Economy

For developing countries, the challenge of raising finance to meet the costs of climate change looks impossibly daunting.Rich countries have commonly failed to deliver the amounts they promised — which, in any case, are far short of what is needed. Borrowing holds little appeal for low-income countries, more than half of which are in debt distress or at high risk of it. And blended finance, in which multilateral institutions, such as development banks, attract commercial capital — once seen as having great potential — has proved a damp squib.That has left development economists to conclude that, rather than tinkering with solutions to a fraction of the problem, what is needed is an overhaul of those multilateral institutions to increase their firepower.“One of the key problems is that multilateral financial institutions are fundamentally ill-suited to the challenges,” says Daniel Munevar of the debt and development finance department at the UN Conference on Trade and Development. “The one thing that should be done is to further leverage their balance sheets, but there is not the political commitment to do it.” Putting a figure on the amount of finance that must be mobilised is a challenge in itself. US Treasury secretary Janet Yellen spoke last month of the “trillions and trillions of dollars” needed to tackle climate change in developing countries. A widely cited report by the consultancy McKinsey identified a global need for additional capital spending on energy and land-use systems alone of $3.5tn a year for the next 30 years.A recent UN report says spending on adaptation — dams to hold back rising sea levels or irrigation to deal with droughts — will require as much as $300bn a year by 2030 and $500bn a year by 2050 for developing countries. That is without counting investments in mitigation — such as renewable energy and electric vehicles — where most finance is directed today.But the finance so far delivered is a fraction of those amounts. In 2009, developed countries promised $100bn a year by 2020 to reduce greenhouse gas emissions and finance adaptation in developing countries. This promise has not been met. Between 2020 and 2025, according to Oxfam, poor countries face a combined shortfall of $75bn.Blended finance has disappointed, too. The amount mobilised for development rose from $15bn in 2012 to more than $50bn in 2018, according to the OECD. But that growth then went into reverse and the money delivered, while welcome, will not make much impact.“Blended finance is likely to remain niche,” says Simon Cooke, emerging markets portfolio manager at Insight Investment, who sees greater opportunity in green bonds.In emerging markets, he argues, bondholders can make a particularly big difference, as more than 60 per cent of corporate issuers of green bonds in these territories have no publicly listed equity. Green bond issuance, indeed, has taken off. From a few hundred million dollars in 2012, annual issuance rose to almost $500bn worldwide last year, according to data compiled by Dealogic. About $200bn was issued by companies, including almost $80bn in emerging markets.However, only about $10bn was raised last year by governments and government-backed issuers in developing countries.Ugo Panizza, professor at the Graduate Institute of International and Development Studies in Geneva, says that while green bonds will play a role, “they are not going to be the silver bullet that solves the climate financing needs of poor countries”.One problem is that, while a lot of corporate green bond issuance is for mitigation projects, the costs for governments lie mostly in adaptation. Sovereign issuance is hard to monitor. Corporate green bond issuance is often deposited in a special account for green purposes, but most governments do not allow this. Indeed, the contracts of green sovereign bonds issued by developing countries often contain language that protects the issuer from any action if they fail to meet their green commitments.“A big problem with green sovereign bonds is that they are not enforceable,” Panizza says. “There is too much hype.”Others question the wisdom of encouraging poor countries to issue more debt, green or otherwise, when they are struggling with the debts they have taken on in the pandemic.“The IMF is telling us that 60 per cent of the world, where a good part of emissions is coming from, doesn’t even have the fiscal space to deal with the Covid crisis,” points out Kevin Gallagher, director of the Boston University Global Development Policy Center. “How are they going to mobilise trillions by 2030, when our pledge of $100bn a year is still a drop in the bucket?” A big part of the answer, he and others argue, is for multilateral development banks such as the World Bank to take a less conservative approach.

Studies suggest that two steps — expanding their collateral by including callable capital and accepting a single-notch downgrade from credit rating agencies — would allow them to quadruple the amount of grants and concessional loans they provide to poor countries. This could free up additional annual finance by many trillions of dollars.But the World Bank argues that its own triple A rating is the cornerstone of its financial model and that lower ratings would reduce rather than increase its firepower.Nevertheless, as Yellen and others urge the multilateral lenders to do more, change may come soon. An independent review of these banks’ capital structures commissioned by the G20 group of large economies is due to present its finding by the middle of this year.For EM climate finance, that might just be a game-changer. More

The writer is chair of Rockefeller InternationalAs the US Federal Reserve raises interest rates, debate rages over whether this tightening cycle will trigger a recession or not. History suggests an interesting answer: since the second world war, Fed tightening has led to a range of outcomes for the economy, from hard to softish landings, but has always led to financial crises somewhere — including every major global crisis in recent decades.With the rapid spread of bank and mortgage lending, the first signs of crisis often materialise in rising corporate and household debt, concentrated in real estate. Today, however, these signs are at worrying levels in only a few nations, led by Canada, Australia and New Zealand.But that doesn’t offer much comfort. The constant flow of easy money out of central banks has fed serial crises for decades. Regulators typically try to address the sources of the last crisis, only to divert credit to new targets. After the global crisis in 2008, authorities cracked down on the main sources of that meltdown — big banks and mortgage lending — which pushed the flow of easy money into less heavily regulated sectors, particularly corporate lending by “shadow banks.”This realm beyond regulators is where the next crisis will arise.Shadow banks include creditors of many kinds, from pension funds to private equity firms and other asset managers. Together they manage $63tn in financial assets — up from $30tn a decade ago. What started in the US has spread worldwide, and lately shadow banks have been growing fastest in parts of Europe and Asia.Though it has pulled back recently under government pressure, China’s shadow banking sector is still among the largest in the world at 60 per cent of gross domestic product — up from 4 per cent in 2009 — and deeply enmeshed in risky lending to local governments, property companies and other borrowers. In Europe, the hotbeds include financial centres like Ireland and Luxembourg, where the assets of shadow banks, particularly pension funds and insurers, have been expanding at an 8 to 10 per cent annual pace in recent years. The borrowers to watch most closely now are corporations. In the US, corporate debt as a share of assets remains near record highs, particularly for firms in industries hardest hit by the pandemic, including airlines and restaurants. A third of publicly traded companies in the US do not earn enough to make their interest payments. Any increase in borrowing costs will make life difficult for these companies, which need easy credit to survive. Many of them rely on expensive junk debt, which has doubled over the past decade to $1.5tn, or roughly 15 per cent of total US corporate debt. Their vulnerability was exposed early in the pandemic, when default risks briefly spiked, but was quickly covered up by massive injections of liquidity from the Fed.The biggest booms are under way in private markets. After 2008, as regulators tightened the screws on public debt markets, many investors turned to these private channels, which have since quadrupled in size to nearly $1.2tn. A substantial chunk of it is direct lending from private investors to often risky private corporate borrowers, many of whom are in this market precisely because it is unregulated.Nothing highlights the frenzied search for yield in private markets more clearly than so-called business development companies. Some of the world’s biggest asset managers are raising billions for BDCs, which promise returns of 7 per cent to 8 per cent on loans to small, financially fragile companies. As one investor told me: swing a stick in Manhattan these days and you are bound to hit someone involved in private lending. These risks are symptomatic of the financialisation of the world economy. Optimists say that household finances are healthy so the economy will be fine, even as markets get slammed by higher interest rates. But this again is to make the mistake of focusing on the past and ignoring how much has changed.Over the past four decades, as financial markets grew to more than four times the size of the global economy, feedback loops shifted. Markets, which used to reflect economic trends, are now big enough to drive them. The next financial crises are thus likely to arise in new areas of the markets, where growth has been explosive, and regulators haven’t yet arrived. The even bigger risk, in a heavily financialised world, is that an accident in the markets settles the debate over how hard Fed tightening will hit the real economy. More

The writer is chief investment officer at Franklin Templeton Fixed IncomeThe US Federal Reserve and financial markets are experiencing a long overdue reality check on inflation and interest rates. But markets have barely begun to take into account how far the world has changed.I believe they are still experiencing a severe case of cognitive dissonance. Inflation has surged to levels not seen since the infamous 1970s and remains stubbornly high. The Fed has started tightening, with policy rates already moving up and the central bank set to shrink its balance sheet after ending its market-boosting asset-buying programme.But even after the evidence of inflation rises in recent weeks, most investors still expect interest rates will not rise very much and will not remain elevated for very long. I think this may be very misguided.Markets anticipate that US economic growth will slow as we head into 2023 — and here I would agree. High inflation has taken a toll on purchasing power and will hurt household consumption, even though real income still exceeds pre-pandemic levels. Supply chain disruptions continue to hamper production, and the combination of somewhat tighter monetary policy with less generous fiscal stimulus will hold back activity. Financial markets have been conditioned to believe that the Fed will react to this slowdown in growth in the same way it always has in the post-financial crisis period: by loosening monetary policy quickly and decisively. This is where I expect things will play out differently.This time when growth slows, inflation will in all likelihood still be too high for the Fed to stop tightening. Month-on-month headline consumer price inflation has averaged 0.6 per cent since the start of last year. Even if that monthly pace halves, inflation will end 2022 close to 6 per cent year over year, and will be running at an average of 4.5 per cent in the first quarter of 2023. If financial markets are nonetheless expecting the Fed to quickly ease policy again, it’s at least in part because their cognitive dissonance has been abetted by a significant degree of wishful thinking that seems to inform the central bank’s own outlook.

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The Fed seems to be hoping that inflation will fall back to its 2 per cent target despite policy interest rates remaining negative after taking into account inflation. Bringing inflation down in such circumstances is a feat that the Fed has never managed before.How likely is it that the Fed will pull that off now without a more decisive policy tightening? The Fed seems to be betting that inflation expectations will remain anchored until all exogenous shocks have been worked out of the system. But consumers’ long-term inflation expectations are already running at about 4 per cent and wages are rising at a 5.5 per cent pace (average hourly earnings of all employees).Every month that goes by, inflation expectations become entrenched at a higher level as workers, consumers and businesses learn to anticipate and get ahead of persistent increases in their cost base. When activity slows, it could take some pressure off this very tight labour market. But with labour force participation persistently below pre-pandemic levels, the cooling impact on wage growth might be limited. We have a wage-price spiral developing that will probably make inflation more self-sustaining than the Fed assumes.We operate in a very different environment than we did a decade ago. Inflation has asserted itself as a major social and political issue for the first time in more than 40 years. The year-on-year rate may abate in coming months because it is measured against the higher base of inflation as 2021 progressed. But the effect will be slow and we will always be one supply shock away from inflation bumping back up. During the past 12 years, the Fed could always afford to give priority to supporting economic growth and asset prices because inflation remained blissfully dormant. This is no longer the case.I therefore expect that even as growth slows, the Fed will keep hiking rates during the first half of next year, in order to bring inflation back under control. And that once markets realise the Fed cannot afford to reverse course, long-term yields will also move higher still.We still need to acknowledge fully that inflation has become self-sustaining and bringing it back under control will be harder and more painful than the central bank hopes and financial markets are pricing in. This time, the Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect. The corresponding risk to asset prices and economic growth is greater than many like to admit.  More

Representatives of the United States, Australia, Canada, Chile, Japan, the Republic of Korea, and New Zealand said in a joint statement that they had “grave concerns” over the humanitarian crisis in Ukraine. “Reaffirming the importance of the rules-based international order that underpins an open, dynamic, resilient and peaceful Asia-Pacific region, we strongly urge Russia to immediately cease its use of force and completely and unconditionally withdraw all of its military forces from Ukraine,” the nations said. Representatives from Canada, New Zealand, Japan and Australia joined the Americans, led by U.S. Trade Representative Katherine Tai, in walking out of the Asia-Pacific Economic Cooperation (APEC) meeting on Saturday.The walkout took place while Russian Economy Minister Maxim Reshetnikov was delivering remarks at the opening of the two-day meeting of the group of 21 economies.The delegations from five countries that staged the protest returned to the meeting after Reshetnikov finished speaking, a Thai official said. More

ORLANDO, Fla. (Reuters) – The slump on Wall Street and rebound in the U.S. bond market point to a growing belief that recession is on the horizon, curtailing the Federal Reserve’s tightening cycle sooner than it would like and opening the door to rate cuts later next year.That’s exactly what hedge funds appear to be betting on also, according to the latest Commodity Futures Trading Commission report on rates futures positioning.Data for the week to May 17 show that speculators slashed their net short position in three-month Secured Overnight Financing Rate (SOFR) contracts to the smallest in almost two months, and maintained a net long position in 30-day fed funds futures.The shift in SOFR futures positioning is most revealing, especially in light of the broader trends underway in that market, one of the most accurate barometers of traders’ views on the path for U.S. interest rates over the next few years. Funds cut their net short three-month SOFR position to 388,207 contracts from 460,721 the week before. That’s the smallest net short in seven weeks, and down significantly from the record of more than 600,000 contracts only a month ago. 417b4cb4-4628-40b6-9928-75f3119bf3863The shift was almost entirely down to a jump in long positions rather than short covering, suggesting traders are beginning to look beyond the aggressive tightening likely to be delivered this year toward possible easing next year.A short position is essentially a bet that an asset’s price will fall, and a long position is a bet it will rise. In rates, implied yields fall when prices rise, and move up when prices fall.Fed officials have stressed they will keep tightening policy until they think their inflation goals are being met, despite the economic “pain” that will cause. Traders and funds in the SOFR market are putting more of their eggs in that “pain” basket. affb6724-499a-449b-b17e-98651e870c8d1 ea0d747d-cd45-46c7-87c1-038b6d9fa9a92RATE CUTS SEEN STARTING NEXT YEARFirstly, implied rates for next year have fallen sharply. The June 2023 contract now implies a fed funds rate of around 3%, down almost half a percentage point from the high on May 4, the day of the Fed’s 50-basis point rate hike.Secondly, the expected length of the Fed’s tightening cycle has shortened dramatically. A few months ago traders projected the Fed’s ‘terminal rate’ being reached in September next year. That has since shifted to June, but now March is on the table.The implied rate on December 2023 SOFR futures has fallen to 2.80%, the lowest in almost 2 months. Set against the peak terminal rate forecast in June, that implies an 80% chance the Fed will cut rates in the second half of next year.Even St Louis Fed President James Bullard, who wants rates raised to 3.5% this year, said the Fed could be cutting them as early as next year if inflation is under control. Fed officials and most economists still say there will be no recession. But the rapid tightening in financial conditions is starting to bite – Wall Street is in turmoil, and Citi’s U.S. economic surprises index is now negative and at a five month low. “We continue to expect that the financial conditions tightening triggered by Fed policy will likely lead to a recession by end 2023,” Deutsche Bank (ETR:DBKGn) analysts wrote on Friday. Wells Fargo (NYSE:WFC)’s research arm last week joined Deutsche in predicting a U.S. recession, but even earlier, at the end of this year. 51ba9e45-cf9f-4651-99e4-67514e57e11d4Related columns:- If Fed has to choose, markets could get much uglier (Reuters, May 20)- Fed fingers crossed for 1994 re-run as hiking path shortens (Reuters, May 5)(The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Sam Holmes) More

DAVOS, Switzerland (Reuters) -Global private equity firm General Atlantic plans to plough $2 billion into India and Southeast Asia over the next two years after falling valuations made the region’s startups more attractive, a senior executive told Reuters.General Atlantic is in early-stage investment talks with about 15 companies in sectors including technology, financial services, retail and consumer, Sandeep Naik, the head of its business in India and Southeast Asia, said in an interview. The market for startups, especially in India, is going through a rough patch. After raising a record $35 billion in 2021, founders are struggling to attract cash, sparking fears of lower valuations and forcing some to cut jobs.After investing just $190 million in Indian startups in 2021, its lowest ever annual figure, General Atlantic is now ready to loosen its purse strings, Naik said in an interview at the World Economic Forum in the Swiss ski resort of Davos.”The realism is setting in. We were waiting for the value creation to happen. We are now ready,” Naik said of General Atlantic’s plans for India and Southeast Asia, it has investments of more than $4.5 billion, mostly in India.”We are very bullish on India, Indonesia and Vietnam,” Naik added, while declining to name any companies it is looking at.General Atlantic’s existing high-profile Indian investments include education technology companies such as Byju’s, which offers online tutoring in a country where internet and smartphone use is booming and is valued at around $22 billion. It has also invested in Reliance Retail, India’s largest retailer, and in Southeast Asia its portfolio includes Indonesian food and beverage retailer PT MAP Boga Adiperkasa and social entertainment platform Kumu in the Philippines.Many tech companies globally have suffered in recent weeks as the conflict in Ukraine and rising interest rates hit investor sentiment. Japan’s SoftBank has reported a record loss of $26.2 billion at its Vision Fund investment arm.Given the tough market environment and falling valuations, General Atlantic is advising all its portfolio companies to look at consolidation opportunities.”Now is the best time to consolidate … Strong gets stronger,” Naik said. Analysis: Zombie unicorns: Indian startups go from feast to faminehttps://reut.rs/3G85gv3 More

The chief executive of JSR, one of the world’s largest suppliers of a material critical for semiconductor production, has said lack of industry infrastructure will make it “very difficult” for China to develop leading-edge chipmaking technology despite a push for self-sufficiency.Eric Johnson, a rare American leader at a Japanese semiconductor company, also said in an interview that he expected chip sector supply bottlenecks to continue into 2023.US export curbs on technologies required to make the most advanced chips have prompted China to invest heavily to develop its own semiconductor supply chain. But Johnson said China would struggle to master the sophisticated chipmaking technology based on a technique known as extreme ultraviolet or EUV lithography. “I think China also would love to develop their own EUV competency, their ecosystem for these things. I think it’s going to be very difficult for them to do that, frankly,” Johnson said.Semiconductors, essential to products from smartphones to washing machines, have become a focus of competition between Washington and Beijing. Joe Biden on Friday began his first trip to Asia as US president by visiting a Samsung chip plant in South Korea and stressing his desire to secure semiconductor supply chains.EUV lithography is a highly demanding process using light to etch minuscule integrated circuits on to silicon wafers.Even if China “got a paper on exactly what the chemistries were . . . to manufacture that at the purities, and the precision, and reproducibility is really tough”, Johnson said. “It’s not that simple and they don’t have the supply chain to support that either.”Tokyo-based JSR is a leading supplier of photoresists, thin layers of material used to transfer circuit patterns on to semiconductor wafers. Analysts say it has around 30-40 per cent of the global market for photoresists used to make advanced chips and counts Samsung, Taiwan’s TSMC and Intel of the US among its customers.

China is the world’s biggest importer of chips and has been investing heavily in semiconductor initiatives as part of its “Made in China 2025” push, which calls for 70 per cent self-sufficiency in the most important components for critical technologies by 2025. But Johnson said “leading-edge capability takes decades and a lot of money to develop . . . you really need applications like the iPhone to pay for the stuff”. Still, Johnson stressed that Beijing was aggressively investing in less advanced chipmaking technologies that were also important, and that China was a big part of JSR’s growth strategy.He said he wanted to balance being able to “respectfully” and “responsibly” service customers in China with “sensitivity to the concerns that the US government has and concerns with protecting interests in Japan”.“It is under-appreciated how much opportunity there is in China that’s not dependent on those very leading-edge capabilities,” he said.Johnson said global chip supply bottlenecks that have undermined the global economy would take until next year to resolve. “It just takes time to bring new capacity online and that new capacity won’t really start to make an impact probably until the end of this year or next year,” Johnson said.He said he expected it to be particularly “problematic” for the sector to meet demand for semiconductors used in vehicles, as they used less advanced chips which were less profitable and so attracted less investment. More

DAVOS, Switzerland (Reuters) -Russia would normally have its own “house” at the World Economic Forum as a showcase for business leaders and investors.This year the space on the dressed-up main street in Davos has been transformed by Ukrainian artists into a “Russian War Crimes House”, portraying images of misery and devastation.Russia has denied allegations of war crimes in the conflict.Ukraine is top of the agenda for the four-day meeting of global business leaders, which kicks off in earnest on Monday with a video address by Ukrainian President Volodymyr Zelenskiy.”This is the world’s most influential economic platform, where Ukraine has something to say,” Zelenskiy said in his daily video address on Sunday night.As the WEF meeting emerges from a coronavirus pandemic hiatus of more than two years, a deferral from January to May means that attendees are surrounded by spring flowers and verdant slopes rather than navigating icy streets.But not only the weather is different in 2022, with Russian politicians, executives and academics entirely absent.Russian institutions such as its sovereign wealth fund, state banks and private companies have in previous years thrown some of the most glitzy parties, serving black caviar, vintage champagne and foie gras.They even hired Russia’s most prominent musicians and pop stars to perform for top chief executives.MARKET MELTDOWNAside from the Ukraine crisis, the post-pandemic recovery, tackling climate change, the future of work, accelerating stakeholder capitalism and harnessing new technologies are among the topics scheduled for discussion at Davos.European Commission President Ursula von der Leyen, German Chancellor Olaf Scholz and NATO Secretary-General Jens Stoltenberg are among the leaders due to address the meeting. On the business agenda, discussions are likely to focus on the souring state of financial markets and the global economy. After a sharp bounceback from the downturn triggered two years ago by the onset of the pandemic, there are now myriad threats to that recovery, leading the International Monetary Fund to downgrade its global growth forecast for the second time since the year began.Inflation due to hobbled supply chains emerged as a problem last year, particularly in the U.S. economy.That has been compounded since the beginning of 2022 by events including Russia’s invasion of Ukraine and waves of COVID-19 lockdowns across China that have stalled a recovery.’DEFINE TOMORROW’The Ukrainian artists are hoping to get their message of fighting for a better future to world leaders in Davos.Visitors are confronted by images such as a badly burned man in Kharkiv after Russian shelling and a film made up of thousands of pictures of dead civilians and bombed houses.”This is a place where all influencers and all decision-makers of the world come together,” the artistic director of the PinchukArtCentre in Kyiv, Bjorn Geldhof, told Reuters TV.”What is happening in Ukraine will define tomorrow.”Russian President Vladimir Putin calls the invasion of Ukraine a “special military operation” to disarm the country and rid it of radical anti-Russian nationalists. Ukraine and its allies have dismissed that as a baseless pretext for the nearly three-month war, which has killed thousands of people, displaced millions and shattered citiesWhile the WEF meeting may not be back to pre-pandemic levels, with Zurich’s airport expecting the number of flights to be about two-thirds of previous levels, its return comes as a welcome relief to the ski resort’s hotels and restaurants.”It is another step back to normality,” Samuel Rosenast, spokesperson for the local tourism board, said last week. More