NOTWITHSTANDING the official report of One Year Progress, published last week to mark its first anniversary, the Rudd government has made remarkable achievements – more than one could expect in a new administration’s first 12 months in office.
Much of its success is due mainly to the strength, unity and concentrated focus of the prime minister’s competent team.
Of course, this is not stated in the 74-page report because it would be deemed as “blowing its own trumpet”.
One thing is certain, though. Kevin Rudd is a hard taskmaster who works ridiculous hours and expects his team to do the same. A strong leader with a great vision for the future, he is determined to make dramatic changes in Australia and tolerates no nonsense from anyone who shirks his responsibilities.
At a briefing of department heads not long after he became prime minister, Rudd reportedly warned them that he was prepared to replace anyone who did not meet his expectations.
People who knew him well or saw him work describe him as a politician of moral conviction who wants to get things done at breakneck speed.
This is reflected in his decisive actions to prevent Australia from becoming a victim of the global recession in the wake of the current US financial meltdown.
That he has acted swiftly to minimise the inevitably rising unemployment rate – from 4.5% to an estimated 5.2% next year – is indeed a credit to him and his team.
Bringing forward some projects originally scheduled for next year has established the Rudd government’s hard-working, efficient and effective credentials.
Compared with the first year of the three previous governments, the Rudd government has delivered on its election promises within a short time. But the challenges in the rapidly changing world have been complicated by the US financial crisis.
Rudd believes, however, that the actions his government has taken at an early stage – “anticipating events rather than reacting to events” – would allow Australia to emerge from the crisis stronger, fairer and secure for the future.
At the same time, he points out that the government has to deal with an increasingly complex international environment marked by a shift in strategic and economic power to the Asia-Pacific region, the ongoing threat of terrorism and racial extremism and a new energy security.
Soon after taking office, the Rudd government’s first priority was to respond to the national security challenges and to work closely with Australia’s international partners and the Asean group on common security problems and strategies.
It then worked on policies to boost Australia’s long-term productivity growth through a comprehensive economic reform programme.
It is also working towards achieving a stronger trade performance to get the Australian economy onto a more sustainable footing beyond the resources boom that is now showing signs of weakening.
In addition, the Rudd government has set aside an extra A$50mil to open new markets through the World Trade Organisation and free trade agreements with Chile, South-East Asian countries and New Zealand.
Improvements and reforms in almost every aspect of the Australian economy are outlined in the official report released last week. Some projects have started, some will be implemented on the scheduled dates and others are awaiting funds.
Together, they indicate that the Rudd government has taken great efforts to find what can be done to improve the economy and how it should be done.
Interestingly, there will also be a White Paper on Australia’s homelessness – those sleeping under bridges or in makeshift shelters. It is expected to be released soon.
Despite the current difficult times, a 50% loss of wealth in the Australian Share Market in the past 12 months, and a probable deficit in next year’s federal budget because of the billions of dollars Rudd is spending to stimulate the economy against the looming recession, his latest opinion poll ratings remain high – an indication of public approval of his position in the nation’s top job.
Given the circumstances in which global economies have gone into recession in various parts of Europe and South-East Asia, it is difficult to understand the Opposition’s criticisms that the Rudd government has failed in its economic management after inheriting “strong public finances” from the Howard government.
In fact, the situation is plain and simple. Despite the depreciation of the Aussie dollar by almost 40% in recent weeks, which makes Australian products and resources cheaper in terms of foreign exchange, the global demands have decreased from the trading partners.
This, in turn, means less buying from Australia and less income which, ultimately, slashes the federal budget revenue – whether it is that of the Labour or the Liberal-National government. That’s an undeniable fact.
The nation’s 400 mayors and 165 local council presidents received a windfall to keep local jobs going during the financial crisis. This is part of the PM’s next phase of stimulating Australia’s somewhat shaky economy.
SPEED is now the essence of survival in Australia. But this is a special kind of speed – spending quickly millions of dollars of taxpayers’ money – by order of Prime Minister Kevin Rudd who, only two hours earlier, had returned from the G20 summit in Washington.
He summoned the nation’s 400 mayors and 165 other local council presidents to Canberra for a special meeting last week. They thought it was only to discuss the improvement of working relationships with the federal government.
At first, they were surprised that the Prime Minister had wanted to see them personally. Even more surprising was his giving away of A$300mil (RM673.5mil) to spend immediately on building local infrastructure and help support the local economies and jobs in the wake of global recession following the US financial meltdown.
Rudd told them in no uncertain terms: “And by immediate, I mean immediate. It means now. It’s ready to go now.”
Stern as the language might sound, the mayors and presidents were smiling gleefully after the applause died down in Parliament House.
After all, the needs of the local councils had been ignored for years by previous governments,
Sudden windfall
Now they were suddenly receiving a windfall to keep the local jobs going during the financial crisis as many private firms, including the big banks and financial institutions, have begun to retrench their staff.
But it is not just maintaining the jobs that the councils have to do. They also have to create thousands of jobs such as tradespeople, engineers and administrators to take charge of rolling out new infrastructure or repairing existing ones.
This is part of the Prime Minister’s next phase of stimulating Australia’s somewhat shaky economy as a result of the fallout from the brutal financial crisis now gripping almost the entire world.
Although the US is not technically and officially in recession yet, its massive debts of several trillions of dollars and unemployment of about two million would soon show its severe economic contraction.
On the other hand, those in official recession include Japan and Germany – the world’s second and third biggest economies respectively, the entire Eurozone, Britain, Ireland, Hong Kong, Singapore and Australia’s closest southern neighbour New Zealand.
They are among the nations that import more than 60% of Australia’s trade.
And the economic slowdown in China is certainly having a flow-on adverse effect on the Australian economy.
That is why Rudd is seriously concerned about rising unemployment and financial hardship to families, and wants to ensure the nation, still financially sound overall, would not be the next victim of recession.
His concern is based on the fact that the G20 summit, which he described as an important milestone for the global economy, having brought together the leaders of the world’s 20 largest economies, reflects the size of the challenge they are now confronted with.
It is, as he points out, recognition of “the changing centre of gravity in the world economy”.
“Simply put, global economic growth won’t get back on track without the G20 economies of our region – China, India, Indonesia and South Korea – economies that now comprise a large share of global economic growth,” Rudd said.
“Where the private economy cannot fill the growth gap, let us be clear: government must step in.”
What Rudd is saying is that the governments in the region must chart a course of action to see through the great challenge that is now facing them.
For Australia’s part, his government has launched its economic security strategy, which includes a substantial fiscal stimulus of A$10.4bil (RMb23.3il) to underpin growth, A$6.2bil (RM13.9bil) new car plan to transform the nation’s automotive industry and A$47bil (RM105.5bil) tax cuts for families to help them in these difficult times.
‘A war against recession’
Rudd has declared “a war against global recession and global unemployment”, and he is determined to use every tool at his disposal to protect Australia’s economic growth and jobs for the people.
He reiterated that the government’s strong action will stabilise the Australian financial system, guarantee bank deposits to protect investors’ money, build confidence in the banks and guarantee the term wholesale funding of banks so that credit can continue to flow.
“You cannot have a strong Australian economy without a healthy global economy. Equally, you cannot have a strong national economy if you do not have strong local economies,” he declared.
But with Australian exports of commodities and resources to big buyers like China and India being curtailed and the collapse of some big companies, including the second biggest childcare centre last week after the billion-dollar deficit of ABC Learning, some businesspeople believe the country would have its first negative growth quarter this year.
A second negative quarter will put Australia in recession.
Whether Rudd could prevent this from happening with the billions he is spending in his self-declared war is difficult to ascertain at this stage – just as the Americans cannot say for sure that their President-elect Barack Obama would be able to find a magic wand to cure what must surely be the greatest symptomatic financial problem the world has ever known.
NOTHING pleases the Greenies more than to have Kevin Rudd as prime minister. To them, Rudd literally has a green heart.
Almost everything he touches – or does – is, in some ways, connected with the environment or climate change – as he puts it, advancing the greener future of this planet.
Last week, he bailed out the struggling car industry in Australia with a A$6.2bil lifeline with one condition.
Of the amount, A$800mil will be put into a fund to raise it to A$1.3bil for research and innovation to build a new green car with low emission and fuel efficiency for Australia and the world.
Describing the automotive sector of the industry as a “cornerstone of Australian manufacturing”, Rudd wants a car that is more innovative, more productive, more competitive and more export-focused, as the late Industry Minister in the Hawke government John Button envisaged in the 1980s.
The new plan, aimed at also addressing the challenges now facing the industry, will “green” and reinvent it to create a low-carbon, environmental-friendly car of the future which, the government hopes, will be indispensable for global markets and supply chains.
It will turn the industry into a provider of green-collar jobs – jobs that will still be around in “tomorrow’s increasingly carbon-constrained world”.
And it will ensure that the car industry will continue to contribute to the nation’s prosperity which, in turn, will give the industry the certainty it needs to invest in the vehicle technologies of tomorrow.
The idea has been described as the most comprehensive plan ever devised for the vital sector of the Australian industry.
It is to bring about a historic transformation that will prepare the industry for the future.
Right timing
And it has certainly come at the right time in view of the recent dreadful financial crisis that has severely affected the car industry in the United States.
GM, America’s biggest car manufacturer now on the brink of bankruptcy, is seeking a further US$25bil from the US government in addition to the original US$25bil it has been offered.
It claims that more than 1.4 million workers and suppliers will be out of jobs by the middle of next year if it is not rescued from the deep black hole.
Rudd points out that Australia is one of the only 15 countries in the world today that can create a car from the drawing board to the showroom floor.
Historically, Australia’s first car on the road was in 1897 when inventor David Shearer displayed his steam-driven horseless carriage in Adelaide.
Two generations later, the Holden 48-215 came off the production line in 1948. It has made Australians proud of their Holden, which has since gone through many improvements.
Rudd believes that the advanced technologies that the nation uses in its modern cars, from microchips to composite materials, would enable manufacturers to build a lot more things as well.
The fund, to which the government will raise a further A$4.9bil, will provide transitional assistance to car manufacturers for research and development on new innovation of greener cars over the next 10 years.
The projects include A$116.3mil to promote structural adjustments through merger and consolidation in the car component sector from Jan 1 next year. This has been brought forward from the starting date in 2011.
About A$20mil will be provided to help suppliers improve their capacity to integrate into complex national and global supply chains.
Buyers of new vehicles with factory-fitted LPG technology will receive A$2,000 each as an incentive under the expanded A$10.5mil scheme.
The government report, titled “Plan for a Greener Future”, specifies that participants, such as car designers, engineers, technologists and researchers, must prove that they are aiming for better environmental outcomes and are building the capacities needed to compete in global markets.
Keeping pace
“The government expects this assistance to stimulate industry investment of at least A$16bil in new capacity and new technologies – not to mention billions of dollars in wages and salaries for tens of thousands of workers,” it says.
The report adds that the world is changing and Australia’s automotive industry must change with it.
“Global warming, the emergence of low-cost competitions … have all altered the landscape in which our vehicles and component markets operate.
“The recent deterioration in the international economy has compounded these challenges.
“Our choices are simple – our industry must either adapt to the new environment or face extinction.”
IT wasn’t unexpected in a sense, but the speed with which it came, like a lightning strike, surprised most of the business community and the federal government who had assured themselves they were quite safe.
Suddenly, the ugly shadow of the looming global recession spread over the horizon, threatening to cause more pain than initially thought.
Fears have overtaken confidence even at the top echelon of government as the Reserve Bank of Australia (RBA), in a desperate move last week, cut the official interest rate by 0.75% to 5.25%.
It was the second substantial cut – at both times more than the economists had anticipated – in two months, bringing down by a total of 2% as part of an intensive drive to stimulate the economy and create a strong buffer against the impending worldwide recession.
The borrowing cost is now at its lowest level for more than five years. The easing of monetary lending has also been greatly amplified by the Aussie dollar depreciation of 32%.
Leaving the door open for a further interest rate cut next month, RBA Governor Glenn Stevens explained that concerns about high inflation had been replaced by growing fears that the economy would slow down even faster than was originally believed.
Deteriorating international conditions and falling commodity prices are dampening fiscal stimulus announced by the government last month.
Stevens’ statement underlines the RBA’s determination to do whatever it can to avoid recession in Australia.
It came a day after the mining industry revealed that China, with its confidence on its own economy collapsing for the first time in 30 years, has begun to cut drastically its imports of iron ore and natural gas from Australia. Some mines even claim that their long-term contracts have been renegade.
Mt Gibson Iron is one of the mines suffering most because its key customers in China have defaulted on sales agreements.
As a result, most of the mines, which until recently were so short of workers, will be sacking at least 920 employees and shifting nearly 200 to other duties.
The number of contractors who will have no work at the various mines is not known yet, although 70 will lose their jobs at WorleyParsons, Australia’s biggest engineering group.
This is in addition to 300 other workers who were retrenched from mines in Western Australia recently, a move that saddened many Malaysians and Filipinos hoping for highly-paid jobs in the state’s north-west.
The biggest job losses are expected at Fortescue Metals Group (FMC), whose executive chairman and Australia’s richest man Andrew Forrest had his wealth slashed by A$7bil in the recent stock market meltdown.
FMC has decided it would not expand in the Pilbara, as previously announced, until it could secure A$1bil development funds.
All of a sudden there is gloomy prospect in Australia’s mining industry. How badly it will be affected by a global recession is still too early to gauge. Hitherto the mines were enjoying a resources boom on a scale they had never experienced before and were paying attractive wages to lure young people to the remote areas. Now they are looking at closing down some of the areas and reducing their exploration activities.
This is just one sector of the economy that has been adversely impacted by the US subprime crunch, followed by last month’s stock market crash.
Billions of dollars have been lost in the stock market and billions more in superannuation funds for the self-funded retirees who are looking for odd jobs to supplement their incomes. And there is less money for families to spend and less entertainment and outings despite the one splurge for the Melbourne Cup racing last week – for those who could afford it.
Cafes and restaurants are suddenly not crowded as they used to be, mainly because families are staying home.
Although there are no official statistics yet, empirical evidence shows that retail sales have recorded the biggest fall in three years and house prices have dropped by a further 2% in the past 12 weeks – the biggest quarterly fall in 30 years.
Manufacturing output has also dropped to previous recession levels and job advertisements have fallen by 34% to a 16-year low.
Such is the effect that Federal Treasurer Wayne Swan fumbled for a moment with his figures on the government-projected economic growth for 2008-09 and the unexpected deep hole in the May Budget.
Finally, after going through his file of papers, he announced in a somewhat unconvincing voice that the nation’s growth would drop to 2%, which is still reasonable compared with other developed countries where negative growth is expected, and a drop in revenue of A$40bil in the forward estimates, which leaves only A$5.4bil Budget surplus. The unemployment rate is expected to rise by 0.5% to 5% this financial year.
Wayne blamed the Lehman Brothers bankruptcy in the US for turning the ugly face of the global financial crisis.
“It’s taken a nasty turn,” he added. “And the consequence there can be seen on the stock markets … the slowing of the world’s economic growth and the battering of confidence.”
But he declared that the Rudd government is determined to ensure that Australia would not go into a full-fledged recession.
AS the world’s stock markets continued their dramatic plunge last week, two senior researchers at the Reserve Bank of Australia released a comprehensive discussion paper on how to deal with the root of the problems that caused the financial meltdown.
The 44-page document titled Promoting Liquidity: Why and How? is applicable more for international financial institutions and central banks than those in Australia that have healthy balance sheets.
Nonetheless, three of the main Australian banks are reported to have lost a total of about A$200mil following the US sub-prime credit crunch recently.
Referring to the recent write-downs by international banks, researchers Jonathan Kearns and Philip Lowe find it difficult, even for sophisticated investors, to assess whether their asset valuations are realistic.
Lack of data
Some banks have written down the same assets numerous times within a relatively short period. And some investors have interpreted this as banks holding back information, at least initially, particularly given the lack of transparency about the exact assets that were in the portfolio and how those assets were being valued.
This is because the banks’ level of disclosures, in many cases, remain well short of what is required. The disclosures contain only general statements of valuation policies with little specific information about particular assets or portfolios of assets.
The lack of such information reflects the banks’ reluctance to be specific for fear of revealing trading strategies or portfolio positions to their competitors and counter-parties.
As an alternative, Kearns and Lowe are calling for an improvement of the credit rating process, particularly as it relates to structured credit products, to rebuild investors’ confidence and ensure that the ratings convey more complete information.
They believe that recent events have shown some shortcomings in the way the financial institutions manage their own liquidity – shortcomings which in times of uncertainty can have significant implications for them as well as the national economy.
Their inability to sell assets and raise funds can amplify disturbances in the financial system and contribute to significant losses in output.
“The liquidity problems have not just affected a small group of financial institutions but have been global in nature and have had significant effects on economic activity,” Kearns and Lowe point out.
“Indeed, the swing from a situation in which liquidity was unusually high to one in which it is unusually tight has been the major driver of the current business cycle in many countries.”
The discussion paper centres on two broad issues – first, how best to promote the asset market liquidity and, second, having the appropriate balance between the private and public sector in setting up arrangements for dealing with liquidity problems.
It focuses on what extent the public sector should provide “systemic liquidity services” to the private sector and how this should be done and what conditions should apply to address “moral hazard” concerns so as to ensure that there are no “new distortions”.
The real world has fallen short of what Kearns and Lowe describe as the “first-best benchmark of complete markets” because, firstly, not all assets can be bought and sold in liquid markets to generate liquidity. Secondly, where liquid markets exist in normal times, they can disappear at short notice – just as when they are most needed.
“The effect of this can be particularly pronounced if it coincides (as it is likely) with illiquid asset markets as the institution experiencing the funding difficulties cannot simply downsize its balance sheet by selling assets in an orderly market,” they say.
To overcome these problems, the banking sector must be more transparent and improve its financial market infrastructure. It must also restrict the amount of maturity transformation and be able to access various liquidity services from the government.
“Given that widespread liquidity problems are most likely to emerge at turning points in economic and financial cycles, one possibility is to strengthen the macro-prudential dimension of supervision with increased capital and possibly liquidity,” they say.
“(And) given the limitations of the real world, distressed fire sales of assets can occur, amplifying movements in the prices of financial assets – the potential systemic implications are much larger than they once might have been.”
Missing markets
But the key question is how policy makers respond to the potential for adverse impacts on liquidity problems on the financial system and the real economy.
Both Kearns and Lowe believe that further financial innovation is required “so that the real world looks more like the first-best, not just in normal times but also in troubled times”.
The main problem with current arrangements, they say, is that there are too many “missing markets”, too many impediments to state-contingent contracts and that key parts of the financial infrastructure are underdeveloped.
“The key to a more stable system is to develop these markets, remove these impediments, and shore up the existing markets by improving the financial infrastructure so that participants can transact on reasonable terms in both good and bad times.
“Financial markets will never be complete and, realistically, the various forces that periodically cause liquidity problems can never be completely overcome,” the paper says.