Clock ticking for US government debt ceiling rise – Industry roundup: 9 May
by Graham Buck
Time running out to raise US government debt ceiling
President Joe Biden has invited House of Representatives Speaker Kevin McCarthy and Republican leaders to a meeting today in a bid to secure their agreement to raising the US federal government’s debt ceiling from its current US$31.4 trillion (£25.12 trillion) limit.
In the absence of any consensus to increase what the federal government can borrow, it could run out of money by early June. Since 1960 the US debt ceiling has been raised, extended or revised 78 times, but negotiations to authorise an increase have often continued to the eleventh hour.
US Treasury Secretary Janet Yellen warned at the weekend that failure to again raise the US debt ceiling could have dire consequences and could result in the federal government being unable to make wage, welfare and other payments.
“It’s Congress's job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making,” she said, adding that debt ceiling negotiations should not be conducted “with a gun to the head of the American people.”
Yellen continued: “It’s simply unacceptable for Congress to threaten economic calamity for American households and the global financial system as the cost of raising the debt ceiling and getting agreement on budget priorities.
“Even as we get very close to this date, if Congress doesn't act, we're likely to see financial market consequences. There is no way to protect our financial system and our economy other than Congress doing its job and raising the debt ceiling and enabling us to pay our bills.”
Congress has previously tied approval of a higher debt ceiling to stipulations on budget and spending measures, but as little as three weeks remain to reach a new agreement.
Last month the House of Representatives passed a bill to raise the ceiling, currently equivalent to about 120% of the country's annual economic output but stipulated that it was subject to major spending cuts over the next decade.
Biden wants Congress to agree to the increase with no conditions and insists that he will discuss budget cuts only once the issue is resolved.
As the US nears the brink of a default, reports have circulated about potential emergency options that could be used to avoid disaster. Some ideas that have surfaced include invoking the 14th Amendment, issuing a rillion-dollar coin and issuing debt with coupons above current yields.
Although Biden said last week that he’s “not gotten there yet” on possibly using an option like the 14th Amendment, Yellen warned: “We should not get to the point where we need to consider whether the president can go on issuing debt. This would be a constitutional crisis.
“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”
Over the past 63 years the threat of a default on government payments including debt obligations has always led to compromise. The US has never defaulted and to do so would have a major impact on global financial markets and extensive economic consequences.
Malaysia and Indonesia launch cross-border QR payment link
Bank Negara Malaysia (BNM) and Bank Indonesia (BI) have announced the commercial launch of the Indonesia-Malaysia cross-border quick response (QR) code payment linkage.
The linkage enables Indonesians and Malaysians to make instant retail payments in both countries by scanning the Quick Response Code Indonesian Standard (QRIS) or DuitNow.
The launch follows the successful completion of the pilot phase of the linkage announced in late January 2022, the central banks said in a joint statement.
BNM governor Tan Sri Nor Shamsiah Mohd Yunus said the link offers significant potential to boost economic activities, including tourism spending in the two countries.
“The payment linkage will also help expand markets for some businesses, and facilitate increased settlements in local currency, thereby improving financial outcomes,” she said.
“Asean is more connected now than ever. Many more users from Malaysia and Indonesia will benefit from a secure, more seamless and more efficient experience to make and receive cross-border payments.”.
She added that the QR payment linkage between Malaysia and Indonesia complements a growing network of bilateral payment linkages within the region that will contribute towards a more vibrant Asean and further development of the region as a centre of growth.
BI governor Perry Warjiyo said that the link is concrete evidence of strengthened cooperation on regional payment connectivity to promote faster, cheaper, more transparent and more inclusive cross-border payments, particularly for the benefits of micro, small and medium enterprises.
“The linkage aligns with the Group of 20 initiative in establishing the Roadmap for Enhancing Cross-Border payments and serves as a significant deliverable of Indonesia’s chairmanship of Asean in 2023, while representing another milestone for the Indonesian Payment System Blueprint 2025,” he added.
Warjiyo also said the development provides more options for users in cross-border payment transactions and serves as a key to improve efficiency and promote the digital economy and financial inclusion in the region.
“It would also maintain macroeconomic stability by promoting more extensive use of local currency for bilateral transactions under the Local Currency Transaction Framework,” he said.
The QR payment linkage would strengthen the close economic ties between Indonesia and Malaysia, and at the same time support a more inclusive and stronger post-pandemic economic recovery.
Europe’s gas purchases muted as buyers expect bigger price drop
Natural gas purchases needed to replenish Europe’s storage sites are slower than usual for this time of year despite a recent price drop as some buyers anticipate they have further to fall, reports Bloomberg.
The continent’s benchmark futures have moved back sharply from the record levels seen last summer but this has not been enough to stimulate purchases as consumption has been slow to recover from crisis lows. Confidence that prices will continue to move lower has persuaded many buyers waiting to fill inventories ahead of next winter to hold off for now.
Reduced fuel usage means that global supplies adequately cover current European demand, even as Europe steadily weans itself off flows from Russia. But gas producers and traders warn that the crisis is not over, and a delayed and uncertain rebound in consumption could disrupt what is a fragile market balance.
Consumers seem confident, buoyed by the message from political leaders that the worst has passed, according to Klaus Reinisch, group chief sales officer at Swiss-based energy trader MET Holding AG.
“They are hearing from the news everywhere that Europe has done phenomenally well and the crisis is over,” Reinisch said.
There are expectations that prices could drop as low as €10 per megawatt-hour, more than 70% from current price levels now, but even if that happens, lower prices will be fairly short lived, he said.
Heavy reliance on a global commodity like liquefied natural gas (LNG), which replaced Russian pipeline fuel, leaves Europe extremely exposed to broader market moves and sharp price volatility, says Reinisch.
The market remains vulnerable and a rapid pick-up in gas consumption from industry coupled with a resurgence in demand from Asia could reverse the current situation. Analysts from Goldman Sachs to Boston Group Consulting see a possibility of a price rebound above €100.
Expectations of a further price dip mean gas-storage refills in some European countries will probably ease, according to Norwegian energy giant Equinor ASA, Europe’s top supplier. The refill - albeit from very high levels - has already been slower than usual amid low temperatures in April.
With gas prices relatively flat over the next three months before steep gains in the run up to the winter, “those who have flexibility that allows them to wait, they will wait,” said Helge Haugane, Equinor’s senior vice president for gas and power marketing, in a separate interview in Amsterdam.
“Most people would therefore not inject tomorrow,” he said. “That means you probably will not see storage levels increasing very much in the short term.”
However, it is highly likely that Europe will still rebuild its gas stockpiles to meet European Union’s targets. Inventories are already fuller-than-normal, and there should not be issues for the upcoming winter, Haugane said.
Apple to raise US$5.25 billion in five part debt offering
Tech giant Apple Inc is selling debt in the US blue-chip bond market as many borrowers raise cash ahead of key inflation readings later this week.
The Cupertino, California-based company is returning to the bond market to sell bonds in a five-part, US$5.25 billion deal which was originally targeted at about US$5 billion, state reports citing a person familiar with the matter. The longest portion, a 30-year bond, will yield 108 basis points over comparable Treasuries, less than the roughly 135 basis points initially discussed, said the person, who asked not to be identified because the discussions are private.
Apple, which announced quarterly results last week and said it would boost its dividend and share buyback programme, previously tapped the debt market in August 2022 when it sold US$5.5 billion worth of debentures.
The tech giant has some of the highest-rated credit amongst corporate issuers, with Moody's upgrading it to AAA in December 2021. Standard & Poor’s (S&P) has awarded Apple's debt a AA+ rating, while Fitch has assigned a AAA rating.
On the group’s earnings call, CFO Luca Maestri reiterated Apple's stance that the company intends to become cash neutral over time.
A recent report on the group suggested that Apple had debt of US$111.1 billion at the end of 2022, q reduction from US$122.8 billion a year earlier. With US$51.4 billion in cash, its net debt totalled about US$59.8 billion.
Last month Apple announced it would launch a Goldman Sachs savings account for its Apple Card users.
Free trade agreement could give Africa a 15% boost, says IMF
A successful African free trade area implementation could unlock major benefits for Africa, with a significant boost to incomes and employment, states a report by the International Monetary Fund (IMF).
The African Continental Free Trade Area (AfCFTA) agreement was one of three agreements signed in March 2018, but has yet to be effectively implemented.
The IMF departmental paper published earlier this month examines the prospects for African trade integration in the context of a changing world amid the climate crisis, risks of geopolitical fragmentation, technological progress, and the continent’s prospective demographic growth.
The 64-page document found that comprehensive reforms combined with the AfCFTA implementation could increase the median merchandise trade flow between African countries by 53 percent and with the rest of the world by 15%.
This would consequently raise the real per capita GDP of the median African country by over 10%. The estimates tally with research suggesting that trade reforms could help reduce extreme poverty by an additional 30–50 million people across the continent.
The authors of the report said that realising these opportunities would require investment in physical and human capital, a macroeconomic and business environment conducive to private sector-led growth, and a modernised social safety net that supports the most vulnerable.
Separately, a memorandum of understanding (MoU) signed by the Nairobi, Kenya-based African Organisation for Standardisation (ARSO) and the Geneva-based International Trade Centre (ITC) aims to contribute to continent-wide efforts to design a ‘Made in Africa’ label and boost trade under AfCFTA.
New ETF platform targets institutions and hedge funds
Tema ETFs, a New York-based exchange traded fund (ETF) platform that aims to focus on thematic ETFs and actively managed vehicles, has been launched after “building in stealth” for a year, its founder and CEO Maurits Pot said on LinkedIn.
“A lot of thematic issues focus on what's hot today, not what’s actually a long-term structural trend,” said Pot. In addition to active thematic ETF strategies, its goal is to also make it easier for institutions to create ETFs.
“We believe the next decade of ETF market growth will be driven by active ETFs, that represent ~5% of global ETF assets today, but a growing double-digit share of global ETF flows,” Pot noted. “We’ll be launching our own active ETFs focused on structural long-term themes without a listed US ETF today such as reshoring, luxury goods, and oncology.”
Tema ETFs has already filed to launch a pure-play oncology ETF, says Pot. According to the company website, these themes include “biotechnology, financial inclusion, environmental commodities, regulated monopolies, the Asian middle class and dominant consumer brands.”
Index Ventures and Accel led the investment round, together with Zinal Growth. Fintech investor Jane Gladstone, founder of Aberdeen Asset Management Martin Gilbert and former co-CEO of Bridgewater Associates Jonathan Rubinstein also participated.
The company plans to unveil a “proprietary turnkey ETF issuance infrastructure solution” later this year, which will enable existing asset managers to enter the ETF space.
There are some high-profile investors behind the venture.
The launch underscores recent investor interest in actively managed ETFs. So far this year, active ETFs make up 30% of total ETF flows, according to Bloomberg data. Tema ETFs sees this market segment offers much room for growth.
“The active ETF asset class is half the age of its passive counterpart, yet it represented the majority of ETF launches over the past 18 months,” Tema ETFs said in a statement. “As of Q4-2022, global active equity ETF assets remain below US$150 billion, versus over US$20 trillion in active equity mutual fund assets: This comparison underscores how nascent the active ETF industry remains, despite its accelerating growth.”
Since the first active ETF was launched in 2008, the market segment has seen uneven growth, but reports suggest that the level of investor interest this year even surprised the managers of the largest and most popular active ETF, the JPMorgan Equity Premium Income ETF.
Japan’s MUFG Bank to end the 24-hour ATM
Japan’s Mitsubishi UFG (MUFG) Bank has announced it will limit the hours of its automated teller machines (ATMs) by the end of 2023 as a cost-cutting measure for 98 locations across the country. The bank took the decision in response to decreased cash usage and the rise of cashless payments, according to a report by Nikkei Asia.
The bank’s ATMs are currently available 24 hours a day in its urban branches like Tokyo, Osaka and Aichi Prefecture, as well as near train stations and at airports. However, the hours between midnight and 6 a.m. only accounts for 0.1% of the total number of times customers have used the ATMs and that figure has halved in the past five years. In addition, there are 24-hour ATMs located inside of convenience stores.
By September, operating hours for 91 of the 98 will be reduced to 18 hours a day, from 6 a.m. to midnight the next day at a maximum. The remaining seven ATMs will also shorten their hours of operation by the end of this fiscal year.
Japan’s two other major banks, SMBG and Mizuho Financial, plan to keep their ATMs open 24 hours a day for the time being.
Banks have been struggling to improve profitability in maintaining networks of branches and ATMs. The cost of maintaining cash settlement infrastructure is about 2.8 trillion yen (JPY) or US$20 billion per year, according to government estimates. Among regional banks, Hokkoku Bank has announced a plan to eliminate ATMs outside its branches by September 2024.
Nigeria’s treasurers protest at forex scarcity
The Association of Corporate Treasurers of Nigeria (ACTN) has urged the Federal Government to address the scarcity of foreign exchange that has continued to hamper the country’s economy.
The ACTN's new president, Yinka Ogunnubi, recently raised the issue during his inauguration. He noted that most of the association’s challenges had often revolved around the scarcity of forex and the issues around the multiplicity of foreign exchange were something that must be resolved.
“For our members and, of course, you know we are a treasurer organisation, most of our challenges have to do with the forex situation because there is acute forex scarcity and our members are not able to access forex easily,” Ogunnubi said.
“So, we need the Federal Government to solve the policy problems, because that is where the solution is. If they address the problems, it will be easier for us to get trade financing, easier for us to pay our taxes and continue business.”
The ACTN’s outgoing President, Victory Olumuyiwa, praised his successor and emphasised the need for continuity by reaching out to other corporate treasurers and increasing the membership to help become an integral part of the treasury workplace, especially as related to efficiency in the interaction with financial institutions and making the treasury function more seamless.
In March it was reported that Nigeria is blocking foreign airlines from repatriating at least US$744 million as its central bank rations dollars. “For over a year, Nigeria has been the country with the highest amount of airline-blocked funds in the world,” stated a letter issued by the International Air Transport Association (IATA) to the Minister of Aviation Hadi Sirika. The amount owed had risen from US$464 million in July 2022.
Many individuals, businesses and banks no longer have confidence in the naira (₦), the domestic currency which lost over 20% of its value in 2022, and is projected to be on course for a record 30% depreciation this year. The resulting insistence on payment in US currency and “dollar crunch”, triggered by a sharp drop in dollar revenues, has forced the Central Bank of Nigeria (CBN) to ration the dollar supply to key sectors of the economy – at the expense of local businesses.
Worldpay expands cross-border payments in India
UK-based payments processor Worldpay from FIS is focusing on cross-border payments in India, with the aim of taking Indian merchants global.
Worldpay is looking to work with domestic merchants who are selling goods and services abroad. As the company operates in multiple geographies, it can help these businesses offer unique payment solutions for specialised markets, said company officials.
In 2019, UK-based Worldpay was acquired by FIS at an enterprise value of US$45 billion. FIS has also looked to spin Worldpay off into a separate entity.
Worldpay’s expertise is in international transactions and the domestic payments market in India is increasingly crowded, so the company is avoiding this market. PayPal, one of the former’s competitors, is also currently only operating in the cross-border payments space in India, after withdrawing from domestic payments in 2021.
Officials from Worldpay commented on how United Payments Interface (UPI) had emerged as the backbone of the digital payments transformation seen by India since 2021. Opening credit on UPI is a major achievement for its operator, National Payments Corporation of India. (NPCI) This will eventually push to newer forms of Buy Now, Pay Later (BNPL) opportunities in the country and drive credit penetration.
While BNPL has seen a slowdown, the UK-based payments processor is bullish on the opportunities in India. It has tapered a bit due to regulatory interventions, but newer forms of Pay Late offerings will emerge, Worldpay’s executives added. Regulators around the world are putting guardrails around the BNPL segment so that consumers are not cheated by high interest rates.
According to its press release, Worldpay’s officials foresee a consolidation of many of the different BNPL players that are in the market. Many of the big tech companies, device manufacturers, and card network schemes like Visa and Mastercard, may be getting into this type of a payment method.
Calling out the global payment trends, mobile wallet is emerging as one of the most popular payment modes around the world. While China popularised it with WeChat Pay and Alipay, consumers and merchants are taking to this payment mode quickly, representatives from Worldpay said. In terms of transaction value, wallets will rule 73% of the overall transactions done in the Asia-Pacific region, citing data from the Global Payments Report 2023 by Worldpay from FIS. Samsung Pay and Apple Pay are also emerging as popular wallet payment methods globally, they added.
Worldpay says that the most successful ones are those that provide a super app ecosystem, where within that digital wallet, one can do many things. For example, WeChat Pay allows people to book transportation, shopping, groceries, and the ecosystem even allows for bill payments and reminders for bill payments. The future of payments will be through embedded finance where there will be credit, investments, and everything within one app.
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