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HSBC sets up US$1 billion fund for Asean’s digital economy – Industry roundup: 28 March

HSBC launches US$1 billion fund to boost Asean’s digital economy

HSBC announced that it is launching a US$1 billion (RM4.73 billion) Asean Growth Fund in six of the fastest growth countries in Asean, to help scale up platform players in the region’s booming digital economy. Asean – the Association of Southeast Asian Nations – comprises the 10 member states of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

To help the region’s digital platform players achieve economies of scale, grow their asset portfolios and advance along the corporate lifecycle, HSBC is allocating US$1 billion of credit facilities through the dedicated fund.

Southeast Asia’s digital economy is among the world’s fastest growing; worth US$218 billion in 2023 and on course to reach US$600 billion by the end of the 2020s at a compound annual growth rate of 16.2%.

“Like so many other internationally minded businesses, we are excited about Asean’s booming digital economy,” said HSBC Malaysia CEO Datuk Omar Siddiq.

He added that with a working population that is digitally native, increasing in size, and poised to consume more goods and services – especially on e-commerce – Asean has great potential for growth. “We are delighted to work with digital companies as they expand in the region and beyond,” he added.

The HSBC Asean Growth Fund will provide lending to companies that are scaling up through digital platforms across Southeast Asia. It will support new economy names, more established corporates, and non-bank financial institutions by assessing operating metrics tied to their cashflow-generative asset portfolio, rather than relying solely on traditional financial metrics.

“HSBC has a proud history and strong heritage in Asean of supporting entrepreneurs and scaling up businesses,” said Omar. “The introduction of our latest offerings allows us to better support new economy companies in Asean, whether startups or scale-ups, as they expand across the region and advance along the corporate lifecycle,” remarked Omar.

The six highest growth countries in Asean are: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. HSBC has a presence in all six countries.

HSBC recently surveyed 600 companies operating in Southeast Asia and found that “digitalising operations” is a key business priority, selected by 55% of Malaysian respondents. Other priorities include “growth in Asean” (59%) and “product development/research and development” (33%).

“To help capture growth in the booming digital economy, almost three quarters of the respondents (73%) said that digitisation of operations is becoming more important compared to 2023. More importantly, we also see 82% of the respondents planning to increase their investment in the digitalisation of their businesses in Asean,” said HSBC Malaysia commercial banking head Karel Doshi.


Sweden signals interest rate cuts could begin in May

Sweden's central bank has held its key interest rate at 4.00% as expected but said that if the country’s inflation rate continued to drop toward the 2% target there was a good chance of a series of rate cuts starting in May.

With inflation easing in many countries, central banks around the world are weighing up when to start easing policy. The Swiss National Bank was the first to reduce rates last week, with the US Federal Reserve and the European Central Bank expected to follow suit in June.

After peaking at 12.3% in late 2022, headline inflation in Sweden is close to target and the Riksbank is almost ready to start reversing two years of policy tightening. “What we are saying is that if our forecasts in a broad sense turn out to be right, there is a high chance there will be a cut in May,” Governor Erik Thedeen told reporters.

The central bank’s rate path gives a roughly 50% chance of a cut in May and a total of three rate cuts this year. Many analysts believe inflation will fall faster and that the Riksbank will accelerate rate cuts.

“We stick to our call that the Riksbank will start cutting rates in May,” Nordea economist Torbjorn Isaksson said. “We see the policy rate at 2.50% at year-end 2024.” The central bank last reduced rates in 2016.

The Riksbank’s outlook has shifted radically in recent months. Last November, it warned rates could rise further but said in February that it might be possible to relax policy in the first half of the year.

Thedeen said it had been too early to cut at Wednesday's meeting and the Riksbank “wanted to be even more sure” inflation would remain low and stable. Rates are likely to come down gradually, he said.

The central bank is concerned, however, that the prospect of lower borrowing costs could prompt a spending spree by Swedish households. “To a certain extent it is good that we get improved demand and purchasing power when rates go down, but we don't want it to go too fast so we get setbacks,” Thedeen said.


Sri Lanka makes surprise interest rate cut

Sri Lanka's central bank has surprised markets by lowering interest rates by 50 basis points (bps) in an unexpected move and said there was space to ease policy further as it prioritises growth to steer the economy out of its worst financial crisis in decades.

The Central Bank of Sri Lanka (CBSL) reduced the Standing Deposit Facility Rate to 8.50% and the Standing Lending Facility Rate to 9.50%, catching markets unawares as 11 out of 16 economists and analysts polled by Reuters had expected rates to remain unchanged.

“Going forward, if we see that inflation on a stable basis remains between 4 per cent-5 per cent, I see space for monetary policy to be reduced further in the current cycle,” said CBSL Governor P. Nandalal Weerasinghe.

At a post-policy press conference, Weerasinghe noted that monetary conditions still remain tight, adding current projections suggest that Sri Lanka’s inflation will track between 4% to 5% over the next 12 to 18 months.

The latest easing brings the total interest rate cuts to 700 bps since last year as Sri Lanka began a painful recovery after undergoing its biggest economic crisis since independence from the British in 1948.

“The decision seems to be very much driven by a desire to support demand conditions and boost growth further, taking advantage of the impact of electricity tariff reduction and appreciation of currency,” commented Thilina Panduwawala, head of research at Frontier Research.

The bank had kept its policy rates unchanged in January to tame inflation after a 3% sales tax increase at the start of the year pushed up prices and boosted inflation to 5.9% in February.


Surge in cocoa prices leaves a sour taste

Chocolate lovers are having to pay more for their indulgence, with price rises in recent months often accompanied by smaller sizes of chocolate bars and other products. Cocoa prices have risen by more than 250% over the past year, reaching US$10,000 per metric ton, nearly double the previous record high set 46 years ago.

“In every sustained commodity price rally, there’s a moment when fundamentals – supply, demand, inventories – no longer matter,” writes Javier Blas for Bloomberg News. “The cost of the molecules, whether in the form of energy or foodstuffs or metals, stops being a price and becomes just a number. The market ceases to be orderly and becomes unruly.

“It’s clear that moment has arrived for cocoa. On Tuesday, cocoa futures in New York surged above the previously unthinkable $10,000 a metric ton. In dollar terms, they surged more than $1,000 over two days – equal to the trading range that in the past would have taken a year to witness.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown said that chocolate lovers are braced for higher prices over the coming months. “With the commodity scaling to fresh peaks it will cause a dilemma for big confectioners. Many will have hedged prices, but those are likely to run out later this year or next,” she noted.

“With prices not expected to dip significantly due to production issues in West Africa, caused by poor harvests and financing issues among producers, consumers may have to brace for fresh price hikes or fresh bouts of shrinkflation as manufacturers look at ways to support margins. However, some big consumer goods giants have already been witnessed declines in volumes with shoppers baulking at recent price hikes nor are they are unlikely to be impressed by another Willy Wonka style shrinking act, if some bars are reduced again in size.’’

Chocolate makers including Cadbury owner Mondelēz International and Hershey Company have warned that the soaring cost of cocoa would hit earnings. Harvests in the West African nations of Ivory Coast and Ghana have been poor recently due to prolonged dry weather and disease outbreaks, with traders fearing the El Nino weather pattern will mean another bad year ahead.


Thames Water faces funding crisis as shareholder refuse cash injection

Thames Water, the UK’s largest water and wastewater utility faces a deepening funding crisis as shareholders refuse to inject funds into the indebted company amid a growing dispute with the UK’s water industry regulator.

Thames Water’s shareholders, which include the Universities Superannuation Scheme and China’s sovereign wealth fund, said in a brief stock exchange statement that regulatory conditions being imposed by the regulator, Ofwat made a proposed turnaround plan drawn up last year “uninvestible”.

“Discussions with Ofwat and other stakeholders are ongoing,” the company said. “Thames Water aims to secure a … regulatory determination that is affordable for customers, deliverable and financeable for Thames Water, as well as investible for equity investors.”

According to reports, Thames Water has asked Ofwat to make a number of regulatory concessions. These are said to have included increasing customers’ bills by 40% by 2030 and imposing lower fines for rule breaches.

Chris Weston, chief executive of Thames Water said: “I’d like to reassure our customers that, despite this announcement, it is business as usual for Thames Water.”

The company’s shareholders had indicated last year that they were willing to commit £3.25 billion (US$4.1 billion) to the company in the coming years, with the first £750 million due to be handed over this year. The commitment came after it was revealed that the government had drawn up contingency plans for the collapse of Thames Water amid growing doubts about the ability of the company to service its £14 billion debt pile.

A spokesperson for the shareholders said they would work with Ofwat and the government. “After more than a year of negotiations with the regulator, Ofwat has not been prepared to provide the necessary regulatory support for a business plan which ultimately addresses the issues that Thames Water faces. As a result, shareholders are not in a position to provide further funding to Thames Water.”

Ministers and Ofwat examined placing Thames Water into a special administration regime that would in effect have taken the company into temporary public ownership. Thames Water, together with other UK water companies were privatised by the UK government in 1989.

Ofwat said: “Safeguards are in place to ensure that services to customers are protected regardless of issues faced by shareholders of Thames Water. Today’s update from Thames Water means the company must now pursue all options to seek further equity for the business to turn around the performance of the company for customers.”

It said its price control would put customer and environmental priorities at the heart of the water sector. “To drive this change, we need to ensure that the sector attracts investment and is fair to bill payers.

The Times reports that "the ratcheting up of the financial crisis at Britain's largest privatised water company has riased the prospect that it may have to go through a giant debt-for-equity swap wiping out its current shareholders, that it could slide into a special administration regime with outside accountants taking control, or that there could be a renationalisation of the business."


Fed’s operating losses at record US$114.3 billion in 2023

The Federal Reserve has reported that its expenses exceeded its earnings in 2023 by US$114.3 billion, its largest operating loss ever, forcing the US central bank to forgo remittances to the Treasury as interest rates remain elevated.

Interest expenses, which includes reserves balances at the Fed’s reverse repo operations, nearly tripled to US$281.1 billion in 2023, according to audited financial statements released this week. Meanwhile, the Fed’s interest income earned on its portfolio of assets totalledUS $163.8 billion last year, compared with roughly US$170 billion in 2022.

After covering its day-to-day operating expenses, the Fed is required to send the money it earns on its securities portfolio to the Treasury, where the revenue helps offset federal deficits.

When expenses exceed earnings, as they have since late 2022, the Fed can create money to fund its operations when dealing with operating losses which means it faces no obstacles to operate. It captures its loss in an accounting device called a deferred asset. The official level of the deferred asset stood at US$133.3 billion at the close of 2023. As of March 20, it had risen to US$157.8 billion and it is unclear how much larger it will get.

The Fed receives income from the securities in its portfolio and pays interest on reserves held at the Fed by banks. That generated massive earnings when rates were nearly zero, and huge payments to the Treasury, but that changed as the Fed began raising rates in March 2022. Most regional Fed banks began suspending remittance payments in September that year.

Once the Fed returns to profitability it will use excess earnings to reduce the deferred asset and when it is extinguished the Fed will start returning excess profits to the Treasury again. Fed officials have noted they've handed back substantial sums to the Treasury over recent years. However, a St. Louis Fed report last year concluded that it could take years before the Fed is able to resume returning profits to the government.


South Korea and Thailand begin EPA negotiations

The governments of South Korea and Thailand announced the launch of negotiations for the Economic Partnership Agreement (EPA), with South Korea’s Ministry of Trade, Industry and Energy’s Deputy Minister Roh Keon-ki meeting Thailand’s Deputy Prime Minister and Minister of Commerce Phumtham Wechayachai in Bangkok.

The two countries agree to push for negotiations in areas of mutual interest, including economic cooperation, digital and government procurement, and attain a high level of market access to goods and services through the EPA, which will be at a higher level than the Regional Comprehensive Economic Partnership (RCEP) signed in November 2020.

According to the South Korean government, the South Korea-Thailand EPA is expected to increase bilateral trade in automobiles, electric vehicles (EVs) and car parts, create opportunities in construction, manufacturing and visual and auditory service markets; strengthen economic cooperation in supply chains, bio and clean economy; and build forward-looking strategic trade relations between the two countries.

The agreement will create new market opportunities in the Asean region to facilitate the spread of Korean culture and foster.deeper cooperation in crucial fields such as supply chains, biotechnology and the clean economy, said an official of the South Korean government.

Both countries have completed all required procedures for launching negotiations and plan to hold the first official negotiating round in the near future once prior consultations make headway in the first half of this year.


Fashion labels agree to rinse out greenwashing

UK fast fashion labels Asos, Boohoo and George at Asda have agreed to clarify the way they display, describe and promote environmental credentials as the UK’s competition watchdog concludes its investigation into greenwashing.

The Competition and Markets Authority (CMA) said it had secured “landmark changes” following its probe into the fashion retailers in response to claims theyto entice consumers and environmental investor funds.

The three retailers have agreed to provide “clear and specific” product information, such as providing the percentage of recycled or organic fibres used, rather than using ambiguous terms such as ‘eco’, ‘responsible’, or ‘sustainable’ without further explanation.

The brands must also set out the criteria and minimum requirements for its environmental collections, so clothing is not marketed or labelled as part of an environmental range unless it meets all the relevant criteria.

CMA chief executive Sarah Cardell said the agreements “mark a turning point for the industry” and that “millions of people who shop with these well-known businesses can now have confidence in the green claims they see”.


Crypto exchange KuCoin “violated AML laws”

US federal prosecutors have charged crypto exchange KuCoin and two of its founders with violating anti-money laundering (AML) laws, alleging that the exchange operated in the US, lied to at least one of its investors about operating in the US and failed to both register with US government entities and maintain an AML programme.

The US Department of Justice said in an indictment that KuCoin and founders Chun Gan and Ke Tang operated KuCoin as a money-transmitting business with over 30 million customers but did not implement a know-your-customer (KYC) or AML programme until 2023 – and even then, its KYC programme did not apply to existing customers. Neither Gan nor Tang were arrested, the DOJ said in a press release.

The DOJ indictment said that KuCoin did not register with the US Financial Crimes Enforcement Network as a money services business.

As it did not implement any KYC or AML programmes, KuCoin "made itself available to be used, and in fact was used, as a vehicle for laundering the proceeds of suspicious and criminal activities, including proceeds from sanctions violations, darknet markets, and malware, ransomware, and fraud schemes," the indictment said.

The indictment pointed to allegations that KuCoin "indirectly received a total of more than US$3.2 million worth of cryptocurrency from Tornado Cash," a sanctioned crypto mixer. KuCoin was mentioned in criminal filings against two of Tornado Cash's developers, Alexey Pertsev – whose trial in The Netherlands began this week – and Roman Storm, who is set to go on trial in the US later this year.

The Commodity Futures Trading Commission (CTC) also filed a suit against KuCoin, alleging the company, which offers both spot and futures trading services, did not register as a futures commission merchant, swap execution facility or designated contract market. Its suit also charged that KuCoin failed to implement the CFTC's equivalent of a KYC programme.


Vayana TradeXchange partners with Arqit on trade finance

UK-based software company Arqit Quantum and Vayana TradeXchange announce a partnership to use Arqit’s TradeSecure digital negotiable instrument technology to transform international supply chains.

Vayana TradeXchange is a global marketplace facilitating the financing of cross-border trade, headquartered in India’s Gujarat International Finance Tec-City, aka GIFT City, and operating under license from the International Financial Services Authority in India (IFSCA). It is part of the Vayana Group, which operates India’s largest regulated network for domestic supply chain finance.

The initial focus for the partnership will be India, Singapore, the United Arab Emirates (UAE) and the UK, nations that are global leaders in the digitalisation of trade. These countries have embraced legislation based on the UN’s Model Law on Electronic Transferable Records (MLETR) that gives legal recognition to digital negotiable instruments (DNIs) allowing them to replace wet ink paper contracts.

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