UK regulator makes ‘final call’ to switch off Libor

Markets participants have a month to end any remaining use of the London Interbank Offered Rate, aka Libor, said the UK’s Financial Conduct Authority (FCA).

For more than 40 years a key benchmark for setting the interest rates, Libor was charged on adjustable-rate loans, mortgages and corporate debt and reflected the cost of lending between banks, using quotes from panels of banks in 35 variants across five currencies.

Libor’s reputation was tarnished when banks were found guilty of attempting to rig the rate – although recently it has been alleged that banks were pressured to manipulate both the Libor and Euribor rates at the height of the global financial crisis in October 2008 through a co-ordinated drive by national central banks and governments,

Most quotes have already been scrapped and remaining dollar quotes end on June 30, replaced by "risk free" rates compiled by central banks such as the US Federal Reserve in the biggest switch in markets for decades, raising concerns about pricing bank assets during market shocks.

“This is the last remaining Libor panel and its end marks another critical milestone in the transition away from Libor,” the FCA said in its "final messages" on the rate. “Firms must continue to actively transition contracts that reference Libor to appropriate, robust reference rates, and we continue to expect firms to deliver demonstrable progress.”

Market participants were given permission to continue using dollar Libor in new contracts on a limited basis, but the FCA said that this would end on July 1. The one, three and six-month dollar Libor rates only will be published in a “synthetic form” for legacy contracts from July 3 to end-September 2024.

“Synthetic Libor settings will not continue simply for the convenience of those who could have transitioned their contracts but have not done so,” the FCA said.

Separately, US securities clearing and settlement firm DTCC said it could be challenging for firms to meet the June deadline given there could be over 150,000 legacy contracts that may be impacted and require action.

And the Financial Times reports that about half of the US$1.4 trillion US junk loan market is still shackled to Libor just 30 days before the rate is set to expire, with meagre dealmaking activity curbing companies’ ability to split from the lending benchmark and embrace its replacement.

Slower-than-expected progress means that corporate borrowers and the institutions facilitating their switch to the new benchmark face a crunch point, as they strive to push loans over the line before the cut-off, to avoid automatically falling back on to potentially less favourable borrowing terms.

At least US$700 billion worth of lowly rated corporate loans are still priced using Libor, reports the FT citing estimates from industry participants. This is despite years of warnings that the rate will cease this summer. Moody’s puts the percentage outstanding even higher, at approximately 60 per cent, or $900bn, as of May 19 — based on holdings within loan portfolios rated by the agency.

The rest of the market has migrated to the newly accepted benchmark in the US known as “Sofr”, the secured overnight financing rate, and the pace of transition has accelerated in recent months. But the clock is ticking for residual debt to catch up by June 30, with the flow hindered by economic and market strains.

“I expect everyone across the spectrum — banks, law firms, private equity companies and their portfolio companies — everyone will be impacted and busy doing what they can to transition their portfolio of deals by the end of the month,” said David Ridley, partner at law firm White & Case, pointing to “a lot of paperwork”.

 

Eleventh-hour accord on increase to US debt ceiling

The US House of Representatives has approved a deal to allow America to borrow more money, days before the world's biggest economy is due to start defaulting on its debt. The measure easily passed the chamber by a vote of 314-117, despite some defections on both sides.

The Senate must vote on the bill later this week before President Joe Biden can sign it into law. The government is forecast to hit its borrowing limit on Monday 5 June. That leaves little margin for error as lawmakers race to avoid the US defaulting on its US$31.4 trillion (£25 trillion) debt, which underpins the global financial system.

A default would mean the government could not borrow any more money or pay all of its bills. It would also threaten to wreak havoc on the global economy, affecting prices and mortgage rates in other countries.

On Wednesday evening, 165 Democrats joined 149 Republicans in approving the 99-page bill to raise the debt ceiling, allowing it to pass the House by the required simple majority. With Republicans in control of the lower chamber of Congress and Democrats holding sway in the upper chamber and White House, a deal had proven elusive for weeks until President Biden and House Speaker Kevin McCarthy agreed a bipartisan compromise last weekend.

President Biden thanked the Speaker, saying he had negotiated in good faith. “Neither side got everything it wanted,” he said. “That's the responsibility of governing.”

The agreement suspends the debt ceiling, the spending limit set by Congress which determines how much money the government can borrow, until 1 January 2025. The legislation would result in US$1.5 trillion in savings over a decade, the non-partisan Congressional Budget Office stated earlier this week.

But the bill's passage had been in jeopardy right up to the deadline after lawmakers from both parties voiced opposition. Ultra-conservative Republicans complained they had secured too few concessions in exchange for raising the debt limit.

 

Emerging Asia “will deliver economic outperformance to 2050”

By 2050, four of the world’s seven largest economies will be in Asia. China looks set to overtake the US as the world’s largest economy by 2035 and India could take fourth place by the early 2030s, according to the abrdn Research Institute (aRI).

Its analysis suggests that Indonesia is set to be the world’s seventh-largest economy by the mid-2040s, with Japan in the fifth spot, meaning Asia will dominate the global economy over the second half of the 21st century. The analysis also shows the Philippines, Pakistan, Bangladesh, and Vietnam are all set to be in the top 25 global economies.

Emerging Asia could account for 58% of global growth by 2050. although this is set to slow from around 2.5% a year to 1.5% a year by 2050; due in part due to less support from population growth in the major economies. The analysis shows Asia could still outperform, due to a more favourable demographic backdrop and the opportunity to play catch up with developed peers.

For example, income levels are still relatively low in many Asian countries, there is still significant potential for workers to move out of agriculture and into more productive manufacturing and service jobs, and many Asian firms have yet to reap the efficiencies of technology and industry-leading processes to boost productivity. The whole of Asia could account for 46% of the global economy by mid-century against the current 35%.

Emerging Asia can also still benefit from a demographic dividend. India and Indonesia are expected to see their populations expand by 253 million and 42 million, respectively, by 2050.

Although in other Asian markets, population growth is less supportive and demographic profiles are less favourable, research shows, other factors should compensate, such as an improvement in dependency ratios – the ratio of workers to non-workers (primarily the case in India, Indonesia, and Malaysia) – and the scope for an improvement in the quality of the workforce through education and skills development.

While Asia may dominate global manufacturing, growth is rotating towards the consumer. Despite pressures in developed markets to reshore jobs, supply chains are too tightly knit to unravel quickly. Furthermore, as urbanisation expands and personal incomes rise, Asia is set to power global consumption of goods and services.

China’s consumer market is already 50% the size of that of the US. By 2050, aRI predicts it could be almost 10% larger at US$25 trillion. India’s consumer market is also set to grow fourfold over the next 30 years. Emerging Asia is predicted to more than double its consumption - by comparison, Euro area consumption is only expected to grow 18% over the same period.

As consumption grows in Asia, spending patterns will increasingly resemble those seen in middle and high-income economies, with more devoted to discretionary spending. A growing ‘silver economy’ of older consumers will amplify this trend, further boosting spending on healthcare and entertainment.

Urbanisation will drive infrastructure demand. With rapid economic development and growing populations, Asia needs more transport, homes, and public-service infrastructure. This demand will drive capital expenditure and economic activity. Less-developed countries, especially those in Asia, are only 40-60% urbanised.

As urbanisation expands, it should drive construction activity and a concomitant rise in economic activity (GDP) – even in those Asian markets where demographic factors are not so supportive. aRI’s calculations suggest almost $1 out of every $2 of global investment will be spent in Asia, and that Asia will account for half of all global investment up to 2050 – potentially US$390 trillion (2015 dollar terms).

 

Soda ash producer WE Soda plans major London IPO

WE Soda, the world’s largest producer of natural soda ash, announced that it plans to apply to list on the London Stock Exchange (LSE).

The company did not give any details on the price or size of the offering. However, reports note that WE Soda is a high-margin business and last year it reported adjusted operating profits of US$892 million on revenues of US$1.77 billion. Initial talk in the City is of a valuation of between £5 billion (US$6.2 billion) and £7 billion, which would put it in the top 75 of the UK’s largest companies.

This would make it London’s largest initial public offering (IPO) this year comes at a time of growing concern that the City is becoming less attractive to international investors who are opting for other markets such as New York.

WE Soda, an extractor of soda ash in Turkey and the US, is a subsidiary of Ciner Group, an industrial and media conglomerate controlled by Turgay Ciner, 67, a UK-domiciled Turkish billionaire. The offering would include existing shares held by Ciner Group, which represent at least 10% of its share capital.

Chief executive Alasdair Warren said: “I believe our combination of unique operating capability, sustainable products and operations, scale and market leadership gives us ‘locked-in’ structural and competitive advantages, which makes for a compelling investment case.

“I am proud of what we have so far achieved, and I am excited about the prospects for our business in the future. We look forward to sharing our story with potential investors over the coming weeks.”

Soda ash is used in glass manufacturing and in other products such as powdered detergents, soaps and rechargeable batteries. It is also used in metallurgical processes, and across the food, cosmetic and pharmaceutical industries.

Susannah Streeter, head of money and markets at UK investment manager Hargreaves Lansdown commented: ‘’WE Soda’s intention to list on the LSE is a boost for the City just as the capital has been left reeling from some high-profile names which have opted for the bright lights of New York instead. By describing the FTSE 100 as being associated with quality and prestige, the company has provided a ray of light for London, with the LSE’s defensive characteristics considered a benefit at a time of uncertainty due to soaring inflation and high interest rates.

‘’The stock market launch of the industrial materials maker will be the FTSE’s first major IPO this year, but although this is a much-needed drop in a parched landscape, it’s still unlikely to lead to a flood of immediate listings due to the still volatile nature of market sentiment. Nevertheless, it brings a wash of confidence to London, and raises hopes that the City can capitalise on the UK’s entrepreneurial activity in the sustainable solutions sector.”

 

Australia's lowest paid workers set for the biggest wage rise in 33 years

Australia's lowest-paid workers can expect a 7% increase in the minimum wage, the biggest increase in 33 years according to the Australia and New Zealand Banking Group (ANZ). The bank’s just-released annual wage review forecasts that the Fair Work Commission (FWC) is about to grant the increase in a landmark judgment.

The increase would give workers on the minimum wage A$56.88 (US$36.80) more a week from July 1, and spare them a cut in real wages. It would also meet calls from Australia’s trade unions and mark the biggest increase since 1990 when the minimum wage rose by 9.2%.

ANZ published its prediction on the annual wage review shortly before official data was released showing a 6.8% inflation rate for April - an increase on the March figure of 6.3%. The bank’s economists Adam Boyton and Catherine Birch suggested the workplace tribunal will heed Prime Minister Anthony Albanese’s call for the minimum wage to match inflation, when a decision is announced on Friday morning.

The federal government has for a second year recommended that “the FWC ensures the real wages of Australia’s low-paid workers do not go backwards,” they said. “Quantified wage increase recommendations from employer bodies, as well as unions, have been higher than last year, suggesting there may be a larger increase this year.”

According to the Australian Bureau of Statistics (ABS), Australia has a national law currently requires a minimum hourly wage of A$21.38 (US$14.21) for both part-time and full-time workers, which compares favourably with both the US minimum hourly wage of US$7.25 and the UK’s rate of £10.42 (US$12.93).

The FWC’s decision directly affects 180,000 workers in the retail, tourism and hospitality sectors. Granting a 7% rise would see those now on A$812.60 a week would get an extra $56.88, taking it to $869.48 or $45,213 a year.

The minimum wage decision usually has flow-on effects for more than 2.67million Australians on national awards. But ANZ argued those on awards were more likely to get a smaller 5 to 5.5% increase, with the FWC mindful about the possible effects of wage inflation. 

“Risks around this are skewed to the downside, as the commission might seek a mid-point between submissions from unions and employers,” said the economists. 

The Australian Council of Trade Unions (ACTU) has lobbied for a 7% increase as employers, represented by the Australian Chamber of Commerce and Industry (ACCI), want it limited to 4%. Last year's 5.2% increase in the minimum wage was the most generous since a 5.7% rise was awarded by the old Australian Industrial Relations Commission in 2006 at the height of the mining boom.

It was also slightly above the 5.1% inflation rate for the March quarter of 2022, which rose to 7% a year later, based on the more comprehensive quarterly consumer price index data from the ABS. 

Meanwhile, Reserve Bank of Australia (RBA) Governor Philip Lowe on Wednesday has told a parliamentary hearing that while wages growth isn't fuelling inflation, pay rises without productivity improvements threaten to keep keep inflation high. 

“Over the last three years, there has been no increase in the average output produced per hour worked in Australia,” he told the Senate economics committee in Canberra. “And that means unit labour costs growth in Australia is quite high. It’s a problem for the country and it’s a problem for the inflation outlook as well.”

 

South African rand hits record low on dollar strength

The South African rand (ZAR) has begun the month by hitting new record lows, extending a hammering from May on the back of souring investor sentiment.

The ZAR fell as low as 19.9075 against the US dollar, worse than the previous record low of 19.8600. In early trading on Thursday, the ZAR traded at 19.8900, more than 0.8% weaker than its previous close.

“The rand remains entrenched in the R19.50/R20.00 range, but short-term risks remain for a breach of the R20.00 level as investor outflows continue and exporter inflows remain limited," Andre Cilliers, Currency Strategist at TreasuryONE, said.

The ZAR endured a torrid May, losing more than 7% against the dollar over the month, as investor sentiment slumped over a raft of factors including a heightened power crisis and US allegations denied by South Africa that it supplied weapons to Russia last year. This made it the worst-performing emerging market currency last month and its slide since the start of the year has only been exceeded by Argentina’s peso (ARS).

Among the factors contributing to the currency’s weakness is the continuing problems of indebted state-owned power utility Eskom, which this week reported that over the 12 months to March 2023 costs to run its diesel-powered units more than doubled as its fleet of coal-fired plants experienced frequent breakdowns.

Eskom paid ZAR21.4 billion (US$1.1 billion) over the period, compared with ZAR10 billion a year before to operate the open-cycle gas turbines intended to run during peak-demand periods, National Treasury said in a presentation to lawmakers.

South Africa’s central bank is working on a contingency plan to ensure the country’s payments system remains in operation in the event the nation’s electricity grid collapses.

The South African Reserve Bank (SARB) and other financial markets regulators including the operator of the Johannesburg Stock Exchange (JSE) are working on the strategy to ensure the orderly closing and reopening of markets, Deputy Governor Kuben Naidoo said earlier this week.

 

First Abu Dhabi Bank and Alfanar launch Saudi supply chain finance programme

First Abu Dhabi Bank (FAB), the United Arab Emirates’ (UAE) largest bank said that it is strengthening its trade product offerings by introducing the Supply Chain Finance (SCF) programme in the Kingdom of Saudi Arabia (KSA), expanding its influence in the region.

Electrical construction products producer Alfanar, as the inaugural local client, gains access to FAB’s on-ground SCF capabilities, marking a significant milestone in their collaboration.

FAB said in a release that its SCF and Receivable Finance (RF) solutions enable corporates to monetise their receivables at competitive rates and get immediate payment, without borrowing funds, thereby supporting corporates, especially in the current scenario of rising interest rates.

Earlier in 2021, FAB launched its fully automated solution in Egypt and has now expanded its trade product suite in KSA by offering SCF and RF solutions.

Fahad Al Juwaidi, Country CEO at FAB, Saudi Arabia said: “At FAB, our mission is to continually expand our regional presence and offer cutting-edge solutions that drive growth for our clients. The launch of our Supply Chain Finance programme in KSA is a significant step forward in our regional expansion strategy. Our state-of-the-art FABeSCF platform and fully automated solutions will provide our clients with a seamless and integrated experience that strengthens connectivity across the entire supply chain.”

 

HSBC uses artificial intelligence for ESG index

HSBC has launched a global Index that uses artificial intelligence (AI) to help measure the improvement of a company’s environmental, social and governance (ESG) credentials and their potential for positive financial performance.

Developed by Arabesque AI and powered by data from ESG Book, the Index has been designed to track the performance of 1000-plus liquid stocks of global companies that are expected to benefit financially from improvements in their ESG risk.

Yasin Rosowsky, co-founder and VP of engineering, Arabesque AI, said: “Based on our back-tested data, tilting investments towards stocks exhibiting ESG momentum showed excess returns per annum versus S&P global benchmarks during the same period. In other words, there is a positive correlation between companies transitioning to more sustainable business practices and their returns.”

ESG Book calculates the ESG score of each constituent of the Index by deploying natural language processing to mine relevant public sources daily, such as ESG-related news and NGO data.

The ‘ESG momentum score’ is then computed by Arabesque AI every six months to determine whether each constituent has improved their ESG credentials. Investors will be able to invest in a range of products tracking the Index, allocating capital toward ‘ESG improvers’.

Patrick Kondarjian, global head of sustainability for markets & securities services, HSBC, commented: “The HSBC ESG Risk Improvers Index enables investors to gain exposure to stocks exhibiting ESG momentum — a useful financial indicator of future performance. This is in contrast to traditional ESG best-in-class, or ESG integration, investment approaches that purely target high ESG ratings - agnostic to whether the stock’s ESG credentials have recently improved or deteriorated.

 

Standard Chartered and Singapore FinTech Association publish blockchain paper

Standard Chartered, together with the Singapore FinTech Association (SFA) as its knowledge partner, have published the ‘Deepening Sustainability with DLT’ paper that explores how different stakeholders can work together to improve payment transparency in supply chains. The paper advances knowledge on complex topics such as Distributed Ledger Technology (DLT) and how it can be used in supply chain payments for corporates, financial institutions and their corresponding ecosystems.

Launched ahead of Ecosperity Week, the paper complements the Bank’s efforts with external partners to address the persistent issues challenging industries with long, complex supply chains, by empowering innovation while embedding sustainability into product lifecycles more effectively. As the demand for sustainable development increases, the finance and banking sector must consider financial innovations that support their clients in achieving greater transparency and access to sustainable production and related payment transactions.

With support from the SFA, the paper highlights case studies where digital currencies have enabled desired sustainability outcomes, while highlighting the key roles that banks, fintechs, corporates and non-governmental organisations can play in creating an ecosystem that is sustainable and future-proof. Importantly, the paper outlines a framework where various blockchain solutions were measured against a set of qualifying criteria to identify the most efficient set of sustainability outcomes.

By presenting achievable solutions which seek to address some of the critical challenges facing the global value chain today, such as traceability and visibility, cash efficiency, and accountability, this can help financial institutions and corporates focus and prioritise their innovation approach on sustainable financial flows.

Philip Panaino, Global Head of Cash, Transaction Banking, Standard Chartered, said: “Many of the markets we operate in rely on supply chain-intensive industries for their continued economic growth – yet these are the same markets where the impact of opaqueness, fragmentation and inefficiencies in global value chains are often most difficult to unravel. Standard Chartered is in a unique position to support the industry’s transition to a more transparent, efficient and secure infrastructure, while also ensuring the sustainability of supply chain payments. Together with the SFA, we hope to raise awareness and understanding of how environmental, social and governance values may be assured with digital currency infrastructure and shared innovation from all stakeholders.”

Shadab Taiyabi, President of the SFA, said: “With companies around the world placing more emphasis on sustainability, the focus on strengthening the resilience of supply chains will not only be an integral part of protecting companies’ growth, but also ensures that they are leaving a positive impact on the environment and society. We see huge potential in Green FinTech and technologies like DLT to break down barriers to sustainable supply chains by enabling greater traceability and visibility.”
 

Sweden's Handelsbanken to sell Finnish businesses for US$1.4 billion

Sweden's Handelsbanken said that it has agreed to sell parts of its Finnish operation to three local companies for about €1.3 billion (US$1.43 billion), equal to the net assets of the divested businesses.

Handelsbanken will also receive a small premium of up to €8.5 million on top of the net asset value, with the deal expected to close in the second half of 2024, it added.

Private customer, asset management and investment services operations were sold to S-Bank, small and medium-sized enterprise operations were sold to Oma Savings Bank and life insurance operations to Fennia, Handelsbanken said.

Oma Savings Bank separately said the deal was “really positive” and would boost the company's position among small and medium enterprises in Finland.

“The growing business volumes further improve OmaSp's cost efficiency and business profitability and has a material impact on the annual profit-making ability,” said Oma CEO Pasi Sydanlammi.