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War casting a shadow over economies, EBRD warns – Industry roundup: 16 May

War casting a long shadow over economies, reports the EBRD

The European Bank for Reconstruction and Development (EBRD) expects an uptick in economic growth in the regions it operates to 3% in 2024 from 2.5% in 2023 but cut growth forecasts for countries including Ukraine and Turkey, saying war is ‘casting long shadow’.The EBRD was set up in 1991 to help rebuild the economies of the former Soviet Union and eastern Europe after communism collapsed, and subsequently extended its offer of support to countries in the Balkans, the Middle East and north Africa.

In its latest flagship Regional Economic Propects (REP) report, the Bank says that it expects Turkey’s economy to grow by 2.7% in 2024, down from its previous forecast of 3%, amid expectations of a continued tightening of monetary and fiscal policy in the face of persistently high inflation. It predicts that Turkey’s economic growth will pick up to 3% in 2025.

The report notes that Turkish economic policy has tightened, with increases in taxes and stronger macroprudential policy measures. Since June 2023, the Central Bank of the Republic of Türkiye has hiked its policy rate nine times, bringing it to 50% from 8.5%.

The country’s growth was driven by the services sector last year, with post-earthquake reconstruction efforts also having an impact.

Ukraine's economy is expected to grow by 3.0% in 2024, says the EBRD published today. The figure is down on the 5.3% seen in 2023, which halted a sharp earlier fall in growth in 2022 following Russia's invasion. The report noted that, while 2023 growth in Ukraine – an agriculture superpower – had been supported by a record harvest, recent war damage to the country’s electricity infrastructure was among factors seen likely to constrain further growth in 2024.

The Ukraine forecast is in line with the EBRD’s overall 2024 projections of 3.0% output growth across the regions where it works (central and eastern Europe, Central Asia and the southern and eastern Mediterranean, or SEMED). The overall figure is up from 2.5% in 2023, despite challenges stemming from global geopolitical tensions, including increasing limitations on trade. Growth in the Bank’s regions is projected to pick up further in 2025, to 3.6%.

However, the EBRD noted that more than two years of fighting in Ukraine was affecting not only the warring countries but also their neighbours. Beata Javorcik, the EBRD’s chief economist, spoke of the war “casting a long shadow”.

“The war has intensified. Mobilising additional men to fight will hit the economy, and the destruction of power generation is something that will have repercussions. The situation is challenging,” she added.

“The authorities have managed to keep the macro economy stable and that’s a big achievement.

“The war is the big unknown. In the initial phase of the war the military fighting took place in an area that generated 60% of Ukraine’s economic activity. Subsequently, the fighting moved to a much smaller area. If the area affected by the fighting goes back to the early days of the war that would take its toll of the economy.”

The EBRD has revised up its 2024 growth forecast for Russia this year from 1% to 2.5% but Javorcik said the exodus of foreign firms and skilled workers would eventually be felt.

“While the short-term outlook for Russia has improved, in the medium-term Russia is going to feel the effects of the war. Sanctions and the impact of the brain drain will affect its productivity growth.”

The EBRD said the weakness of the German economy, wariness among central banks about cutting interest rates and the running down of savings accumulated during the Covid pandemic had also contributed to weaker growth in its regions.

“Geopolitical tensions are having a profound impact on the EBRD regions and beyond, leading to rapid fragmentation of trade and investment and a notable rise in defence spending”, it said.

“Bridging” economies that traded with both eastern and western blocs had been large recipients of foreign direct investment and stood to benefit from fragmentation. China accounted for half of greenfield inward investment by value in the EBRD regions, Javorcik said.


Japan’s economy struggles in Q1

Japan's economy contracted by a worse-than-expected 0.5% in the first three months of the year, according to preliminary government figures, marking the first contraction in two quarters amid sluggish consumption.

The latest real gross domestic product (GDP) growth rate compares with a median forecast for a 1.5% decline among economists surveyed by QUICK, a Nikkei group company.

GDP in the world’s fourth-biggest economy was expected to have shrunk by only 0.3% from the previous quarter, according to economist forecasts.

Exports shrank 5.0%, after growing 2.8% the previous quarter, while imports fell 3.4%, the cabinet office data showed.

Compared with the first quarter of 2023, GDP fell 2.0% compared with a forecasted drop of 1.2%, according to Bloomberg News.

The economy was hit by a major earthquake on 1 January on the Noto peninsula and by halts in production at auto giant Toyota’s Daihatsu subsidiary.

Japan has been flirting with recession since last year, with zero growth -- revised from an expansion of 0.1% -- between October and December 2023.

In the previous quarter, from July to September, GDP suffered a major contraction of 0.9%, also revised from an earlier reading of -0.8%. Technical recession is generally defined as two successive quarters of falling GDP.

Japan, which was overtaken by Germany as the world’ third largest economy in 2023, has battled for decades stagnant growth and deflation. Inflation, however, has been picking up, allowing the Bank of Japan in March to raise interest rates for the first time in 17 years. Last month, the BoJ kept rates on hold.

The BoJ has been a global outlier in sticking to an ultra-loose monetary policy while other central banks pushed rates up as they fought against surging inflation.


Klarna says most employees use generative AI daily

Swedish financial technology company Klarna says that nearly nine in 10 employees of its 5,000-strong workforce are now using generative artificial intelligence (AI)) tools in their daily work.

Klarna, which lets individuals split their purchases into interest-free, monthly instalments, said over 87% of its employees are using generative AI tools, including OpenAI’s ChatGPT and its own internal AI assistant.

The biggest users of generative AI in the company are those in non-technical groups, such as communications (92.6%), marketing (87.9%) and legal (86.4%), Klarna said.

At those rates, Klarna is seeing much higher adoption of generative AI within the company than in the broader corporate world.

According to a survey by consultancy firm Deloitte, 61% of people working with a computer use generative AI programs in their day-to-day work — sometimes without their line manager being aware.

Klarna has its own internal AI assistant, called Kiki. According to the firm, 85% of all its employees now use Kiki, and the chatbot now responds to an average of 2,000 queries a day.

Klarna said a key use of generative AI — namely, OpenAI’s ChatGPT — by its communications teams was in evaluating whether press articles written about the company are positive or negative.

Klarna’s lawyers are using ChatGPT Enterprise, the business-grade version of OpenAI’s tech, to create first drafts of common types of contract, cutting the hours it takes to draft up a contract.

“You still need to adapt it to make it work for your particular case but instead of an hour you can draft a contract in ten minutes,” said Selma Bogren, senior managing legal counsel at Klarna.

Klarna has been touting AI as a major boon to its bottom line as the company has pushed to steer its narrative away from the boom market conditions of 2020 and 2021.


EU finalises investment fund labels to combat greenwashing

The European Union’s (EU) securities watchdog has issued final guidelines on when investment funds can label themselves as being ‘sustainable’ without being accused of greenwashing.

Trillions of dollars globally have flowed into investments that promote their green attractions, but regulators say that some funds exaggerate sustainability claims.

The European Securities and Markets Authority (ESMA) said a fund that has any environmental, social or governance (ESG) related words in its name must have at least 80% of assets that meet ESG objectives in accordance with the binding elements of its stated investment strategy.

The minimum is in line with draft guidance that ESMA put out to public consultation.

The watchdog ditched its initial plan for a 50% threshold for investment funds that label themselves as being sustainable.

ESMA said that it has decided instead to introduce a commitment to invest 'meaningfully' at all times in sustainable investments, when using any sustainability-related words in a fund's name.

It has also introduced a new category for transition-related terms, which also includes the 80% minimum rule, to avoid penalising investment in companies that derive part of their revenue from fossil fuels, thus promoting strategies aimed at moving to a greener economy.

"The objective of the guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names," ESMA said in a statement.

Managers of existing funds have about nine months to comply, while new funds will have to comply sooner.

The UK, now outside the EU, will introduce its first bespoke labelling rule to combat greenwashing in finance from the end of this month with regulators in the United States also taking action.


Reshaping of global supply chains is gathering pace

President Joe Biden’s sweeping tariff hikes on a range of Chinese imports are just the latest United States moves in a years-long campaign that is rewiring Asian trade routes, figures released in recent days show.

Taiwan’s booming exports to the US are just one example of the way great-power tensions have already reshaped supply chains – and how China is getting left out of some of them.

The island’s sales to US markets climbed more than 80% in April from a year earlier, hitting a record high, according to new data. In the first four months of 2024, shipments to the US overtook those sent to China, which continued to shrink. Even when Hong Kong is included, China’s share of the island’s trade is dropping.

This week has seen the Biden administration raise tariffs on a range of Chinese products, from computer chips to electric vehicles as part of US efforts to curtail what it describes as Chinese “cheating”. The changes are projected to affect around US$18 billion in current annual imports, the White House said.

It’s part of a broader trade overhaul for key American allies in Asia, including major economies such as South Korea and Japan. Both are seeing a bigger share of exports heading to the US at the expense of China.

Driving the change is a US campaign to cut China out of its supply chains, especially for sensitive and high-end technology products. Investment flows are shifting along with trade, with global firms investing in South-east Asia to avoid US tariffs on China and companies from Taiwan, Korea and Japan also building factories in the US to take advantage of subsidies for high-tech industry.

“This is a region-wide theme reflecting the trade war and then the investment war,” says Trinh Nguyen, an economist at Natixis. “I think this is going to be accelerating.”

China is not losing out completely as its own firms are rapidly boosting investment in South-east Asia, to avoid tariffs and hold onto their share of supply chains, Nguyen says. What has not changed is that “the US continues to be a key importer of goods in Asia”.

Foreign companies are increasingly unwilling to expand in China. Only 13% of European firms already in the country say it’s a top destination for investment, less than half the figure for 2021, while new Japanese investment has been declining since the peak in 2021. The auto market, where foreign brands have a shrinking share, is one example: Hyundai Motor is selling plants after sales collapsed, and Mitsubishi Motors has pulled out.


HASI and KKR invest US$2 billion in US sustainable infrastructure

US climate solutions investor Hannon Armstrong Sustainable Infrastructure Capital (HASI) and global investment firm KKR have agreed to establish the CarbonCount Holdings 1 (CCH1) fund, which will invest up to US$2 billion – with each firm committing US$1 billion – in climate positive projects and clean energy assets across the United States over the next 18 months.

HASI will source the investments for and manage CCH1, remain the interface with its clients and measure the avoided emissions of all investments in CCH1 using its CarbonCount scoring tool. These investments will be consistent with HASI’s existing investment strategy, which is focused on behind-the-meter, grid-connected, renewable natural gas and transport projects.

At close, CCH1 will be seeded with assets representing approximately 10% of the up to US$2 billion committed. Morgan Stanley acted as the financial adviser for KKR, and Lazard, as financial adviser for HASI.

“Our strategic partnership with KKR perfectly aligns with our Climate Clients Assets strategy, enabling us to capitalize on our ambitious pipeline of opportunities and scale our business,” says Jeffrey A. Lipson, HASI’s president and CEO.

Marc Pangburn, the company’s CFO, states: “CCH1 represents a significant milestone in our objective to migrate to a more capital light model and reduce reliance on public equity markets for growth. This transaction further increases the resilient, non-cyclical nature of our business.”

Cecilio Velasco, managing director of KKR’s infrastructure team, adds: “HASI has built an impressive portfolio of sustainable infrastructure projects through strategic partnerships, and their pipeline of future opportunities is highly complementary to our existing clean energy investing strategy.”


US inflation data relieves markets

Markets have been cheered by data showing that US inflation rose less-than-expected in April, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to Wall Street expectations for a September interest rate cut by the US Federal Reserve. The US consumer price index (CPI) rose 0.3% sequentially, according to data released by the Labor Department's Bureau of Labor Statistics.

In the 12 months through April, the CPI increased 3.4% year-on-year (YoY), following a 3.5% rise in March. The annual increase in consumer prices has dropped from a peak of 9.1% in June 2022, however the progress has since slowed. The April CPI data marks the first month of slowing annual data since January.

The so-called core CPI — which excludes food and energy costs — rose 0.3% in April, snapping a three-month streak of above-forecast readings which spurred concerns that US inflation is getting sticky in the world's largest economy. Economists see the core gauge as a better indicator of underlying inflation than the overall CPI.

The core CPI increased 3.6% in the 12 months through April; the smallest YoY gain since April 2021, which followed a 3.8% rise in March. The core CPI over the past three months increased an annualised 4.1%, the smallest since the start of the year.


Clearstream adds UAE domiciled funds to platform 

Post-trade services provider Clearstream has partnered with Standard Chartered to facilitate the inclusion of United Arab Emirates (UAE) domiciled funds on its Vestima platform.

The collaboration “ensures seamless end-to-end fund processing and execution while maintaining compliance with recent regulatory updates from the Securities and Commodity Authority (SCA) of the United Arab Emirates,” stated a release.

The partnership extends enhanced custodial support to Standard Chartered for the custody and execution of UAE domiciled funds and expands investment opportunities for retail clients through Clearstream’s Vestima platform enabling them to efficiently invest in UAE domiciled funds.

Neil Wise, Chief Commercial Officer for Clearstream Fund Services, stated: “We are excited to be part of Standard Chartered’s United Arab Emirates retail fund launch. This successful collaboration exemplifies our commitment to fostering partnerships and delivering market solutions. Through Vestima, custodians can continue to support local funds, contributing to the growth of the fund business in the UAE while adhering to regulatory standards.”

Owen Young, Managing Director and Regional Head of Wealth Management for Africa, the Middle East and Europe at Standard Chartered, stated: “Through this successful collaboration with Clearstream, we are able to offer locally domiciled funds to our retail customers in the UAE and deliver on our promise to provide innovative and best-in-class investment solutions that cater to clients’ diverse needs while supporting the UAE government’s vision of making the country a global financial hub.”


IFC and Absa to boost East Africa coffee trade with US$60 million facility

International Finance Corporation (IFC), a member of the World Bank Group, and South Africa’s Absa Group will provide an up to US$60 million commodity trade finance facility to Volcafe, a leading global green coffee merchant, to strengthen the company’s operations in East Africa, supporting tens of thousands of coffee farmers in the region.

The financing will provide working capital to facilitate the purchase of coffee cherries – the fruit from which coffee beans are extracted – from smallholder farmers and local traders, as well as the processing, storage, and transport of coffee to export ports.

East Africa is a coffee-growing hub, accounting for over 80% of the continent’s production and 10% of the global total. An estimated five million smallholder farmers rely on the industry for jobs and livelihoods in the region.

However, many smallholder farmers lack access to relevant financial support, and crop production is impacted by the unpredictable effects of climate change.

The one-year facility, with the participation of up to US$30 million each from Absa and IFC, will allow Volcafe to provide more than 75,000 farmers with access to the market. The facility will also support trainings on sustainable production techniques and good agronomy practices that can improve crop resilience and profitability, through the long-running Volcafe Way programme.


YouLend provides over €50 million in financing to Spain’s SMEs

UK-based embedded finance provider YouLend reported that it expects to hit a new milestone to provide over €50 million (US$54 million) in finance to Spanish small and medium-sized enterprises (SMEs) in 2024. “This is much-needed financing for Spain SMEs at a time when 86% of businesses experienced increased interest rates and a further 18% faced tighter collateral requirements for bank financing,” said the company

According to recent data, just more than one in four Spanish companies plan to implement embedded finance services by 2024 to facilitate cash flow support for their customers and provide them with the finance to stockpile inventory and expand growth opportunities. YouLend has revealed that the hospitality sector leads the highest demand for embedded financing, closely followed by e-commerce, food delivery platforms, and payment service providers.

YouLend has been able to sustain growth and maintain its competitive rates after securing a recent private securitisation capital injection from JP Morgan and Castlelake LP. The deal enables billion in additional revenue-based financing to European SMEs.

Ariam Rodríguez Pou, Country Head for Spain at YouLend, said: “This financing milestone emphasises YouLend’s expansion in Spain and our commitment to continually invest in the platform and serve our customers in the region.

YouLend recently teamed up with Glovo and Just Eat, both leading Spanish technology companies, to extend financing to the Spanish restaurant and hospitality sector. With the partnership, Glovo and Just Eat’s restaurant partners can apply for funding from €1,000 to €1 million, depending on their monthly sales volumes, through their existing business accounts.

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