Economy

LONDON (Reuters) – Investors have piled back into bonds in Pakistan and Argentina following cash infusions and optimism over multilateral support, but the two nations have secured only enough help to limp to autumn elections, experts said. The rally in international bonds issued by the two countries has intensified over the past two weeks, seeing returns on Pakistan’s bonds soar to above 45% and Argentina’s close in on 30% year-to-date, making them some of the best performers in their asset class, according to JPMorgan (NYSE:JPM) data. But the boost in the bonds belies the difficulties both nations face implementing major reforms once new leaders arrive after upcoming elections. “Its not enough to resolve the country’s issues – not nearly enough,” said Carlos de Sousa, emerging market portfolio manager at Vontobel Asset Management said of Pakistan’s recent funding gains, adding Argentina’s challenges are also immense. Pakistan’s 11th hour deal for $3 billion from the International Monetary Fund (IMF), after months of talks got official approval this week. Saudi Arabia and the UAE followed with $2 billion and $1 billion infusions. This fresh cash means Pakistan is unlikely to default on its debt in the next six to nine months, said de Sousa. Elections in the politically volatile country must be held by early November. Reserves remain precariously low at $9.8 billion as of 7 July, only roughly two months of imports. JPMorgan pegs its external financing needs at greater than $30 billion. Even in the near-term, Pakistan will have to stay on top of tricky reforms such as allowing its currency to move somewhat freely.”Pakistan has a history of undershooting fiscal targets and the risk of fiscal slippage is high in an election year,” JPMorgan said in a note. The real challenge for Pakistan, which is still recovering financially and physically from last year’s devastating floods, comes after the contentious elections, when it will likely need to secure a longer-term IMF program. This will likely require punishing, and unpopular, cuts to food and fuel subsidies, increases to electricity prices and loosening controls on the rupee. “It gives some space for them to be able to go through the political moment that they’re going through now,” said Roberto H. Sifon Arevalo, head of global sovereign & international public finance ratings at S&P Global (NYSE:SPGI), adding “its still a very complicated political situation.” Reflecting the challenges ahead, the Pakistan bond rally was heavily skewed towards shorter-dated maturities.DEEP ROOTED PROBLEMSIn Argentina, infamous for its chaotic cycles of debt and default, problems are even more deeply rooted. South America’s second-largest economy is teetering on the edge of recession, with inflation topping 100% and a currency that keeps depreciating in official and parallel markets. International reserves are at record lows, and the nation is struggling to stay current on a $44 billion IMF programme, a loan secured last year to refinance a failed 2018 bailout. Battling an acute dollar scarcity, in June it paid part of $2.7 billion due to the Washington-based lender with Chinese yuan from a Beijing swap line.Argentina’s bond gains, investors said, reflected the IMF’s commitment to Buenos Aires – accounting for roughly 28% of the fund’s total lending. The first test of what’s to come will be Argentina’s mandatory primary vote on Aug. 13 in advance of a general election in October. “The outcome doesn’t translate in who will sit in the presidential palace, but it will show the candidates that are performing well,” said Jimena Blanco, chief analyst at Verisk (NASDAQ:VRSK) Maplecroft. Investors and pollsters said the tough times could force Pakistan and Argentina’s leaders to reckon with needed fiscal reforms.”The Peronist government faces a high chance of losing the election,” said Alejandro Catterberg, director of Buenos Aires-based polling firm Poliarquia. “The disappointment and frustration among Argentines are running at the highest level in the last two decades”. Peronist candidate and current economy Minister Sergio Massa will face a suite of rivals, including a coalition of centrist Horacio Rodriguez Larreta and conservative Patricia Bullrich, and leading far-right contender Javier Milei.Whoever wins, reality won’t leave much choice in policy making, said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management. “They have run down reserves to a point where they really don’t have much of a choice going forward.” More

Import prices dropped 0.2% last month, the Labor Department said on Friday. Data for May was revised to show import prices declining 0.4% instead of 0.6% as previously reported.Economists polled by Reuters had forecast import prices, which exclude tariffs, dipping 0.1%. In the 12 months through June, import prices tumbled 6.1%. That was the biggest year-on-year decline since May 2020 and followed a 5.7% drop in May.Annual import prices have now decreased for five straight months. The report added to data this week showing consumer and producer prices rising moderately in June in suggesting that the economy is shifting into a disinflationary environment. Though inflation remains above the Federal Reserve’s 2% target, easing price pressures have left most economists believing that an expected interest rate hike this month would be the last in the U.S. central bank’s fastest monetary policy tightening cycle since the 1980s.The Fed skipped raising rates in June after hiking its policy rate by 500 basis points since March 2022. More

According to credit bureau Serasa, about 71.9 million Brazilians have been blacklisted in Latin America’s largest economy after the pandemic and high borrowing costs to tame inflation strained families’ budgets.The first phase of the comprehensive renegotiation program “Desenrola Brasil” will kick off on Monday, said the Finance Ministry. During this phase, banks will forgive debts up to 100 reais ($20.9) and provide customers with incomes of up to 20,000 reais the opportunity for direct debt renegotiation without any value limitations.There will be no contribution from the Treasury, but to encourage negotiation by banks, the government will offer financial institutions a regulatory incentive to increase credit availability, allowing the use of presumed credits totaling approximately 50 billion reais.According to the ministry, about 30 million people could benefit from this initiative.The renegotiation for the public with income up to two minimum wages, equivalent to 2,640 reais ($552), will begin in September, the ministry said. In these cases, the renegotiation will have government guarantees for financial and non-financial debts up to 5,000 reais.This phase is deemed the heart of the program and is considered more complex as it requires the government to structure a platform centralizing data on consumer debts to coordinate discounts from creditors.The government stated that the program aims to combat the delinquency crisis in the country “in a scenario where interest rates have radically changed.”The central bank has maintained its benchmark interest rate steady at a cycle-high of 13.75% since September, drawing frequent criticism from Lula. ($1 = 4.7824 reais) More

Borrowers will be eligible for forgiveness if they have made either 20 or 25 years of monthly IDR payments, the department said. The IDR program caps payment requirements for lower-income borrowers and forgives their remaining balance after a set number of years.The department said the relief addresses what it described as “historical inaccuracies” in the count of payments that qualify toward forgiveness under IDR plans. “For far too long, borrowers fell through the cracks of a broken system that failed to keep accurate track of their progress towards forgiveness,” Secretary of Education Miguel Cardona said.Biden has said he will pursue new measures to provide student loan relief to Americans after the Supreme Court blocked his plan to cancel hundreds of billions of dollars in debt. The Education Department launched a regulatory “rulemaking” process to pursue his $430 billion loan relief plan. That process is expected to take months. Friday’s relatively smaller relief falls under a separate, payment count adjustment program that the Biden administration announced in April last year, the department said. More

The travel industry is on high alert for disruption after Europe’s peak season last year was hit by cancellations, causing chaos at airports. This summer, air traffic control issues are likely to be the weak spot, according to warnings from Eurocontrol, which manages European airspace.Here is a summary of recent developments:EUROCONTROLOne of the Eurocontrol trade unions has announced a six-month period when industrial action could take place in the Network Manager Operations Centre, which oversees traffic across the European airspace, the pan-European organisation said on July 7. The union has not set specific dates for a strike.BELGIUMRyanair pilots in Belgium will strike on July 15-16 in demand of higher wages and better working conditions, their union said on July 7. The strike could affect around 140 flights from Charleroi airport, but it is yet unclear how many pilots will join and how many flights will need to be cancelled.BRITAINAround 950 workers at Britain’s No.2 airport Gatwick, including ground staff, baggage handlers and check-in agents, will strike due to a pay dispute from July 28-Aug. 1 and from Aug. 4-8, the Unite trade union said on July 14.Concerns over air traffic control delays already prompted EasyJet to axe 2% of its summer flight schedule on July 10, affecting holiday plans of 180,000 customers. The airline cancelled 1,700 flights, mostly from Gatwick, for the rest of July and August.At Birmingham Airport, around 100 security officers and terminal technicians will begin continuous strike action from July 18. The strikes will severely impact the airport’s security and terminal maintenance, leading to flight delays, Unite said.FRANCERepeated air traffic control (ATC) strikes in France, related to President Emmanuel Macron’s plan to raise pension age, have led to delays and limited flights across the country, causing more air space congestion in Europe.Ryanair, which has asked the European Commission to protect overflights from strike disruption, cancelled more than 900 flights in June mainly due to French ATC strikes.ITALYMultiple unions have called a nationwide airport staff strike on July 15 related to talks for a new collective contract. Air traffic controllers, baggage handlers and check-in personnel along with Italian pilots of Vueling will walk out between 10 a.m and 6 p.m. local time. Malta Air pilots and flight attendants will join them from noon for four hours.Talking to Italian media, Transport Minister Matteo Salvini said the companies and workers would meet the following week to continue negotiations.Air traffic control company ENAV has confirmed there will be no strikes in the Italian air transport sector between July 27 and Sept. 5 due to a summer exemption provided for in the industry regulations.PORTUGALEasyjet cancelled 350 flights arriving to or departing from Portugal ahead of a cabin staff strike on July 21-25, the SNPVAC union of civil aviation flight personnel said. It will be the union’s third strike since the beginning of the year.SPAINPilots at Iberia Regional Air Nostrum, who had been striking every Monday and Friday since Feb. 27, went on a daily indefinite strike from June 6 amid a pay dispute. As of July 14, Iberia said on its website some flight routes could be affected. More

(Reuters) -Wells Fargo raised its annual forecast for net interest income (NII) after its profit surged 57% in the second quarter, sending shares up 4% in premarket trading. NII climbed 29% to $13.16 billion, benefiting from higher interest rates as Wells Fargo (NYSE:WFC) and other banks raised their borrowing costs following a series of rate hikes by the Federal Reserve to tame inflation. “The U.S. economy continues to perform better than many had expected,” CEO Charlie Scharf said in a statement. “Although there will likely be continued economic slowing and uncertainty remains, it is quite possible the range of scenarios will narrow over the next few quarters,” The fourth largest U.S. lender said NII is expected to be about 14% higher than last year’s $45 billion. It had earlier forecast a 10% rise.Wells Fargo reported profit of $1.25 per share for the three months ended June 30, beating analysts’ average estimate of $1.16 per share, according to Refinitiv data. The bank set aside $1.71 billion in provisions for credit losses in the second quarter, compared with $580 million a year earlier. REAL ESTATE WOES The provision for credit losses included a $949 million increase in the allowance for potential losses in commercial real estate (CRE) office loans, as well as for higher credit card loan balances.CRE has emerged as a big worry for banks as financing costs rise for many buildings that have been largely vacated by employees who opt to work remotely. “We do expect that there will be more weakness in the market and it’ll take a while to play out,” said Wells Fargo Chief Financial Officer Michael Santomassimo during an earnings call with the media. The higher provision also comes against the backdrop of growing worries around the health of the economy as the collapse of three regional lenders fueled a turmoil in the banking sector and prompted calls for tougher regulation. Wells Fargo is still operating under an asset cap that prevents it from growing until regulators deem that it has fixed problems from a fake accounts scandal. Scharf has said Wells Fargo’s repair efforts could take several years.The company has struggled over the past few years to satisfy regulators that it has fixed its problems and repaid customers who were harmed by its sales practices.Rival JPMorgan Chase (NYSE:JPM) also posted a 67% jump in second-quarter profit on Friday as it earned more from borrowers’ interest payments and benefited from the purchase of regional lender First Republic Bank (OTC:FRCB). More

(Reuters) -JPMorgan Chase reported a bigger-than-expected jump in second-quarter profit as it earned more from borrowers’ interest payments and benefited from the purchase of First Republic Bank (OTC:FRCB).Shares of the largest U.S. lender rose 2.6% in premarket trading as it kicked off second-quarter results for the big U.S. banks and CEO Jamie Dimon reassured investors that the economy remained resilient.”Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. That being said, there are still salient risks in the immediate view,” he said in a statement.Dimon flagged high inflation, consumers using up their cash buffers, quantitative tightening and the war in Ukraine as some of the risks.The bank bought a majority of failed First Republic Bank’s assets in a government-backed deal in May after weeks of industry turbulence.That bolstered its net interest income (NII), which measures the difference between what banks earn on loans and pay out on deposits. The bank’s NII, which has also been gaining from high interest rates, was $21.9 billion, up 44%, or up 38% excluding First Republic.The bank forecast NII of about $87 billion for the full year, higher than the $83.37 billion expected by Wall Street, according to Refinitiv IBES data.Its profit climbed 67% to $14.47 billion, or $4.75 per share, for the quarter ended June 30. Excluding one-time costs, the bank earned $4.37 per share, comfortably above analysts’ average estimate of $4.00 per share.”It was very hard to find anything wrong with JP Morgan’s earnings,” said Octavio Marenzi, CEO of consultancy firm Opimas.”Consumer banking was particularly strong, but even investment banking, which has been a problem child over the past year or so, is starting to show signs of life.”The results come against the backdrop of a possible end to Federal Reserve’s rate hikes that have swelled profits at big U.S. banks in the past few quarters.Dimon has cautioned against premature optimism on inflation, and said that the federal funds rates could go up to as much as 6% or 7%.The rate currently stands in the 5% to 5.25% range, and investors are largely expecting just one more 25 basis points hike this year.While the monetary tightening campaign has stalled mergers and acquisitions – another major source of income for banks, a flurry of initial public offerings has raised hopes of a nascent recovery in capital market activity.Investment banking revenue for the quarter was $1.5 billion, up 11% from last year. Markets revenue fell 10%, with both fixed income and equities trading taking a hit.Sluggish trading revenues have prompted investment banks to trim their headcount as they rush to cut expenses. JPMorgan (NYSE:JPM) plans to cut around 500 jobs across different divisions, a source familiar with the matter told Reuters in May.The bank also set aside $2.9 billion as provision for credit losses, more than doubling from last year. More

CAIRO (Reuters) – Egypt risks fuelling its record inflation and putting more pressure on the Egyptian pound if it does not slow an expansion of the money supply which bankers and analysts say has been used to plug widening budget deficits.Central bank figures show “M1” money supply, which includes domestic currency in circulation and demand deposits in Egyptian pounds, jumped by 31.9% in the year to end-May 2023, after growing 23.1% in the fiscal year to end-June 2022 and 15.7% in FY2020/21.The sharp acceleration in money supply growth has come during three years in which Egypt’s underlying economic weaknesses have been exposed by a series of shocks including the COVID-19 pandemic and the war in Ukraine. Its finances have been squeezed by a persistent shortage of foreign currency and rising debt, $20 billion of which needs to be refinanced or repaid over the next 12 months. Spending has meanwhile surged as the state has pursued ambitious infrastructure projects including new cities and a vast expansion of roads while seeking to sustain some subsidies in order to prop up sliding living standards. The finance ministry is forecasting a budget deficit of 824.4 billion Egyptian pounds ($26.7 billion) in the 2023/24 fiscal year that began on July 1, up from an estimated 723 billion pounds in 2022/23 and 486.5 billion in 2021/22.Ministry data also shows it expects total expenditure to rise to 2.07 trillion pounds this year from 1.81 trillion pounds in 2022/23. The rapid creation of more pounds to chase a slower-growing amount of goods and services drives up inflation and further weakens the currency, analysts say. “Given limited access to external financing and a banking sector that is already heavily exposed to government debt, failure to rein in the budget deficit could lead to increased monetization of the deficit and exacerbate Egypt’s inflation and foreign exchange problems,” Patrick Curran of Tellimer said. The central bank and finance ministry did not respond to requests for comment. INFLATION SURGESEgypt’s headline inflation rate accelerated to 35.7% in June, surpassing the previous all-time high reached in 2017, from 30.6% in April, while core inflation surged to a record 41%. Earlier this week JPMorgan (NYSE:JPM) pushed up its forecasts for the new fiscal year, which ends in June 2024, to 22.7% from 21.3% “due to (inflation) pressure persistence and over FX risks”. Core inflation is expected to average 23.5%. The Egyptian pound’s official exchange rate has fallen by half against the dollar since March 2022 and by more on the black market. The FX forwards market sees the pound falling to 40 per dollar over the next year from around 30 now. Much of Egypt’s budget deficit results from rising interest on domestic and foreign borrowing that has mushroomed over the last eight years. The interest bill worsened after the U.S. Federal Reserve began raising rates in early 2022 and as investors turned away from emerging market debt. The finance ministry projects that domestic and external interest payments will soak up 52.3% of revenue in the 2023/24 fiscal year. A $3 billion International Monetary Fund loan confirmed in December will be disbursed over 46 months, though the first review of the programme has been delayed amid uncertainty over Egypt’s pledge to move to a flexible exchange rate and raise funds through sales of state assets. GOVERNMENT BORROWINGBankers and analysts say a main way the central bank has been expanding money supply is by lending directly to the government, including by purchasing government bonds. This can be seen in the central bank’s “net claims on government”, which leapt to 1.48 trillion Egyptian pounds as of end-May 2023 from 1.06 trillion pounds at end-June 2022, central bank data shows. The local interest rate bill could rise further following a 1,000 basis point increase in the central bank overnight rate since March 2022. The interest rate on a one-year treasury bill jumped to 24.07% at the last auction on July 6, from 14.09% a year earlier. Over the last five months, Moody’s (NYSE:MCO), Standard & Poor’s and Fitch have all downgraded Egyptian sovereign debt. In May, Moody’s placed Egypt on review for another possible downgrade, citing slow progress with asset sales. A Moody’s downgrade would move Egypt from B3, or “speculative”, to at least Caa, or “poor standing and subject to high credit risk”. Moody’s says such reviews normally take 90 days.($1 = 30.8500 Egyptian pounds) More