No World Recession From Brexit But Risks High, Says IMF’s Lagarde

International Monetary Fund chief Christine Lagarde said that Britain’s shock vote to quit the European Union has injected significant uncertainty into the global economy but is unlikely to cause a world recession.

But in an exclusive interview with AFP, she also said that Brexit underscores the need for the EU to do a better explaining how it benefits Europeans, amid “disenchantment” with the institution.

And she said that Britain’s move to cut corporate taxes to counter the expected economic fallout from its choice to break with the EU was just a “race to the bottom” that could hurt everyone.

Two weeks after the British referendum on cutting its EU ties, Ms Lagarde, speaking in her Washington offices at the beginning of her second five year term as IMF managing director, called the event a “major downside risk” for the world.

“We don’t think that a global recession is very likely. The immediate effects will be on the UK,” with some spillover into the euro area, she said.

Yet the longer the process for Britain’s withdrawal remains unclear, the worse the effects could be, she said. “The key word about this Brexit affair is uncertainty and the longer the uncertainty, the higher the risk,” she said.

“The sooner they can resolve their timeline and the terms of their departure the better for all. It needs to be predictable as soon as possible.”

But Ms Lagarde, who during her first five years leading the Fund has already endured a substantial amount of turmoil in Europe, said she remained positive over the outcome.

“There will be spillover effects on the euro area. But my optimistic approach of life tells me that Brexit could be a catalyst that could push the EU to deepen its economic integration.”


Brexit offers lifeline on $800 billion emerging company debt

Britain’s vote to exit the European Union (EU) has thrown a lifeline to emerging-market companies facing an $800 billion wall of maturing debt.

By hindering the Federal Reserve’s plan to raise interest rates, the referendum result has led to speculation borrowing costs will remain lower for longer as policy makers attempt to prevent Europe’s turmoil turning into a recession. This means developing-nation companies that borrowed when it was cheaper to do so won’t have to pay more to service those bonds, at least for now.

The prospect of fewer defaults shows how the so-called Brexit vote is proving a blessing for developing-nation companies that need to pay back about $200 billion per year from 2017 to 2020. Economists from the International Monetary Fund (IMF) to the Bank for International Settlements have been warning Fed monetary tightening may set off an increase in corporate failures in emerging markets. Defaults have been climbing since 2013 and reached a seven-year high in the second quarter.

“We might even see a decline in default rates again in the third and fourth quarters of this year,” said Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, who recommends investing in Latin American company bonds. “The overall outlook now is more positive for emerging-markets corporates because the Fed is very unlikely to move any time soon following the Brexit.”

Uncertain outcomes

The policy uncertainty engulfing the developed world has boosted the appeal of emerging countries, usually viewed by investors as more vulnerable to political risk. Yields on a Bloomberg index tracking developing-nation corporate bonds have fallen 27 basis points to 5.19% since the UK vote, adding to a recovery that started when oil prices began rebounding from a 20 January low.

The sentiment shift means that defaults are probably past their peak, according to Kathy Collins, an analyst at Aberdeen Asset Management in London. By 28 June, S&P Global Ratings had recorded 10 emerging-market corporate defaults in the second quarter, the worst quarterly tally since mid-2009. The rating company’s 12-month junk-bond default rate climbed to 3.2% at the end of May from 2.9% at the end of April.

“Given where commodity prices are at the moment, we’re not expecting too many more defaults,” Collins said. “In the first six months of this year, we’ve seen a lot of companies be very proactive in terms of tenders and buybacks in the market.”

Buying back

Russia’s Novolipetsk Steel PJSC and shipping operator Sovcomflot OJSC have announced they intend to buy back debt totaling as much as $2 billion. Latin American bonds sales surged over the past week, which HSBC Holdings Plc partly attributed to an increased likelihood of “ultra-low global policy rates” for longer. Brazilian meat packer Marfrig Global Foods SA sold $250 million of securities to repurchase outstanding notes in a push it said would “lengthen its debt maturity profile and reduce the cost of its capital structure.”

The issuance boom may prove short lived if the prospect of Fed tightening re-emerges. The UK’s vote to end its 43-year association with the EU has also ushered in a period of uncertainty for global markets that may eventually turn investors off developing-world assets. In June, the BIS reiterated a warning that emerging market non-bank borrowers that have accumulated $3.3 trillion in dollar debt are coming under strain as their economies slow and currencies weaken.

“If we get some volatility in emerging markets, say from political noise coming from the EU, and there is no access to capital markets from some issuers, that could be really negative,” Badr El Moutawakil, an emerging-market credit strategist at Barclays Plc in London said.

Even after the Brexit dust settles, looming elections in the US, Germany, France and possibly the UK mean a lengthening list of potentially disruptive events, strengthening the hands of dovish central bankers. Emerging-market companies have raised $3.71 billion of international bonds since the UK’s referendum on 23 June.

“External factors are more supportive,” said Bantis from Commerzbank. “The default trend of the past quarter is unlikely to continue.” Bloomberg


What’s India’s strategy to beat Brexit? Here’s a sneak peak

India is considering recalibrating its strategy, including renegotiating its tariff offers, for the proposed free trade agreement (FTA) with the EU following Brexit, with demands from key sectors for a separate trade pact with the UK gathering pace, sources said. But with both the EU and the UK busy grappling with Brexit, serious trade negotiations are unlikely to start anytime soon.

Textiles secretary Rashmi Verma told FE: “Britain continues to be an important market for us, as it makes up for around 23% of the EU demand for Indian textiles and garments. We have requested the commerce ministry to look into the possibility of a bilateral preferential trade agreement (PTA) with the UK.”

The UK accounts for over a half of India’s software services exports to the EU, 23% of key engineering and electrical goods exports and 16% of jewellery, precious metal and stones exports. So, senior industry executives from these sectors endorse an FTA or PTA with the UK. Britain alone accounted for 3.4% of India’s goods exports in 2015-16, while the EU – including the UK – made up for 17%.

Nasscom president R Chandrashekhar said once the current storm settles down, the UK will also be looking to compensate itself for no longer being part of the EU trade bloc.

“At that time, a special trade arrangement or relation with India will become crucial to them. And for India, it will perhaps be a tad easier to negotiate with one nation instead of the entire EU,” he said. He, however, added that much will depend on the exact terms and conditions of Britain’s exit from the EU.

Meanwhile, sources said the government is open to a trade pact with the UK, but India also remains committed to taking the proposed EU FTA talks to its logical end. “The EU isn’t ignorable just because Britain has decided to be out of the bloc,” said one of the sources.

However, the Brexit has added to the workload of Indian negotiators as they have to deal with the UK separately now. As such, the FTA with the EU is still a work in progress, so there is a scope for renegotiation of offers in view of the Brexit reality, said the source. The government is closely monitoring the situation and a final call will be taken at an appropriate time, the source added.

With the depreciation of the pound, euro and Chinese yuan following the Brexit referendum, India’s export competitiveness to these regions has come under strain. If the situation persists, a trade pact with the UK or the EU will come handy, as fears of China pegging its currency to its advantage loom, said analysts. The pound, euro and the Chinese yuan have depreciated almost 12%, 2.3% and 1%, respectively, against the dollar while the rupee has appreciated 0.1% between the closing of June 23 and July 1.

But a foreign diplomat posted in New Delhi said: ”Their (the EU’s) job is already cut out. They have to first finalise the terms of the British exit, which is a mammoth and complex task. Both the parties have to recalibrate their strategy even at the WTO. In such a situation, starting another front of negotiations (with India) could take some time,” he said.

As such, differences already persist on the broad contours of the proposed FTA, including on EU’s insistence that India cut import duties on auto parts and wine and strengthen intellectual property rights regime and Indian demand for greater liberalisation in services.

Anwarul Hoda, a former deputy director general at the WTO and current chair professor for trade policy at Icrier, said the Brexit holds some potentially good news for India, apart from the obvious shocks. “The UK is more liberal than the rest of the EU. So, it could still be easier for India to clinch an FTEU-FTAA with the UK than with the EU.”

There is a fair amount of chance that an FTA with the UK, if talks are initiated simultaneously, will be sealed before such a deal with the EU, he said. In fact, Britain doesn’t have the same baggage as the EU. For instance, the UK may not stubbornly insist on the removal of tariff barriers in automobiles as the EU, as the former isn’t a major auto player.

The EU hasn’t yet given the dates for a resumption of the FTA talks, said the source mentioned earlier. Recently, commerce minister Nirmala Sitharaman had written to her EU counterpart, asking for dates to resume the negotiations.


JPMorgan Chase & Co gets RBI approval to open 3 new branches

JPMorgan Chase & Co today said it has received Reserve Bank’s approval to open three more branches in the country.

The bank will open new branches at New Delhi, Devanahalli (near Bengaluru) and Paranur (near Chennai) in the next few months, it said in a statement.

“We are seeing an increasing level of cross-location and cross-border activity among our clients as they capture business opportunities driven by the country’s economic growth.

These branches will further enhance our capability to better serve our clients in India and overseas,” JPMorgan Chase Bank India MD and CEO Madhav Kalyan said.

JPMorgan will provide all existing products and services through these new branches, including cash management, trade finance and foreign-currency payments.

At present, the bank serves its clients from Mumbai branch.

“Our strategy is to follow our clients’ priorities. The expansion endorses our long-term commitment to India, a key market for JPMorgan, as well as for many of our clients,” JPMorgan South & South East Asia CEO Kalpana Morparia said.


ASUS betting big on India market

Peter Chang, Regional Head (South Asia) of ASUS and Country Manager (ASUS India), at the opening ceremony of India’s first exclusive Republic of Gamers (ROG) store in Kolkata, on Friday Ashoke Chakrabarty

Peter Chang, Regional Head (South Asia) of ASUS and Country Manager (ASUS India), at the opening ceremony of India’s first exclusive Republic of Gamers (ROG) store in Kolkata, on Friday Ashoke Chakrabarty.

Taiwanese laptop and smartphone-maker Asus is looking to double its market share in mobile phones in India, by 2016. New offerings across various price brackets, along with premiumisation, is likely to give it the much-needed fillip.

Incidentally, India is amongst the top global markets for the smart-phone maker. The company started selling its smart-phones in the country in 2014.

Current strategy

According to Peter Chang, Regional Head (South Asia) and Country Manager (System Business Group), Asus India, the Rs. 10,000-15,000 price bracket will be its sweet spots, while new launches – scheduled August onwards – will also start competing across high-end segments, such as Rs. 20,000 and upwards.

Asus at present sells 2,00,000 smartphones per month, which it intends to double to 4,00,000 a month within December.

Its market share stands at 2.5 per cent; which will be pushed up to 5 per cent during this period. “Focus on the Rs. 10,000-15,000 range will continue and we will ramp up this portfolio. Asus will also compete strongly in the premium-end. This will give us the scope to double both our market share and sales (in India) within this year,” he told BusinessLine .

The products – launched across different price segments – are said to be “new generation devices” (with high-end specifications). At least four new smartphone models are set to be made available soon (as new generation devices).

Mid-range dominates

As per a report from analyst firm CyberMedia Research, 23.6 million smartphones were sold in the first three months (January-March) of this year. Of these, the higher price-band phones ( Rs. 10,000-15,000) were more popular than budget ones. This means most brands are pitching for mid-range phones as the market grows flat.

The average selling price (ASP) was Rs. 12,983 in the quarter, while it stood at Rs. 10,364 in Q1 last year, indicating a year-on-year rise.

“There is a change coming in the Indian market. Over a period of time it will mature with the average selling price going up,” Chang said. Asus’ ASP stands at around Rs. 11,000.

Growth in laptop sales

Interestingly, Asus is also betting on high-end offerings in the laptop PC segment to see through an overall slump in market conditions. The company is betting on high functionality and specification-heavy devices, targeting gamers.

The laptops targeting gamers are priced at a premium (because of their high specs) ranging between Rs. 70,000 and Rs. 200,000.

Asus launched its standalone store targeting gamers (one that focuses on selling these high spec devices) – Republic of Gamers – in Kolkata on Friday. It is looking to add four more stores across the country by the end of this year.

“Now the first device to connect to an Internet is not a laptop; it is a smartphone. So one has to judge the functionality (of a laptop) and how it will target end users. Gaming gives us a good opportunity which we are targeting,” Chang said.

Other competitors have also forayed into the segment where Asus claims to have a 30 per cent market share.

Sources say gaming in India accounts for just 1 per cent of the global market, with 2,000-3,000 such high-end devices being sold every month.


India opens Foreign Direct investment (FDI) floodgates

In what showed a mindset shift among India’s policymakers, the government on Monday opened the floodgates for foreign direct investment (FDI) by easing the terms for nine sectors

In what showed a mindset shift among India’s policymakers, the government on Monday opened the floodgates for foreign direct investment (FDI) by easing the terms for nine sectors. Showing scant signs of legacy inhibitions, it virtually paved the way for even foreign airlines to acquire their Indian counterparts, removed the condition of domestic access to state-of-the-art technology for 100% FDI in the defence sector and put in abeyance the fractious 30% local sourcing norm for FDI in single-brand retail of advanced-technology products. graph 2

Despite the local pharma industry’s oft-expressed fear of being swamped by Big Pharma, foreign firms can now take majority (up to 74%) ownership in Indian drugmakers via the automatic route, which could again catalyse big-ticket M&A activity in the sector.

With the relaxations in the aviation sector, even a foreign airline could acquire 100% ownership in an India airline company by working in concert with a related party, according to some analysts. For example, a Qatar Airways could acquire a GoAir by directly picking up a 49% in the Indian firm and lapping up the balance equity through the West Asian nation’s sovereign wealth fund, Qatar Investment Authority.

Analysts, however, said the government seems to have tightened the sourcing rule in single-brand retailing, instead of giving a blanket exemption from such a rule for entities having “cutting-edge” technology, as was the case earlier. For instance, Apple will be exempted from the local sourcing rule for three years and have a relaxed sourcing regime for another five years if it wants to set up its own retail store, as its technology has already been described as “cutting edge” by a government panel. However, the company will still have to start local sourcing from the fourth year itself, thanks to the insistence of the finance ministry, which wanted that the Make in India programme get a boost. Similarly, Chinese company LeEco will be subjected to the same conditions if its claim of having “cutting edge” technology is endorsed by the panel headed by department of industrial policy and promotion secretary Ramesh Abhishek. However, another Chinese smartphone maker, Xiaomi, which recently withdrew its application for such a waiver, will have to comply with the mandatory 30% sourcing rule from the beginning should it wish to set up its own retail store.


Commenting on the new FDI policy for airlines, Amber Dubey, partner and India head of aerospace and defence at KPMG in India, said: “The avoidable controversies on settling ‘ownership and control’ issue is now over. Foreign airlines can now focus on the customers and competition rather than wasting time on legal and regulatory issues.”

“The likely increase in competition will bring down prices and enhance air penetration in India, both international and domestic. Indian carriers can now look for enhanced valuations in case they wish to raise funds or go for partial or complete divestment,” he added.

Calling the new norms a “bit tricky”, Amrit Pandurangi, senior director, Deloitte Touche Tohmatsu India, said, “Foreign airline investment is restricted to 49% and FDI investment in this sector has been opened up to 100%, so if the beyond the portion of the equity is by a related entity, then that needs to be tested.”

Among domestic airlines, the Rahul Bhatia-controlled Interglobe Enterprises holds close to 43% in IndiGo, Ajay Singh has a 60% stake in SpiceJet and Naresh Goyal holds 51% in Jet Airways. While Tata Sons holds 51% in both Vistara Airlines and AirAsia India, GoAir is wholly owned by the Wadia Group.

In defence, the decision to scrap the condition of access to “state-of-the-art technology” for FDI beyond 49% (through government route) will make it easier for foreign investors to invest in India. Already, Russian firm Kalashnikov is reportedly looking for local partners for manufacturing in India. Similarly, Swedish defence major Saab is learnt to be looking at more than 49% FDI in defence in its joint venture with a local partner to make the Gripen aircraft in India.

The government’s move to allow 100% FDI through the automatic route (earlier it was up to just 49%) in the broadcast carriage industry, comprising teleports, cable, direct-to-home (DTH) players, HITS (head-end-in-the sky) and mobile TV operators will provide a breather to the cable industry which has been struggling with the process of digitalisation of cable TV. The government has also allowed 74% FDI (49% under automatic route and through government approval beyond this ceiling) in private security agencies. Earlier, only 49% of FDI through government route was allowed.

Also allowed now is 100% FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture under the automatic route under controlled conditions. It has been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.

“For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted,” a PMO statement said..

Monday’s is the second largest FDI liberalisation initiative by the Modi government, after the steps taken in November 2015. Prime Minister Narendra Modi tweeted: “In two years, Govt brings major FDI policy reforms in several key sectors… India now the most open economy in the world for FDI; most sectors under automatic approval route.” He added: “Today’s FDI reforms will give a boost to employment, job creation & benefit the economy.”

In what seemed to indicate that the government’s intention was indeed to let foreign airlines acquire Indian firms and thereby augment their capital and fleet strength for the benefit of air travellers, economic affairs secretary Shaktikanta Das said that Monday’s reforms in the sector were a “game changer”.

India’s FDI inflows increased to $55.5 billion in FY16 from $36 billion in FY14. Net FDI inflows stood at $36 billion in FY16 compared with $32.6 billion in FY15.

Commerce and industry minister Nirmala Sitharaman, however, rejected assumptions that the government decided to announce so many FDI policy reforms in one go to divert public attention from RBI governor Raghuram Rajan’s decision to not continue at the central bank after his current tenure ends on September 4. The reforms are a result of months of deliberations among various departments and are not announced in a hurry to divert attention, she affirmed.


Abu Dhabi banks in talks to form largest West Asia lender

National Bank of Abu Dhabi (NBAD) PJSC and First Gulf Bank (FGB) PJSC said they’re in talks to merge in a deal that would create the largest lender by assets in West Asia.

A working group of senior executives from each bank is reviewing the commercial, structural and legal aspects of a potential transaction, according to a filing to the Abu Dhabi stock exchange on Sunday. Bloomberg News was first to report the two banks were considering a potential merger on June 16.

A deal would create a lender with assets of about $170 billion and mark the first major banking merger in the United Arab Emirates’ since National Bank of Dubai and Emirates Bank International combined to create Emirates NBD PJSC in 2007. The country’s fragmented banking industry is ready for further consolidation and a deal could prompt further mergers among lenders, according to investment bank EFG-Hermes Holding SAE.

“There’s no doubt it will lead to synergies and would give them a competitive edge, considering there are more than 40 banks in the UAE,” Chiradeep Ghosh, a banks’ analyst at Securities & Investment Co in Bahrain, said by phone on Sunday. “The combined entity will have a bigger equity book. That will help them to lend to larger entities and take up a greater share of the syndicated loan book.”

First Gulf Bank could pay a premium of as much as 14 per cent to buy National Bank of Abu Dhabi, Arqaam Capital Ltd said in a note to investors on Thursday. NBAD shares surged 15 per cent on Sunday, the maximum allowed in a day, to 9.2 dirhams as of 10:52 am local time. First Gulf Bank also soared, rising 7.8 per cent to 12.7 dirhams. NBAD is the UAE’s second-biggest bank by assets, while FGB is third-ranked.

A combination would help them overtake Emirates NBD as the country’s largest lender and represent nearly a quarter of the system’s loans and deposits, according to EFG-Hermes.

The UAE is home to about 9 million people and has about 50 banks, including the local units of Citigroup Inc, HSBC Holdings Plc and Standard Chartered Plc. Both NBAD and FGB have pushed to expand in other countries to beat the limitations of a small home market and build investment banking businesses to compete with bigger foreign rivals.

NBAD was the fifth-biggest arranger of syndicated loans in the six-nation Gulf Cooperation Council last year, while FGB ranked seventh, according to data compiled by Bloomberg. NBAD was also the second-largest arranger of bonds and sukuk sales last year.

The league tables are dominated by foreign lenders including HSBC Holdings Plc, Citigroup Inc and Sumitomo Mitsui.

NBAD, with a market value of about $11.3 billion at the end of Thursday, is 69 per cent owned by sovereign wealth fund Abu Dhabi Investment Council. State-owned investment fund Mubadala Development is the biggest shareholder in FGB, whose market capitalization is $14.4 billion, according to data compiled by Bloomberg.

The news “was a surprise considering, they have a very contrasting style of management and business strategy,” Ghosh at SICO said. “One is a public-sector focused bank, while FGB is an aggressive private sector bank, with reasonable focus in consumer lending. FGB primarily operates within the UAE, while NBAD is looking to expand outside the UAE.”