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Riksbank is ahead of the ECB with interest rate cut – Industry roundup: 9 May

Sweden leads the way with first interest rate cut since 2016

Four weeks ahead of the European Central Bank’s (ECB) next interest rate decision on 6 June – widely expected to be a rate reduction - Sweden’s central bank has cut its benchmark interest rate for the first time in eight years.

Acting before the neighbouring euro zone in a bid to revive Sweden’s recession-hit economy, the Riksbank in Stockholm lowered its policy rate by a quarter point to 3.75% and said two further rate cuts could follow in the second half of the year.

The move makes the Swedish central bank the second among its developed economy peers to embark on post-pandemic easing after the Swiss National Bank (SNB) lowered its main policy rate in March, by 25 basis points (bps) to 1.5%. It offers further evidence of how approaches are differing as the US Federal Reserve’s plans to cut rates appear to be delayed by stubborn inflationary pressures and a thriving economy.

The Swedish krona fell on Wednesday after the decision, sliding as much as 0.6% to hit the day’s low of 11.7561 per euro. The moves put the currency closer to the weakest level of the year, of 11.7709, reached in late April.

“We have come a long way, but I will never say that we have defeated inflation because my job is to always be vigilant,” Riksbank Governor Erik Thedeen told reporters . “There is room to act independently, and we have to use that because our mandate is to bring Swedish inflation to 2%.”

Two in three economists surveyed by Bloomberg had expected the Riksbank to cut, while the remainder predicted that borrowing costs would be kept unchanged.

Sweden’s choice to reduce rates now signals that the domestic situation, with subsiding inflation and a sputtering economy, takes precedence over any concern that moving ahead of bigger peers will lead to another bout of krona weakening that in turn would fuel import prices.

Thedeen and his colleagues sought to temper expectations by charting a gradual path to easing, with the no move foreseen at the next meeting in late June, as they stressed that price increases could reaccelerate.

“The risks that may cause inflation in Sweden to rise again are primarily linked to the strong US economy, the geopolitical tension and the krona exchange rate,” the bank said. “The adjustment of monetary policy going forward should therefore be characterized by caution, with gradual cuts to the policy rate.

In its commentary, ING Think stated: “The fact that the Riksbank has chosen to move today – and crucially ahead of the ECB – is telling. The Riksbank has been very sensitive to the value of the currency and this was one of the principal reasons for hiking aggressively over the past couple of years. Policymakers went as far as saying that they needed to stay out in front of the ECB during the hiking cycle.

“These fears about the krona have clearly not evaporated entirely. Governor Thedeen has repeatedly signalled that a weaker currency is the major risk to inflation, a line repeated in the latest policy statement. Presumably for this reason, the committee is pushing back on the idea that it could cut rates at back-to-back meetings, continuing to signal its intention to cut rates just twice more this year.”


South Africa post-election prospects assessed

The outcome of the 2024 general election in South Africa on 29 May is unlikely to shake up the status quo and lead to any shocks for the economy, predicts Oxford Economics Africa.

However, for the first time in 30 years the country’s governing party faces an electoral crisis with expectations that its support will dramatically reduce and it may lose its parliamentary majority after this month.

But even as the African National Congress (ANC) – which has been in power since the end of apartheid in 1994 – struggles to attract voters, analysts say it has one key advantage that could help it stay in power: a splintered and disorganised opposition.

The research group says that in the scenario ANC wins between 46% to 49% of the national vote in three weeks’ time, it is likely to partner with smaller parties to get over the line. Fears that it might shake up the status quo with ties to parties like uMkhonto weSizwe (MK) or the Economic Freedom Fighters (EFF) are overstated, it adds.

This outcome is not expected to shock the rand, as the country is not likely to deviate significantly from current ANC policy positions—however, the party would still need to compromise a lot more than it has been used to.

The ANC received 57% of the vote in the previous general elections in 2019 but its support is expected to decline due rising unemployment, a persisting power crisis and allegations of growing misgovernance.

According to a recent opinion poll by market research firm Ipsos, the ANC’s support now sits at 40.2%. The same poll shows marginal growth for three of the country’s top opposition parties – the EFF, the Democratic Alliance (DA) and Inkatha Freedom Party (IFP). Other opinion polls also indicate that the ruling party may lose the majority needed to form a national government.

Should the ANC fall short of 50% at a national level, the small parties that it would pull in are likely to be the IFP, the Patriotic Alliance (PA), African Independent Congress (AIC), Good, and Al-Jama’ah.

“Its national-level coalition agreement obliges the ANC to give a handful of ministerial positions to the smaller parties but requires no drastic move away from the ANC’s policy direction as adopted at its last National Conference,” said Oxford Economics.

However, the ANC will find it more difficult to pass legislation without an outright majority. “It would need to compromise more often with its coalition partners and risks being removed from government should its coalition partners defect,” said Oxford Economics.

Should the ANC enter a national coalition with minor political parties, South Africa’s political-economic risk profile will remain relatively unchanged from the current baseline or pre-election baseline, it adds.

It also forecasts that the national election result “will not shock the rand, but lofty international oil prices and El Niño will keep inflation high (forecast is 5.2% in 2024), and it will decline only slowly in the following years.” The group also expects the South African Reserve Bank (SARB) to hold interest rates until the third quarter of this year. The bank increased rates by 475 basis points (bps) between September 2021 and May 2023, from 3.50% to 8.25%. Its next rate decision is scheduled for 30 May, a day after the elections.

Supply-side limitations are expected to continue to limit real grross domestic product (GDP) growth to 0.7% in 2024 and 1.4% in 2025 due to logistical constraints, electricity loadshedding, and weak consumer spending which is being constrained by high unemployment and elevated interest rates.

“Muted inflation, soft consumer demand, a diversified economy, and orthodox monetary policies [will] keep market risks relatively low compared to the rest of Africa,” said Oxford Economics.

Additionally, Oxford Economics “forecast government debt to continue to rise and peak closer to 88% of GDP over the long term.”

“South Africa’s business and operational environment compares favourably to the rest of the continent and should remain relatively similar should the ANC stay in power in a coalition government,” of this nature, it added.


Global debt rises to record high of US$315 trillion

Global debt has surged to a record high of US$315 trillion, reports the Institute of International Finance (IIF), which warns that China and India have continued their borrowing binges despite the risks posed by geopolitical tensions and higher interest rates.

The Washington, DC-based global association for the financial services industry warned that post-pandemic efforts to reduce debt were winding down as governments cut taxes and increase spending amid a record number of elections this year. 

The IIF said the increase was “primarily driven by emerging markets”, where debt surged to “an unprecedented high of over US$105 trillion”. The figure is US$55 trillion more than a decade ago, with China, India and Mexico seeing the biggest increases so far this year.

China is already dealing with a properrty crisis that threatens to exert a drag on economic growth for years to come, while the International Monetary Fund (IMF) has also warned that India’s debt pile could exceed the size of its economy by the end of the decade as it spends billions of pounds each year dealing with natural disasters.

IIF analysis showed total world debt rose by US $1.3 trillion to a new record high of US$315 trillion in the first three months of 2024 as global debt-to-GDP “resumed its upward trajectory” after falling for a sustained period after Covid lockdowns. The IIF added that increases in government debt drove the rise among advanced economies in Q1 as stubborn US inflation threatens to keep interest rates higher for longer.

“Given 'sticky' US inflation and an expected delay to Federal Reserve rate cuts, a dollar rally ... could once again bring government debt strains to the fore, particularly for developing countries,” the IIF said in its latest debt monitor.

It warned that US President Joe Biden was presiding over an ever-rising debt pile, even as households in the world’s biggest economy were paying back money owed on personal loans and credit cards.

“While the health of household balance sheets should provide a cushion against higher for longer rates in the near term, government budget deficits are still higher than pre-pandemic levels and are projected to contribute around US$5.3 trillion to global debt accumulation this year,” it said.

Last month, the International Monetary Fund (IMF) urged governments around the world to resist the temptation to cut taxes or raise spending in the hope of winning votes in the “biggest-ever election year”.It said: “In this great election year, governments should exercise fiscal restraint to preserve sound public finances.”

The IIF banking lobby group also warned that “rising trade frictions and deeper geoeconomic fragmentation could diminish the external debt servicing capacity of emerging markets” as many developing economies struggle with high dollar denominated debts.

It said: “Although the relatively sanguine near-term global economic outlook is a positive factor for debt dynamics, stubborn inflation, particularly in the US, continues to pose a significant risk, putting upward pressure on global funding costs.

“Rising trade friction and geopolitical tensions also present significant potential headwinds for debt markets. As China aims to become the world’s leading supplier of new clean energy technologies, tighter supply chain constraints, fuelled by industry-specific protectionist policies, could keep both inflation and interest rates above pandemic levels. Such a scenario would undermine trade and investment flows and further reduce the external debt servicing capacity of emerging and frontier markets.”


Company chiefs say sustainability a higher priority than 12 months ago

Sustainability and climate issues are moving back into focus for senior executives globally, with more than half of CEOs reporting that sustainability is a higher priority now than it was a year ago, and decarbonisation found to be the top long-term strategic priority for CEOs, according to a survey by global professional services firm EY.

For the study, EY’s CEO Outlook Pulse Survey, EY surveyed 1,200 CEOs from large companies across 21 countries and five industries, as well as 300 institutional investors in 21 countries. The surveys were conducted by FT Longitude on behalf of EY.

According to the survey, 54% of CEOs reported that sustainability is being given a higher priority by them and their boards than it was 12 months ago, while 23% said that sustainability has been deprioritised at their companies, mostly due to challenging economic or financial circumstances.

By region, respondents in the Americas were the most likely to report that sustainability has become a higher priority, at 62%, and the least likely to report de-prioritisation, at 16%, compared with 51% increasing prioritisation and 27% decreasing in Europe, and 49% increasing and 25% decreasing in Asia-Pacific.

The survey also found that sustainability-related issues are more of a long-term focus for CEOs, with only 16% including decarbonisation of business models and achieving net zero as a top-three strategic priority over the next 12 months, compared with 47% prioritising investing in technology and AI to improve growth and productivity in the top spot. Over a three-year horizon, however, decarbonisation was the most-often cited strategic priority, at 43%.

The increasing prioritisation – particularly over longer-term horizons – comes as CEOs reported feeling more confident in their business prospects, with 60% saying that they are more optimistic about their companies’ revenue growth, and 65% more optimistic about profitability, compared with 12 months ago.

The findings align with those of a 2023 EY survey of senior corporate finance leaders, which found that while sustainability remained as a top investment priority, it was also the most likely area to experience near-term budget cuts in the current inflationary and geopolitically unstable environment in order to meet short-term earnings goals.


Argentina introduces 10,000 peso banknote

Argentina launched a peso (ARS) 10,000 banknote this week, worth the equivalent of about US$11 and five times the face value of the previous biggest ARS2,000 bill.

The new note, which will allow people to carry around fewer bills, was made available at banks and ATMs from Tuesday, the South American country's central bank said in a statement. With no end in sight, the Central Bank of Argentina (BCA) said an ARS20,000-note will be issued later this year.

Argentina is in the grips of an economic crisis that has seen annual inflation nearing 290% as poverty affects about half the population.

The ARS2,000-bill was launched just a year ago, double the then biggest note of ARS1,000 -- of which one would need about 15 to pay for an average restaurant dinner for one today.

The issuing of high-domination banknotes is nothing new in Argentina, which had a bill with a face value of ARS1,000,000 in the 1980s.

In a commentary on the country, the global treasury intelligence service CompleXCountries said that Argentina’s government had enacted a series of shock measures since Javier Milei’s election victory late last year. “In December 2023, he devalued the Argentine peso by 50%, and instituted a series of measures which are intended to free up the currency market and restore convertibility of the peso. These drastic actions have also pushed the inflation rate up from nearly 100% annualised to close to 200% - though one peer reported this is now decreasing.

“The government has sold dollar denominated bonds, with a maturity of three years, known as BOPREAL – bonds for the reconstruction of a free Argentina. There have been three issues to date: the first one was a flop, but interest has been gradually increasing for the subsequent ones.”


India's banks plan to step up IT spending

India's banks plan to increase their technology spending to around 10% of their operating expenses to keep up with the surge in digital transactions as the central bank intensifies scrutiny on frequent outages, local reports suggest.

Indian banks typically spend between 6%-8% of total operating expenditure on technology, well below the global average of 10%-12%.

Increased scrutiny of banks' IT systems by the Reserve Bank of India (RBI) over the past year and the recent sanctions imposed on Kotak Mahindra Bank due to technology-related deficiencies are forcing lenders to take the regulator's concerns more seriously.

Two weeks ago the RBI asked Kotak Mahindra to cease and desist from issuing new credit cards, onboarding new customers through online and mobile banking channel with immediate effect after it found “serious deficiencies and non-compliances” in certain areas of its operations.

The RBI has frequently directed banks to reduce tech-related glitches that disrupt customers' ability to transact, five bankers said, declining to be identified as they are not authorised to speak to the media. As operating expenses have grown over the years, Kotak Mahindra spent “significantly” more on technology, claimed its MD and CEO Ashok Vaswani.  However, “what is evident, is that our efforts have fallen short of what the regulator expects,” he conceded.

India's banking and investment services firms were estimated to have spent US$11.3 billion on technology in 2023, according to latest available data from Gartner.

“We believe in today's world, systems cannot be down and you have to create online, real-time systems to match the capabilities,” said Sumant Kathpalia, CEO at private lender IndusInd Bank which currently spends about 8%-10% of cost-to-income on IT-related expenses. “We have invested and will continue to invest in these.”

The increased investment will go towards upgrading core systems which form the backbone of all banking operations, and on better monitoring of digital frauds, protecting customer data and tech-driven processes for customer verification, bankers said.

Other private lenders like ICICI Bank, Axis Bank, Yes Bank, and Kotak Mahindra Bank, at recent post earnings events said they will increase IT spending to deal with rising digital activity, including transactions via India's home-grown payments system Unified Payments Interface (UPI).


South Korea is fourth member of Digital Economy Partnership Agreement

The three founding members of the Digital Economy Partnership Agreement (DEPA) have announced the addition of South Korea as the first new member. 

DEPA was set up by Chile, New Zealand, and Singapore in June 2020 and aims to provide its members with disciplines on digital trade to boost the growth of the digital economy. It also offers a platform for collaboration on projects of mutual interest.

South Korea formally applied in September 2021, while discussions on its accession led by Singapore were completed in June 2023.

Chile Undersecretary for International Economic Relations Claudia Sanhueza noted that Korea is the first member to join through an accession process.mIn a joint statement, the founding members said DEPA’s expansion “will add to the heft of the agreement and provide greater opportunities for collaboration amongst parties.”

Trade Minister Cheong Inkyo assured that Korea “will make efforts for the expansion of DEPA while acting as a bridge between founding and new members as the first non-founding member country.”

He also said his country “will lay the foundation for cooperation on the digital economy between members to ensure DEPA will serve as a platform to enhance economic partnership.” 

New Zealand Minister for Trade Todd McClay acknowledged Korea’s experience in the digital economy, adding that its accession demonstrates DEPA’s value as a pathfinder agreement for economies with high ambition for digital trade.

Meanwhile, Singapore’s Minister for Sustainability and the Environment and Minister-in-charge of Trade Relations Grace Fu said she looks forward to deepening collaborations on the digital economy with Korea.


GAFI, Crédit Agricole Egypt collaborate to attract foreign investment

Egypt’s General Authority for Investment and Free Zones (GAFI) and Crédit Agricole Egypt have signed a memorandum of understanding (MoU) to support GAFI’s strategy of attracting foreign direct investments (FDI) to Egypt.

“GAFI is the premier destination to which investors and investment turn towards in Egypt. thus, Egypt becomes a strategic partner for investors and a leading regional centre in attracting investments in Africa and the Middle East,” states the Authority’s website.

The signing ceremony for the MoU, attended by officials from both entities, “marked an important step in fostering economic growth,” a release noted.

Hossam Heiba, CEO of GAFI, said that Crédit Agricole Egypt plays a crucial role in attracting foreign investors to Egypt through the French banking group’s extensive international network, which serves individuals and investors in 46 countries worldwide. This collaboration aligns with the Egyptian government’s plan to increase European investments, with the Egypt-EU Joint Investment Conference scheduled for 29-30 June.

Under the MoU, Crédit Agricole Egypt will continue its efforts to introduce global clients, supporting business opportunities in Egypt. The bank’s role includes facilitating communication between GAFI and its global clients. Additionally, Crédit Agricole Egypt will assist GAFI in organising meetings with clients abroad who are interested in Egypt’s growing business potential.

This potential “is driven by factors such as economic diversification, strategic location, a vast consumer market, and national mega-projects like the New Administrative Capital and the Suez Canal Economic Zone.”

GAFI, in turn, “will provide foreign investors with comprehensive information on investment opportunities in Egypt, focusing on priority target sectors aligned with the government’s plan. Heiba emphasized the government’s belief in the vital role financial institutions play in stimulating investment across various sectors, contributing to a more sustainable business environment in Egypt.”


Paymentology and Diamond Trust Bank drive embedded finance in Kenya

Paymentology, the UK-based global card issuing and processing platform, announced a strategic partnership with Diamond Trust Bank (DTB), a tier one East African commercial banking franchise.

The partnership “is aimed at driving financial inclusion in Kenya through the embedding of financial services, and deployment of Cards-as-a-Service (CaaS), for both licensed and unlicensed entities.”

Operating across Kenya, Tanzania, Uganda, and Burundi, DTB offers “innovative banking and insurance solutions to retail, SME, and corporate customers, and is deeply committed to driving sustainable economic growth in the markets it serves.”

A release stated: “By combining Paymentology’s technological expertise and advanced next-generation platform with DTB’s extensive market presence and regulatory compliance, the two organisations are providing an aggregated card solution to fintechs and any other non-financial organisations that are looking to embed a CaaS programme as part of their proposition in line with regulatory framework.

“Paymentology, leverages its technology and robust payment card solutions to empower clients in the creation, distribution, and management of cards. Conversely, DTB, a fully licensed issuing bank compliant with banking laws and regulations, holds the distinction of a Card Association Issuer license, enabling it to establish and sponsor BINs (Bank Identification Numbers) for card issuance.

“Now more than ever, trust and convenience are paramount for consumers and businesses alike. As more and more individuals rely on their preferred brands for seamless transactions, the provision of physical and virtual cards emerges as the next logical step to enhance checkout experiences and foster loyalty through rewards programmes.”


JBIC leads US$355 million loan for Chile copper mine

The Japan Bank for International Cooperation (JBIC) has signed a US$248 million loan agrreement with Chilean copper minining firm Compania.

JBIC said the loan is co-financed with Mizuho Bank, Sumitomo Mitsui Banking Corporation and MUFG Bank, bringing the total co-financing amount to US$355 million.

The loan is intended to finance the funds necessary for Compania, which is invested in by Nittetsu Mining Co., Ltd. (Nittetsu Mining) and the Chilean company Fondo de Inversion Privado Talcuna, to develop the Arqueros copper mine in the Coquimbo Region of Chile.

“In the current trend of decarbonisation, demand for copper is expected to increase globally because it is an indispensable metal for electric vehicles, renewable energy facilities, and equipment,” said the JBIC. “Since Japan relies solely on imports for copper concentrates, it is essential to secure a long-term, stable supply of copper resources.

“[Japan’s] Strategic Energy Plan, which was approved by the Cabinet in October 2021, set the goal of achieving at least 80% self-sufficiency by 2030 for base metals, including copper, and it established the policies of strengthening support for Japanese refineries to reduce the procurement risks for ores and establishing resilient supply chains. With the aim of increasing the self-sufficiency ratio of copper concentrate, Nittetsu Mining intends to develop and operate this project by using its knowledge and expertise of mining and mineral processing it has cultivated through the Atacama copper mine project in Chile.”

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