ECB primes European companies for steeper rate hikes

European Central Bank (ECB) Governing Council member Joachim Nagel says that investors are getting a better understanding of the ECB’s challenge in returning inflation to the 2% target.

Nagel, who is also President of Germany’s Bundesbank also indicated that the ECB may need significant further rate hikes this year – while declining to speculate how high they should rise –and should accelerate the rundown of its oversized bond portfolio to fight stubbornly high inflation.

He added that investors have at times had too optimistic a view of what’s needed to tackle the euro era’s persistent resurgence in inflation and “the interest rate step announced (by ECB) for March will not be the last.

“Further significant interest rate steps might even be necessary afterwards, too.”

Nagel said that the impact of policy tightening has to be reflected in underlying inflation and it would not be possible to begin reducing rates until this had fallen.

He added that with the ECB’s current pace of balance sheet reduction is at €15 billion (US$15.95 billion) a month, it will take too long to make a significant reduction. “I am therefore in favour of taking a steeper path of reduction starting in July in light of experience gained up to that point,” he said.

Regarding the economy, “although there could be a gradual pick-up in the second quarter, there is still no sign of any major improvement for now,” Nagel said. “Our experts are not expecting there to be a visible economic recovery until the second half of the year.”

Separately, the ECB’s Chief Economist, Philip Lane, said in an interview with Reuters that eurozone inflation pressures have begun to ease, including for all-important core prices, but the Bank will not end rate hikes until it is confident price growth is heading back towards the target rate of 2%.

“There's significant evidence that monetary policy is kicking in,” said Lane. “For energy, food and goods, there’s a lot of forward-looking indicators saying that inflation pressures in all of those categories should come down quite a bit.”

However other ECB policymakers, including board member Isabel Schnabel and Dutch central bank chief Klaas Knot, have expressed concern core inflation could prove stickier and remain above 2%.

For the ECB to end rate hikes, Mr Lane outlined three criteria: the Bank needs lower inflation projections through its three-year forecasting horizon, to make progress in lowering actual underlying inflation and to conclude that monetary policy is working.

“We’re all signed up to the criterion that sufficient progress in underlying inflation is important,” Lane added. Once rates plateau, the ECB plans to keep them there for some time and will not revise plans as soon as core inflation starts falling significantly, he said.

Asked how long rates could stay in a territory that restricts economic growth, he said: “It could be quite a long-lasting period, a fair number of quarters."

Markets now expect the ECB’s 2.5% deposit rate to rise to nearly 4% before the end of 2023, with the peak rate estimate increasing by around 35 basis points this month alone, mostly over fears core inflation has got stuck.

On a more positive note, strong investor inflows into bond markets since the start of this year mean traders and bankers are confident the ECB will have a smooth start to unwinding its huge bond holdings, but the long term impact of its “quantitative tightening (QT)” is a big unknown.

The ECB has amassed a €5 trillion portfolio after nearly a decade of quantitative easing (QE) that saw it buy bonds to fight deflationary risks in the euro zone in the aftermath of the euro zone debt crisis. From this month it will start running the bonds off its balance sheet at a monthly rate of €15 billion on average through June.

QT is the ECB's next step following 300 basis points of rate increases and a halt to new bond buying since last year.

Currency battered as Ghana misses restructuring target

Ghana’s cedi (GHȻ), the world’s second-worst performing currency this year, faces further volatility after the West African nation missed a self-imposed deadline to restructure its bilateral debt and move closer to tapping foreign aid.

Finance Minister Ken Ofori-Atta aimed to reach a restructuring agreement with bilateral creditors by the end of February to help qualify for a US$3 billion International Monetary Fund (IMF) programme, but Ghana has only partially completed the domestic-debt part of the exchange programme.

The GHȻ is down by 21% against the US dollar in 2023, the worst performer among more than 100 currencies tracked by Bloomberg after the Lebanese pound. Although the missed deadline doesn’t automatically derail the talks, it highlights Ghana’s problems as it tries to reduce its debt load and contend with critics ranging from international bondholders to local trade unions.

“For the foreseeable future the cedi will continue to be volatile until we are able to make substantial progress on the external debt restructuring front,” said Kweku Arkoh-Koomson, an economist at Databank Group. “The IMF deal is what will cause a clear stability in the cedi.”

Ghana is trying to restructure most of its public debt, estimated at GHȻ 576 billion (US$45 billion) at the end of November. Local bondholders have been asked to voluntarily exchange GHȻ 130 billion of debt for new bonds that will pay between 8.35% and 15% interest, compared with an average of 19% on old bonds.

Ghana stands to ask external creditors to write off as much as 50% of the debt it owes them — far higher than the 30% the government initially considered, Standard & Poor’s (S&P) Global Ratings said in a report Tuesday.

“Uncertainty on when the rest of the restructuring will be completed” is influencing cedi volatility, said Courage Boti, an economist at Accra-based GCB Capital. “To the extent that those things are hanging in the balance now — in that timelines are not very certain — the volatility of the cedi will continue.”

To date, local investors have exchanged GHȻ87.8 billion, or 67.5% of bonds under restructuring, for new securities, against an overall target of 80%. The country will have to reorganise obligations owed to local pension funds to complete the domestic exchange, a move that has been criticised by trade unions.

The government aims to start “substantive” discussions with international bondholders and their advisers in coming weeks, Ofori-Atta said last month, offering eurobond holders some losses while seeking to reschedule payments on bilateral obligations.

Americanas bankruptcy adds to Brazil’s rising corporate debt

Brazil’s troubled corporate debt has surged to US$11.9 billion, with corporate bonds hit by high rates and a restrictive local market, reports Bloomberg.

It adds that Brazilian corporate bonds got hammered last month after the bankruptcy of the major retail chain Americanas, further weakening the outlook for firms already wrestling with high borrowing costs in late January.

Local newspaper O Globo reported on Wednesday – citing internal investigation documents –  that the management of the troubled Brazilian retailer denied the existence of the financial operations that led to an accounting scandal early this year.

Six of the 10 worst-performing issuers in Latin America during February were Brazilian companies, data compiled by Bloomberg show. Dollar-denominated notes from GOL Airlines, business process specialist Atento and power generator Light lost at least a quarter of their value, while airline Azul, fintech Stone and food processor BRF’s bonds delivered losses of between 10% and 15%. BRF confirmed reports earlier this week that it is seeking a buyer for its pet foods division.

Brazilian corporates may be facing a debt problem due to rising borrowing costs, leading to weaker business investment and slower GDP growth, according to Capital Economics.

“A growing number of companies appear to be struggling with debt payments. Airlines and retailers, in particular, seem to be hurting,” William Jackson, the chief emerging markets economist at Capital Economics, wrote earlier this week.

“So far at least, there is little evidence of widespread stress and the banking sector looks well placed to deal with rising non-performing loans.”

Saudi Arabia’s NEOM Green Hydrogen secures US$8.5 billion of financing

Saudi Arabia’s NEOM Green Hydrogen has signed finance agreements with a group of financial institutions totalling US $8.5 billion to finance its clean energy facility, according to a bourse filing.

Located at Neom – the planned “smart city” in Tabuk Province in north-western Saudi Arabia – the NEOM Green Hydrogen Project is reportedly the world's largest utility scale, commercially-based hydrogen facility powered entirely by renewable energy.

It includes the development, financing, design, engineering, procurement, manufacturing, and factory testing of a world scale green hydrogen and green ammonia plant.

Under a 30-year green ammonia offtake contract with US multinational Air Products, the project will also comprise transportation, construction, erection, installation, completion, testing, commissioning, insurance, ownership, operation and maintenance of the facility.

NEOM Green Hydrogen Co (NGHC) is a joint venture between Public Investment Fund-backed power generation, renewable energy, and water desalination firm Air Products, and NEOM Co, and ACWA Power – which holds a 33.3% equity stake.

The total investment cost is funded by a combination of long-term debt and equity and is divided into US$5.85 billion senior debt and US$475 million mezzanine debt facilities, both arranged on a non-recourse project finance basis.

The arrangement includes US$1.5 billion from the National Development Fund on behalf of the National Infrastructure Fund and a further US$1.25 billion in the form of Saudi riyal-denominated financing from Saudi Industrial Development Fund.

The consortium of financiers from which the balance came from entails First Abu Dhabi Bank, HSBC, Standard Chartered Bank, Mitsubishi UFJ Financial Group, BNP Paribas, Abu Dhabi Commercial Bank and several others.

Last year, during the Future Minerals Forum in Riyadh, NEOM’s CEO Nadhmi Al-Nasr announced the first phase of its green hydrogen facilities was scheduled to come online in 2025. He added that the company is also creating universities that will specialise in technical research and innovation in new industries, specifically mining. 

NEOM is doing this to attract the best students in the world to come and be prepared for the research and innovation for the future of mining, Al-Nasr explained.“It is time for the mining industry to compete with the oil industry.

“Oil has made the big move to move to the next generation. We need the same in the mining sector.”

Swaps market ready for US$60 trillion Libor conversion

Central counterparties (CCPs) are reported to be confident about the upcoming conversion from the discontinued London interbank offered rate (Libor) of US$60 trillion of cleared US dollar contracts to the secured overnight financing rate (SOFR).

Risk.net describes the exercise as a giant undertaking that will be split into multiple parts to spread the load – though some worry the extended process could leave the market with a booking hangover and the scale of the switch still presents challenges.

The Financial Times also reports this week that more than US$1 trillion of risky US corporate loans are still tethered to Libor just four months before the “tainted” lending rate finally expires at the end of June, with borrowers and investors “scrapping over the fine print” as the deadline approaches. The official panel overseeing the Libor transition in the US has set out a series of recommendations for loans switching over to SOFR.

Earlier this week, Citi issued an update on how it will handle the transition for “debt securities, certificates of deposit, preferred stock, asset-backed securities and trust preferred securities” that will not mature before the 30 June 2023 cessation date.

Meanwhile the two main derivatives clearing houses, CME and LCH, will conduct their primary conversions for swaps over two weekends this spring, a month apart. The staggered timeline aims to smooth the transition, with the first tranche starting next month – more than two months before Libor is turned off – and the second tranche following in May.

Axis Bank closes Citi India deal

Indian private lender Axis Bank has completed a deal to buy Citigroup’s local consumer and non-banking finance businesses in India, marking the US group’s exit from its credit card and retail businesses in the country.

Originally announced in March 2022, the sale covered credit cards, retail banking, wealth management and consumer loans, in addition to the transfer of about 3,200 Citi employees. The deal did not include Citi’s institutional client businesses in India and the group says that it will continue to focus on serving institutional clients in India and globally.

Axis Bank's banking operations and transformation group executive Subrat Mohanty told Reuters that the deal closed at a reduced sale price of rupees (INR) 116.03 billion (US$1.41 billion) against INR123.25 billion to as a result of drop in deposit base and Citi’s customer attrition.

Axis Bank will acquire 2.4 million Citi customers with the deal, also less than the initially announced three million.

Citi has also closed the sale of its retail banking and consumer credit card businesses in Vietnam to Singapore’s United Overseas Bank (UOB Group). The divestiture forms part of Citi’s strategy refresh, which involves exiting from consumer banking across 14 markets in Asia, Europe, the Middle East and Mexico.

To date, Citi has signed sales agreements in nine markets. It has closed sales in seven markets including Bahrain, Australia, Malaysia, the Philippines, Thailand, and Vietnam, in addition to India. Citi has also announced plans to wind-down its consumer business in China and Korea, and is in the process of reducing its overall presence in Russia.

Abrdn launches its first European exchange traded fund

Scottish investment group Abrdn – formerly Standard Life Aberdeen – has become the latest manager to enter Europe’s increasingly crowded exchange traded fund (ETF) market.

The Edinburgh-based group, which said 2022 was “one of the toughest investing years in living memory” plans to improve its results by building out a European ETF business, a format that is enjoying solid growth across the continent, reports the Financial Time

The first seed of this drive is the Global Real Estate Active Thematics (Great) ETF (R8TD), which will invest in a portfolio of listed real estate securities, such as equities and Real Estate Investment Trusts (REITs). It will have a total expense ratio of 40 basis points.

Others are due to follow, although the paper reports that a planned metaverse ETF, for which Abrdn has also secured regulatory approval, is seemingly now unlikely to see the light of day.

“This is definitely not a one-off. It will be one of a number [of ETFs] that we will bring to market,” said Neil Slater, global head of real assets at Abrdn.

Abrdn follows in the footsteps of Franklin Templeton, Axa Investment Managers and Fineco Asset Management, which have all recently entered the European ETF market. Others are poised to follow suit.

Japan hosts first meeting of Asia zero-emissions initiative

Energy demand in southeast Asia has increased, on average, by 3% a year over the past 20 years, and this trend is expected to continue according to the International Energy Agency (IEA). Three-quarters of the increase in energy demand to 2030 is expected to be met by fossil fuels, leading to almost 35 per cent increase in CO2 emissions.

Against this backdrop, Japan's Ministry of Economy, Trade and Industry will host a gathering of cabinet-level officials from Southeast Asia and Australia this weekend, marking the first ministerial meeting of the Asia Zero Emissions Community (AZEC).

Through broad-based cooperation across Asia, AZEC seeks to accelerate energy transition among its member countries, by supporting the use of renewable energy and cutting power plant emissions.

Yasutoshi Nishimura, Japan's minister of economy, trade and industry, will attend the Tokyo meeting, which is intended to build on the AZEC concept. Japan and Indonesia jointly announced the initiative last November in Bali, on the side-lines of the G20 Summit.

Both countries believe that “Asia, as the centre of global economic growth, will become a driving force for the world economy as well as a model for cooperation in realising a clean, sustainable, just, affordable, and inclusive energy transitions while taking into account different national circumstances.

“Security of supply, affordability, and people-centred are the main keys in the energy transition process to achieve the goal of carbon neutrality/net zero emission to enable this region to lead the global energy transition process without compromising economic development.”

Citi chief says clients shifting supply chains away from China

Citigroup’s corporate clients are shifting supply chains away from China in a trend that is likely to last for years, says David Livingstone, the group’s chief executive officer for Europe, the Middle East and Africa.

Citi remains positive on China but a recalibration of global supply chains that has been underway since the Covid-19 pandemic has accelerated following Russia’s invasion of Ukraine, Livingstone said in an interview with Bloomberg Television.

“That will be a multi-year, decadal type trend and we’re seeing places, like Mexico, like Vietnam and others benefiting very significantly, and that’s something which we can assist with wherever our clients go,” he said, predicting that chips will also move away from China.

Livingstone’s comments follow reports that continuing trade tensions between the US and China is spurring a rethink of the electronics industry’s decades-old supply structures. The world’s reliance on China as a supplier was underlined when China’s zero-Covid lockdowns and restrictions choked off the supply of everything from phones to cars.