Aurelia Butler

The writer is head of global equity at Bank of America. He writes in a personal capacityThe toxic trifecta of soaring food and energy prices, coupled with the threat of drought, is having a severe impact on a number of developing nations. Several countries commonly referred to as emerging markets could perhaps be better described as “submerging markets”. Sri Lanka, where frustrated citizens stormed the presidential palace in July, could be merely the opening act in a wave of instability across the developing world. In 2015 the G7 made a commitment (reiterated in 2022) to lift over 500mn people out of hunger and malnutrition by 2030. At this point, however, we appear to be going in the opposite direction. The World Food Programme predicts that over 320mn people are at risk of acute hunger. Many emerging market countries took advantage of the era of low global interest rates to fund spending by raising debt in the international capital markets. But rate increases by the US Federal Reserve, combined with weaker EM currencies, are now resulting in severe debt servicing burdens which are eating into governments’ discretionary spending on health and education. The impact of emerging market meltdown could be felt in developed countries across North America and Europe in the form of increased migration flows. As several Central American countries, among others, grapple with dramatically slowing growth and food price inflation, we may again see waves of refugees gathering along the US’s southern border. We could also see more boatloads of desperate people from Africa and the Middle East arrive on European shores in search of better lives.Food insecurity and economic downturns will result in many countries experiencing civil war-type conflicts as local groups compete for scarce resources. And these economic and security challenges will result in migration flows that adversely affect both potential migrants and the countries that receive them. There are several steps that can be taken to address the challenges facing emerging market nations. In the short term, the IMF and sovereign donors should announce a three-year debt servicing moratorium for the most vulnerable countries. This will help create much-needed fiscal space, and should be coupled with a requirement that the proceeds saved in lieu of debt payments be invested in agriculture, health and education. Furthermore, the IMF, together with the G7 and EU, should also increase lending to emerging markets to help fund fertiliser, food and energy imports. Countries such as Saudi Arabia and the United Arab Emirates, which benefit from higher energy prices, should be strongly encouraged to contribute to these global efforts, along with China and Japan. Aid should also be channelled towards groups such as the World Food Programme and the International Rescue Committee, which together operate in over 120 developing countries and have built-in processes to direct food and other supplies to the most needy. The G7 and larger trading blocks across Europe, North America and Asia should also encourage targeted duty free imports from these countries, with the assistance of the World Trade Organization. The G7 summit in July announced an incremental $4.5bn to combat hunger — but the Greek bailout packages in the last decade totalled over $300bn. While stabilising Greece helped to stabilise Europe, the gap between these numbers is massive. We don’t want a planet where millions go hungry, countries default on their debt, the hungry are forced to leave their homes to find subsistence elsewhere and civil wars rage — in short, a world in which countries submerge. We can and must do better.   More

ISTANBUL (Reuters) – Turkey’s central bank delivered another surprise 100 basis-point rate cut on Thursday, sending the lira tumbling to an all-time low, even as inflation rose above 80% and as central banks globally race in the opposite direction and tighten policy.Turkey’s lira touched a record 18.42 versus the dollar, surpassing the level reached during a full-blown currency crisis last December. It edged back to 18.37 by 1223 GMT.Analysts called the monetary easing unsustainable and driven by President Tayyip Erdogan’s effort to lower borrowing costs to stoke exports and investment, and they predicted more currency depreciation ahead. [L8N30T3FS]Unorthodox rate cuts over the last year, along with rising commodity prices, have sent inflation to a 24-year high and sparked a cost-of-living crisis for Turks.The central bank justified the move by citing continued indications of an economic slowdown, and it repeated that it expected disinflation, or a deceleration in the inflation rate, to set in.”Leading indicators for the third quarter continue pointing to loss of momentum in economic activity due to the decreasing foreign demand,” its policy committee said.”It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment,” it said, pointing to increasing uncertainties in global growth and escalating geopolitical risk. GRAPHIC – A widening gap A widening gap The rate cuts go against a global tightening cycle that saw the U.S. Federal Reserve hike its benchmark overnight interest rate by 75 basis points on Wednesday to a range of 3.00%-3.25%. The European Central Bank also raised its key rates by 75 basis points this month.NEGATIVE YIELDS, WEAKENING LIRAEleven of 14 economists in a Reuters poll forecast rates would be kept on hold. One had predicted a 50 basis-point cut to 12.50%, while two forecast a 100 basis-point cut to 12%.Liam Peach, senior emerging markets economist at Capital Economics, said that the “window for easing remains open” but that further cuts would likely be more gradual.”The macro backdrop in Turkey remains poor. Real interest rates are deeply negative, the current account deficit is widening and short-term external debts remain large,” he said.”It may not take a significant tightening of global financial conditions for investor risk sentiment towards Turkey to sour and add more downward pressure on the lira,” Peach added.Last month, in a previous shock to market expectations, the bank slashed its key one-week repo rate by 100 basis points to 13% to head off a cooling economy. It had left the rate steady the previous seven months.In the latter part of last year it lowered the rate by 500 basis points in line with an unorthodox policy advocated by Erdogan, leaving real rates deeply negative, which is a red flag for investors.Turkey’s lira has halved in value in the last year largely due to the policy of cutting rates despite soaring prices. GRAPHIC – Turkish lira timeline September 2022https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnkkmlvq/Turkish%20lira%20timeline%20September%202022.PNG Each rate cut weighs more on country risks and the lira, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.”As an economist, it is hard to comment on this decision, because normally, higher inflation requires higher interest rates,” she said. “The freestyle monetary policy management costs, and is certainly not sustainable.”Erdogan has prioritised exports, production and investments under an economic programme aiming to lower inflation by flipping chronic current account deficits to a surplus.That target is all but unattainable this year due to the surge in energy prices and a global economic slowdown that is likely to hit Turkey’s exports.Since last month’s cut, the central bank has taken steps that are meant to address the widening gap between the bank’s policy rate and lending rates, sowing confusion for lenders and borrowers alike. More

HONG KONG (Reuters) – Beijing has sent a team of regulatory officials to Hong Kong to assist the U.S. audit watchdog with onsite audit inspections involving Chinese companies, four people familiar with the matter said, as part of a landmark deal between the two countries.A China-U.S. agreement last month allows U.S. regulators, for the first time, to inspect China-based accounting firms that audit New York-listed companies, a major step towards resolving an audit dispute that threatened to boot more than 200 Chinese companies from U.S. exchanges.About 10 officials from the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) have arrived in Hong Kong and joined the audit inspection, which started on Monday, three of the people said.The officials will assist a team of inspectors from the Public Company Accounting Oversight Board (PCAOB), the U.S. audit watchdog, who are in Hong Kong for the onsite inspection, the four people said.All of the sources declined to be named due to the sensitivity of the matter.Representatives at CSRC and MOF did not immediately respond to Reuters requests for comment. The PCAOB did not respond to Reuters queries sent outside U.S. business hours.The gathering of U.S. and Chinese officials together in Hong Kong marks a major step forward in what was expected to be a fraught process implementing the audit deal, the most detailed agreement the PCAOB has ever reached with China.State-owned China Southern Airlines and data centre company GDS Holdings (NASDAQ:GDS) are among the U.S.-listed Chinese companies for audit inspection in the Asian financial hub, two separate sources said.China Southern Airlines and GDS did not respond to requests for comment.Reuters reported last month that U.S. regulators had picked a number of U.S.-listed Chinese companies including e-commerce majors Alibaba (NYSE:BABA) Group Holding Ltd and JD (NASDAQ:JD).com Inc for audit inspection.FULL ACCESSOfficials from the CSRC, which has been leading negotiations with U.S. authorities to resolve the audit dispute, are expected to be present when the PCAOB conducts interviews with and takes testimony from the audit firms’ staff, one of the four people familiar with the audit process said. The whole inspection process will last about eight to 10 weeks, said two of the four sources, in line with comments by U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler in a meeting with lawmakers last week.It was not clear whether the Chinese officials would be present for every step of the inspection process with PCAOB representatives.A separate source familiar with the matter said that involvement by the Chinese regulators was consistent with the way the PCAOB conducts inspections elsewhere around the world and that the U.S. watchdog was not giving China any special consideration. U.S. regulators have for more than a decade demanded access to audit papers of U.S.-listed Chinese companies, but Beijing has been reluctant to let U.S. regulators inspect its accounting firms, citing national security concerns.Despite the audit deal, legal experts and China watchers last month warned they could still clash over how it is interpreted and implemented, with the U.S. side seeking full access to Chinese audit papers without any consultation or input from Chinese regulators.Beijing’s statement on the deal last month, however, emphasised that the U.S. watchdog will have to obtain documents through the Chinese regulators, and must involve the China side during interviews and testimony taking. The onsite inspections by the PCAOB are being conducted in the Hong Kong offices of the selected Chinese companies’ audit firms, said two of the sources.The PCAOB will spend the first week inspecting the auditors’ compliance and internal control systems and move to review the audit working papers of selected companies from the second week, they added.In line with the U.S. regulators’ statements, the PCAOB inspectors can see complete audit work papers without any redactions, and they will adopt view-only procedures for personally identifiable information, the two sources said. More