Aurelia Butler

This article is an on-site version of our Moral Money newsletter. Sign up here to get the newsletter sent straight to your inbox.Visit our Moral Money hub for all the latest ESG news, opinion and analysis from around the FT While much of the world focuses on the horrors unfolding in Israel and Gaza, the IMF and World Bank representatives are in Marrakech this week meeting the world’s leading central bankers in the wake of the biggest global inflation shock for decades.These annual talks on how to improve the global financial architecture, held in Africa for the first time in 50 years, will see the institutions make the case for a bigger lending and investment capacity. They want to tackle sky-high levels of debt distress in the developing world, alongside climate change and poverty.We have a double bill of interviews for you today on how leading figures in the development world are thinking about these complex financing challenges. Read on for more from the president of the African Development Bank and the head of the world’s biggest philanthropic institution. (Kenza Bryan)The US is a ‘stumbling block’ on development financingThe Bill & Melinda Gates Foundation, the world’s largest philanthropic group, has allocated more than $70bn in grant payments since it was created by Microsoft founder Bill Gates and his then-wife Melinda French Gates in 2000. Since then it has supported the developing world through climate disasters, debt defaults, the pandemic and violent conflict, sometimes working in lockstep with the IMF and World Bank to distribute funds where they are most needed. One of the group’s biggest challenges, though, is much closer to home, chief executive Mark Suzman, a former UN adviser, told me before the start of this week’s Marrakech talks.“US politics is a very big stumbling block right now” for unlocking the resources developing countries need to adapt to climate change and fund development, Suzman said. “The gridlock is preventing progress . . . when we don’t have the US resources coming in it reduces the pressure on other countries.”The Bill & Melinda Gates Foundation is pushing for more development financing by the World Bank and IMF More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The OECD has hailed progress on a global deal to make tech giants and other large multinationals pay more tax where they do business, after publishing an international treaty drafted by more than 130 countries.The treaty, published on Wednesday morning, codifies the landmark deal that countries reached two years ago to update the international tax system for the digital age. “The release of this text . . . represents another significant step towards practical implementation of the October 2021 agreement,” said Manal Corwin, director at the OECD Centre for Tax Policy and Administration.If signed and ratified by enough countries, the text would lead to the redistribution of $200bn-worth of profits a year from multinationals to countries where sales are made. Some 143 countries are taking part in negotiations at the OECD. The existing international rules, which were designed in the 1920s, are out of date, as they do not adequately give countries the right to tax digital businesses operating within their borders but without a physical presence. The changes will apply to multinationals with more than €20bn in revenue and a profit margin above 10 per cent. For those companies, 25 per cent of their profits above a 10 per cent margin would be taxed in countries where they have sales. The reforms are expected to raise revenue of between $17bn to $32bn a year, the OECD has forecast. However, it remains uncertain how many national governments will pass the deal. Meanwhile, unless a certain proportion of countries sign the treaty by the end of the year, a ban on unilateral digital services taxes previously agreed by countries will expire. This could lead to a “proliferation” of digital services taxes that would be “significantly harmful”, Corwin warned. Despite negotiating countries “unanimously” agreeing to the publication of the treaty text on Wednesday, the multilateral convention was “not yet open for signature” as differences remained between some countries, she added.In particular, Brazil, Colombia and India have reservations about how their existing levies will interact with the new tax regime. Corwin said the disagreements did not mean the countries had not endorsed the treaty text, but there were areas “where there is still conversation”.“Those countries have continued to be extremely constructive throughout, [by] trying to bridge the gaps . . . and will continue to do so,” she said.The text of the treaty will be presented to G20 finance ministers and central bank governors in a new OECD secretary-general tax report ahead of their meeting in Morocco this week.It is unclear whether some countries, notably the US, will sign the treaty and ultimately ratify it in their legislatures.In order to come into legal force internationally, the treaty will need to be signed by at least 30 jurisdictions, which house the headquarters of a minimum of 60 per cent of the 100 or so companies affected by the changes. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Governments around the world must take more meaningful steps to rein in public spending and raise revenues or risk hindering central banks’ efforts to tame inflation, an IMF official has warned.Vitor Gaspar, head of the fiscal affairs department at the multilateral lender, urged policymakers to tighten fiscal policy at a time when it was becoming “increasingly difficult for most countries around the world to balance public finances”.Speaking to the Financial Times ahead of the fund’s annual meetings in Marrakech in Morocco, he said: “Timing matters, and the sooner [this] can be done in many countries the better, from the viewpoint of consistency between monetary and fiscal policy.”Fiscal discipline would help the “credibility” of central banks and lessen the need to hike interest rates, which would have a “stabilising effect” on global bond markets and help shore up financial stability, he said. Gaspar’s comments come amid a surge in global borrowing costs as central banks have sought to bring inflation under control. Financial markets saw some reprieve this week, but Gaspar warned that debt servicing costs for governments were on the rise. This would be a “persistent trend” over the medium-term and have a “lasting effect”, he warned. His call came ahead of the IMF’s latest report on the top fiscal challenges confronting governments. The Fiscal Monitor, published on Wednesday, warned of rising deficits, reflecting slower growth and higher real interest rates, with governments “dipping further into the red”. On current trends, government debts would grow “considerably faster” than pre-pandemic projections, with the global public debt ratio on course to approach 100 per cent of gross domestic product by the end of the current decade. The US stood out as one of the worst performers among large economies, according to the report. Its general government deficit is on track to exceed 8 per cent of the country’s GDP this year. It would remain high in 2024, at 7.4 per cent. Net borrowing would still be at 7 per cent of GDP in five years’ time, the IMF warned. A White House official attributed the jump in the deficit between 2022 and 2023 to a “sharp decline” in revenues, saying this accounted for 63 per cent of the increase as a share of GDP. Government spending has been a major political sticking point in Washington, almost leading to a government shutdown before Democrats and Republicans agreed a short-term deal last month. A new budgetary deadline is now coming in mid-November.“Something must give to balance the fiscal equation,” the IMF warned in the Fiscal Monitor. “Policy ambitions may be scaled down or political red lines on taxation moved if financial stability is to prevail.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is resident fellow at the Mossavar-Rahmani Center for business and government in the Harvard Kennedy School and former assistant secretary for international affairs at the US TreasuryMembers of the IMF are gathering in Marrakech, Morocco, for their annual meeting this week. High on their agenda is the 16th review of IMF quotas, commitments by members to provide funds to the multilateral institution to be lent to other members.IMF members have not changed the total size and distribution of quotas since 2010. Another failure to reach agreement on doing this would further imperil the status of the IMF as the central institution of the international monetary system. A perpetuation of the status quo would weaken its credibility and capacity to serve as lender of last resort and global standard-setter.Members gather at IMF meetings and ritually declare that the lender should be a quota-based institution. But the truth today is that less than 50 per cent of resources available for the IMF to lend come from quota subscriptions. An agreement in Marrakech to change quotas requires a compromise on three issues that have led to a stalemate on negotiations for more than a decade. The first issue is to reduce the IMF’s reliance on borrowed funds. This would be accomplished by an increase in total quotas large enough to allow the termination of the fund’s temporary bilateral borrowing arrangements — which today amount to 15 per cent of its lending capacity — without reducing resources potentially available to lend. The IMF would still have its semi-permanent borrowing capacity to bolster its financial resources, known as the new arrangements to borrow.The second is reform of the formula that is the starting point for quota reviews. Emerging market and developing countries argue that the current formula supports advanced countries’ larger quota and voting shares (which are based on quota shares).The third is redistribution of quota and voting shares in the direction of faster-growing member countries. China has the largest discrepancy between its actual quota share and what it would have if the current formula was applied to it.Today, the US quota share is 17.43 per cent, and its voting share is 16.50 per cent. Consequently, America must agree to all the IMF’s major decisions, including any changes in quotas. In other words, whether we like it or not, any deal must satisfy the US Treasury. China has the third-largest share in the fund after the US and Japan. The combined share of members of the EU is larger than that of any individual country by a wide margin. Key IMF members must compromise to ensure a successful meeting in Marrakech.A compromise should start with agreement on a proportionate increase in each member’s quota by at least one-third. That would add sufficient quota resources from IMF members in strong external positions to allow the institution’s bilateral borrowing arrangements to lapse. It would also tip the balance of IMF resources back to a majority reliance on quota resources.The second element is for the emerging market and developing countries to drop their insistence on a revision of the quota formula in this review. A proportionate increase in all quotas would increase these members’ capacity to borrow from the IMF. A failure of the quota review would freeze the current scope of their borrowing.The third element is agreement on selective, or ad hoc, increases in the quotas of those members which have a quota most out of line with the current formula. The combined size of these selected increases must not threaten the US voting share, or Washington will block the compromise.Under the current formula, the quotas of 25 IMF members should be at least 50 per cent larger than their current ones, led by China. If all 25 countries received selective quota increases that closed half the gap, the total increase would reduce the US voting share to close to 15 per cent.Moreover, the US has made clear that it will not support an increase in any member’s quota share unless that country respects the rules and norms of the IMF, which in the US view China does not.  To remove this obstacle, China should agree not to accept the selective increase in its quota to which it would otherwise be entitled, and the US should support the compromise. As a result, both China and the US could take credit for avoiding another stalemate in Marrakech. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a former Federal Reserve economist, founder of Sahm Consulting and a writer of the Stay-at-Home Macro blogIn the past month, there has been a significant shift in the views of investors on where interest rates are heading. The yield on 10-year US Treasury notes jumped half a percentage point, before a sharp retracing this week. High rates boost the borrowing costs for households and businesses. And that adds to the big increases in the past two years.The increase in market rates is seemingly at odds with the Fed’s decision at its late-September meeting to hold the federal funds rate, its policy interest rate, steady. In a recent interview, Austan Goolsbee, president of the Federal Reserve Bank of New York, said the recent rise in long-term interest rates was a “puzzle” and downplayed the Fed’s role.Goolsbee is partly correct. Several other factors, such as concerns over rising federal deficits, which increase the supply of Treasuries, could be pushing up interest rates. And there’s no consensus on the cause. However, Treasury yields rose somewhat directly following the Federal Open Market Committee policy-setting meeting in September, and there are reasons to think that the Fed caused that increase, even if unintentionally. If unintentional, that is particularly a concern given the rising risks of the central bank raising rates too high at this stage in the cycle.What the Fed said about the future, known as “forward guidance”, probably made a difference. At the last meeting, officials updated their expectations for economic growth, unemployment, inflation, and, most importantly, the federal funds rate for the end of this year and the next three years. It’s known as the Summary of Economic Projections and is a collection of individual forecasts from the 19 Fed officials. Unlike the changes in the federal funds rate, which committee members vote on, the SEP is uncoordinated and anonymous.The idea of the SEP and other tools of forward guidance, like the press conference and speeches, is to influence borrowing costs for firms and households now by signalling to financial markets what the Fed may do. It was created at the end of the Great Recession brought on by the global financial crisis. Then the benchmark federal funds rate was at zero, which left little scope to push down borrowing costs and boost economic activity. Even though interest rates now are well above zero, the Fed uses it to bolster its credibility as an inflation fighter and give markets a heads-up on what future policy might be. Forward-looking markets build that into market asset prices now.   The SEP is a powerful tool. Economists Taeyoung Doh and Andrew Foerster at the Federal Reserve Bank of Kansas City argue that the SEP and other types of forward guidance shorten the time it takes for the Fed to affect financial market conditions and the economy. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.However, the SEP can also be an unpredictable tool. What the Fed thinks it is saying (in words or numbers) and what market participants hear are not always the same; it can take time to line the two up. Thus, small changes in the SEP sometimes have outsized effects on interest rates as markets catch up. It looks like that might have happened after its last meeting.So what did the SEP say? The Fed sees a more robust economy and higher interest rates than its last SEP in June. The median forecast across Fed officials for inflation downplayed the recent good news on core inflation and passed none of that unexpected disinflation through to the coming years. In contrast, the SEP marked gross domestic product up and the unemployment rate down throughout. The Fed’s usual good-news-is-bad-news style raised its path for the federal funds rate next year, strengthening its “higher for longer” mantra. It’s not hard to see how that would boost market interest rates; fewer rate cuts expected from the Fed were a surprise after months of disinflation.The SEP often gets pulled into bigger debates. One example now is if a recession is coming. Some called the SEP a “Goldilocks” forecast because it looked like inflation would come down and unemployment would stay low, but Fed chair Jay Powell at the press conference disputed that such a “soft landing” was the Fed’s baseline expectation. When the SEP and the chair don’t send the same message, it’s confusing but not unusual.Another debate is whether we have entered a persistently higher interest rate world. The Fed did not raise its estimate of the long-run federal funds rate, but it stretched out the current levels and allowed the inflation-adjusted rate to move up further. So it’s at least a thumb on the scale that the Fed is in no hurry to lower its interest rate. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.In this new era of “de-risking”, with each of the G7 group of leading wealthy nations committed to lessening their reliance on China, business leaders need to develop new ways to manage their supply chains.At a time of escalating geopolitical tensions with China, companies have sought to reduce their exposure. In 2021, Yahoo and LinkedIn announced plans to withdraw from the country and IBM shuttered its China Research Laboratory after a quarter of a century. US foreign direct investment in the country fell from a peak of $20.9bn in 2008 to an 18-year low of $8.2bn in 2022.This exodus of American investors signals a definitive shift in global supply chains. Many US companies are “friend-shoring”: moving supply chains to political or economic allies such as India, Thailand and Vietnam. In 2022, Dell said it would move at least 20 per cent of laptop production to Vietnam. In June, Apple announced plans to shift 18 per cent of its global iPhone production to India.At the same time, businesses are increasing their sourcing from “nearshoring” countries such as Mexico and Canada to take advantage of the USMCA free trade agreement. In July, HP said it would move production of millions of consumer and commercial laptops to Mexico. De-risking from China through friend-shoring or nearshoring can improve supply chain resilience, but it is not risk-free. First, it may trigger risks including retaliation that impedes future US economic growth. In May, Beijing imposed a ban on Chinese operators purchasing chips from the US chipmaker Micron Technology, which derives more than one-tenth of its $31bn annual sales from the country.FT Executive MBA RankingThis story is from the EMBA report and magazine, out on October 16 Shares in Apple — which derives one-fifth of its sales from China — fell by about 6 per cent in early September after reports that the country had banned officials at central government agencies from using iPhones. Ten stocks in the S&P 500, including Qualcomm, Monolithic Power and Texas Instruments, received more than a quarter of their annual revenue from China. If retaliation persists, the tech sector will face increasing headwinds.More than half of Chinese consumers shun US goods, according to a recent survey. With a few notable exceptions, such as Tesla’s electric vehicles and Apple’s devices, sales of many prominent brands have been declining in China since the trade war began in 2018. GM’s market share, including its joint ventures, fell from roughly 15 per cent in 2015 to below 10 per cent in 2022. To counteract the market risks, US companies must devise strategies to tap into new markets with promising growth potential. De-risking from China by diversifying suppliers across multiple countries can also amplify operational risks by increasing the complexity and lack of transparency in global supply chains. According to a 2021 McKinsey survey, just 2 per cent of companies reported visibility beyond their second-tier suppliers — those who provide materials and parts to their direct suppliers.This opacity makes for difficult communication and co-ordination across suppliers in different countries, adding complexity in consistency of quality and timely delivery. For example, Boeing suffered multiple setbacks in the development of its 787 aircraft. Companies should adhere to W Edwards Deming’s quality management principles, simplifying supply chains and enhancing transparency.The lack of supply chain traceability can inadvertently cause difficulties for suppliers. For example, South Korea’s SK Hynix ceased shipping chips to Huawei after the US imposed a ban on exporting advanced chips to China. The company has been scrutinising its supply chain to understand how its chips ended up inside Huawei’s Mate 60 Pro phone.Conversely, the US Uyghur Forced Labor Protection Act, which came into effect in June 2022, aims to prevent goods made in China from entering US markets. But forensic checks by customs officials on 37 imported Chinese garments last May showed 10 samples came from the Xinjiang region.Professor Christopher Tang While de-risking the interconnected trade relationships of the US and China is not easy, the difficulties are not insurmountable. For example, after a worldwide recall of more than 19mn unsafe toys tainted with lead paint in 2007, Mattel gradually shifted production from China to Mexico, Malaysia and Vietnam. Its plant in Nuevo Leon, Mexico, is now the company’s largest worldwide.Government support can play a pivotal role in mitigation. For instance, the $52.7bn US Chips Act subsidies can help incentivise companies such as Intel to reshore their semiconductor supply chains.To facilitate overseas sales, the UK joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in July, expanding its free trade relationships with 11 Pacific nations. Similarly, US president Joe Biden initiated the Indo-Pacific Economic Framework in 2022 with 13 other nations, including India, Japan, South Korea and Vietnam, to streamline trade negotiations. More such international alliances are crucial to reduce the risks of de-risking.Christopher S Tang is UCLA distinguished professor and the Edward W Carter Chair in business administration. He is senior associate dean of global initiatives, and faculty director of the Center for Global Management at the UCLA Anderson School of Management More

SINGAPORE (Reuters) – The dollar dipped broadly on Wednesday, tracking a slide in U.S. Treasury yields weighed down by dovish Federal Reserve comments, as traders looked to the central bank’s policy meeting minutes out later in the day for clues on its interest rate outlook.A slew of Fed officials have signalled in recent days that the U.S. central bank may not need to tighten monetary policy much further than initially thought.Atlanta Fed Bank President Raphael Bostic said on Tuesday the central bank did not need to raise borrowing costs any further, and Minneapolis Fed President Neel Kashkari followed with similar remarks later in the day.The comments pushed the greenback to a two-week trough against a basket of currencies in the previous session, with the dollar index languishing near that level in early Asia trade. It last stood at 105.66.Sterling rose to a three-week high of $1.2296, while the euro last bought $1.0606, not far from Tuesday’s more than two-week top of $1.0620.”The Fed is shifting away from further rate hikes, and its tightening bias too may be dropped by December,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist.U.S. Treasury yields have similarly tracked lower following the dovish Fed comments, with the two-year yield, which typically reflects near-term rate expectations, hitting a one-month low of 4.9260% on Tuesday. It was last at 4.9675%.The benchmark 10-year yield stood at 4.6468%. [US/]The focus now turns to minutes of the Fed’s September policy meeting out later on Wednesday, which could offer further clues on its interest rate outlook. U.S. inflation data is due the next day.”I think markets will be particularly interested in whether or not the (Federal Open Market Committee) will follow through with the extra 25-basis-point hike forecast in (its) latest dot plot,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) (CBA).”Any comments that are perceived to be slightly dovish, I think the unwind of yields can continue and that can weigh down on the U.S. dollar more.”CHINA AID?The Australian dollar rose to a roughly one-week high of $0.6440 while the New Zealand dollar scaled a two-month top of $0.6050, helped slightly by a report saying China is weighing new stimulus measures.The two Antipodean currencies are often used as liquid proxies for the yuan.China is looking to increase its budget deficit for 2023 as the government prepares to bring a new round of stimulus to help the economy meet Beijing’s annual growth target, Bloomberg News reported on Tuesday.”Markets are still pretty cautious about whether or not the government will introduce a large scale stimulus given they have been reluctant this past year about unleashing any large scale stimulus. So I think markets are a little bit unsure whether that report is real,” said CBA’s Kong.”If that report is true and Chinese officials come out with a big stimulus package, that will obviously boost (the yuan) and currencies linked to the Chinese economy.”The offshore yuan, which touched a roughly one-month high of 7.2700 per dollar on Tuesday, last bought 7.2839. More