Economy
Rupiah's Advance In Question With Slowing Economy, Rate Cuts – BNN
(Bloomberg) — The rupiah’s stellar rally may run out of steam after Bank Indonesia cut its benchmark interest rate and signaled the economy will expand less this year than previously thought.
With Indonesia overtaking Singapore as Southeast Asia’s coronavirus hotspot, and more rate cuts on the cards, analysts at Rabobank and HSBC Holdings Plc see the rupiah easing in the second half of the year.
The currency’s 15% surge against the dollar this quarter has owed a lot to support from the central bank. But now that the rupiah has regained ground it lost during a sharp selloff in March, BI looks like it is in a position to step back a little.
When Bank Indonesia kept rates on hold at its May meeting, Governor Perry Warjiyo said he was mindful of the “need to maintain exchange rate stability.” As BI lowered borrowing costs Thursday to 4.25%, Warjiyo noted that the rupiah was under less pressure, though he still thinks it’s undervalued.
“Bank Indonesia’s latest rate cut clearly reflects the stabilization in global risk sentiment and the gradual return of capital flows to Indonesia, which bolstered the rupiah,” said Joseph Incalcaterra, HSBC’s chief Asean economist in Hong Kong.
HSBC expects another 50 basis points of rate cuts by the end of the first quarter next year and sees the rupiah weakening to 15,200 per dollar by the end of 2020.
The central bank’s 2020 forecast for the currency is 14,000-14,600. It closed at 14,100 on Friday.
Second-Wave Risk
Rabobank’s projection is for the rupiah to ease to 15,237 by the end of next quarter amid the risk of a second wave of Covid-19 infections.
“The reality of a lack in swift recovery will be seen at a later moment when markets catch up with the real economy,” said Wouter van Eijkelenburg, an Asean economist at Rabobank in the Netherlands.
BI pared its growth forecast for the year to 0.9%-1.9% on Thursday, from 2.3% previously, and flagged “room for lower interest rates.”
Inflows to Bonds
Net purchases of Indonesian bonds by global funds have reached about $1 billion this quarter, following outflows of $8.6 billion in the first three months of the year.
Still, the central bank is unlikely to cut its benchmark any lower than 4% because it needs to preserve high enough bond yields to attract fund inflows from overseas, which also supports the rupiah, Wellian Wiranto, an economist at Overeas-Chinese Banking Corp. wrote in a note.
©2020 Bloomberg L.P.
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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