US$21tril to US32tril stashed away in tax havens pose economic challenge

CAPITAL flight to offshore tax havens, estimated at between US$21 trillion to US$32 trillion, poses a major challenge especially in tackling income inequality, poverty and debt issues.

In total, 10 million individuals around the world hold assets offshore, with almost half of the minimum estimate of US$21 trillion to US$9.8 trillion owned by just 92,000 people, said The Observer, quoting James Henry, a former chief economist at McKinsey and an expert on tax havens.

“These estimates reveal a staggering failure,” John Christensen of the Tax Justice Network was quoted as saying. “Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people.

“This new data shows the exact opposite has happened: for three decades extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich.”

Henry has conducted groundbreaking new research for the Tax Justice Network campaign group – pouring through data from the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and private sector analysts.

He used the BIS’s measure of “offshore deposits” – cash held outside the depositor’s home country – and scaled it up according to the proportion of their portfolio large investors usually hold in cash.

This research suggests that in many cases, if governments had been able to draw their richest citizens into the tax net, they could have avoided being dragged into indebtedness in the first place, said The Observer.

For example, oil-rich Nigeria has seen more than US$300bil spirited away since 1970, while Ivory Coast has lost US$141bil.

In terms of capital flight, Malaysia is estimated to have US$283bil drawn away; Singapore (US$169bil), Indonesia (US$331bil) and China (US$1.189 trillion).

This research has shown that “the wealth held in tax havens is probably sufficiently substantial to turn Europe into a very large net creditor with respect to the rest of the world,” said The Observer, quoting French economist Thomas Piketty, an expert on inequality who helps compile the World Top Incomes Database.

In other words, even a solution to the eurozone’s seemingly endless sovereign debt crisis might be within reach – if only Europe’s governments could get a grip on the wallets of their own wealthiest citizens, said The Observer.

The IMF has warned the eurozone faces a gloomy economic outlook, thanks to lingering worries over Greece, high unemployment and a banking sector still battling to shake off the financial crisis, said The Guardian.

“The recovery is strengthening, underpinned by lower oil prices and the European Central Bank’s (ECB) expanded asset purchase programme. But the medium-term outlook remains weak, weighed down by the legacies of insufficient demand, lagging productivity and weak bank and corporate balance sheets.

The IMF is forecasting eurozone GDP growth of 1.5% this year and 1.7% next year. It expects inflation to remain close to zero this year and rise to 1.1%.

The forecasters are gloomy about the prospects for a strengthening economy to lift employment in many eurozone countries. Meanwhile, the unemployment rate remains high, above 11% for the whole eurozone and near 25% in Greece and Spain, said The Guardian.

The IMF also urges eurozone officials to find ways to better measure and encourage progress in areas of structural reform. For example, it wants the currency bloc to use benchmarks, such as how long it takes to launch a business or the number of days it takes to enforce a contract.

Gold prices may be falling but they need to fall another 30% to reach fair value, said the Sydney Morning Herald (SMH), quoting Deutsche Bank.

“Gold would need to fall towards US$750 per ounce to bring prices in real terms back towards long-run historical averages,” said Deutsche Bank, which ran the gold price through several models to determine “fair value” for the precious metal.

The Deutsche “gold price model”, which factors in world growth, the US dollar, money supply and central bank gold purchases, calculated fair value at US$785 per ounce.

A falling oil price is the one caveat to this bearish forecast. Cheap oil reduces inflationary pressure in the US, eases the need for the Federal Reserve to raise interest rates and therefore, puts downward pressure on gold’s main competitor – the US dollar.

“We would view the falling oil price as the most likely catalyst to provide support to the gold price,” Deutsche Bank was quoted as saying.

“Not only could lower energy prices and US inflation delay Fed tightening but we are already seeing lower oil prices push US energy corporate bond spreads to their widest levels since the beginning of the year.

“The risk of a default cycle for US energy names and a broader credit event spilling onto US financial markets may provide some welcome support for the gold market.”

ABN Amro says bullion will be at US$800 by 2016. However, Capital Economics tips gold to be at US$1,050 at the end of the third quarter and US$1,200 at the end of 2015, rising higher in the years after that.

The World Bank tips gold will fall but only gradually, reaching US$1,000 in 2025. UBS’ official forecast for gold is an average price of US$1,180 in the second half of 2015, said the SMH.

The magnitude of gold’s recent plunge – it was at US$1,200 in June – is “surprising” to some. Spot gold was flat at US$1,096.75 per ounce last Thursday. It sank to as low as US$$1,077 last week, its weakest since February 2010, after a sell-off in New York and Shanghai, said Reuters.

Lax tax laws and a host of other factors have led to trillions of dollars being stashed offshore in so-called tax havens.

Going after this money trail and retrieving some of this taxable cash may help governments in so many areas like education, healthcare, nutrition and climate change.

A dim economic outlook for the Eurozone should be a note of caution for investors who may be lured by some of the good corporate earnings on the European bourses.

In recommending for possible further quantitative easing, where the ECB buys eurozone government bonds using electronically created money, the IMF is signalling that more trouble potentially lies ahead for the eurozone.

Gold, generally regarded as the safe haven asset, appears to be losing its glitter in anticipation of a US interest rate hike, among other factors. Investors for the long haul could be checking on good entry price levels for the commodity and have to tread cautiously in view of mixed expectations for gold price.

Columnist Yap Leng Kuen reckons that checks on money laundering trails appear like just the tip of the iceberg, where massive amounts of capital flight are concerned.

Challenge of capital flight

Lax tax laws and a host of other factors have led to trillions of dollars being stashed offshore in so-called tax havens.