducing a foreign countries tax base. Switzerland is definitely the rich guy on the block.

Since 2009, there have been many lawsuits directed toward Swiss banks (such as UBS for $780M) but an increase of political pressure has been applied on Swiss banking authorities and privacy has been breached. Foreign governments have been successful in lobbying Swiss banking authorities to reveal information making other banking jurisdictions more attractive. With the current global climate, these havens will move around. Switzerland has comparatively vast political clout.

You’re better off going to Switzerland to ski because now a days, if you are looking to hide ill gotten gain, Switzerland is not at the top of your list.

This nostalgic subject brings up an interesting topic in economics and it’s the role of privacy within our transaction system and our world. What amount of privacy is acceptable and in what circumstances? What is money laundering if not hiding wealth accumulated from what would be considered shady activities. I think that with evolution of our financial system and communication, these subjects are going to become increasingly important as mining your data is progressing in use and effectiveness. How private should your money be?

That Third of the World that Never had Access to Banking

When was the last time you bought something with cash?

The difference between being fortunate and challenged has long depended on geography but today with growing communication capacity, global markets are at peoples disposal and prosperity is seeing less physical boundaries. Over one third of the world on the other hand, still does not have access to banking. In terms of essential services, I agree that banking is no more important than postal services , but maybe the reason with there’s no postal service is because there is no bank. Hey let’s be honest here, some places also just don’t want postal service.

In the case of those villages who want postal service, if we were to build a bank, would they then have the prosperity to have postal services? Obviously not and that’s why there aren’t bank everywhere. Of course, I am writing in allegory where the postal services signifies prosperity. People in these villages do have mobile phone though and with Moors Law and electronics continuously getting cheaper, entire generations are leap-frogging in technology. Imagine someone only ever have called someone using a cellphone or even voip. Those people are a growing number.

In saying that, cellphones and the internet have now become the ultimate postal service and what is banking if not a postal service for money. Well at it’s core, that’s what it should be…

People are now increasingly getting access to banking not through traditional brick and mortar but through technological platforms such as mobile banking and even bitcoin. I think what is particularly interesting is that some of these technologies make current established models obsolete. I think that it is definitely fitting that the third world usher in these new technologies of trade.

As seen by the World Bank Global Findex, the reaches of banking are spreading in all sorts of ways. One comes to wonder how this leap-frog in technological platforms will influence their prosperity…


Canada’s 2015 commitment to improve remittance services

Canada’s new fiscal budget was released this week. Being a federal election year, the Conservative Party of Canada has tried to sell the budget as being more centered than ever before. Within it they talk about tax free investing, large scale infrastructure investment, to income tax cuts and the balancing of the fiscal budget. Doesn’t this just seam all right, in the perfect world?

Despite having practically frozen investment to the health and education sector, the federal government is still providing large scale stimulus. Much of it in infrastructure. Like any traditional government budget, it is way over sold. Take the contributions to foreign remittance infrastructure for example. It was highlighted in the budget as being a sector of the economy that had to evolve as fees are generally high and service quality is generally low. The Conservative Party of Canada highlighted that they will be investing to this sector of the economy. How much, you may ask? $5 million over 5 years.

It is very much a positive contribution to understand that many immigrants to Canada remit back home to help their family and should have access to fair and adequate services. So $5 million over 5 years, what’s the deal?

I think that the size of the contribution is actually quite suitable as this sector has significant technological opportunities for businesses to thrive. At the moment, the environment in many developed countries is underdeveloped as it relates to money transfer businesses. In many cases, regulation has gotten in the way but with the advent of block-chain technologies, the entire industry has the opportunity to evolve to reduce fees and increase trust exponentially. Transferring value is something that should be practically free. The evolution of the internet is slowly (or rapidly in some cases) decentralizing our society and the exchange of value is following suit. Trading systems are opening up and more international competition is joining the marketplace. This is what is going to reduce fees and better service for foreign remitters.

Within this budget, the amount of money contributed to the industry was absolutely irrelevant in my opinion. Much of the Canadian media have been quick to point out that the budget contained plans to invest toward remittance infrastructure and this contribution, albeit a good thing for the sector, is not what it needs. Our financial and payment system requires finesse as it relates to regulation. At them moment, much regulation is designed for a none digital world and actually impedes innovation, as companies utilizing new digital systems for exchanging value and identification run into stiff KYC (Know-Your-Client) and AML (Anti-Money Laundering) regulation. This regulation needs to be revamped for our changing economy and that is when the remittance industry will evolve. To add, this issue is not just a Canadian issue but many developed countries have similarly archaic financial regulation.

I’m not saying I have all the answers to the issues presented as they are fairly complex. I am saying that many developed countries need to review their financial regulation to make sure it fits a digital world.

What is remittance and why does it exist?

When foreigners go to work in a country other than their own and send money back home to their people, this practice is known as remittance. It is a normal concomitant to migration and it’s estimated that approximately 5% of the world’s population live outside their home countries. As the world continues to be integrated and essentially become a global village, movement between countries and continents increases and remittances continue to grow as workers move abroad in the hopes of securing jobs.

Remittances have since the 20th century played an important role in the economies of countries like Spain and Italy when emigrant workers would send money back home. However, in recent years remittances to developing countries have grown due to the increased immigration of workers from these countries to developed nations like the United States and the United Kingdom. The Remittance Prices Worldwide Database established in 2008 by the World Bank offers remittance advice and shows that 60% of total remittances are to developing countries. For some of these developing nations remittances can be as high as 10% of their GDP and in 2013 a new record was set with $400 billion going to these nations out of $500 billion of global remittances. The leading source of remittance has been the US for years followed closely by Switzerland, Saudi Arabia and Russia in recent times. On the other hand, the leading recipients have been Asia (China and India) and Africa (Nigeria, Kenya and Sudan)

Reasons for why people send money back home have been studied for years despite the reasons being quite simple. The altruism model suggests that the most basic reason for remittance is to aid family and friends back home. Pure concern for relatives and dependants in the home country drives migrant workers to send money. The well-being of their families is of paramount importance especially in periods of natural disasters and conflicts which see increased influx of remittances to families in affected countries.

For most families that send their children abroad to study and consequently work there, financing the initial costs of the migration is an expensive venture. Since the migrant is unable to cover the cost of travel and maintenance alone, they receive a lot of financial support from the parents which at times leaves them financially strained back home. Once the migrants secure jobs, they in return send money back home in essence to mitigate the financial toll it took on the family and help the family make invests assumed they would have made had they not spent their savings on the migration process.

The desire to themselves invest in the home country and develop assets is another reason for the continued sending of remittances. Some migrant workers go back home after living aboard for a while and start their own businesses. Working in developed nation exposes them to how successful businesses are run and with this in mind, they are able to notice opportunities at home to invest in. They therefore send remittance to secure such assets as land, financial assets, and real estate. Some send money to invest in public assets that might improve their popularity especially if they have interests in a political seat when they return home.

Remittance is a source of much needed funds to governments in developing countries who have difficulty borrowing money in most cases due to instability of governments. In some countries remittances exceed aid such as USAID sent from developed countries and important in the home economy’s growth. Funds from abroad help develop the domestic financial system with many wire transfer and banks getting into competition by providing favourable rates which encourage continued remittances. Governments have also in many countries developed policies to encourage their citizens in the diaspora to invest in their home countries through remittances which aside from exemption from taxation include dual citizenship and a chance to vote in presidential elections.

Due to the difficulty in tracking remittances and the reluctance of certain governments to release such information, money from remittances can be fertile ground for laundering money and can be used to finance terror. Many countries have tried to develop systems to track how this money is spent but this is difficult because most of it is sent to private persons who have discretion of expenditure.

Although it is thought that remittances decrease when the attachment to family gradually weakens or as migrants determine to permanently reside abroad, they do not altogether stop. This is especially encouraging to countries that continually depend on these as a source of funds and the billions of people who directly or indirectly benefit from remittances.