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Mon, 27th March 2017

Anirudh Sethi Report

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Archives of “Bank” Tag

Ghana central bank suprises with interest rate cut to 23.5%

Ghana’s central bank has cut its main policy rate by 200 basis points this month after the west African economy saw a drop in inflation at the start of the year.

The move to lower rates to 23.5 per cent marks only the second rate cut since 2011 after interest rates were trimmed back in November. Analysts polled by Bloomberg had forecast no change this month.

Overnight: “PBOC Said to Inject Funds After Missed Interbank Payments”

Bloomberg report, citing “according to people familiar with the matter”
  • the People’s Bank of China has injected hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market
  • Tuesday’s injections followed missed interbank payments on Monday
  • The institutions that missed payments included rural commercial banks
Missing payments in the interbank is not a positive … Combined with the slide in metals prices on futures exchanges, not a positive either.

Global banks may have helped launder $80 billion in Russian money

A series of top-flight global banks assisted in helping Russian criminals launder enormous sums of money, the Guardian reports.

HSBC, the Royal Bank of Scotland, Lloyds, Barclays and Coutts are among 17 banks that played a role in a scheme from 2010-2014 that laundered at least $20 billion and up to $80 billion.

An estimated 500 people were involved in laundering the money and include oligarchs, Moscow bankers and people connected to the government.

This looks like the first report in what will be a series. Leaked documents include details of about 70,000 banking transactions, including 1,920 that went through UK banks and 373 via US banks. The transactions used the offshore system to hide and move money.

UP farm loan waiver: SBI report sees Rs 27,420 cr hit on banks

If the UP government fulfils its farm loan waiver promise, banks are likely to take a hit of Rs 27,420 crore and the scheme will lead to some stress on the state’s fiscal arithmetic, warns a report.

The BJP had in its UP election manifesto promised to waive farmers’ loans if elected to power. The party and its allies won a whopping 325 seats in the 403-member House.

An SBI Research report today said schedule commercial banks together had an outstanding farm credit of Rs 86,241.20 crore in UP with the average ticket size of Rs 1.34 lakh, as of 2016, most of which is to small and marginal farmers.

According to RBI data (2012), 31 per cent of the direct agriculture finance went to marginal and small farmers (landholdings upto 2.5 acre).

“Taking this as a proxy for UP as well, around Rs 27,419.70 crore will have to be waived off in case the farm loan waiver scheme is implemented for the small and marginal farmers, for all banks,” the report said.

As per the Socioeconomic and Caste Census of 2011, 40 per cent of rural UP households are engaged in cultivation. When it comes to landholdings, 92 per cent are marginal and small farmers in the state, according to the 2010-11 Agriculture Census.

Full text of the G20 statement from Baden-Baden

The full G20 communique released on March 18, 2017 from Baden-Baden, Germany

G20 Finance Ministers and Central Bank Governors
March 18, 2017, Baden Baden

  1. We met at a time when the global economic recovery is progressing. But the pace of growth is still weaker than desirable and downside risks for the global economy remain. We reaffirm our commitment to international economic and financial cooperation. We reiterate our determination to use all policy tools – monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth, while enhancing economic and financial resilience. Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks’ mandate, but monetary policy alone cannot lead to balanced growth. Fiscal policy should be used flexibly and be growth-friendly, prioritise high- quality investment, and support reforms that would provide opportunities and promote inclusiveness, while ensuring debt as a share of GDP is on a sustainable path. We emphasise that our structural reform and fiscal strategies are important components to supporting our common growth objectives and will continue to explore policy options tailored to country circumstances in line with the Enhanced Structural Reform Agenda. We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimise negative spillovers and promote transparency. We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth. We agree on a set of principles to foster economic resilience which provides an indicative menu to be considered in the update of G20 countries growth strategies under the Hamburg Action Plan. We take note of the work on inclusive growth within the Framework Working Group.
  2. We will deepen as well as broaden international economic and financial cooperation with African countries to foster sustainable and inclusive growth in line with the African Union’s (AU) Agenda 2063. We launched the initiative “Compact with Africa” aimed at fostering private investment including in infrastructure. The initiative is demand-driven and respects country-specific circumstances and priorities. The initiative provides modules of good practices and instruments that could be applied in tailor-made investment compacts being implemented through the commitment of multiple stakeholders, such as individual African countries, International Financial Institutions (IFIs) and bilateral partners. We welcome the report by the African Development Bank (AfDB), International Monetary Fund (IMF) and World Bank Group (WBG) and other contributors for the Compact. We support the intention of Côte d’Ivoire, Morocco, Rwanda, Senegal, Tunisia, the AfDB, IMF and WBG, and interested bilateral partners to work on investment compacts and develop strong investment climates. We encourage the private sector to take advantage of the investment opportunities provided and invite other African countries, IOs and interested bilateral partners to join the investment compacts. We will support continuity of this work and its coherence with other initiatives.

Upcoming Events for this week

The European Central Bank was just a teaser! Plenty more central banker action this week, amongst other things:

TUESDAY 14 March 2017:
China 
  • February industrial production, fixed-asset investment growth & retail sales
WEDNESDAY 15 March:
U.S.:
  • Inflation and retail sales data for February
  • Oh yeah … and its Federal Reserve FOMC decision day! :-D. A hike is very widely expected. And don’t miss the statement & press conference
THURSDAY 16 March:
Japan:
  • BOJ announcement, likely no change (Kuroda presser to follow later)

Global economy walking a tight rope, Bill Gross warns

Bill Gross, the bond manager, on Thursday renewed his warning that high levels of debt across the world pose a rising risk of derailing the global economic expansion.

The portfolio manager at Janus Capital said that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.

Mr Gross noted that the world economy has generated more debt relative to gross domestic product than it did ahead of the 2008 financial crisis. Credit across the US economy of $65tn equates to 350 per cent of GDP, while China’s leverage ratio has doubled over the past decade to nearly 300 per cent, he noted.

“If rates are too high (and credit as a per cent of GDP too high as well), then potential Lehman black swans can occur,” he said.

“On the other hand, if rates are too low (and credit as a per cent of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities.”

World Bank issues bond aimed at highlighting sustainable development

The World Bank is hoping to draw attention to the United Nations’ sustainable development goals with a sale of unusual bonds.

Payouts on the securities, which are relatively small, will be linked to the stock market performance of 50 companies considered to be making a significant contribution to the goals, including Nestle and Danone.

The World Bank has been making concerted efforts to promote global sustainability within financial markets and has previously sold green bonds and a sustainable development bond denominated in Chinese renminbi.

Sustainable development goals were created in the mould of the UN’s earlier Millennium Development Goal and encompass economic, social and environmental objectives such as gender equality and combating climate change.

OECD Warns There Is A “Disconnect” Between Markets And The Global Economy

In a report released this morning by the Organisation for Economic Cooperation and Development titled “Will risks derail the modest recovery? Financial vulnerabilities and policy risks” the OECD warns the global economy may not be strong enough to withstand risks from increased trade barriers, overblown stock markets or potential currency volatility, and adds that the “disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could derail the modest recovery.

The OECD projects global GDP growth to pick up modestly to 3½ per cent in 2018, from just under 3% in 2016, boosted by fiscal initiatives in the major economies, a forecast which is broadly unchanged since November 2016 and notes that while confidence has improved, “consumption, investment, trade and productivity are far from strong, with growth slow by past norms and higher inequality.

In Latest Tightening Move, China To Cut Money Supply Growth To 12%

For a majority of China watchers, while Beijing’s goalseeked GDP reports are largely dismissed as politburo propaganda, most of the attention falls on the PBOC and banking sector’s credit creation, and particularly, how this translates into broad money supply, or M2, growth: after all, in a nation which has roughly $35 trillion in bank assets, the biggest variable is how much cash is being injected into the system, and what happens with said cash.

Which is why a Reuters report overnight that China plans to target broad money supply growth of around 12 percent in 2017, down from 13 percent in 2016, has been promptly noted as the latest signal to contain debt risks while keeping growth on track. The M2 growth target was endorsed by leaders at the closed-door Central Economic Work Conference in December, according to sources with knowledge of the meeting outcome.

As a reminder, yesterday even the NY Fed released a note in which central bank researchers warned about the unsustainability of Chinese debt. Under the PBOC’s new “prudent and neutral” policy, the central bank has adopted a modest tightening bias in a bid to cool torrid credit expansion, though it is treading cautiously to avoid hurting the economy. 

“It’s not necessary to maintain last year’s high money supply growth,” said a source who advises the government. “A money supply rise of 11 percent should be enough for supporting growth, but we probably need to have some extra space, considering risks in the process of deleveraging.”

In 2016 China’s money supply target was 13%, roughly double the country’s GDP , though it ultimately grew just 11.3% due to the effects of the central bank’s intervention to support the yuan currency, which effectively drained yuan liquidity from the economy.  Last year’s M2 target reflected Beijing’s focus on meeting its economic growth targets, but top leaders have pledged this year to shift the emphasis to addressing financial risks and asset bubbles.