Friday, 30 May 2014

Australia may escape a recession as mining boom fades

Conventional wisdom predicts an imminent economic decline for struggling Australia, but a closer look suggests the Lucky Country might actually fare better than many would think.

After more than two decades of uninterrupted income growth, low unemployment and low inflation, the boom times have come and gone. The Reserve Bank of Australia (RBA) forecasts Australia’s growth as slowing to 2.6% in 2014.

The country’s mining sector is contracting as Asian demand tapers off. As a result, growing levels of unemployment could become an issue because jobs are still largely unavailable in alternative sectors such as commodities, services and tourism.
Coupled with the slowdown, the strong Australian dollar refuses to budge from its heights despite the RBA cutting interest rates to record lows in an effort to depreciate the currency.

However, so long as the dollar does not lift appreciably again this year, low interest rates are having the ancillary effect of stimulating residential construction and investment and could help mitigate the mining slowdown.

Because of this, Australia finds itself in a relatively healthy position. The supreme challenge facing the country now is managing their emergence from the mining boom.

How they got into this position is relatively straightforward.

The mining boom beginning early 2001 strengthened the Australian dollar, damaging other industries in its wake. Today the dollar remains high, but the low–hanging fruit of easy resource extraction is falling away.

Although it is still a heavy importer, Asian growth slowed, especially in China. China’s rapid growth and seemingly insatiable demand floated Australia above the global recession as China purchased enormous quantities of coal, iron ore, energy and agricultural commodities.

Popping the mining bubble increased pressure on the Australian dollar, and impacted debt levels. That effect in particular could go either way for the economy.

Because of the pressure, the Australian dollar should stay unexpectedly strong this year, holding its enviable status as a safe haven currency. Of course, a strong currency will also hurt export markets, exacerbating any effects of the fading mining boom.

To soften the fall, the RBA suggest a currency depreciation of between 15% and 20% may be required. They predict this will encourage competitiveness and grow the tourism, retail, and industrial sectors.

This might work, but in Canberra, the Australian government is trying a few tricks of their own to counter the worst consequences of the fading economy.

Australian Prime Minister Tony Abbott revealed his budget earlier in May promising both spending cuts and a temporary increase of taxes. He explained that raising the tax rate was aimed at reducing the $AUS28 billion deficit for 2014–2015.

Addressing the deficit should be applauded, but Mr Abbott campaigned on a promise of no new taxes and “no surprises”. The budget appears to directly counter those vows and he will now have to answer public dissatisfaction and widespread criticism.

The now–retired economist Gerard Minack also talked earlier this year about the importance of lowering interest rates to help rebalance economic growth.

The RBA recommends “a period of stability” over the next few months, whereas Mr Minack and others predict interest rates could be lowered. Although he did warn this move will increase inflation and house prices as a by-product.

Despite the RBA’s recommendation, there will be good reasons for further interest rate cuts: weaker business investment would be one signal. Another would be if the dollar continues to strengthen and doesn’t respond to rate cuts.

On top of this, if the mining sector forecasts further weakening then cuts would definitely be in the queue. The country is in the enviable position of being able to drop interest rates further, but they may not be able to go too much lower than they already are.

Record low rates are already having a positive effect, but not on the intended target. Instead, residential construction – which is predicted to grow over the next three quarters – is getting the most benefit from low rates.

Higher levels of residential construction will be useful for any transition away from mining. Magnifying this effect both national employment and unemployment figures are heading up, reversing the trend of last year.

Growth of residential construction could soak up some of these unemployed workers, potentially enough to delay the worst effects of the slowing mining sector. It will also encourage greater private borrowing. RBA governor Glenn Stevens recently warned borrowers to take care with increased leverage, particularly in Sydney and Melbourne.

And just as with New Zealand, statistics now show a swell in foreign purchases of residential housing. Chinese buyers account for one in eight new houses nationwide. That figure could rise to 30% by 2020, according to a Credit Suisse report.

The RBA’s predictions aside, the markets now expect interest rates to rise this year instead, and the respected Wall St economist Mr Minack concurs. Despite the looming problems, Australia has plenty of ammunition to fight off a recession. The market appears to be betting on an Australian surprise to transition successfully away from mining and into other sectors.

Friday, 23 May 2014

Thailand's armed forces conduct coup, political situation unstable

 Thailand’s military declared May 22 that it has taken control of the government for the good of the nation. The military’s actions now constitute a coup against the elected government, the 19th such military takeover in Thailand since 1932.

The latest development in the politically troubled South East Asian country follows an announcement of martial law on May 19. The armed forces still see themselves as the ultimate arbiter of power in the country.

Thai coups are historically bloodless and essentially part of the country’s cycle of politics.

Army chief General Prayuth Chan-ocha (second right) 
announces the military coup in a televised address. 
Photograph: Rungroj Yongrit/EPA
Coup leader General Prayuth Chan-ocha will serve as acting Thai prime minister pending the appointment of a new prime minister. The military have denied rumours that a government in exile is being established or that armed clashes are occurring inside the country.

The actions by the Thai military come after a series of meetings between opposing political forces that the generals were mediating. Unfortunately, a compromise was unable to end the standoff that has crippled the Thai government for several years.

According to news reports, a fresh wave of protests was being planned for the coming weeks. Stashes of weapons were reportedly found among protesters suggesting the demonstrations were intended to quickly turn violent. Rather than let the situation deteriorate further, the military decided to intervene.

A political impasse in Thailand is almost a status quo. It is a reflection of centuries-old rivalries between the rural majority in the north and northeast of the country and the urban elite clustered in Bangkok.

Economic success both allowed the country to better balance the differences between the interests of rural and urban poor with those of the business elite and royalists. But it also has slowly wrenched the groups apart.

Adding to the problems this time is the responsibility of the aging King Bhumibol Adulyadei. He has not been as involved in the politics of Thailand in recent years due to rumours of failing health. His absence as an involved mediator has left a large hole in the reconciliation process.

The Crown Prince does not have the popular support necessary to act as a replacement for his father. Rumours that the royals could have some affinity with the Shinawatra family means their objectivity could be in question as well, putting their role as mediator in further doubt.

The ousted government of the Shinawatra family represents the political control of the Bangkok business elite. The recent protests have been generated by a deep dissatisfaction with the current politics emanating from the rural masses who demand more political representation.

Since the last coup in 2006, the political situation has been unstable between the two main political forces. Thailand has relatively weak democratic institutions so any political movements tend to result in violent street protests and clashes when they are not resolved through normal channels.

The military’s move to take control of the country is an attempt to put a lid on the deteriorating political discourse before it explodes once more. Neither of the political forces in Thailand could compromise which made a coup almost inevitable.
A Thai soldier stands guard in front of the 
Democracy Monument after Thursday's coup. Pic: AP

The armed forces would not have acted if they didn’t think it was absolutely necessary, especially given how negatively the public reacted to the military during the previous coup in 2006.

It is unclear whether this military coup is being conducted in cooperation with the Privy Council or interim government, but it is unlikely.

The immediate security challenge for the armed forces now comes from the “Red Shirts” who are the supporters of the overthrown Shinawatra government.

Reports from Bangkok say the Royal Thai Army has already begun to detain Red Shirt leaders and block borders to prevent political leaders from leaving the country.

The next move for the military will be to extend its control outside the Bangkok city limits before large-scale protests can coalesce. Overnight, security forces tightened security in northeastern cities such as Udon Thani where Red Shirt supporters dominate.

The intervention by the military may delay confrontation between the two sides, but it does not provide an exit for the political stalemate. The coup will provoke pro-democracy supporters and escalate the conflict. Unrest will persist, but a civil war is unlikely in the near term.

Tuesday, 20 May 2014

Martial law declared in Thailand

The Thai army declared martial law May 19, Asian Correspondent and AP reported…According to a statement signed by army chief Gen. Prayuth Chan-ocha, the army took the action to "keep peace and order" because of "groups with bad intentions creating a violent situation with war weapons against the people"… The army reportedly seized control of several TV stations in Bangkok and internet and phone communications are down…A ticker on an army channel reportedly said "the invocation of martial law is not a coup"…Soldiers have deployed to strategic locations throughout Bangkok but there is still no word on whether the move is part of an attempted coup…Attacks by militant groups on army personnel – as have occurred in the last months - are expected as the situation escalates…The martial law order comes two weeks after former prime minister Yingluck Shinawatra was removed from her office and after months of violent clashes between royalists and the rural population…Back-channel negotiations have been taking place between political and military figures during this time, but the talks have clearly hit an obstacle…The ability for the ruling party to administer the country is now in doubt...There have been 19 coups in Thailand since 1932 and the military has already warned it would stage a coup if unrest became uncontrollable…However, the military is conflicted over taking control of Thailand forcibly and inciting an already angry population to more violence if it does so. 

In India, new government looks business-friendly

Results from the Indian Lok Sabha election announced over the weekend show a landslide victory for the opposition Bharatiya Janata Party (BJP).

Free trade with New Zealand could now be on the fast track as a more business-friendly government takes the reins.

The BJP’s leader, Nahendra Modi, will serve as the new prime minister. As the results become clear it appears the party won more than the 272 seats needed to form a government without a coalition.

In total the BJP won 282 seats. According to the Election Commission of India, 814.5 million people were eligible to vote, with an increase of 100 million voters since the last general election in 2009, making this the largest-ever election in the world. 563 million people cast votes.
Around 23.1 million or 2.7% of the total eligible voters were aged 18–19 years. A total of 8,251 candidates contested for the 543 Lok Sabha seats. The average election turnout over all nine phases was around 66.38%, the highest ever in the history of Indian general elections.

New Zealand India Research Institute director Sekhar Bandyopadhyay says the BJP has emerged as a national party in a true sense.

“Previously the BJP did not have any presence in South or East India but they have won a large number of seats throughout the country.

“It does not mean the BJP has overwhelming support of the entire electorate. Their vote-share is only 31% and they did not receive support from more 50% of the population. So they will have to reach out to this large group of Indians.”

In terms of representation, the BJP might have power, but they don’t command full national support. However, Mr Modi’s government can speak for a larger percentage of the population than has been possible for a ruling Indian party for some time.

Mr Modi’s government has received initial support from the New Zealand government. Minister of Trade Tim Groser is encouraged by Mr Modi’s strong pro–business stance and hopes now to reinvigorate stalled free trade talks.

India is a key partner for New Zealand and the country’s 12th largest export market with considerable room to grow. The National-led government considers a free trade agreement with India as a top priority.

Both governments will be looking for an appropriate time in the next few months to conduct a new formal negotiating round.

Mr Bandyopadhyay says New Zealand and India are already in their ninth round of trade talks, which haven’t gone anywhere. He thinks a new leadership offers a better time to push that agenda.

“The problem is that we don’t really know yet what the exact polices of this new government are. They have promised a lot of things throughout the campaign but they have been thin on actually policy details.

“Their election manifesto promises more economic development and growth. This means thinking in a Chinese model and openly welcoming foreign direct investment. But they want investment not in multiple brand retail trades, but in manufacturing, infrastructure, technology or research and development.”

New Zealand trade will benefit from a closer relationship with India especially, according to Mr Bandyopadhyay, in technologies New Zealand does very well.

“India needs many things New Zealand can offer, particularly around improving agriculture. A large problem in Indian agriculture is cold storage.

“India is a major milk producing country. So what India really needs is more agricultural, dairy, and cold-storage technology and New Zealand is a world-leader in those.”
New Indian prime minister Nahendra Modi

He thinks the new Indian government has the power to enact some of the promised economic and business changes.

“Mr Modi has a very clear mandate. For the first time in about 30 years there is a one party government in India with an absolute majority. It will be a stable government and if it wants to pass any legislation it can do so without depending on any other political party.

“He is also backed by some of the top business houses in the country. He is publicly projected as a business-friendly prime minister. So there is every reason to be optimistic that he will promote a more positive business environment.

The new government is expected to think outside the box of normal Indian politics by bringing technocrats and business leaders into ministerial roles.

Mr Bandyopadhyay says some rumours suggest a businessman or a banker will sit as the finance minister, but it remains to be seen. Mr Modi is expected to do things differently because he has “created a huge amount of optimism” in the minds of the Indian middle-classes.

“He has to show within one or two years that things are changing.”

The vote for the BJP reflects public dissatisfaction with the previous Congress Party government, particularly its economic policies. But despite the optimism, Mr Modi will face significant challenges in jump–starting India’s sagging economy, upgrading its infrastructure, and modernising the rural areas.

Despite the impressive victory there are also concerns that Mr Modi and his Hindu party will deepen divisions between the Hindu majority and Muslim minority. Mr Modi has pledged to improve ties with the international community, including China, but New Zealand and other developed countries will be watching his treatment of the Muslim minority closely.

Tuesday, 13 May 2014

Asia Second half 2014 forecast


Aside from China and India, the remaining Asia Pacific nations boast a huge 1.024 billion people. Economically it is the world’s most dynamic region with 2013 GDP figures reaching $NZ13.85 trillion. This is forecast to grow by 5.2% in 2014 to $NZ14.57 trillion according to IMF data.

Three trends will dominate the Asia Pacific in 2014. First, China will struggle to reform its economy amid slowing growth. Second, other major Asian powers will respond to China’s growing influence. Third, developing Asian states will become volatile as China slows and US monetary policy alters.

Emerging Southeast Asian countries will take advantage of China’s gradual shift away from manufacturing and compete for market share. Coupled with this, varying levels of political instability and social discontent will persist across the region.

Asia is also a net importer of wheat. Prices for the commodity have risen more than 25% since the geopolitical tensions in Ukraine and weather-related effects. Much of Asia is vulnerable to food price spikes, which are expected this year. Diversifying food supply will be the policy answer, as well as releasing stockpiles.

The Economist reported that after years of strong growth, Asia’s luxury goods market is showing signs of a slow-down. However, a rising middle class and ultra-rich consumers offers huge long-term opportunity. Unlocking Asian potential will remain the priority for luxury brands out to 2030. The forecast for retail sales in Asia is stronger than in any other region with the middle class making up the bulk of this consumption.

Major trading partners

Indonesia’s (pop: 253 million) new government may struggle to maintain stability this year as budgetary, trade, and inflation pressures escalate. Economic growth will be hampered by nationalistic industrial policy and institutional corruption. Presidential elections set for July are now uncertain after no party gained the necessary 25% of the vote in recent parliamentary elections. The splintered legislative results will require a coalition to hold power which may impede quick government reform actions during the next term. Main opposition Indonesian Democratic Party-Struggle (PDI-P) leader Joko Widodo remains on course to win the presidential poll in July. Owing to the conflicting attitudes towards reform that exist within the current ruling coalition, and the presence in the country of various vested interests which will remain intent on preserving their privileged positions after a new government takes office in late 2014, reforms will move forward in a stop-start manner. Economic growth will slow from an estimated 5.8% in 2013 to 5.4% in 2014, but the country’s young population can expect steady 5% growth until at least 2030.

Japan (pop: 127 million) will continue developing its renewed sense of international purpose while gradually normalising its military and balancing relations with Russia and the US. Higher meeting frequencies between Chinese and Japanese political and business leaders reveal efforts to cool relations. Japan will focus on infrastructure exports and emerging markets this year, and work to solidify its supply chain security. By the end of 2014, Japan’s weak currency will benefit exports but the country is likely to run a current account deficit for the next several years. Due to skyrocketing energy prices, nuclear power may be controversially restarted this year, encouraging vocal political opposition but not threatening political stability. Growth of about 1.2% is expected in 2014 as “Abenomics” puts Japan on a path to address its huge public debt.

South Korea (pop: 49 million) can expect to grow in 2014 as the global economy strengthens, says HSBC, barring a sharp increase in domestic production costs. Relations with North Korea could deteriorate again, but outright conflict is doubtful this year. A series of scandals may further delay government effectiveness, but revision of policies instead of further resignations is the more likely step to recovery. A lack of differentiation between intermediate and end-consumer products means that South Korea’s dependence on a healthy Chinese economy is often overstated. Approximately half of South Korea’s exports to China are destined for other consumer markets. Also, their structural competitive advantage over Japan remains intact. South Korea is well-placed to prosper in an improving world trade climate as European economies emerge from hibernation and can expect an average GDP growth of 3% for out to 2030. Despite growing regional competition, South Korea will remain a major player in the global information and communications technology field. The government will continue to pursue policies aimed at bolstering the country’s trading position regionally and globally by concluding free-trade agreements with important trading partners.

Country profiles

Bangladesh (pop: 166 million) is attempting to reinvigorate its hurting garment industry while the country settles into its first civilian government since 1990. GDP will stagnate at 6% unless a political impasse is broken.
Brunei (pop: 423,000) will remain politically stable this year. Although high oil prices will produce trade and fiscal surpluses, economic growth will be sluggish. Recent implementation of Islamic Sharia law will worry investors.
Burma/Myanmar (pop: 55 million) continues its economic opening and political reform with only gradual improvements expected. An election scheduled for 2015 will encourage some political manoeuvring this year.
Cambodia (pop: 15 million) still struggles with the results of a controversial 2013 election. Political violence could devolve into serious unrest. The government will try to implement new tools to restore support.
Laos (pop: 6 million) faces rising rural-urban inequality and unpopular land policies, which could threaten political stability. However, the state is strong and there is no opposition party, so real GDP growth should accelerate.
Malaysia (pop: 30 million) will continue to see both growth and internal ethnic issues rise, which will frighten foreign investment. Political uncertainty has been a major impediment to the performance of the Malaysian stock market. A government subsidy rationalisation plan will increase consumer price inflation.
Mongolia (pop: 3 million) elected a dominant government, although political stability is tentative. Its mining industry will improve this year along with mineral exports. A weak banking sector will mitigate stronger economic growth however.
Papua New Guinea (pop: 7 million) might see an improved political situation this year as a strong government coalition forms. Economic prospects are subdued but should improve when a major natural gas project comes on stream in late 2014 and commodities output is increased.
The Philippines’ (pop: 107 million) economy will lift as reconstruction spending after Typhoon Haiyan gathers pace. The government will implement planned legislative reforms after the government weathered compounding scandals.
Singapore (pop: 5 million) dealt with tense immigration riots in December 2013 by expanding the social safety net. Economic growth will lift as external demand strengthens this year and the country leverages its technology industry.
Thailand (pop: 67 million) has not been able to break its political crisis and renewed clashes are likely. Royalist and populist movements will not reach a compromise this year. The economy is negatively impacted and will grow by only 2.5% in 2014.
Timor-Leste (pop: 1 million) has tumultuous relations with Australia following a controversial international natural gas arbitration. A period of political manoeuvring can be expected as the influential prime minister plans to step down in 2015.
Vietnam (pop: 93 million) will try to contain growing public grievances. Their trade balance remains in surplus with private consumption and investment accelerating. Reforms in state-owned enterprises and banking will be sluggish. Tensions with China may escalate as ties with the United States deepen.
Oceania (pop: 3 million)
  • Fiji should return to democracy in September, but a trade deficit is limiting what could be very strong economic growth.
  • New Caledonia may begin negotiations for independence from France this year. Nickel mining is the archipelago’s economic backbone, but high living and fuel costs are a major problem for policymakers.
  • Samoa remains devastated after Cyclone Evan but recovered well in 2013. GDP will grow by 2.2% this year due to promising agriculture, tourism, and rising remittances.
  • The Solomon Islands will experience a continued political impasse but will see rapid economic growth compared to other islands. The country’s forests are approaching exhaustion, which may strangle the log export industry if alternatives are not found. 
  • Tonga’s young democratic system will remain tense. A weak economy keeps the country reliant on foreign donors but tourism and worker’s remittances will increase GDP marginally.
  • Vanuatu’s string of no-confidence votes will keep their political system unstable this year. Fiscal and land reforms, as well as tourism and infrastructure growth will support a GDP rise of 4%.

Monday, 12 May 2014

NATO not what it used to be, so now what?

As Russia plays great power politics in Eastern Europe, the NATO alliance suddenly realises it might not be as prepared militarily to defend its interests as it once was. After decades of kicking the can down the road, many leaders are finally discussing increasing their military spending, or at least lifting it to the minimum of 2% of GDP.

Despite the depredation, NATO members largely understand the necessity of cooperation and mutual defence. But few have been willing to isolate sufficient state funds for equipment.

Aside from the United States, which supplies the vast bulk of alliance spending, other European countries barely have enough money for social projects let alone military purchases.
The political will in Europe isn’t as strong as it once was either. During the Cold War, the prospect of Soviet tanks driving into Central Europe was acute. Now, the position of defence minister is the last role to be filled in many European cabinets and considered a dead-end job.

The United States on the other hand considers that role one of its most prestigious. This reflects the way Americans see the world. They were never directly threatened by a Soviet Union campaign during the Cold War, at least in the same way European powers were.

America’s goal was in ensuring a balance of power on the European Peninsula and intervening at the last possible moment if a crisis flared. This has been the way the US has dealt with the world’s crises since World War I, and remains their strategy in the 21st Century. The strategy has worked very well so far.

For the Europeans, things are a bit different now. A major problem is that NATO doesn’t have a unifying threat to hedge against any more. The old Soviet Union is gone, no matter what Russian President Vladimir Putin wants the world to think.

After 1991, most NATO countries dropped spending below the agreed 2% minimum. In 2012, only three countries maintained spending above this threshold: United Kingdom, Estonia, and Greece. The United States picked up the slack by supplying 61% of the budget in 1990. In 2012, their contribution had risen to 72%.

Now the Russians are making moves on Central Europe’s doorstep once more. In contrast to NATO countries, Russia spends 4.1% of GDP on defence per year according to the Stockholm International Peace Research Institute.

Mr Putin’s expedition in Ukraine caught NATO by surprise. And it could be too late to do anything about it now. Ukraine is not a signatory of Nato’s Article 5 “collective defence” treaty (in which an attack on one member is considered an attack on all). So the lack of a NATO intervention in Crimea is understandable.

Yet if Russia threatens a NATO member, such as any of the Baltic states or the countries in the Balkans, could the alliance come to their aid? At this point, even if the members ramp up their military spending, it would take years to make a difference, and this could be too late.

NATO does have a quick-reaction force it can deploy to any flashpoint. The NATO Response Force (NRF) is a brigade-sized force (roughly 13,000 multinational personnel) with air and sea components and troops trained in chemical, biological, radiological, and nuclear operations.

Had this force been stationed in Poland or the Baltic states at the beginning of the Ukraine crisis, it might have played a useful mitigating role in Russian adventurism. The force is highly capable and extremely well-equipped. If the crisis heats up, this force could be deployed to intervene around key strategic areas in member nations.

Europeans in the NATO structure are now discussing the necessity of doing more for their defence than just the NRF can supply. But without a significant threat (not Mr Putin’s Russia anyway) to unify the members and provoke the necessary political energy, it is becoming increasingly unlikely that NATO is the correct structure for future security.

This is because while the United States effectively bankrolls the alliance and supplied the majority of military force, it does not consider the fate of Europe to be existentially threatened. From Washington’s perspective, Russia is punching well above its weight and Mr Putin knows if he sparked a NATO response to his adventurism, Russia would lose the battle and the war.

It is hard to see NATO playing an effective role when everyone in Europe would rather buy bread than guns. No one wants a war, and it is not yet clear one will come. Germany is at the centre of the issue because of its geographical position, but it is equally unclear whether Berlin sees the conflict as threatening its core interests either.

So while NATO is an imperfect alliance, it has survived for 65 years for good reason. It may not retain the political explanations for existence 40 years ago, but the agitation felt over the past few months in Europe indicate the alliance is still important.

No European leader has yet suggested an alternative for NATO. Budgets might actually increase and some European nations, Sweden for example, are debating whether they should join the alliance. It seems better to be in than out. Whether that is enough is another question.

Ultimately, the long-term survival of NATO depends on the emergence of a unifying threat.

Currently, that threat appears to be Russia, but Russia faces its own constraints on expansion and will probably not be that long-term threat. Then again - coupled with the European Union - NATO keeps the bickering European states from fighting amongst themselves. Maybe that’s a good enough reason to encourage it to stand firm.

Friday, 9 May 2014

Thai court closes as prime minister resigns

Thailand’s anti-corruption commission voted to indict Thai Prime Minister Yingluck Shinawatra May 8 over a controversial rice-subsidy program…A day before, the country’s constitutional court ordered Ms Yingluck to resign…If the Senate finds Ms Yingluck guilty of charges of cronyism, she could be barred from politics for five years…Thailand's Constitutional Court closed its offices on May 8 following unexplained gunfire on May 7, The Nation reported…A grenade was also thrown at the home of one of the court's judges overnight May 7, and the headquarters of a major commercial bank, as well as a scientific research facility, were similarly damaged…Elections are scheduled for July 20…The gunfire incident could indicate that a backlash is underway after the Constitutional Court's ruling May 7 to oust Prime Minister Yingluck Shinawatra…It also shows that Thailand’s political turmoil could continue despite Ms Yingluck stepping down…Her party, Pheu Thai, still retains significant support and will campaign in the upcoming elections…However, as the prime minister resigns, the opposition will see it as a victory, even if real changes are still a long way off.

Wednesday, 7 May 2014

What does New Zealand need to fear? Interview with Paul Buchanan

New Zealand’s interaction with the world of terrorism is extremely low. However, stories have been reported of New Zealanders fighting in insurgent wars with elements of al Qaeda in failed-state countries such as Yemen and Syria.

The intelligence services of New Zealand are heavily involved in ensuring against the threat of terror coming back to the country in the form of trained and experienced fighters.

They also protect New Zealanders from more traditional threats, such as economics espionage and political subterfuge. Security analyst Paul Buchanan, based in Auckland where he runs a geopolitics and strategic assessments company, commented on where New Zealand fits in the world of intelligence.

Mr Buchanan is the author of three books, over fifty scholarly articles, chapters, monographs and reviews as well as more than 130 opinion pieces in various media. He has extensive experience as a media commentator on international affairs. He also has practical and scholarly experience in international security affairs, including intelligence analysis and unconventional warfare.

INTEL and Analysis sat down with him to discuss what we can expect for the future of New Zealand’s security.  

INT&A: I understand Western intelligence agencies are monitoring people going to war zones in Yemen, Syria, and northern Pakistan. Are recent exposures of New Zealanders in these places an indication of a “tip of the iceberg” scenario?

PB: I don’t think it’s the tip of the iceberg. We may see up to another thousand Westerners travel to the Middle East to join militant groups in various conflicts for a variety of reasons. That will be about it. I don’t think we’re going to see a massive wave of Western converts to Islam or radicalised youth in Yemen honing their skills and coming home to wreak havoc.  

The threat of these people coming back does exist, especially in Europe. But it is much less likely the case that someone will come back to New Zealand. Australia does have a more radicalised Muslim community, so someone may return there to cause trouble. But Europe and the UK (including France, and to a lesser extent Germany and Sweden) is where the real threat might be. There have been some US citizens fighting in Yemen alongside al Qaeda, although a lot of them have been killed off.

We know that there’s over a thousand Westerners fighting in Syria. They’re spread among the groups, a lot of them are fighting with Jabhat al-Nusra, but some of them are with the Free Syrian Army (FSA). They aren’t necessarily ideologically unified in their motivations for going [to Syria]. Some of them are jihadists, others are not. We have to remember the fight in Syria isn’t about us. Inasmuch as it is, it’s a proxy for Iran, Russia, and the West in a game of great power politics.

It’s actually Muslim on Muslim, or more accurately, Shiite on Sunni, because the Alawite regime belongs to a subsect of Shiite Islam.  

INT&A: What about Yemen?

PB: Yemen is a different story. Al Qaeda moved the bulk of its training sites to Yemen because it’s a failed, lawless state. Which is why Western intelligence agencies have spent a lot of time in that country using mostly technical means. Unfortunately they are not using a lot of human intelligence, although they do have people on the ground. They would prefer to employ signals intelligence (SIGINT) and satellite and non-lethal drone (UAV) coverage.  

One of the things we have to keep in mind, as with the recent drone strike which killed a New Zealander in Yemen, the chances of a Westerner going into these places and surviving I would say is less than 50 percent.

INT&A: Does this have more to do with the realities of warfare or the efforts of intelligence surveillance?

PB: The fighters are being monitored from the get-go. The case of the Kiwi is illustrative because he was watched here in New Zealand, he was watched as he departed, and he was watched as he arrived in Yemen. It’s open to question whether the GCSB or the SIS, or both, were monitoring him at the point where he opened the door on the ute as the UAV missile struck. So these people are being monitored very closely.

They can try things like taking the SIM card out of their cellphone, to escape notice, but the intelligence agencies are actually following the phone hardware, so it won’t help. Or they may try to buy throwaway phones, but [the intelligence agencies] have the serial numbers on throwaways bought in various countries. SIGINT agencies are able to triangulate your position even if you try to disguise your movements.  

INT&A: Because New Zealand Prime Minister John Key is the head of the intelligence agencies in New Zealand, do you think he and the agencies come off looking quite good after the strike on the Kiwi in Yemen?

PB: Yes and no. I say no in the case of the Prime Minister because he continues to try to use these events to justify the expansion of the GCSB’s powers and authority. Lets be very clear, the warrant to surveil this guy in New Zealand, and when he moved abroad, was issued before the GSCB amendment bill was passed. Mr Key’s claims that the expansion of the GCSB’s domestic powers will help stop terrorism is not accurate.  

In point of fact, these powers have everything to do with cyber espionage conducted by nation states such as China. But that’s what politicians do. Mr Key has always struck me as being quite disinterested in the most important portfolios which he controls: security and intelligence.  

For example he glibly said about this drone strike - which raises all sorts of ethical as well as legal issues - that the guy was in some sort of terrorist camp. Why didn’t Mr Key know where he was? Why did he say it was in a “terrorist camp”? Was that like a hunting camp where there’s two dudes with a rifle?  

You can’t be glib about the most serious responsibility you have, and he all too often is. Mr Key likes to use the plausible deniability ploy to put distance between himself and operational planning so he can claim he wasn’t aware. This either means he’s incompetent or he’s being lied to by his subordinates and they’re not giving him the full story.

Having said that, I think the intelligence agencies come off looking pretty good. Because they have this guy on the radar screen. I don’t believe for a moment they handed over responsibility of surveillance when he reached Yemen.  

Let’s just remember that the GCSB’s job is to surveil threats from outside New Zealand. If you use an email address such as Gmail and Yahoo which has a foreign server then the GCSB is within its legal rights to tap into your communications. And that was all under the old law, now they have even more expanded powers.  

But the mission in Yemen compliments the New Zealand intelligence community that they were on to this person for some time. Mr Key was talking about Kiwis fighting in Yemen last April, then again in June. So it’s to their credit that our intelligence communities were on top of it. 

INT&A: If the intelligence community is looking at this guy, are there any others they might be monitoring in New Zealand?

PB: The New Zealand Muslim community is heavily penetrated and surveilled by not only the intelligence services but by the police.  

Because the Muslim community in New Zealand is heavily factionalised and broken into all sorts of subgroups and rival factions, they tend to rat on each other for reasons which have nothing to do with terrorism.  

Let’s say two guys in a mosque start fighting over a woman or some financial disagreement. They regularly approach the police and say that the other person is a ‘jihadist’. New Zealand agencies since 9/11 have been heavily involved in monitoring the actions and movements of people in the Muslim community who express any interest in the jihadist cause.  

That’s a benefit of being a small community. There’s only 50,000 Muslims in New Zealand. And if you count only men between the ages of 20 and 40 you reduce that number even further. In fact they’re actually a pretty easy community to surveil because they’re so small. Which is much easier than the experience that Australia is having.  

INT&A: Is there a possibility that the Islamic militancy in the Asia Pacific could spill over into our Muslim communities in New Zealand?

PB: What’s interesting is that radicalised Muslims in New Zealand tend to come from North Africa. There’s no real evidence of Malaysian or South East Asians in New Zealand  being radicalised. Although Indonesian militants have really taken a beating in the past years, there’s a growing Islamist movement in Malaysia and Thailand. To say nothing about Abu Sayyaf in the Philippines.  

I wouldn’t say their groups are growing, but there are thriving insurgent groups in South East Asia. Although there’s no indication New Zealanders with those particular persuasions are prone to extremism in New Zealand, it can’t be discounted because our education centers now recruit very heavily from Malaysia. The focus for years has been on Chinese students - both secondary and tertiary - but now we’re reaching out to other Asian countries. If the student body is any reflection of the politics in their home country, there could be some hotheads among the kids now studying here.

INT&A: Even though we had a Kiwi in Yemen, where is the real threat to New Zealand from Islamic extremism?

PB: If I had to do a comparative threat-assessment I would say the threat from terrorism in New Zealand is less than 5 percent. The threat of corporate espionage is closer to 80 percent however. There’s diplomatic and military espionage as well but it’s clear the major concern is traditional state-on-state espionage undertaken by cyber means.  

But that’s not as sexy as raising the specter of terrorism. Legislation doesn’t really change if the public message is that someone is spying on Fonterra or on Carter Holt Harvey. But that is how we’re being penetrated

INT&A: Are we an important spying target?

PB: Because we’re part of the Five Eyes club we’re bound to attract the attention of adversaries of the Five Eyes. New Zealand is seen as the Achilles Heel because we haven’t practised very good cyber security. Which is what the GCSB amendment act was all about: tightening up the security and giving the GCSB expanded power at home as well as abroad.  

As a result of [Edward] Snowden’s revelations it is clear that New Zealand is a small but front-line partner in SIGINT and electronic espionage with our larger partners. My understanding is that every day of the week New Zealand companies and government agencies are hit with probes and hacking. Its become a major concern for our economic well-being and to our military and diplomatic partners. We could be seen as a backdoor into the larger spy network. Economic espionage should be our number one priority.  

INT&A: So although we can track someone halfway around the world we still have a lot of work to do at home.

PB: I think that the political elite need to evolve, not so much the security specialists. I still remain of the opinion that despite the debacles of the past few years, by and large our intelligence agencies are staffed by professionals who are as good as the people I worked with in the [United] States or people in the UK, Australia, or Canada.  

On the other hand our political elite who supervise those agencies betray a sort of provincial mentality that, “oh we’re so small, we’re so far away, we don’t matter, no ones going to look at us.”  

But with globalisation it doesn’t matter if you’re physically distant or small, you can be reached very easily. And because of the Wellington/Washington agreements we are now frontier military allies with the United States. We will be a target, especially if our political elite display indifference to security requirements in a larger alliance.

INT&A: Where does Edward Snowden fit into all this?

PB: I would have thought he would drop a bombshell already. It’s coming. Our role in the Five Eyes will certainly be on the documents he took. It will probably involve New Zealand espionage, not so much on adversaries, but against allies - particularly trading partners.  

Releasing those documents is going to be designed to hurt our reputation heavily. Because if it turns out we’re spying on our TPP (Trans-Pacific Partnership) partners and sharing information with the rest of the Five Eyes group to gain some sort of leverage in the negotiations, then the diplomatic fallout’s going to be great.  

My understanding is that Mr Snowden et al are holding off because we have an election this year. The conduit for the leaks will be a well-known investigative reporter, and timing as to when the leaks will occur will be sometime in the lead-up to the elections in such a way that it will not allow the government to recover fully before they are held.

INT&A: Is this speculation at the moment?

PB: It’s in the grapevine of those who travel in investigative reporting circles. And there’s already a track record of using Mr Snowden leaks to write stories about places other than New Zealand.  

But certainly the NZ based - particularly the one fellow I’m thinking of - reporter who probably has the information already, the question is whether you dump it out there now and hope that the damage sticks through September or you dump it in July or August and force them to react while they’re trying to campaign.  

I tend to think they’ll wait until the last six weeks before the election. It would be very hard at that point for the government to conduct a proper election campaign when they’re doing the diplomatic crisis-management.   Of course, if it turns out we’re spying on the Chinese, that could hurt us as well because we’re vulnerable to Chinese backlash, but that particular leak would not be surprising.  

They can manage that I think. John Key knows what Snowden has on New Zealand, he’s been told by US and others, as well as his own security agencies. So he knows what’s coming at him, and I would think that the National Assessments Bureau would have prepared a contingency plan already, knowing what they know.  

When those details are released they can go to the Chinese and explain to them that we were being very naughty and we won’t do that ever again. We’ll try to mitigate the backlash from any number of countries which get caught up in the revelations. If the government isn’t doing that they’re remiss because it is coming our way. I’d say the government is fairly confident they can mitigate the damage, but we’ll just have to see.  

INT&A: You say John Key knows what Mr Snowden took. I was under the impression that even the NSA were a little bit crippled at the moment, because if only he would tell them what he took they could start to mend the gaps. You must have different information.

PB: My understanding is they’ve got about 95 percent certainty of what he took.  

It is the most damaging intelligence breach in US history, bar none. It’s forced them to rewrite codes, revamp their protocols. It really is square one. And it’s an open question whether he was working for someone when he did this.  

I think he used infringements on privacy as a way to legitimate his escape. Yet pretty much everything he’s revealed from about two months into the saga has been attempts to destroy the reputations of the Five Eye partners and their allies.  

You realise that Mr Snowden put out there that Singapore spies on Malaysia via their telecom networks. He did that because Singapore is a partner to the Five Eyes system. There was no other reason to get Singapore caught up in this. It’s now traditional state-on-state espionage, nothing to do with privacy, but he went ahead and did that. So the suspicion is that there’s more than meets the eye.  

The Americans have revealed as much as they can. Probably the 5 percent that they don’t know about is to do with the very tight security intelligence issues relevant to the US alone. In terms of their international partnerships, it’s pretty much out there in Snowden’s and other media’s hands, because he made sure that in the event that he meets an untimely demise that the information will still be available.  

I think he’s a dead man walking which is probably why he sought safe-haven in Moscow. Even there someone can reach out and touch him. I’d say that he improved his chances of survival by not saying anything about the Israelis. Had he said something about them his lifespan would have been shortened considerably. He’s smart enough to know that you can do this to all other US allies but do not do it to Israel. Because Israel has ways of getting into Russia and touching him in a very unpleasant way.

INT&A: Which just proves that he’s not out to break open the world of spying, his goal is to break open the world of the United States’ spying. And everything he’s released so far fits right into the Russian playbook and laundry list of intelligence goals against the US. That looks suspiciously like handling.

PB: I’ll give you this as food for thought. My background is in human intelligence (HUMINT) not so much in signals, but here’s the thing I find very curious.  

Mr Snowden was stationed in Geneva which is known to be spy-central. In Europe if you want to talk to other spies you go to Geneva. He was on bulletin boards complaining about what the CIA was doing in Europe. He used a very easy to track pseudonym to espouse very libertarian beliefs.  

Now, of all the political ideologies that are ill-suited for espionage and intelligence, libertarianism is it. He was openly complaining that there was blackmailing of European diplomats, etc. And it could be that it came the attention of a foreign intelligence agency.  

They wouldn’t necessarily have had to approach and say “Hi, we’re the government of so-and-so and we’d like to spy for us”, no, they could have come and said, “Hi, I’m a fellow libertarian, I agree with you. This is egregious, this is terrible what they’re doing.”  

So in this way, they would never have to identify themselves to him. You could be a sympathetic figure, posing, as a Wikileaks supporter or a member of Anonymous but you are in fact working for a foreign government. It would be easy to persuade Mr Snowden it was in the best interest of humanity for him to exploit the cracks in the US security vetting process, get in, steal as much as he could and then be provided the means to escape to a safe haven where the US cannot physically or legally touch you.  

That seems to be what happened. I find it very hard to believe that he could have done this all alone in the measure that he did. I was particularly struck when he did the first interview in Hong Kong. If you know that the full weight of the American government is chasing after you, and your life is at risk because they know what you have and they want to get to you. Then you go and give a press conference in Hong Kong where you’re remarkably calm and nonplussed about the situation.  

I was thinking, this guy has protection. He’s physically secure, take a look at him. He’s not sweating and very relaxed. He must have a physical presence around him at this point which prevents US people from getting close to him. Then of course he went on to Moscow.

When I think of who could do that - and this was a perfect mission, if it was a mission it was superb - some thirty-year-old guy who’s got a grudge about privacy issues, I don’t believe it. People always say to me that I’m conspiratorial and I hate the Russians. I’m just saying that it’s implausible he would be able to do this alone for the righteous reasons he says he’s doing it. And like you say, he’s doing damage to US intelligence networks and not benefiting anyone else.        

In Japan, structural reform picks up steam

In early April, Japanese Prime Minister Shinzo Abe’s controversial plan to increase exports by undermining his own currency looked to be undone by jittery foreign investors flooding into the yen for safety. A weak yen makes Japanese exports cheaper, but as China slows and Ukraine boils, the forex tide was quickly reversing on Mr Abe.

Now, new data from Tokyo appears to signal the country turning around as East Asia’s sleeping giant rumbles into life again. The data indicates a trend away from deflation and towards rising wages and consumer prices. Mr Abe’s quantitative and qualitative easing, along with currency devaluation, are finally pushing Japan forward.

There is still some way to go, but Mr Abe’s so-called ‘Abenomics’ seems to be hitting the goals he set up. The “third arrow” of Mr Abe’s strategy - the growth element - was recently given a confident ‘A’ grade at a Japan Society forum by a high-level government official.

One of the signs to monitor that Mr Abe’s plan to boost corporate earnings through yen depreciation is actually having the desired wage-push inflationary effects is if wages rise concurrently. This is exactly what’s happening. But Mr Abe is walking a fine line. Raising wages, hopefully sparking some inflation, at the potential cost of a drop in consumer spending, could be undone if his new tax hike hurts the economy in unexpected ways.

Mr Abe’s government introduced a temporary new sales tax last month, the first increase in 17 years. This was the part of the plan many in Japan were not looking forward to: the “bitter medicine” of higher taxes to pay for government largesse. The tax, which took effect April 1, added an extra 3 percent to retail prices (normally 5 percent).

The tax hike led companies to lower inventories in anticipation of a decline in consumer demand. In turn, factory output fell threatening to slow the government’s reform plans.   These effects will be temporary, assured the Bank of Japan Governor Haruhiko Kuroda. He believes the “positive cycle in the Japanese economy will not be stopped and the economy will continue to recover moderately.”

However, Japanese consumers may continue to hold off on major purchases until the sales tax runs its course. Mr Abe has been reluctant to impose the tax until now. Critics of the hike point to a similar tax rise in 1987 which they believe contributed to the country’s return to recession.

This tax increase could still be dangerous if the Japanese economy slips backwards. But the new data suggests the opposite might be happening. The Japanese economy is in relatively decent shape and its debt is probably not as significant as strict numbers would suggest. For instance, much of the debt is owed to domestic rather than international creditors.

The further success of Japan’s reform efforts depends on how much political capital Mr Abe is willing to spend on pushing them through. If Mr Abe can go through with the sales tax and maintain good economic performance - which will depend on restarting nuclear power, reinvesting tax revenues effectively, boosting efficiency, and spurring investment - he stands to bolster his own political position.

Vested political and business interests have diluted proposals in the past, but Mr Abe might have convinced important business heads to support him by lifting wages.  This is important because currently, wage gains are below the rate of inflation which will weaken real consumer spending power.

The tightening labour market has put upward pressure on wages. Dai-ichi Life Research Institute said to be sure of growth there needs to be a higher rate of increase in pay.

So while corporations are doing well, especially the Japanese automobile industry, the economy can only function if people are spending money. After all, my spending is your income, and your spending is my income. When everyone tries to limit spending at once the net result is an overall decline in income and a depressed economy. Mr Abe has been trying to climb out of that hole.

To achieve this, he loudly lobbied large corporations to distribute their impressive profits with employees by increasing wages. The IMF agreed, saying that only when the link between corporate profitability and wages is restored will “investment in durables return and finally rid Japan of its deflation.”

Traditionally, change in corporate Japan begins with the most respected companies leading the way.  And already, a number of noteworthy companies are planning to increase salaries in 2014. Japan’s second-largest convenience store chain, Lawson Inc., wants to raise salaries, while Daiwa Securities Group – Japan’s second-largest broker - will raise salaries and extend its mandatory retirement age from 60 to 70.

Japanese manufacturers may also raise wages for the first time in decades. Panasonic Corp. and Hitachi Ltd. both agreed to lift monthly wages by $US20, half of what was requested by unions.

And after six years of trying, unions at Toyota Motor Corp., Japan’s largest automaker, secured a monthly base pay increase of about $US26, falling short of labour’s $US40 request. On top of this, higher seniority pay and annual bonus payments lifted total compensation by about 7.6 percent from the year before.

Nissan Motor Co. and Honda Motor Co. – Japan’s second- and third-largest car makers – also called for base pay increases of just under 1 percent, with Nissan fully meeting its unions requests and offering bonuses equivalent to 5.6 months of wages.

Japan’s exit from deflation to positive inflation over the past year is encouraging for Mr Abe’s strategy. Greater labour market flexibility and making sure profits from yen depreciation are passed on to workers through wage inflation could help the central bank to reach its target of 2 percent inflation this year. All this will help solidify Mr Abe’s influence on the Japanese economy.