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INDIA: CORRUPCION OUTSOURCING

Financial Scandal at Outsourcing Company Rattles a Developing Country

By HEATHER TIMMONS

Published: January 7, 2009

NEW DELHI — Ramalinga Raju was contrite, sort of.

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European Pressphoto Agency

Ramalinga Raju resigned from the outsourcing company he helped found, Satyam Computer Services, after an accounting scandal.

Related

Floyd Norris: A Corporate Hero Admits Fraud (January 7, 2009)

Company Statement (pdf)

brush,” said Lakshminarayana, the chief strategy officer for Wipro Technologies, which competes with Satyam.packages like those in China and the United States.

Outsourcing and information technology are crucial parts of the Indian economy. They provided local companies with $64 billion in revenues in 2008 and employed more than two million people directly, and millions more indirectly.

Mr. Raju said he had regularly falsified Satyam’s accounts as the company expanded from a small family-run firm into a back office giant with 53,000 workers in 66 countries.

Some of India’s biggest conglomerates started out as family-run companies, and analysts fear the taint of corruption from Satyam — poor governance, lax accounting controls and a lack of transparency — could sully any of those big companies for investors and customers.

Relatives often hold crucial management positions and sizable stakes in the companies. Foreign investors have begun to push for more outside representation on boards, and for families to give up controlling stakes they hold.

A huge piece of Satyam’s finances was a fantasy. Of the 53.6 billion rupees in cash and bank balances the company listed as assets at the end of its second quarter, 50.4 billion rupees ($1 billion), were nonexistent, according to Mr. Raju’s letter. Revenues for the quarter ended Sept. 30 were actually 20 percent lower than the 27 billion rupees reported, and the company’s profit for the quarter was just 10 percent of what it reported at the time.

Many analysts said it was unthinkable that Mr. Raju had acted without accomplices, and regulators in India, Europe and the United States were likely to take action against Satyam for false accounting. In addition to being listed in India, its shares have traded on the New York Stock Exchange since May 2001, and on Euronext since January 2008.

Satyam’s auditor, PricewaterhouseCoopers, which has audited the company since its NYSE listing, said it was “examining” Mr. Raju’s statement and could not comment further.

Many Satyam clients said they were studying the situation. Cisco said it did not expect any “material impact.”

The revelations could lead to a major shake-up in India’s outsourcing industry, as a nearly cashless Satyam struggles to meet payroll and other expenses. Satyam may be shut down, sold off in its entirety or broken into pieces, they say.

John C. McCarthy, an analyst with Forrester Research in New York, said Satyam’s clients were scrambling to find out “whether the fraud is intermingled” with their operations, and what their liabilities are.

“This happens like clockwork in the high-tech business,” he said. “Every three to four years there’s some financial scandal. It is because high-tech has traditionally been viewed by the financial analysts as a growth industry. There are huge pressures to maintain that growth, and not all companies have the management wherewithal to survive under those pressures.” In the short term, many Satyam clients will migrate to competition like Infosys and TCS, said analysts with Religare Hichens Harrison.

News of the scandal sent the Sensex index down 7 percent on Wednesday. Shares in Satyam fell about 78 percent. Trading in Satyam on the NYSE was suspended until further notice.

Though Mr. Raju’s announcement shocked most of the world, there had been signs for months that something was wrong at the top of Satyam.

The company came under close scrutiny after an October report on Fox News that it had been banned from World Bank contracts when spy software was installed on some computers. Satyam denied the accusation, but in December the World Bank confirmed it had been banned for giving improper benefits to bank staff, and for not accounting for all its fees.

In December, Satyam investors revolted after the company proposed buying two firms with ties to Mr. Raju’s sons.

On Dec. 30, analysts with Forrester Research warned that corporations that relied on Satyam might ultimately need to stop doing business with the company.

“Firms should take the initial steps of reviewing the exit clauses in their current Satyam contracts,” in case management or direction of the company changes, Forrester said.

Four of the company’s directors resigned recently and the company hired Merrill Lynch for strategic advice, a move that is generally a precursor to a sale.

On Wednesday, Merrill Lynch sent a letter to India’s stock exchanges, saying it had terminated its relationship with Satyam after the bank “came to understand that there were material accounting irregularities” at the company. Merrill Lynch officials declined to comment further.

Mr. Raju wrote in his confessional letter that neither he nor the managing director (his brother B. Rama Raju) had “taken one rupee/dollar from the company.” He said the board, his brother and their families had no knowledge of the situation, seeming to leave open the possibility that someone else did.

SEBI, India’s securities regulator, said it would investigate trading in Satyam’s shares. Mr. Raju could face up to 10 years in jail and fines of $5 million in India for the accounting fraud.

Claire Cain Miller contributed reporting from San Francisco.

CHINA: USA BONDS

China Losing Taste for Debt From U.S.

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By KEITH BRADSHER

Published: January 7, 2009

HONG KONG — China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an

 

inconvenient time.

On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.

Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves will increase by $177 billion this year — a large number, but down sharply from an estimated $415 billion last year.

China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.

For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows. (The more investors want notes and bonds, the lower the yield, and short-term rates are close to zero.) The long-term effects of China’s using its money to increase its people’s standard of living, and the United States’ becoming less dependent on one lender, could even be positive. But that rebalancing must happen gradually to not hurt the value of American bonds or of China’s huge holdings.

Another danger is that investors will demand higher returns for holding Treasury securities, which will put pressure on the United States government to increase the interest rates those securities pay. As those interest rates increase, they will put pressure on the interest rates that other borrowers pay.

When and how all that will happen is unknowable. What is clear now is that the impact of the global downturn on China’s finances has been striking, and it is having an effect on what the Chinese government does with its money.

The central government’s tax revenue soared 32 percent in 2007, as factories across China ran at full speed. But by November, government revenue had dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn on Monday that 2009 would be “a difficult fiscal year.”

A senior central bank official, Cai Qiusheng, mentioned just before Christmas that China’s $1.9 trillion foreign exchange reserves had actually begun to shrink. The reserves — mainly bonds issued by the Treasury, Fannie Mae and Freddie Mac — had for the most part been rising quickly ever since the Asian financial crisis in 1998.

The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars, so a weaker euro means that euro-denominated assets are worth less in dollars, decreasing the total value of the reserves.

But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appeared to reflect much broader shifts.

China manages its reserves with considerable secrecy. But economists believe about 70 percent is denominated in dollars and most of the rest in euros.

China has bankrolled its huge reserves by effectively requiring the country’s entire banking sector, which is state-controlled, to take nearly one-fifth of its deposits and hand them to the central bank. The central bank, in turn, has used the money to buy foreign bonds.

Now the central bank is rapidly reducing this requirement and pushing banks to lend more money in China instead.

At the same time, three new trends mean that fewer dollars are pouring into China — so the government has fewer dollars to buy American bonds.

The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinationals are hoarding their cash and cutting back on construction of new factories.

The second trend is that the combination of a housing bust and a two-thirds fall in the Chinese stock market over the last year has led many overseas investors — and even some Chinese — to begin quietly to move money out of the country, despite stringent currency controls.

So much Chinese money has poured into Hong Kong, which has its own internationally convertible currency, that the territory announced Wednesday that it had issued a record $16.6 billion worth of extra currency last month to meet demand.

A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses.

China’s trade surplus set another record in November, $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run average trade surpluses this year of less than $20 billion a month.

That would give China considerably less to spend abroad than the $50 billion a month that it poured into international financial markets — mainly American bond markets — during the first half of 2008.

“The pace of foreign currency flows into China has to slow,” and therefore the pace of China’s reinvestment of that foreign currency in overseas bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets Ltd., a Hong Kong securities firm.

Two officials of the People’s Bank of China, the nation’s central bank, said in separate interviews that the government still had enough money available to buy dollars to prevent China’s currency, the yuan, from rising. A stronger yuan would make Chinese exports less competitive.

For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets.

Many Chinese companies are keeping more of their dollar revenue overseas instead of bringing it home and converting it into yuan to deposit in Chinese banks.

Treasury data from Washington also suggests the Chinese government might be allocating a higher proportion of its foreign currency reserves to the dollar in recent weeks and less to the euro. The Treasury data suggests China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac, with a sharp increase in Treasuries in October.

But specialists in international money flows caution against relying too heavily on these statistics. The statistics mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly than in the past.

The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.

China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.

“This is a political decision,” he said. “This is not purely an investment decision.”

AMERICA LATINA: ADIOS AL DESACOPLE

2009: A. Latina no escapará a la crisis

Marcelo Justo  Analista BBC Mundo La economía latinoamericana no escapará a la crisis mundial. Ya no entrarán tantos dólares. Si a principios del 2008 se hablaba de que la economía latinoamericana seguiría creciendo a pesar de la crisis mundial, a fin de año se descartó este concepto de "desacople". El Banco Interamericano de Desarrollo (BID) calcula un crecimiento económico del 1% para los siete países de América Latina que constituyen el 90% del Producto Interno Bruto (PIB) regional: Argentina, Brasil, Chile, Colombia, México, Perú y Venezuela. Por su parte, la CEPAL estima un crecimiento del 1,9% para el conjunto de la región. Este cálculo se apoya en un supuesto optimista: que en la segunda mitad de 2009 comenzará una recuperación económica del mundo desarrollado. "Habrá países más afectados como México por su vínculo con Estados Unidos o Centroamérica por su relación con el turismo. Pero en Sudamérica impactará la reducción de los precios de commodities. Sólo unos pocos países como Perú, Panamá y Uruguay crecerán pero más por una inercia del crecimiento actual", indicó Osvaldo Kacef, director de la División de Desarrollo Social de la CEPAL. No todo lo que brilla es oro El panorama es inevitablemente heterogéneo. Los altos precios internacionales de las materias primas ocommodities facilitaron en gran medida el crecimiento económico regional en el período 2003-2008, pero su caída tendrá un impacto diferente en distintos países Será un duro golpe para los exportadores (Venezuela, México, Ecuador), pero aportará un alivio para los importadores (Centroamérica). Los exportadores de commodities alimenticias (países productores de soya o soja como Argentina, Brasil, Paraguay) sufrirán una caída menor de los precios que los de metales o productos energéticos (el cordón andino: Chile, Perú, Ecuador, Colombia y Venezuela). Esto se debe a que la demanda mundial de alimentos es "inelástica" (el consumo de alimentos depende de una necesidad básica y no del crecimiento económico), mientras que la de metales o energía sufre vaivenes vinculados al crecimiento (la demanda de acero o cobre o gas fluctúa con el ritmo de la producción industrial). En un informe publicado a fines de 2008, "No todo lo que brilla es oro", el BID calculó el impacto de factores externos en el crecimiento económico de las siete economías más importantes. ¿Funcionarán los paquetes de estímulo fiscal? "En estos años se hablaba de desacople sin precisar el impacto que habían tenido algunos factores internacionales muy favorables a la región. Si uno toma en cuenta la variación del precio de los commodities, el alza de las tasas internacionales y el crecimiento negativo de los países del G7 el panorama es muy diferente", indicó a BBC Mundo Alejandro Izquierdo del BID. Según el cálculo del BID, el viento favorable de estos tres factores explica buena parte del superávit fiscal y comercial de la región en el período 2003-2008: su desaparición por la crisis redundaría en una pérdida de dos puntos de crecimiento. Planes y realidades Los países de la región no se quedaron con los brazos cruzados ante el vendaval que está sacudiendo el mundo. Argentina, Brasil, Chile y México lanzaron programas de estímulo fiscal a fin de neutralizar el impacto que la crisis en el mundo desarrollado empezaba a tener sobre su economía. El enigma para estas economías es el mismo que desvela al mundo desarrollado y se resume en dos interrogantes: ¿darán resultado? y ¿cuándo? "Ha habido muchos anuncios. En muchos casos no hay una clara idea del grado de compromiso fiscal. Pero hay que diferenciar entre los países más grandes que tienen más capacidad para adoptar este tipo de medidas, de los pequeños que no la tienen", le dijo Osvaldo Kaceef a BBC Mundo.  Aunque América Latina está menos expuesta a la contracción crediticia que otras economías emergentes, tiene fuertes necesidades financieras  Robert Ward, The Economist El gobierno de Michelle Bachelet comenzó en 2009 con el anuncio de un plan de estimulo de US$4.000 millones. Este plan se puede financiar gracias al importante superávit fiscal de 2008. Pero otros países dependerán del crédito internacional en momentos de escasez de este tipo de financiamiento. "En ese sentido es fundamental que los organismos multilaterales puedan sustituir la actual escasez del crédito internacional", puntualizó Osvaldo Kaceff. El vaticinio más generalizado, sin embargo, es que 2009 será un año complicado financieramente para la región. "Aunque América Latina está menos expuesta a la contracción crediticia que otras economías emergentes, tiene fuertes necesidades financieras que no se sentirán tanto en países como Chile, Brasil y México, pero que afectarán a todos", le indicó a BBC Mundo Robert Ward, director de Global Projection de la Unidad de Inteligencia de la revista The Economist. ¿"Subprime" latinoamericano? A estos problemas de las economías nacionales, algunos países de América Latina le añaden ciertas dificultades del sector privado. El sector financiero regional no quedó directamente involucrado en la crisis "subprime" (hipotecas de alto riesgo estadounidenses), aunque dada la importancia de los bancos extranjeros en América Latina, no hay que descartar algún coletazo de esta crisis en 2009. Además, hay temores por la situación de algunas empresas importantes en Brasil y México que especularon en el mercado de futuros con la estabilidad de sus respectivas monedas y quedaron mal paradas cuando se devaluaron el peso y el real. Desde el gigante cementero mexicano Cemex hasta el conglomerado brasileño Votorantim perdieron fuertes sumas en esta apuesta. En octubre, la tercera cadena de supermercados en México, Controladora Comercial Mexicana, se declaró en bancarrota. Según Enrique Álvarez, encargado de América Latina, de IDEA, una consultora internacional de inversiones y mercados, la situación de varias compañías es delicada. "La situación no ha empeorado. El temor del mercado era que a estas compañías siguieran muchas otras. Esto todavía no ha sucedido. Pero esto no quiere decir que la crisis haya pasado", le dijo Álvarez a BBC Mundo. Será uno de los tantos enigmas a develar en este difícil 2009. Lea también: Economía mundial 2009

UK:BOE a 1.5%

Las tasas más bajas en 300 años

Redacción BBC Mundo El Banco de Inglaterra ha reducido el valor del dinero en cuatro ocasiones desde octubre de 2008. El Banco de Inglaterra redujo este jueves las tasas de interés en medio punto, hasta situarlas en el 1,5%, el nivel más bajo en los 315 años de existencia de la institución. Esta rebaja, adoptada para hacer frente a la profunda crisis económica que atraviesa la economía británica, sitúa las tasas de interés en el Reino Unido por primera vez por debajo del 2% desde que el Banco de Inglaterra fuera creado en 1694. La institución responsable de la política monetaria británica ha reducido el valor del dinero en cuatro ocasiones desde octubre de 2008, cuando las tasas estaban situadas en el 5%. Según explicaron los responsables del Banco de Inglaterra en un comunicado, la decisión se tomó, entre otros motivos, debido a que "el nivel de contracción en la actividad económica en el Reino Unido se ha agudizado en el cuarto trimestre de 2008, algo que es probable siga sucediendo en la primera parte de este año". "Las encuestas realizadas entre los comerciantes y los informes de los agentes regionales del Banco indican que el gasto de los consumidores se está debilitando", señaló la institución. Lea: Un año duro para el mundo Cautela Según el editor de temas económicos de la BBC, Hugh Pym, en esta ocasión el Banco de Inglaterra ha sido más cauteloso que cuando adoptó recortes de las tasas en noviembre y diciembre. "En el comunicado de la institución hay pistas que sugieren que se manendrá firme durante un tiempo para analizar el impacto de los grandes recortes aplicados en los últimos meses", indica Pym. Según Hetal Mehta, analista del Ernst & Young Item Club de Londres, el recorte de medio punto es "apropiado" aunque el Banco debería ir más allá. "Con los datos de los sondeos mostrando un continuo deterioro de los indicadores económicos no vemos ninguna razón para que el Banco de Inglaterra no siga reduciendo las tasas hasta el 1% o por debajo", señaló Mehta.