Economy

Hello and welcome to Trade Secrets, a day later than normal because of Queen Elizabeth’s funeral yesterday. The British civil servants we know of who were pressed into service last week to steward crowds of mourners in London, or greet visiting dignitaries at airports, are back at their desks and normal policymaking service resumes, of which more in coming days. Today we’ll look at a bold attempt to cushion the effects of Covid-19 and the energy shock on middle- and low-income countries by boosting the lending power of the multilateral development banks (MDBs). Charted waters looks at the canary in the mine, FedEx. As ever I’m on [email protected] for anything globalisation related that crosses your mind.The political capital of development lendingPropping up businesses during Covid lockdowns, shielding households from soaring energy prices, funding the vast investment costs of the green transition: government finances worldwide are under extraordinary strain. It’s enough effort for rich economies to afford this. In middle and low-income countries, a trickle of debt defaults is threatening to go into spate.On the whole, poorer countries managed their fiscal affairs quite well in the years before Covid. But spending to cope with the succession of crises has created immense pressure at a time when rising US interest rates are pushing up the cost of borrowing from the capital markets and through banks. The average public debt-to-GDP ratio in emerging markets went from 5 per cent before the pandemic to 67 per cent now, and as the charts show, the IMF reckons it’s going higher in coming years.

The demand for publicly backed concessional finance (or grant aid) has risen accordingly. Unfortunately, aid promised by rich nations to fund green transitions has not materialised. (I was amazed too.) And one of the biggest sources of cheap finance for infrastructure, China, is pulling back from its Belt and Road Initiative after disappointing returns and political backlash. Enter, you would hope, the multilateral development banks (MDBs), led by the World Bank, to fill the gap. Unfortunately, the World Bank in particular doesn’t have anything like enough capacity based on its established practices, and going back to the shareholder countries to ask for more capital might not go down well.Instead, there’s a move afoot, which has got traction among the G20 of leading economies, for the MDBs more aggressively to leverage up to increase their firepower. This involves changing the banks’ risk assessments and capital adequacy rules, relatively small adjustments that can have material impacts on lending capacity. The technical details are here in a report commissioned by the G20, and there’s an excellent discussion hosted by the Center for Global Development think-tank here.A paper from the Italian central bank (Italy pushed this issue while hosting the G20 last year) estimates that the four main MDBs — the International Bank for Reconstruction and Development (IBRD, the commercial arm of the World Bank), the Asian Development Bank (ADB), the African Development Bank (AfDB) and the Inter-American Development Bank (IADB) — could increase their collective spare lending capacity from $415bn to $868bn without damaging their triple A credit rating. If they wanted to go further and accept a credit rating one notch lower at AA+, their lending capacity could shoot up to nearly $1.4tn. (Now you’re talking.) The New Development Bank, set up by the Brics countries, has done just that with its credit rating and is a strong advocate of others following suit.This apparent miracle involves a lot of technical detail, but rests on the idea that the agencies undervalue the extent to which the MDBs are supported by their preferred creditor status in case of default and their ability (never yet activated) to whistle up “callable capital” from its shareholders in times of stress. The banks need to persuade the rating agencies to take a more supportive view and to rely more on their own judgments of capital adequacy.Sounds like an easy call, but any change involves taking on an entrenched institutional culture at the World Bank in particular, which guards its triple A rating with the tenacity of an emperor penguin protecting its egg. Bank staffers often say this is for political economy as well as financial reasons. They’re always concerned the US Congress might suddenly pull the plug on its support for the bank, the need to keep Capitol Hill onside being one of the main reasons the bank’s presidency has traditionally gone to an American. Congress isn’t likely to be keen on the idea of the bank starting some funny stuff with its balance sheet and taking risks with its credit rating.It’s a valid concern. Multilateral development banks are intrinsically political institutions in the sense that their existence rests on their legitimacy among their shareholder governments. Preferred creditor status for MDBs, for example, is generally a market custom rather than a matter of contract: it relies on debtors’ belief that the cost of alienating shareholder governments is too high. Leveraging up the MDBs can’t just be a technical exercise. The banks need to be sure that the shareholders are prepared to back their decision wholeheartedly and advocate with bond investors, credit rating agencies and potentially nervous legislatures on their behalf.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersThe success of FedEx in becoming postie to the world means that when things turn south for the company, the world — and in particular anyone concerned about global trade — has to sit up and take notice. That is why last week’s preliminary results announcement — a week before the company was scheduled to report figures — sparked the biggest daily drop in the share price on record.One swallow does not a summer make, nor one woodcock a winter, but FedEx is delivering a warning message to those who still think the world is heading for a soft landing. (Jonathan Moules)Trade linksThere’s a proposed text floating about (first reported by Politico) to revise the contentious Energy Charter Treaty, an agreement which has come under fire for making governments liable to litigation for phasing out fossil fuels.South Korea joins the EU in the list of economies cross with the US over tax credits for electric vehicles that discriminate in favour of North American suppliers.The FT details progress towards “Fortress China”, Xi Jinping’s bid for economic independence.It turns out that Russia and China don’t have a solid unconditional alliance after all, grist to the mill of my contention that the world is, in fact, not splitting into geopolitical blocs.The quiet but fierce global war over setting tech standards sees another battle in the coming weeks as the International Telecommunication Union elects new leadership.Intel’s plans to build chip manufacturing in the US after being showered with taxpayer dollars is being welcomed by the government but not its shareholders. 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LONDON (Reuters) – Britain is not immediately prioritising talks on a free trade deal with the United States, a spokeswoman for Prime Minister Liz Truss said before a meeting on Wednesday between the new leader and U.S. President Joe Biden.”We’re not prioritising negotiating a free trade deal with the U.S. in the short to medium term. However, the United States is already our largest trade partner and we’re continuing to grow our economic relationship,” Truss’s spokeswoman told reporters on Tuesday. More

The US central bank will release its latest quarterly projections Wednesday following a two-day policy meeting in Washington, where officials are expected to raise their benchmark rate by three-quarters of a percentage point for the third time in a row. Such a move would lift rates to levels not seen since before the 2008 financial crisis. The next phase of the tightening cycle carries greater risks, which will probably be reflected in their revised projections.Inflation has moderated little since the last forecast round in June, and that has pushed policy makers into a more aggressive stance. They’re also increasingly doubting old estimates of the relationship between unemployment and inflation, which may be part of the reason why they’re now inclined to aim for a bigger slowdown in economic activity.“The higher trajectory for interest rates is going to have a bigger impact, certainly, on unemployment. We see the unemployment rate coming up closer to 4.5% in the Fed’s new forecast,” said Brett Ryan, senior US economist at Deutsche Bank AG in New York. “They still are going to peddle the ‘soft landing’ scenario, but it’s going to imply a high risk of recession within that.”In June, the median policy maker’s projection for the unemployment rate called for a half-point increase, to 4.1%, by the end of 2024. Since then, monthly data on consumer prices have been disappointing: The latest report, published by the Labor Department on Sept. 13, showed inflation over the last year was still 8.3%.Chair Jerome Powell and other officials meanwhile have stepped up public warnings about rising rates. In a key speech at Jackson Hole on Aug. 26, Powell suggested they would “bring some pain to households and businesses,” representing “the unfortunate costs of reducing inflation.”What Bloomberg Economics Says…“The overarching theme of the forecasts will be: Prepare for higher unemployment, as it will take more rate hikes and a longer period of restrictive rates before inflation comes under control. Current market pricing for the terminal fed funds rate is at 4.4%, and policy makers likely will see that as fairly priced.”– Anna Wong, Andrew Husby and Eliza Winger (economists)– For the full report click hereCharles Evans, the Chicago Fed president who during his 15-year tenure has often been seen as one of the central bank’s more dovish policy makers, said Sept. 8 that he was “optimistic that we’re going to be able to navigate this and keep unemployment to about 4.5% by the time we’re done,” adding that such a scenario “would still be a pretty good outcome, although it will be costly for some.”But lingering inflation isn’t the only data point leading to rising pessimism at the Fed toward the way forward. Record numbers of job postings are contributing as well. And an increasingly public debate about them since June may portend higher estimates for the unemployment rate Fed officials see as consistent with low and stable inflation in the longer run.Their median estimate for that number has been stable at about 4% since before the pandemic, so an upgrade would mark a significant shift in the committee’s thinking. Powell, in a July 27 press conference, hinted at the possibility when he said “it must have moved up materially,” citing reduced rates at which job openings are being filled.The idea is that, with approximately two openings for every unemployed person searching for work — versus a ratio of about 1.2 in the years before the pandemic — the unemployment rate will have to go higher now than it would have had to then to bring labor supply more in line with labor demand and reduce upward pressure on wages.At 3.7% in August, the unemployment rate counted 6 million Americans out of work and actively searching for a job. A rise to 4.5%, assuming no change in the size of the labor force, would amount to job losses of about 1.3 million.But the pain won’t be distributed evenly, according to Michelle Holder, an economics professor at the John Jay College of Criminal Justice in New York.Holder noted that unemployment for Black and Hispanic Americans tends to rise faster than that for White Americans in economic downturns. There’s also the risk of increased homelessness and hunger among lower-income households due to job loss, as well as the long-term impact on earnings and employability from being out of work.“I’m fearful that if these projections have a large margin of error, we are talking about really rolling back substantive gains in terms of Black employment in this country,” Holder said. “What I think the Fed is missing is that the pain is not a sort of modest pain for everyone.”©2022 Bloomberg L.P. More

WASHINGTON (Reuters) – The Biden administration on Tuesday named a team of senior advisers to oversee $52.7 billion in government funding to boost semiconductor manufacturing and research.Commerce Department chief economist Aaron “Ronnie” Chatterji will serve as White House Coordinator for CHIPS Implementation at the National Economic Council (NEC) and will manage the work of the CHIPS Implementation Steering Council created by President Biden’s chips executive order signed last month.In August, Congress approved $52.7 billion for semiconductor manufacturing and research and a 25% investment tax credit for chip plants that is estimated to be worth $24 billion.NEC Director Brian Deese said Chatterji “will help coordinate a unified approach to our key implementation priorities while ensuring that we have guardrails and oversight in place to responsibly spend taxpayer dollars.”The legislation championed by Biden aims to boost efforts to make the United States more competitive with China and alleviate a persistent chips shortage that has affected everything from cars to washing machines to video games and weapons.At Commerce, Treasury official Michael Schmidt will serve as CHIPS Program Office director. Schmidt previously served as New York State Department of Taxation and Finance commissioner.Eric Lin, director of the government’s Material Measurement Laboratory (NYSE:LH), will be interim director of the CHIPS Research and Development Office. The chips law includes $11 billion for research spending.Commerce Secretary Gina Raimondo said the chips team would consist of about 50 people.”These leaders bring decades of experience in government, industry and the R&D space, with a special emphasis on standing up and implementing large-scale programs,” Raimondo said.Also named Tuesday is Todd Fisher, a Commerce Department economic official who will serve as CHIPS Program office interim senior advisor in the CHIPS Program Office. Former Palm Computing CEO Donna Dubinsky is Raimondo’s senior counselor for CHIPS implementation and Commerce official J.D. Grom will serve as senior advisor on CHIPS implementation.Commerce hopes by February to begin seeking applications for $39 billion in semiconductor chips subsidies to build new facilities and expand existing U.S. production. More

STOCKHOLM (Reuters) -Sweden’s central bank raised interest rates on Tuesday by a larger-than-expected full percentage point to 1.75% and warned of more to come over the next six months as it sought to get to grips with surging inflation.Inflation hit 9% – a 30-year high – in August as the effects of soaring energy prices spread through the economy, and has overshot the Riksbank’s forecasts.The rate hike was the biggest since the inflation target was adopted in 1993, equalling the full percentage point hike of November 1992 during Sweden’s domestic financial crisis when the main rate hit 500% for a short period.”When rates go up, obviously, interest costs go up for many households, but the costs of high inflation – persistently high inflation – those are, in fact, even bigger,” Governor Stefan Ingves told reporters.”By raising rates now and by continuing to hike rates we reduce the risk that inflation is going to park itself at a high level.”A majority of analysts in a Reuters poll had forecast a 75 basis point hike on Tuesday, with only two expecting a full percentage point. The Swedish crown was flat after initially rising on the rate announcement.There is little the central bank can do about the current level of inflation. But rate-setters do not want surging prices to spill over into higher wage demands, which would make the job of returning to the 2% inflation target much harder in the longer term.Rate rises will continue despite forecasts Sweden’s economy is heading for a sharp downturn – possibly even a recession.The Riksbank forecast GDP would shrink 0.7% next year.Rate-setters now see the policy rate peaking at around 2.5% in the second quarter of next year, rather than a 2% peak early next year seen in June.”We … believe the policy rate will be higher than that and we don’t exclude a peak of 3.5% at the end of 2023,” Lars Kristian Feste, head of fixed income at Ohman Group said.”The reason is that inflation is not going to come down as fast as in the Riksbank’s forecast of around 2.0% in 2024.”Markets also see the policy rate peaking around 3.5%.Sweden’s economic downturn creates an immediate challenge for the new government, which is expected to be formed by a four-party, right bloc which won most seats in a national election earlier this month.Tax cuts are likely on the agenda, although Governor Ingves said fiscal policy would be better focused on structural reform than holding up demand.Other central banks are also expected to keep tightening monetary policy. Earlier this month, the European Central Bank raised its key interest rate by 75 basis points, following two such hikes by the U.S. Federal Reserve.Analysts are betting there will be no let-up in the pace of hikes from the Fed and the ECB, while other central banks, such as the Swiss National Bank, are likely to follow suit with aggressive hikes.The United States, Britain, Norway, Switzerland and Japan all have monetary policy meetings this week. More

TOKYO (Reuters) -Japan’s ruling party is ramping up calls for a fresh spending package worth at least $105 billion to cushion the blow from rising inflation, reinforcing fears that the world’s third largest economy will lag others in pruning huge fiscal support.A package worth at least 15 trillion yen ($105 billion) was needed to fight headwinds from rising living costs and monetary tightening by U.S. and European central banks, said Toshimitsu Motegi, a key ruling party official, the Kyodo news agency said.”We need a large-scale, comprehensive package,” Motegi, the sectretary-general of the Liberal Democratic Party (LDP), said on Tuesday, regarding a spending package the government is due to compile next month.But another senior LDP official, Hiroshige Seko, estimated at least double that, or 30 trillion yen, was needed, he told a separate news conference, Kyodo added.That figure echoed comments last week by party policy chief Koichi Hagiuda.Prime Minister Fumio Kishida, who has seen public support for his cabinet slump in recent weeks, faces pressure from his ruling coalition for fresh measures to prop up his ratings and a fragile economy.To fund the spending, the government is likely to submit a supplementary budget next month to parliament.Just as Japan’s economy recovers from wounds inflicted by the COVID-19 pandemic, it finds itself battling rising commodity prices and slowing global growth.The Bank of Japan has pledged to retain ultra-low interest rates to support the economy. But its dovish policy stance has driven the yen currency to 24-year lows, pushing up food and fuel import costs, to put more strain on homes and firms.Natsuo Yamaguchi, head of the LDP’s coalition partner Komeito, said policymakers must watch the impact rapid moves in the yen could have on livelihoods.”The yen is weakening much faster than before, which is said to be driven by the interest rate policies of Japan and the United States,” Yamaguchi told a briefing.Japan’s core consumer inflation quickened in August to 2.8%, its fastest annual pace in nearly eight years, and exceeding the central bank’s target of 2% for a fifth straight month as prices of raw materials grew, along with the yen weakness.The BOJ is set to keep ultra-low rates and its dovish stance at a two-day meeting that ends on Thursday, just hours after a big rate hike expected by its U.S. counterpart, possibly triggering a fresh bout of yen selling. ($1=143.3200 yen) More

Wall Street will watch the central bank’s economic forecasts closely on Wednesday, when another jumbo-size rate increase is expected.The Federal Reserve is expected to deliver a third straight supersize interest rate increase this week as it wages its most aggressive fight against inflation since the 1980s — and it could signal even more to come.Central bankers are widely expected to raise interest rates three-quarters of a percentage point at their meeting on Wednesday, and investors think there is even a small chance of a full percentage-point move.But Wall Street is more focused on what comes next. Officials will release updated economic forecasts for the first time since June after their two-day meeting this week. Those are expected to show a more forceful path ahead for rates than Fed officials previously anticipated as rapid inflation continues to plague America. The question is just how much more assertive the Fed will be.Central bankers have already raised interest rates considerably in an attempt to slow the economy and temper price increases. Business activity is slowing in response, but it is not falling off a cliff: Employers continue to hire, wages are rising, and inflation has remained stubbornly quick.That has prompted officials to reinforce in speeches that they are serious about getting price increases under control, even if doing so comes at a cost to growth and the labor market. It’s an inflation-focused tone that many on Wall Street refer to as “hawkish.”The economic projections could give policymakers the chance to underline that commitment.“Things are not quite evolving as they had expected — they’re having trouble slowing the economy,” said Gennadiy Goldberg, a U.S. rates strategist at TD Securities. “At the end of the day, there is very little they can do this week but sound hawkish.”Jerome H. Powell, the Fed chair, will hold a news conference after the release, and is likely to echo his pledge late last month to do what it takes to wrestle prices lower.That could be a painful process, Mr. Powell has acknowledged. Higher interest rates temper inflation by making it more expensive to borrow money, discouraging both consumption and business expansions. That weighs on wage growth and can even push unemployment higher. Firms cannot charge as much in a slowing economy, and inflation cools down.“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Mr. Powell said last month. He later added, “We will keep at it until we are confident the job is done.”If the Fed continues raising rates along the trajectory that economists and investors increasingly expect, the fallout could be painful. In the early 1980s, the last time inflation was as high as it is today, the central bank under Paul A. Volcker jerked borrowing costs sharply higher and mired the economy in a recession that sent joblessness to double-digit levels. Homebuilders mailed Mr. Volcker two-by-fours from buildings they could not build; car dealers sent keys from cars they could not sell.Inflation F.A.Q.Card 1 of 5What is inflation? More

The country’s economy has been very hard hit by cascading crises which have disrupted worldwide trade.When the state-owned factory where Hesham al-Atar worked for 15 years was liquidated this month, he had a feeling it was linked to international pressure on the Egyptian government to reduce its role in the economy amid a severe downturn.Mr. el-Atar, 39, was a supervisor at the factory, El Nasr Coke and Chemicals Plant, which turned coal into a fuel called coke used in iron and steel production. Now, with his daily expenses rising, he said that he fears he will not be able to find another job near his home in the city of El Saf, about two hours south of the Egyptian capital.“I don’t know what to do,” he said. “I have four kids. We’re used to a certain standard of living. It will have to change.”Egypt, which relies heavily on imported goods and foreign borrowing, has been badly battered by the cascading disruptions to global trade from the pandemic and Russia’s war on Ukraine. The exit of foreign investment capital, a collapse in tourism and spiking commodity prices have all translated into a foreign-currency shortage.The government has responded by implementing more onerous import rules, devaluing the local currency and pushing up interest rates. It has also taken steps to privatize or shut down state-owned enterprises, a key demand of international investors and creditors who say the government’s outsized role in the economy hinders private investment.But at the same time, Egypt has succeeded in raising more than $22 billion this year in investment pledges from wealthy Gulf allies leery of seeing one of the pillars of the Arab world on the brink after a decade of tumult that began with the country’s 2011 uprising.Consumers immediately felt the impact of the government’s response to the crisis, particularly Egypt’s middle class, which has been whittled away by a persistent lack of job opportunities, decreases in consumer subsidies, paltry spending on health and education and a regressive tax system that goes in no small part to fund grandiose infrastructure projects.The import rules introduced at the beginning of the year required companies to pay for goods up front through the national banking system. That left some imported goods stuck in the ports and created shortages, though the government has since taken steps to ease the problems.In March, the central bank devalued the currency by about 14 percent and prices shot up. Salaries, however, did not.“We have to pay European prices on Egyptian salaries,” said Mona Hosni, a 34-year-old Cairo resident. “Our salaries are not like Europeans!”Ms. Hosni works on one side of Cairo and studies on the other. With the rise in prices, she cannot afford to move out of her family home in the suburb of Helwan. So she spends about three hours a day driving her 2011 Nissan between home, school and work.A new car is out of the question.High-rise buildings in Cairo seen from the Nile in 2020.Sima Diab for The New York TimesThe roads she drives on are lined with new developments and billboards advertising luxury real estate, even as much of the country remains mired in poverty.In recent years, President Abdel Fattah el-Sisi has overseen a huge building boom, borrowing from abroad to fuel Cairo’s inexorable sprawl. The government is even erecting a new capital in the desert, not far from the current one, at a cost of some $59 billion.Samer Atallah, an economics professor at the American University in Cairo, said that the country had taken on tremendous debt — which is becoming more expensive by the day as interest rates rise — without investing in the kinds of things that could create more exports, more sustainable economic growth or steady government revenues.“Fundamentally, the economy was geared up for a crisis,” he said.The government has been in talks with the International Monetary Fund about a loan: Economists estimate that Egypt may need $15 billion over the next three years, though the government has said it will seek a smaller package. And Egypt is expected to devalue the currency even further soon.The government must balance the demands of investors — whose money could help alleviate the economic crisis — with the risks of implementing measures that could cause even more economic pain for its citizens.International lenders have urged Egypt to privatize more of its economy as one way to achieve more lasting economic growth. Much of the economy has long been controlled by the state through moribund government-owned companies.In the case of the El Nasr factory where Mr. al-Atar worked for 15 years, the government said that it had incurred a loss of about $1.5 million last year and had no possibility of modernizing or improving its financial standing. The factory, which began production in 1964, was emitting significant pollution, according to news reports and government documents.Mr. el-Atar is now a union representative negotiating a severance package for the workers but whatever deal is reached, the money surely won’t go far given the rising prices and currency devaluation.The military’s control over a range of businesses has stifled competition from the private sector in industries from concrete to pasta production by leaning on advantages such as free conscripted labor and exemptions from taxes and customs fees.Egypt has promised before to privatize without following through. But as the economy cratered this year, the government has shown signs of renewed resolve, starting to sell off or shut down several state-owned companies.Across Cairo, people from all walks have been forced to adjust their daily routines to adapt to the economic pressures.At an auto-repair shop in one suburb, two managers said that the cost of parts they need from Europe had shot up and that they were losing customers because of the higher prices. Business is half of what it was before the pandemic, they added.“We’re all struggling,” said Mostafa el-Gammal, the general manager. “It’s showing on everyone.”Though they haven’t laid anyone off, wages at the shop are stagnant.Mr. el-Gammal said that he tried to shield his four children from the economic decline. But he said he was taken aback when he went to buy two of them backpacks for the start of the school year and shelled out double what he had in the past.His colleague who manages the auto shop, 33-year-old Mohamed Farouk, said that he had transferred his 6-year-old son to a more affordable school near their home in Nasr City, another Cairo neighborhood.The government has also tried to increase revenue by raising fees for its services.Assem Memon, 39, runs AdMazad, a private business with 14 employees that collects data on billboards to sell to companies that want to optimize ad campaigns. He said the economic slowdown and devaluation have complicated his plans to expand outside Egypt.A construction site at Egypt’s new administrative capital east of Cairo in September.Khaled Elfiqi/EPA, via ShutterstockThe government was creating headaches for employers, Mr. Memon said, including a new Ministry of Finance online portal that must be used for all business-to-business transactions. The aim is to allow the government to see every transaction.Some tax withholding practices were also changed, he added, reducing the cash he can keep on hand. While he understands the government is aiming to increase revenue, he said the approach could deter entrepreneurship.“It’s suffocating small businesses,” he said.Gamal Osman, 59, a warehouse worker in Tanta, a city about two hours north of Cairo, said he was also paying more in fees for basic services, like renewing his identification card. He said that he had cut back to eating meat only once every two weeks and that, still, he could not save money like he used to.“You can feel it in everything you do,” he said. “From the moment you step onto the street until the moment you go to sleep.”Still, others see opportunity in the hardship.Mohamed Ehab is a marketing director for an auto company that introduced Jetour, a Chinese brand, into the Egyptian market in 2020. Sales were booming last year, but the new import rules have snarled the business.The company stopped accepting orders months ago and is focusing on expanding service centers.Mr. Ehab said that there was still demand for a practical family car, even after prices shot up with the devaluation. The company’s lowest-priced car went up to $26,000 from about $18,000, largely because the importers have to pay China in dollars.But he is hopeful that the impasse will spur the government to offer incentives for auto companies to assemble their products inside Egypt, which could generate jobs and make cars more affordable.“It’s a difficult time, but I think it’s part of a bigger, good story,” he said. More