The Bitcoin Chimera
It has been hard to avoid the media hype around Bitcoin, and if we were to believe certain pundits it seems that Bitcoin is set to become the new reserve currency of choice. Whilst it may be an attractive idea, given its decentralised nature, there are some issues, in particular its great volatility and non-universal acceptance, which make it more akin to an asset as opposed to a reserve currency.
In fact, Bitcoin has been making headlines with its extreme price fluctuations. After reaching a record high price of $19,666 on the 17th of December 2017, it has since seen its value slide. During the current holiday season it has failed to fully recover from its wild swings in value with its current figure sitting at $15,249 as of the 26th of December. Such spells of volatility mean that cryptocurrency are highly speculative and unsuitable as long term savings products.
Morgan Stanley recently commented that the true value of Bitcoin is potentially 0. Bitcoin’s value is fundamentally dependent on the network effect, therefore “if nobody accepts the technology for payment then the value would be 0.” Among the top 500 eCommerce Merchants only 3 currently accept Bitcoin, a shrinking figure from 5 last year. With the recent peak values of Bitcoin, what do these “successes” mean if there is no merchant acceptance alongside it or wider market acceptance
(beyond it being a tool for speculation)?
Bitcoin is therefore best viewed as a speculative high risk, high reward investment – a far cry from what it was originally intended to be. Furthermore, it is hard to ascertain the intrinsic value it holds, compared to – for example – Gold. At a surface level both are similar. Gold faces mistrust from governments and currency printing, the reality is similar for Bitcoin where there is no central bank in charge of the currency. However, the value of Bitcoin fluctuates more than Gold. However, given the physicality of Gold and its historic eminence, at least it is easier to comprehend its intrinsic value. Not only does Bitcoin lack the physicality but also suffers from a lack liquidity putting it at a disadvantage. Indeed during its peak-value the most popular US exchange Coinbase suspended buying and selling as it was unable to process the high traffic and there were warnings of delays of up to 10 days. A way to counteract this is to effectively bid a high transaction fee for miners to prioritise your transaction during periods of high demand. But during moments such as when the price of Bitcoin reached peak value, you would effectively be attempting to outbid every user in the world attempting to cash out and be included in the next block which would diminish your returns.
Exchange services are also particularly vulnerable to attacks from hackers. In addition to exchange sites such as Coinbase and GDAX going down multiple times as a result of increased activity. Other traders such as Bitfinex reported it had been under sustained DDoS attacks. South Korean crypto exchange Youbit had been hacked in April earlier this year which resulted in 4,000 Bitcoins being stolen, as a result of the 17% loss in assets the service filed for bankruptcy. The vulnerability and unreliability of these exchange services increase the risks of using Bitcoin as a means of investment.
The Pakistani economy is a tale of two halves according to the World Bank. On one hand, it noted that the county had seen economic growth of 5.3% in the 2017 financial year, its highest level in the last decade, and also predicted that this growth could potentially increase to attain 5 .8% in 2019 fiscal. However despite this positive projection, the Pakistani fiscal and account deficits have increased.
The budget deficit reached record levels of Rs1.864 trillion equating to 5.8% of GDP, blowing past the government’s target of 3.8%. This has been the result of some rather libertine spending for the upcoming 2018 election cycle. Furthermore their current account deficit had skyrocketed by 102% during July and August 2017 to $2.6bn compared to the previous year’s total of $1.29bn. The largest determining factor is the increasing trade deficit which widened by 30% from $7.01bn in the previous fiscal year, to $9.08bn. This reflects failure of long term policy to diversify exports and reduce import dependency.
Pakistan should utilise its 46.2 million acres of arable land, as there is potential for improving agricultural output and efficiency. In 2015 Pakistan’s agriculture sector was valued at approximately $68bn by the World Bank, however there is room for the industry to grow further, as there are a number of waste management and yield inefficiencies. In fact, despite agriculture being its second largest industry, Pakistan is a net importer of food. There is a definite potential for crop yields in the Punjab to increase two-fold from current levels. There is a similar trend in disparity between current yields and potential yields in maize, rice, cotton, and sugarcane. The yield gap is primarily due to the lack of investment in research and development and creation of high yielding varieties. Cultivated varieties of cotton, sugarcane, maize and potato for instance are instead developed abroad and adopted into Pakistan despite being created for different climatic conditions. The investment is most certainly worth it as the International Food Policy Research estimates that accelerating agricultural growth will lead to greater economic growth and an additional 2.6% gain in average household income.
Labour productivity is also an issue for Pakistan. Matters are not helped by the lack of incentives for the female labour force. Overall only 22% of female Pakistani’s over the age of 10 are in work, and in some sectors earn approximately 40% of what men earn, and only 25% of women in Pakistan with a university degree work outside of homes.
Nonetheless Pakistan’s demographics could be turned into a major strength, and currently it has the 6th largest population on the planet with 198 million people, with the middle classes numbering around 84 million according to economist Akbar Zaidi – a population size larger than the United Kingdom. The IBA-SBP Consumer Confidence Index showed a peak figure of 174.9 points which suggested rising consumer demand within Pakistan and consumer spending in Pakistan in 2017 amounted to $333.71bn, and retail sales growth reached 6.7% in the same year. All this points towards the increasing potential of Pakistan as a major FMCG and Food and Beverage market. The importance of Pakistan as a consumer market is best highlighted by PepsiCo which ranks Pakistan as one of its top 10 markets outside of US, posting revenues of Rs82bn. The food and beverages market in Pakistan grew by 4.8% last year, presenting a prime opportunity for investors to follow PepsiCo’s lead by taking advantage of the burgeoning Pakistan middle class.
2017 has been something of a breakthrough year for the Pakistani IT industry primarily through the mobile and gaming application development sector. The PSEB stated that there was a need to promote gaming and animation at an international level to increase Pakistani developer’s market share. The nation’s IT exports reached a total of $2.9bn and total revenue neared $3.5bn. The industry is expected to continue developing in the long term with plans focusing on developing infrastructure, encouraging entrepreneurship and innovation, meeting increasing domestic demand for ICT products and services, and adopting ICT in the public sector. Educational and community broadband centres are being created across the country, and telecom coverage is being expanded to rural areas. With this being said, Pakistan still lags behind direct rivals India in the IT market as contribution of IT towards India’s GDP is equal to the contribution of agriculture to Pakistan’s GDP.
The smartphone and internet market in Pakistan is also rapidly growing. In fact, Pakistan’s internet market is one of the fastest growing in Asia, last year 18% of the population currently were connected with the internet. There is massive potential to increase these numbers given that 73% of the population had a mobile subscription in 2016. Since then there has been continual growth in the amount of individuals connected to the internet, actively engaging in social media, and purchasing mobile subscriptions. Smartphones make up 70% of all web traffic in Pakistan, making mobile advertisement and marketing incredibly valuable. It is estimated by 2020 Pakistan will have 17 million new mobile subscribers.
The shining light in Pakistan’s economic story is the Chinese investment into the China Pakistan Economic Corridor (CPEC), and China’s One Belt One Road initiative includes investments of $57bn into Pakistan. Chinese companies are looking to explore mining opportunities in the Balochistan province, and extend its civilian and military naval influence in the Arabian sea via a port development in Gwadar. Plans for infrastructure improvement within Pakistan have also been underway – China has invested in building power plants to improve the unreliable electric supply in Pakistan. Other projects include improved roads, pipelines and railways, installation of fibre optic communications, new dams, and other infrastructural upgrades. It would therefore appear that CPEC’s larger goal is to advance the local Pakistani economy. This would counter the potential improved relations between India and the United States.
One of the aims of the Chinese Silk Road project is to gain access to minerals in the area which include marble, limestone, coal, chromite, as well as precious metals such as gold and copper. Current valuations of potential earnings extend to the trillions.
Currently however there are questions about safety and security which has historically deterred Western investment. Balochi nationalists have been engaging in varying levels of guerrilla warfare in the region since 1948, preventing access and development in the most resource rich province. The Chinese are working closely with the Pakistani Army in order to secure the area, however the rest of the world is looking with renewed interest to ascertain whether the Chinese investment is a viable medium term project. Should this be the case, then the upside potential to the Pakistani economy will be significant, as it is predicated that other nations will join the mineral rush.
Various commentators have described the current political situation in the Middle East as “the new great game”. This has undoubtedly been caused by the inconsistent, incoherent and divisive foreign policy decisions of the Trump administration, which has redrawn diplomatic lines across the region and reduced America’s standing in the world. Examples of this includes President Trump’s opposition to the Iran deal, accusing an ally – Qatar – of funding radical and politicised ideology, committing full support to Saudi Arabia and failing to demonstrate a clear plan to resolve the conflict in Syria, all of which have profound political and economic implications for the Middle East.
At the most basic level the geopolitical struggle in the Middle East can be reduced to a rivalry for regional hegemony between Saudi Arabia and Iran. Some interesting by products of the receding influence of the US in the region and their lack of reliable support has been increased co-operation between Israel and Saudi Arabia, in an attempt to stymie Iran. It is very much an alliance of convenience and is firmly joined by the UAE, as well as Egypt and Jordan.
It seems to fit in with Crown Prince Mohammad Bin Salman’s ambitious new vision for Saudi Arabia, as he seeks to posit The Kingdom at the heart of political and economic matters in the Middle East. This includes projects such as ‘Neom’, a new hi-tech city strategically located in the North West of the country near allies Egypt, Jordan and Israel. The Neom project follows a series of social reforms in The Kingdom led by the Crown Prince, who has attempted to improve his nation’s image. He vowed to restore the nation to “moderate Islam” – by which he means a reversion to normative Sunni Islam as exemplified by the four main legal schools – and has attempted to break alliances with the puritanical Wahabi clergy which has been a cornerstone of the theological underpinning of The Kingdom. His purging of corrupt elites while causing consternation amongst the regions equity markets, pushed oil prices higher, as the price of oil reached a two year high of $62 a barrel. These modernising policies are an attempt to make the country a more palatable ally and a potential economic partner to Western suitors.
Given Saudi Arabia’s dependence on the Petroleum sector, projects such as Neom project can help diversify the economy. The total cost of the megacity is said to amount to $500 Billion, and will operate independently from an “existing government framework”. This will be especially appealing for foreign tourists and business partners who are uncomfortable with the opaqueness of dealing in the Kingdom. The project will consist of funding from the government, the sovereign wealth fund, as well as local and international investors. The city will reportedly be powered by clean energy, as Saudi attempts to align itself towards global trend in renewable energy.
Unfortunately, several attempts to diversify the national economy have failed in the past, such as the $10 billion financial district in Riyadh. Clearly investors require more details and a cohesive vision, such details have yet to be provided as the Neom project is still in its early planning stages. Furthermore, cynics have argued that domestic reforms are attempts to deflect attention from The Kingdoms rather disastrous – and exorbitantly expensive – war in Yemen, and its bizarre intervention in Qatar. The latter has strained relations between members of the GCC and perhaps could have been dealt with in a more amicable manner, particularly given the close integration within the region. While the former doesn’t show any signs of abating, particularly with the recent assassination of former President Saleh, who was attempting to seek peace with Saudi Arabia.
Iran has responded to President Trump’s aggressive policies by strengthening its ties with Russia as well as entrenching its position in Lebanon and Syria and making pragmatic overtures to Turkey and Qatar. Re-elected Iranian president Hassan Rouhani faces the daunting task of reinvigorating a moribund economy which continues to be stifled by US sanctions and an over reliance on the Oil and Gas sector. While it may be that America is likely to be alone in pursuing these sanctions, nonetheless they will still dampen international enthusiasm for reintegrating Iran into the World Economy. In 2017 The Iranian parliament passed a 5-year economic plan which placed emphasis on foreign investment, with plans of raising on average $30 billion of foreign financing per annum, and it seems such ambitious goals will not be achieved in the near term. Nonetheless the Iranian market is still large enough to attract investors from within the region – Russia and Turkey – in particular the growing e-commerce sector and growing FMCG market remain attractive to investors that can navigate the intricacies the Iranian economy.
Perhaps the greatest boon to the Iranian economy is its continued backing of the Assad regime which Tehran will expect to reap economic rewards in the form of contracts to rebuild Syria. Already the Iranians have agreed a deal with Syria to repair their power grid, hoping to inevitably connect it with its own power grid in an attempt to create the largest power network in the Middle East which will extend into both Lebanon and Iraq. Already Iran has exported $58 million worth of goods to Syria which marks a 100% increase from the previous year.
A final word on the other major regional power Turkey, which currently finds itself – as always – at the cross roads between competing powers. Much has been written on its failed Syria policy (circa 2011-2015) however the continued ambivalence shown by NATO and Western Europe towards President Erdogan – a misguided policy in our view, which includes arming YPD in Syria, an extension of the PKK – has pushed Ankara to seek alliances with Russia. Turkey has managed to salvage a modicum of respectability with Syria, as it seeks the disbarment of PKK affiliated Kurdish militia – and carve out a corridor along the border to protect its southern cities. Furthermore, it has sought arrangements with the Government in Baghdad to cut short the Kurdish Regional Governments attempts at independence, as well as pursuing PKK terrorists into Northern Iraq.
While it remains to be seen as to whether Turkey with benefit from the reconstruction of Syria in the same way Iran will, it has been extensively involved in the reconstruction of northern Syria, with the 772 square miles (about the same size as Luxembourg) triangle of Jarablus, al-Bab and al-Rai triangle being their main point of focus. This serves as a means of extending their sphere of influence whilst also providing an outlet for Syrian refugees to return home.
Financially Turkey is still exposed to the vagaries of international capital markets and investor sentiment, with the Lira under continued pressure, causing inflation to reach a 9-year high (11.9% in October). Despite this GDP has been solid in the first half of the year, at around 5%.
President Erdogan has continued stimulating economic growth via the construction of mega projects such as the Canakkale Bridge and the Third Istanbul airport. Furthermore Turkey is set to be a major recipient of Chinese largess with respect to the One Road One Belt project. All these large infrastructure projects will no doubt fortify the medium term success of the Turkish economy. In the short term however, given the tumultuous domestic events over the past year or so – the coup attempt and marginal win in the referendum – as well as Ankara’s involvement combating terrorism in Syria and Iraq, President Erdogan’s priorities lie firmly within the national security and political realms for now.