IMF warns that AI will impact on jobs, as Davos summit opens

This year’s World Economic Forum (WEF) summit in Davos, Switzerland has commenced with geopolitical tensions to the fore and a warning that the growth of artificial intelligence (AI) could adversely impact on global employment.

The International Monetary Fund (IMF) believes that nearly 40% of jobs worldwide could be affected by the rise of AI, with high-income economies facing greater risks than emerging markets and low-income countries.

The Washington, DC-based institution has assessed the potential impact of AI on the global labour market and concludes that, in most cases, the technology is likely to worsen overall inequality.

IMF chief Kristalina Georgieva urged policymakers to tackle this “troubling trend” and to proactively take steps “to prevent the technology from further stoking social tensions.”

“We are on the brink of a technological revolution that could jumpstart productivity, boost global growth and raise incomes around the world. Yet it could also replace jobs and deepen inequality,” Georgieva said.

The IMF noted that about 60% of jobs could be impacted by AI in high-income nations, and roughly half could potentially benefit from AI integration to boost productivity.

Comparatively, AI exposure was estimated to be about 40% in emerging markets and no more than 26% in low-income countries, respectively.

The findings suggest that emerging markets and low-income countries face fewer disruptions from AI in the short-term. The IMF notes that many of these nations don’t have the infrastructure of skilled workers to harness the immediate benefits of AI, raising the risk that the tech could worsen inequality.

The IMF also flagged that AI could affect income and wealth inequality within countries, warning of “polarisation within income brackets.” Workers able to access the benefits of AI could increase their productivity and salary, while those who cannot risk falling further behind.

Concerns on the potential impact of AI are shared by the Basel Committee on Banking Supervision (BCBS), which said that global leaders need a co-ordinated response to the challenges posed by the fast-developing technology as it “could change the course of history, not necessarily for the good”.

Pablo Hernández de Cos, who is chair of the BCBS and also governor of the Bank of Spain, urged leaders in attendance at Davos to use financial regulation as a blueprint for tackling issues such as AI and climate change.

The “really remarkable” co-operation on financial regulation that allowed watchdogs to keep the world’s financial system stable through a pandemic and two wars should be extended to AI, he told the Financial Times.

De Cos said the Basel Committee would publish a report on the financial stability implications of AI in the coming months.

“Financial stability is only one dimension, there are many other potentially more important consequences related to AI. Issues that if not properly managed could change the course of history not necessarily for the good,” he said.

De Cos said that there had been a clear increase in economic problems in the past decade and that international institutions needed to co-operate on finding solutions.

“However, what we are observing at the geopolitical level shows that reaching common agreements is becoming more and more difficult. That is a concern for me and is a concern for many people.”

Day one of Davos 2024 was also marked by reports that Turkey’s President Recep Tayyip Erdogan instructed his country’s officials to stay away from this year’s WEF summit over the organisers’ stance on Israel’s war against Hamas.

Turkey’s Treasury and Finance Minister Mehmet Simsek apparently planned to attend the annual gathering until Erdogan, who has criticised Israel’s conduct of its war against the militant group in the Palestinian enclave of Gaza, reversed the decision according to insiders.

 

China’s central bank keeps rates on hold to wrongfoot analysts

China’s central bank has left its medium-term lending facility (MLF) policy rate on hold at 2.50%, wrongfooting the market where a 10 basis points (bps) reduction was expected by many analysts in what would have been the first cut since August.

However, a narrowing interest rate margin at commercial banks and a weakening Chinese yuan have limited the room for the People's Bank of China (PBOC) to manoeuvre, and rate cuts may be postponed until later this year, according to some commentators.

The PBOC said it was keeping the rate on yuan (CNY) 995 billion (US$138.84 billion) worth of one-year MLF loans to some financial institutions at a rate of 2.50%, unchanged from the previous operation. Monday’s operation comprised a net CNY216 billion fresh fund injection into the banking system, with CNY779 billion worth of MLF loans set to expire this month.

“We suspect the main reason the PBOC failed to deliver this time is a desire to avoid triggering renewed depreciation pressure on the renminbi (RMB),” economists at Capital Economics said in a note.

The currency has weakened more than 1% against the US dollar (USD) since the start of the year to a more than one-month low due to uncertainty around when the Federal Reserve will start cutting US interest rates.

A slew of recent indicators continued to reflect China’s uneven economic recovery, with a pick-up in exports in December but weak credit growth and persistent deflationary pressure calling for more stimulus measures.

Capital Economics still expects two 10-bps rate cuts by the end of the second quarter and a reduction to the reserve requirement ratio (RRR).

Investor expectations of a cut in the reserve requirement came after Zou Lan, monetary policy department head of PBOC, highlighted RRR as a monetary policy option to support credit growth, according to a state media report last week.

Seasonal factors could also delay monetary easing, as financial institutions usually have to assess their profitability and their clients' loan appetite for 2024 ahead of the Lunar New Year holiday, which starts on 10 February, said Marco Sun, chief financial markets analyst at MUFG Bank (China).

China’s economic data due this week includes December’s industrial output figures, investment and retail sales, along with fourth-quarter gross domestic product (GDP), which will give investors clues on whether the economy will need further support.

 

Germany’s GDP shrank by 0.3% in 2023

The German economy contracted by 0.3% in 2023, initial figures published by the country’s national statistics agency showed.

“Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises,” Federal Statistical Office President Ruth Brand reported at a press conference.

Brand said high inflation, rising interest rates and weaker domestic and foreign demand all weighed on the gross domestic product of Europe’s largest economy and noted that GDP was still 0.7% higher than in 2019, before the Covid-19 pandemic.

However, in an assessment of the preliminary figures, Carsten Brzeski chief economist at ING Germany commented: “Since 2020, there has been a long list of crises and challenges facing the German economy: supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy, China’s changing role from being a flourishing export destination to being a rival that needs fewer German products, and several structural shortcomings.

“All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% YoY this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.”

 

Bank valuations could improve by U$7 trillion over five years, suggests BCG study

Global banks could boost their valuations by a combined US$7 trillion over the next five years, but only if they take major steps to promote growth and boost productivity, claims a report issued by the Boston Consulting Group (BCG).

"The largest driver of pessimism about the banking sector has been the significant drop in profitability," BGC reports, but suggests that lenders could roughly double their current valuations by pursuing growth and improved price-to book ratios despite obstacles.

Around 75% of bank stocks had price-to-book ratios below 1 in 2022, while price-to-earnings multiples were almost half of 2008 levels. Meanwhile, shareholder returns on bank stocks have lagged those of major market indexes since the global financial crisis, and the gap is widening.

Even for those banks that invest in productivity and radically simplify their businesses, profits will remain under pressure from higher capital requirements and increased competition from newer players such as fintechs, BCG warned.

“Banks are not likely to return to the profitability levels and valuations that existed prior to the global financial crisis,” the consultant said.

Previous reports by the consultancy have forecast that artificial intelligence (AI) will be a major driver in transforming the banking sector. Banks are data-heavy industries and the transactional data of customers that they collect “provide many more insights than every other industry data set actually can,” said Stiene Riemer, a BGCG partner last November.

 

Morgan Stanley: CBDCs “risk undermining US dollar”

Central bank digital currencies (CBDCs) could contribute to a shift away from the US dollar’s hegemony, suggests one of Morgan Stanley’s chief analysts,

In a research note, Andrew Peel, executive director and head of digital asset markets at the bank says that CBDCs are capable of creating a new standard for cross-border payments, reducing the need for the dollar and traditional payment structures.

“As CBDCs become more widely adopted and technologically advanced, they hold the potential to establish a unified standard for cross-border payments, which could diminish the reliance on traditional intermediaries like SWIFT and the use of dominant currencies such as the dollar.,” writes Peel.

“Furthermore, CBDCs can enable significant innovation in financial services, such as the use of smart contracts for automating payments, making the concept of programmable money a practical reality.”

The analyst adds that US-dollar-pegged stablecoins are “set to have a profound impact” on the global financial sector and have the potential to reshape how money is moved across borders. Peel suggests that stablecoins may be crypto’s “killer app.”

“Rather than challenge the dollar’s dominance, their continued evolution and growing acceptance by mainstream financial entities underscore their potential to significantly alter the landscape of global finance and in fact reinforce the dollar as the dominant global currency…

As the world adjusts to these technological advancements, understanding the interplay and nuances between traditional fiat currencies, Bitcoin, e-money, and stablecoins becomes crucial. This dynamic is set to significantly influence the future of international trade and finance, potentially reshaping the global economic and financial landscape.”

 

EU banking watchdog reveals ruling behind BNP Paribas’ capital rejig

The European Union’s banking regulator has announced that millions of euros of capital used by BNP Paribas for its safety buffers were ineligible and must be removed, a step that last month the bank flagged that it would undertake.

The European Banking Authority (EBA) has been cleaning up capital used by lenders in 'Tier 2' buffers that supplement core capital, in particular targeting perpetual bonds, aka “discos”, that were issued during the 1980s.

The EBA has said that the complex structure of discos could prove an obstacle should it be necessary for a bank to be wound down in a crisis, and must be replaced by a simpler, more readily available form of capital that complies with EU rules.

The need for barrier-free, speedy closures of failing banks to stem contagion and fear spreading in markets was highlighted last March when Silicon Valley Bank (SVB) collapsed in the US along with Silvergate Bank and Signature Bank and Switzerland's Credit Suisse was rescued by UBS.

"The EBA has advised that the instrument cannot count as fully eligible Tier 2 instrument of BNPP (BNP Paribas)," the watchdog said in a letter to lawyers representing holders of the notes. The notes were issued in 1986 and should have been phased out by the end of 2021, as made clear in the EBA's “opinion” in October 2020 on legacy instruments, the watchdog added.

Last month, BNP said it would no longer include discos and other subordinated instruments totalling €726 million (US$794 million) in its regulatory capital from 31 December 2023, without giving a reason for the decision.

 

EBRD teams with Raiffeisen to boost Kosovo small businesses

The European Bank for Reconstruction and Development (EBRD) is providing its first Guarantee for Growth (G4G) facility to Raiffeisen Bank in Kosovo, aiming to boost funding for micro, small and medium-sized enterprises (MSMEs).

The EBRD guarantee, worth up to €20 million, will be provided over three years and is linked to the bank’s domestic sovereign bonds portfolio. The additional risk-taking capacity freed up by the guarantee will allow Raiffeisen Bank to commit fresh funds to Kosovan businesses, increasing its support to the real economy.

Raiffeisen Bank’s lending under the programme will focus on supporting local MSMEs, which “are vital to the sustainable growth of Kosovo’s economy”. At least a fifth of the subloans will be dedicated to Green Economy Transition (GET) projects such as energy and resource efficiency. 

Sergiy Maslichenko, EBRD Head of Kosovo, said: “The EBRD is committed to further supporting private sector development by financing MSMEs and the green transition through this innovative guarantee instrument.”

Anita Kovacic, Chief Executive Officer of Raiffeisen Bank in Kosovo, added: “As the largest bank in the country, we strongly support the transition towards a greener economy in Kosovo. We are pleased to see that our commitment has been boosted through our signing of this important agreement with the EBRD. We are grateful to the EBRD for this partnership and invite MSMEs to take advantage of this innovative financial instrument.”

The EBRD is also providing a €60 million loan to Bulgaria’s ProCredit Bank to finance investments that mitigate the impacts of climate change and promote environmental resilience.

The proceeds of the loan will be allocated for on-lending to green projects in Bulgaria and Greece, including, among others, projects on energy efficiency, renewable energy and climate resilience measures.

The loan will expand ProCredit Bank Bulgaria’s green lending activities, and will accelerate both countries’ transition towards greener, more sustainable economies.

 

RBI issues draft framework for fintech self-regulatory bodies

The Reserve Bank of India (RBI) has issued a draft framework that lays down broad functions, governance standards, and eligibility criteria for setting up a self-regulatory organisation for fintech companies (SRO-FT).

However, the RBI has left it to the industry to decide whether there should be a single SRO or multiple SROs.

“Given the diverse nature of fintechs, restricting to one SRO-FT could dilute some industry concerns, while having multiple SRO-FTs could undermine the representative character of self-regulation. A consensus on these issues would be crucial to the effectiveness of self-regulation," the central bank said in its draft norms.

The RBI said it would invite applications for SRO for fintech firms, either for the entire sector or for specific sub-sectors, as and when required. The number of SRO-FTs to be recognised would be considered based on the number and nature of applications received.

“The RBI’s omnibus draft is a welcome move,” said Anuj Kacker, executive committee member of Digital Lenders Association of India. The industry body is expected to apply for the SRO status, once the process starts.

“What is important is the RBI is recognising how fintechs are playing a role and at the same time the regulator understands that they cannot regulate everybody, so SROs can play an important role by trying to bring the large community under some sort of regulations, without hampering innovations, which is important for growth of a relatively new sector like digital lending," he added.

As per the draft norms, the SRO-FT should operate independently, free from the influence of any single member or group of members.

 

Prometeo raises US$13 million to expand open banking in Latin America

Prometeo, a Uruguay-based start-up that provides “a single application programming interface (API) to connect to Latin American banks” and “a gateway to information and payments in 10 countries across the region” has secured US$13 million in funding to expand its business.

Valuation is not being disclosed but the company says the round is at a “standard” dilution for Series A, meaning it’s now likely valued at just under $100 million.

Founded in 2018, to date Prometeo has grown on relatively lean funding. Prior to this round, it had raised only around US$6 million, says co-CEO and co-founder Ximena Aleman, who previously worked as a journalist covering the media and tech industries before taking a turn to fintech.

Prometeo is tackling Latin America and its extensive fragmentation as a single market, and using a single API to do so.

Under that one API, so far, it has turned on some 350 channels across 283 financial institutions in 10 countries. Brazil and Mexico are its two biggest at the moment, as well as being the biggest fintech markets in the region overall. And its most popular services so far mirror those that have also found traction elsewhere: account-to-account payments and account validation, and (for businesses) cash management, said Aleman, who shares the CEO job with co-founder Rodrigo Tumaián.

The plan is to bring on more users, add more services and expand to further geographies, she added, with revenues growing tenfold in the past two years, although the startup is not disclosing actual revenue numbers.

All the same, the challenges facing companies in open banking in the region are significant, starting with the fact that Latin America, overall, is well behind more mature markets like Western Europe and the US when it comes to financial services.

Bank account penetration is estimated to be around 70% and although showing growth is still behind the high 90+ percentages of countries in other regions where open banking has launched and taken off.

“There is a lot of improvements still to be made for financial inclusion,” said Aleman, who describes daily transactions among most businesses and consumers as “mostly cash-based.”

ArcelorMittal finalises €1.8 billion investment to cut French plant emissions

France and India’s multinational steelmaker ArcelorMittal have agreed on a €1.8 billion (US$1.97 billion) investment to cut greenhouse emissions at a steel plant in Dunkirk, northern France.

The French government's subsidy package, which could be up to €850 million, had already been cleared by the European Commission and is part of President Emmanuel Macron's strategy to cut emissions at France's 50 most polluting sites.

The money will finance two electric furnaces and a direct reduction plant, said Finance Minister Bruno Le Maire, which will cut French carbon emissions from the industrial sector by 5.7%.

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