Citi’s surprise gambit for the African debt market

Greetings from New York, the place I (and plenty of others) are recovering from the fun of limitless feasting over Thanksgiving. That is historically a pageant that sparks retrospection concerning the previous 12 months, and this appears well timed for the setting, social and governance agenda, provided that it’s presently grappling with two competing — contradictory — developments.

On the one hand, there may be a swelling backlash among the many rightwing political forces — and a few company leaders — towards the stricter variations of ESG. Then again, the renewable vitality area continues to spark a wave of fundraising and dealmaking — and that is arguably as vital because the soul-searching round the controversial COP27 conference.

In one other signal that the vitality transition funding wave is intensifying, the battle across the US Inflation Discount Act — and its $369bn in inexperienced spending — is heating up (excuse the pun). Learn our dialogue about this beneath. And likewise be aware of the placing saga round Citi’s new transfer into the inexperienced African repurchase market — a subject that has barely been coated wherever else, however which reveals the diploma to which the sustainability battle is shifting into new corners. (Gillian Tett)

Has govt pay at main firms reached unjustifiable ranges? Or is it a good reward for exhausting work and added worth? That debate would be the focus of our subsequent Moral Money Forum report — which is able to, as all the time, characteristic the views of our readers. Have your say by answering our quick survey here.

Africa is lastly getting a ‘repo’ market. Will it work?

In June 2020, Vera Songwe took to the opinion part of the FT to call for an ambitious new move in African credit score markets.

Cameroon-born Songwe, then govt secretary of the UN Financial Fee for Africa, had been alarmed by the impact of the Covid-19 pandemic on African governments, which have been seeing their borrowing prices surge because the world financial system lurched into disaster.

This drawback was notably stark in Songwe’s dwelling continent due to the poor liquidity in African authorities bonds. In her FT column, she set out a plan for a attainable response.

Africa, Songwe declared, wanted a “repo” marketplace for its sovereign bonds. On this well-established mannequin, an investor sells a bond to a counterparty, whereas agreeing to repurchase it (sometimes at a barely greater value) after a set interval. In some ways, it’s just like a short-term mortgage, with the bond used as collateral.

Whereas repo markets are a serious a part of the monetary system in developed economies, serving to to drive liquidity and cut back credit score prices, they’ve been very restricted in Africa. This month, nevertheless, Songwe’s imaginative and prescient lastly began to bear fruit.

On this maiden transaction, Citigroup turned the primary establishment to utilize the lately launched Liquidity and Sustainability Facility, chaired by Songwe and funded, to date, primarily by the Cairo-based African Export-Import Financial institution. Citi (which has been named because the LSF’s structuring agent for future transactions) used the LSF to borrow towards $100mn of African sovereign bonds — utilizing a few third of the fledgling establishment’s roughly $300mn capability.

Songwe advised me she hopes that capability will greater than triple within the close to future, with a lot larger-scale development to comply with, because the LSF wins new help from central banks and multilateral establishments. She argues {that a} well-functioning repo market would dramatically increase liquidity in African sovereign bonds, making these belongings extra enticing to traders, who would due to this fact demand much less painfully excessive yields.

This might save African governments as a lot as $11bn over 5 years, she estimates — a significant sum in a continent the place lots of of thousands and thousands dwell on lower than $2.15 a day, based on the World Financial institution.

“While you purchase a US treasury or a British gilt, you may go to the secondary market 5 minutes later and commerce it in for money,” Songwe advised me. “In the event you purchase Côte d’Ivoire or Senegal paper, as a result of we don’t have these secondary market repo amenities, you open a drawer and put it there.”

That illiquidity presents traders with an “alternative price”, which has been getting handed on to the sovereign debtors, Songwe famous. This additional price might begin to come down, she hopes, with a critical growth of the LSF — which has already attracted the involvement and help, in varied varieties, of main monetary establishments together with BNY Mellon, Amundi and Pimco. Including to the attraction is the LSF’s specific give attention to inexperienced bonds and different debt devices supporting sustainable improvement — a area the place trillions of {dollars} in new finance are wanted, as stressed in a recent UN report co-authored by Songwe.

For a healthily sceptical tackle this initiative, it’s worth reading this paper by Daniela Gabor, an educational on the College of the West of England. She questions the choice to give attention to international foreign money bonds, that are sometimes tougher to service at instances of financial stress — in distinction with ongoing initiatives to assist growing nations to borrow in their very own currencies.

There may be additionally a threat of undermining financial coverage autonomy, Gabor warns. For instance, if the LSF tightens its requirements for repo transactions in Kenyan sovereign bonds, it will “de facto tighten financial situations in Kenya, interfering with the central financial institution’s preferences”.

However Songwe maintains that the LSF is an concept whose time has come. “Rising market economies have developed a lot sooner than the infrastructure we’ve got for them to succeed,” she advised me. “We targeting African nations going to the market, which has been costly, resulting in excessive debt burdens. Now we’re saying: now that they’re going to the market, can we guarantee they get cost-effective pricing?” (Simon Mundy)

IRA: The battle heats up

I’ve to confess that once I first heard about US president Joe Biden’s “IRA” (Inflation Discount Act) initiative, I used to be sceptical. Fairly other than the unlucky connotations of the title for individuals who grew up uncovered to the Troubles in Northern Eire, the invoice is a misleading piece of branding, because it does little to chop inflation.

However what I initially missed (like many traders) is the doubtless dramatic affect that IRA might have on vitality transition investments, as a result of subsidies within the invoice. In current weeks, I’ve heard enterprise executives inform me that they plan to extend their investments in applied sciences reminiscent of hydrogen within the US, due to the IRA; associates are selecting to purchase Tesla automobiles over Polestar electrical autos as a result of the previous will get a subsidy for being American-made, however the different doesn’t (as a result of its manufacturing is principally in China); and corporations are unveiling inexperienced funding plans. Final week, for instance, South Korean group LG Chem introduced a $3bn investment in a battery plant in Tennessee.

However one key query for sustainability-focused traders now could be what the European Fee does subsequent in response — and whether or not this might block (or blunt) the IRA. European politicians believe that the IRA breaches World Commerce Group guidelines, and are threatening a proper WTO dispute. It’s simple to see why the Fee is upset: not solely does the IRA exclude European-made merchandise, nevertheless it additionally provides American companies a subsidy benefit — and this comes as European firms are shedding out to cheap Chinese imports in sectors reminiscent of photo voltaic panels and wind generators.

Most European enterprise leaders would most likely favor that the area reply with their very own subsidies, somewhat than begin a commerce struggle, and French president Emmanuel Macron and German financial system minister Robert Habeck appear minded to do that. Some European politicians are additionally lobbying for Washington to vary the “made in America” provision within the IRA to a “made by American allies” idea — ie a variant of the “friend-shoring” (or “ally-shoring”) precept that Janet Yellen, US Treasury secretary, keeps talking about.

Nevertheless, Washington appears unlikely to vary the IRA, provided that the White Home views the invoice as one thing of a political triumph, and the European Fee may wrestle to match US subsidies. So time is operating out for a simple decision. The subsequent formal wave of US-EU commerce talks happen on December 5, with the IRA attributable to take impact on January 1. So brace your self for diplomatic jostling, not simply in Europe but additionally from nations reminiscent of Australia and Canada which are scrambling to work out their very own response. The one silver (or inexperienced) lining to the row is that it’ll most likely prod governments all over the world to lift whole help for renewable investments. Competitors works. (Gillian Tett)

Sensible learn

Is massive enterprise getting sick of the online zero agenda? As strain mounts on firms — notably with a brand new UN report at COP27 — some are getting conspicuously disgruntled, warns Pilita Clark in her newest FT column.