Aurelia Butler

(Reuters) – Asian companies will slow investment sharply this year, deterred by soaring interest rates and fears of deepening recession, and budgets will on average fall next year, the first contraction since 2015, data showed.Capital spending at large and mid-cap Asian companies is expected to grow 6.4% in 2022 and slip 0.7% in 2023, compared with a 13% rise last year, according to Refinitiv data.GRAPHIC: Capex change at Asian companies https://fingfx.thomsonreuters.com/gfx/mkt/mypmnllngvr/Y-O-Y%20change%20in%20Asian%20companies’%20capital%20expenditures.jpgCompanies globally are grappling with rising costs of raw material, labour and logistics as China’s COVID-19 related lockdowns have further strained supply chains and the Ukraine war has pushed up energy prices. Businesses have sounded caution over slowing consumer demand.Some sectors are expected to cut spending more aggressively.Capital expenditure (capex) for Asian autos and their component suppliers is expected to plunge 16.5% this year although it may rise 2.1% in the next.The region’s tech firms, which will still spend 8% more than they did last year to catch the last of the demand generated by the pandemic, are expected to cut spending by 3% next year.Spending by consumer discretionary firms is expected to fall 7.8% in 2022 and rise 3.3% in 2023.GRAPHIC: Capex change by industry https://fingfx.thomsonreuters.com/gfx/mkt/gkplgyygdvb/Breakdown%20by%20sector%20for%20y-o-y%20change%20in%20capex.jpg”There are increases in parts of Asia tech hardware – especially mature foundries – and capex is high for utilities or manufacturing firms that invest in changing their businesses,” said Herald van der Linde (NYSE:LIN), head of HSBC’s Asia Pacific equity strategy.Utilities and industrial firms are expected to boost capex this year by 18% and 17% respectively.Budget cuts will also vary by country, with data showing Malaysia and China making the deepest cuts at 12.1% and 4.68% respectively.GRAPHIC: Capex change by country https://fingfx.thomsonreuters.com/gfx/mkt/mopanaanqva/Breakdown%20by%20country%20for%20y-o-y%20changes%20in%20capex.jpg More

Nestlé increased prices for its products 6.5 per cent in the first half of the year, as the world’s largest food company became the latest group to pass rising costs on to consumers.The rising price tags for food and drinks brands including KitKats, Nescafé, Maggi noodles and Purina pet food did not deter people from buying Nestlé products, enabling the group to increase sales volumes by 1.7 per cent.This brought like-for-like net sales growth to 8.1 per cent and prompted Nestlé to raise its sales outlook for the year. The company follows peers including Kraft Heinz, Danone, Unilever and Mondelez, which have all reported steep price increases for their products and raised forecasts for the year. Consumers appear to have largely absorbed higher prices for staple supermarket products while cutting spending in other areas such as clothing.But the Vevey-based company said its margins had been dented by rapid increases in input costs such as commodities, energy and freight. Its underlying trading operating profit margin fell half a percentage point to 16.9 per cent, “reflecting time delays between cost inflation and pricing actions”.It said margins for the full year would come in at 17 per cent, the lower end of a previously forecast range of 17 to 17.5 per cent, though sales are expected to be higher. Nestlé said it expected like-for-like net sales growth of 7 to 8 per cent for the year, up from a previously indicated rate of 5 per cent.

“Pricing is taking over this year, with inflation being so strong,” chief executive Mark Schneider told reporters. “Of course we are doing everything we can to protect consumers from rising prices but we have to protect our company too.”Schneider said there was only “very limited” evidence of households trading down to cheaper products, though that did not mean it could not happen in future. Sales were especially strong for Nestlé’s Purina pet foods and for confectionery, which had suffered during the initial phase of the pandemic as shoppers bought fewer chocolate bars “on the go”, but had “double-digit” sales growth during the first six months. Coffee sales were also strong, partly thanks to people returning to cafés and restaurants.Jean-Philippe Bertschy, analyst at Vontobel, said changes made under Schneider in the past five years, including moving a fifth of the portfolio into faster-growing categories, “will help Nestlé navigate the current, challenging environment”.Shares in the company fell 1.98 per cent in morning trading to SFr115.14. More

Bangladesh has approached the IMF for a multibillion-dollar loan, making it the latest South Asian country to seek international financial assistance as rising food and fuel prices globally strain emerging economies.The IMF said Bangladesh has contacted it to start negotiations for a programme, adding that it was seeking a “Resilience and Sustainability” facility designed to help countries adapt to climate change. Local media in Bangladesh reported that the government was seeking $4.5bn.“The IMF stands ready to support Bangladesh, and the staff will engage with the authorities on program design,” the IMF said. The IMF did not comment on the potential size of the package, adding that “the amount of support will be part of the program design discussions”.Bangladesh’s approach to the IMF comes as nearby Sri Lanka and Pakistan have also sought assistance. Both countries have been hit by inflation, dwindling foreign reserves and ensuing domestic political upheaval.Sri Lanka’s woes, in particular, have turned the country into a symbol of the political and economic dangers of surging commodity prices following Russia’s invasion of Ukraine this year.Former Sri Lankan president Gotabaya Rajapaksa resigned and fled overseas earlier this month in response to widespread protests against his rule. Crippling shortages of fuel, medicine and food have prompted a dramatic decline in living standards since the country defaulted on its foreign debts of more than $50bn in May.Many analysts worry that Pakistan could follow Sri Lanka in defaulting on its foreign debt unless it manages to stabilise its foreign reserves and currency.Bangladesh has been better placed than other South Asian countries thanks in part to its stronger export sector, with the garment trade a valuable source of foreign currency.It is now also struggling with a rising import bill, but Bangladeshi officials dismissed suggestions that the country was facing a crisis. They argued that Bangladesh’s foreign currency reserves — equivalent to about five months of imports — gave the country a cushion.

“If the IMF conditions are in favour of the country and compatible with our development policy, we’ll go for it, otherwise not,” AHM Mustafa Kamal, Bangladesh’s finance minister, told journalists in Dhaka on Wednesday. “Seeking a loan from the IMF does not mean Bangladesh’s economy is in bad shape.”Economists are concerned that the pressures in South Asia, a region largely dependent on energy imports, will only intensify.While Sri Lanka has yet to agree terms with the IMF, Pakistan this month reached a preliminary deal for a $1.3bn loan, as part of an existing $7bn assistance package.Pakistan’s central bank governor Murtaza Syed told the Financial Times in an interview this week that he hoped the IMF would finalise the deal next month. “We have the cover of the IMF programme during what is going to be a very difficult 12 months globally,” he said. More

The writer is a senior fellow at Brown University and global chief economist at KrollThe new leaders of Sri Lanka might be forgiven if they wish for a recession in the US. Rate cuts in America and a weaker dollar might make the small Indian Ocean nation’s debt obligations easier to service. Deeply indebted, with foreign exchange reserves exhausted and low on fuel and hope, Sri Lanka’s crisis suggests trouble is coming in emerging markets, and there isn’t much they can do about it.Aspects of Sri Lanka’s default are specific to its plight. The former president cut value-added and income taxes in 2019, resulting in lost revenue of 2 per cent of GDP. The country’s finances were dealt an additional blow when Covid-19 destroyed the tourism industry. And then last year, a bid to make Sri Lanka’s farms organic led to an official ban on chemical fertilisers. Rice production plummeted, forcing the government to use $450mn of foreign reserves on rice imports.In many other ways, though, it’s a familiar story for emerging markets. Assessing the economy in March, the IMF noted Sri Lanka had run budget deficits exceeding 10 per cent of GDP in 2020 and 2021, its public debt jumped from 94 per cent of GDP in 2019 to 119 per cent in 2021 and it had a significant foreign exchange shortage owing to debt service payments and a big current account deficit. The IMF proclaimed Sri Lanka’s public debt unsustainable, the biggest red card the lender can show.The final blow was from external events, with Russia’s invasion of Ukraine. Energy and food prices skyrocketed around the world. Sri Lanka defaulted on its debt two months later in May, having chosen to use remaining foreign reserves on staples rather than pay creditors. Before the country was officially in default, its leadership belatedly requested an IMF bailout.But Sri Lanka will not be the last country to have to choose to between subsidising essentials and paying creditors.Many low- and middle-income countries are suffering from high food and fuel costs. Energy prices, already on the rise before the Russian invasion, are forecast to remain high. The UN’s food price index rose 23.1 per cent in the year to June. In its latest World Economic Outlook, the IMF forecast growth in emerging markets and developing economies to fall from 6.8 per cent in 2021 to 3.6 per cent this year. External demand for emerging countries will get worse before it gets better. The US and Eurozone are likely to go into recession by the end of 2023. China, on track for its lowest growth rate in several decades (barring 2020), is focusing stimulus measures on technology and public services. Those will be less import- and commodity-intensive than in previous downturns, with fewer opportunities for spillover into other emerging economies.As growth weakens in emerging markets, borrowing costs are rising. With US prices escalating at the fastest pace in 40 years, the Federal Reserve is raising interest rates aggressively. That is pushing borrowing costs up across the globe. It is also driving the US dollar higher. This renders trade invoiced in dollars more expensive — pushing inflation higher — and dollar-denominated debt more difficult to service.Sri Lanka, like many emerging nations, is heavily indebted to China. The world’s biggest bilateral creditor accounts for about 10 per cent of Sri Lanka’s foreign debt. The World Bank estimates almost 25 per cent of emerging and developing countries’ external debt is owed to China, though only China knows for sure. So far, it has been reluctant to restructure any of it.The Common Framework, an agreement whereby G20 countries, sovereign creditors from the so-called Paris Club and private creditors agree to the same terms of a debt restructuring for a low income country, has yet to yield any such agreements. Many were hoping the Common Framework would be expanded to middle-income countries, but Sri Lanka suggests that won’t happen.Beyond Sri Lanka, the list of developing countries that look vulnerable is long and varied. More than 20 emerging market countries have foreign bond yields over 10 per cent. Pakistan, Ghana, Egypt, and Tunisia are all in rescue talks with the IMF. Relief might come for them in the form of a US downturn, damping demand for energy, reducing global borrowing costs as the Fed cuts rates and pushing the dollar down. But a recession in the world’s largest economy would hardly be good news overall. The IMF’s title for the World Economic Outlook might as well be a commentary on the prospects for emerging markets: “Gloomy and More Uncertain.” More

Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate rises since 1981, it has provided painstaking detail about its future plans to tighten monetary policy. On Wednesday, that changed, with chair Jay Powell announcing the US central bank would shy away from offering an official running commentary on its quest to stamp out soaring inflation. “It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided,” Powell said at a press conference after the Fed increased its main interest rate by 0.75 percentage points for the second month in a row. By tipping their hand thus far, policymakers have tried to manage investor expectations and avoid bouts of extreme market volatility. But the Fed has been burnt after giving a blow-by-blow account of its plans, only to then hurriedly change tack as inflation spiralled further out of control. After raising rates by half a percentage point in May, Powell sent a clear signal that the Fed would implement similar increases at subsequent meetings. He went so far as to say a 0.75 percentage point rate rise was “not something the committee is actively considering”.The Fed doubled down on that guidance as the June policy meeting approached, but abruptly changed course after worse than expected inflation data, which landed during a blackout period that prevented it from making public comments. It then implemented the first 0.75 percentage point increase since 1994. Earlier this month, the Fed came under further pressure after another alarming inflation report, with investors betting it would abandon its guidance again and raise rates by a full percentage point. Some economists on Wednesday welcomed the more tight-lipped approach, arguing that the central bank needs to be nimble in the face of uncertainty about how far it will need to tighten against a backdrop of high inflation and a slowing economy. “This meeting was a good step in the direction towards not providing forward guidance,” said Tiffany Wilding, a US economist at Pimco. “When you’re in a tightening cycle, there’s no real benefit . . . and I’ve been surprised that they’ve kept doing it, frankly, as long as they have.”Unlike the European Central Bank, which last week ditched forward guidance “of any kind”, the Fed has not abandoned soothsaying altogether. Powell on Wednesday repeatedly pointed to the closely watched “dot plot” that summarises policymakers’ projections. The most recent graph from last month signalled that most officials foresaw the Fed’s main rate rising to almost 3.5 per cent by the end of the year before hitting closer to 4 per cent in 2023. A fresh dot plot will be published in September. Powell said it was right to stop providing such detailed guidance because rates are now in line with the so-called long-run neutral level, where they would neither fuel nor restrain economic growth if inflation were at the Fed’s 2 per cent target. Despite Powell’s pledge to be more circumspect, he did provide some hints as to what was in store for the next meeting in September. Investors seized on his remark that it “likely will become appropriate to slow the pace of increases”, which prompted a rally in stocks and bonds. However, he also left the door open to “another unusually large rate rise” — that is, a 0.75 percentage point increase — and said the central bank “wouldn’t hesitate” to be even more aggressive if forthcoming data warranted a more hawkish approach. The Fed is edging away from detailed forward guidance as the economic backdrop becomes more complex. Although the jobs market is resilient, there are early signs that business activity has begun to decline, investments are slowing and the housing market is starting to cool.

Powell welcomed the cooler environment and insisted price stability was “what makes the whole economy work”. That means growth needs to moderate and the labour market has to become less tight, he said, adding that the risk of doing too little was worse than not being forceful enough.Michael Gapen, chief US economist at Bank of America, said a 0.75 percentage point rate rise in September would be a tall order, adding that half-point and quarter-point increases were more probable given how much tightening has been implemented. But not everyone agrees with the Fed’s shift to a more taciturn approach. Torsten Slok, chief economist at Apollo Global Management, warned it could result in more market volatility. “If they no longer want to communicate strongly about what the expected path of rates is, that’s going to just magnify the current discussion in markets.”He added: “The market can easily get confused and latch on to anecdotes . . . [and] numbers that normally would not get that much weight, because the Fed is dimming the lights on where they are going.” More

Hong Kong’s monetary policy moves in lock-step with the United States’ as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.The Federal Reserve raised the benchmark overnight interest rate by three-quarters of a percentage point. The move came on top of a 75 basis point hike last month and smaller moves in May and March, as the Fed stepped up efforts to cool inflation.Fed Chairman Jerome Powell told a news conference following the rate announcement that he did not believe the U.S. economy is currently in a recession but that it is softening. More

HONG KONG (Reuters) – Hong Kong Monetary Authority (HKMA) chief Eddie Yue said on Thursday he expects the city’s overnight and one-month interbank rate to continue to rise, but at a much faster pace. Yue was speaking after the city’s de facto central bank raised its base rate charged through the overnight discount window by 75 basis points to 2.75%, hours after the U.S. Federal Reserve delivered a rate hike of the same margin. More