Global growth, inflation and interest rates to settle at lower, stable levels - Moody’s

A report from Moody’s notes that the global economy has shown remarkable resilience in bouncing back from supply chain disruptions during a pandemic, an energy and food crisis as the Russia-Ukraine war began, high inflation and consequent monetary policy tightening. Most G-20 economies will experience steady growth and continue to benefit from policy easing and supportive commodity prices. 

However, post-election changes in US (Aaa negative) domestic and international policies could potentially accelerate global economic fragmentation, complicating ongoing stabilisation. The aggregate and net effects of trade, fiscal, immigration and regulatory policy changes will expand the range of outcomes for countries and sectors.

The report posits that G-20 economies will post steady but differentiated growth rates. Moody’s forecast is that the G-20 economies will grow by 2.8% in 2024, down from 3.0% in 2023, and moderate through 2026. The US economy is outperforming other advanced economies, though its growth will likely decelerate despite the strong momentum. Europe's sluggish recovery will gradually firm. China's (A1 negative) growth will likely slow even as stimulus measures are implemented. Rising trade protectionism and a push in several large economies to strengthen domestic industries makes external demand a less reliable source of growth.

Increased trade tensions and geopolitical stresses are primary risks to the macro outlook. The inclusion of North Korean soldiers by Russia in Ukraine (Ca stable), rising tensions in the South China Sea and the Taiwan Strait and expanding conflicts in the Middle East contribute to a tense international backdrop. Competition between the US and China will shape policies, potentially raise global trade barriers and trigger trade or currency wars, the report notes. This long-term geoeconomic fragmentation could further split the global economy into geopolitical blocs, complicating global trade and financial connectedness, further dampening global growth.

Meanwhile, reductions in global policy interest rates will end in 2025. Moody’s expects core inflation to decline to near central bank targets by mid-2025, facilitating the movement of policy rates toward neutral stances. Synchronised easing will help bolster economic stability, but at least some of this may be countered by heightened risks to US inflation from policies proposed by the incoming administration of Donald Trump. Moody’s expects the Fed will adopt a cautious approach to policy normalisation.

Finally, the report underlines that the change in US administration injects greater policy-induced uncertainty. The new US administration will inherit an economy with surprising strength, but for forecasting purposes, Moody’s assumes that the net effect of policies will exert a small drag on economic activity. Other than that, the report does not account for changes to fiscal, immigration or trade policies until they are implemented.

 

Profit warnings issued by UK-listed companies with DB pension scheme peaked in Q3 2024

UK-listed companies with a defined benefit (DB) pension scheme issued 20 profit warnings in Q3, the highest quarterly total of 2024 so far, according to EY-Parthenon’s latest Profit Warnings report. 

The 20 warnings issued between July and September represented the same figure as Q3 2023, but a 33% increase on the 15 warnings issued in Q2 2024 and made up 24% of the 84 profit warnings issued by UK-listed companies during the quarter.

The rise in Q3 warnings issued means almost a quarter (23%) of UK-listed companies with a DB pension scheme have issued a profit warning in the last 12 months. Companies with DB sponsors in the FTSE Industrial Support Services sector issued the most warnings in Q3 (six), closely followed by FTSE Industrial Engineering (four).

Contract issues (30%), rising costs (20%) and credit tightening (20%) were cited as the main reasons for warnings from UK-listed companies with a DB sponsor. For the first time this year, labour market issues were not cited as a reason for any warnings from companies with a DB pension scheme.

“Uncertainty has been a persistent feature of the business environment for several years now,” commented Karina Brookes, UK Pensions Covenant Advisory Leader and EY-Parthenon Partner. “This pressure intensified over the summer as companies awaited the new Chancellor’s Autumn Budget and faced heightened geopolitical tensions. The latest profit warning data gives us a real-time indicator of this shift in business sentiment and the impact it can have on company earnings.

“In this environment, against a backdrop of the new DB funding code and better-funded pension schemes, it’s still important for schemes to monitor if the sponsor covenant can support the scheme’s risk level, as even low dependency on covenant will mean that some covenant reliance remains especially for those adopting a run-on strategy. Both corporate and scheme positions can shift quickly, so having flexible plans in place which can be adopted quickly when circumstances change will be key in securing the best possible outcome for scheme members.”

 

Strengthening FX buffers helping APAC sovereigns’ credit profiles

Foreign exchange (FX) reserves are rising across the vast majority of rated Asia-Pacific (APAC) sovereigns in Fitch Ratings’ portfolio and, if sustained, will strengthen external buffers and support the credit profiles of many sovereigns across the region, says Fitch. However, rising reserves could also contribute to international tensions over exchange-rate policies in some cases, while in others, US dollar strength could lead to rising FX interventions and a fall in reserves.

Fitch estimates that reserves rose during Q3 2024 in at least 15 of the 20 APAC sovereigns in its portfolio. This continues the trend over the last 12 months, in which at least 10 have seen double-digit percentage increases. Higher reserves are unlikely to affect the credit profiles of highly-rated sovereigns such as Singapore (AAA/Stable) and New Zealand (AA+/Stable), but rising reserves would be modestly positive for the capacity of some large emerging markets to respond to shocks, such as Indonesia (BBB/Stable) and the Philippines (BBB/Stable).

Improved external buffers would have an especially positive effect on credit profiles of APAC’s frontier markets, which are also more vulnerable to a strong US dollar from rising protectionism. Pakistan’s gross FX reserves reached $17.4bn at the end of September, up from a trough of $7.9bn in January 2023. When Fitch upgraded Pakistan’s rating to ‘CCC+’ in July, it stated that improved FX levels and further fiscal consolidation were likely in light of the greater external funding certainty from its recently agreed $7bn Extended Fund Facility with the IMF. However, Pakistan's large funding needs would leave it vulnerable if its access to external finances were constrained, for example due to a failure to implement the challenging reforms under its IMF programme.

The Maldives was one of the few APAC sovereigns whose foreign reserves fell in Q3 2024 by 27% compared to Q2, to $371m, only $49m net of short-term liabilities. Fitch’s decision to downgrade the Maldives to ‘CC’, from ‘CCC+’, in August 2024 was driven by its assessment that intensified external liquidity pressures had made default more likely.

The Indian government’s announcement on 7 October that it would provide currency swap agreements to the Maldives, worth around $757m in total, should provide near-term relief. Nevertheless, external liquidity strains will most likely remain high in the next two years without radical policy adjustments, with total debt servicing requirements of $557m in 2025 and over $1.0bn in 2026. The swaps will have to be repaid and do not resolve the underlying issues of high and rising public debt in combination with low foreign reserves and a hard peg to the US dollar.

Sri Lanka’s gross official reserves soared by 81% in October compared to the previous year, to $6.5bn on the back of the IMF programme, but the speed of the recovery in reserves is likely to be set back if the government resumes servicing its external debt. Its improved external buffers will only begin to influence the sovereign’s rating once it moves out of ‘RD’.

The broad upward trend in APAC foreign reserves is generally credit-positive for the region’s sovereigns and may help cushion the impact of any fallout from rising trade tensions. However, it could also increase geostrategic tensions – particularly with the US – if it is perceived as a sign that governments are maintaining weaker currencies to strengthen their trade competitiveness. US president-elect Donald Trump previously said the US has a currency problem and suggested that weak currencies give some countries an unfair competitive advantage when it comes to trade.

 

41% of UK SMBs targeted by fraud in past 12 months

Over two-fifths (41%) of small and medium-sized businesses (SMBs) in the UK have been victims of fraud in the past year, according to a report by Visa. The financial toll is significant, with the average loss per business reaching £3,808.

Billing and invoice fraud was cited as the most prevalent threat (26%), followed by phishing scams (24%) and bank account hacks (23%). The consequences extend beyond finances, eroding decision-makers' confidence and trust in third parties while impacting personal well-being. Nearly 29% of SMB leaders reported diminished confidence due to fraud, and one in five acknowledged its toll on their mental health.

Fraud also has implications for consumer behaviour and SMB growth. Security concerns are becoming a decisive factor for consumers, with transaction security (48%) ranking second only to price (62%) as a priority when shopping online. Other considerations, such as ease of returns (29%) and customer reviews (27%), lag behind, underscoring the need for businesses to prioritise robust fraud prevention measures.

Visa’s data shows that the ripple effects of fraud extend to consumer spending patterns. After a fraud incident, 91.2% of consumers spend less, with 6.4% ceasing purchases entirely. On average, spending declines by 46.2% in the six months following an incident, a shift with wide-ranging implications for economic activity.

 

First cloud resilience crisis management exercise undertaken in APAC 

Asia Pacific financial regulators and global cloud service providers (CSPs) in the Financial Sector Cloud Resilience Forum, established by the Monetary Authority of Singapore (MAS), conducted a crisis management tabletop exercise on 6 November 2024. The exercise, which is the first of its kind in the region, simulated a severe public cloud incident disrupting multiple financial sectors across the region. 

The exercise enabled Forum members to strengthen their mutual understanding of one another’s incident response playbooks, identify possible supervisory interventions, and collaborate on measures to mitigate the impact of a severe public cloud service disruption. The exercise also demonstrated the importance of close collaboration and communication between financial regulators and CSPs during an incident to improve situational awareness, inform decision-making, and coordinate efforts to recover from disruptions. 

The exercise was attended by senior representatives from financial authorities from the region, including the Australian Prudential Regulation Authority, Hong Kong Monetary Authority, Otoritas Jasa Keuangan (Indonesian Financial Services Authority), Bank of Japan, Bank Negara Malaysia (Malaysian Central Bank), Bangko Sentral ng Pilipinas (Philippines Central Bank), Bank of Thailand, and MAS. Amazon Web Services, Google Cloud, and Microsoft Azure were the CSPs which participated in the exercise.

“Cloud adoption is set to increase as the financial industry presses ahead with digital transformation,” noted Vincent Loy, Assistant Managing Director (Technology), MAS, and Chairperson of the Forum. “This Forum provides an important avenue for regional financial authorities and global CSPs to work together to improve operational resilience in the financial sector.”

 

Over $16bn in unreclaimed withholding tax still left on the table

A TaxTec study estimates that around $16.4bn of withholding tax globally lies unreclaimed annually on foreign dividends and interest payments. US cross-border investors are missing out on over $3.8bn in rightful returns.

When foreign dividends or bond interest payments are made, the tax regime in question retains a certain level of withholding tax. Where that jurisdiction has a double taxation treaty with the investor’s domicile, a proportion of that withholding tax is reclaimable.

The reclamation process is, however, bureaucratic and complex. Many studies have remarked on the complexity of reclaiming withholding tax. The result is that not all reclaims are processed, with investors ending up losing a percentage of their rightful income.

This issue has come under the spotlight as the global volume of dividends paid out rises, and bonds once more deliver a significant coupon. Asset owners such as pension funds have a duty to their beneficiaries to maximise income, fund managers also have a fiduciary duty to optimise returns for investors, and custodians want to deliver the best possible service to clients.

“While some progress has been made over the past decade in withholding tax reclamation rates, there is a still a long way to go,” commented Stephen Everard, CEO of TaxTec. “These returns belong to investors and it is the ethical duty of all market participants to ensure they are not left unnecessarily on the table. Double taxation treaties were set up to ensure that investors are not taxed twice, yet lack of reclamation on a proportion of rightful income is effectively allowing double taxation to continue.”