March 2023 Economic Update
Recent global developments have captured attention due to their economic impact and significance. Diverse actions taken by various countries have sparked intrigue and potential implications in the global economy.
Eurozone
On February 8, the Dutch government announced new export restrictions on advanced semiconductors as the Netherlands succumbs to US pressure to limit sales of the precious product to China. America has been encouraging its allies in Europe and Asia to support efforts to contain China both economically and militarily. A key component of this strategy is to limit China’s access to semiconductor technology which is crucial to its technological, economic, and military development. Consequently, in January, the US reached a deal with Japan and the Netherlands, both critical producers of chip making technology, to limit China’s access to semiconductors, however no details were released. Earlier this month, those plans were revealed as the Dutch announced plans to limit the export of specific semiconductor production equipment to China.
Turkey has raised $2.25bn in its first international bond deal since the devastating earthquakes rocked huge swathes of the country last month, taking the lives of thousands and displacing millions. The Turkish government will need to spend billions of dollars to rebuild the nation’s infrastructure following damages to schools, hospitals, residences, and commercial buildings. A report published by the Turkish Enterprise and Business Confederation has put the cost of the damage at $84.1bn. The bond agreed earlier this month, which matures in 2029, at a yield of 9.5%, will undoubtedly be just the first of many.
Germany has thwarted attempts of the EU to end the production of vehicles powered by combustion engines. EU member states and the European Parliament have agreed on legislation to ban the sale of new vehicles powered by combustion engines by 2035. Rather than rubber-stamping the regulation, as expected, German ministers instead voted to indefinitely postpone the new law. While some are unsurprised, given that 20% of Germany’s revenues come from the sale of Automobiles, others believe it sets a bad precedent by holding EU legislation hostage to national interests and undermines the credibility of Berlin’s green transition.
Americas
As wages cooled in February, the US job market added a further 310,000 jobs. Additionally, the consumer price index (CPI) rose by an annual rate of 6% in February, a step down from the 6.4% registered in January. The data represents a challenge for the US Federal Reserve (the Fed), which recently intervened to contain the sudden catastrophic collapse of Silicon Valley Bank (SVB). Despite continued elevated inflation prints, recent instability in the financial system could force the Federal Reserve to pause or slow down potential rate increases.
Graph 2. US jobs increase in February. Financial Times.
The IMF and Argentina have agreed for more flexible currency reserve targets this year following droughts across the country which have depleted exports in various industries. In 2022, the IMF Executive Board approved a $44bn IMF loan to Argentina to avert a default and tackle the economy’s crippling inflation. A requirement of the loan is that Argentina must rebuild their depleted foreign currency reserves to $5.5bn by March and $9.8bn by the end of 2023. However, following a severe drought and numerous heatwaves which have inhibited the production of goods such as soybean, corn, and wheat, the IMF have agreed to temporarily waive the requirements and release a $5.3bn tranche of the loan.
Africa
The Ministry of Mines, Petrol, and Energy have announced that Ivory Coast’s production of gold reached a record high of 48 tons in 2022, up 14% from the previous year. While the Ivory Coast has long been the world’s top cocoa producer, policymakers have been urged to invest in and develop its neglected mining sector in order to diversify the Ivorian economy. Consequently, gold production has steadily increased in recent years to reach a record high this year. Gold production is expected to reach 50 tons in 2023 and 55 tons by 2024.
Ghana’s inflation rate fell to 52.8% in February, down from 53.6% in January. Ghana’s economy has been battered by Covid-19 and Russia’s invasion of Ukraine which has caused food and energy prices to skyrocket and interest payments on debt to increase dramatically. This saw Ghana’s debt-to-GDP ratio pass the 100% mark and the Cedi plummet to a 21-year low in December. For the first time in two years, however, the inflation rate decreased in January and continued to do so in February. This can be attributed, in part, to the Ghanaian central bank increasing its lending rate by 13.5 points in the last 12 months, but most believe falling food and energy prices is the primary reason for the consecutive decreases. Elsewhere, Ghana’s finance minister, Ken Ofori-Atta, will travel to China this month to discuss proposals for the restructuring of Ghana’s debt and to secure additional financing assurances for Ghana’s economic program.
Italy has urged the IMF to unblock a $1.9bn loan to Tunisia, amongst fears that further economic turmoil in the country will unleash a new wave of migrants heading towards Europe. Tunisia has been afflicted by economic woes since 2021, when the current president, Kais Saied, ousted the government and dissolved parliament. The war in Ukraine has compounded Tunisia’s economic troubles which has seen the country’s foreign reserves depleted, debt skyrocket, and persistent inflation. Consequently, the North African nation has sought a bailout from the IMF. Negotiations have stalled, however, as the IMF demand far-reaching political reform from Kais’ government to obtain the cash.
APAC
On March 6, at the CCP’s annual parliamentary gathering, Xi Jinping revealed ground-breaking changes to China’s financial and tech regulation to ensure financial stability at home while bolstering China’s tech sector. First and foremost, the CCP will seek to exert a tighter grip on China’s finance sector through the creation of State Financial Regulatory Commissions, which will oversee and regulate financial conglomerates. Elsewhere, Beijing will increase investment towards science and technology in the country, with emphasis being placed on developing first-rate tech products such as advanced military semiconductors. It is hoped that these endeavours will enable Beijing to continue to resist US containment efforts.
Graph 2. Global sales of semiconductors. The Economist
After seven years of tension and political rupture, Iran and Saudi Arabia have agreed to re-establish diplomatic ties. The rapprochement, which was mediated by the Chinese government, has sent shockwaves throughout the Middle East, and will have geopolitical implications for numerous states. Diplomatic relations were severed in 2016, following the execution of Saudi-born Shia cleric, Nimr al-Nimr, after decades of political and religious tensions. Following almost two years of negotiations, which were brokered by Chinese representatives, Tehran and Riyadh agreed to re-establish embassies in the two capitals and resume economic and political relations.
Following a summit in New Delhi on Friday the 10th of March, India and Australia have agreed on important trade commitments which suggests that a comprehensive trade deal, which has been stuck in negotiations for over a decade, may soon be finalized. After the two Prime Ministers, Narendra Modi and Anthony Albanese, met in New Delhi, important agreements were made which will see Australia expand its provision of critical minerals used in the manufacturing of electric vehicle batteries in India. This development will allow India to make strides in its effort to reduce its carbon footprint. Albanese also revealed that the two leaders had agreed to an early conclusion on the ambitious Comprehensive Economic Cooperation Agreement, which has stuttered for over a decade.
