The Global Financial Maelstrom and Nepal
By Sujit Mundul
The mayhem that the global financial/economic meltdown has caused to the western world is no more a distant phenomenon for Nepal. The keen interest of our government, economists, media, politicians, business community and public at large exhibits the pertinence of the subject matter to us along with our western counterparts.
At this juncture, perhaps the most crucial concern for us would be its affect on Nepal. Would the Nepali economy be influenced by the global crisis or will the winds of west pass through without a rustle? Before examining the effects, it becomes essential to trace the origin of the predicament. Therefore presented below is a brief outline of the roots of the global crisis followed by the Nepali scenario.
CRISIS PARENTAGE:
-
Sub-Prime Lending: The most dominant trigger that initiated the crisis was the bursting of the US housing bubble due to high default on substandard lending. For a number of years prior to the burst, people with low credit rating and unstable income were advanced loans at sub-prime rates encouraged by a long-term trend of rising housing prices and a future opportunity of refinancing. The Federal Reserve Board also basked in the bubble and refused to accept the aftermaths. It was thus initiated by US financial institutions and nurtured by the Fed. The Federal National Mortgage Association (Fannie Mae) and Federal Home Mortgage Corporation (Freddie Mac) fueled the fire for a long time underwriting 80% of all toxic US mortgages that ultimately led to their bankruptcy.
-
Excessive Leverage : Banks and financial institutions with overflowing debt component in their capital base proudly prevailed in the US markets for a long time. Going further, the mortgages against loans were securitized and converted into financial securities with a certain rate of interest. The investment banks sold these complicated securities that were backed by highly risky debt, the risks that even they were not aware of or which emerged in due time.
Over confidence: Most banks and financial institutions throughout the western world were convinced that economic cycle was extinct and depression could only exist in the pages of history. They failed to understand that longer the debt-fueled boom lasted and the greater the debt burden became, the greater would be the carnage when the inevitable day of reckoning arrived. They acted as if the longer the good times lasted the more they could be regarded as a permanent fixture.
-
Unhealthy competition: In a pursuit to earn more and more interest earnings, the banks, blinded by the profits, went about in a spree of advancing loans to whoever was willing to take loans in times of market boom. They felt that even if few of the borrowers defaulted, the volume of transactions and subsequent refinancing would make them a neat profit in their overall position.
-
Rating Agencies: The alertness of ace rating agencies like Moody’s and S & P can be viewed with skepticism as they looked on while Collateralized Debt Obligations (CDOs) elevated the credit rating of mortgages.
-
International financial regulators: Amidst the cry for toughening regulations and empowering the regulators globally, the manifold growth of US Credit Default Swap (CDS) market went unchecked. The arrangement of complex derivatives remained unquestioned which intensified the magnitude of the crisis.
THE ASIAN ABODE:
Asia , at large, is somewhat better protected than other parts of the world against a slide into recession. It is believed that most Asian Governments are in sound financial condition owing to their strong economic imperatives. Nevertheless, it is not decoupled from the global economics (mainly western world and US). Major Asian stock markets have recorded a significant drop in the past few weeks. Countries such as Taiwan, South Korea and Vietnam have high dependence on exports. In China, weak exports orders combined with rising costs have forced thousands of small factories to close in the country’s export zones. The woes of exporters are felt throughout the region, which is tightly linked by trade in manufacturing parts and machinery. Slower sales to US means reduced orders up and down the supply chain.
INSULATED NEPAL?
Apparently, the Nepali financial market does not seem to be directly impacted by the crisis due to negligible amount of foreign private capital inflows. However, Nepal has critical dependence on other larger economies both in terms of imports and exports including remittances. Therefore, the contagion effect of the global economies cannot be overlooked under any circumstances. Deceleration in earning from exports and remittances would tend to impair the country’s current account. Furthermore, the sustainability of speculative lending, particularly in realty sector, is a matter of deep concern. In the absence of conscious efforts in managing the economy, the crisis could gradually grapple the market. It would be apposite to mention that the recent debacle in the commodity prices (steel, palm oil, plastics etc) has inflicted deep injuries to the corporates in Nepal. Although the magnitude of the financial loss is a matter of conjuncture, it should be treated as an expensive lesson for the market. The real conc ern behind this episode is the effect on the financial system. Two questions quickly emerge:
This situation very clearly reminds us of the 1997 Asian crisis and the roles played by the respective governments and the regulators. To my estimation the following would be prone to the global ill effects:
-
Tourism : The first 10 months of 2008 witnessed 40% tourist arrival from US and Europe (Source: Nepal Tourism Board Statistics). With the global woe crafting a decrease in the expenditure muscle of these foreign tourists, the tourism sector of Nepal is likely to witness a setback.
-
Foreign aid: The development projects in Nepal are to a great extent depended on foreign aids and grants. In face of the crisis, concerns are there if some portion of such aids is likely to shrivel.
-
Big budget projects and FDIs : International institutional investors are considerably hit by the turmoil and so their investment in our country could be hindered, resulting in delays.
-
Exports : Less demand in the West for exportable products from Nepal.
Against the backdrop of the foregoing, the Government, regulators, commercial banks, financial institutions and the constituent players would require to be vigilant and flexible for ensuring a smooth pass-over.
FUTURE OUTLOOK
The people closely following the financial developments in the last few weeks have undoubtedly witnessed history. This upheaval has outshone all major events in the world’s economic history. The Nepali financial market should consider this as a valuable learning experience and make a collective and conscious effort to shield it against any similar situation. Banks and FIs should adopt a disciplined management of capital and liquidity to avoid replicating the fate of the west. Regulators should ensure that commercial banks are restrained from making over financing and speculative financing particularly in the commodity and realty sectors. A conservative and prudent approach in lending should be implemented without any compromise on financial disciplines. I expect that the dark clouds of the financial crisis would disappear hopefully within a period of 12-18 months and the bright sunshine in the form of economic recovery will emerge.
(Mundul is the CEO of Standard Chartered Bank Nepal Ltd.)
How Young are You?
By L P Bhanu Sharma
We have been inclined to think that we age with the passage of time, and this looks obvious at the surface. In our society, people still think that you have grown old when your hair starts turning grey. Some societies believe that the threshold of old age is when you turn 40, while few others believe you are old when your children either get married or start earning for themselves. Two cars left out in the rain will rust at about the same rate; the process of oxidation attacks them equally, turning their iron and steel into ferrous oxide following a scientific law. But, even after decades of intense investigation, there is no adequate theory of human aging. Even our attempts to understand animal aging have resulted in over 300 separate theories, many of them contradictory. The aging process obeys no such simple laws. What has now come to be understood is that it is very personal and is more a factor of mind rather than of body, suggesting that it is a mental phenomenon. Today, we are not much concerned with how old our body looks but how old we feel we are.
Dr. Deepak Chopra in his renowned book Ageless Body Timeless Mind explains that there are three distinct and separate ways to measure someone’s age. They are:
Chronological age – how old you are by the calendar
Biological age – how old your body is in terms of critical life signs and cellular processes
Psychological age – how old you feel you are
We have seen people who look and feel old even in their early thirties; we have also seen people who demonstrate agility, vigor and freshness even at their seventies. The question is not how old or how young we are, but how old or young we feel we are. We live our life the way we feel about ourselves. If I feel that I am old, everything I think and do will carry this imprint. Similarly, if I feel young, all my thoughts and actions will have the stamp of creativity, youth and boldness. My thoughts and actions emanate from my deep understanding and realization of who I am.
How do you know whether you are young or old? We have already seen that the psychological age is the most important determinant of our age. There are a few tests that you can make on yourselves to find out if you are young.
Inquisitiveness: Young people are naturally inquisitive and are never contented with what they know. This prompts them to stay ahead and look forward to new frontiers of knowledge and truth. They never miss out on an opportunity to learn and explore this vast expanse known as universe.
Scientific mind: Young people believe in questioning and experimenting. They don’t accept something as true unless they have come to the same realization. They are open to scientific thinking and are not afraid to put their knowledge and experience to scientific tests. This makes them free from all dogmas, beliefs, principles, religions, sects, superstitions and blind faiths. In a way, they are non-believers.
Openness: Openness is the capacity to face the challenges as they come. It is the courage to accept life as it unfolds and a willingness to participate in all the ups and downs of life. Young people are free from presumptions about any person or event and would like to face the reality as it is. This makes them truth-oriented and upright.
Positive attitude: This is one of the most important characteristics of young people. They are convinced that their capacity to solve problems is infinitely larger as compared to the problems they are likely to encounter. So, they are filled with an attitude of ‘yes’ towards life. They treat problems as ‘issues for future learning’ and challenges as ‘opportunities’. This makes them die-hard worshipper of all the dimensions of human life. To them the body is an extension of the spirit and every moment is an opportunity for creativity, love and service.
Witnessing nature: Young people are naturally non-clinging and non-attached to the events and situations in life. They know that the one who is experiencing is more important than the experience and a long-term perspective is far better than a short-term approach. This sets their mind and heart free from negativities such as greed, anger, envy, jealousy and pride. This freedom of the mind and heart is the doorway towards an attitude of gratitude, joy, and celebration.
Negotiation: The Ultimate Skill
By Manohar Man Shrestha
Why are we poor as a nation? Why don’t we have Nepali multi-national companies? Why are our joint families breaking-up? Why did we suffer the flood of Koshi River? Why is the Melamchi project in limbo? Why are there so many Nepal Bandhas? How did Upendra Mahato become a billionaire? Why aren’t things the way we wish them to be? Why do husbands and wives quarrel? Why are our children not the way we want them to be? Why are you paid less than you deserve? Why is someone paid more than you for the same job? Why did you have to give away money to extortionists? Why is the Hotel Kathmandu in Maharajgunj still closed? Why are factories shutting down? Why aren’t there TATA’s , Reliance’s or HCL’s in Nepal? Why is there so much load shedding? Why a government officer doesn't do your work? Why are our staffs not giving their best performance?
There is a common answer to all these seemingly uncommon socio-economic phenomena.
Mahendra Nagar
I was back from a workshop from this very well-planned city to the airport in Dhangadi. This city is one where most employees of any organization dread to be transferred to. But having been there I found not much reason for such dreadful feeling. Especially I was impressed by the roads, which were wide and smooth. Then I asked my host, “Why is it this part of Nepal is so underdeveloped despite having such a good transportation infrastructure?”
Earlier, I had asked the same question to a policeman who took a ride with me. He replied, ‘Road politics!' He meant to say that the frequent closure of roads against any political issue that obstructs the movement of cargo and passenger vehicles was helping the roads to retain their charm. It seemed logical but not convincing.
My host, however, gave me a different answer. He said, “Yes, this road system is good but it is only a recent breakthrough. A breakthrough because the project had been lingering for decades because Nepal could not follow-through and negotiate its immediate construction. As a result, this part of Nepal has also lingered decades in terms of development compared to the Eastern part of Nepal.”
Poor negotiators
What I am drawing you to is that we Nepali people are not good at negotiations. It may seem trivial but I want to draw the attention of you, of all the movers and shakers, visionaries, strategists, tycoons, leaders to this ignored fact.
My answer to all the questions mentioned in the first paragraph is only one: Poor Negotiation Skill. We are poor as a nation because we could not strike deals with other countries, the governing party could not strike deals with opposing ones.
We don’t have a Nepali MNC because we don’t know how to strike deals with foreigners.
Families break up because they can’t negotiate conflicting interest for a common good.
Koshi river flooded because the Nepali government officers could not convince Indian officers at the right time.
The Melamchi is in limbo because project managers haven't been able to negotiate with villagers, World Bank and other stake-holders effectively.
Nepal Bandhas are the epitome of failure to negotiate on a table.
Upendra Mahato became a billionaire because he had the flair to make the most winning deals. People like him trot the globe in search of the best deal and they know how to negotiate to get the best terms.
I hope that by now you are convinced that we have a national problem: lack of negotiation skills.
Benefits of Negotiation
Husband and wife quarrel until they negotiate their differences. Children must be led through negotiation, not through dominance.
In the current economic scenario, separate yourself from your time, skills, knowledge, expertise, creativity and talent. The latter sets must be treated like commodities. Learn to get the best bargain because they are on sale.
Gone are the days when you could pass by life without negotiating. Let’s see an example.
In a resort, there was a swimming pool. One day a very large man who had drunk excessively dived head first at the shallow end of the pool. In an instant the pool became red. The large man died.
Villagers came by and demanded that the owner pays several lakhs of rupees as compensation to the relatives of the deceased.
The owner resisted. Since it was not his fault why should he pay anything? But the mob got louder and threatened of worst repercussion if he did not pay. Still the owner decided that he was not stooping to this extortion. So he negotiated his way out by saying, “I will not pay a paisa. Instead, I think the deceased owes me for my losses due to his stupidity. If you want to fight come and fight with me. Do you think I am scared of you? You better get lost right now.” This show of half-lunacy was convincing enough and the villagers left saying, “Let’s go. This Sahuji is a lunatic and a dacoit.”
Similar wisdom in negotiation could not be shown by another resort owner who, for a similar death at the swimming pool, ended up paying half a million rupees, five days of jail time and a ruined image regarding the safety of his pool. This was all because he relented to the extortionists.
If only they could negotiate, factory owners won’t have to give in to unions. The problem starts from the fact that the factory owners have closed the door of the boardroom for workers. The owners should call the workers in before they sense that they have not been heard and some mischievous party lures them to unionize. The solution is negotiation because both have a common interest: growth in production. However, when external parties enter, this common interest is diluted and negotiation becomes tougher.
Role of Chairman: Chief Negotiator
Negotiate with everybody, at all levels, everywhere to get what you want. In fact the job of a chairman is to prepare for the negotiations, negotiate and follow through deals.
That is what Dhirubhai Ambani did all the time to make Reliance a corporate superpower. If you are the chairman of a company, stop putting your nose in the business. Your CEO is there to do the job. Get out of there and sniff out the best deals, call them up, research to convince you are the best buyer, or partner, stay physically, emotionally and intellectually fit so that you can get the most of negotiations.
Had the Chairman of NEA been listening to this advice, we would have been having over-supply of electricity propagating its consumption through more manufacturing units, commercial activities or even more trolley bus services. Had the Chairman of NOC been listening to this advice, there would be pipes delivering petrol to the pumps in all major cities of Nepal.
Negotiating all the time
I want something from you. You don’t care about it as much as I do. What is it? It is performance.
Every organization that has risen up, has three major factors: suitable market forces, visionary founder and upbeat staffs. The successful leaders have ways to negotiate with their staffs for top performance.
Frankly speaking, I can’t train anybody unless I negotiate their learning process. It goes like this: I teach you something that you want or need for your own growth and you learn what your employer paid me to teach you. Fair enough I hope. Otherwise why should anybody care about customer service, time management, leadership, motivation, teamwork and similar skills which are directly linked to increasing productivity and sales?
Those who fail to understand that we need to negotiate constantly, lose out. They end up with mediocre staffs with little willingness to work, hanging around like dead weight.
From submissiveness via aggressiveness to negotiation mentality
Forget natural resources, forget politics, forget geography, and forget everything, because at the root of all our problems is our inability to negotiate.
Before the revolution of 2046 BS people begged, resorted to favoritism or nepotism and waited to get their share of development. After Jana Andolan 1, people revolted, took refuge in brute force or coercion and tried to get what they thought was their share of development funds through forceful means.
The volcano was dormant earlier, now it erupted abruptly and this occurrence is not limited to politics.
Astrologers have correlated many of the world’s disasters, whether it were major earthquakes, tsunamis or man-made ones like the great depression or the world wars, with certain alignments of the planets. There is a documentation of an astrologer who predicted the stock market crash of the US called the Black-Monday based on his analysis of planetary alignments. According to this astrologer, this particular alignment makes people excessively emotional. People are emotional decision makers but their logical halves save the day. This time it did not. Person A sold cheap wanting to get out of the market crash in time. Person B sold even cheaper fearing to be left in a sinking ship. Like a domino effect, billions worth of shares soon were worth nuts.
Could it be that a similar planetary alignment made us aggressive? This aggression in getting what one wants proliferated most easily in the manufacturing sector with workers unionizing and getting their demands met at the cost of their own future. They were tearing up the goose to get the eggs. In the process, many geese have long expired.
Even schoolteachers went on a strike to get their demands of job securities.
There was nothing to gain much from the land by farming in it. So, millions of Nepalis, with basic education, flocked into the metropolis to harvest crops for which they did not need to do the planting. Why bother plowing the land, planting seeds, scaring the crows, waiting for the monsoon and harvesting when, in the metropolis, you can buy some goods and lay them for sell on the street. All you need to do is shout to to draw the attention of the customers and threaten the policemen by gathering a mob if they try to chase you away from the street.
One of the biggest revolutions is regarding the gender issues. Women have risen from the dungeons and are aggressively claiming for their rights.
The wave of change swept the country like a tornado and those in power are still not prepared: be it the king or politicians, be it industrialists, be it the principals or be it the metropolitan corporations.
But “everything is negotiable”
Growing violence is the signal of change, but the people in power do not know this fact. So, they are sitting at the negotiating table with the other constituents.
However, after the successful negotiations between the political parties that led to the peaceful state that we are currently basking under, people have begun to understand the importance and power of negotiation.
Hopefully, soon the government and people in authority will make channels for negotiations at all levels.
But what is negotiation?
It is the process by which two parties with differing demands but many commonalities meet to find out a solution. If the solution is good for both the parties, there will be a closure and perhaps the end of deadlock.
Party A wants to buy Party B’s property (land, shares) for say Rs. 10 million but Party B wants to sell it at Rs. 20 million. Why should Party B even bother then? Well, may be Party B is too old and wants to retire or maybe he thinks that his property will appreciate. Well, maybe. For whatever reasons, he is still talking. Subsequently, negotiation has to be held. There is something common: A want to buy and B wants to sell. Also there are differing demands related to price. Closure will ensue only after the papers are signed and there will be a deadlock until that deal is inked. A good negotiator will find a creative solution to arrive at the closure.
In a certain locality, there is a group of houses and there is a landowner amidst them who is renting his land to garbage collectors: that is the commonality. The houseowners can’t stand the smell from that land but the landowner is earning good income from the rentals: the differing stances. Here, closure could mean many things. The landowner agreeing to stop to rent his land to the garbage disposers and the houseowners agreeing to tolerate the smell forever or something in-between. While stalemate will persist, if nothing happening and status quo remains with the houseowners complaining and landowners simply listening. The solution to arrive at any of these closures could be even more varied. It could be collecting from house owners an amount equivalent of the rental. It could be a one time severance paycheck to the landowner. It could be a buy out.
So, there are two types of negotiations: one that we go and look for; the other that comes to us unwanted.
If you want to become rich look out for negotiations
Don’t believe me? Ask any kidnapper. They create a situation in which people who would not even give them a job of Rs.1000 salary per month, have to negotiate with them to settle for either Rs. 5 million or the lives of their dear ones.
But it is not only them. The East India Company entered India and created a situation in which the local Maharajas had to negotiate on whether to lose it all or retain a rich but ceremonial status.
Similarly, the corporate take-overs, mergers and acquisitions take place because someone went out to create situations in which the company that is selling out is forced to negotiate its fate.
Without strong negotiation skill, no one would have made fortunes.
Bill Gates would not be what he is today if he had screwed up his negotiation with IBM. At the last hour, he got removed the clause that would have made him bound to sell his operating system to IBM only. This allowed him to sell his operating system to any other hardware manufacturers. The rest is history.
In search of the best deals
Now armed with negotiation skills, all you ought to do is find out whom to make deals with, understand their values, desires, concerns and expectations and do things that will put you in the position in which others will have to negotiate with you. Learn from Prachanda and apply that in your business. He created a situation in which negotiation was the only alternative. Look at what he got!
Let us put corporations from developed nations in a position in which they will have to negotiate with us on whether to invest billions or lose out the opportunity to competitors.
