UBS Says Australia Should Start Wealth Fund as Debt Crisis Fallout Spreads
Australia, the world’s biggest iron ore and coal exporter, can’t escape fallout from economic stagnation in the U.S. and Europe and should be saving more for leaner times, UBS AG (UBSN)’s top banker in the nation said.
“It would be silly to think that none of this is going to have an impact on us -- it will,” Matthew Grounds, 42, chief executive officer of UBS’s Australian business, said in an interview on Sept. 14, before the bank disclosed a $2.3 billion unauthorized trading loss in London. “That’s got to impact China and that’s got to impact Australia.”
China is Australia’s largest trading partner and Grounds said he doubted commodity prices or the Australian dollar can hold current values. UBS workers in Australia will be among those hit as the Zurich-based bank cuts jobs, said Grounds, who’s also the joint global head of investment banking.
UBS, the largest foreign investment bank in Australia, repeated a call for Prime Minister Julia Gillard to use the proceeds of the biggest mining boom since the 19th century to set up a new wealth fund. The MSCI World (MXWO) Index has plunged 14 percent since July 22 on concern the global economy will slip back into recession amid a worsening sovereign-debt crisis.
“If we’re looking at a worst-case scenario, the two avenues that would really feel the effects of that global downturn would be investment and terms of trade,” said Helen Kevans, an economist in Sydney at JPMorgan Chase & Co. who sees a 40 percent chance of a U.S. recession. “A lot of firms would postpone investment. That would impact jobs. It would also influence commodity prices and terms of trade so we wouldn’t get that lift to national income.”
Mining, Carbon Taxes
U.S. economic growth weakened during the first half to its slowest pace since the recovery began. Meantime, Australia’s terms of trade, or export prices relative to import prices, are at all-time highs, helping deliver record profits for Melbourne- based BHP Billiton Ltd. (BHP), the world’s biggest miner.
Gillard’s government, which is proposing a mining tax as well as a levy on carbon emissions, also plans to build a A$36 billion ($37 billion) nationwide high-speed broadband network.
“Our biggest fear is that we emerge from this period with nothing to show for it,” Guy Fowler, 43, UBS’s head of investment banking in Australia, said in the same Sept. 14 interview. “You come to the end of the process and ask: what have we got? Fast internet. You can only dig this stuff up and sell it once. We should be building the biggest sovereign wealth fund of all time.”
Australia’s Future Fund, established in 2006 by the then ruling Liberal-National Coalition government to cover the pension costs of retiring politicians, judges and public servants, had A$75.2 billion of assets at the end of June.
In Norway, petroleum revenue has allowed the country to build a $544 billion sovereign wealth fund. Chile created an Economic and Social Stabilization Fund in 2007 to help offset commodity price swings. That fund held $13.4 billion at the end of July, according to the Ministry of Finance’s web site.
Grounds questioned the timing of a tax on Australia’s biggest emitters.
“We have an economy supported by carbon-intensive industries,” Grounds said. “Does it make a lot of sense to be the leader in the world in taxing your carbon economy? I wouldn’t have thought so, not in today’s market environment.”
The country’s gross domestic product rose 1.2 percent in the second quarter from the previous three months, the most in four years, driven by China’s demand for iron ore and coal. Mining companies are helping prop up the economy while retailers such as David Jones Ltd. and Myer Holdings Ltd. struggle to attract consumers.
Still, Grounds said Australia is “fortunate.” An unemployment rate of 5.3 percent is almost half that of the euro zone and the 9.1 percent of the U.S. Economic expansion in Australia will accelerate from an average of 2 percent in 2011 to 4.5 percent in 2012, according to the central bank. That would be the envy of most nations, Grounds said.
UBS, Switzerland’s biggest bank, said Sept. 18 its unauthorized trading loss, estimated three days earlier at $2 billion, amounted to $2.3 billion. UBS has covered the risk from the trading and its equities unit is operating normally within risk limits, the bank said.
“It’s business as usual in Australia,” Erica Borgelt, a UBS spokeswoman in Sydney, said in an interview yesterday, declining to comment on the trading loss.
UBS said last month it would eliminate about 3,500 jobs, or 5.3 percent of its workforce, to reduce costs. Profit dropped 49 percent in the second quarter as earnings slumped at the investment bank.
“Globally, we’re going into an environment which is going to be really tough,” Grounds said. “We have a significant pipeline of capital markets deals, particularly in the northern hemisphere. If we can get them all done, we’ll have a reasonably good year. If we don’t, nobody else is going to get them done either.”
Australia-born Grounds, who joined UBS in 1998, said he’s “comfortable” with the outlook for the business in his country.
UBS has been the top-ranked underwriter of equity sales and rights offers in Australia every year since 2005, according to data compiled by Bloomberg. The bank is fifth among arrangers of mergers involving Australian companies for 2011, versus 10th globally. It topped Australian M&A rankings in 2010.
Fowler, who has worked at UBS for almost two decades, has attributed the success of the business to the longevity of its relationships with clients. Even that might not be enough should economic malaise spread east.
“The fear clearly is that if China really slows down, and we start to have a slowdown in the very strong sectors that are holding everything else up at the moment, we’d be in for a tough time,” Fowler said.
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