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Low interest rates will return, IMF predicts – Industry roundup: 11 April

IMF expects low interest rates to return

The International Monetary Fund (IMF) and the World Bank Group (WBG) are hosting the first in-person spring meetings in Washington, DC since Covid-19 lockdowns, with the first day marked by a forecast that the world’s developed economies will soon return to a new era of low interest rates.

The IMF’s economist said that they expect the recent resurgence of inflation to 40-year highs to prove relatively short lived. Nor would policy tightening through rising interest rates persist in economies with continued low productivity and ageing populations.

In its latest World Economic Outlook, the IMF lines up against former US Treasury Secretary Lawrence Summers in the debate over the future direction of interest rates once inflation is tamed. It argues that rates in the US and other industrial countries will revert toward the ultra-low levels that prevailed prior to the pandemic. It sees the so-called natural or neutral rate – the inflation-adjusted short-term rate that neither pushes the economy ahead nor pulls it back – comfortably below 1% in the US.

With a combination of lower inflation and weak growth likely to return soon, the IMF expects central banks to begin lowering interest rates again and this was particularly likely in the UK, France and Germany. “Our analysis suggests that recent increases in real interest rates are likely to be temporary,” said IMF analysts Jean-Marc Natal and Philip Barrett. “When inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels”.

In a speech released ahead of Day One of the event, Kristalina Georgieva, the IMF’s managing director said: “We project global growth to remain around 3% over the next five years––our lowest medium-term growth forecast since 1990, and well below the average of 3.8% from the past two decades. This makes it even harder to reduce poverty, heal the economic scars of the Covid crisis, and provide new and better opportunities for all.”

The Spring Meetings are yearly events that combine official closed-door meetings among World Bank and IMF leadership, public seminars on global economic development, and high-level events featuring prominent officials. This year’s agenda also includes the appointment of the new World Bank President and a response to the growing public calls for the Bank to shift its financing away from fossil fuels.

Another key topic of discussion is how to mitigate the threat of severe debt distress for more vulnerable emerging economies – see stories below.

Warning of debt crunch in vulnerable economies

Attendees at the IMF and World Bank Spring Meeting in Washington, DC are addressing forecasts that a combination of higher interest rates and flat global growth could push several emerging economies that face escalating refinancing needs into debt difficulties next year.

Many weaker economies navigated the fallout from the Covid-19 pandemic and the war in Ukraine with financing aid from multilateral and bilateral lenders. But reports suggest that repayments on emerging markets’ (EMs) high-yield international bonds will total US$30 billion in 2024, more than three times the total of US$8.4 billion left for the remainder of this year. This adds a layer of complexity to more vulnerable countries if some issuers can't refinance their debt soon.

“A more prolonged period without market access would be of more concern for the lower-rated tiers of the EMs sovereign universe,” said James Wilson, EM sovereign strategist for ING.

Tapping international debt markets has not proved difficult for emerging economies. Sovereign issuance has hit a record high so far this year, although that bond sale bonanza has been driven by higher rated sovereigns. Meanwhile countries such as Tunisia, Kenya and Pakistan “would need to find alternative sources of financing if the market doesn't re-open for them,” said Thys Louw, portfolio manager for the EMs’ hard currency debt strategy at investment manager Ninety One, in London.

Investors are concerned over refinancing risks for Kenya’s US$2 billion bond maturing in June 2024, said Merveille Paja, EEMEA sovereign credit strategist for Bank of America. “The market expects more solutions to be delivered, either the IMF's resilience and sustainability trust or US$1 billion external issuance or syndication loan,” he told Reuters.

Tunisia's debt crunch comes even earlier than Kenya's: a €500 million overseas bond matures in October and another €850 million is due in February. Ratings agency Fitch sees a default as a “real possibility” for the CCC rated country. Last October, the country reached a staff-level agreement for a US$1.9 billion bailout with the IMF, although Tunisia's President Kais Saied recently gave his clearest rejection yet of the terms of the stalled programme.

Ethiopia, currently negotiating a financing programme with the IMF, has a US$1 billion eurobond issue coming due in 2024. Investors are already offering to extend maturities. Sri Lanka, Zambia and Ghana have already defaulted on their overseas debt and are slowly working towards debt reworkings with creditors.

Bahrain has limited reserves and large refinancing needs, but “strong support from peers such as Saudi Arabia mitigates some of this risk”, according to an ING report.


Pandemic depleted forex reserves of most emerging economies

Most developing economies had lower foreign exchange reserves at the end of 2022 than they did at the beginning of the Covid-19 pandemic, according to a recent fDi Markets analysis of central bank data from 75 countries collected via Haver Analytics.

Import cover ratios — a standard comparable measure of foreign exchange reserves — fell by 25% or more at 39 of the countries.

Bolivia saw the sharpest decline – of 88% - in its forex reserves, followed by Sri Lanka, Lebanon and Pakistan, which all saw a decline of at least 75% since March 2020. In the Kyrgyz Republic, the decline in forex reserves was aggravated by the fall in remittances from Russia.

The depletion of reserves limited the ability of these countries to finance their fiscal deficits and imports of food, fuel and other essential goods. Countries bucking the trend were led by Ecuador, Bosnia, Bahrain, Nigeria, Montenegro and Côte d’Ivoire, which were all able to increase their reserves over the same period.

While in Ecuador and Côte d’Ivoire the rise started from a very a low base, the International Monetary Fund (IMF) found that a current account surplus, public sector borrowing and resilient FDI had an impact, as well as higher oil prices which helped boost the export earnings in US dollars.

Gabriel Sterne, the head of global emerging market research at Oxford Economics, said dwindling forex reserves highlight that “crisis resolution policies are themselves in the midst of one of the biggest crises since the formation of the IMF and World Bank at Bretton Woods in 1944.

Current efforts to help countries like Sri Lanka and Zambia “should provide clues as to when resolution policies can provide impetus to rebuilding FX reserves and recoveries more generally in these economies,” added Sterne.


Indonesia and US to explore limited free trade deal on critical minerals

Indonesia is to propose a free trade agreement (FTA) for some minerals shipped to the United States so that companies in the electric vehicle (EV) battery supply chain operating in the US can benefit from America’s tax credits.

Indonesia does not have an FTA with the US, but its nickel products have increasingly become important in the supply chain. The Southeast Asian country aims to leverage its nickel reserves, the world's biggest, to attract investment from battery and EV makers, including US companies such as Tesla and Ford.

Washington has issued a new guidance for EV tax credits under the Inflation Reduction Act (IRA), requiring a certain value of battery components to be produced or assembled in North America or a free trade partner. The rules aim to weaning the US off dependence on China for the development of its EV battery supply chain.

Asked about the latest guidelines of the IRA, Indonesia’s coordinating minister of maritime and investment affairs, Luhut Binsar Pandjaitan, who has led efforts to attract US companies, told a news conference that Jakarta will propose an FTA with Washington.

“We do not have an FTA with them,” said Luhut. “Now we’re proposing a limited FTA with them.” He will meet with Ford and Tesla executives to discuss the proposal when he travels to the US this week.

Luhut's deputy, Septian Hario Seto, said the FTA proposal, which was still at an early stage, will likely be similar to the one the US signed last month with Japan for the critical mineral trade. The swiftly negotiated trade deal on EV battery minerals covered  lithium, nickel, cobalt, graphite and manganese.

"It's the same in essence, that for critical minerals there will be free trade with requirements on processing, such as for nickel, aluminium, cobalt, copper," he said.

Since Indonesia banned exports of nickel ore in 2020, many Chinese companies invested in refining facilities, including high pressure acid leach (HPAL) plants, that produce mixed hydroxide precipitate, a material extracted from nickel ore used in EV batteries.

Last month, Ford signed an agreement with an Indonesian unit of Brazilian nickel miner Vale and China's Zhejiang Huayou Cobalt to partner in a US$4.5 billion HPAL plant in Indonesia's Sulawesi island.

Luhut led an Indonesian delegate last week on a trip to China to promote investment opportunities. Seto said officials will hold talks with Chinese EV company BYD Group in May on potential investment. He declined to comment on the progress of talks with Tesla, citing a non-disclosure agreement.

Last November, Indonesia was reported to be keen to set up an Opec-like body for the world's main nickel producers.


Tunisia plans to join BRICS emerging economies bloc

Tunisia says that it intends to join the BRICS countries bloc of the five emerging economies of Brazil, Russia, India, China, and South Africa.

Mahmoud bin Mabrouk, spokesman for the pro-presidential July 25 Movement in Tunisia and pro-Tunisian President Kais Saeid, said that his country was applying for membership.

“We will accept no dictates or interference in Tunisia’s internal affairs. We are negotiating the terms, but we refuse to receive instructions and the EU’s agenda,” said bin Mabrouk in remarks to the Arab News Agency.

Saied had earlier expressed rejection of what he described as “dictates” of the International Monetary Fund (IMF) to grant Tunisia US$1.9 billion in loans.

Mabrouk described the BRICS nations as “a political, economic and financial alternative that will enable Tunisia to open up to the new world.” He stressed that Tunisia's accession to the group would give it major economic gains, which would positively affect the social conditions in the country.

In 2018, Tunisia signed an agreement to join the “Belt and Road” initiative set up by China in 2013.

Bin Mabrouk went on to say: “After Algeria announced that it will join the group, we will also announce our intention to join BRICS.” Algeria had earlier announced plans to join the BRICS group next year.

Several other countries have expressed either an intention to join BRICS or interest in possible membership as data suggests that the gross domestic product (GDP) of BRICS countries, as measured by purchasing power parity (PPP), has edged ahead of that of the G7’s members.

Reports suggest that the share of GDP of G7 nations based on PPP, reduced from 50.42% of world GDP in 1982 to 30.39% in 2022, while that of BRICS nations increased from 10.66% in 1982 to 31.59% in 2022.

According to the analysis the share of the BRICS nations in global GDP based on PPP, equalled that of G7 nations in 2020, at the onset of the pandemic and had surpassed it within two years.


FedEx targets US$4 billion in cost cuts

US multinational package handling group Federal Express (FedEx) announced plans to cut costs by U$4 billion that include following rival UPS by combining its two main delivery networks into one.

The courier has for decades operated an express package business separately from its ground unit, which FedEx acquired in 1998 and depends on third-party contractors to make the last-mile delivery of parcels. As of June 2024, it will be “a single company operating a unified, fully integrated air-ground network” as part of its wider plan to cut US$4 billion in permanent costs by the end of its 2025 financial year.

The move to integrate FedEx Ground, its outsourced package delivery arm, with the FedEx Express overnight delivery business comes almost a year after activist investor D.E. Shaw, who won two additional board seats, called out for change, Reuters reported. “We are excited to announce that we are moving forward as one FedEx team. Our new operating structure will provide greater flexibility, efficiency, and intelligence,” the company tweeted last week.

The US$4 billion cost-saving measures will be achieved through three key areas, including US$1.2 billion in Surface Network, US$1.3 billion in Air Network and International, and US$1.5 billion in General and Administrative expenses, according to the company. 

Incoming Chief Executive Officer Raj Subramaniam has been under pressure to increase FedEx’s profit margins. Last month, the company said that it planned a 10% reduction in its director and officer positions as part of a broad downsizing effort that has resulted in a reduction of 12,000 workers since June. It also said that FedEx was already on track to hit US$1 billion in permanent cost reductions in the financial year to May 31.


IFC, HSBC and Standard Bank invest in avocados

To support the growth of the avocado industry in Africa, Asia, South America, and Europe, the International Finance Corporation (IFC), HSBC Bank and Standard Bank are investing in Westfalia Fruit International Limited to help the company expand sustainable avocado production at its existing facilities and explore opportunities in new markets.

The trio have each invested US$100 million for a combined US$300 million investment in South Africa’s Westfalia, supporting its strategy to develop new orchards and nurseries in Colombia, India, Mexico, Mozambique, Peru, and South Africa. Westfalia also plans to upgrade its packing, ripening and storage facilities in Africa, South America, and Europe to improve access to markets.

As part of its strategy to become carbon neutral by 2030, Westfalia will continue to introduce climate smart growing techniques that conserve energy and water and reduce pesticide use. Westfalia will also use drought and disease resilient varieties to address the impact of climate change.

“The investment will enable Westfalia to continue to grow its business, strengthen value chains to sustainably produce and source quality avocados and improve access to export markets to meet the growing demand for the fruit,” said Alk Brand, Group Chief Executive Officer, Westfalia Fruit Group. “The partnership with IFC, HSBC and Standard Bank will contribute to our efforts to enhance sustainable farming practices, create jobs in the communities where we operate and support economic growth.”

Samsung Electronics expands B2B online store to 30 countries

South Korean multinational Samsung Electronics has opened a new online store for its business-to-business (B2B) clients in Germany, and plans to expand it to 30 more countries. The B2B online store is a service within providing products, solutions and purchase benefits for small and medium-sized businesses (SMBs).

The Samsung B2B online store accepts various payment options for businesses, such as instalment payments and invoice payments. Customers can benefit from exclusive corporate-only promotions, discounts on the total purchase amount and technical support. They can also shop from the company’s diverse product portfolio, ranging from TVs, monitors, air conditioners, and refrigerators to mobile products such as laptops, tablets, and mobile phones.

Samsung Electronics launched its B2B online store in October 2021 in Australia, France, Turkey, the UK, and the US and the service has since expanded to 30 countries across Europe, Southeast Asia and the Middle East. Company officials said that the key elements to the expansion of B2B online stores are open accessibility, simple purchase process, and a variety of payment methods specialised for SMBs.

The average number of newly signed-up members globally has increased by 100% and the sales on the B2B online stores have doubled in growth as of 1 February 2023, according to the press release. Based on these achievements, Samsung Electronics plans to grow its online B2B retail footprint further to maximise the benefits and services aimed specifically at SMBs.

In a separate announcement, the company said that it will cut back on memory chip production, as it faces a sharp decline in global demand for semiconductors that has sent prices plunging.

The world’s biggest memory chip maker said it would make a “meaningful” cut to chip output after sales dropped sharply and it flagged a 96% drop in first-quarter profits, worse than expected. The fellow South Korean firm SK Hynix and Micron Technology of the US have also reduced production.

“Samsung talking about production cuts is evidence of how bad the current slump really is,” said Greg Roh, the head of research at Hyundai Motor Securities.

Texas proposes its own gold-backed digital currency

Texan senators have introduced a Bill that would require the state comptroller to establish a digital currency that is fully backed by gold.

The US state would hold gold backing the currency in trust on behalf of the digital currency holders. A gold-backed digital currency would create an alternative and allow individuals and businesses to avoid central bank digital currencies (CBDCs).

Bills have been introduced in the Texas House and Senate that propose the creation of a state-issued, gold-backed digital currency, reports the website

Enactment of this legislation would create an option for people to transact business in sound money, set the stage to undermine the Federal Reserve’s monopoly on money and create a viable alternative to CBDCs.

Republican Senator Bryan Hughes introduced Senate Bill 2334 on March 10 and fellow Republican Mark Dorazio introduced a companion, House Bill 4903 the same day. The legislation would require the state comptroller to establish a digital currency both backed by gold and fully redeemable in cash or gold as well. The comptroller would also be required to create a mechanism to use this gold-backed digital currency in everyday transactions.

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