Germany’s economy on brink of recession, warns Bundesbank

Germany’s economy will shrink again in the first quarter of 2023, the country’s central bank predicts.

In its latest monthly report, the Bundesbank predicts: “German economic activity will probably fall again in the current quarter. However, the decline is likely to be less than in the final quarter of 2022.”

German consumer sentiment and business expectations improved slightly at the beginning of 2023, but they remain at relatively low levels said the bank.

German GDP shrank by 0.4% in the final quarter of 2022. A second consecutive drop in activity in Q1 2023 would put Europe’s largest economy into a technical recession.

More positively, the Bundesbank forecast that inflation in Germany is likely to fall sharply from this month as high energy prices no longer impact on the year earlier figures. The consumer price index stood at 8.7% in February, unchanged from the previous month after peaking in October 2022 at 10.4%. It also commented on “positive” developments in the national labour market and its team expects unemployment to edge down in the coming months.

Despite a small rise of just over 2,000 to 2.51 million in the number of people out of work, Germany’s jobless rate in February was unchanged at 5.5%

But price growth will remain uncomfortably high, the Bundesbank warns: “That being said, the core rate is proving exceptionally persistent. It could even increase slightly towards the middle of the year.”

Elsewhere, a spokesperson for German chancellor Olaf Scholz brushed off concerns that recent market turmoil sparked by failing banks was reminiscent of the 2008 financial crisis. Germany's banking system, the spokesperson stressed, was “well positioned” in the wake of the takeover of Credit Suisse by larger rival UBS.

SWIFT: ISO 20022 coexistence begins, with new possibilities for cross-border payments

SWIFT has announced that migration to the ISO 20022 standard for cross-border payments and reporting (CBPR+) successfully began yesterday, marking “an important milestone” for the global payments industry. Both MT and ISO 20022 messages will be supported through November 2025.”

The financial messaging services said that after years of intense preparation by the global financial community, the migration to ISO 20022 for cross-border payments and reporting (CBPR+) officially began on 20 March.

This marks a significant milestone for the payments industry and the start of a coexistence period until November 2025 where both MT and ISO 20022 messages will be supported, enabling financial institutions to migrate to the new standard at their own pace.

In its release, SWIFT commented: “The rich and structured data enabled by ISO 20022 is an essential element of the next generation of payments. It’s the foundation for financial institutions to work smarter and faster, leading to greater operational efficiency, improved data analytics and compliance, new opportunities for innovation and enhanced customer experiences that promise to transform the payments landscape.”

Pat Antonacci, Chief Customer Experience Officer at Swift, added: “The go-live of ISO 20022 for CBPR+ and the start of the coexistence period represents the huge collective effort of the entire Swift community and opens significant possibilities for the future.

“We look forward to continuing to work with the payments industry to unlock new opportunities as institutions move to fully adopt ISO 20022 and benefit from its richer, more structured data.”

The release also stated: “We’re now entering the next stage of the community’s adoption journey as we move toward full community-wide adoption of ISO 20022 and its rich, structured data. Swift will continue to provide support throughout the coexistence period.

“We are also continuing to support real-time gross settlement systems (RTGSs) in adopting ISO 20022 for domestic payments, with several major market infrastructures already migrating or preparing to adopt the standard. On 20 March, RTGSs in several key domestic markets – Australia (RITS), Canada (LYNX), Europe (EURO 1 and T2), and New Zealand (ESAS) – also started their migration to ISO 20022, with others set to go live over the coming months and years.”

Volkswagen’s Russian assets frozen by court

Volkswagen’s year-long plan to wind down its operations in Russia have been disrupted after a local court frozen all the group’s assets in the country.

The German automaker is one of many companies that either closed or suspended operations in Russia after western countries imposed unprecedented sanctions on Moscow following the invasion of Ukraine.

VW is attempting to sell its Russian factory in Kaluga, south of Moscow. The plant, which has a capacity of 225,000 vehicles a year, has been furloughed since March 2022.

VW and Russia's industry ministry said no decision had yet been made on the sale of the factory after it was reported earlier this month that local car dealer group Avilon was set to buy the factory.

Russian automaker GAZ, which was contracted to produce VW vehicles at its factory in Nizhny Novgorod, had sued Volkswagen for breach of contract after VW terminated the agreement last August. GAZ estimated its losses from the terminated contract at almost roubles (RUB) 16 billion (US$207.8 million).

Other automakers have already been forced to take big hit to get out. When France's Renault exited Russia a year ago it sold its stake in the country’s Autovaz to the Russian state for one single rouble – barely more than one US cent – despite its assets having been previously valued at US$2.35 billion.

Last week Volkswagen Group subsidiary Skoda said it was close to concluding the sale of its own assets in Russia, a process which has been complicated by the invasion of Ukraine. Companies from Western countries that have applied sanctions on Russia are viewed as unfriendly and must now win approval from Russia’s government before any sale can proceed.

South Africa launches first rapid payments programme

The South African Reserve Bank (SARB) has announced the launch of the country’s real-time rapid payment platform called PayShap.

PayShap aims to offer a cost-effective, convenient and instant payment service across banks, a proxy service to simplify the identification information for banking transactions, a request to pay service, as well as support for several known retail payment use cases.

The service also addresses gaps in the interoperability of banking payment systems and is aligned with new international ISO standards for financial messaging, adopted by the South African payments industry last year.

PayShap was developed by an industry-spanning collaboration, driven by automated clearing house (ACH) BankservAfrica, the Payments Association of South Africa (PASA) and the South African banking community, with the aim of modernising the national payments industry. It is rooted in the SARB’s Rapid Payments Programme, as part of its Vision 2025 strategy to reform the South African national payment system framework.

The SARB intends that PayShap will ultimately offer a cost-effective, instant payment service across banks, a proxy service to embed user banking details, a request to pay service, as well as support for several known retail payment use cases. The service also addresses gaps in the interoperability of banking payment systems by implementing a Transactions Cleared on an Immediate Basis (TCIB) payments platform.

Among the more tangible benefits for day-to-day users will be a reduction in information required for payments. In its initial phase, PayShap users will be able to access its real-time payment feature in order to pay recipients instantly, using either their banking details or by proxy via a unique identifier called a ShapID. A person's ShapID could, for example, be a mobile phone number, or a bank-generated identification number, used as a proxy for their full banking details.

The SAB says that these IDs are easier to share and use than, for example, the cumbersome details needed for electronic funds transfers, which still require manual inputs of information such as branch codes, and the payee's name and account details.

IFC invests US$15 million as Mongolia launches first green bond

Khan Bank, Mongolia’s largest commercial financial institution, has issued the country’s first-ever green bond, a US$60 million five-year offering.

The International Finance Corporation (IFC) is investing US$15 million, with the remaining US$45 million from international investors, US$35 million coming from Dutch entrepreneurial development bank FMO and US$10 million from MicroVest Capital Management.

This investment will allow Khan to develop its climate portfolio by funding projects that support renewable energy, energy efficiency, green buildings, green mobility, and climate-smart agriculture in Mongolia. IFC says its subscription will also contribute to improved sustainability of the country’s financial market.

Mongolia is facing significant environmental challenges. Air pollution levels in its capital Ulaanbaatar are among the world’s highest, with coal and wood burning in homes and coal power plants contributing much of the pollution.

The country has also experienced significant climate change, with average temperatures increasing more than the global average. Rainfall has also declined with more extreme climate-driven hazards, including heatwaves, droughts and river floods, all expected to put pressure on the country’s unique fragile ecosystem.

Earlier this year, Khan Bank received a US$130 million syndicated loan arranged by IFC to support Mongolia’s micro, small, and medium enterprises, especially women-owned businesses. Mongolia has committed to reducing greenhouse gas emissions by 22.7% by 2030, and the annual financing required to achieve its green development targets is estimated at US$413 million, with 80% from international investors and private sector players.

IFC’s investment in Khan Bank’s green bond is expected to support Mongolia’s goal to increase green lending from 1.4% at present to 10% of all banking sector lending by 2030. The project is also expected to help mitigate climate change by avoiding tens of thousands of tonnes of greenhouse gas emissions annually.

Khan Bank chief executive officer Munkhtuya Rentsenbat said “This transaction marks a significant milestone for our bank and Mongolia’s banking sector to promote green financing and sustainable economy. This investment will enable us to provide long-term loans to our clients and help us diversify our funding sources.”

Asia better placed than developed economies to withstand banking crisis, says Morgan Stanley

Asian economies are better positioned than their developed-world counterparts to absorb shocks from a banking crisis that has unsettled global financial markets, say analysts at Morgan Stanley.

“We saw a number of factors which would keep Asia’s domestic demand robust, hence helping in its growth outperformance,” analysts led by Chetan Ahya wrote in a research note. They highlighted strong liquidity coverage ratios at Asian banks and “relatively stable” debt-to-GDP ratios.

Added to this, monetary policy is currently less restrictive than in the US and consequently“the downside risk to Asia’s growth will be more muted.”

Morgan Stanley does nonetheless anticipate some tightening in lending standards to follow in Asia in response to US bank stress, though “the magnitude and persistence are likely to be less intense than what is likely to transpire in the US.”

Whether Asia’s growth can outperform the developed world will depend on how the US economy evolves, they said, laying out two potential scenarios:

• A deep slowdown or mild recession in the US: Growth impact to Asia will likely be manageable
• US hard landing: Asia’s growth will be impacted, but less so than in developed markets and the region will recover faster than the US and Europe

Money market funds back in favour with worried US investors

Global money market and government bond funds obtained massive weekly inflows earlier this month as investors rushed to safer assets on fears of contagion from the recent collapse of three US banks,

US money market funds attracted the most cash in nearly three years as the first US bank failures to occur since the 2008 global financial crisis pushed depositors to find other places to stash their funds. 

For the week ended Wednesday 15 March a total of US$120.93 billion flowed into money market funds (MMFs), the Washington, DC-based Investment Company Institute (ICI) reported last Friday. It was the highest weekly figure since April 2020, when the Covid-19 pandemic was in its early stages, Barclays noted.

There was an influx of US$20.15 billion into retail accounts, and cash from institutions tallied US$100.78 billion. The increase was paced by cash put into government MMFs. The push of cash into money market funds resulted in a record US$5.01 trillion in total assets tracked by ICI.

The weekly moves followed a remarkable rupture in the US banking landscape, which included the closure of Silicon Valley Bank and Signature Bank by regulators, while Silvergate Bank wound down its operations.

In recent days investors have also sharply driven down shares of First Republic Bank and other lenders with a high amount of deposits that would be uninsured by the US Federal Deposit Insurance Corporation (FDIC), which limits protection to US$250,000 per account. But in the case of Silicon Valley Bank, authorities said all depositors would be shielded from losses. 

Global coal use could peak in 2024, says Bloomberg

Global coal consumption is likely to peak in 2024 as economics and climate strategies shift the world toward cleaner energy, but several wild cards could determine how long the dirtiest fossil fuel persists, suggests a report by strategic research provider BloombergNEF.

Coal power generation increased in both the past two years as China and India battled electricity shortages and Europe tried to replace Russian natural gas. BNEF modelled two scenarios — a purely economic one and one driven by policies to reach net zero emissions by 2050 — both of which see demand rise to a record next year before declining.

It says that under both scenarios there are several wild cards that could affect how slowly or rapidly use of the fossil fuel declines. These include stronger-than-expected power demand, social backlash against the loss of mining jobs and lobbying from plant owners. China’s clean energy policies, economic support for poorer nations’ energy transitions and prices are other key factors.

BloombergNEF sees coal use persisting through the middle of the century even under strong net zero policies, where demand in the power sector would fall about 70% from its 2024 peak to 1.5 billion tons a year and require plants equipped with carbon capture systems to keep emissions at bay. That would require massive investments in the technology, which has struggled to prove it can operate commercially at scale.

Coal production has outpaced demand over the past two years, as top miners China and India lifted output to help battle power shortages. That led to a surge in inventories by the end of 2022, especially in China.

The report also highlights a rocky road ahead for the seaborne thermal coal trade. While production increased for domestic use in China and India, miners in exporters including Australia and the US have ramped down investments to avoid being stuck with stranded assets. That could create a supply squeeze if demand in importing countries rises.

Singapore’s OCBC Bank offers net-zero-linked financing

Singapore-based OCBC Bank has launched a financing solution that incentivises corporates to set and work towards clear carbon emissions reduction targets aligned with internationally recognised, science-based net-zero decarbonisation pathways for their sectors.

Under the OCBC 1.5°C loan programme, corporates will be eligible for a reduced interest rate on the borrowed amount when the targets are met or exceeded.

The reference pathways, developed by autonomous global organizations, are geared towards achieving a net-zero level of greenhouse gas emissions by 2050 to limit global warming to 1.5⁰C above pre-industrial levels.

While many corporates have already set net-zero goals, these may not be robust or ambitious enough. They may also not be grounded in the latest research, according to The Net Zero Tracker, a global initiative that assesses global net-zero targets to promote transparency and ambition. Science-backed net-zero pathways based on a 1.5°C scenario are now the baseline that corporates should commit to.

The bank says it has been its longstanding commitment to work with customers to help them get started on their net-zero journeys.  

Last October, OCBC Bank joined the Net-Zero Banking Alliance, a global coalition of banks committed to aligning their portfolio with the goals of the Paris agreement. The bank has also been working to support a transition to net-zero carbon emissions for customers in key sectors, including proactively engaging customers on the latest science-backed decarbonization pathways associated with their specific sectors.

As it works with corporates securing the OCBC 1.5°C loan, the bank believes it will gain greater insight into their transition strategies, their progress on the targets they have set, and how they are tracking against industry peers.

These insights will in turn enable the bank to offer the most appropriate advisory and suitable financing solutions to support the corporates’ transition plans. At the same time, OCBC Bank says, it will be able to more accurately assess its own overall “financed emissions” – those associated with its loan portfolio – so as to measure its progress against its own net-zero targets.

Mercedes has “greenest” electric vehicle supply chain, study finds

Mercedes’ efforts to source greener steel and aluminium for its electric vehicles (EVs), coupled with its recycling policy, have been commended in a comparison study of EV manufacturers.

The German luxury car group’s supply chain is ranked better than that of its peers in terms of climate impact, according to a study from Lead the Charge, a coalition of climate, environment and human rights organisations. Tesla’s performance is rated as only middling, and China’s manufacturers are ranked the poorest.

Out of a possible 100, Mercedes got an environmental score of 37% according to the Lead the Change scorecard, which was designed in partnership with the Pensions & Investment Research Consultants (PIRC) to study automakers’ “efforts to ensure equitable, sustainable, and fossil-free supply chains,” although it looks specifically at the EV supply chain, not necessarily its internal combustion engine (ICE) supply chain.

Lead the Change noted Mercedes’ efforts to reduce overall supply chain emissions with responsibly sourced steel and aluminum, its “commendable efforts” to recycle more, and its “industry-leading policies and measure for conducting effective human rights due diligence.”

The group notes, though, that the automaker is only marginally better than its competitors, including Ford and Volvo, both of which scored in the 30s. While it was one of the few automakers with an explicit commitment to respecting Indigenous peoples’ rights, Lead the Change notes that the automotive industry does not do well in this category.

The EV scorecard was launched by a group of advocacy partners, including the Sierra Club, Transport and Environment, Investor Advocates for Social Justice, and the University of Colorado.

“The campaign encourages automakers to leverage the unprecedented opportunity offered by the electric vehicle (EV) transition to radically transform their supply chains to be equitable, sustainable, and 100% fossil free,” the university’s First People Worldwide foundation stated. “It also raises awareness of the human and Indigenous peoples’ rights, climate, and environmental impacts that occur throughout auto supply chains, focusing in particular on steel, aluminium, and batteries.”