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Are the EU’s supply chain protection plans too draconian? – Industry roundup: 20 September

EU’s supply-chain plan criticised as “interventionist”

Proposals issued by the European Commission (EC) that would allow it to intervene in markets and ask European companies to prioritise some orders over others during emergencies have received a mixed reception, with critics suggesting the plan would introduce too great a degree of state intervention.

The just-published Single Market Emergency Instrument (SMEI) aims to avoid shortages, supply-chain disruptions and hoarding similar to those seen in European Union (EU) member states during the Covid-19 pandemic — when many countries introduced unilateral measures to secure masks, gloves or testing materials.

“The Covid-19 crisis showed us that our single market isn’t perfect. It is strong, but not unbreakable,” said EU commissioner for competition Margrethe Vestager at the launch on Monday. Unilateral measures adopted by some member state had triggered shortages of supplies elsewhere when they were most needed, she added.

“Rather than relying on ad hoc improvised actions, the Single Market Emergency Instrument will provide a structural answer to preserve the free movement of goods, people and services in adverse times,” added EU commissioner for the internal market Thierry Breton.

The SMEI instrument would introduce a staged approach which would give emergency powers to the commission to monitor and tackle any potential threat that could trigger disruptions or shortages of key products within the EU

In normal circumstances, the EU executive and member states will exchange information, conduct training, and hold simulations to prepare for possible crises, and issue early warning alerts when a potential threat or incident is detected. Should a crisis be identified, EU countries will then be asked to voluntarily share information regarding the supply chain of particular strategic goods or services.

This so-called “vigilance phase” will also allow the EC to ask countries to develop strategic reserves that prevent shortages. Under the “emergency mode”, where a crisis or threat has a negative impact on the availability or free movement of goods, the EC can request information from European companies and ask them to prioritise orders for specific goods needed during the crisis.

Companies that do not comply with Brussels’ requests will be allowed to justify their position but could face fines of up to €200,000.

The emergency mode, which would be activated if approved by a majority of EU countries will also ban member states from restricting exports of critical goods or the movement of critical workers. EU countries would also have to notify the commission and justify any unilateral measures they may introduce, such as border closures.

But the SMEI has already been criticised by some governments and industry groups for granting regulators wide powers to intervene in business decisions. “We fear that the new tool will be too interventionist, giving the Commission the power to steer industries in non-crisis times,” said one EU government representative.

A group of nine countries, including Belgium, Denmark, the Netherlands and Slovenia, has already warned the EC not to go too far with its proposals. The diplomat said that some of those countries are still unhappy with the text, as it does not appear to address their concerns , and cited stockpiling measures and extra requirements for companies as key issues.

Saudi Arabia’s economic growth “headed for a 10-year high”

Saudi Arabia’s gross domestic product (GDP) for 2022 is expected to grow at 7.5%, the highest rate in 10 years, as the country steadily recovers from the pandemic, forecasts Standard & Poor’s (S&P). The credit rating agency updated its outlook for Saudi Arabia to positive and assessed the Kingdom’s short and long-term foreign and local currency sovereign credit ratings to A-/A-2.

S&P’s report noted that the surplus in the Kingdom’s state budget is expected to be about 6.3% in 2022. The credit rating agency further added that the positive outlook reflects its strength of GDP growth, healthy financial policies, and government reforms that aim to diversify the economy, which has depending heavily on oil revenues for several decades. 

S&P expects the Saudi economy’s productive capacity i to grow in the long term, driven by development of the general finances and significant economic reforms. It foecasts no dramatic rise in sovereign debt costs in the Kingdom, as most of the public debt portfolio is running at a fixed rate. 

S&P added that inflation in Saudi Arabia is relatively low against the rates of its peers and it is likely to remain under control as the government subsidises fuel and food prices, along with tying the local currency with the relatively-strong US dollar. 

“Non-oil sector growth also remains strong, with robust services growth as the economy continues to rebound after the pandemic. The economy also benefits from large public investment projects, largely funded by the Public Investment Fund and the National Development Fund,” said S&P in the report.

UK still lags on business investment

The UK’s incoming prime minister, Liz Truss, has been warned that a series of corporation tax cuts introduced by previous administrations have done little to spark greater business investment.

A report by the Institute for Public Policy Research (IPPR) describes a “race to the bottom” on the headline tax rate on company profits which has failed to boost the UK’s investment and economic growth over the past 15 years. The UK has fallen behind Italy and Canada to record the lowest private sector investment of the G7 economies.

Truss, who took over from predecessor Boris Johnson two weeks ago and her chancellor, Kwasi Kwarteng, have pledged to scrap plans to raise the UK corporation tax rate to 25% and argues that lower rates of corporation tax could encourage investment and drive the UK’s GDP growth up to an annual target of 2.5%. A tax cutting mini budget scheduled for this Frida promises to release £30 billion (US$34.2 billion) of giveaways for companies and high-income workers.

However, the IPPR said that cutting the UK headline rate from 30% in 2007 to 19% in 2019, encouraged by former chancellor, George Osborne, did not spur higher private investment or faster economic growth.

Despite the tax cuts to the lowest rate in a century, the UK fell behind Italy and Canada to rank with the lowest private sector investment in the G7 as a share of national income. The following year, the UK ranked 28th for business investment out of 31 members of a wider group of developed countries in the Organisation for Economic Cooperation and Development (OECD).

The IPPR report questions over Kwarteng’s desire to scrap the planned increase in corporation tax to 25% next April, that former chancellor Rishi Sunak planned to help repair the sharp deterioration in finances caused by business bailouts during the pandemic.

Urging the government to consider alternative ways to increase investment and economic growth, the left-wing thinktank said targeted tax cuts for companies and a commitment to an industrial strategy would have a bigger impact.

George Dibb, the head of the Centre for Economic Justice at the IPPR, said: “Slashing corporation tax is just a continuation of a failed race to the bottom that hasn’t delivered for the UK economy. Tax cuts are not a magic bullet to increase investment and growth.”.

Time running out for Australia’s ‘zombie’ companies

The ending of the government’s financial support packages for businesses hit by the pandemic is pushing Australia’s uneconomic, or ‘zombie’ companies into insolvency as rates return to pre-2020 levels, reports the Reserve Bank of Australia.

The RBA expects business failures to increase as rising cost pressures and Australian Tax Office (ATO) round up of outstanding tax debts apply further stress, with the construction and manufacturing sector particularly hard hit. Company failures hit a 2.5 year high in the third quarter of 2022 as 717 firms entered into external administration, data from the Australian Securities and Investments Commission (ASIC) reveals.

A recent report by Sydney-based firm Coolabah Capital Investment found that up to 34% of companies listed on the Australian Securities Exchange (ASX) could be classified as zombies if based on the ability to produce sufficient EBIT to cover their interest repayments.

“Business failures will continue to increase, but this will be a slow burn rather than a tsunami,” commented Jennifer Ball, Restructuring and Insolvency Partner at law firm Clayton Utz. “There are still some zombie companies out there that need to be restructured, or alternatively, put into a formal administration process.”

Kyriba launches cash management AI

Fintech Kyriba, a major name in Cloud-powered finance and IT solutions, has announced the launch of Cash Management AI, a solution based on artificial intelligence (AI), which it says employs data science tech to predict cash availability with greater speed, control and reliability.

Kyriba added that the solution enhances firms’ cash management and forecasting capabilities and should help mobilise greater confidence and precision for the financing of investments, a key priority for treasurers in the current environment of surging interest rates and market volatility.

The group cites a recent survey by International Data Corporation (IDC), which found that 93% of finance professionals take advantage of real-time insights and 99% of have been using business intelligence to make improved liquidity decisions.

IDC reported that finance industry participants without a proper data strategy incorporating application programming interfaces (APIs), business intelligence (BI) and AI are reliant on outdated solutions and cannot consume, analyse and leverage terabytes of structured and unstructured data in an efficient manner.

“With increasing market volatility, chief financial officers (CFOs) are demanding greater accuracy and reliability from their cash forecast,” said Jean-Baptiste Gaudemet, SVP of data Analytics at Kyriba. “Data science and analytics are needed to learn from the vast amounts of information that finance teams manage every day. AI helps CFOs harness data to make more informed, rapid and effective decisions.”

Main features of Kyriba’s Cash Management AI include:

  • Artificial Intelligence: Using built-in Machine Learning, Cash Management AI automatically learns from historical data and continuously improves predictions with new data;
  • Confidence Levels: Users can adjust forecasts in real time by selecting the optimal confidence level based on the organisation’s strategy and risk profile;
  • Business Intelligence: Users can view data in dashboards available as standard with flexible filters, adjustable forecast periods, cash budget calculations, and more

India’s central bank stands firm on mark-to-market losses

The Reserve Bank of India (RBI) has again turned a request from the country’s banks for allowing greater flexibility in the accounting of mark-to-market (MTM) losses in their balance sheet, according to local reports. The request was aimed at delinking banks’ MTM losses from their operating performance.

The RBI rejected a similar request from the banks in June for forbearance in accounting for treasury losses. An earlier proposal for allowing them to spread such losses, incurred during the June quarter, over the remaining quarters of this fiscal, was rejected. Indian banks have suffered huge MTM losses due to a rise in interest rates in recent months. The repo rate at which the RBI lends to banks has risen to 5.40%, with a further increase of up to 0.50 basis points (bps) expected at the end of this month.

Lenders, through the Indian Banks’ Association (IBA), had re-approached the central bank to permit them to account for the MTM losses only after the operating profit is estimated. They suggested that such losses be allowed to be a part of their “provisions and contingencies”, which come into the balance sheet calculations after the operating profit is arrived at, according to reports.

Such a move, the bankers suggested, would offer a more realistic picture of their performance, given the volatility in treasury operations.

However, the RRBI apparently rejected the demand on the basis that ensuring the accounting transparency of banks is a non-negotiable part of its regulation. Any attempt by regulated entities at camouflaging the real picture on their operating performance wouldn’t be allowed, as it could mislead investors or other stakeholders.

One analyst commented: “When banks made profits on their treasury operations, which contributed immensely to their operating profits, they never asked for this flexibility in accounting. But when they incur losses on this, they are asking for the change.”

UK watchdog lists crypto exchange FTX as unauthorised 

UK regulator the Financial Conduct Authority (FCA) has listed of the world’s largest crypto exchanges as an ‘unauthorised firm’ claiming that it operates without being licenced.

“Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised or registered by us,” said the FCA. “This firm is not authorised by us and is targeting people in the UK.”

The FCA warns potential customers that they will be unable to get their money back or seek the protection of the UK’s Financial Services Compensation Scheme (FSCS) “if things go wrong” and will not have access to the Financial Ombudsman Service.

Launched by Sam Bankman-Fried (SBF), FTX has raised its profile over recent months by helping digital asset platforms that have faltered as cryptocurrency prices have declined.

Despite challenging conditions for many crypto exchanges, FTX has continued to grow, with its revenue for 2021 reportedly jumping by 1,000% to US$1.02 billion. The projection for 2022 is US$1.1 billion in revenue in 2022, after US$270 million in Q1.

Crédit Agricole and MUFG structure Japanese data centre green loan

Asia Pacific tech company AirTrunk, a specialist in smart data, has announced the successful close of what it said is a first of its kind green loan in Japan with joint Sustainability Structuring Agents Credit Agricole and MUFG as part of the group’s new Green Financing Framework.

The inaugural Japanese data centre green loan will be used to finance AirTrunk’s 110+MW West Tokyo data centre, AirTrunk TOK2 and also be the first to use operating Power Usage Effectiveness’ (PUE) and water productivity eligibility criteria. Under the Framework, AirTrunk’s green projects must meet certain eligibility criteria which have a positive impact on the environment, in order to be financed through green loans. The company has defined three categories as ‘green loan’ eligible – Green Data Centre, Renewable Energy and Water Efficiency.

The Framework ensures that AirTrunk’s green loans are aligned to the four Loan Market Association Green Loan Principles (GLP) being the use of proceeds, the process for project evaluation and selection, management of proceeds and reporting. It also aligns to six of the United Nations’ Sustainable Development Goals (SDGs). The Framework complements AirTrunk’s Sustainability Linked Loan (SLL) announced in late 2021. The A$2.1b loan was the largest in global data centre history and first in APAC.

“We continue to drive sustainable innovation throughout the design, build, operations and financing of our data centres. The green loan closed today has set several industry benchmarks including being the first for a data centre in Japan, and first to use eligibility criteria based on operating PUE and water productivity” commented AirTrunk CFO Prashant Murthy.

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