Author: Helen

Leaked emails reveal Shell’s ties to convicted money launderer

Posted on by Helen

Royal Dutch Shell has been hit with fresh allegations of corruption and bribery, with new evidence suggesting the firm may have dealt with a convicted money launderer while negotiating access to a vast Nigerian oilfield.

In 2011, Shell partnered with Italian oil firm Eni to purchase the offshore oilfield OPL 245 for a substantial $1.3bn. The two companies made this payment to the Nigerian Government, but a series of leaked emails has revealed that top Shell executives were aware that a large portion of this sum would be passed on to Dan Etete – the nation’s former Minister of Petroleum and convicted money launderer.

Shell has repeatedly denied any wrongdoing, claiming to have only paid money to the Nigerian Government

Containing more than nine billion barrels of oil, the OPL 245 oilfield is an extremely lucrative region, worth close to half a trillion dollars at today’s prices. Shell had expressed an interest in obtaining access to the field long before its 2011 acquisition, but faced opposition from Etete, whose company purchased the Niger Delta oil block for a small sum during his term as Minister of Petroleum.

When Shell and Eni eventually settled on a deal with the Nigerian Government over access to the oilfield, the government allegedly passed on $1.1bn to Malabu, a company owned by Etete. According to documents filed by Italian prosecutors investigating the case, more than $466m of that sum was then laundered through foreign exchange, ending up in the hands of then-President Goodluck Jonathan and his political peers.

In the six years since the OPL 245 deal, Shell has repeatedly denied any wrongdoing, claiming to have only paid money to the Nigerian Government itself. But following the recent email leak, a Shell spokesman told The New York Times on April 10 the company was well aware of Etete’s involvement in the deal.

Andy Norman, Vice President for Global Media Relations at Shell, told The New York Times: “Over time, it became clear to us that Etete was involved in Malabu and that the only way to resolve the impasse through a negotiated settlement was to engage with Etete and Malabu, whether we liked it or not.”

In addition to this frank revelation, emails leaked to the BBC and other media outlets also suggest top Shell executives knew Etete would benefit from the deal. A March 2010 email shows the company was indeed in the process of negotiating with Etete for up to a year before the deal was eventually finalised.

“Etete can smell the money. If, at 70 years old, he does turn his nose up at [$1.2bn], he is completely certifiable and we should then just hold out until nature takes his course with him”, the email read. This email was forwarded to then-Shell CEO Peter Voser, seemingly indicating company leaders were indeed aware of the Etete negotiations.

On April 20, Italian prosecutors will decide whether to pursue criminal charges against Shell and its partner Eni. As the leaked emails continue to circulate, Shell may well come under pressure to overhaul its internal controls and corporate governance, in addition to ramping up its lax anti-corruption measures.

 

The economic importance of Ecuador’s presidential election

Posted on by Helen

Between 1997 and 2007, Ecuador lost seven presidents to coups, impeachments and political movements. Then, a left wing political party called the Alianza PAIS (AP) swept to power. Led by the charismatic Rafael Correa, the AP became wildly popular with its promises of wealth redistribution and national sovereignty, and over the course of seven years drastically cut poverty and improved infrastructure across the country. The stability was a welcome change for Ecuadorans.

Unfortunately, there was a fundamental flaw in this development: state-led reforms rested heavily on an oil boom, and in 2014 the global crash in oil prices caused the government’s economic model to fall apart, plunging Ecuador into recession. However, three years later, Correa was still in power.

With corruption scandals and media suppression also rife in Ecuador, the AP recently hit a double crisis: an arduous battle in the run-up to the April 2 election, and a deepening economic downturn.

A tight race
On the surface, the election was a clear-cut choice between left and right. After a decade in power, Correa handed the reins to former Vice-President Lenín Moreno, a left wing candidate widely considered to be less charismatic than his predecessor. Dr Andrés Mejía Acosta, Senior Lecturer in Political Economy of Emerging Markets at King’s College London, told World Finance: “He is thought to be a safe pair of hands and represents continuity and the promise of fewer adjustments.”

Many expected the 2017 election to be an economic turning point for Ecuador, but in reality, change was never likely to come quickly

On the right was opposition candidate Guillermo Lasso. Ecuador’s middle class latched on to his policies, fearing that Moreno’s limited reforms would prove unsustainable. Lasso’s manifesto promised deregulation, lower taxes and greater support for the private sector. He also wanted Ecuador to join the Pacific Alliance. “That would be a total reorientation of the country”, said Mark Keller of the Economist Intelligence Unit.

On April 4, Moreno was narrowly declared the victor. Throughout his campaign, left and right wing economic policies were debated, often with big labels like “revolution” and “democracy” attached to them. Ideology was important to voters on both sides. As such, it is worth considering just how significant this moment really was for Ecuador.

Many expected the 2017 election to be an economic turning point for Ecuador, but in reality, change was never likely to come quickly under Lasso. Indeed, even Moreno’s limited adjustments will now see stiff opposition.

The AP’s economic model is a huge obstacle to reform. Keller explained: “Even with the massive windfall, the Correa government spent like oil would always be over $100 a barrel and put no money aside for a rainy day.”

Ecuador’s foreign reserve equals only about four to five percent of GDP. The AP therefore realised that the 2014 crisis was going to unfold in a particularly painful way, thanks to this small safety net and a lack of diversification into other sectors, such as mining. Correa attempted to make up for the oil trough by borrowing, but as this strategy was unsustainable, fiscal adjustments are now necessary.

“Moreno’s style alone is very different to Correa’s”, explained Keller. “But, considering that he is still beholden to the Alianza PAIS – which will consider a lot of changes to be ‘neoliberal’ and a betrayal of the ‘citizens’ revolution’ – I don’t think [his reforms] will be extreme.”

Ecuadorians are nowadays used to the idea of Correa’s citizens’ revolution, which is perhaps the biggest barrier to change. Some programmes like the CEGA conditional cash transfer are cheap enough to keep, but heftier elements of public spending might die harder. One example is fuel subsidies, which account for roughly $300m a month. With many citizens heavily dependent on the state, cuts are particularly difficult to implement, since lower subsidies mean higher prices for food and transportation.

According to Mejía Acosta: “A bigger constraint for fiscal adjustments is the reduction of public sector salaries. This will be controversial and will undermine the base of support of many Correa followers… The other thing that would be very difficult to adjust, whether it’s Lasso or Moreno, is raising further taxes. Nobody is talking about the ‘t-word’ unless it’s to decrease them, because people will not have the capacity to contribute in a context of economic stagnation, unemployment and high inflation.”

Wider scope
Other Latin American countries have already hit these stumbling blocks. Dr Paulo Drinot, Professor of Latin American History at University College London, told World Finance: “If you look at what’s happening in Argentina at the moment, [President Mauricio] Macri has introduced a number of cuts and there have been large protests… It remains to be seen whether [Macri] can roll back the bulk of the measures that were implemented under both Néstor Kircher and then Cristina Fernández. Similarly, in Brazil under Temer, there are some moves to hollow out the state as in the neoliberal era, but it’s not clear whether such moves will succeed.”

The real significance of the Ecuadoran election is that it represents an extension of the status quo, rather than a commitment to a long-term rightward shift

For example, the new Brazilian Government has upheld Bolsa Família social spending, and Peru has kept the Juntos scheme. Both are conditional cash transfers like Ecuador’s CEGA.

Under either Moreno or Lasso, change was always likely to be slow. As such, the real significance of the Ecuadoran election is that it represents an extension of the status quo rather than a commitment to a long-term rightward shift.

In South America, the popularity of state-led economies peaked in the mid-2000s when they were installed in Chile, Brazil, Colombia, Uruguay, Nicaragua and elsewhere. This wave of left wing governments was called the Pink Tide. It began to recede in 2013 with the death of Hugo Chávez in Venezuela, and has been in full retreat since the impeachment of Dilma Rousseff in Brazil and the election of Macri in Argentina. Economies are now liberalising in the subcontinent, even though state intervention has endured.

In a similar way, a Lasso victory could have planted the seed for open borders, liberal markets and a private sector that drives economic growth. “April can be a litmus test”, said Mejía Acosta, speaking prior to the election. “The world is out there. This election will signal whether Ecuador can return to democratic competition, or remain and go deeper into the 21st century socialism, non-democratic brand… Ecuador has the chance to break that trend.”

Lasso wanted to join the process of economic integration between Latin American countries such as Colombia and Peru, which have signed agreements with multiple partners. This would have signaled a diversification of Ecuador’s trade links and a step back from socialist alliances.

Under Moreno, this future has been denied. Moreno will implement a fiscal reform, but it will not be as drastic as it could have been. He is also unlikely to shift Ecuadoran borrowing away from China and back towards the IMF.

The country will look somewhat different as it moves to tackle the economic downturn – the second crisis on the AP’s list. Yet in the long run, as Correa’s legacy is consolidated, things are set to remain largely the same.

EU announces the G20 will miss 2018 growth targets

Posted on by Helen

On April 8, it emerged the world’s 20 biggest economies will miss their ‘2-in-5’ growth targets by 2018, according to a terms of reference document released by EU finance minsters. The document also said structural reforms will continue despite the failure.

The revelations will be discussed in full at a G20 finance ministers’ summit in Washington at the end of the month.

The targets in question were set by the G20 three years ago. Member countries promised to grow their economies by two percent over the following five years through reforms and targeted investments, with a final goal of adding more than $2trn to the global economy.

Today’s global outlook is much less optimistic than it was in 2014, when the 2-in-5 targets were originally set

According to the document: “We should reflect on the appropriate communication around our 2-in-5 objective and build a shared assessment and understanding of why we have not fully delivered… It is thus vital to accelerate the implementation of structural reforms and of investment in productive infrastructure.”

Rising protectionism was a significant threat to global economic growth in the early months of 2017. In March, G20 countries backed down from their hard line against trade barriers at a meeting in Baden-Baden. While they noted trade is important to the global economy, they caused shockwaves by dropping their prior commitment to “resist all forms of protectionism”. US President Donald Trump’s anti-globalisation stance was widely blamed for the change of wording.

Other factors have changed the playing field since the G20 targets were set. According to analysts from forecasting group Focus Economics, the UK’s vote to leave the EU in 2016 combined with the rise of protectionist politicians in France and the Netherlands has caused further uncertainty.

There are also longer-term causes of the G20’s failure to hit its targets. UBS reported in mid-2016: “Monetary policy is no longer as supportive of growth as it was several years ago. For many developed economies, monetary policy has been used to the point of exhaustion where interest rates have been cut so aggressively that diminishing returns have now set in.”

The global economy made a relatively good start to 2017, propelled by momentum from the prior quarter. What’s more, G20 countries like China and India are set to continue posting strong growth figures for the next few years. Nonetheless, whether global growth will continue on this brief upward swing is somewhat doubtful given the protectionist measures that continue to emerge worldwide and general uncertainty regarding the Trump administration’s capacity to implement fiscal reforms. As such, today’s global outlook is much less optimistic than it was in 2014, when the 2-in-5 targets were set.

US and China find common ground on reducing trade imbalance

Posted on by Helen

Donald Trump and Xi Jinping concluded their first face-to-face talks with an agreement to instigate a 100-day plan to address the trade deficit between the two countries.

Since the start of his presidential campaign, Donald Trump has continuously railed against China allegedly stealing American jobs through unfair trade policies, making the US-China trade deficit a key point of contention. The deficit stood at $43.6bn in February, with US imports of $236.4bn and exports of $192.9bn.

Efforts to reduce the US’ trade deficit appear to be focused on increasing US exports to China, rather than creating new barriers to trade

Trump’s accusatory tone and aggressive campaign promises regarding this imbalance have stoked fears of a trade battle and created a constant source of uncertainty since the presidential election. Despite this, Commerce Secretary Wilbur Ross underscored that the president approached the talks with an aim to increase trade between the two nations.

“We made very clear that our primary objectives are twofold”, Ross said during a Fox News interview on April 9. “One is to reduce the trade deficit quite noticeably between the United States and China, and two, to increase total trade between the two.”

As a result, efforts to reduce the US’ trade deficit appear to be focused on increasing US exports to China, rather than creating new barriers to trade. Towards this aim, China has offered to remove a ban of US beef exports as well as offering greater market access in finance, according to a report in the Financial Times.

Interestingly, some clear common ground emerged in the talks. According to Ross, China expressed an active interest in reducing its trade surplus with the US: “They expressed an interest in reducing their net trade balance because of the impact it’s having on money supply and inflation.”

While there is more common ground than many expected, tensions have not fully dissipated. In just a few days’ time, the US Treasury will publish its first currency report since Trump’s inauguration, in which it will make a fresh judgment on whether or not China is a currency manipulator. Indeed, Ross was quick to express that frictions remain: “Words are easy, discussions are easy, endless meetings are easy. What’s hard is tangible results, and if we don’t get some tangible results within the first 100 days, I think we’ll have to re-examine whether it’s worthwhile continuing them.”

China’s Xi Jinping meets with Trump for first summit

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Chinese President Xi Jinping has arrived in Florida for his first official summit with the US president. On April 6, the Chinese leader dined with Donald Trump at the property mogul’s Mar-a-Lago resort, with Trump later telling reporters that he had “developed a friendship” with Xi.

Despite Trump’s optimistic tone, the evening was somewhat overshadowed by the rapidly escalating humanitarian crisis in Syria, with the US president having just launched his first major military action in the nation. However, as the summit enters its second day, talks between the two leaders are still expected to centre on the contentious issues of trade and North Korea’s pressing nuclear threat.

Trump threatened to impose punitive tariffs on Chinese imports, but since taking office in January, he has failed to follow through with these threats

In this historic first meeting with the Chinese leader, President Trump is under considerable pressure to fulfil his campaign promise to address trade deficits and bring manufacturing jobs back to the US from China. During his presidential campaign, Trump fiercely condemned current trade practices, stoking fears of a US-China trade war.

“We can’t continue to allow China to rape our country”, Trump told a crowd of cheering supporters in Indiana last year. “There are no jobs because China has our jobs.” The then-presidential candidate also accused China of manipulating its currency to boost exports, and threatened to impose punitive tariffs on Chinese imports as retaliation. However, since taking office in January, Trump has failed to follow through with these threats.

The US president also allegedly wants China to cut its tariffs, but it is believed that this issue will not be raised in his first summit with Xi.

While Trump has so far been unsuccessful in addressing what he sees as unfair trade practices, he has maintained his critical stance on the issue. In an effort to make gains for US manufacturing workers, Trump may use the summit to push for more Chinese investment in American infrastructure. Interestingly, Chinese investment in the US more than tripled in 2016 to a record $45bn, but Trump remains critical of the nation’s supposedly tight controls on foreign investment.

In addition to the tough topic of trade, the two leaders are also expected to address the increasingly urgent issue of North Korea’s nuclear programme. On April 5, Pyongyang fired a medium-range missile into the Sea of Japan, marking the latest in a series of test launches from the communist nation.

While China has condemned North Korea’s nuclear ambitions, it has so far been somewhat reluctant to take punitive action against Pyongyang. Xi is therefore expected to come under pressure from Trump to take a tougher stance with its neighbour, with the US president potentially calling for China to step up targeted sanctions on North Korea.

The brief, two-day summit will conclude with a working lunch on April 8, but the meeting may have a lasting impact on international politics for some time to come.

Top 5 fastest-growing economies

Posted on by Helen

In January, the World Bank published its latest biannual Global Outlook report, which measures economic growth in almost 200 countries by calculating the year-on-year percentage change in GDP.

India and China are usually considered to be stars in this respect. While the global average growth rate is about 2.7 percent, India reported a whopping seven percent last year, with China roughly the same. Such figures are staggering – but they are not the world’s most impressive.

The Global Outlook provides growth forecasts for 2017, 2018 and 2019. India’s three-year forecast is strong – yet China fails to make the list. Meanwhile, a handful of smaller emerging markets are set to out-pace both. Here, World Finance ranks the world’s five fastest-growing economies based on the average of these percentages.

  1. Bhutan – 11.1%

Located between China and India, Bhutan’s mountainous terrain makes it difficult to build infrastructure, such as roads and pipelines. Consequently, manufacturing industries are not the cornerstone of the economy’s growth. Instead, the roots of Bhutan’s prosperity lie in hydropower, agriculture and forestry. For example, the construction of a huge power plant in Dagan has been an important aspect of the government’s plan to increase Bhutan’s hydropower capacity to 10,000MW by 2020.

  1. Ethiopia – 8.7%

While Ethiopia is Africa’s largest recipient of developmental aid and remains one of the world’s least developed countries, several of its sectors show great promise for the economy. A burgeoning services industry underlies the hope that Ethiopia will become a middle-income country by 2025. The construction sector was also boosted in the mid-1990s by massive public infrastructure investment, and gathered real pace between 2004 and 2014. A prime example of its accomplishments is the Grand Ethiopian Renaissance Dam, which is often considered the crowning glory of the country’s recent growth.

  1. Ghana – 8.1%

Since the country’s democratisation in 1992, Ghana’s political and legal systems have been central to maintaining the economy’s strong expansion. With courts remaining largely independent and the political process fairly stable, there are few barriers to international trade, which therefore allows the country to draw upon its gold and cocoa reserves to boost prosperity. The discovery of oil reserves in 2010 is also a major cause of development at present. This, alongside a fiscal consolidation plan, will be central to Ghana’s future growth.

  1. Cote d’Ivoire – 8.1%

In 2012, Cote d’Ivoire’s productivity suddenly boomed. There were two reasons for this: first, a peace agreement halted the country’s 10-year civil war, and second, the government received a $4.4bn package from the IMF. Nowadays, cocoa, coffee and palm oil are the backbone of the country’s economy. The government also channels oil revenue into education and infrastructure development, which in turn advances industry. The capital city Abidjan now plays host to Parisian-style cafes, and the country hopes to achieve ‘emerging market’ status by 2020.

  1. India – 7.7%

Indian growth often receives global attention because the country’s economy is both stable and huge. Services are fundamental for the economy, counting for two thirds of Indian GDP, while consumerism is on the rise thanks to a growing middle class. This growth is aided by an entrepreneurial spirit in civil society and a deep sense of national pride. While China is slowing down, India marches ahead, with the IMF predicting it will crack eight percent GDP growth in 2021.

Barclays sees annual profits almost triple to £3.2bn

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Barclays has reported a jump in its full-year profits for 2016, with pre-tax profits almost trebling to £3.2bn ($3.99bn). The British bank also confirmed it is now producing positive earnings, swinging from a net loss of £349m ($435m) in 2015 to a net profit of £1.6bn ($1.99bn) for 2016.

Last year proved to be pivotal for Barclays, with the bank engaging in one of the largest restructuring initiatives in its history. In order to focus on its core UK and US markets, Barclays has been steadily selling off overseas assets and scaling back other parts of its business. As part of this ongoing reorganisation, the bank has decided to pull out of Africa, and it still negotiating the sale of its Johannesburg-listed African subsidiary.

Although the bank’s full-year profits look promising, Barclays is also facing a number of costly settlements

CEO of Barclays Jes Staley said: “We are now just months away from completing the restructuring of Barclays, and I am more optimistic than ever for our prospects in 2017, and beyond.”

Since taking over as CEO in December 2015, Staley has set out a new strategic agenda for the bank, focusing on repositioning Barclays as a transatlantic consumer, corporate and investment bank. Under Staley’s leadership, the bank has been reorganised into two major units, with Barclays International dealing with corporate and investment banking, and Barclays UK specialising in local consumers and small businesses. This ambitious business restructuring is due to be completed in 2017, and may allow the bank to return to a more stable financial performance in the near future.

Although the bank’s full-year profits look promising, Barclays is also facing a number of costly settlements. The firm has agreed to pay its African offshoot, Barclays Africa, ZAR 12.8bn ($972m) as part of its separation agreement, as negotiations prove more expensive and time consuming that previously anticipated.

Meanwhile, Barclays is also facing fraud charges in the US, relating to its involvement in the sale of mortgage-backed securities in the lead up to the 2008 financial crash. The US Department of Justice has formally filed a civil lawsuit against Barclays, after the group rejected a settlement offer late last year. While still ongoing, these negotiations are likely to prove costly for the banking giant.

Despite such challenges, the bank struck an optimistic tone in its annual report for 2016, insisting that exiting from non-core markets is the right step for the firm.

In the report, Barclays Chairman John McFarlane said: “Today the group is smaller, safer, more focused, less leveraged, better capitalised and highly liquid, with the customer at the centre of the business. The sale of Africa, the settlement of legacy conduct matters and the exit of non-Core will improve this significantly going forward.”

Restaurant Brands International to buy Popeyes for $1.8bn

Posted on by Helen

After weeks of speculation, Restaurant Brands International (RBI) confirmed on February 21 that it will be purchasing multinational fried chicken chain Popeyes Louisiana Kitchen for $1.8bn, or $79 per share.

According to a press release published on RBI’s website, the offer marks a 27 percent premium of the “30-trading day volume weighted average price” on February 10, the last day of trading before talks of the merger emerged.

The acquisition of Popeyes marks the latest in a string of mammoth takeovers by 3G Capital, a private equity firm that acquired Burger King for $3.3bn in 2010

RBI will finance the deal with $600m cash on hand, together with a commitment from Wells Fargo and JP Morgan for the remaining $1.3bn. Subject to closing conditions and regulatory approvals, the deal is expected to close as early as April 2017.

RBI CEO Daniel Schwartz said in the press release: “Popeyes is a powerful brand with a rich Louisiana heritage that resonates with guests around the world. With this transaction, RBI is adding a brand that has a distinctive position within a compelling segment and strong US and international prospects for growth.”

RBI was formed in late 2014 when Burger King purchased Canadian doughnut and coffee chain Tim Hortons for $11bn. The key motivator behind the merger was Tim Hortons’ potential to expand in the US and further afield. In the short time since the takeover, Tim Hortons has pressed ahead with store expansions, having opened new sites, signed development deals and struck new partnerships in several US states.

Given that fried chicken accounts for 10 percent of the fast food sector, and that Popeyes’ own market share continues to grow, the Louisiana chain also boasts massive potential for serial expansionists RBI.

The acquisition of Popeyes marks the latest in a string of mammoth takeovers by 3G Capital, a private equity firm controlled by wildly successful Brazilian entrepreneur Jorge Paulo Lemann, which acquired Burger King for $3.3bn in 2010. With the likes of Anheuser-Busch InBev and Kraft Foods also under its belt, in a relatively short period of time 3G Capital has marked itself as a force to be reckoned with in the cut-throat world of M&As.

Find out more about 3G Capital and the incredible success of Jorge Paulo Lemann in World Finance’s special report

Alibaba’s Ant Financial invests $200m in Kakao Pay

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Alibaba’s digital payments affiliate, Ant Financial, is set to further expand its global presence through a deal with South Korea’s fledgling Kakao Pay. The soon-to-launch service is a mobile finance subsidiary of the hugely popular messaging app, Kakao Talk, and will allow users to make cashless payments from their smartphones.

First launched in 2010, Kakao Talk has fast become South Korea’s dominant instant messaging app, installed on around 97 percent of all of the nation’s smartphones and boasting an impressive 48 million users.

Through  strategic investments, Ant Financial is increasingly looking to position itself alongside PayPal, Visa and MasterCard as a global payments network

While Kakao Talk has long offered certain mobile payment options on its app, last month the firm decided to consolidate its financial services arm into a new company. In addition to supporting digital payments, the upcoming Kakao Pay will also offer more traditional financial services, such as loans, bill payments and financing.

The deal will give China’s Ant Financial a strong foothold in South Korea, and will make it easier for Chinese tourists to use Alibaba’s Alipay app while visiting the nation. With more than 7.5 million Chinese citizens taking a trip to South Korea every year, Alipay usage is set to surge in the east Asian nation.

Ant Financial has been pressing ahead with its overseas expansion of late. The fintech giant is in the process of raising $3bn in debt financing in order to fund an ambitious programme of international investments and acquisitions. Although the group is yet to close on this debt funding round, it has already made a series of significant business moves.

In January, the digital finance firm confirmed it had agreed to buy the US money transfer group MoneyGram for $880m, marking a significant milestone in the company’s international growth plan. The Chinese firm has also recently snapped up a substantial stake in India’s leading mobile payments service, Paytm, and has also invested in Ascend Money, a major Thai fintech company.

Through such strategic investments, Alibaba’s Ant Financial is increasingly looking to position itself alongside PayPal, Visa and MasterCard as a global payments network.

Historically, Ant Financial has been used almost exclusively in China, and has fast become the nation’s leading financial technology company. In its latest round of funding, the company was valued at $60bn, while its digital payments platform, Alipay, has over 450 million active users. The firm is now gearing up to make its stock market debut, with industry experts anticipating an IPO within the next two years.

If Ant Financial begins to enjoy the same success overseas that it has experienced in China, the group could be well on its way to becoming an international payments powerhouse.

Kraft Heinz abandons its $143bn Unilever takeover plan

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US food giant Kraft Heinz has abandoned its $143bn pursuit of Unilever, just two days after confirming its interest in the brand. On February 17, Unilever rejected the US firm’s initial offer, insisting that there was “no merit, either financial or strategic” to a deal with Kraft Heinz.

The merger would have been one of the largest in corporate history, creating the world’s second largest consumer goods group and combining a host of popular household brands. Unilever, whose brands include Marmite, Dove soap and Magnum ice cream, is the UK’s third-largest listed company, employing more than 7,000 workers across the country.

The Kraft Heinz-Unilever merger would have been one of the largest in corporate history, creating the world’s second largest consumer goods group

The withdrawal came after UK Prime Minister Theresa May asked senior officials to scrutinise the proposed merger in order to assess whether the foreign takeover bid warranted government intervention. Rumours of the merger were met with anger among UK trade union groups, who expressed fears that the Kraft Heinz megadeal would trigger large-scale job losses at the two companies.

In June 2016, May promised to implement a “proper industrial strategy” to prevent predatory foreign takeovers of UK companies, particularly targeting acquirers that fail to maintain or establish factories in the UK. In 2010, Kraft Heinz’ takeover of UK chocolatier Cadbury prompted a government reassessment of takeover procedures. Shortly after the controversial acquisition, Kraft Heinz backtracked on its promises to maintain Cadbury’s Somerdale factory, announcing that it would instead close the plant.

In the face of brewing political opposition, Kraft Heinz’s billionaire owners retreated from the deal on February 19 – just 55 hours after announcing its ambitious bid. Shares in Unilever initially soared after Kraft Heinz confirmed its interest, but fell by eight percent in the wake of the withdrawal.

Despite Unilever’s firm rejection of the deal, on February 19 the two companies released a joint statement, insisting “Unilever and Kraft Heinz hold each other in high regard”. The statement added: “Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.”

While the two companies cater to the same market, they differ greatly in their approach to business. The Brazilian private equity group that jointly manages Kraft Heinz is dedicated to cost-cutting initiatives, and has gathered an industry reputation for slashing factory jobs. Unilever, on the other hand, stands by its principles of corporate responsibility and environmental protectionism, even when this eats into costs at the company.

Norway plans to chase riskier assets with $900bn oil fund

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Norway’s $900bn sovereign wealth fund, which amounts to $171,000 for each Norwegian citizen, has long followed a strict investment strategy wherein overseas investments are restricted to 60 percent stocks, 35 percent bonds and five percent real estate. On February 16, the Norwegian Government proposed a rethink of this approach, putting forward a plan to channel investments towards stocks and away from bonds, which have recently seen dwindling returns.

The proposed change would raise the limit for spending on stocks from 60 to 70 percent, which would amount to a shift of $90bn into equity markets.

The Norwegian Government has put forward a plan to channel investments towards stocks and away from bonds, which have recently seen dwindling returns

According to a government statement: “The expected return on equities exceeds that of bonds, thus supporting the aim of increasing the fund’s purchasing power. At the same time, equities carry higher risks. The proposal to increase the equity share is based on a comprehensive assessment of the recommendations received.”

The Norwegian Government’s plan is based upon a report issued by a government-appointed commission, which warned that if no action is taken, returns on the fund could slump to just above two percent a year over the coming 30 years: “A higher share of equities increases the expected return, and the contribution to the fiscal budget, but also entails more volatility in the value of the fund and a higher risk of a decline in its long-run value.”

The extra risk would have knock on effects for fiscal policy, which would have to adapt to a more unpredictable income.

The government also put forward a proposal to cut the long-running four percent rule that currently restricts the proportion of the fund that is allocated for government spending each year. The governor of the central bank, Oeystein Olsen, welcomed this move. As reported by Reuters, he said: “Fiscal policy must be decoupled from financial assets subject to considerable volatility… The period of rising government spending of petroleum revenues should now be over.”

The plans are still subject to parliamentary approval, and the government would need cross-party support in order to pass the changes. In an interview with Reuters, Finance Minister Siv Jensen appeared positive that the proposals would pass: “My impression is that there is broad agreement for setting a good framework for the management of the fund.”

According to Business Insider, the fund currently owns 2.3 percent of all equity in listed European companies. This could now be pushed up further if proposed changes come into force, resulting in substantial ripple effects for European markets.

Furthermore, the fund owns 1.3 percent of total listed equity worldwide, again demonstrating the impact of Norway’s investment decisions.

EU-Canada trade deal passed by European Parliament

Posted on by Helen

On February 15, the European Parliament approved the EU-Canada Comprehensive Economic and Trade Agreement (CETA) by 408 votes against 254, marking a key milestone for a deal that has been seven years in the making.

The agreement promises one of the most comprehensive tariff reduction packages that the EU has ever achieved in the context of a free trade deal.

In light of CETA’s parliamentary approval, many of the measures – most notably, tariff reductions – will come into force on a provisional basis. However, the national governments of all 28 member states still need to ratify the agreement in order for it to be finalised and implemented in full.

The national governments of all 28 member states still need to ratify CETA in order for it to be finalised and implemented in full

More specifically, the full process of ratification will be necessary for some of the more controversial aspects of the agreement to come into effect. This could present a major stumbling block for CETA, with opposition to the deal holding the potential to dissuade governments from granting their final approval.

In particular, the deal has sparked controversy for its changes to the court system, with protesters arguing it could empower large corporations to write the rules of trade. Concerns have also been raised that it would erode the EU’s commitment to environmental, labour and consumer standards.

Canadian Prime Minister Justin Trudeau has long been a staunch defender of the deal. Upon signing the agreement in October, he argued that people will start to see the deal in a more positive light when the benefits kick in: “Small businesses [and] consumers will start to feel the benefits of this immediately, even before all the 28 different parliaments proceed with their ratification steps.”

However, the process of full ratification could be drawn out for years to come as those opposing the deal turn their efforts toward fighting it on a national level.

If fully enforced, it will eliminate approximately 98 percent of tariffs and save EU exporters an estimated €500m a year in duties. The volume of trade between both sides currently stands at €60bn a year, a sum that could be boosted by 20 percent as a result of the deal, according to EU experts.

Many in the EU celebrated the parliamentary vote as a triumph in promoting openness against a tide of protectionism. Marietje Schaake of the Alliance of Liberals and Democrats said: “With President Trump in the White House, we see a clear change in US policy… Leadership for open economies and societies must come from us in Europe.”

Brexit won’t break London as a financial centre

Posted on by Helen

Speculation over Brexit’s impact on the City of London has hit a new high, with politicians in Paris claiming 10,000 financial jobs could relocate to the French city.

However, forecasts that London’s position as a top financial hub is about to crumble could be over-hyped, with smaller operations and back-office jobs being the likely targets for relocations. Furthermore, Synechron, an IT management and consulting company, has estimated the cost of relocating an average financial employee to Europe to be a hefty £50,000 ($61,800). This figure was reached based on a hypothetical scenario in which a bank shifted 1,000 roles from the UK to a new headquarters in another major European financial centre.

Forecasts that London’s position as a top financial hub is about to crumble could be over-hyped

As banks attempt to forge strategies in the wake of the UK’s decision to leave the European Union, they must take stock of the fact that London will likely become a less effective gateway into the EU market. However, according to Alex Howard-Keyes, Investment Banking Partner at executive search firm Alderbrooke, the relocations currently appear to be small-scale. He told World Finance: “We are hearing from some large US and European banks [that] are seriously considering relocating small operations to different destinations in Europe.”

UK Prime Minister Theresa May has promised to trigger Article 50 before the end of March, after which the UK will face a two-year deadline to negotiate an exit deal. This presents substantial uncertainty over the shape of the deal that will ultimately be forged.

However, Alderbrooke stressed “any future relocation will almost certainly be gradual, and the scale of this migration will depend on the agreement reached by the UK and EU. In any case, the likelihood is London will remain the pre-eminent financial centre in Europe for the foreseeable future”.

Furthermore, it is becoming clear that many of the most important operations are set to remain in London. Lloyd Wahed, Managing Director at recruitment firm Athelstan Search, explained: “Not only are the more highly skilled and strategic roles staying put, we have seen demand for data analysts in London’s investment banks increase. In particular, there has been an uptick in search requests for chief data officers.”

According to Wahed, while banks are looking to move certain functions to mainland Europe, the bulk of this movement will come from back office, support and administrative roles.

IMF divided over Greek GDP target

Posted on by Helen

The IMF’s involvement in a new bailout for Greece hangs in the balance following a rare split within its board. The division comes over what GDP target should be stipulated by international lenders.

During the fund’s annual review of the Greek economy on February 7, some directors argued for a stringent fiscal surplus target of 3.5 percent by 2018. However, most of the board remained in favour of a more achievable 1.5 percent.

Some IMF directors argued for a stringent fiscal surplus target of 3.5 percent by 2018

Though details of how many board members backed the 3.5 percent target have not been shared, the IMF did reveal that it expects Greece’s economy to grow by just under one percent in the long term, with the primary fiscal surplus expected to reach 1.5 percent of GDP. This forecast was calculated in light of the government’s policy adjustment programme and bailout constraints.

Despite ongoing macroeconomic risks in relation to policy implementation delays, the IMF does believe that the lower fiscal target of 1.5 percent should be met. According to a statement on the IMF website: “Most directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date which is expected to bring the medium-term primary fiscal surplus to around 1.5 percent of GDP, while some directors favoured a surplus of 3.5 percent of GDP by 2018.”

Though a target has not yet been agreed, the institution’s board did settle on advice for Athens looking ahead, calling for the rationalisation of pension spending, the expansion of Greece’s personal income tax base, lower tax rates and more targeted assistance to the population’s most vulnerable groups.

The fund also called for renewed efforts to tackle the long-standing issues of tax evasion and large tax debt through a strengthening of the state’s taxation infrastructure.

While the review was positive overall, the IMF’s future participation in an upcoming Greek bailout remains precarious. Adding further doubt is the ongoing disagreement between the organisation and European authorities. For over a year now, the IMF has maintained that the targets demanded of Athens following its €86bn ($92bn) bailout are too severe, and that instead the nation should be granted additional long-term debt relief.

Having abstained from involvement in Greece’s third bailout in 2015, there is a strong chance that the IMF could do so again, in spite of its active involvement in negotiations surrounding a new deal that is expected to start in mid-2018. However, some experts argue that should the IMF pull out of the new bailout, the entire rescue programme could fail.

The February 7 review, though ambiguous in some respect, made clearer the position that the IMF has held for some time now – that Greece does indeed require greater debt relief, and that more needs to be done in order to re-establish its debt sustainability. As such, stringent targets run the risk of expanding Greece’s debt and so hindering its ability to achieve long-term growth.

Whether European lenders will agree with the IMF in this respect by mid-2018 seems to be unlikely. If so, the economic adjustment achieved by Greece since 2010 may not be given the chance it needs to incur further gains, resulting instead in the continuation of the country’s economic woes in the foreseeable future.

Chinese foreign investment spree reined in amid clampdown on capital outflows

Posted on by Helen

Chinese direct investment has been hit by a surge in the number of cancelled deals amid a stricter regulatory environment, according to new analysis by law firms Baker McKenzie and Rhodium Group. In 2016, 30 outbound investment deals were cancelled, worth a total of $74bn.

The value of cancelled deals was around seven times greater than that of 2015, when the sum of cancelled deals amounted to just $10bn. This marks a change in the regulatory climate for outbound investment from China, which has introduced increasingly tight capital controls in a bid to protect the renminbi from spiralling depreciation.

Unprecedented capital outflows have been a key cause of the depreciating currency, which hit eight-year lows against the dollar at the end of last year.

Chinese authorities have relied heavily on foreign currency reserves to support the dwindling renminbi

Chinese authorities have relied heavily on foreign currency reserves to support the dwindling currency; consequently, reserves have now dipped below $3trn. Beijing has also more recently resorted to capital controls in various forms. Part of this effort is an informal tightening of controls on outbound investments, with deals being subject to heightened scrutiny.

This regulatory climate is likely to continue in the coming months, and the effect may also be compounded by regulatory changes in the US and EU.

According to Michael DeFranco, Global Head of M&A at Baker McKenzie: “A short-term slowdown in new deals is likely in 2017, driven both by China’s temporary measures to slow capital outflows and tougher screening of inbound deals in the US and Europe.”

While the regulatory landscape is certainly weighing on large Chinese outbound deals, the broader trend is one of rapid expansion. Foreign direct investment from China hit a record $94.2bn in 2016, up 189 percent from the previous year in the US and up 90 percent in Europe. The investments came primarily from privately owned Chinese enterprises, which accounted for 70 percent of the total FDI value.

This demonstrates the success of a longer-term strategy by Chinese authorities to promote foreign operations and investments by Chinese enterprises. In his address at the recent World Economic Forum meeting in Davos, President Xi Jinping signalled he remained committed to this global approach. He underscored the benefits of economic integration and free trade.