Aurelia Butler

DOHA (Reuters) -The managing director of the International Monetary Fund (IMF) Kristalina Georgieva said on Wednesday she was confident the United States would avoid a debt default.The U.S. government could fall behind on its bills next month – and even default on its debt – if Congress doesn’t raise a $31.4 trillion cap on government borrowing, a failure that could trigger economic calamity and panic on global financial markets.The latest round of talks on the debt ceiling between representatives of President Joe Biden and congressional Republicans ended without progress on Tuesday, as the June 1 deadline inched closer. “History tells us that the U.S. would wrestle with this notion of default… but come the 11th hour it gets resolved and I have confidence we will see that play again,” Georgieva said at the Qatar Economic Forum in Doha, organised by Bloomberg.Finance ministers from Saudi Arabia and Qatar, who joined Georgieva for the panel discussion, agreed that a resolution was needed sooner rather than later.”I hope wisdom will prevail and prevail sooner (rather than later)… it is not easy to play with the international markets, and when they catch a cold, everybody will sneeze,” Mohammed Al Jadaan, the Saudi finance minister, said. Georgieva said that the U.S dollar is likely to remain a global reserve currency despite increasing discussion on moves by countries to reduce their reliance on the greenback, known as “de-dollarisation”.”We don’t expect a rapid shift in (dollar) reserves because the reason the dollar is a reserve currency is because of the strength of the U.S. economy and the depth of its capital markets…Don’t kiss your dollars goodbye just yet,” Georgieva said.During Georgieva’s visit to the Gulf state, she met with the Emir Sheikh Tamim bin Hamad Al Thani. Qatar has pledged 20% of its Special Drawing Rights (SDR) holdings towards the IMF’s Poverty Reduction and Growth Trust (PRGT) and Resilience Support Trust (RST) mechanisms for financial support, Georgieva said on Twitter. SDR is an international reserve asset created by the IMF to supplement other reserve assets of member countries. According to the IMF website, Qatar has SDR holdings of 985 million.”The pledge made today would allow the IMF to expand concessional lending to low income countries and expand lending to vulnerable-to-climate-shocks countries,” Georgieva said in a video shared by the Qatar News Agency. More

On the surface, UK inflation in 2023 is becoming similar to that of the 1970s, when everyone talked about a “British disease” making the country the “sick man” of Europe. Stubbornly high inflation that eclipses rates in other countries. Contracts, such as mobile phones, linked to inflation, amplifying price pressures. The authorities struggling to control household costs. And wages following prices higher. Certainly, UK inflation seems to be stickier than that of other countries. This has been caused by a combination of robust spending at a time when labour markets are tight — also a problem for the US — and the residual effects of a huge rise in European wholesale gas prices last year. Stephen King, senior economic adviser to HSBC and author of We Need to Talk about Inflation, was scathing following the release of new data by the Office for National Statistics on Wednesday. In April, the inflation rate stood at 8.7 per cent, greatly exceeding the 8.4 per cent expected by the Bank of England. “It doesn’t look good, does it?” King said. “Depressed growth, not helped by Brexit. Real wage resistance. Core inflation the highest in decades. The BoE admitting it’s been using a model that hasn’t worked well of late. Policy rates still very low relative to 6.8 per cent core inflation . . . oh dear.” For three consecutive months, the BoE has been caught out, failing to understand the short-term dynamics in prices. In February, the central bank expected inflation to fall to 9.2 per cent by March but it remained at 10.1 per cent. When the BoE revised its forecasts this month, it built in new margins for error to improve accuracy. Privately, officials said the bank had tried everything to ensure the forecasts were not again too optimistic.Andrew Bailey, BoE governor, conceded on Tuesday that the bank had “very big lessons to learn” on controlling inflation and its forecasting. He said the failure to understand immediate price pressures in food were partly the result of adverse weather in Morocco, which had affected supply chains. But he also accepted that the BoE had not realised that food manufacturers had locked in long-term wholesale contracts on food global commodity prices, which were close to their peak of last year. Adding to the list of problems, it is clear the governor also did not see the latest month’s 1.2 per cent rise in UK prices coming. Nor did he expect price rises to be as broad, driven higher by increased costs of second-hand cars, large rises in mobile phone prices, as well as books, sports and gardening equipment and pets products. Even before the latest forecast errors, BoE officials had been under pressure to explain themselves to MPs at the House of Commons’ Treasury committee on Tuesday.

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Although Bailey said the bank had already used its judgment to push its forecasts higher he was criticised by Harriett Baldwin, the committee chair, for using a model solely based on data that reflected 30 years of relative price stability. Huw Pill, BoE chief economist, said the central bank was studying historic data carefully for insight into how to control inflation. “We do think about [whether] we should be using models or revisiting frameworks that were applied to the data of the 1970s and 1980s,” he said.“But crucially, while there may be something to learn from that, there are also reasons to think that experience is not immediately relevant,” Pill added. Inflation remained persistent in those decades, Pill said, because companies and employees began to expect inflation would remain at high levels, and set prices and demanded wage increases accordingly. Even though Bailey has accepted that a wage-price spiral is amplifying inflation, his chief economist said the current situation was different to the 1970s.“The structure of the labour market is very different . . . and in particular the regime in which monetary policy is conducted is very different,” Pill said.The BoE has stressed that most of the inflation has come from sharp rises in the price of gas and food, which the UK imports and the central bank has no control over.

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As economists pointed out on Wednesday, the problem with the BoE blaming inflation on imported energy and food prices is that it is becoming increasingly inconsistent with the data. Core inflation jumped from 6.2 per cent in March to 6.8 per cent in April when the average of economists’ expectations predicted it would remain constant. Official figures also showed that the goods and services that contained few imported elements were adding increasingly to the overall inflation rate. In April, the ONS said items that had less than a 10 per cent import intensity, such as housing rents, contributed 1.76 percentage points to the 8.7 per cent inflation rate. This was up from 1.38 percentage points in March and the highest level since the series was first published in 2006. Allan Monks, UK economist at JPMorgan, said this was alarming and would prompt the BoE to raise interest rates further.

“[The data] cannot be described as a one-off or simply as an indirect byproduct of food and energy price gains, as the BoE and the doves have tended to suggest up until very recently,” Monks said.The echo of times past spooked financial markets on Wednesday, sending expectations of future interest rate sharply higher. Financial markets predict rates will rise to 5.3 per cent by the end of the year. This might be over-egging the problem, according to Sandra Horsfield, UK economist at Investec, who expects another quarter-point rise to 4.75 per cent in June. In a time of 1970s-style stagflation, with little growth and high inflation, she said: “Little can be ruled out, but it is questionable that slamming that much harder on the brakes is necessary.” More

JOHANNESBURG (Reuters) -South Africa’s central bank will likely extend its tightening cycle and push rates cuts further into the future amid countrywide power outages and currency weakness, analysts said, adding to inflationary pressures straining businesses and households.The South African Reserve Bank (SARB) – which is facing a dilemma of how to keep a lid on inflation without further stifling already anaemic economic growth – has hiked its main lending rate by 425 basis points since November 2021. But inflation continues to run hot.The next rate decision is on Thursday, and a majority of economists surveyed by Reuters last week expect a 25 basis points (bps) hike to 8.00%. But some analysts, like Nicolaie Alexandru-Chidesciuc at JPMorgan (NYSE:JPM), have ramped up their forecasts, now expecting the bank to deliver a 50 bps hike and predicting the first rate cut would not come until well into 2024. “The risk of worsening electricity cuts as well geopolitical concerns after the U.S. ambassador claimed the country was not acting in a non-aligned manner in the Russia-Ukraine conflict have significantly impacted the currency,” said Alexandru-Chidesciuc. The outlook faced by South African policy makers is at odds with other developing economies’ central banks, many of which have front-run the U.S. Federal Reserve in their hiking cycles and are gearing up to deliver cuts in the coming months. This provides relief at a time when growth woes for the world’s top two economies – the U.S and China – dominate. Among major emerging markets, only Israel and Colombia have recently raised rates. Hungary on Tuesday started the first policy easing cycle in Europe.SARB Deputy Governor Rashad Cassim acknowledged in an interview with Reuters on May 3 that rate hikes were unpopular in a low-growth economy but said the priority was managing inflation expectations. Annual consumer price inflation is running at over 7%, above the central bank’s target range of 3%-6%.”We want to ensure that the depreciated exchange rate and (high) food prices don’t permeate into other parts of the inflation basket,” Cassim said.”If we did nothing, (consumer) income is going to erode more and more. So maybe a little initial pain may benefit consumers in the medium to long run.”South Africans were already facing rising prices after COVID-19 and the Ukraine war disrupted supply chains. The power crisis has added to pressure, as businesses, including food producers and retailers, spend more on alternatives such as diesel generators and pass on the costs to consumers.The central bank estimates that rolling blackouts – which can last up to 10 hours a day – will add 0.5 percentage points to headline inflation in 2023.The rand weakening more than 10% this year makes imports more expensive. “With the rand’s substantial weakness and markedly higher production and retail costs coming from (power cuts), the risk to the inflation outlook on balance is still on the upside,” said Annabel Bishop, chief economist at South African lender Investec.”We expect on balance that a 50 basis points hike is more likely … instead of a 25 basis points lift.” CREDIT WORRIESCredit demand has been rising as household incomes have not kept up with prices, economists said, and higher borrowing costs could increase indebtedness.The rate of new defaults on credit cards in the fourth quarter rose 20% year-on-year and those on home loans 19%, according to a Eighty20/XDS credit stress report.”Even if interest rates come down at least by 2025, we may see the consumer still battling with the price pressures they had to deal with now, and how they might have chosen to deal with them,” said Koketso Mano, senior economist at South African lender FNB. More

LONDON (Reuters) – European Union plans to increase protections for consumers of financial services are reigniting a long-simmering power battle between national and EU regulators that could hamper how the tougher safeguards will be enforced.The European Commission, the EU’s executive body, on Wednesday proposed stricter rules on selling financial products, such as mutual funds and insurance, to increase consumer trust in investing, and deepen the bloc’s capital market as it faces competition from Britain since Brexit.Retail financial services are typically regulated by national rather than EU watchdogs and some market participants are predicting clashes, particularly on the transfer of greater supervisory powers to the securities and insurance watchdogs, ESMA and EIOPA.The plans, known as the retail investment package, propose an EU layer of “value for money” safeguards for products and tougher EU rules for financial advisors.Firms would also have to report to the watchdogs on their cross-border services to “identify areas where supervision should focus on and where stronger cooperation may be needed”, the plans say. “The question for me is does the retail investment strategy get bogged down into an institutional power sharing question before you even start to talk about the substance?” said Victor van Hoorn, head of the Brussels office at the Investment Company Institute, a global funds industry body.ESMA and EIOPA would devise cost and performance benchmarks that about 30,000 mutual funds and other products would have to comply with, or be withdrawn.ESMA, which would need an extra 11 staff to exercise its new powers, has also proposed fining asset managers who charge “undue” costs to customers.The division of power between state and EU-level financial regulators has long been politically fraught, with countries rejecting the notion of a centralised counterpart to the powerful U.S. Securities and Exchange Commission.The European Central Bank already regulates the biggest banks in the EU, while insurers comply with pan-EU solvency rules, leaving retail-product markets among the few areas where countries have discretion.The finance ministers of Luxembourg, a major EU investment funds centre, and Poland told the Financial Times in a letter last week that further centralisation of supervisory powers in the EU would be counterproductive to deepening the capital market.But Better Finance, which campaigns for investors, said existing value for money rules were never properly enforced by member states, and bolstering EU-level watchdogs would help to change this.”It is therefore vital to thoroughly improve the effectiveness and consistency of the supervision of the European investor protection rules, and to provide the EU supervisory authorities with the tools to achieve that,” the campaigner said.EU consumer group BEUC echoed this, saying that for the proposed protections to work they would need to be enforced at the European level in a unified way.Member states’ opposition has already led to the substance of the EU proposals being watered down before publication.The Commission’s initial intention was to ban commission paid by banks and insurers to brokers and advisors who favour their products over potentially cheaper rivals, a step Britain and the Netherlands have already taken.But Germany, France, Italy and Poland, along with banks and insurers, had lobbied hard against such a broad ban, arguing it would upend a widely-used business model that relies on commission-based sales.To avoid “significant and sudden impacts”, a ban is now only proposed for products where no advice is provided.An insurance industry official said even this could end up becoming a broad ban in practice because of the tougher safeguards advisors would have to meet under the proposals, pushing customers towards advice-free products.EU states and the European Parliament have the final say on the plans, with changes likely, including attempts to reintroduce a full ban on commission. More

JOHANNESBURG (Reuters) -Africa’s economic growth is set to edge upwards in 2023 and 2024 amid tighter global monetary policy and the fallout from Russia’s invasion of Ukraine, but South Africa’s will plummet, the African Development Bank (AfDB) said. The continent’s GDP growth is projected to rise to 4% this year and 4.3% in 2024 after a 3.8% expansion last year, the AfDB said in its annual African Economic Outlook on Wednesday.However, GDP growth was still some way below the 4.8% expansion in 2021, the lender found. AfDB President Akinwumi Adesina called for “cautious optimism” in the face of risks including high global interest rates and a strong dollar while the continuing war in Ukraine could worsen food insecurity and push up prices further.Growth in the continent’s southern region is projected to slow sharply to 1.6% this year from 2.7% last year, dragged down by poor economic performance in South Africa, where scheduled power cuts of up to 10 hours a day have stymied the economy. In a sharp downward revision, the AfDB now forecasts the continent’s most industrialised economy to grow by only 0.2% in 2023 and 1.5% next year. Average African inflation is set to accelerate again this year to 15.1%, from 14.2% in 2022, the report said. The average debt-to-GDP ratio in Africa is expected to be 66% this year and 65% next year, the AfDB said, noting a rise in domestic debt.”Domestic debt restructuring, therefore, should be part of the negotiations for the resolution of public debt crises in countries facing heightened risks,” it said. More