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Russia’s economy ‘recovered’ quicker than most of industrialised world

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Moscow’s targeted approach to supporting Russia’s economy during the pandemic has helped it bounce back from the crisis quicker than most of the industrialised world, says a deputy finance minister.

Although the Kremlin’s Rbs4tn ($54.3bn) Covid-19 support package amounted to a scant 4 per cent of gross domestic product, or less than a tenth of the assistance provided by Germany, Italy, and the US, Russia estimates the contraction in its GDP has slowed from 8 per cent year-on-year in the spring to 3.6 per cent in the third quarter of 2020, which placed it in the top five of G20 nations.

Russia benefited from a stimulus ordered by president Vladimir Putin before the virus struck, of which Rbs1.75tn has been spent this year.

“It’s a myth that Russia’s anti-crisis package was small,” Vladimir Kolychev said in an interview with the Financial Times. “The economy doesn’t care how you paint your expenditure. The important thing is that it increased.”

The country was able to make a quick recovery because targeted spending made it more efficient in handling the coronavirus crisis, even though it spent less than other countries, Mr Kolychev added.

He said Russia had boosted government spending in total by 27 per cent this year, a figure Moscow claims is higher than that of any EU country.

“It’s obvious that Russia’s economy suffered less in the second quarter and recovered more quickly in the third quarter,” Mr Kolychev said. “That’s not just because of our support measures, but because the quarantine itself in Russia was structured differently than in Europe.”

Russia has recorded more Covid-19 cases than all but three countries worldwide, hitting a new daily record of 29,093 on Sunday.

Mr Putin, however, chose not to impose a nationwide lockdown in favour of delegating patchwork measures to local authorities who largely left Russia’s industry alone while shutting the consumer sector almost entirely.

The recovery plan eschewed tapping Russia’s $167bn cushion of savings from its oil and gas wealth to make direct payments to businesses and citizens in favour of tax holidays and loan guarantees.

Vladimir Kolychev, a deputy finance minister, said Russia’s Rbs500bn in yearly payments to families with children had helped consumer activity grow © Luke MacGregor/Bloomberg

Elina Ribakova, deputy chief economist at the Institute of International Finance, said Russia’s “proactive fiscal support” in the wake of Covid-19 had been small. “Not surprising as Russia was facing a triple shock in 2021 from Covid, oil and risk of sanctions given the US election.”

She said the country would have “one of the smallest contractions globally due to the arithmetic of keeping lockdowns limited to keep economic damage under control”.

She added: “Unfortunately, it is not clear whether in Russia the healthcare system is capable of handling so many Covid cases.”

Mr Kolychev said Russia’s Rbs500bn in yearly payments to families with children — one of the few direct support measures in the coronavirus package — had helped consumer activity grow 3 to 5 per cent in the second quarter and continue to rise 1 to 2 per cent.

Moscow also passed several tax breaks for sectors including small businesses and the petrochemicals, including a cut from 20 to 3 per cent for IT businesses.

Mr Kolychev claimed the contraction in Russia’s GDP would have been negligible if not for the Opec+ deal of oil producers that limited production during the first wave of the pandemic.

“European countries haven’t grown their expenditure as quickly. The US, Canada, and Australia might have, but their programmes evidently were set up in a way that didn’t lead to quick growth in consumer spending. They recovered, but there hasn’t been a consumer boom,” he said.

“We wanted to use these temporary benefits to target growth in places where people had the most problems with their income. If you give everyone [money], including the rich, then the rich are hardly going to change their consumption habits.”

Mr Kolychev defended Russia’s decision not to spend the $167bn national wealth fund, squirrelled away from surplus oil and gas revenue, on economic stimulus payments, saying it had to be saved to “spread natural resource revenue fairly among the generations over time” rather than used as a way out of the crisis.

The finance ministry has used some of the fund to cover budget shortfalls during the pandemic, but has doubled its external borrowing to Rbs5tn rather than tapping its oil savings to boost spending.

Mr Kolychev said: “When there’s a fall, the private sector is careful about spending and doesn’t want to go into debt, and the financial sector doesn’t want to give debt to the private sector because it knows the risks of default might be quite high. That creates a space for the state to borrow more without there being issues for the availability of debt financing for the private sector.”

Last month, Russia raised €2bn in eurobonds for the first time this year, taking advantage of favourable market conditions at a time when the Kremlin fears US president-elect Joe Biden’s administration could ramp up sanctions on Moscow next year.

Mr Kolychev said the country had drawn up plans to ease the impact of any future US sanctions that would bar foreigners from holding Russia debt. Those potential countermeasures include regulatory easing for Russian borrowers and a possible pause in future issuances to ease pressure on the secondary market.

But even though foreigners hold more than a third of Russia’s rouble bonds, Mr Kolychev said Moscow could replace them through local demand if required.

“Foreign holdings of Russia’s sovereign debt haven’t gone up much in cash terms in the last two years,” he said. “That essentially means that as far as debt is concerned, there isn’t that much reliance on foreign investors. Our domestic financial system can easily handle the existing level of borrowing.”



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Emerging Markets

South Korea looks to fintech as household debt balloons to $1.6tn

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South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed



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European and Chinese stocks rise after calming words from Beijing

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Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

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Turkey battles to quell wildfires as residents and tourists flee

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Turkey updates

Turkey has contained more than 100 wildfires after a series of blazes near its Mediterranean coastline killed six people and forced thousands of residents and foreign tourists to flee holiday resorts, the government said on Sunday.

Winds gusting at 50km per hour, low humidity and temperatures hovering near 40C have made controlling the fires difficult, Bekir Pakdemirli, the forestry minister, said on Twitter and in comments reported in state-run media.

The fires began on July 28, and the simultaneous start of so many conflagrations raised suspicions they may have been deliberately set, Pakdemirli said, although he did not offer evidence of arson.

About 100 Russian nationals were evacuated from the Bodrum peninsula in western Turkey on Saturday and moved to hotels elsewhere, the Russian consulate in the city of Antalya said in a statement, according Sputnik, a Russian state media outlet. Local tourists were also among the evacuees, with some forced to leave by sea as the blaze cut off other escape routes.

Flights from Russia, Turkey’s biggest source of tourists, only resumed in late June after Moscow suspended charter trips amid a record outbreak of Covid-19 cases in Turkey in the spring. Coronavirus-related travel restrictions to Turkey have hammered its tourism sector, which directly and indirectly accounts for about 13 per cent of gross domestic product.

Villagers water trees to stop the wildfires that continue to rage in the forests in Manavgat, Antalya, Turkey © AP

The forestry ministry website showed at least 15 active fires on Sunday. Villagers and forestry workers were among the six people who died, according to Turkish media. Mehmet Oktay, mayor of the resort town of Marmaris, said one volunteer firefighter had died and another 100 people had been injured in a spate of fires that have scorched more than 10,000 hectares near the town.

A half-dozen fires continued to sear areas mostly inaccessible by road, and the number of blazes across Turkey meant not enough firefighting planes were available, he said. “It’s heartbreaking, and I am fighting back tears to concentrate on the emergency at hand. It will take more than a decade to restore this land,” he said.

Thousands of farm animals and untold numbers of wild animals also perished in the fires, which one meteorologist estimated reached 200C.

Wildfires are an annual occurrence in south-west Turkey’s pine forests, and one expert told CNN Turk television that 95 per cent are deliberately or accidentally sparked by people.

Yet the scale of the current conflagration is remarkable, and some are blaming climate change for the disaster. Turkey recorded its highest ever temperature in a south-eastern town last month, and much of the country has been gripped by drought this year, while deadly floods struck north-east Turkey last month.

Several other Mediterranean countries are battling blazes this summer, including Cyprus, Greece, Lebanon and Italy, and scientists have said the extreme weather events across the globe this summer may be the result of global warming.



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