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Industry roundup:16 November

Vietnam’s problems impact global supply chains, says BofA

Vietnam’s sharp surge in Covid-19 infections in July and August this year triggered a more prolonged and stricter lockdown than in 2020, which is likely to create a butterfly effect on global supply chains warns Bank of America.

A Global Economic Viewpoint research note issued by BofA Global Research and BofA Securities and (BofAS) and written by Mohamed Faiz Nagutha, Asia & ASEAN Economist, Merrill Lynch Singapore; Bum Ki Son, Asia Economist, Merrill Lynch Hong Kong; and Aditya Bhave, US and Global Economist, BofAS explains why the impact of Vietnam’s problems will have a wider ripple effect .globally

Alongside the direct hit on Vietnam’s consumer-facing services, labour-intensive production activities were also severely impacted by the pandemic, they write. Third quarter GDP fell by over 6% on year-ago and 9% sequentially – the most on record. Just how quickly production can be recovered in Vietnam will have major implications for global supply chains, especially in the apparel and footwear sectors where Vietnam's global market share has been rising over the past decade.

A sluggish recovery

Due to the relaxation of restrictions since September and notable progress by Vietnam on the vaccination front in recent months, expectations are high that many of the worst-affected sectors can ramp up production quickly. While global sports brands and original equipment manufacturers (OEMs) have guided a return to full capacity by end-2021, the three analysts believe such expectations for a quick normalisation are overly optimistic for several reasons:

  • Two-tiered reopening: Re-opening in Southern provinces, where many apparel and footwear producers are located, has been slower than in the North.
  • Tight, and complicated, local rules for reopening: Current factory operation rules are still very tight, complicated, and differs across provinces. This will likely lead to delays and productivity losses while hindering migrant workers' return to work.
  • Low vaccination rate: Despite substantial progress over the last few months, Vietnam's full vaccination rate is only around 30% - among the lowest in the ASEAN region.
  • Labour shortage: There is evidently greater hesitation among migrant workers to return to work, due to both physical and mental health concerns, adding to shortages.

Added to these domestic factors, rising input prices and port congestions may also lead a slower resumption of production activity. There have been efforts to overcome these difficulties, such as shifting shipments to air freight and proposals to relax the over-time work cap. But these are not permanent solutions and a full recovery of productivity and utilization is likely to take longer than expected.

Butterfly effect

Vietnam's role in global supply chains has grown as it has absorbed a significant portion of labour-intensive goods production from China and also some portion of the electronics supply chain (in particular, Samsung's smartphone production). While supply chains responded to the lockdown with reallocation of capacity across Asia, the analysts do not see the other economies in Asia fully replicating Vietnam's role in the long run.

For the US, they believe the spillover effect from Vietnam's lockdowns will not be huge, but it won't be trivial either. Roughly a 5% increase in apparel and footwear prices in the first half of 2022 seems plausible. This would contribute to core PCE inflation and could shave several basis points off consumer spending.

Standard Chartered in US$250m Saudi repo deal

Standard Chartered Bank has completed a US$250 million repurchase agreement transaction (repo) based on environmental, social and governance (ESG) principles with the Saudi National Bank.

The transaction is the first of its kind in the Middle East, North Africa and Pakistan region, and among the first globally, where repo financing proceeds are allocated towards ESG assets, it said in a statement.

The Saudi National Bank, the kingdom's largest bank, will allocate the proceeds of the financing to several large renewable energy projects and green initiatives in Saudi Arabia and the wider Gulf region. The deal follows Saudi Arabia's recent pledge to cut its carbon emissions to net zero by 2060.

In September, Reuters reported that a senior Standard Chartered executive said the bank is looking to add bankers to focus on sustainable finance, project finance and capital markets in Saudi Arabia, a market it sees will become a front-runner for its regional business in coming years. 

The deal came as the largest bank in the United Arab Emirates (UAE), First Abu Dhabi Bank, said that it has executed a green repurchasing transaction with Deutsche Bank.

Under this agreement, FAB receives Emerging Market Eurobonds collateral from Deutsche Bank and provides US dollar financing in exchange. Deutsche Bank will deploy the funds into green financing activity.

BBVA offers US$2.6bn for full control of Turkey’s Garanti

Spain’s BBVA, which has a 49.85% stake in Turkey’s Garanti Bank, has offered up to €2.25 billion (US$2.6bn) to take full control following a slide in the value of the Turkish lira.

The cash offer to buy out the remaining 50.15% stake in Garanti for 12.20 Turkish lira (US$1.22) per share represents a premium of 15% over Friday's market price. If successful, BBVA would be paying much less than the €7 billion it paid to acquire 49.85%. It first acquired a stake in Garanti in November 2016 when it paid €4.2 billion for a 24.9% stake.

In recent months Turkey's already weak lira has depreciated further to hit a record low of 10.05 to the dollar. Turkey’s central bank has slashed interest rates by 300 basis points since September despite inflation rising to nearly 20% and a further cut is expected imminently.

Should not all Garanti shareholders accept the new offer though BBVA exceeds a 50% stake, BBVA could increase its holding without launching a takeover bid. However, the Spanish bank also needs approval from Turkey's Capital Markets Board and the BDDK bank watchdog, government regulators that could technically block the offer.

Bank of America advised BBVA on the deal, which would help the Spanish bank to generate up to 25% of its earnings from Turkey from 14% at present.

Should approval be given, the transaction is expected to be closed in the first quarter of 2022.

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