Aurelia Butler

The writer is chief economist at German bank LBBWAs inflation rises in the eurozone, the pressure is inevitably building for the European Central Bank to step up planned monetary policy action.In March, European Central Bank president Christine Lagarde explained how the overdue normalisation of monetary policy was envisaged in Frankfurt: in the third quarter, bond purchases could be reduced to net zero with only maturing securities to be replaced. Only then would interest rates be raised “gradually”.The ECB is likely to be concerned that a more rapid normalisation of monetary policy, comparable with moves by the US Federal Reserve or the Bank of England, could entail risks to financial market stability. For this reason, it may prefer to move only cautiously, almost as if on eggshells.What seems to be the problem? A key concern appears to be Italy. Will the country be at risk of descending into a debt abyss if super-loose interest rates rise? The ECB may feel it has been wrongfooted once. Back in March 2020, Lagarde stated in one of her first press conferences that the ECB was not there to close government bond spreads. That is not wrong, of course. But her words had not yet faded away when a formidable sell-off of Italian government bonds began, worse than on any single day of the euro crisis. Lagarde had to row it all back immediately. But the ECB needs to leave the difficulties of that day behind. It should not stand in the way of tightening monetary conditions more courageously than it has hitherto communicated. The fear that Italy’s high debt load could pose a challenge to monetary normalisation cannot be dismissed out of hand. But Italy’s resilience has become much more solid than many doomsayers give it credit for.Last month’s announcement from Lagarde that the ECB would end its colossal bond purchases sooner than generally expected provoked a comparatively restrained reaction in Italian government bonds.For sure, it will not be without consequences if the ECB stops buying the equivalent of all new issues of euro government bonds, as has been the case for the past two years. Interest rates have already risen. Spreads are likely to widen further. But that is a healthy market response and should not be feared.Italy is in a better position than many observers believe: high inflation is reducing government debt. With inflation-driven nominal growth of 10 per cent, Italy’s debt ratio falls by 15 per cent of GDP in 2022, other things being equal. That helps. It helps even more that effective interest rates are very low. Italy pays an average interest rate on its outstanding debt that has declined to only 2 per cent, right at the ECB’s inflation target and well below inflation. Higher-yielding bonds issued a decade ago are still maturing and can be refinanced more cheaply today. The effective interest burden will therefore remain low or even fall for a few more years.Something else is both unusual and favourable. Italy currently has a stable and competent government that enjoys broad parliamentary support. This is by no means a matter of course in a country where the last “elected” prime minister, meaning the candidate heading the victorious party list, was one Silvio Berlusconi, almost fifteen years ago.Finally, Italy will have to issue less debt than many realise. The average life of Italy’s public debt is seven years, even if the Treasury has not taken advantage of the super low rates to extend its maturity profile. Only a small portion needs refinancing every year. And Rome busily pre-funded in the first quarter while the ECB’s €1.85tn “pandemic emergency purchase programme” of asset buying was still up and running. Rome’s borrowing needs will be further reduced through substantial budgetary relief from the Next Generation EU reconstruction fund. Between 2023 and 2025, Italy can expect annual grants of more than 1 per cent of its gross domestic product and a little more than that again through cheap EU loans. This makes it much more likely that prime minister Mario Draghi will be able to push through structural reforms to address Italy’s growth weakness than any of his predecessors, including Mario Monti, who had to run austere public finances.The risk of inflation getting out of control is rapidly rising. The ECB must shift up a gear. The worry that Italy cannot cope financially is unfounded. It can and it will. All the stars are aligned, and it won’t get any better than this. The longer Lagarde hesitates, the more likely it becomes that an Italian government crisis will get in the way. Then it would get truly tricky to increase rates. Don’t wait! More

We’ve been writing about the international monetary system for long enough to be somewhat dubious about oft-repeated claims of the dollar’s demise. Sure, we can see why the greenback ought to be dethroned. The US is no longer the economic power it once was, inflation’s at multi-decade highs, and now Washington has frozen hundreds of billions of dollars worth of assets held by regimes it doesn’t like. But history tells us that global reserve currency status tends to work like Teflon in reverse — it’s really hard for all of that exorbitant privilege to come unstuck. Our faith in the dollar is only bolstered when we come across nuggets such as this:

That particular piece of evidence comes courtesy of Central Banking’s latest annual poll of official sector reserve managers — that is, the people responsible for investing the rainy-day stockpiles built up by central banks across the world.The poll of 82 reserve managers, who together manage reserves worth a whopping $7.3tn — or 48 per cent of the world’s total — was conducted between February and mid-March. So some of the respondents might have reassessed their answer following the decision to put about $300bn-worth of the Russian central bank’s assets on ice due to Moscow’s invasion of Ukraine. But frankly we doubt there’s been too much of a reassessment among this crowd. For large, conservative investors such as these, there is simply no real alternative. As this respondent to the poll noted: It’s not about absolute security. It’s about the relations between selected currencies. And measured by relative value, USD is still the largest economy in terms of taxes generation, it is the most technological economy (the largest global technology companies are from the US), it has the biggest financial market, the most transparent regulation and the longest tradition. That’s not to say that there hasn’t been interest in other currencies too — over half of the survey respondents invest in the Australian and Canadian dollars, and in the renminbi. Interest in alternatives is on the up too:Compared with last year’s survey, the numbers investing in Australian and Canadian dollars increased marginally, but the increase for renminbi is significant — 41 in 2022 compared to 33 in 2021. Indeed, the onshore renminbi is poised to win more converts, with 14% of respondents saying they are considering investing now. Interestingly, the number of respondents investing in the offshore renminbi is lower than the 2021 figure of 22…. . . Viewed regionally, reserve managers from African central banks are notable for investing in the renminbi (both on- and offshore), and real at above sample percentages, as well as the South African rand. Reserve managers from the Americas favour Scandinavian currencies as well as the Singapore dollar and Korean won. The won is popular among reserve managers from Asia: one- third of the sample invest in this currency, compared to 19% in the survey. Just over 70% of reserve managers invest in the Australian dollar and nearly half in the New Zealand dollar, both considerably higher than the survey. There was considerable support for the Singapore dollar too. But, in terms of the big picture, these efforts at diversification are piecemeal. As the IMF’s quarterly summation of the currency composition of the official sector’s assets repeatedly show: Of course, at some point this will all change. No reserve currency remains on top forever. But, if central bank reserve managers have anything to do with it, the dollar’s going nowhere anytime soon. More

Indonesia counts for more than half of the global supply of the edible oil, which is used in everything from cakes, chocolate, margarine and frying fats to cosmetics, soap, shampoo and cleaning products.It is also key to Ferrero Rocher chocolates and Nutella spread, giving them a smooth texture and longer shelf life.Here is a summary of how much palm oil companies use, based on the most up-to-date data available: UNILEVERUnilever said in 2016 that it used about 1 million tonnes of crude palm oil and its derivatives and about 0.5 million tonnes of crude palm kernel oil and its derivatives.It said it was the largest user of physically certified palm oil in the consumer goods industry.The company declined to give more up-to-date data.NESTLEIn 2020, the maker of KitKat chocolate bars bought about 453,000 tonnes of palm oil and palm kernel oil, mostly from Indonesia and Malaysia, its website says. It uses about 88 suppliers from more than 1,600 mills in 21 countries. It also buys from Latin America, Africa, and other parts of Asia.PROCTOR & GAMBLEThe company used about 605,000 tonnes of palm oil and palm kernel oil, and their derivatives, in its 2020-2021 fiscal year, a company document showed. It is used in its fabric and home care categories and beauty products.Its purchases account for about 0.8% of global palm oil production and it sells palm oil byproduct it cannot use. Some 70% of its palm oil is sourced from refineries in Malaysia and Indonesia.MONDELEZ INTERNATIONALThe Oreo cookie maker said that it purchases “large quantities” of palm oil in a securities filing.It accounts for 0.5% of palm oil consumption globally, according to its website.DANONE:Danone said it purchased a total of 71,000 tonnes of palm oil in 2018.FERRERO:The Italian maker of Nutella sourced 85% of its palm oil supplies from Malaysia and only 9% from Indonesia in the first half of 2021, according to its website.L’OREAL:L’Oreal said in 2021 that it purchased less than 310 tonnes of palm oil and also used, from its suppliers, ingredients including palm derivatives in a quantity equivalent of 71,000 tonnes. More

Palm oil is the world’s most widely used vegetable oil and is used in the manufacture of many products including biscuits, margarine, laundry detergents and chocolate.Below are details on the world’s major edible oils:PALM OIL Palm oil is by far the most produced, consumed and traded edible oil in the world, and accounts for roughly 40% of the supply of the top four most popular edible oils: palm oil, soybean oil, rapeseed oil (canola) and sunflower seed oil.Around 77 million tonnes of palm oil are expected to be produced this year, according to the U.S. Department of Agriculture (USDA). Indonesia is the top producer, exporter and consumer of palm oil, accounting for around 60% of total supply. Malaysia is the second largest supplier with about 25% of global supply share. India is the top palm oil importer, while China, Pakistan, Bangladesh, Egypt and Kenya are other major buyers. In a typical year, palm oil accounts for 40% of India’s vegetable oil food consumption, according to the USDA. Import forecasts have declined this year because of Indonesia’s restrictive trade policies, high edible oil prices and other factors.Global palm oil production slumped in 2020 and 2021 due to a drop in migrant labour on plantations across Southeast Asia, which led to reduced fruit bunch collection and lower fertilizer applications for trees.Indonesian authorities previously restricted exports of the edible oil between late January and mid-March to try to control domestic cooking oil prices. SOYBEAN OILSoybean oil is the second most produced edible oil, with around 59 million tonnes expected to be produced this year. China is by far the largest producer (15.95 million tonnes), followed by the United States (11.9 million tonnes), Brazil (9 million tonnes) and Argentina (7.9 million tonnes). Prices soared to a record high on concerns over Indonesia’s decision to effectively ban exports of palm oil.Argentina is the top soyoil exporter but expected to ship less oil this year following a poor end to its soybean growing season. The country briefly halted new overseas sales of soy oil and meal in mid-March before hiking the export tax rate on soy oil and meal to 33% from 31% in a bid to tamp down domestic food inflation. Brazil and the United States are the next largest exporters, according to the USDA. More soy crushing plants are expected to open in coming years in the United States due to a strong demand to use the oil in biofuel, but capacity to increase demand in the near term is limited.India is the top soyoil importer.RAPESEED OILAround 29 million tonnes of rapeseed oil are expected to be produced this year, according to the USDA, mainly in Europe, Canada and China. China and the United States are top importers. In 2021, drought slashed Canada’s harvest of canola, a variety of rapeseed, and Europe also suffered crop damage, which reduced oil supplies for 2022.Canada exported about 75% of its canola oil used in food and fuel last year, with United States taking 62% and 25% heading for China, the Canadian Oilseed Processors Association said.Top edible oil importer India this year harvested a record rapeseed crop, popularly known as mustard in the country.SUNFLOWERSEED OILRussia and Ukraine account for 55% of global sunoil output and 76% of world exports. Since Russia’s invasion of Ukraine in February, shipments from the region have slumped and this year’s production is expected to be disrupted in Ukraine.Traditionally, China, India and Europe are the main sunoil importers, but buyers there are all currently scrambling to find alternative oils to replace the lost supplies from the Black Sea.More than 90% of India’s imported sunflower oil usually comes from Ukraine and Russia. Argentina is the world’s fifth biggest sunflower oil exporter, according to the USDA. More

Sri Lankan businesses are struggling to keep operating after a surge in fuel prices that has exacerbated the highest inflation rate in the Asia-Pacific region, with authorities concerned supplies may run out as they negotiate an IMF bailout.The island nation of 22mn is going through its worst debt and economic crisis in decades as a foreign exchange shortage has left the government unable to pay off its loans and import basics including food and medicine. This has triggered weeks of mass protests, with President Gotabaya Rajapaksa under pressure to resign.A surge in global oil and gas prices, combined with a 60 per cent drop in the value of the Sri Lankan rupee since last month, has also led to critical shortages of petrol and cooking gas.Sri Lanka’s state oil company, which had previously rationed petrol to conserve its limited stock, last week raised prices by a third to SLRs338 ($1.00) a litre.“We are now at the state of depending on a shipment by shipment situation for fuel availability,” said Susantha Perera, a former senior engineer at Ceylon Electricity Board, the state power entity. “Currently, the fuel available would be enough to last till the month’s end. How the government would continue with supplies remains to be seen.”Sri Lanka said last week that it had secured $500mn worth of assistance for fuel from neighbouring India. It has also suspended bond repayments to conserve its foreign currency reserves.The island owed about $8bn in debt and interest payments this year on more than $50bn in total foreign debt, according to the finance ministry.It has started negotiations over debt restructuring and further assistance with the IMF, private creditors and countries such as India and China. The IMF said on Saturday that a Sri Lankan delegation in Washington had “initial technical discussions” last week.But with IMF talks expected to drag out, Sri Lankan officials and the UN are pushing for immediate financial assistance to prevent economic collapse.The lack of fuel has led to long queues, lengthy power cuts and stoked inflation as businesses pass on higher costs to consumers. Sri Lanka’s consumer inflation rate in March of 21.5 per cent was the highest in the Asia-Pacific region. MD Paul, secretary of the National Construction Association, said his members would raise their rates by at least 60 per cent owing to the rising costs of supplies. He said a 50kg bag of cement now costs as much as SLRs3,000, compared with less than SLRs1,000 before.“Most of the material prices have gone through the roof,” he said. “At the moment we are only focused on minimising our losses, not making profits.”Both private and public transport is becoming unaffordable. The Lanka Private Bus Owners‘ Association has received government approval for a 30 per cent fare increase, chair Gemunu Wijeratne said.

Aruna Weerasinghe, a 33-year-old IT sector employee, said he no longer knew how he would get to work. “With petrol at over SLRs300, we cannot afford to run cars because our salaries won’t be increased to meet that,” he said. But Perera, the former electricity board official, said energy and power prices remained deeply distorted. The CEB provides heavily subsidised power but has not been able to pay its creditors for six months.“Even a 100 per cent increase [in tariffs] would not suffice with the current cost escalations,” Perera said, warning that if authorities increased tariffs now, “you would see riots”. More