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TACKLING THE “NEW NORMAL” OF UNCERTAINTY

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TACKLING THE “NEW NORMAL” OF UNCERTAINTY

From growing concerns over protectionism to geopolitical turbulence, global trade continues to be hampered by an environment of uncertainty. In such times, Daniel Schmand, Chair of the International Chamber of Commerce (ICC) Banking Commission, explains why strengthening the rules-based international trade system is critical

Following the release of its latest World Trade Outlook Indicator, the World Trade Organisation (WTO)stated that the trade recovery of 2017 should continue, with solid trade volume growth in the first quarter of 2018. While such positive news is to be welcomed, the rebound in global trade could be short-lived.

From the US’s withdrawal from the Trans-Pacific Partnership (PPP) – as well as its ongoing renegotiations of the North American Free Trade Agreement (NAFTA) – to rising anti-trade populist stances in Europe and elsewhere in the world, the system of rules and regulations that has governed world trade for decades has increasingly come under the spotlight.

At the very least, isolationist policies – such as those espoused by Trump’s “America First” policy – are likely to mean a substantial change in the way international trade is organised. In the worst case scenario (although far from certain) there is the danger of an all-out trade war, as tensions continue to escalate between the US and China.

But, of course, protectionism is neither new nor a US monopoly. In fact, according to international law firm Gowling WLG, research into global protectionism shows that, in net terms, 60 of the world’s top economies have adopted over 7,000 protectionist trade measures since 2008. Such figures are a cause for concern.

A recent example is India. Despite Prime Minister Modi’s “open-economy” speech at Davos last month, the country has recently introduced tariffs across a range of imports – including automobile parts, cameras, televisions, electricity meters and smartphones. Indeed, such has been the scale of India’s protectionist turn that import duties are now at their highest in three decades. And the risk of trade disputes is likely to rise.

Meanwhile, geopolitical turbulence continues to cast a long shadow over global trade. In Europe, both Brexit – particularly ongoing negotiations over the UK’s transition arrangements – as well as prevailing tensions with Russia have the potential to pose a serious risk to the outlook for trade. Additionally, tensions in the Korean peninsula involving four of the world’s largest trade champions (China, South Korea, Japan and the US) could also have a spillover effect on global trade.

And third, with some 80% of the world’s trade flows underpinned by some sort of credit,a growing trade finance shortfall – estimated at US$1.5 trillion by ICC and the Asian Development Bank – continues to affect those markets and companies that need it most. While there are a number of reasons behind the shortage in financing, ongoing “derisking” by international banks – in turn, resulting in capacity constraints – continues to be a drag on global trade growth.

Finally, compared to 10 years ago, the market has arguably become more constrained by regulation and compliance requirements that have – albeit indirectly – impacted trade volumes. That said, such oversight responsibilities and requirements have been deemed crucial to the overall, long-term health and maintenance of the financial system.

The case for open and inclusive trade

In the face of such uncertainty, it is important that the benefits of trade and its positive impact on jobs, investment and economic growth are not forgotten. The ICC has steadfastly maintained a strong stance against protectionism – and will continue to do so. And while legitimate concerns about trade should not be ignored, the proven power of open markets to drive extraordinary increases in prosperity and economic opportunity should also be stressed.

Open economies grow faster than closed economies. This is a fact: according to figures from the World Bank, per capital real income grew more than three times faster for developing countries that lowered trade barriers (5.0% per year) than other developing countries (1.4% per year) in the 1990s.

Nowhere is this more apparent than in East Asia and the Asia-Pacific, where those countries that have embraced outward-orientated development strategies have witnessed growth in both trade and GDP, as well as an equally impressive reduction in poverty.

Strengthening the rules-based, multilateral trading system to further democratise trade and support business growth should also be a priority. Certainly, the promotion of a system that reflects an inclusive, fair and progressive approach – and a level playing field benefitting all – would go a long way in defending global trade against rising protectionism.

This is precisely why ICC is working with the WTO to establish new trade recommendations for all nations. What’s more, each year ICC published its Open Markets Index (OMI). Representing 90% of trade and investment worldwide, the OMI seeks to highlight the level of trade openness in different economies across the globe.

Facilitating better access to trade finance

While trade is an essential component of sustainable economic growth, complementary policies are also needed in order to realise its full benefits. Among the most fundamental is the need to ensure that trade is adequately financed.

As the ICC continues to reiterate, trade finance and export finance are critical banking products that are essential to the facilitation and growth of international trade.Not only do these products provide importers and exporters with multiple methods of financing and a range of proven risk mitigation options, they also allow them to transact with confidence across borders – often with unfamiliar counterparties in distant markets.

Yet as the banking environment continues to evolve –particularly in light of increased regulatory scrutiny and compliance measures – what has become clear is that the rules governing trade finance and export finance will also need to adapt and evolve. Indeed, this context makes it more critical than ever for banks to understand and stay up-to-date with the risk profiles of such products.

In response to these changes, in 2009 ICC established its annual Trade Register to provide banks and regulators with objective,fact-based support to the narrative of favourable credit risk and default experience in trade finance and export finance. Based on over US$10.5 trillion of exposures and more than 20 million trade finance transactions from 2008 to 2016 – approximately 40% of global traditional trade finance flows – the report uses a data-driven approach to consistently show that trade finance and export finance contains a very low probability of default, which makes it an excellent asset class for banks.

More importantly, the report’s data-set forms the basis of dialogue between ICC Banking Commission’s Advocacy and Regulatory Working Group and the Basel Committee to substantiate the case for an appropriate treatment of trade products from a regulatory perspective.

In addition to its Trade Register, ICC also publishes its Global Survey on Trade Finance. An accurate snapshot of market trends, the Survey enables bankers, traders and government officials to gauge global trade expectations, as well make informed, forward-looking decisions.

In an uncertain landscape, the benefits of a policy mix – that addresses concerns over protectionism, further strengthens the rules-based international trading system and promotes the advantages of maintaining open markets for trade, while equally stressing the need for trade to be financed – must be better articulated.

This article provides a preview of one of the discussions due to take place at ICC Banking Commission’s 2018 Annual Meeting on the 3-6 April 2018 in Miami. Register now to catch this panel, and other key discussions reflecting on and influencing the global trade finance landscape.

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Teed off: As COVID fuels S. Africa’s housing crisis, golf courses feel the heat

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Teed off: As COVID fuels S. Africa's housing crisis, golf courses feel the heat 1

By Kim Harrisberg

JOHANNESBURG (Thomson Reuters Foundation) – It sounds like a developer’s dream: A greenfield site in the heart of Cape Town, close to the best schools, hospitals and transport links and big enough to build more than 1,400 affordable new homes. The only hitch – it’s a golf course.

The 46-hectare (114-acre) Rondebosch Golf Club is one of hundreds of golf courses in South Africa facing scrutiny by land rights campaigners as a surge in evictions during the COVID-19 pandemic exposes an acute shortage of low-cost housing.

Rondebosch had its lease renewed by the city government late last year despite the presentation of some 1,830 objections by local housing rights group Ndifuna Ukwazi, which says turning golf courses over for homes is a way to tackle deep inequality.

“Using this land for the benefit of a few wealthy individuals at the expense of those in dire need of affordable housing is inefficient, unequal and unjust,” said Michael Clark, head of research and advocacy at Ndifuna Ukwazi.

Warnings by city officials that eviction is on the cards for occupiers of abandoned buildings, just months after Rondebosch’s lease was extended, have roused activists and sparked calls for cities to prioritise land use according to need.

“Golf courses occupy expansive tracts of land in well-located areas across cities,” said Edward Molopi, a researcher with the Socio-Economic Rights Institute of South Africa (SERI), which uses litigation and advocacy to support human rights.

“South African cities face an acute need for affordable housing and this land can be used to address the problem,” Molopi told the Thomson Reuters Foundation, adding that he knows of hundreds of housing evictions since lockdown began.

Nearly three decades after the end of white minority rule, South Africa remains one of the most unequal countries in the world, according to the World Bank, with urban areas still starkly divided along racial and class lines.

In other countries too, from South Korea to the United States, the swathes of green space needed for a round of golf have stirred debate around alternative uses for the land, whether apartment blocks, public parks or even vineyards.

‘NOT THE ONLY LAND’

But in South Africa, where tracts of land, including golf courses, were used as physical barriers to separate different racial groups during the apartheid regime, campaigners say repurposing such areas is key to achieving a fairer society.

Golf lovers have a choice of about 450 courses in South Africa, according to independent golf course ranking platform Top 100 Golf Courses.

They are easy to spot on a Google Maps view of the nation’s cities, many in close proximity to other golf courses, and also poorer neighbourhoods or townships.

But officials say finding space for affordable homes is more complex than repurposing golf courses.

Not all of the courses are publicly owned or suitable for residential use, said officials from the cities of Cape Town, Johannesburg and Durban. The sport also draws tourists and creates jobs, they added.

“Densification, diversification and inclusionary housing requirements in well-located parts of our cities is a more realistic approach,” said Nthatisi Modingoane, a spokesman for the city of Johannesburg.

‘SPATIAL JUSTICE’

Johannesburg’s Observatory golf course lies less than five kilometres (three miles) from Hillbrow, an inner-city suburb notorious for derelict, overcrowded buildings and crime.

People unable to afford rent end up there in “dark buildings” – properties seized by rogue landlords that offer crowded but cheap rooms, often without electricity.

“Since COVID, people need cheap rent, but if you don’t pay the landlords you get kicked out or … they kill you,” said Ethel Musonza, a housing activist who used to live in a dark building.

“There is a big need for people to be resettled in a safe place they can afford,” she added.

But the Observatory course sits on the site of an old ash dump, making it a poor site for residential construction, said club captain Simon Leventhorp.

“There is need for affordable houses but golf courses aren’t the only land available,” he said, adding that the club had a lower membership fee that other courses, making it a more inclusive space.

Some courses – like Rondebosch in Cape Town – do fit the bill for affordable housing, said Clark.

Golfers at the course can still enjoy views of the city’s famous Table Mountain from the greens, but authorities did add a two-year cancellation clause to the club’s lease if an alternative use of the land is identified.

Land used for community and recreational use, including golf courses, is currently being reviewed for possible residential sites, the city added.

In the meantime, land campaigners will continue to put pressure on state and city governments to “proactively intervene in housing markets”, said Molopi from SERI.

“This will be central to dismantling the ‘apartheid city’ and moving towards urban spatial justice,” Molopi said.

(Reporting by Kim Harrisberg @KimHarrisberg; Editing by Helen Popper. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 2

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 3

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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