Economy

Meanwhile the Group of 20 leading economies’ debt restructuring process, the Common Framework, which is underway in Zambia and Ethiopia and has concluded in Chad, has proven ineffective at faciliating restructurings and is unlikely to improve next year, the ratings agency added. Dozens of emerging countries, especially smaller and riskier ones referred to as frontier markets, have seen their borrowing costs soar to unaffordable levels in 2022 as the U.S. Federal Reserve has embarked on a hiking cycle in an effort to contain soaring inflation in the wake of Russia’s invasion of Ukraine and ongoing COVID-19 lockdowns in China.Sri Lanka defaulted on its debt earlier this year, while other countries including Egypt, Tunisia and Ghana have sought help from the International Monetary Fund.”International bond market access will remain a challenge for small and frontier EMs, and more defaults are probable,” the Fitch report said. “As in 2022, there will be cases of more urgent funding challenges in smaller and frontier EMs.”A greater share of emerging markets had a positive credit rating outlook compared to developed markets for the first time since 2018, Fitch said.Nonetheless, 2022 was the second worst year for emerging market downgrades, the ratings agency said in a statement accompanying the report.”Geopolitical risks remain high. There is as yet no clear path towards reconciliation for Russia and Ukraine, and similarly for China-U.S. relations,” the statement said.”Supply chains of traded goods effectively transmit the risks and consequences of these conflicts globally.” More

Investing.com — Walt Disney stock is selling like Taylor Swift tickets on the news that Bob Iger is to return to the CEO seat at the entertainment giant, as Bob Chapek’s streaming vision unravels. Global markets have gloomier stuff on their minds, though, after China confirmed its first deaths from COVID-19 in months, casting doubt on its ability to reopen its economy this winter. European and Asian stocks headed lower, along with oil prices, and U.S. stocks are set to follow. Zoom Video will report earnings after the bell. And Bitcoin falls as more grisly details about FTX’s bankruptcy continue to ooze out.1. The return of the kingWalt Disney (NYSE:DIS) stock rose 9% in premarket on the news that Bob Iger, who grew the company’s value five-fold in his 15 years as CEO, is back.Iger has been given a two-year contract with “a mandate from the Board to set the strategic direction for renewed growth.”The Mouse House has given up on Iger’s successor, Bob Chapek, having seen the company’s stock lose nearly half its value in the last 12 months due to the mounting costs of fighting Netflix (NASDAQ:NFLX) for supremacy in the streaming market.Chapek has had his fair share of bad luck during his three-year stint, as the pandemic wrought havoc with its theme park and cruise businesses – as well as its movie production and distribution. He’s also been caught in the middle of a culture war between Governor Ron DeSantis and the artistic community over Florida’s so-called “don’t say gay” law.2. Crypto keeps wobbling as FTX fiasco plays outCryptocurrencies remained under pressure as more investors headed for the exit, dismayed at the stream of news flow around the collapse of crypto exchange FTX.Bitcoin fell briefly below the $16,000 level but held above the two-year low that it posted two weeks ago as FTX crumbled. By 06:50 ET (11:50 GMT), it was down 2.7% at $16,064.Reports over the weekend suggested that FTX owes its 50 largest unsecured creditors over $3 billion. Various social media accounts tracking blockchain data noted on Monday that the ‘hacker’ (suspected by many to be a company insider) who drained digital currency from the exchange after it filed for bankruptcy protection is still moving those assets around – a constant reminder of the company’s inability (or unwillingness) to safeguard customers’ assets.The market’s focus has begun to shift in recent days away from FTX itself and on to Digital Currency Group, whose Grayscale Bitcoin Trust (BTC) (OTC:GBTC) has come under pressure after Genesis Trading, another of its affiliates, suspended client withdrawals.3. Stocks set to open lower on China news; Zoom earnings eyedU.S. stocks are set to open lower later, under pressure from the weekend news out of China and still weighed on by the reluctance of the Federal Reserve to send any signal that could be construed as a pivot to a gentler monetary policy.A series of Fed officials last week went out of their way to stress that, while an interest rate hike of 50 basis points at its next meeting would be a smaller step than those seen at the last four meetings, it’s still a hike and there may be a few more of them yet before the central bank is done.By 06:30 ET, Dow Jones futures were down 83 points, or 0.2%, while S&P 500 futures were down 0.5%, and Nasdaq 100 futures were down 0.8%.Aside from Disney, the spotlight later will fall on Zoom Video Communications (NASDAQ:ZM), which reports third quarter earnings after the closing bell. Also in focus will be Taiwan Semiconductor Manufacturing (NYSE:TSM), after reports of a cryptic meeting between its CEO and Chinese President Xi Jinping in Thailand at the weekend.4. China reports COVID deaths in Beijing as outbreaks spreadChina reported its first deaths from COVID-19 in several months, including three in Beijing, while nationwide case numbers surged past their April highs and cast doubt over the authorities’ ability to meaningfully relax the country’s Zero-COVID strategy.Outbreaks are ongoing in both Beijing and Shanghai, with localized lockdowns once again in force.Bloomberg reported that Shijiazhuang — a city of some 11 million people about 186 miles (300 kilometers) from Beijing – has suspended schools and universities and asked residents to stay at home for five days. The significance of that is that Shijiazhuang was thought to be a test case for scrapping all virus restrictions.The health news overshadowed the central bank’s decision to keep its Loan Prime Rate unchanged.5. Oil drops on China news; Iran protests gather strengthCrude oil prices fell back below $80 a barrel, under the combined weight of the Chinese news and expectations of a drop in demand against a backdrop of reports that both Europe and China have recently been buying more oil than they need.China’s domestic demand is likely to fall sharply if the current wave of COVID outbreaks forces a return to more restrictive mobility measures, while European buyers have reportedly been stockpiling ahead of December 5th, when a ban on Russian oil and product imports is due to take effect.U.S. crude futures were down 0.2% at $79.98 a barrel, while Brent futures were down 0.3% at $87.38 a barrel.As oil prices fall, protests against the ruling authorities in Iran continue to gain strength. The protesters got surprise encouragement from the captain of the national soccer team earlier Monday, only hours before its opening World Cup game against England. Ehsan Hajsafi opened a press conference by saying, with no prompting, that the protesters “should know we support them.” More

Meyrick Chapman is the principal of Hedge Analytics and a former portfolio manager at Elliott Management.The Federal Reserve is causing a fine mess in China. Driven by the rapid rise in US interest rates, Chinese banks are rapidly deleveraging their dollar balances. To a large degree the fall in dollar holdings in China reflects the unwind of the global dollar carry trade. This strategy was in response to zero-interest rate policy from 2009 onwards and entailed borrowing low-interest currencies and lending higher interest currencies. A BIS paper from 2015 details how a version of this trade encouraged dollar-denominated debt issuance: Non-financial firms from emerging market economies (EMEs) have used US dollar bond issuance to take on financial exposures that have attributes of a dollar carry trade, in addition to any use of such funds for real investment.This version of the trade was gargantuan, with the side effect that the Chinese banking system accumulated large dollar deposits and loans. In effect, China operated as a Greater Dollar Area.All things must pass, and Fed monetary tightening has made the carry trade very unprofitable. Unwinding means a sharp reduction of outstanding dollar balances in the Chinese financial system.The flows out of Chinse dollar holdings neatly match the behaviour of the renminbi against the dollar. When dollar balances are converted to renminbi this expands Chinese money supply, which is tantamount to reducing the value of renminbi. It is by no means the only factor, but it isn’t surprising that the renminbi has lost value against the dollar in line with the decline in Chinese dollar holdings.

One other noteworthy factor is that the reduction in dollars accelerated markedly after the invasion of Ukraine in February this year. Sanctions imposed on Russia may have panicked Chinese monetary authorities into directing the reduction in dollars held in their system. Divestment of dollar loans from end-February to end-September amounted to $170bn, while dollar deposits declined $140bn, collectively equivalent to a reduction of $5bn exposure per week. The reduction has been more-or-less equal between local dollar customers and foreign customers.The effects of Chinese deleverage extend far beyond China. Only a small portion of Chinese bank balance sheets are denominated in foreign currency — roughly 3 per cent. Yet, deposits and loans at Chinese banks due to foreigners are overwhelmingly denominated in dollars. In the last decade, the Chinese financial system intermediated vast quantities of dollar carry trade for other emerging economies, no doubt taking a commission along the way.Foreigners’ dollar holdings in the Chinese system are now collapsing even faster than domestic holdings. Strikingly, the deposits and loans of foreign customers remained constant this year if denominated in renminbi, while local deposits and loans shot up. It looks like foreign customers were forced to sell dollars to match the rise in the value against the renminbi. Partly this is a function of the carry trade unwind, but the stability of balances in renminbi suggests Chinese authorities may have instructed their banking system to limit foreign exposures to some renminbi limit.This wander into Chinese bank balance sheets is diverting. More arresting, if speculative, are questions arising from the change in dollar asset composition. Three asset categories account for all the change in the dollar balance sheet since February 2022. Overseas Loans and Reverse Repo have fallen, and Portfolio investments have risen. Taken together these categories more-or-less exactly mirror the behaviour of total dollar deposits on the liability side. So, if the banks were indeed told to hold fewer dollars, these categories suggest the main route in which they enacted that decision.

It is not clear exactly who faces Chinese banks on the other side of the reverse repo — but for our purposes it doesn’t matter. The definition of reverse repo is clear enough; a purchase of securities with the agreement to return them at a specific future date. Reverse repo is a loan, usually short-term made against collateral. In summary, Chinese banks have reduced both foreign and short-term dollar loans while continuing to accumulate portfolio investments. In balance sheet terms, Chinese banks have swapped debt for equity.

We have no way of knowing if the equity banks have accumulated previously belonged to foreign borrowers whose loans have now been curtailed. But it would make some sense. There has long been a suspicion that Chinese lending to emerging economies came with unpalatable conditions. As global economic and monetary conditions deteriorate further, perhaps we should expect the ‘portfolio investment’ category to increase while the overseas loan category continues to decrease. It is at least possible the Chinese banks are fleeing dollars while partially disguising their flight by accumulating emerging economy assets. The debt-for-equity swap may have only just begun. More

Good morning. Ethan here; Rob’s off enjoying the Atlantic north-east. The FT had a good interview on Friday with Coinbase’s Brian Armstrong, who has been making the rounds as head of the crypto exchange that won’t randomly blow up. A reasonable press strategy, but I was struck to learn yesterday that Coinbase’s 2028 bonds are trading below 60 cents on the dollar. The FTX fallout is sparing no one. Email me: [email protected] the dollar is weakerIs the dollar’s romping year over? The DXY index, which tracks the dollar against a weighted currency basket, has been falling since October and took another tumble down this month:The most popular explanation is interest rates differentials. Higher US rates attract money from abroad, lured in by the spruced-up yields. 2 per cent on a two-year Bund is all right, but 4.5 per cent on a two-year Treasury sounds a whole lot better. So money flows out of lower-yield economies and into the higher-yield US, pushing up the dollar in the process. But if the Federal Reserve slows the pace of — or pauses — rate hikes, that suddenly removes a key dollar tailwind. This appears to be what markets are sniffing out, as this FT piece from the weekend sums up nicely:The dollar has tumbled in the past fortnight from a 20-year high as signs of inflation easing in the US fuel speculation that the Federal Reserve will soon slow down its rate rises.The greenback has fallen more than 4 per cent against a basket of six peers so far in November, leaving it on track for the biggest monthly fall since September 2010, according to Refinitiv data. It is still up about 11 per cent for the year to date.This month’s fall comes as investors scrutinise early indications that US inflation may finally be easing, potentially paving the way for the Fed to reduce the speed at which it has been boosting borrowing costs. Some data, such as those on the housing and manufacturing sectors, have also suggested the broader economy is facing rising headwinds, another deterrent to Fed monetary tightening.“Everything is pointing to disinflation in the US and with that we will see a slowdown in the US economy in the first quarter of next year . . . That forms the basis for the weaker dollar story,” said Thierry Wizman, a strategist at Macquarie.No doubt the Fed and disinflation matter, if only because these are dominant macro forces that affect basically everything. You can see hopes for a dovish Fed at play in other markets: since the dollar’s peak in October, equities have rallied 11 per cent. But I suspect there is more to the weakening-dollar story. The world is locked in a reverse currency war, where central banks defend their currencies from the Fed’s rate increases with hikes of their own (and, in some cases, with direct FX intervention). The Fed is setting the tempo for global tightening. Yet that suggests that if the Fed slows down, everyone else will too. Other central banks are hiking so that they don’t fall behind the Fed — but have no reason to run ahead of it. Today’s rate differentials might not close so quickly.What else might be at play? Start with what ignited the dollar’s monstrous rally in the first place. Karthik Sankaran, an FX strategist at Corpay, has a pithy mnemonic for this — the three BoPs. They are:Balance of payments — the massive terms of trade shock that slammed Europe after Russia’s invasion of Ukraine. As energy prices soared, Europe’s spending power shifted to importing energy, flipping the eurozone from trade surplus to deficit nearly overnight. Trade deficits usually weigh on currencies.Balance of power — the dollar’s position as a safe haven from geopolitical tail risks. An ocean away and blessed with abundant food and energy resources, the US seemed the obvious hidey-hole for investors spooked by Russia’s war.Balance of Powell — the rate differential dynamics discussed above.Now, the balance of payments and power seem to be nudging back in the other direction. Geopolitical risks are arguably ebbing a little, as US-China ties improve and Russia’s nuclear threats quiet down. More importantly for markets, Europe is faring better than many imagined. Lower energy prices, fiscal stimulus and a few lucky breaks have lowered the chance of a catastrophically deep recession. Another weekend FT piece:Greater fiscal support from governments, lower gas prices and a mild autumn have all helped to improve the [eurozone’s] outlook.Most forecasters still expect eurozone output to contract in the coming quarters . . . But the downturn will be more moderate than previously feared. Economists forecast eurozone growth of 3.2 per cent for 2022 as a whole — up from an earlier projection of 2.7 per cent in July …Moscow’s shutdown of key gas pipeline Nordstream 1 over the summer fuelled fears that the region would struggle to replace Russian energy sources and led to a surge in gas prices. But one of the mildest Octobers on record has meant households and factories are using less power, helping to keep gas storage facilities close to full capacity.Lower gas prices, a reduced risk of energy rationing and extra fiscal support from governments pointed to “a shallower recession”, said Sven Jari Stehn, chief European economist at Goldman Sachs.Cheaper energy has also helped the yen. In contrast oil-rich Canada hasn’t seen its currency strengthen nearly as much. The chart below shows how far the six currencies in the DXY basket have appreciated:The point here is not that rates are irrelevant, but that energy bears watching too. How strong the dollar remains could depend as much on what the Fed doesn’t control as what it does.One good readBrendan Greeley on “the complexities of forever”. More

Western supply of graphite will be constrained in the coming decade by the “opaque” market for the key battery material, the world’s largest natural graphite producer outside China has warned.Shaun Verner, chief executive of Australia’s Syrah Resources, a Tesla supplier that operates a huge mine in Mozambique, said that the graphite market’s lack of transparency over pricing was making bankers hesitant to fund new projects.“The single biggest impediment to new investment is the opaque nature of the market because to get the commercial debt in place is really challenging,” he added. A battery’s anode, which is made of graphite plus increasingly a silicon additive, is more dependent on China than other materials as the country mines 65 per cent of graphite, processes 85 per cent and is home to the world’s six largest anode material producers, according to the International Energy Agency. China dominates the refining of other battery materials such as lithium, nickel and cobalt but the raw minerals that feed those refineries are mined from all over the world.The centralised nature of the graphite market means that supply agreements are done bilaterally through long-term deals between producers and consumers. That leaves small volumes traded on exchanges, providing limited pricing transparency. Few analysts follow the industry and there is a lack of visibility on future projects, making forecasting on long-term prices difficult.Natural graphite demand is set to treble in the next four years as sales of electrical vehicles soar. The material can also be created synthetically from pet coke but this process is carbon-intensive and struggles to combine with silicon, which improves the anode’s performance.Reflecting the hot demand for the mineral, Syrah’s market capitalisation is A$1.7bn (US$1.13bn), despite a pre-tax loss of $9.7mn on revenues of $50mn in the first half of the year.The passing of the US Inflation Reduction Act this year has boosted further interest in graphite producers. The legislation says EVs entering the market after 2024 will not be eligible for tax credits — which can go up to $7,500 — if any of the critical minerals are extracted, processed or recycled by a “foreign entity of concern”, which includes China. Eric Desaulniers, chief executive of Nouveau Monde Graphite, which is developing a graphite mine and battery-grade anode material plant in Canada, said that discussions with cell manufacturers over supply deals had accelerated because of the IRA. However, he agreed that challenges remained in securing project financing because the “cellmakers are cash-constrained” and had their hands full trying to scale up battery manufacturing sites.Syrah has been fortunate in bridging the funding gap. It received a grant of up to $220mn from the US government last month to expand its anode material facility in Louisiana, which is under construction.Prices of graphite have risen a third compared with a year ago to Rmb5,300 ($740) per tonne, according to Argus. This represents a reversal from price falls in 2019 that forced Syrah to cut output at its Balama mine, a facility that can produce 350,000 tonnes per year into a global market consuming 1.3mn to 1.4mn tonnes today.Its production out of Mozambique was disrupted at the end of September by a workers’ strike that was eventually resolved.Nico Cuevas, chief executive of Urbix, which aims to build a graphite processing hub in the US, said that Korean battery manufacturers had also been prompted into action by the IRA but they were still some way from being prepared to sign deals to buy upcoming raw materials.“We pushed for the past year and a half and they would take a long time to respond,” he said. “[Now] within two weeks, I’m getting emails from three of the five largest battery makers on what we can do together.” More

US retailers are facing their first real-terms fall in revenues since the global financial crisis this holiday season, even as resilient consumer spending poses challenges to officials seeking to bring inflation under control. Black Friday, the informal start of the peak shopping season, falls this week at a turning point for consumer spending, as the highest inflation since the early 1980s erodes shoppers’ purchasing power. Most retailers are cautiously optimistic about the coming weeks, however, as the pandemic health fears and supply chain shocks that affected holiday spending in 2020 and 2021 recede. Retailers should report headline sales growth of 4.5 per cent year on year this holiday season, according to S&P Global Market Intelligence. But after stripping out the inflation that has caused retailers to increase prices to offset their own higher costs, that would equate to a real-terms fall of 1.2 per cent. “Demand has held up surprisingly well given how much prices have risen,” said Michael Zdinak, who leads S&P’s US consumer markets service. He added, however, that the exceptional combination of high inflation with historically low unemployment made consumers’ plans unusually hard to forecast. “There’s not another year like it,” he said. Inflation was leading consumers to seek out promotional offers much more than usual, noted Stephanie Cegielski, vice-president of research at ICSC, a shopping centre industry group, but they still intended to spend. “They’ll be buying as much as last year, just at higher prices.” 

Many will turn to credit card borrowing to do so, after depleting their savings from pandemic stimulus programmes. New York Fed economists this week reported that credit card balances had jumped by 15 per cent a year in the third quarter, their steepest year-on-year increase in more than 20 years.Credit card borrowing had been “really ramping over the last quarter”, said Betsy Graseck, a Morgan Stanley managing director covering US large-cap banks, with delinquencies also accelerating at the fastest pace since the 2008 financial crisis, a trend which would typically prefigure more loan losses to come. Earnings announcements from large chains offered a mixed picture of the outlook this week, with Target warning that spending patterns had changed “dramatically” at the end of the third quarter, with shoppers becoming more price sensitive. Walmart raised its outlook, however, while Foot Locker, the shoe retailer, boasted of “strong momentum”, leading analysts to conclude that differing inventory positions may determine the season’s winners and losers. “I think this is going to be a have/have not holiday season,” said Mark Cohen, a Columbia Business School professor and former CEO of Sears Canada. But he added that the 2021 holiday was so anomalous that the normal process of predicting demand based on the previous year’s performance had “all gone to hell”. Federal Reserve officials are scrutinising consumer spending particularly closely as they seek to damp demand with large interest rate increases to tame inflation they deem “unacceptably high”. Lael Brainard, the Fed’s vice-chair, has expressed hope that a reduction in retail margins “could meaningfully help reduce inflationary pressures in some consumer goods”. This week she reiterated her view that a bigger stock of inventory could fuel “competitive pressure” to reverse the mark-ups many retailers imposed while the economy was rebounding from the depths of pandemic-induced contraction, and saddled with supply-chain issues. James Bullard, president of the St Louis branch of the Fed, told reporters this week that businesses face a “very dicey situation if they get the pricing decision wrong”.“[If] they try to raise prices too much and too far ahead of whatever their rivals are doing, they will lose market share,” he said, adding that such a loss tended to be “permanent, and it can even put you out of business entirely”.

Retail sales last month rose by a higher than expected 8.3 per cent year on year. After the Fed’s most aggressive efforts in decades to tighten monetary policy, however, higher borrowing costs have begun to bite. “Consumers are stepping back, they’re changing how they allocate their spending,” said Mary Daly, president of the San Francisco Fed, this week.“They’re dealing with high inflation, of course, so they have to make trade-offs and put things back that they would otherwise get, but they’re also preparing for a slower economy. That’s a very good start.”Because policy changes work with a lag, officials at the central bank expect a stronger economic response in due course, suggesting a far less buoyant outlook for consumer spending next year, when many economists expect a US recession.“This Christmas season can’t be as good as last Christmas season,” Bullard said on Thursday. “But from my perspective, a slowdown would be fine for the Christmas season.” More

The writer is chair of Rockefeller InternationalIf you want to escape the global gloom, just take a flight from its epicentre, London, to any leading capital of the Gulf, the only region in the world where economic growth forecasts are rising. As host of the Fifa World Cup, Doha has been bubbling over with anticipation, as have its neighbours, who are welcoming the overflow from Qatari hotels. Dubai is enjoying yet another real estate boom. Regional rivals like Riyadh are racing to be the next Dubai, funnelling oil profits into property mega-projects. Many Gulf leaders recognise that a boom built on high oil and property prices is unlikely to endure, but that age-old problem can wait. Despite concerns in the west about human rights across the region, the party is happening now. With 28 buildings over 300 metres high, most built in the past 10 years, Dubai is easily the most vertical city in the world, making even Manhattan and Shenzhen in China look flat by comparison. Now in its third and most effervescent real estate boom of the past decade, Dubai is setting records for the number and value of buildings sold, with sale prices rising fastest at the upper end of the market. Dinner conversations at Dubai’s many globally branded restaurants, from Armani to Zuma, revolve around which billionaire paid how much for the latest luxury villa. Saudi Arabia and the United Arab Emirates, which includes Dubai and Abu Dhabi, account for nearly 75 per cent of the Gulf economy and are home to its financial centres. Proceeds from initial public offerings are down to a trickle in much of the world so far this year — collapsing by 95 per cent in New York to just over $7bn — but they have increased more than threefold in Riyadh, fivefold in Abu Dhabi and have soared from zero to $7bn in Dubai. The Gulf boom started slowly, on the back of crisis-driven reforms over the past decade, then took off when oil prices started to climb in early 2020. Following the global oil price collapse of 2014, which triggered a bust in Dubai property, the emirate made it even easier to move there tax-free. Now the city attracts an ever-wider array of foreign buyers, from big hedge funds to Russian tycoons seeking a haven from sanctions related to the war in Ukraine. The Saudis responded to the 2014 oil price shock with even more sweeping reforms, streamlining the state, easing religious restrictions, making it easier for women to work and foreigners to invest. Public sector wage cuts have helped Saudi Arabia to cover its budget with oil prices under $70 a barrel, down from just under $100 in 2015. The share of Saudi women who hold jobs has doubled in just five years to 35 per cent. Longtime visitors to the country are now astounded to be greeted by female border agents, and to find raves, coffee shop dating and Halloween parties in a country that banned any public mixing of the sexes only a decade ago. The old ways have not entirely disappeared, however. Religious police no longer enforce the hijab but most women still wear it. Foreign visitors are asked not to show their knees. Still, the Saudis are moving towards openness at a time when many countries are turning inward. Riyadh seems serious about challenging Dubai as the commercial crossroads — if not quite the freewheeling Las Vegas — of the Gulf. To outdo Dubai’s Burj Khalifa, the world’s tallest building by far, the Saudis began work last month on The Line, a 105-mile-long “linear city” comprising two parallel skyscrapers that would be the world’s longest and largest buildings by far, if the project actually gets finished. The idea is straight out of Dubai: build it spectacularly big and they — global celebrities, financiers — will come. Gulf officials also talk endlessly now about drawing tech entrepreneurs to the party as well. Technology is an important driver of productivity growth. No region has a worse record in this regard than the Gulf. On average, core productivity has shrunk more than 2 per cent a year in the six Gulf economies since data begins in 1980, according to Citi Research, which ties this failure to ineffective governments that have struggled, in particular, to regulate soundly and provide ready access to credit. Negative productivity growth helps explain why, in an oil state like Saudi Arabia, per capita income rises towards developed world levels only when oil prices are rising, then retreats when they are falling. Gulf leaders recognise the task that confronts them: directing more investment into technology and manufacturing in order to free their economies from the boom bust cycles of oil and real estate. Without such changes, their fate will be periodic parties, not lasting progress.   More

Greg Karpovsky had a formative experience at university that would inspire the creation of Stenn, an online platform providing working capital to international suppliers. He was studying at Moscow State in the 1990s when Jack Welch, then chair and chief executive of the conglomerate GE, visited to give a lecture.The young Karpovsky asked Welch what line of business he should consider — markets were rapidly opening up in eastern Europe and he was already a keen entrepreneur.Welch’s response was to focus on commercial finance. And that set Karpovsky on his journey to creating Stenn.His first venture, Eurokommerz, focused on providing working capital to small companies serving mainly domestic trade in eastern Europe. But Karpovsky had global ambitions. After exiting Eurokommerz, and following other projects, he used his own capital to set up Stenn in 2015. Karpovsky’s aim was to offer cash through digital channels to small businesses trading goods on an international scale, but lacking banking support. “We saw there is a very large market of small businesses engaged in international trade and the digital economy who are dramatically underserved by the banks,” he says. “I learned there was an opportunity more than 20 years ago, so I started solving this issue in local markets. I’m now trying to grow this idea on a global scale.”The need for trade finance remains pressing. The gap in international trade credit amounts to $3tn and is widening, according to the World Bank. A report by consultants Accenture, commissioned by Stenn, estimates the demand for trade finance will hit $6.1tn in the next four years.But the provision of finance to smaller businesses is lagging behind — a problem exacerbated by the global financial crisis in 2008, which made large banks pull back from lending more broadly. Recently, supply chains have also come under pressure, hitting small supplier companies. The Covid-19 pandemic and the war in Ukraine have restricted the movement of goods globally, compounding the problem of suppliers receiving payments on time.

In the picture: Stenn Technology’s mobile app makes it easy for customers to gain the finance they need © Emre Akkoy/Alamy

Stenn is working to address this issue. It aims to connect small and medium-sized businesses around the world to developed capital markets. Through its proprietary technology, Stenn can process applications for trade finance in as little as 48 hours, in more than 70 countries.It is backed by large global financial institutions, including HSBC and Barclays, but focuses on businesses in need of financing and trade credit protection in the range of $10,000 to $10mn. To date, Stenn has facilitated some $10bn of financing in total.“We realised a lot of goods are being bought from emerging markets, such as China, India and Latin America, so we started meeting with suppliers in these countries and we saw how dramatically they were underbanked,” Karpovsky explains. “Many of these suppliers are serving business in mature markets, for example the US and western Europe. But they are also selling directly to the end customer in those markets.”Although Stenn provides a range of financing options, its bread and butter is invoice finance: advancing payments to suppliers immediately and collecting from their customers later, in return for a fee. Its service enables suppliers to be paid as soon as their goods are shipped, while allowing the buyers to receive their products and generate some revenue from them before they have to settle the bill.

Without invoice finance, suppliers could end up waiting months for payment when they export goods to buyers overseas, which can harm their cash flow and growth. In return, Stenn takes a fee from the supplier of between 0.65 per cent and 4 per cent of the invoice value, and also takes on the risk of a buyer defaulting.Unlike many other providers of invoice finance, however, Stenn offers larger loans. “This company is doing it at a large scale, up to $10mn invoices, which is pretty impressive,” says David Brear, chief executive of fintech consultancy 11:FS.“In this market, given the cash flow situation, I think there are going to be people queueing up for this service,” he adds. “The pressures that those midsized growing SMEs are facing [are] scary. I can only see Stenn clearing up in that space. So, if it’s got a big enough book from a lending perspective, this is pretty low-risk when it comes to invoice financing. It’s a bit of a blue ocean for them given the lack of competition at this scale.”Although banks offer trade finance, their approval processes tend to take longer than the 48 hours offered by Stenn. “The banks, in various guises, do some of this, but they make people jump through a lot of hoops,” notes Brear. Shane Burgess, of venture capital fund Stripe, an adviser to Karpovsky, says Stenn is “democratising access” to working capital for entrepreneurs in the emerging markets. “Karpovsky shaped his view of the world not just by sitting in London, he’s lived in Singapore, he’s gone out to meet merchants in China and other areas of the Far East, and is building a good understanding of their pain point.”At the heart of Stenn’s competitive offering is its technology. “What we’re selling investors is risk management,” says Karpovsky. “We can onboard customers, credit assess, manage client risks — that is what our technology is designed to do. “We are a technology company focused on managing risks, credit, fraud and compliance. We call it ‘de-risking’ for banks . . . 50 per cent of [our] people are computer engineers, which has allowed us to scale fast.”He says Stenn’s technology allows the company to “source and efficiently onboard customers online, as well as to risk-assess and verify transactions digitally”.Larry Illg, of venture capital firm Naspers and a non-executive director on the board of Stenn, sees it meeting a need in emerging nations. “Western capital won’t fund the developing world because they, frankly, misprice the risk,” he argues. “Karpovsky is trying to help bridge the gap [and] bring western capital to the developing world; he’s built technology that can better price risk.”Earlier this year, Stenn raised $50mn from private equity firm Centerbridge, giving the company a $900mn valuation and putting it on track to become a “unicorn”, as $1bn start-ups are dubbed. Even the Covid-19 pandemic has been an opportunity for Stenn. “What we saw during the pandemic, those companies found it even more difficult to access capital from banks,” says Karpovsky. Later-stage co-founder and group chief financial officer, Chris Rigby, believes the “perennial benefit” of being able to extend credit terms with buyers was only “accentuated by the pandemic.”However, it is not a business activity without risks. Or critics. Invoice financing and its dangers came under scrutiny last year, when supply chain finance firm Greensill Capital collapsed. Greensill, which counted former UK prime minister David Cameron among its advisers, was overly exposed to certain customers, some of whom defaulted on their payments.

Stenn is keen to emphasise that it has a different business model. “We never competed with [Greensill]; we never were in its business,” says Karpovsky. “It was focused on bigger transactions, that were buyer-led. We’re focused on suppliers and small businesses, globally. It was acting like a bank, and was not using technology as we do. So we have a different business model.”Brear at 11:FS says: “I don’t think Greensill has tainted the industry as a whole. Invoice financing has been around a really long time because of the need for bridging between winning the work and doing the work. For anybody on a smaller scale, cash flow is king.”Karpovsky is keen to continue expanding. “We will plan new equity rounds, but we’re in a very good position at the moment. We’re profitable, which is almost unique for a young tech company.”There is no sign of his ambition waning, either. Where does he see the valuation of the company heading? “We are planning to grow about 30 times in the next four-five years,” he says. More