Brazil and Argentina want to develop common currency

South America’s two biggest economies have begun  talks aimed at developing a common currency, amid scepticism from analysts that the concept is realistic.

Brazil’s President Luiz Inacio “Lula” da Silva and Argentina’s President Alberto Fernández wrote in a joint article published by Argentinian paper Perfil that they wanted to foster greater integration between their countries’ economies.

They have “decided to move forward with discussions about a common South American currency that could be used for financial and commercial flows, reducing operating costs and our external vulnerability.”

The announcement coincided with Lula visiting Argentina for his first trip abroad since taking office this month. At a press conference in Buenos Aires, he said establishing a common currency for trade would reduce reliance on the US dollar, which appreciated sharply last year against many other currencies.

“I think this will happen with time, and it is necessary because there are countries that sometimes have difficulty acquiring dollars,” Lula declared after meeting his Argentine counterpart, Alberto Fernández. “We must not in the 21st century continue doing the same as what was done in the 20th century.”

The proposed new currency would initially be shared between Argentina and Brazil for trade and transactions between the two countries and later be adopted by fellow members of the Mercosur trade bloc, Lula explained. Brazil’s Finance Minister Fernando Haddad later clarified that the proposal would not entail the adoption of a sole currency to replace the Brazilian real (BRL) and the Argentine peso (ARS).

However, first responses to the plan from analysts were sceptical. Some suggested that neither country is positioned to undertake such a complicated project or instil confidence in the concept with global markets.

Economic conditions are deteriorating in Argentina, where nearly four in 10 people live in poverty. The nation has one of the world’s highest inflation rates, rising to 94.8% in December 2022 from 92.4% the previous month and its currency has been steadily depreciating for over a decade.

Brazil, Latin America’s largest nation, has a stronger economy and inflation eased to 5.79% at the end of 2022 although still exceeded the central bank’s target range for a second year. The real has lost half its value against the USD since 2014, when it entered a two-year deep recession. The nation’s growth prospects remain subdued, and it last recorded a primary budget surplus in 2013.

Neither country has the initial conditions to make this succeed and attract others,” Mohamed A. El-Erian, former CEO of investment manager Pimco, tweeted on Sunday. “The best this initiative can hope for is that talk creates some political cover for much-needed economic reforms.”

The initiative might be more about politics than economics: Fernández will seek re-election this year, and amid the persistent economic gloom, the idea of a common currency may appeal to potential voters, said Thiago de Aragão, director of strategy at Brasilia-based political risk consultancy Arko Advice.

Big banks join forces on digital wallet rival to Apple Pay

Several banks are reportedly collaborating on a digital wallet that links with debit and credit cards, in a bid to compete with Apple Pay and PayPal.

A report by The Wall Street Journal says that the planned digital wallet would be operated by Early Warning Services, a joint venture from several banks that also runs Zelle. Banks involved in the initiative are said to include Wells Fargo, JPMorgan Chase and Bank of America.

The new wallet would initially be launched with Visa and Mastercard already on board, according to the report. Early Warning Services confirmed in response to the report that it plans to launch a wallet product this year.

The initiative could be seen as an effort to slow Apple’s push into consumer banking. The tech giant launched a branded credit card in 2019 and is exploring other products for its customer base.

Bernstein analyst Harshita Rawat commented in a note to clients that the major banks have “likely always had PayPal envy” but that it would take time for the new wallet to be a serious risk to incumbents.

“It simply takes a very long time, a killer customer experience (which needs to be better than incumbents, not just similar), and a compelling merchant value proposition to build the two-sided network effects in payments to achieve scale,” Rawat noted.

Sweden’s rare earths find “won’t end Europe’s reliance on China”

European companies have been warned that the recent discovery of the region’s largest known deposit of rare earth elements in northern Sweden will not immediately lessen the European Union’s (EU) reliance on China for critical raw materials.

Swedish mining company LKAB announced on 12 January that it had located a deposit in the country’s Arctic region of more than one million tons of rare earth oxides, used in the manufacture of items from mobile phones to missiles.

The discovery has been hailed as a key step in helping the EU in its green transition and in diversifying its supply. China currently provides nearly 98% of the EU’s rare earth minerals required to build green transition technologies. Russia is also a major supplier of metals such as palladium, titanium, platinum and aluminium.

“The EU’s self-sufficiency and independence from Russia and China will begin in the mine,” said Sweden’s Energy, Business and Industry Minister Ebba Busch, following LKAB’s announcement.

However, Marie Le Mouel, an affiliate fellow on the macroeconomics of decarbonisation at the Bruegel think tank points out that Europe can't lessen its reliance on China without also ramping up its refining and production capacity.

“There's more of a dependency on Chinese manufacturing than on the actual materials that go into these components,” Le Mouel said, adding that she expects “large parts” of the mined Swedish deposit to end up being exported outside the EU for refining.

China also accounts for 85% of rare earth processing worldwide and about 98% of the EU’s rare earth permanent magnets, used for the electric motors of battery-powered cars, are imported from China.

There are “many, many intermediate steps between these raw materials and the installation of green technologies,” said Le Mouel, playing down claims that the Swedish discovery is “good news for Europe's autonomy.”

Despite her caution LKAB;s President and CEO Jan Moström insists that his company's recent investment in the Norway-based rare earths elements (REE) manufacturer REEtec will create “the base for a strong and sustainable Nordic value chain for rare earth metals."

In November, REEtec closed a financing round of €115 million (US$125 million) to build an industrial scale plant for separating rare earths in Herøya, near Porsgrunn in Norway. This is scheduled for completion in H1 2024 and REEtec’s second new factory, which will also be able to process material from LKAB, is planned for 2026.

Brussels is aware of the challenge of lessening the EU’s reliance on China. As part of its upcoming Critical Raw Materials Act, expected in March, the Commission is expected to outline how to subsidise both production and also processing and strategic storage reserves of critical raw materials within the bloc.

Before LKAB can tap the new resource, it must also undergo a permitting procedure that could last 10 to 15 years. The process will start with an application for an exploitation concession to be able to investigate the deposit further, as well as the conditions for mining.

The term “rare earth” refers to a group of 17 elements used to make a range of products and infrastructure which are increasingly important to everyday life. Uses range from mobiles, hard drives and trains to components for green technology including wind turbines and electric vehicles. Some are essential for military equipment like missile guidance systems.

Demand for rare earths is expected to increase fivefold by 2030, but extraction is both difficult and potentially damaging to the environment.

China’s digital yuan gets new use cases.

China’s central bank digital currency (CBDC) has seen several new use cases in the first weeks of 2023, including buying securities and making offline payments.

The digital yuan, or eCNY, also has received upgrades giving it smart contract functionality alongside the new use cases.

The smart contract function was launched on the Meituan app, which offers retail and food delivery services, according to a report by local cryptocurrency media outlet 8btc.

When Meituan users place an order and pay with their e-CNY wallet, a smart contract triggers and searches for keywords and purchased items in their order. If a user buys something on the list of keywords for the day, they go in the draw to win part of a prize.

The prize is a share of a “red envelope” known locally as hongbao containing CNY 8,888, worth just over US$1,300. Hongbao are small packets traditionally used for gifting money around Chinese New Year as a gesture of good luck.

In December, the e-CNY wallet app introduced a feature for users to send digital red envelopes in a bid to boost adoption before the Chinese New Year on 22 January.

In addition, new uses for the e-CNY have been reported this month. A report from the China Securities Journal said that e-CNY was used to buy securities for the first time. Investors can also use the CBDC to buy securities with the mobile app for Soochow Securities, a local brokerage firm.

The digital yuan wallet app also received an update with users now able to make contactless payments using Android phones even if their device is without internet or power, according to a Yicai Global report.

The new uses for the digital yuan follow reports that China has been struggling with the adoption rate of its CBDC. A former official from the People’s Bank of China (PBOC) even made a rare public admission last month that the digital yuan’s “usage has been low” and “highly inactive,” adding “the results are not ideal.”

Two weeks ago the PBOC included digital yuan reports for the first time, revealing the CBDC represented roughly 0.13% of the CNY10.47 trillion in circulation at the end of 2022.

Pakistan’s biggest cooking oil producer announces IPO

Dalda Foods, Pakistan’s largest producer of cooking oil, plans to hold an initial public offering (IPO) on the Pakistani Stock Exchange (PSX) as early as March to finance the expansion of its production capacity.

Aziz Jindani, Dslda’s chief executive officer (CEO) said the company aims to raise between 3.3 billion rupees (PKR) – about US$14 million – and PKR4.6 billion. The share sale could be held within the next two months to precede Ramadan, which will start on 22 March.

“This particular IPO is intended to fund Port Qasim expansion,” Jindani was quoted as saying, referring to Dalda’s factory in Karachi. The CEO added that the proceeds could expand its capacity in Karachi to extract oil from seeds. “It may reach 900 tons a day, more than doubling the current rate.”

The offering could involve the sale of about 50 million shares, consisting of two-thirds new shares and the rest coming from existing shareholders, according to Shahid Ali Habib, CEO of the Arif Habib business conglomerate and sole adviser to the IPO, reports stated.

Dalda was previously owned by Anglo-Dutch consumer goods giant Unilever, which in 2004, Unilever sold the company’s Pakistan business to Westbury Group, owned by Bashir Jan Mohammad and a group of employees. In addition to manufacturing cooking oil, Dalda has expanded into the production of liquid tea whitener.

A PKR 4.6 billion offering would make Dalda’s IPO Pakistan’s largest by a consumer staple company, according to Bloomberg data. It would also be the country’s biggest since mobile phones distributor Air Link Communication’s PKR 6.4 billion listing in September 2021.

The IPO will take place against a difficult economic backdrop in Pakistan, which faces dwindling foreign exchange reserves, an inflation rate of 24.5% and economic slowdown. However, this is offset by continuing high demand for edible cooking oil from Pakistan’s 231 million citizens.

“It’s recession-proof as a category,” Jindani said and the listing could help Dalda capture a larger share of Pakistan’s fragmented edible oil market.

Big rise in AML and crypto fines for 2022

Anti-money laundering (AML) fines globally rose by 53% in 2022 while fines to crypto firms jumped by more than 90% as regulators cracked down on financial misconduct, data from compliance firm Fenergo reveals.

In total, financial institutions were fined nearly US$5 billion (£4.04 billion) last year. According to Fenergo’s financial crime policy manager Rory Doyle, the jump was linked to the huge increase in fines levied at crypto firms, as well as fines related to sanctions busting commodity trading that followed Russia’s invasion of Ukraine and the settling of legacy issues.

Last year’s figures included a penalty of US$2.1 billion imposed on Danske Bank by the US Department of Justice in December 2022 for AML violations at its former Estonia branch, the largest AML fine issued to date.

While fines surged globally, in the UK AML fines actually fell to US$188.2 million in 2022 from $436.5 million the year before. However, the total number of fines issued more than tripled, with 14 fines issued in the UK in 2022, up from four in 2021. The largest fine issued by watchdog the Financial Conduct Authority (FCA) was to Santander, which was hit with a US$132 million penalty.

Netherlands to close Groningen gas field as scheduled

The Dutch government has confirmed that it still plans to close production at Groningen, once one of Europe's largest gas fields, by October 2023 following earthquake risks which made it dangerous to keep operating.

However, the war in Ukraine and the subsequent sanctions on Russian gas have put the country in a difficult spot. Hans Vijlbrief, state secretary for mining, said he aims to close the earthquake-prone Groningen gas field by 1 October, although the Europe gas shortage in winter could still delay the shutdown by a year to October 2024.

Due to the danger of high seismic activity in the region, production at the gas field has already been reduced to a fraction of its full capacity, said Vijlbrief in an interview with the Financial Times.

“We won’t open up more because of the safety issues,” he said adding, “It is politically totally unviable. But apart from that, I’m not going to do it because it means that you increase the chances of earthquakes, which I don’t want to be responsible for.”

In Netherlands’ northeast, the Groningen gas field is close to the German border and has felt about 100 tremors annually since the 1980s. Gas excavation was increased after sanctions were imposed on Russia but due to the increased risk of earthquakes, the annual output has been reduced to 2.8 billion cubic metres (bcm). Vijlbrief said that it is potentially dangerous to take production beyond 5bcm.

“It’s very, very simple: everybody who has some knowledge of earthquake danger tells me that it’s really very dangerous to keep on producing there. I’m quite convinced it’s wise to close it down,” he stressed.

Vijlbrief also revealed that the previous government’s approach to addressing the impending danger was inadequate and "it was crystal clear that the whole safety aspect of Groningen gas drilling was neglected for many years." 

The Groningen gas field was discovered in 1959 by the Dutch Petroleum Company (Nederlandse Aardolie Maatschappij; NAM) when searching for oil. Opened in 1963, it produced 50 bcm annually at its peak. The Netherlands instructed gas operator NAM, a joint venture of Royal Dutch Shell and ExxonMobil, to reduce production in 2013 following seismic activity and in 2018 it was announced that the field would close although the plan was subsequently delayed.

Westpac links with RDC for AI-powered business lending

Australian ‘big four’ bank Westpac has partnered Rich Data Co (RDC) to improve customer experience (CX) for its business lending customers utilising artificial intelligence (AI).

RDC’s AI platform will be applied to determine the current and projected cashflow status of an enterprise, supporting credit worthiness and lending decision making. RDC previously partnered with National Australia Bank (NAB) in 2020 under a similar arrangement to improve the group’s small business lending offering.

The technology supports a digital application process and faster decisioning for borrowers with an expanded cash flow offering, supporting Westpac to extend flexible, unsecured funding with faster turnaround times.

“AI-led decisions will streamline lending processes. Integrating AI into our business lending decision-making processes will simplify and accelerate our lending practices for customers, allowing us to enhance our existing platforms and decisioning capability in a safe and controlled way” said Westpac Business Lending MD Shane Howell.

“The work provides a deeper understanding of our customers so that we can support and provide insights as and when they need it. Customers will see tangible benefits, including our two-sided digital finance application form, which allows both customers and bankers to jointly work on an application for a faster experience.”

Apex Group to acquire BoA’s Irish depositary business

Bermuda-based financial services provider Apex Group announced its planned acquisition of Bank of America Custodial Services (Ireland) Limited (BACSIL), the Irish depositary business of Bank of America. Apex Group will acquire BACSIL though its subsidiary European Depositary Bank (EDB).

BACSIL is a depositary solution for onshore and offshore funds servicing blue-chip clients consisting of UCITS (Undertakings for the Collective Investment in Transferable Securities), Alternative Investment Funds and offshore depo-lite fund structures, across a wide range of strategies. The BACSIL business, based in Dublin, provides depositary services to client assets of US$71.4 billion.

The deal is the latest in a series of strategic global acquisitions for Apex Group to broaden the geographical scope of depositary services in the European market. It recently added fund administration software company Pacific Fund Systems and completed its acquisition of  Darwin Depositary Services in the Netherlands last November.