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Spain pushes ahead with bank windfall tax – Industry roundup: 22 December

Spain approves windfall tax for banks and energy companies

The Spanish Senate has given its final approval to a windfall tax on the country’s banks and large energy companies that aims to alleviate the cost-of-living crisis, although it will not be levied on smaller local lenders and foreign banks’ units in Spain.

The amended tax proposal cleared its first hurdle in parliament four weeks ago, with the backing of the leftist ruling coalition and several regional parties.

The Bank of Spain recently estimated that the government will raise a combined €5 billion (US$5.2 billion) by 2024 from its proposed taxes on Spanish banks and large energy companies, which central bank Governor Pablo Hernandez de Cos said was less than the figure of €7 billion euros initially anticipated by the ruling coalition.

In a speech posted by the central bank on its website, De Cos forecast that “the temporary levies on certain credit institutions and energy companies could together raise around €2.5 billion in 2023 and 2024.”

In its initial plan set out in July, Spain’s government was planning to raise €3 billion from banks and €4 billion from large energy companies by 2024.

Previous to yesterday’s final approval both tax proposals were amended and cleared last month in the lower house of Spain’s legislature during the first reading after some parties in northern regions approved an exemption of large energy firms’ domestic regulated activities and foreign operations.

The new estimates by the central bank contrast with the government’s updated tax collection forecasts. Budget Minister Maria Jesus Montero said last month that the government would collect only €400 million less than expected from the revised windfall tax proposal on energy companies.

The banking tax was also amended to impose levies on the local units of foreign lenders after the European Central Bank (ECB) warned that the proposal could distort market competition.

Spain faces challenging times in 2023 with sluggish economic growth and job creation, high but slowing inflation (6.8% year-on-year in November), sharply higher electricity bills due to the global energy crunch and water shortages in some areas due to drought.

The economy grew by around 4.6% in 2022, but the figure masks a declining trend, due to falling consumption, shortages of raw materials, tighter financial conditions, the consequent rising financial burden on companies and households, and the inflation impact. Quarter-on-quarter growth dropped from 1.5% in Q2 to only 0.2% in Q3 and a possible slight contraction in Q4. Household savings began to fall in October from a record €997.4 billion in July as consumers drew on them.

Resurgent inflation spurs US corporates’ FX risk management action

In response to rapidly rising interest rates and stubbornly high inflation, US corporates are turning away from FX options to forward FX for hedging currency exposure, research from market researcher East & Partners reveals.

Seeking greater flexibility in the event FX volatility exceeds expectations, over 2,200 CFOs and treasurers directly interviewed as part of East & Partners long running Business FX United States programme revealed a step change in hedging intentions.

A sequence of shocks to the global economy stemming from geopolitical tensions, ongoing Covid-19 pandemic impacts, lingering supply chain disruptions and recession fears has led to significant exchange rate adjustments according to the Bank for International Settlements (BIS).

Most notable is a strengthening of the US dollar as the US Federal Reserve (Fed) raises its target rate “faster and higher” than at any other time in recent history is reflected in cross-country disparities in “shock exposure” as central banks globally struggle to curtail rampant inflation.

With US inflation recently hitting a 40-year high, the Fed has increased the effective federal funds rate by more than two percentage points in only six months, forcing US corporates to reassess their FX risk management strategy.

East’s report notes that the Fed initially planned to increase its target rate to 4.40% by the end of 2022 yet raised interest rates by 50 basis points (bps) this month to range between 4.25% and 4.50%, well above the Fed’s long-term target of 2%.

Evolving FX hedging behaviour is also reflected in heightened switching intentions with customer churn accelerating to record highs. US importers and exporters have never been more likely to shop around for both spot FX and risk products execution, driven by both pricing and service incentives in addition to innovative new digital tools and platform features.

Citi, Bank of America and HSBC compete closely for forward FX relationship share leadership as each bank recorded exceptionally strong year-on-year growth rates. Wells Fargo, Citi and HSBC account for over one in two FX options relationships cumulatively also.

“As CFOs and treasurers adapt to the new interest rate and inflationary environment, incumbent spot and risk product leaders are set to face growing competition, placing enormous pressure on customer retention” commented East & Partners Global Head of Markets Analysis, Martin Smith.

“While wallet share continues to slide sharply as customers multibank for FX, the research outlines key elements FX customers will both switch provider for and allocate greater execution to existing providers.”

UK grocer Tesco sued by Thai factory workers over alleged exploitation

Tesco, the UK’s biggest supermarket chain by market share, faces a UK lawsuit over “alleged negligence and unjust enrichment” from former workers at a factory in Thailand, reports British daily The Guardian.

A group of 130 former workers at VK Garment Factory in Mae Sot, who produced garments for the company’s ‘Florence & Fred’ label, have claimed that they were trapped in “effective forced labour, working 99-hour weeks for illegally low pay in appalling conditions”, among other allegations.

The workers made jeans, denim jackets and other F&F clothes for adults and children for the Thai branch of Tesco’s business between 2017 and 2020. Tesco said the garments were sold only on the Thai market, although according to the newspaper it has seen images of labels written in English on clothes understood to be made there.

Tesco was not involved in the day-to-day running of the factory beyond setting and checking standards and placing orders. However, workers in its supply chain are seeking to hold the company to account for allegedly failing to protect them.

The lawsuit claims that although Tesco and UK multinational Intertek carried out audits and did not identify any unlawful activities, they should have been aware that the area is known for exploitation of workers.

A spokeswoman from Tesco, told The Guardian: “Protecting the rights of everyone working in our supply chain is absolutely essential to how we do business. In order to uphold our stringent human rights standards, we have a robust auditing process in place across our supply chain and the communities where we operate.

“Any risk of human rights abuses is completely unacceptable, but on the very rare occasions where they are identified, we take great care to ensure they are dealt with appropriately, and that workers have their human rights and freedoms respected.

“The allegations highlighted are incredibly serious, and had we identified issues like this at the time they took place, we would have ended our relationship with this supplier immediately.

“We understand the Thai labour court has awarded compensation to those involved, and we would continue to urge the supplier to reimburse employees for any wages they’re owed.”

The report added that a claim has been issued in the high court and is expected to be served in the new year. Also facing legal action is Ek Chai, which was the Thai branch of Tesco’s business until it was sold to Charoen Pokphand Group in December 2020.

RBI chief warns that crypto could trigger next financial crisis

India's central bank Governor Shaktikanta Das has warned that the next financial crisis will come from “private cryptocurrencies” if they are allowed to be regulated and not banned outright.

Speaking at this week’s Business Standard Banking, Financial Services and Insurance (BFSI) Insight Summit, Das said: “Our view is that it should be prohibited because if you try to regulate it and allow it to grow, please mark my words the next financial crisis will come from private cryptocurrencies.

“They have no underlying value. They have huge inherent risks for our macroeconomic and financial stability. I have yet to hear any credible argument about what public good or what public purpose it serves.”

The term “private cryptocurrencies” is used to distinguish between a public cryptocurrency such as India’s central bank digital currency (CBDC) and cryptocurrencies such as bitcoin and ether, which are issued by private players, said insiders at the Reserve Bank of India (RBI).

“I think the term private cryptocurrency is a fashionable way of describing what is otherwise a 100% speculative activity and there is a talk that it should be regulated,” Das said.

The RBI’s governor has previously stated that cryptocurrencies should be prohibited. His comments have particular weight currently as India is holding the presidency of the Group of 20 nations, giving it the power to set the agenda. Indian Finance Minister Nirmala Sitharaman has identified the regulation of crypto assets as an international priority and will be a big topic of discussion during its G-20 presidency.

“Countries have been taking different views,” added Das. “I don't think we need to say anything more about our stand after the developments over the last one year including the latest episode around FTX.”

The governor’s comments also come at a time when the RBI is trying to create awareness around its CBDC, the e-rupee or digital rupee, and faces questions on whether CBDCs are in competition with private cryptocurrencies.

“It's not a question of fear of missing out or of offering competition to a private cryptocurrency. I think that is how the world is going to evolve,” said Das when asked whether India’s CBDC was an “optic to fight crypto.”

He added: “You will see in days to come more and more central banks will embrace digital currencies and India has been in the forefront of the digital revolution in the current century.”

Russia’s central bank “to test international crypto payments”

The Central Bank of Russia plans to use cryptocurrency for cross-border payments in trials with private companies, claims a member of its top management. Testing would be conducted under a special legal regime currently under development.

The monetary authority’s First Deputy Chairman, Olga Skorobogatova, announced earlier this week that the CBR aims to trial international trade settlements with cryptocurrencies. “We are now planning, within the framework of the experimental legal regime that we are preparing, to try the use of cryptocurrency for international settlements, that is, for foreign economic activity,” she said, quoted by the Tass news agency.

Speaking at the State Duma, the lower house of Russian parliament, Skorobogatova stated that the pilot project would be carried out with interested companies but did not specifically name any of the likely participants.

Government institutions in Moscow have been working to expand the regulatory framework for digital financial assets to cover decentralised cryptocurrencies. The CBR. previously a strong opponent to their legalisation in Russia, has significantly softened its stance since the West imposed sanctions over the invasion of Ukraine, that have limited the country’s access to global finances and markets.

In September, Deputy Minister of Finance Alexey Moiseev admitted that his department and the monetary policy regulator have agreed that, in current conditions, it would be impossible for Russia to do without cross-border settlements in cryptocurrency.

However, the CBR is maintaining its position against allowing the free circulation of digital currencies like bitcoin under Russian jurisdiction, including domestic crypto payments. It recently backed legislation designed to regulate mining, provided the minted crypto is exchanged abroad or exclusively under special legal regimes inside Russia.

The central bank will reportedly begin testing a digital rouble around April 2023. The exchange of the digital rouble for foreign currencies and the opening of digital wallets to non-residents is expected to follow in 2024.

Supply chain management advice as China learns to live with Covid

China’s recent shift from a “zero Covid” policy to one of living with and dealing with the pandemic means that businesses and investors are anticipating manufacturing and supply chain disruptions as a result of the resulting spike in Covid-19 cases, comments China Briefing.

The website has responded with an online article, Managing Your China Manufacturing and Supply Chains During Covid Outbreaks, ahead of a peak in new cases predicted over the winter months.

“Businesses should, to the best of their ability, prepare for the impending disruption and formulate risk mitigation plans for at least the period until mid-2023,” the site recommends. “To help with this, we provide practical advice on dealing with disruptions in manufacturing and supply chains and highlight the positive impact that the lifting of COVID restrictions may have on businesses in China.”

Since early 2020 the pandemic has impacted every aspect of the supply chain, from the procurement of raw materials to the end consumer. It has exposed vulnerabilities and resiliency gaps for many organisations while challenging the commercial, operational, financial, and organisational resilience of businesses worldwide, notes China Briefing.

But a 10-measure notice issued by the National Health Commission on 7 December effectively removed requirements such as mandatory centralized quarantine, compulsory testing, and sweeping lockdowns. “While this sudden pivot in its COVID-19 approach has been welcomed by many businesses, the switch to living with COVID comes with its own risks and difficulties, such as a sudden spike in the number of cases,” the guide adds.

“As such challenges may continue to hamper the recovery of manufacturing and supply chains, it is essential for businesses to find practical solutions. How can firms attempt to strengthen their supply chains going ahead as COVID-19 continues to impact global supply chains? In this article, we explore some of the disruptions to China’s manufacturing and supply chains and discuss key strategies for companies to become more resilient in the face of these sudden changes.”

TriLinc and WCA expand partnership in Africa and Latin America

TriLinc Global Impact Fund (TGIF) has announced the approval of Working Capital Associates (WCA) as a new sub-advisor for business expansion and socioeconomic development in Africa and Latin America. WCA initially entered into a partnership with TriLinc Global in January 2022 to act as an origination and servicing partner for its private funds

TGIF is a public non-traded, externally managed, limited liability company that makes impact investments in small- to medium-sized enterprises (SMEs) in developing economies, while WCA is a female-led and founded alternative private credit provider, specialised in responsible financing to sustainable food systems for high growth SMEs in Africa and Latin America. 

“We are very excited to be expanding our partnership with WCA for broadening our existing term loan and trade finance investment capabilities throughout Africa and Latin America,” said Gloria Nelund, CEO and founder of TriLinc. “International trade has the potential to deliver important short, medium, and long-term economic development to SMEs and the communities in which they operate. WCA’s experienced track record, local in-country presence and institutional quality approach to portfolio management align with our goal to deliver risk-adjusted returns to our investors while creating positive measurable impact in communities across the globe.”

Federica Sambiase, WCA’s CEO and Founder, commented: “This new agreement comes after over a year of co-investing with TriLinc in our portfolio of food value chains in Africa and Latin America. It represents an important step towards achieving WCA’s mission of scaling up its highly successful approach.”

IMF looks to Egypt for flexible exchange rate after US$3 billion loan

The International Monetary Fund (IMF) will be watching for a shift by Egypt to a flexible exchange rate after a requirement to finance imports through letters of credit (LCs) is phased out at the end of this month, a senior IMF official has said.

Earlier this week the IMF’s executive board approved a 46-month loan for Egypt, totalling more than US$3.1 billion. The fund will immediately disburse almost US$347 million.

As part of the loan conditions, Egypt has committed to “a permanent shift to a flexible exchange rate regime to increase resilience against external shocks and to rebuild external buffers”.

Egypt announced it would float the pound (E£) at the end of October. The country has faced high inflation, while the Egyptian pound has steadily lost value against other currencies, particularly the US dollar, leading many Egyptians to hoard gold and raising its price in the local market. A recent report by CNN commented that the Arab world’s most populous country “has dug itself a massive hole of debt”.

Two devaluations of the currency this year were accompanied by sharp interest rate hikes and analysts expect a further hike to be announced later today.

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