Aurelia Butler

BRUSSELS (Reuters) – The European Union is considering excluding banks in Belarus from the SWIFT messaging system that underpins the global financial transactions, as it has already done for seven Russian banks, an EU official said on Thursday.”On the SWIFT side, we’re also looking now at the preparation of the equivalents for the Belarus financial sector, but knowing that SWIFT is not as strategically important in the Belarus economy as it is in the Russian side,” the official said. More

BEIJING (Reuters) – Under President Xi Jinping, China has pushed for self-reliance in key areas of technology and the payments needed to settle trade to minimise its vulnerability to economic pressure over flashpoints, from trade policy to Taiwan.Russia’s invasion of Ukraine and the tough global response, including curtailment of access to the SWIFT payments system and a freezing of Russian assets, provide a case study for China on the economic and financial vulnerabilities analysts expect it will continue to address.The unexpectedly heavy sanctions, led by the West, have exposed vulnerabilities for Russia, including dependence on the U.S. dollar, that China would want to mitigate before becoming the target of any such measures.While the China-U.S. trade war during the Trump administration forced China to seek greater self-sufficiency, the sanctions on Russia are a louder wake-up call, said Abraham Zhang, chairman of Shenzhen-based China Europe Capital.”Just as China needs food security, China also needs oil reserves, and a complete industrial system, so that if China is one day cut off from external supplies as Russia is now, China can still be self-sufficient, maintain internal circulation, and survive,” Zhang said.China has in recent years ramped-up efforts to develop home-grown technologies, from semiconductors to advanced materials to aircraft, to ease reliance on imports. Huawei Technologies, crippled by sanctions preventing its access to high-end chips, is a cautionary example. “China needs to accelerate the development of key technologies. Otherwise, it would be too late once you’re suffocated by sanctions, if Russia offers any lessons,” he said.To be sure, China has a much bigger and more diversified economy than Russia’s, although it depends on imported energy and food, and relies heavily on global commerce as the world’s largest trading economy. Also, Ukraine is not Taiwan, which Beijing has vowed to bring under its control, by force if necessary. The political and geostrategic circumstances are vastly different, including the likely response to a Chinese attack on the democratically controlled island, which among other factors is a linchpin in the global technology supply chain. Where the United States has ruled out intervening militarily in Ukraine, its policy of “strategic ambiguity” towards Taiwan and its strengthening defence ties with the island, including stepped up arms sales and the development of the AUKUS grouping with Australia and Britain, convey a warning.China, which has declined to condemn Russia’s attack or call it an invasion, has blamed the Ukraine conflict on NATO expansion.Taiwan has reported no unusual Chinese military movements since the Ukraine war began and U.S. President Joe Biden this week dispatched a team of former senior officials to visit the island in a show of support. CURRENCIES, PAYMENTSChina has in recent years sought to internationalise its currency by settling more trade with the yuan, including with Russia. The yuan accounted for 13.1% of the Russian central bank’s foreign currency reserves last June, compared with just 0.1% in June 2017China’s central bank is developing a digital currency, which would have the benefit of further encouraging yuan settlement for trade, but the project, while ahead of efforts elsewhere, is still in its early days.China has an alternative system to bypass SWIFT, the Cross Border Interbank Payment System (CIPS), which saw a 75% increase in processing volume last year, although 80% of CIPS transactions still involve SWIFT.Bert Hofman, director of the East Asian Institute at the Lee Kuan Yew School of the National University Singapore, said China has been concerned about dollar dominance of international payments since the global financial crisis.”The sanctions may therefore lead China to accelerate the development of alternative options, including the China-led CIPS system, and the further internationalisation of the (yuan).”WORRY ABOUT ISOLATIONWhile the unity and strength of the diplomatic response to the invasion, which many experts believe Russia underestimated, may be instructive to China, the unexpectedly sluggish early performance of Russia’s forces in Ukraine is less applicable, with the United States not engaged there militarily.U.S. intervention would be China’s biggest worry in the event that it attacked Taiwan, said Yun Sun, director of the China Program at the Washington-based Stimson Center. “The international isolation of Russia, and the broad coalition … make China worry about the potential international isolation of China in a similar event on Taiwan,” she said.Still, she said, China would take comfort that countries that have joined in sanctions against Russia remain in the minority, and the fact that China has yet to face secondary sanctions for its Russia ties.Steve Tsang, director of the SOAS China Institute in London, said Beijing was unlikely to be happy with the way things are going in Ukraine but the ultimate effectiveness of the international response would determine its outlook.If Russia was not brought to its knees, “China will be relatively relaxed about what the West could do when China is finally ready to take Taiwan,” he said.”If the responses should prove effective against Russia, Xi will be a lot more cautious about when and how he will try to bring Taiwan into the fold,” he said.  More

Turkish prices rose at their fastest rate in 20 years as a currency devaluation fed inflation, with food and energy driving the surge, official data showed.The consumer price index rose 54.4 per cent year on year in February, the Turkish Statistical Institute said on Thursday, outpacing a forecast of 52.5 per cent in a poll by Bloomberg.Food prices climbed 64.5 per cent and transportation jumped 75.8 per cent last month, pushing the index to its highest rate since March 2002. The release weighed on the lira, down 0.8 per cent on Thursday to about TL14 against the dollar.President Recep Tayyip Erdogan calls himself an “enemy of interest rates” and has ordered the central bank to keep its benchmark rate at 14 per cent. The lira has shed nearly 50 per cent in the past year, and Erdogan is betting that the weaker currency will boost exports and fuel economic growth ahead of a general election next year. He promised this week that his government would “bring inflation under control in the summer months”.But economists said taming inflation without an interest rate increase will prove elusive, especially as the war in Ukraine causes higher global energy prices. Turkey imports almost all of its oil, natural gas and coal, primarily from Russia.“The spillover effects from the Russia-Ukraine crisis, including higher global commodity prices and potentially fresh supply chain disruptions, mean that the risks are skewed to the upside,” Jason Tuvey, senior emerging markets economist at Capital Economics, wrote in a research note.“Inflation will stay close to these high levels until the very final months of this year, but the central bank and, crucially, president Erdogan seem to have no appetite for interest rate hikes,” he said. More

AGBOPURA, Sri Lanka (Reuters) – W.M. Seneviratne sat watching a mechanised harvester slice through the jade green fields around him in eastern Sri Lanka’s Agbopura village one recent morning, aware that this year’s harvest would be only a fraction of what he was used to.”I cannot recall any time in the past when we had to struggle so much to get a decent harvest,” said Seneviratne, a lean 65-year-old with a shock of silver hair, who has been farming since he was a child.”Last year, we got 60 bags from these two acres. But this time it was just 10,” he added.The dramatic fall in yields follows a decision last April by President Gotabaya Rajapaksa to ban all chemical fertilisers in Sri Lanka – a move that risks undermining support among rural voters who are key to his family’s grip on Sri Lankan politics.Although the ban was rolled back after widespread protests, only a trickle of chemical fertilisers made it to farms, which will likely lead to an annual drop of at least 30% in paddy yields nationwide, according to agricultural experts.The shortfall comes at a bad time for the island nation of 22 million people. Sri Lanka is in the throes of its worst economic crisis in a decade, foreign exchange reserves are at a record low and inflation is soaring, especially for food.Fuel shortages have led to rolling power cuts across the country.The impact of the poor paddy crop could push up the retail price of rice by around 30%, said Buddhi Marambe, an agriculture professor at the University of Peradeniya, who blamed the decision to ban chemical fertilisers.”That’s where the problem is,” he told Reuters. “Yields will likely be lower next harvest season as well. So, costs will keep increasing even 4-5 months from now.”To ease the hit on consumers, Rajapaksa’s administration is importing rice using credit lines from friendly neighbours.And to help farmers, it has raised the minimum government purchase price and announced a 40 billion Sri Lankan Rupee ($200 million) compensation package.Sri Lanka’s agriculture and finance ministries did not respond to questions from Reuters.Agriculture Minister Mahindananda Aluthgamage told reporters on Tuesday that the harvest would be lower this year.”We will start paying compensation to 1.1 million farmers from next week … none of the farmers will suffer financially,” he said. “We will never let that happen.”‘VISTAS OF PROSPERITY’In a campaign manifesto for the presidential election in 2019 titled “Vistas of Prosperity and Splendour”, which became a policy framework after a landslide victory, Rajapaksa proposed providing Sri Lankans with food without harmful chemicals.He pushed the reform through in a single season rather than over several years, adding to confusion across Sri Lanka’s farms including around Agbopura, a quaint hamlet some 220 km northeast of the country’s main city of Colombo.”Farmers around here really tried everything possible to grow their paddy. They applied coconut fertiliser, liquid fertiliser, compost… basically, anything they could get their hands on,” said Chanuka Leshaan Karunaratne, a major paddy trader in Agbopura.Yields among the area’s 500 farmers appear to have dropped by half, Karunaratne said, sitting at his warehouse on the main road that runs through Agbopura.Indika Paranavithana, head of the local farmers’ association, estimated a similar fall in output and said many distressed households had used up their reserve stocks.”This paddy reserve is their savings,” he said. “For the rest of the year, if someone gets sick or there is a funeral, they sell a sack of paddy to cover costs.”On Monday, the government approved a minimum of 50,000 rupees per hectare as compensation, part of the 40 billion rupee package announced in January. That could make it harder to achieve its 8.8% budget deficit target for 2022, and further stoke inflation. Some farmers say the amounts are not enough, and the government has become deeply unpopular, according to a new survey by Colombo think-tank Verité Research.In its first “Mood of the Nation” poll, which surveyed over 1,000 Sri Lankans in January, Verité found that 10% approved the government’s work and more than 80% had lost confidence in the country’s economy.Sri Lanka’s 1.5 million paddy farmers are a core vote base for the nationalist Rajapaksa family, who have supported them with fertiliser subsidies and higher crop prices.The farm sector contributes 7% to the country’s GDP but employs about 27% of the workforce, mostly in rural areas. Sri Lanka’s reserves fell to $2.36 billion in January, leaving the government short of dollars for chemical fertiliser imports for the cultivation season starting in April.The military is getting involved. Thousands of troops have been tasked with producing 2.5 million tonnes of organic fertilisers by April, according to an official who declined to be named.GOLD NECKLACESWeeks before the harvesters arrived at Agbopura, Seneviratne noticed the plants were short and reedy.”These crops need urea. Compost is just not good enough and we didn’t even get any of the organic fertiliser that was distributed by the government,” he said.Despite 150,000 rupees in debt, a decent harvest would allow him to get back two of his wife’s gold chains that were pawned last year to meet household costs.The night before his crop was harvested, Seneviratne camped in the fields to scare away a group of elephants that arrive each winter.But paddy from his two areas only filled 10 bags. His earnings dropped to around 15,000 rupees from 85,000 rupees a year earlier. “After I paid off the harvester, there was only 200 rupees left,” he said.Like many other farmers in Agbopura, Seneviratne said he did not know when and how government compensation would reach him.”If I had known the yield would be this low, I would have left the crop to be eaten by wild animals,” he said. “I don’t know how we will get the pawned gold back.”($1 = 199.2000 Sri Lankan rupees) More

MOSCOW (Reuters) – Russia’s central bank on Thursday said it was increasing the capital of affiliated reinsurance firm AO RNPK, which specialises in providing protection against international sanctions, to 300 billion roubles ($3.08 billion) from 71 billion roubles.($1 = 97.4990 roubles) More

BERLIN/LONDON (Reuters) – Home prices in Germany’s booming property market look set to rise sharply again in 2022 and, while the pace will ease in coming years, the increases will still outstrip general inflation, a Reuters poll found.As in much of the world, many Germans spent most of the coronavirus pandemic working from home and those who could afford to move sought out larger, more expensive properties – fuelling home price rises.Years of ultra-low borrowing costs have also made it cheaper for people to upsize or for first-time buyers to get onto the property ladder.Historically, the German housing market was dominated by renters but the desire for a safe-haven investment, along with speculators, has grown in recent years, adding to the property market boom.European Central Bank board member Isabel Schnabel said in February the bank must consider surging house prices when assessing inflation.Much of the polling was conducted before Russia’s invasion of Ukraine, which could delay – or limit – any ECB considerations of tighter monetary policy. That in turn may support the housing market in the short term.Home prices rose around 10% last year and were forecast to rise 6.3% this year, according to the Feb. 10-March 2 Reuters poll of 16 property market experts. That pace was expected to slow to 4.5% next year and then to 2.8% in 2024.INFLATIONYet consumer price inflation was pegged at 3.0%, 1.8% and 1.9%, respectively, in a January Reuters poll and the latest house price forecasts were an upgrade from the respective 6.0%, 4.0% and 2.0% given in November. [ECILT/EU]”House prices will continue to rise, albeit at a somewhat slower pace than in the previous years,” said Carsten Brzeski, global head of macro at ING.”Both the mismatch between supply and demand, currently fuelled by a stagnating supply, as well as high material and construction costs and the fight against climate change, for which energy-efficient housing plays a major role, will continue to drive house prices up in the coming years.”Germany should curb a boom in house prices by setting caps on mortgages and forcing banks to build up more capital, the European Union’s financial stability watchdog said last month.”The house price to income ratio is even higher than during the housing boom of the ’90s, particularly in big cities,” said Marco Wagner, senior economist at Commerzbank (DE:CBKG).Asked to rate the affordability of German house prices on a scale of 1 to 10 where 1 was extremely cheap and 10 extremely expensive, analysts rated them 8. That matched the previous estimate and one of the highest medians given compared to other Reuters polls for major housing markets.Respondents to an additional question said the ECB would have to lift its refinancing rate to 1.50% this year to significantly slow activity. It currently sits at zero and only 13 of 43 economists in a separate Reuters poll on ECB policy saw it rising at all this year.”To significantly slow down activity, a sharp rise in interest rates is required, which is not to be expected to this extent,” said Pekka Sagner, economist for housing policy and property economics at the German Economic Institute.(For other stories from the Reuters quarterly housing market polls:) More

The writer is chief global equity strategist and head of macro research in Europe for Goldman SachsThe Russian invasion of Ukraine has a significant humanitarian cost above all. There are, also, economic impacts and spillovers into financial markets. Increased uncertainty has, in particular, significantly raised the risk of European assets. Together, this has worsened the growth and inflation mix. Largely as a result of higher energy prices, inflation expectations have been pushed up, while the growth outlook has been lowered.All of this comes at a difficult time for investors and for policymakers: supply side bottlenecks and recovering demand from the Covid-led downturn had already pushed up inflation to levels not seen for many years.Markets have had to absorb a major change in expectations about policy. As recently as last summer, for example, investors were expecting no interest rate rises by the Federal Reserve this year; now the market is pricing in close to seven consecutive increases and we expect a further four rises next year.Multi-decade high inflation and low unemployment have been seen in the US and UK. This has already spurred the Bank of England to raise interest rates twice to 0.5 per cent, the first hike in back-to-back meetings since 2004. Even the eurozone, which has long struggled with deflationary pressures, is seeing upward pressure on prices, and this will be exacerbated by the conflict’s impact on energy prices.The direct effects of the crisis on trade are likely to be small given that Russia and Ukraine account for about 2 per cent of global gross domestic product and trade. The euro area exports about 1 per cent of GDP to Russia and Ukraine. Germany is slightly more exposed than Italy or France. The cross-border banking exposure to Russia is also small — the largest among western European countries is Austria with about 1.4 per cent of GDP in cross-border banking exposure to Russia/Ukraine/Belarus. The UK has the next highest exposure at about 0.6 per cent.The implications for the commodity markets are much greater, as Russia produces 11 per cent of global oil and 17 per cent of global gas. Our economists estimate that a 20 per cent rise in the price of oil would boost global headline US inflation by nearly 0.25 percentage points, and it could be more, potentially with higher food prices. Europe is the most impacted region and will probably face higher gas prices given the halt to Nord Stream 2. Commodity price risk remains skewed to the upside, with further escalation likely to send European natural gas, wheat, corn and oil prices higher from already elevated levels. At the same time, a new focus on increasing defence spending and higher investments in alternative energy sources will increase government debt levels, already elevated as a result of the pandemic.From a financial market perspective, the main impact is through greater uncertainty and the potential effects of higher inflation and slower growth. However, assets such as equities had already experienced a correction since the start of the year as concerns about higher interest rates reduced their valuations. The European stock markets were the most heavily hit on the news of the invasion and are factoring in a slowdown in growth. Using our macro factor estimates for growth pricing across European assets, the market has priced in about 0.5 percentage points of a growth downgrade, towards the lower end of the range of our estimates under escalation scenarios.In the short term the risks are high and market volatility is likely to stay elevated. But it should be emphasised that valuations are not very stretched and we continue to see longer term value in Europe shares. The falls have pushed their price/earnings ratio to about 13 times, below the long-term average.In the UK, the FTSE 100 index trades at a price-earnings multiple of less than 12 and a dividend yield of nearly 4 per cent. While there are downside economic risks, nearly 20 per cent of UK index revenues are from the oil sector — which will benefit from higher prices. The modest valuations are despite low real interest rates, a further reopening recovery and an expected sharp rise in fiscal spending this year. Earnings will be boosted by the increased spend on renewable energy and on defence.For longer term investors, the reasonable valuation, particularly across European and UK equities, should provide support. We would expect moderate returns over a 12-month horizon. More