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EU bank plans debut ‘debt-for-nature’ swap – Industry roundup: 22 June

European Investment Bank plans its first ‘debt-for-nature’ swap

The European Union's (EU) lending arm, the European Investment Bank (EIB), reportedly plans to back its first 'debt-for-nature' swap later this year as it bolsters efforts to stem biodiversity loss.

Debt-for-nature swaps help countries cut their debt in return for conservation commitments and are attracting growing interest after Ecuador completed the world's largest debt-for-nature swap on last month, selling a new ‘blue bond’ that will provide at least US$12 million a year for conservation of the Galapagos Islands.

“We are working with a number of countries,” Maria Shaw-Barragan, a Director of Lending at the bank’s EIB Global arm that lends outside the EU, told Reuters.

Earlier this week the EIB issued a krona (SEK) 1 billion (US$93 million) green bond using the so|bond blockchain platform developed by Sweden’s SEB and France's Credit Agricole CIB.

The two-year bond. listed on the Luxembourg Stock Exchange Securities Official List and the Luxembourg Green Exchange, was the EIB’s fourth digital bond, with each one issued on a separate platform.

Multilateral development banks such as the EIB play a central role by providing credit guarantees that enable cash-poor governments to borrow cheaply. The savings are directed towards the protection ecosystems from barrier reefs to rainforests.

The EIB has considerable financial muscle; its balance sheet is more than double that of the lending arm of the World Bank so its debut in this area will be welcomed by those wanting a rapid increase in debt swaps.

Shaw-Barragan did not reveal the countries and likely amounts involved to avoid impacting bond prices - debt-for-nature swaps work best when existing bonds are bought cheaply - but estimated that there were between five and 10 possibilities in sub-Saharan Africa alone.

Zambia and Ghana are in default, which is likely to rule them out as candidates, but bankers pointed out that bonds issued by Angola, Kenya, Nigeria, Uganda, Senegal, Ivory Coast, Rwanda, Mozambique and even South Africa are all under pressure.

The first EIB deal is expected to be finalised in late 2023 or early next year, Shaw-Barragan added.  A further two are then likely to soon follow and the bank could be involved in as many as five a year once other parts of the world are included.

Arresting the rapid decline in global biodiversity is an increasingly pressing focus for world leaders who have committed to protecting 30% of land, coastal and marine areas by 2030.

Debt-for-nature swaps are not new but have been limited in scope even including last month's super-sized Galapagos deal. There have been about 140 since 1988 although they have only involved around US$5 billion of debt.

However, they are set to receive more backing at today’s summit in Paris hosted by French President Emmanuel Macron and Barbados' Prime Minister Mia Mottley, whose own country completed a US$150 million debt-for-nature swap  in September 2022 and has called for more.

The sharp rise in global interest rates has sparked fears of a major wave of debt crises. No less than 21 developing world countries with a combined US$240 billion worth of debt now have bonds trading at ‘distressed’ levels.

Shaw-Barragan said the EIB would avoid countries already in default. Instead, the swaps will help governments replace short-term debt with new 10- or 15-year debt at lower rates than they could otherwise secure. “Lengthening the tenors and grace periods are very important for countries right now,” she added. “It can make a huge difference”.


Fed plans to resume US rate hikes, says Powell

Federal Reserve Chairman Jerome Powell has stated that further US interest rate increases lie ahead unless further progress is made on bringing down inflation.

Speaking a week after Federal Open Market Committee (FOMC) officials decided for the first time in more than a year not to push rates higher, Powell indicated that the pause was just a brief respite rather than an indication that the Fed has completed its cycle or raising rate.

“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said in prepared remarks for testimony delivered to the House Financial Services Committee. The speech is part of his semi-annual appearance on Capitol Hill to update lawmakers on monetary policy.

Following last week’s two-day FOMC meeting, officials indicated they see rate increases totalling 0.5 percentage points before the end of 2023. That would indicate two additional hikes, assuming quarter-point moves. The Fed’s benchmark borrowing rate is currently pegged in a range between 5%-5.25%.

Noting that inflation has cooled but “remains well above” the Fed’s 2% target, Powell stressed that central bank still has more work to do. “Inflation has moderated somewhat since the middle of last year,” he said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”

Fed officials generally prefer to look at “core” inflation, which excludes food and energy prices and showed inflation running at a 4.7% year-over-year rate through April, according to the central bank’s preferred measure of personal consumption expenditures prices. The core consumer price index (CPI) for May was 5.3%.

Powell said the US jobs market is still tight though there are signs that conditions are loosening, such as an increase in labour force participation in the prime 25-to-54 age group and some moderating in wages. However, he noted that the number of open jobs still far exceeds the available labour pool.

“We have been seeing the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy,” he said. “It will take time, however, for the full effects of monetary restraint to be realised, especially on inflation.”

UK hikes rates again to 5% as Indonesia holds

An under-fire Bank of England (BoE) has delivered a further hike in UK interest rates for the 13th meeting in a row..

While a 0.25% increase was expected by some analysts, the Bank’s nine-member monetary policy committee (MPC) who set official UK borrowing costs opted 7-2 for a 0.5% rise to 5% after Wednesday’s disappointing inflation reading of 8.7% that included a 31-year high for core prices of 7.1%. UK rates are now at their highest since September 2008.

The MPC said: "Second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge. There has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand".

The bigger than expected increase comes with stock markets already under pressure after Federal Reserve chair Jerome Powell yesterday signalled more rate hikes to come in the United States.

Market participants now believe that BoE Governor Andrew Bailey and the rest of the MPC will continue raising UK rates in the second half of 2023 and have raised the likely peak to 6%.

That would be the highest level since February 2000 and mark a major shift in monetary policy since the financial crisis. From early 2009 until December 2021, rates were near zero per cent.

Before the announcement analysts at Japanese investment bank Nomura said that the UK’s latest inflation data “raises [the] risk” of a 0.5% hike today, but still think a smaller lift is more likely.

“There is a strong argument for a 50-basis point hike at the BoE’s meeting. The Bank needs to take the initiative quickly. The risk for further policy failure is real and the stakes are getting increasingly high,” Charles White Thomson, chief executive at Saxo UK, said.

Markets had priced in a 40% chance of a 50-basis point rise, up from an around 20% risk before Wednesday’s inflation numbers.

By contrast, Bank Indonesia (BI) met expectations by keeping its key interest rate unchanged at 5.75% for a fifth consecutive meeting today and many expect no change for the rest of the year, as Indonesia’s inflation eased in May and is expected to decline further,.

After peaking around 6% in September, inflation gradually eased to reach the upper end of BI's 2-4% target range last month, suggesting that the Bank can wait and watch, even as policymakers in the U.S. and Europe are likely to continue tightening policy.

"Bank Indonesia was one of the first central banks in the region to pause its tightening cycle earlier this year. We believe BI will carry out an extended pause to shore up support for the Indonesian rupiah," said Nicholas Mapa, senior economist at ING.

Mapa added BI would “only consider cutting policy rates should global central banks opt to ease monetary policy.” The Indonesian rupiah (IDR) , one of the best-performing Asian currencies, is up over 4% against the US dollar this year.

Median forecasts show a 25-basis-point rate cut to 5.50% in the first quarter of 2024.

Earlier this week, Morocco's central bank paused its monetary tightening and kept its benchmark interest rate at 3%, following three consecutive hikes to curb inflation.

Inflation, driven by food prices, would be 6.2% this year before dropping to 3.8% in 2024, Bank Al-Maghrib said in a statement following its quarterly board meeting. Morocco's economy would grow by 2.4% in 2023 and 3.3% next year, after expanding by 1.3% in 2022, it forecast.


Yuan extends drop against the greenback

China’s yuan (CNY) has fallen past the closely watched 7.2-per-US dollar level this week and analysts anticipate further losses as Beijing has shown little resistance to the decline.

The offshore yuan fell as much as 0.3% to 7.2007 to the greenback on Wednesday, its weakest since November. A lack of aggressive stimulus from authorities has sparked a wave of selling in Chinese assets, Investors are growing increasingly frustrated with the authorities’ reluctance to introduce more policies that stimulate growth, which has disappointed after China abandoned its zero-Covid lockdowns and restrictions last December.

But some traders say the weak currency may be part of Beijing’s plan to support its economy as a depreciating CNY would help shore up demand for the nation’s exports.

“Markets are growing impatient over lack of follow-through on China stimulus,” said Christopher Wong, strategist at Overseas Chinese Banking Corp. Resistance for the offshore yuan is at 7.2150, he added. “A timeline to look forward to is the Politburo’s semi-annual economic conference in end July for any major fiscal announcement. But in the meantime, the silence is deafening.”

The People’s Bank of China (PBOC) set the CNY reference rate at 7.1795 per dollar Wednesday, the weakest level since November 29 last year. The fixing limits swings in the onshore yuan by 2% on either side, and the move may suggest that authorities are willing to tolerate a further decline.

The CNY has depreciated by more than 4% over the past three months to trail all but one of its peers in Asia. Capital outflows from the onshore market and bets that the US Federal Reserve will hike interest rates further are also weighing on the Chinese currency.

China’s economic recovery since the dismantling of its Covid curbs has been unimpressive, with the nation’s manufacturing sector contracting and retail sales trailing estimates in May. The call for more stimulus is growing, with state-run media running front-page articles Wednesday saying the central bank is likely to ease monetary policy further.


India's NIIF seeks to raise US$244 million for infrastructure

India’s National Investment & Infrastructure Fund (NIIF) is in talks to raise at least rupees (INR) 20 billion (US$244 million) for an infrastructure investment trust, according to reports citing people familiar with the matter.

The vehicle would include some assets from Athaang Infrastructure, which operates toll roads, according to one of the people, who declined to be identified because the information is private. The investment will be a private placement and the fund raising should take place by September, another person said.

Established in February 2015 as an investment platform for international and Indian investors anchored by the Government of India. NIIF is India’s first major attempt to develop a capital-raising structure on home soil, to tackle a shortfall in infrastructure spending. Investors include Abu Dhabi Investment Authority and Singapore’s Temasek Holdings Pte, according to its website.

Infrastructure investment trusts, abbreviated to InvIT, are like mutual funds and allow a pooling of assets for financing projects and can help make up the shortfall in investment.

A World Bank report last year estimated that India needs to spend US$840 billion over the next 15 years on developing and maintaining its urban infrastructure. 


Hong Kong dollar one-month rate at 16-year high

The cost for banks to borrow Hong Kong dollars from each other for a month has risen to the highest level since 2007 after prolonged currency intervention shrank the city’s liquidity pool and demand for cash climbed toward quarter-end.

The one-month Hong Kong interbank offered rate for the local currency, aka  Hibor, rose by eight basis points to 5.10%, having more than doubled from this year’s low set in February. The gauge’s discount to the US dollar interbank rate has now almost vanished, making the once popular bearish-Hong Kong dollar strategy less appealing. 

While higher funding costs will help Hong Kong authorities curb bearish bets on the city’s currency and maintain its peg to the dollar, a sustained increase may threaten the nascent economic recovery. The one-month tenor of Hibor is a reference rate for mortgage loans, so a further advance may pose a risk to the property sector. 

Hong Kong dollar Hibor has become more volatile this year as the authorities have spent about US$6.5 billion in currency intervention since February, reducing a gauge of interbank liquidity known as the aggregate balance to the lowest since 2008. 

“Given the current low level of the aggregate balance, there will likely be visible signs of Hong Kong dollar funding tightness around June-end,” said Duncan Tan, a rates strategist at DBS Bank Ltd. in Singapore. “The increase in short-term bank settlement needs could be tied to higher trading volumes of Hong Kong-listed equities and more dividend payments around this time of the year.” 

The challenge for the authorities began when US money-market rates surged above their Hong Kong equivalents, luring hedge funds to profit on the difference. The spread between the two became wide enough for funds to borrow Hong Kong dollars cheaply and buy the higher-yielding greenback. 

Higher rates would add to challenges to the city’s economy that emerged from a recession as the opening of city borders revived spending. 

“The rising interest rate, on top of China’s growth slowdown, will be increasingly negative for the Hong Kong economy as it tightens economic conditions generally,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. “Higher rates would be particularly negative for the property sector.”


Santander CIB partners with Komgo to digitalise trade finance

Spain’s Santander Corporate & Investment Banking (Santander CIB) and Komgo, the world's largest multi-bank trade finance network, have partnered to accelerate the digital transformation of several trade and working capital products.

Santander CIB has become a shareholder of Komgo with a strategic equity investment. Both companies expect to build up synergy between Komgo’s technology and corporate client base, and Santander CIB’s global footprint and leadership in trade finance.

Mencia Bobo, global head of Trade & Working Capital Solutions at Santander CIB said: “We want to support our clients simplify and digitalize trade finance. Partnering with Komgo means we can automate communications, optimise end-to-end processes, reduce operational risk and deliver the best client experience. In addition, it will enable us to innovate and find synergy in our broad Trade Finance business."

Komgo will also its trade finance proposition after acquiring Canada’s Global Trade Corporation (GTC) in January 2022. Santander CIB will contribute expertise and tailor-made trade and working capital solutions for Komgo's client portfolios in Europe and the Americas, while benefitting from Komgo's technology to improve client-to-bank communication and to deploy innovative solutions in trade finance and commodities.

Froda, Lunar, and Visa offer card-based embedded loans for Denmark’s SMEs

Sweden-based fintech Froda has partnered with Danish digital bank Lunar and card payments giant Visa to launch its card-based embedded lending solution for small businesses in Denmark.

The launch of Froda’s embedded lending solution follows a successful test period and the goal is to make it faster and cheaper for Danish small businesses to access financing and secure the necessary capital to drive growth.

Small and medium-sized enterprises (SMEs) make up 99% of all Denmark's businesses and play a vital role in the country’s economy and competitiveness. However, SMEs often face obstacles when in need of financing, which hinders their growth potential.

To address this Froda, in collaboration with Visa, has developed card-based embedded lending, a new loan solution that uses card rails for payouts and repayments. The solution is offered as a white label product through Froda Embedded to partners that are issuers of Visa business cards.

Froda officials commented that their initial idea has transformed into a tangible achievement, all thanks to their collaboration with Visa and Lunar. Throughout the testing phase, they witnessed substantial interest in the solution from Danish entrepreneurs, leading them to consider Denmark as the logical progression in their venture.

The process is fully digitised and by using Visa cards for payouts and repayments, the loan process can be shortened from the usual two months to just minutes. This innovation in the market ensures both speed and efficiency for SMEs that need financing.

Card-based embedded lending was introduced earlier in 2023. With Visa's presence in over 200 countries and territories, the product offers a consistent experience across markets, making it globally scalable. Lunar has become the pioneering partner to introduce this product to the Danish market.

Lunar officials announced their role in introducing an innovative financing option for small businesses in Denmark. They emphasised the convenience of applying through their app, where applicants can expect a non-committal offer within minutes. Moreover, Lunar provides an enticing price guarantee, ensuring their product remains competitive and aligns with their objective of establishing an enhanced financing solution for small businesses in the Nordic region.

During the spring, a selected group of Lunar's Danish customers had the opportunity to test a beta version of the product. The results were positive, with over half of the customers expressing great interest in this financing solution.

The product will be available to all Lunar customers in Denmark from this week. Lunar is building the everyday bank for private and business customers and aims to make running a business in Denmark easier. The partnership with Visa and Froda aims to increase financing options, particularly for smaller businesses.

Bankable buys embedded finance firm Arex Markets

Banking-as-a-Service (BaaS) player Bankable has acquired Spanish fintech and embedded finance specialist Arex Markets, giving the combined company the ability to embed credit and working capital into the payment flows of established neobanks, multinational brands and fintech platforms.

Bankable will add working capital (flexible invoice financing, corporate credit cards, lodged cards and revolving credit) to its existing API-first digital platform, according to a release. Customers will have the ability to become ‘Bankable’ and build cards, payments, and credit solutions on top of the Bankable virtual account core in minutes.

Through extensive investor partnerships, Bankable will offer unlimited working capital matched with an extensive portfolio of relevant customers.

Early use cases for the combined offering are being rolled out in the B2B wholesale travel sector for working capital support on supplier payments; supporting pan-European scale-up fintechs and neo-banks in building net new revenues from credit cards; and working with global consumer brands to establish a single payments solution tailored to their needs.

Eric Mouilleron, CEO, Bankable, said: “Thanks to our complementary assets and strong alignment of our teams, we can attract premium clients seeking to develop a uniform pan-European banking offer leveraging our best-in-class API platform including credit. This partnership clearly sets us up with the richest BaaS offer for premium clients with clear multi-country ambitions.”


UK’s Custom Credit and Ordo to offer instant open banking payments

UK-based lender Custom Credit said that it will be rolling out fintech Ordo's Request to Pay (RTP) and ecommerce services across all areas of its business allowing for Open Banking payments.

Custom Credit provides loans to people who could otherwise find it hard to get credit in the UK and tailors the initial loan and the ongoing payment schedule to their individual circumstances. Ordo’s Open Banking payments platform, using the UK’s real-time money transfer Faster Payments service as the payment rails for the underlying Open Banking payment, provides secure and real time payments, from one bank account to another bank account – used for both paying loans securely out, and loan repayment back.

Custom Credit’s customers can pay using Ordo from more than 98% of banks in the UK, with no need to register, sign up or download an app to be able to make instant and secure payment. The company is rolling out Ordo’s Request to Pay and ecommerce services across all areas of its business allowing Open Banking payments to be used for loan disbursement, borrower repayments and ad hoc collections where customers need to flex their repayments to respond to life events and a pay greater or lesser amount for a particular instalment.

For these use cases flexible, immediate, and accurate Open Banking payments are needed. Launching with Ordo’s Variable Recurring Payments (VRP) services as standard, Custom Credit "is looking to make a difference in the lending market for those that have found themselves trapped without affordable credit or the ability to absorb short term stresses in their income or expenditure."

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