September 2023 Economic Update
In recent global economic developments, the Bank of England's decision to delay banking reforms, mirroring the Federal Reserve, has raised concerns about financial stability in Europe, while the eurozone faces economic challenges amid declining business activity due to interest rate hikes. In the Americas, the US and China have established working groups to ease tensions, particularly regarding Taiwan and semiconductor production, while Paraguay's ultimatum urges the EU to finalize a trade deal with the Mercosur bloc. In Asia, the Asian Infrastructure Investment Bank (AIIB), led by China, plans to triple investments in climate projects by 2030, and India's rice export ban has disrupted global rice prices. In Africa, Zambia's copper mine, KCM, returns to Vedanta, South Africa invites new members to join BRICS, and Glencore strengthens its presence in the Democratic Republic of Congo's minerals market for electric vehicle production, reflecting evolving global economic dynamics.
Europe
On the 25th of September, The Bank of England (BoE) opted to delay implementing the latest package of banking reforms for another 6 months after industry pushback and following the Fed adopting a similar approach. The new regulations, which form part of the broader Basel III reforms, constitute a global post-crisis effort to insulate the banking industry against excessive risk-taking which resulted in the financial crisis of 2007-2008. The package would have limited banks’ ability to decide how much capital they need to backstop certain loans and trades. UK-based banks, however, resisted the proposals, claiming it would give EU banks a competitive advantage. The rules were set to come into force in January 2025, having been postponed from the initial target of January 2021. Now, it appears that it will not take effect until July 2025.
Once again, a eurozone economic downturn is being predicted as data released this month indicates a fall in business activity. The eurozone crisis of winter 2023 that many predicted did not materialise as falling energy prices enabled EU governments to avoid frequent blackouts and economic stagnation. In September, however, the headline figure for the eurozone purchasing managers’ index read 47.1, far below the key 50 mark. Moreover, the HCOB flash composite PMI, which measures the activity of companies across the eurozone, reported a fourth successive monthly decrease, while decreases were also reported in the manufacturing and service industry. Analysts attribute these declines to continual interest rate hikes.
Financial Times
Americas
In efforts to increase engagement and reduce tension between the US and China, two working groups have been established to tackle economic, financial, and political issues. Tension between Washington and Beijing has been growing steadily over the past three decades, with China’s relentless growth perceived as a threat to the US’s hegemony. In recent years, the primary source of tension has been Taiwan – the globe’s leading producer of advanced semiconductors, a priceless component of military and economic technology. This has resulted in military drills around Taiwan by China and sanctions by the US to limit Beijing’s access to semiconductor inputs. Both superpowers, however, appear to understand the need to de-escalate the situation. In July, US Treasury Secretary Janet Yellen visited Beijing with the mandate to oversee the working groups. She has described them as “an important step forward in our bilateral relationship.”
The Economist
Paraguay’s president, Santiago Pena, has declared that the EU must finalise the long-awaited and delayed trade deal with the Mercosur bloc before the 6th of December, or the 4 nations will end negotiations and begin discussions with Asian nations instead. Negotiations between the EU and the Mercosur bloc, which consists of Brazil, Argentina, Paraguay and Uruguay, have dragged on for more than 20 years now. The comprehensive trade deal would cover everything from import and export principles to environmental regulations, looking to harmonise and further align the two blocs’ economies. EU members such as France are demanding more environmental commitments from the Latin American nations while the Mercosur nations make accusations of protectionism in the other direction. Negotiations have thus stalled. Pena, therefore, who began his 5-year reign last month, claimed this month that Paraguay would continue negotiations until December before he seeks alternative economic partners in the East.
Asia
The Asian Infrastructure Investment Bank (AIIB), a multilateral development bank largely controlled by Beijing, is set to unveil a comprehensive climate plan which will triple investment towards projects to mitigate climate change by 2030. The AIIB was established in 2016, despite hostility towards its inception by the US, and is eager to establish itself as a respected member of the international financial architecture. Although the UK, France, and Germany are members, Beijing controls 50% of the voter share which leads many to suspect China will dictate investment flows. These concerns were reinforced when Canadian former head of communications, Bob Pickard, claimed that the CCP run the AIIB “like internal secret police”. Nevertheless, few can doubt the significance of the AIIB’s promise to triple investment from $2.6bn to $8bn by 2030, rendering climate investment a staggering half of the organization’s total investments annually.
Global prices for rice have increased 20% since India banned rice exports on July 20th, causing chaos in rice export markets such as Thailand. India was the world’s largest rice exporter before the ban, exporting 22.3 million tons in 2022. Due to rising prices domestically, however, Modi opted to ban exports of non-basmati white rice to ensure food security. This has had a significant impact on the rice market, with the price of rice exports in countries such as Vietnam and Thailand increasing by as much as 20%.
Bloomberg
Africa
Zambian copper mine corporation, Konkola Copper Mines (KCM), will return to Vedanta four years after it was appropriated by the government of Edgar Lungu. Vedanta lost control of the country’s largest copper producer in 2019 when Lungu accused the company of under-investment and mismanagement in the corporation and used a 20 percent stake to place the company in provisional liquidation. KCM, however, proceeded to produce even less copper which persuaded the new Zambian president, Hichilema, to open negotiations with Vedanta over ownership. The conclusion was that Vedanta was to retake control of the company and fund a $250m investment into the company. Hichilema has set an ambitious target for Zambia to more than triple copper production from less than 800,000 tonnes last year to more than 3m tonnes in 2034.
South African president, Cyril Ramaphosa, has declared a “new chapter for BRICS” as six nations have been offered membership alongside Brazil, Russia, India, China, and South Africa. No new members have been admitted to BRICS since South Africa joined in 2010. Discussions between the members have been ongoing in recent years as the prestigious bloc looks to expand its influence and power base, with China and Russia being big proponents of expansion while India is less enthusiastic. Modi appears to have been persuaded as Ramphosa announced at the end of August that Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the UAE are to be admitted. This represents another political win for Beijing who negotiated a peace treaty between Saudi and Iran earlier this year and will expand the bloc’s share of GDP from 32-37% per cent.
Global minerals and metals producer, Glencore, will increase its activities and exposure in the Democratic Republic of Congo as it sources metals and minerals used in the production of EV vehicles from the world’s largest producer of cobalt. After agreeing on a deal with Tantalex, a Toronto-based group with rights to explore lithium in DRC, London-listed Glencore will obtain the rights to sell Lithium from Tantalex’s refineries to automakers and battery manufacturers. The deal is believed to have cost Glencore $55m and is a key part of the group’s strategy to become a dominant player in the EV market.
