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Russia’s central bank hikes rates to 12% at crisis meeting – Industry roundup: 15 August

Russia’s central bank hikes rates to 12% as rouble sinks

Russia’s central bank has announced a 350 basis points (bps) hike in the benchmark interest rate, hiking it from 8.5% to 12%, following a hastily-convened extraordinary meeting today as Moscow looks to halt a rapid depreciation of the rouble (RUB), which has fallen to its weakest point since just after the February 2022 invasion of Ukraine. The bank explained the reasons behind the increase on its website.

The currency has been steadily losing value since the beginning of the year and fell below the psychologically important level of RUB100 to the dollar on Monday morning.

It has weakened by 26% this year, reflecting a combination of sharply lower export revenues and growing military spending, becoming the third worst-performing global currency in 2023. The decline has led to calls from senior Kremlin officials for higher borrowing costs.

On Monday morning, the Bank of Russia said it saw no threat to the country’s financial stability from the RUB’s fall, blaming the currency’s slide in value on a drop in export volumes and growing internal demand for imports.

However, in the afternoon the Bank made the surprise announcement that its board of directors would meet on Tuesday to discuss the interest rate, with a decision to be published at 10.30am Moscow time.

The rouble has had a period of turbulence since Russia invaded Ukraine in February 2022, dropping to a record low of RUB150 to the dollar two weeks after the start of the war but rallied after the Bank imposed strict capital controls that limited the flow of money out of the country.

By last summer the currency was back at a seven-year high as rising oil and gas prices, partly a result of the invasion, helped Russia raise export revenue while consumer imports fell.

Russian oil revenues have sharply reduced since western price caps and embargos were imposed, while imports have recovered. The government has spent billions on the defence industry to continue the war in Ukraine, with many critical goods still coming from abroad.

The fall in the RUB accelerated after the aborted uprising in June by Yevgeny Prigozhin and his Wagner group of mercenary fighters caused Russians to move money into foreign accounts.

A senior Kremlin aide admitted on Monday that a weak rouble had a “negative effect” on the “population’s real incomes” but said Moscow expected the currency to bounce back shortly.

“The current exchange rate has deviated significantly from fundamental levels, and its normalisation is expected in the near future,” Vladimir Putin’s economic adviser Maxim Oreshkin said in an op-ed for the Tass news agency. “It is in the interests of the Russian economy to have a strong rouble.”

Last week the Russian central bank took steps to stabilise the RUB, holding purchases of foreign currency until 2024 “to reduce volatility”, but the move did not immediately stop the currency’s decline. This has increased concerns among Russian policymakers of the possibility of significantly higher consumer prices.

In the short term, a weaker RUB could help the authorities to fund its extensive war spending. Russia sells its oil in foreign currency and the current exchange will buy more roubles at home. A recent Reuters report stated that Moscow had doubled its 2023 defence spending target to more than US$100 billon (£79bn), a third of all public expenditure.

But the sliding currency could revive memories in Moscow of the battering the RUB took during the 1998 Russian financial crisis and has already led to rare public criticism of the central bank.

At the start of 2014 a dollar bought less than 33 roubles, but the currency dropped sharply after Russia covertly invaded the eastern parts of Ukraine and annexed Crimea.

“The weakening of the rouble is the result of the international screws tightening around the Russian economy, but also the cost of keeping the economy going,” said Erik Meyersson, chief emerging-market strategist at SEB AB in Stockholm. “Nobody wants to hold roubles, and the limited supply of foreign exchange from exporters weighs on the currency.”

At the end of February 2022, days after Russian troops invaded Ukraine, the central bank more than doubled the interest rate from 9.5% to 20% but the emergency move was temporary and reductions soon followed. Back in December 2014, fears that falling oil prices would impact on the economy prompted a 6.5bps increase, from 10.5% to 17%.


Japan’s economy grew by 1.5% in Q2

Japan's economy grew 1.5% in the three months to June according to official data, beating expectations on the back of strong exports.

The average forecast for quarter-on-quarter growth in the world's third-largest economy had been 0.8%, according to Bloomberg News.

The data, released by the Cabinet Office, means the economy grew an annualised 6.0%, twice the market expectation of 2.9%, giving Japan three straight quarters of growth.

The data, however, also revealed the continued weakness of domestic demand as families struggle in the face of raising prices.

"Japan's exports have recovered as the supplies crisis eased for the auto sector while the yen's depreciation provided support," Ryutaro Kono, chief economist at BNP Paribas, wrote in a note issued before the release of the data.

Hiroyuki Ueno, senior economist at SuMi TRUST, also said pent-up demand from the pandemic and an increase in capital investment were boosting the economy.

"The hospitality sector is expected to remain a driver of economic growth due to the increase in inbound tourism, as the pandemic is now in the rearview mirror," he wrote in a report ahead of the release of the data.

"Although the number of inbound visitors to Japan has not yet returned to pre-pandemic levels, the per capita consumption of tourists during their stay in Japan has increased, partly due to the weak yen," he wrote.

Japan is also reaping the benefits of continuing demand for products - particularly cars in key markets, helped by a weaker yen which has made the cost of its exports cheaper, said Susannah Streeter, head of money and markets at UK financial services group Hargreaves Lansdown.

“That’s helped boost growth in the country by more than expected, with GDP growing at an annualised rate of 6% in the April-June period, staving off worries that it may be battered by global recessionary headwinds. But the Japanese consumer remains wary, with domestic demand weaker as the cost of imports has surged.”


Argentina devalues and lifts interest rates after far-right election win

Argentina’s central bank devalued its currency, the peso (ARS), by nearly 18% and hiked its benchmark interest rate by 21 percentage points to 118% on Monday following a shock primary election win by far-right libertarian Javier Milei.

The moves were a bid by the government to calm markets in the wake of the Argentinian congressman’s surprise victory, which gave him the largest share of votes in the country’s presidential primary election at roughly 30%, far exceeding forecasts.

Markets had anticipated favourable results for moderate candidates. Argentina’s presidential election will be held in October. Argentinian stocks and its sovereign dollar bonds also moved lower on Monday.

The Central Bank of the Argentine Republic that the ARS would be held at 350 to the dollar until the October vote.

Milei, riding on a wave of popular discontent, has pledged to abolish the Bank and dollarise Argentina’s economy. He has also advocated for sharp spending cuts.

Although still Latin America’s third-largest economy, Argentina has been mired in economic and financial crisis for years. The country’s foreign reserves are shrinking fast and its inflation is forecast at 142.4% for the year.

Argentina is on the verge of its sixth recession in a decade. Milei is a vocal critic of what he calls the corrupt political class, saying the country’s leaders have thrown it from one crisis to another. He believes replacing the ARS with the dollar could calm inflation, although many economists warn that the move would trigger financial chaos.


China economic data for July disappoints

China has released a batch of economic data for July, with many of the figures falling short of expectations. The National Bureau of Statistics report also excluded the unemployment figure for young people, which has risen to record levels in recent months.

Retail sales rose by 2.5% in July from a year ago, below expectations for a 4.5% increase, according to analysts polled by Reuters, while industrial production rose by 3.7% against July 2022, below the 4.4% increase analysts had expected.

Fixed asset investment rose by 3.4% for the first seven months of the year from a year ago, below the 3.8% forecast by the Reuters poll. The urban unemployment rate ticked up to 5.3% in July from 5.2% in June.

On a year-to-date basis, real estate investment fell by 8.5% from a year ago as of July, a greater decline than in June. The country’s property crisis worsened on Monday as state-backed developer Sino-Ocean Group Holdings missed interest payments while shares in developer Country Garden slumped further after it suspended trading of some onshore bonds.

Developer Sino-Ocean suspended trading of 6% guaranteed notes due in 2024 on the Hong Kong stock exchange due to non-payment of US$20.94 million in interest. The interest covers the period from and including January 30 to but excluding July 30 by August 13, according to a filing on Monday morning.

Country Garden announced at the weekend it would suspend trading of at least 10 onshore bonds issued in 2021 and 2022 starting from Monday. Yesterday, shares of Sino-Ocean fell 5.1% while Country Garden shares at one stage were 16.3% lower. A gauge tracking mainland developers listed in Hong Kong declined 4.5%, extending a 10% loss last week to hover around the lowest level since November 2022.

Sino-Ocean said it is conducting a consent solicitation in relation to the notes and has received sufficient consent instructions to pass an extraordinary resolution at a meeting to be held this Thursday.

As of Monday, US$2 million in aggregate principal amount of the notes has been redeemed and cancelled by the company, and the outstanding principal amount of the notes is US$698 million, Sino-Ocean said in the document.

  • China has cut a key interest rate andannounced a major injection of funding into its banking system after the latest economic data added to concerns over an economic slowdown.. The People’s Bank of China (PBOC) announced a cut in the rate on a short-term lending facility to the banking system to 2.5% from 2.65% in a bid to stimulate economic activity. The reduction could lay the groundwork for the monetary authority to drop China’s loan prime rate, the country’s main interest rate, next Monday, which currently stands ar 3.55%. Beijing also signed off around US$55 billion of new loans to the banking network to shore up firms’ balance sheets.


Multinationals expand use of AI in supply chain management

While artificial intelligence (AI) isn’t new to shipping, companies in the sector are deploying AI in new ways according to a weekend report by the Financial Times.

It says that companies such as Maersk, Siemens and Unilever are using generative AI to source new supplies, finalise contacts and ensure they are not doing business with companies suspected of environmental and human rights abuses.

The report notes that new supply chain laws in countries like Germany, requiring companies to track environmental and human rights issues in their supply chains, have sparked interest and investment in the sector.

Navneet Kapoor, Maersk’s chief technology officer, said: “Things have changed dramatically over the past year with the advent of generative AI,” which can generate conversational responses to human prompts.

The report notes that last December Maersk helped provide US$20 million in funding for Pactum, a San Francisco-based company that says its ChatGPT-like bot has negotiated contracts with suppliers for Maersk, Walmart and distribution group Wesco.

“When there is war or COVID or supply chain disruption, you need to reach out to suppliers,” Kaspar Korjus, Pactum’s co-founder, told the FT. “[With] one disruption after another these days, it takes humans too much time. Walmart doesn’t have time to reach out to tens of thousands of suppliers.”

The shift is occurring at a time when shipping and logistics businesses are seeking smarter ways to operate. “A next-generation cohort of business solutions are bringing to market solutions that layer AI over those existing data flows to vastly improve the efficiency and impact of operational processes,” the report said. 

Meanwhile, the shipping industry is under increased pressure as global demand for moving containers by sea continues to decline.

Maersk CEO Vincent Clerc said earlier this month that customers have been reducing their inventory and there is no sign of this trend ending in the near term.


Nigeria’s NGX and CSCS developing dollar settlement platform for fintechs

Nigerian Exchange Limited (NGX) is working with the Central Securities Clearing System (CSCS) and Euroclear to create a dollar settlement platform that will enable tech startups to raise in dollars.

NGX said that the initiative would create opportunities for domestic investors to access their shares and also contribute to the growth of the Nigerian economy through democratisation of capital formation.

Speaking during the Annual A&O Fintech webinar themed; ‘Fueling Fintech: The Power of Capital, the Role of Regulation’, the Divisional head, Capital Markets, NGX, Jude Chiemeka, noted that, although public markets are viable options for raising capital, fintechs have preferably opted for private markets because of disclosure rules and stricter governance requirements for listing publicly.

To address the issue, NGX received approval from the Securities and Exchange Commission (SEC) to launch a technology board for fintechs and tech companies to raise capital.

Chiemeka said that the tech board is geared at encouraging tech firms to come to the market and raise capital in local currency, which would prove beneficial amid the high interest rate environment that had made foreign investors hawkish.

Although the issue of settlements could discourage fintechs from accessing capital in US dollars on the public market, Chiemeka said that the Exchange was working on a partnership that is directed at fixing that problem. “NGX is working with CSCS and Euroclear to create a dollar settlement platform that allows tech companies (start-ups or existing ones) to raise capital in dollars,” he added.

“We have reviewed listing procedures for tech companies who want to list. Requirements around number of shareholders, years of operation among others have been relaxed to catalyse these listings.”


Shanghai Exchange wants bankers to vet Chinese medical firms’ IPOs

The Shanghai Stock Exchange has urged bankers to pay close attention to the marketing practices of Chinese drug and medical equipment makers seeking initial public offerings (IPOs) in response to an escalating anti-corruption drive in the sector, according to reports.

The bourse asked investment bankers and lawyers to ensure drugmakers’ compliance and legitimacy in sales and marketing activities, according to an internal publication the exchange sent to bankers in late July that was reviewed by Reuters.

The guidance comes after China launched an anti-graft campaign last month, targeting the practice of salespeople bribing doctors in drug and medical equipment sales.

Under the stepped-up crackdown, a growing number of healthcare companies are shelving their IPO plans and listed medical firms also saw their shares slump in the past two weeks.

Bankers should carefully examine if the company, controlling shareholders or actual controllers conduct bribery in marketing activities, the exchange said in the publication.

“Sales and marketing fees are complicated and there could be hidden expenses,” said  the bourse, which also asked bankers to check the authenticity of the marketing expenses and urged companies to fully disclose information in their prospectus.


Mastercard to buy stake in MTN’s US$5.2 billion fintech unit

Mastercard has agreed to purchase a minority stake in the fintech division of MTN Group, Africa’s largest cellphone provider, which it values at US$5.2 billion. The signing of the formal investment agreements is expected shortly as both parties near the end of the regular due diligence process.

MTN Group President and CEO Ralph Mupita said the deal will be structured as a commercial partnership on payments and remittances employing Mastercard’s technical infrastructure to develop throughout Africa and an investment in a minority share. He stated that the share size would be announced after completing the transaction.

The deal comes a year after MTN Group said it was searching for minority investors to invest in its African fintech subsidiary after separating it from the carrier’s main telecom business to maximise development in the thriving division. The Johannesburg-based company’s aspirations were boosted after obtaining a mobile banking license in Nigeria, its largest market, which allowed MTN to offer financial services to millions of new clients.

For Mastercard, it follows a 2021 deal  with Airtel Africa, one of MTN’s competitors, that saw the India-founded telecom receive US$100 million for its mobile money business, Airtel Mobile Commerce, at a US$2.65 billion valuation.


OCBC offers digital invoice financing for SMEs

Singapore’s Oversea-Chinese Banking Corporation, aka OCBC, is now offering digital invoice financing to small and medium enterprises (SMEs) that issue e-invoices through the InvoiceNow and SESAMi systems.

In a press release, OCBC Bank said that it is offering same-day financing approval to up to 90% of the invoice amount, enabling SMEs to access funds quickly.

To do this OCBC will make use of transaction data on e-invoices to assess SMEs’ credit quality, meaning that SMEs will no longer need to submit bank statements or financial reports.

Over 55,000 SMEs are registered in InvoiceNow, Singapore’s nationwide e-invoicing network. A quarter of them are further registered with SESAMi, a platform helping SMEs manage buying and selling processes online.

Based on data with customers' consent and anticipated transaction growth, SESAMi estimates that InvoiceNow e-invoices will hit 200,000 and S$3 billion (US$2.22 billion) respectively over the next 12 months. It expects more than half of the e-invoices to come from Government vendors.

In February, it was announced in the Singapore Parliament that InvoiceNow will be the default e-invoice submission channel for all government vendors within the next few years.


Citi completes sale of Taiwanese consumer unit to Singapore’s DBS

Citigroup confirmed that it has completed the sale and migration of its Taiwan consumer businesses to Singapore's DBS Group.

The now transferred retail arm includes retail banking, credit card, mortgage and unsecured lending businesses, as well as the transfer of close to 3,000 employees. The transaction is expected to release US$1.2 billion in capital that was previously committed under local regulatory requirements. Citi's institutional business in Taiwan was excluded from the sale.

Citi has signed sales agreements for consumer units in nine markets and closed sales in seven other markets in addition to Taiwan: Australia, Bahrain, India, Malaysia, the Philippines, Thailand and Vietnam. The lender plans to complete the sale of the ninth consumer unit in Indonesia later this year.

Citi, in a major strategy shift, announced in April 2021 that it planned to exit consumer banking across 14 markets globally.

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