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  1. Brazil’s economy The devil in the deep-sea oil Unless the government restrains itself, an oil boom risks feeding Brazil’s vices Nov 5th 2011 | from the print edition DEEP in the South Atlantic, a vast industrial operation is under way that Brazil’s leaders say will turn their country into an oil power by the end of this decade. If the ambitious plans of Petrobras, the national oil company, come to fruition, by 2020 Brazil will be producing 5m barrels per day, much of it from new offshore fields. That might make Brazil a top-five source of oil (see article). Managed wisely, this boom has the potential to do great good. Brazil’s president, Dilma Rousseff, wants to use the oil money to pay for better education, health and infrastructure. She also wants to use the new fields to create a world-beating oil-services industry. But the bonanza also risks feeding some Brazilian vices: a spendthrift and corrupt political system; an over-mighty state and over-protected domestic market; and neglect of the virtues of saving, investment and training. So it is worrying that there is far more debate in Brazil about how to spend the oil money than about how to develop the fields. If Brazil’s economy is to benefit from oil, rather than be dominated by it, a big chunk of the proceeds should be saved offshore and used to offset future recessions. But the more immediate risks lie in how the oil is extracted. The government has established a complicated legal framework for the fields. It has vested their ownership in Pré-Sal Petróleo, a new state body whose job is merely to collect and spend the oil money. It has granted an operating monopoly to Petrobras (although the company can strike production-sharing agreements with private partners). The rationale was that, since everyone now knows where the oil is, the lion’s share of the profits should go to the nation. But this glides over the complexity in developing fields that lie up to 300km (190 miles) offshore, beneath 2km of water and up to 5km of salt and rock. To develop the new fields, and build onshore facilities including refineries, Petrobras plans to invest $45 billion a year for the next five years, the largest investment programme of any oil firm in the world. That is too much, too soon, both for Petrobras and for Brazil—especially because the government has decreed that a large proportion of the necessary equipment and supplies be produced at home. How to be Norway, not Venezuela By demanding so much local content, the government may in fact be favouring some of the leading foreign oil-service companies. Many would have set up in Brazil anyway; now, with less price competition from abroad, they will find it easier to charge over the odds. Seeking to ramp up production so fast, and relying so heavily on local supplies, also risks starving non-oil businesses of capital and skilled labour (which is in desperately short supply). Oil money is already helping to drive up Brazil’s currency, the real, hurting manufacturers struggling with high taxes and poor infrastructure. When it comes to oil, striking the right balance between the state and the private sector, and between national content and foreign expertise, is notoriously tricky. But it can be done. To kick-start an oil-services industry, Norway calibrated its national-content rules realistically in scope and duration, required foreign suppliers to work closely with local firms and forced Statoil, its national oil company, to bid against rivals to develop fields. Above all, it invested in training the workforce. But Brazilians need only to look at Mexico’s Pemex to see the politicised bloat that can follow an oil boom—or at Venezuela to see how oil can corrupt a country. Petrobras is not Pemex. Thanks to a meritocratic culture, and the discipline of having some of its stock traded, Petrobras is a leader in deep-sea oil. But operating as a monopolist is a poor way to maintain that edge. Happily, too, Brazil is not Venezuela. Its leaders can prove it by changing the rules to be more Norwegian.
  2. It is among the cities most heavily indebted and at risk of defaulting on its loans, according to Nomura Holdings Inc By Enda Curran - Jun 10, 2015, 20:21:07 Under a plan approved by China's State Council yesterday, Wenzhou will develop more types of bonds and allow trading of unlisted equities, technology and cultural products, according to a statement on the government’s website. Wenzhou is among the Chinese cities most heavily indebted and at risk of defaulting on its loans, according to Nomura Holdings Inc. In a new analysis described as one of the first of its kind, Nomura has dug into China's lending trail to see which cities and provinces are creaking under debt. They examined credit risks covering 30 provincial authorities and 265 cities. The report comes as bad loans and defaults in China tick higher and local governments struggle to meet repayments after years of binge borrowing to build roads and bridges and keep the economy growing. Mizuho Securities Asia estimates China's regional liabilities have now reached 25 trillion yuan ($4 trillion), bigger than Germany’s economy. Here's what Nomura's research found: the highest default risk is concentrated in the coastal and western provinces. Central China fares better. The danger provinces include Qinghai, Zhejiang, Liaoning, Hainan, Jiangsu, Fujian, Guizhou, Gansu, Chongqing and Heilongjiang. "Assessing the geographic distribution of risks is becoming increasingly important, particularly as China’s bond market is on the verge of explosive growth," Nomura analysts led by Yang Zhao wrote in the report. Among the cities, about 60 so-called third and fourth-tier cities carry the highest risk. These include: Datong in Shanxi province, followed by Sanya in Hainan, Wulanchabu in Inner Mongolia, Ganzhou and Shangrao in Jiangxi, Lishui in Zhejiang, Wenzhou in Zhejiang and Bazhong in Sichuan. First-tier cities like Beijing and Shanghai fared better in the analysis, helped by stronger economic fundamentals. Nomura used 13 indicators that cover four risk areas: property market, fiscal, financial and economic fundamentals. China isn't the only country with heavily indebted cities or state governments. In the U.S., Detroit and Stockton, California both emerged from bankruptcy in the past year. It's the pace of Chinese borrowing and a lack of transparency around how much debt there is that has investors worried. Nomura estimates that China's local government bond market may balloon from around 1.2 trillion yuan to 12 trillion yuan by 2020. A string of defaults would gum up the lending system, bring economic growth to a halt and runs the risk of social unrest. So the idea is to keep the credit flowing. http://bloom.bg/1cMoOph Sent from my iPhone using Tapatalk
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