CANADA ECONOMICS
VENEZUELA
The Globe and Mail. 23 May 2018. EDITORIAL. Maduro’s ‘election’
Of the many ignominies perpetrated against Venezuela’s populace over the past two decades, the spiral into authoritarianism, violence, hunger and disease under President Nicolas Maduro stands out.
The strongman successor to Hugo Chavez has laid waste to his country and its economy. People can’t get enough to eat most days, either due to shortages, rampant inflation, or their lack of employment.
With his new six-year mandate, Mr. Maduro has now also debased the country’s democratic process.
In the course of assuring Mr. Maduro’s re-election, the country’s lapdog electoral authorities banned the leading opposition parties and some of their politicians from taking part in the campaign.
That, along with brutal repression and jailings, prompted millions of Venezuelans to protest by refusing to take part in a vote they knew to be a farce. Turnout was far lower than in recent elections, and Mr. Maduro received 1.5-million fewer votes than he did in his first election in 2013.
The U.S. State Department called the exercise a “sham.” Canada’s Foreign Affairs Minister Chrystia Freeland judged it “illegitimate and anti-democratic” and further pared back diplomatic ties with Caracas.
The question is what to do next. It’s certainly appropriate for Canada and other members of the Lima Group – which includes most major Latin American nations – to support U.S.-led sanctions aimed at reining in Mr. Maduro.
As well, several Venezuela experts and exiles have called on Ottawa to designate the country a state sponsor of terrorism, and to agitate for its removal from the United Nations’ Human Rights Council.
Those options can be explored, but punitive isolation only goes so far. And the suffering of Venezuelans, which is already profound, must not be compounded. Canada can play a role in ensuring it isn’t.
As host of the G7 summit in Quebec next month, Ottawa has an opportunity to spearhead a diplomatic effort aimed at restoring the democratic process in Venezuela.
Venezuelans’ future depends on them being able to choose their leaders freely and fairly.
NAFTA
The Globe and Mail. 23 May 2018. Mexico’s low wages a sticking point in NAFTA talks, but labour activists say pay is just start of the problem. U.S. House approves rollback of banking rules
ADRIAN MORROW
Imelda Jimenez spent four years making motorheads at a plant in Monclova, in the northern Mexican state of Coahuila. The salary was 1,300 pesos for a 60-hour work week, she said – the equivalent of about $1.50 an hour.
It was too little to provide for her four children.
“It wasn’t enough to do what you had to do. You could eat, or you could send your kids to school,” the 40-year-old told The Globe and Mail. “I had to take out payday loans.”
Ms. Jimenez had a union, the Confederacion de Trabajadores de Mexico. But the CTM – which is tied to Mexico’s governing political party and is often accused of signing sweetheart deals with multinational corporations – did nothing to get her and her co-workers a raise, she said. So they staged a wildcat strike in the spring of 2014, demanding the right to form a more effective union.
After persuading the strikers to come back to work with promises of better treatment, Ms. Jimenez said, the company fired them.
Mexico’s low wages have become a key sticking point in the renegotiation of the North American freetrade agreement. The Trump administration in the United States is demanding that auto companies be forced to source 40 per cent of their car parts from factories that pay at least US$15 to US$17 an hour. Mexican negotiators are fighting the proposal, worried it would move jobs out of the country, where auto sector wages average the equivalent of US$4 an hour.
Lawmakers vote to advance a measure that is the biggest overhaul since Dodd-Frank
The U.S. House has approved a sweeping overhaul of bank regulations, sending to President Donald Trump a bill that will give him a chance to make good on his vow to “do a big number” on the Dodd-Frank Act.
Lawmakers voted on Tuesday to advance a measure that is the product of years of financial-industry lobbying to soften postcrisis rules and sensitive negotiations on Capitol Hill to attract bipartisan support needed to get it through the narrowly-divided Senate.
The legislation would be the most significant overhaul of banking oversight to become law since Dodd-Frank was enacted in 2010 and may represent Congress’s last shot at dialling back Wall Street regulation before midterm elections in November of this year.
House leaders agreed to vote on the compromise bill that Senate Republicans negotiated with moderate Democrats in exchange for a promise that a broader set of House-passed rollbacks will get a vote later this year.
Senate Democrats who backed the plan sponsored by banking committee chairman Mike Crapo, an Idaho Republican, have said they will oppose further changes.
The legislation gives smaller banks relief from postcrisis rules that they’ve decried as burdensome and costly.
It raises to US$250-billion in assets from US$50-billion the threshold for banks to face stricter Federal Reserve oversight as systemically important financial institutions. That would free companies such as American Express Co. and SunTrust Banks Inc. from higher compliance costs associated with being considered too big to fail.
It could also spark a wave of deal making among regional firms that have been reluctant to cross that US$50-billion threshold.
Even if the bill is signed into law, the Federal Reserve will ultimately determine how much relief regional firms get – and how soon. While losing the SIFI label frees them from some stricter oversight and annual stress tests mandated by Dodd-Frank, banks with more than US$50-billion in assets are still subject to other rules including the Fed’s annual Comprehensive Capital Analysis and Review.
If the Fed does decide to make changes in response to the legislation, the process that could take months, even a year, according to Jared Seiberg, an analyst at Cowen Inc.
G7
PM. May 23, 2018. G7 Leaders' Statement on Venezuela
Ottawa, Ontario - We, the G7 Leaders of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States of America and the European Union, are united in rejecting the electoral process leading to the May 20, 2018, Presidential election in Venezuela.
By failing to meet accepted international standards and not securing the basic guarantees for an inclusive, fair and democratic process, this election and its outcome lack legitimacy and credibility. We therefore denounce the Venezuelan Presidential election, and its result, as it is not representative of the democratic will of the citizens of Venezuela. The Venezuelan government has missed the opportunity for an urgently needed political rectification.
While the regime of Nicolas Maduro solidifies its authoritarian grip, the people of Venezuela continue to suffer human rights abuses and serious deprivation, causing increasing displacement which is affecting countries throughout the region.
We stand in solidarity with the people of Venezuela and call on the Maduro regime to restore constitutional democracy in Venezuela, schedule free and fair elections that can truly reflect the democratic will of the people, immediately release all political prisoners, restore the authority of the National Assembly and provide for full, safe and unhindered access by humanitarian actors.
We remain committed to supporting a peaceful, negotiated, democratic solution to the crisis in Venezuela and to support the Venezuelan population through humanitarian assistance.
Global Affairs Canada. May 23, 2018. G7 Finance and Development Ministers meeting itinerary
The Honourable Marie-Claude Bibeau, Minister of International Development and La Francophonie, and the Honourable Bill Morneau, Minister of Finance, along with Stephen Poloz, Governor of the Bank of Canada, will co-host a meeting of G7 Finance and Development Ministers and Central Bank Governors from May 31 to June 2, 2018, in Whistler, British Columbia. The theme ofthis meeting will be “Investing in growth that works for everyone.”
Media representatives wanting to cover this event must apply for accreditation and obtain an identification badge through an online accreditation portal.
The deadline has been extended for the online application process to May 23, 2018, at 11:59 p.m. ET. Only accredited media with an identification badge will have access to the meeting sites.
Program highlights
The following program elements–or portions thereof–will be open to accredited media only.
NOTE: The program elements noted below are for planning purposes only and are subject to change. A more detailed agenda and itinerary will be published closer to the event itself.
Wednesday, May 30 – Afternoon
Minister Bibeau will meet with six young women leaders
Overview: Minister Bibeau will meet with six young women leaders from developing countries and Canada. These youth activists have been invited to participate in the G7 Development Ministers meeting to provide insights into the issues and challenges they face. They will have the opportunity to share their insights with Minister Bibeau ahead of the ministerial meeting.
Location: Nita Lake Lodge
Thursday, May 31 – Morning
G7 Symposium on Investing in Growth that Works for Everyone
Overview: The symposium is designed to provide a window into the work of G7 Finance Ministers and Central Bank Governors, and to facilitate public engagement and the exchanging of ideas about the challenges related to, and the best opportunities and solutions for investing in growth that works for everyone, increasing economic resilience and stability, and advancing women’s economic empowerment.
Location: Squamish Lil’wat Cultural Centre
Official opening of the G7 Development Ministers meeting and interactive panel with young women leaders
Overview: Young women from developing countries and Canada will join G7 Development Ministers to help ensure that those who are directly affected by the issues being discussed provide their own insights on innovative solutions for real change and positive outcomes.
Location: Nita Lake Lodge
Notes for media: The official opening is open to the media. Minister Bibeau will deliver remarks. The event will include a traditional Indigenous ceremony. The introduction to the interactive panel with the young women leaders will also be open to the media. Some elements will be live streamed. Minister Bibeau and the young women leaders will be available to media for photo opportunities and b-roll.
Thursday, May 31 – Afternoon
G7 Development Ministers
Overview: Discussion topics for G7 Development Ministers include: girls’ empowerment and education; and mobilizing the global architecture for girls’ empowerment
Location: Nita Lake Lodge
Notes for media: Minister Bibeau will deliver brief remarks. Some elements will be live streamed.
Thursday, May 31 – Evening
G7 Finance Ministers and Central Bank Governors – Photo opportunity only
Overview: G7 Finance Ministers and Central Bank Governors will officially open the meetings.
Location: Fairmont Chateau Whistler
Friday, June 1 – Morning
Joint G7 Development and Finance Ministers meeting: Innovative financing for development and women’s economic empowerment
Overview: Participants will discuss innovative financing solutions to ensure economic growth for everyone, including mobilizing private capital for sustainable development and building economic resilience against extreme weather events. Members of the Gender Equality Advisory Council for Canada’s G7 Presidency will exchange ideas with the ministers on how to promote women’s economic empowerment in both developed and developing economies.
Location: Squamish Lil’wat Cultural Centre
Friday, June 1 – Afternoon
G7 Development Ministers
Overview: Discussion topics for G7 Development Ministers include: humanitarian crises and hotspots; and driving gender-transformative approaches to humanitarian assistance
Location: Nita Lake Lodge
G7 Finance Ministers and Central Bank Governors
Overview: G7 Finance Ministers and Central Bank Governors meet.
Location: Squamish Lil’wat Cultural Centre
Saturday, June 2 – Morning
G7 Development Ministers
Overview: G7 Development Ministers will discuss accelerating innovation for development.
Location: Nita Lake Lodge
Notes for media: Minister Bibeau will deliver brief remarks. Some elements will be live streamed.
Minister Bibeau – Closing press conference
Overview: Immediately after the ministerial meeting, Minister Bibeau will summarize the G7 Development Ministers’ discussions and take questions.
Location: Fairmont Chateau Whistler
Saturday, June 2 – Afternoon
Minister Morneau and Governor Poloz – Final press conference
Overview: Minister Morneau will summarize the G7 Finance Ministers’ and Central Bank Governors’ discussions and take questions; he will be accompanied by Governor Poloz.
Location: Squamish Lil’wat Cultural Centre
CANADA - US
U.S. Department of State. May 22, 2018. Launching Negotiations to Modernize the Columbia River Treaty Regime
Washington, DC - The United States is pleased to announce the start of negotiations with Canada to modernize the Columbia River Treaty regime on May 29-30, 2018, in Washington, D.C. The 1964 Treaty’s flood risk and hydropower operations have provided substantial benefits to millions of people on both sides of the border. The Treaty, a worldwide model for transboundary water cooperation, has also facilitated additional benefits such as supporting the river’s ecosystem, irrigation, municipal water use, industrial use, navigation, and recreation. Modernizing the Treaty regime will ensure these benefits continue for years to come.
As the United States enters these bilateral negotiations with our Canadian counterparts, our key objectives include continued, careful management of flood risk; ensuring a reliable and economical power supply; and better addressing ecosystem concerns. Our objectives are guided by the U.S. Entity Regional Recommendation for the Future of the Columbia River Treaty after 2024, a consensus document published in 2013 after years of consultations among the Northwest’s Tribes, states, stakeholders, public, and federal agencies.
The U.S. negotiating team will be led by the U.S. Department of State and will include the Bonneville Power Administration and the U.S. Army Corps of Engineers Northwestern Division (which together comprise the “U.S. Entity” that implements the Treaty in the United States); the Department of the Interior; and the National Oceanic and Atmospheric Administration.
As negotiations proceed, the U.S. government will continue to engage regional stakeholders, Tribes, state government officials, and other interested groups.
INTERNATIONAL TRADE
Canadian International Trade Tribunal. May 22, 2018. Tribunal Initiates Inquiry—Sucker Rods from China
Ottawa, Ontario — The Canadian International Trade Tribunal today initiated a preliminary injury inquiry into a complaint by Dover Canada ULC – Alberta Oil Tool Division, of Edmonton, Alberta, that it has suffered injury as a result of the dumping and subsidizing of certain sucker rods from the People’s Republic of China. The Tribunal’s inquiry is conducted pursuant to the Special Import Measures Act as a result of the initiation of dumping and subsidizing investigations by the Canada Border Services Agency (CBSA).
On July 17, 2018, the Tribunal will determine whether there is a reasonable indication that the dumping and subsidizing have caused injury. If so, the CBSA will continue its investigations and, by August 16, 2018, will issue preliminary determinations. If these preliminary determinations indicate that there has been dumping and/or subsidizing, the CBSA will then continue its investigations and, concurrently, the Tribunal will initiate a final injury inquiry. Anti-dumping and/or countervailing duties will be imposed only if the Tribunal finds that dumped and/or subsidized products are injuring or threatening to injure the Canadian domestic industry.
The Tribunal is an independent quasi-judicial body that reports to Parliament through the Minister of Finance. It hears cases on dumped and subsidized imports, safeguard complaints, complaints about federal government procurement and appeals of customs and excise tax rulings. When requested by the federal government, the Tribunal also provides advice on other economic, trade and tariff matters.
Any interested person, association or government that wishes to participate in the Tribunal’s inquiry may do so by filing a Notice of Participation.
The Globe and Mail. 23 May 2018. Riding Canada’s trade boom, Maersk adds to fleet. Maersk: Container volumes at Port of Halifax increased to record volumes in 2017
ERIC ATKINS
Container ship company Maersk Line is capitalizing on Canada’s expanding global trade, adding a second weekly ship to the Mediterranean from Montreal and Halifax amid new free-trade deals with overseas markets.
The Danish ship owner expects Canadian volumes of imports and exports moving by container ship will grow by 7 per cent this year despite concerns about a possible trade war between China and the United States. The expansion of the container service is in contrast to the global operations of Maersk Line’s parent company, A.P. Moller-Maersk AS. The Danish company last week said it is cutting service on some routes amid missed profit expectations it blamed on rising fuel costs, low freight rates and political tensions.
An index of container rates on major ocean routes is down by 9 per cent in midMay, compared with the year-ago period, according to Britain-based Drewry Shipping Consultants Ltd. The index of spot rates was dragged down by almost 20-percent plunges in prices to move containers between Shanghai and Rotterdam.
New York-Rotterdam rates rose by 9 per cent.
Soren Skou, chief executive officer of Moller-Maersk, told Reuters the company’s freight volumes would be hurt if trade talks failed between China and the United States.
In Canada, new trade agreements and demand for imports and exports have fostered a strong business climate, Jack Mahoney, president of Maersk Line Canada, said by phone. “Canada specifically is a positive story. It is amongst the fastest-growing markets for container trades across the Americas. Free-trade agreements will only act as favourable winds.”
A trade agreement between Canada and the 28-country European Union, came into effect in September and will eliminate almost all tariffs on goods. Canada in March signed on to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership [CPTPP], a free-trade agreement that covers 11 countries, including Japan and Malaysia.
“Since the tariffs went away, there is more moving,” Mr. Mahoney said. “With [CPTPP] in play, we expect that to also be favourable winds in both directions for trade between east Canada and Asia.”
Container volumes at the Port of Halifax rose by 16 per cent to record volumes in 2017, as increasingly larger ships began calling on the deep-water port. But the share of freight to and from Europe rose by just one percentage point to 37 per cent. Asia accounts for 49 per cent of Halifax’s containerized trade.
Lane Farguson, a spokesman for the Port of Halifax, said it is too early to attribute any rise in European trade to the new freetrade agreement. “We are seeing growth across all the regions served by the Port of Halifax,” he said. “What I can say is that [free trade with Europe] creates new opportunities and potential for growth, which is good news for key industries in Atlantic Canada such as seafood and agri-food.”
The growing volumes of imports and exports are driving expansions at most major sea ports.
The Port of Halifax is spending $10-million to boost its capacity for boxes and refrigerated containers, and replacing three cranes. Montreal is spending $750-million to build a new box terminal on the south shore of the St. Lawrence River. Dubai’s DP World last year expanded its box port in Prince Rupert, boosting the Pacific port’s capacity by about 50 per cent.
The ports of Vancouver and Prince Rupert are seeing growth that exceeds 12 per cent in the first three months of the year, said Fadi Chamoun, a Bank of Montreal analyst. The growth is driving freight volumes for the railways, as well, he said, pointing to research that says U.S. importers are stocking up on Asian goods ahead of expected new tariffs. (Canada’s West Coast ports are gateways for high volumes of goods destined for U.S. markets.)
The new Maersk service begins in July, and offers connections to the Middle East, Africa and Asia after ports in Spain. Mr. Mahoney said the decision to add the second ship after beginning the route is driven by a strong domestic economy and demand from exporters of everything from seafood to machinery.
US. CHINA. The Globe and Mail. NEW YORK TIMES. 23 May 2018. Trump ‘not satisfied’ with China trade talks. ‘There is no deal’ to suspend penalties for ZTE, U.S. President says. The fate of Chinese telecom firm ZTE has quickly become a sticking point in trade negotiations between China and the United States.
ANA SWANSON
JIM TANKERSLEYRAYMOND ZHONG
U.S. President Donald Trump declared on Tuesday that he was not happy with how recent trade talks with China had gone, and said the United States had not reached a deal to suspend penalties on the Chinese telecom firm ZTE, disputing reports that the administration had decided to go easy on the company in return for trade concessions.
“There is no deal. We will see what happens,” Mr. Trump said in comments to reporters during a meeting between him and President Moon Jae-in of South Korea. Mr. Trump, when asked if he was happy with how recent trade meetings with China went, responded, “No.”
“China has made a fortune,” Mr. Trump said. “I’m not satisfied, but we have a long way to go.”
The fate of ZTE has quickly become a key sticking point in negotiations with China, with lawmakers and others concerned that the administration would ease restrictions on the company after Mr. Trump’s suggestion in a Twitter message on May 13 that he was working with China’s President, Xi Jinping, to give ZTE “a way to get back into business, fast.”
“Too many jobs in China lost. Commerce Department has been instructed to get it done!” Mr. Trump added in the tweet.
That statement, and reports that the administration had discussed easing the penalties during a visit by Chinese trade negotiators last week, have sparked a backlash from lawmakers across the political spectrum. On Tuesday, senators took steps to limit Mr. Trump’s ability to ease restrictions on ZTE, voting to approve an amendment to pending legislation that would block the President from pardoning the company without first confirming to Congress that it was no longer violating the law.
In a 23-2 vote, lawmakers approved the amendment, which will now be included in a bill related to foreign-investment controls that was offered by Democratic senator Chris Van Hollen. The amendment would require the President to certify that the company was no longer violating U.S. law, had not done so for a year and was fully co-operating with investigators before changing its penalties. The bill is expected to come to a vote this summer.
Senator Marco Rubio, a Republican from Florida, blasted the idea of a deal with ZTE, saying on Twitter: “Here is #ZTE timeline: Violated U.S. sanction laws & got caught lying & covering up. Paid $1billion fine & agreed to discipline employees. But then lied again & instead of discipline gave those employees bonuses. Now we are offering same deal of fine & employee discipline?”
ZTE, one of the world’s largest suppliers of telecommunications equipment, has been facing ruin ever since the U.S. Department of Commerce cut it off from American-made components last month. The department ordered the seven-year ban after the company admitted to lying to it about punishing employees who broke sanctions against Iran and North Korea.
The company had already agreed to a US$1.2-billion fine for the violations last year. But without access to U.S. microchips, software and other parts, its ability to manufacture smartphones and network gear is seriously crippled.
Soon after the Commerce Department’s order, ZTE shut its factory lines.
After three days of talks, the Trump administration said it was holding off on imposing new tariffs on China. But ZTE’s fate remained unclear. Mr. Trump’s economic team hinted at a way forward on the company in television interviews, although the message was muddled.
Treasury Secretary Steven Mnuchin said that the United States was not willing to revisit the penalties. But Larry Kudlow, Mr. Trump’s top economic adviser, said the company’s path to revival existed, although it ran through “very, very tough” punitive measures, including fines, compliance measures, and changes in management and board membership.
The Globe and Mail. REUTERS. MAY 23, 2018. Trump calls for new ‘structure’ for U.S.-China trade deal
SUSAN HEAVEY
WASHINGTON - U.S. President Donald Trump on Wednesday signaled a new direction in U.S.-China trade talks and said any deal would need “a different structure,” fueling uncertainty over current negotiations and sending U.S. stocks lower.
In an early morning post on Twitter, Trump said the current track appeared “too hard to get done” and cited difficulties such as verification, but he gave no other details about what he or his administration was looking for amid ongoing negotiations.
Representatives for the White House did not respond to a request for more information about the president’s statement. Representatives for China’s Foreign Ministry did not immediately respond to a request for comment on Trump’s statement.
“Our trade deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,” Trump wrote in his post.
U.S. stocks slipped after his comments, with all three major indexes down less than 1 percent in late morning trading as analysts anticipated a rocky session.
Trump’s statement comes amid the negotiations between the world’s two largest economies after potential tariffs on both sides raised fears of a trade war, even as some tensions have eased over signs of some possible progress.
Both sides claimed victory on Monday and pledged to continue talking after last week’s round in Washington produced pledges that China would import more American energy and agricultural commodities, although there were no specifics.
U.S. Commerce Secretary Wilbur Ross was expected to visit China next week to help finalize an agreement. U.S. Treasury Secretary Steven Mnuchin told CNBC on Monday that Ross aimed to negotiate “a framework” that could then turn into “binding agreements ... between companies.”
Trump on Tuesday, however, told reporters he was not pleased with recent talks, calling them “a start.”
Any firm deal is likely to take a long time, according to most observers, and U.S. officials have threatened to return to tariffs, which prompted the current standoff, if needed.
Trump initially threatened to impose $50 billion in tariffs on Chinese goods, prompting Beijing to retaliate with a levy on U.S. products, particularly agricultural goods. Trump then responded by threatening another $150 billion in tariffs.
Trade talks have also been clouded by separate negotiations over the nuclear weapons program in North Korea, which counts China as its sole major ally.
Trump is seeking to win a major deal with Pyongyang to denuclearize and is eyeing a June 12 summit with North Korean leader Kim Jong Un. On Tuesday, however, Trump raised doubts the meeting would take place as planned, and suggested Kim’s recent meetings with Chinese President Xi Jinping had influenced Kim to harden his stance.
REUTERS. MAY 22, 2018. Trade and growth fears prompt dash for safe havens
Sujata Rao
LONDON (Reuters) - Investors sold equities on Wednesday and raced to buy Japanese yen and government bonds from the United States and Germany on fears that setbacks to U.S-China trade talks would undermine increasingly fragile-looking world growth.
People walk past an electronic board showing exchange rate between Japanese Yen and U.S. Dollar outside a brokerage at a business district in Tokyo, Japan August 9, 2017. REUTERS/Kim Kyung-Hoon
The yen JPY=EBS rose more than 1 percent against the dollar, U.S. bond yields, which move inversely to price, fell to eight-day lows.
World shares meanwhile slipped half a percent to a two-week low as weak euro zone data added to negative sentiment following U.S. President Donald Trump’s comments on the crucial trade talks.
Investors were also eyeing Turkey and Italy, with the former seemingly headed for a full-blown economic crisis as the Turkish lira plunged to new record lows.
Italian borrowing costs resumed their rise to hit new multi-month highs on fears that an incoming coalition will sharply boost government spending.
The risk-off mood was initially triggered by Trump saying he was not pleased with progress on trade talks with China.
The comments tempered optimism that China and the United States would be able to avert a damaging global trade war. U.S. Treasury Secretary Steven Mnuchin had said at the weekend the “trade war” was “on hold”.
Trump also floated plans to fine China’s ZTE Corp and cast doubt on a planned June 12 summit with North Korean leader Kim Jong-Un.
Those developments are set to weigh on Wall Street later in the day, with S&P500 and Dow Jones futures down 0.6-0.8 percent.
In Asian trading, MSCI’s ex-Japan Asian equity benchmark fell 0.3 percent and Japan’s Nikkei lost 1.2 percent to reach 1-1/2-week lows.
European shares also fell, with one pan-European stock index down 1 percent.
“People have realised the risk of trade war remains with us,” Swiss wealth manager Prime Partners chief investment officer Francois Savary said.
“Increase in trade was a major reason behind the synchronised global growth and if you blow this up you limit the opportunities for the world economy,” he said.
Such worries were underscored by flash Purchasing Managers’ Index (PMI) data, which showed on Wednesday that the euro zone economy was slowing more sharply than previously expected.
The data, along with the global sentiment setbacks, sent euro zone bond yields broadly lower, while U.S. Treasury yields slipped to an eight-day low after retreating sharply on Tuesday from near seven-year highs. They are now on the cusp of slipping back under the psychologically significant 3-percent level.
“Italy’s political impasse continues, French and German PMIs were soft and global risk sentiment has taken another knock,” Societe Generale analysts said.
Prime Partners’ Savary was more sanguine on the data, noting that growth, while slowing, remained healthy. But he warned that trade issues alongside geopolitics, especially the reimposition of Iran sanctions, could have economic consequences associated with potentially higher inflation.
Oil prices came off 3-1/2-year highs hit on concerns over supply from Venezuela and Iran. Brent futures were down 1 percent, inching further from the $80 per barrel milestone.
Lower U.S. yields sapped some of the appetite for the dollar, taking it more than 1 percent lower against the yen, heading for its biggest daily loss in a year.
Bond and currency traders worldwide are now waiting for U.S. Federal Reserve minutes from its last meeting, to glean clues on how many more times the central bank might raise interest rates in 2018. The minutes are due later on Wednesday.
Against a basket of currencies, the dollar rose 0.2 percent and the euro bore the brunt with a 0.4-percent loss.
The single currency also fell against another “safe” asset, the Swiss franc, touching a near two-month low.
ITALY, TURKEY
One reason for the euro’s woes is Italy, where an incoming coalition government comprised of the two anti-establishment parties - the League and 5-Star - looks likely to implement big-spending policies.
That could add to the country’s big debt pile and see Rome clash with the European Union.
Italian bonds fell in value, reversing the modest gains seen on Tuesday and 10-year yields rose 11 basis points (bps) to a new 14-month high. The premium investors demand to hold Italian debt versus safer German bonds rose sharply to 192 bps. The spread was about 120 bps at the start of May.
Italian stocks tumbled 1.8 percent and are so far suffering their biggest monthly losses since mid-2016. Investors are watching to see if the eurosceptic Paolo Savona would be appointed to the economy minister position.
“It is a major blow for Europe potentially,” Savary said. “As long as (coalition partners) play the game of speaking unwisely, bond yields can go higher.”
Elsewhere, emerging markets remained under heavy pressure, with currencies down 0.3-0.6 percent across the board. The selling storm was concentrated on Turkey where the lira fell more than 3.5 percent, bringing losses just in May to more than 16 percent.
Turkish bond yields have jumped to almost 15 percent, more than 250 bps up from the end of April, with an emergency interest rate rise looking all but certain.
“I doubt (the Turkish central bank) have time to wait until June 7 for the scheduled meeting – the lira is in freefall and concrete steps are urgently required to slow down this quite rapid rate of depreciation,” Rabobank analyst Piotr Matys said.
Reporting by Sujata Rao; Additional reporting by Hideyuki Sano and Tomo Uetake in Tokyo; Karin Strohecker in London; Editing by Louise Ireland
BOMBARDIER
The Globe and Mail. 23 May 2018. South African probe urges suspension of Bombardier locomotive deal
GEOFFREY YORK, JOHANNESBURG
An internal investigation has urged the South African government to consider suspending a US$1.2-billion contract with Bombardier Inc. as part of a wider probe into corruption and soaring costs in a US$5-billion locomotive project.
Canada’s export agency, Export Development Canada, provided US$450-million in financing for the locomotive project to help Bombardier become one of four manufacturers to secure contracts in the deal.
The cost of the locomotive project ballooned by nearly 40 per cent after South Africa’s controversial Gupta family gained influence over procurement decisions at South Africa’s state-owned freight company, Transnet.
The Guptas, now the targets of arrest warrants and police raids, were at the heart of the country’s biggest post-apartheid corruption scandal, which led to the resignation of former president Jacob Zuma, whose son was a business partner of the Guptas.
The new government of President Cyril Ramaphosa, who took office in February, has launched a massive clean-up campaign at Transnet and other state-owned companies in which the Guptas were influential. It says it is now taking action on the recommendations of the locomotive investigation, which was conducted by Werksmans, a South African law firm hired by Transnet, with the assistance of a forensic auditor.
Mr. Ramaphosa’s Minister of Public Enterprises, Pravin Gordhan, is threatening to imprison those responsible for the soaring cost of the locomotive project. Originally estimated to cost 38 billion rand in 2013, the cost leaped to 54 billion rand (about US$5-billion at the time) when the contracts were awarded to Bombardier and three other manufacturers in March, 2014.
“I can assure you that our intention is to get to the bottom of all of this and make sure that the true facts are known,” Mr. Gordhan told the South African parliament last week.
“The sudden expansion from 30odd billion rand to 50-odd billion rand has either a valid explanation or some orange uniforms need to be waiting for the people concerned.”
In an e-mail to The Globe and Mail on Tuesday, a spokesman for Mr. Gordhan provided excerpts from a document that the minister had used in a recent briefing, based on the recommendations from the investigation by the Werksmans law firm. “It was recommended that consideration be given to suspending all or certain of the transaction agreements, to review and possibly set aside said agreements under the principle of legality, in particular in relation to CNR and BT,” the minister’s statement said.
His statement refers to two of the four companies that received locomotive contracts: China North Rail (CNR) and Bombardier Transportation (BT).
Olivier Marcil, vice-president of external relations at Bombardier, said the company cannot comment on the content of documents that are not public and have not been seen by the company. “We are aware that reports have been produced about Transnet procurement process, but we did not get a copy,” he told The Globe in response to questions.
“Bombardier Transportation has never been questioned nor asked any information by the law firm or auditor regarding Transnet,” he said. “Bombardier denies any suggestion of misconduct in connection with this contract.”
Shelley Maclean, a spokeswoman for Export Development Canada, said the agency could not provide any specific comment on Mr. Gordhan’s statement about the Bombardier contract “for reasons of commercial confidentiality.” She added: “EDC takes this matter seriously and is following developments closely.”
The 219-page report from the Werksmans investigation has not been officially released, but a leaked copy was obtained by a South African newspaper, City Press. It quoted the report as concluding that the locomotive deal was “cloaked in corrupt and reckless activity.” The evidence of “bribery and similar unlawful conduct” should be investigated by a judicial inquiry, it said.
The soaring cost of the locomotive deal “appears inexplicable, unreasonable and excessive” and was tainted by “suspicious conduct” and “a cavalier waste of vast sums of money,” the report said, according to City Press.
Mr. Gordhan, who was dismissed from cabinet by Mr. Zuma and reinstated in a different portfolio by Mr. Ramaphosa, has now replaced the entire board of directors of Transnet, accusing the former directors of failing to act on the recommendations of the internal investigation into the locomotive project – the biggest locomotive acquisition project in South Africa’s history.
The investigation by Werksmans reported “scathing” findings on “wasteful expenditure” and “malfeasance” in the locomotive deal, Mr. Gordhan told the recent briefing.
When this report was submitted to Transnet last December, the response of the Transnet board was “reckless or worse,” he said, in explaining why he decided to sack the remaining members of the board last week after months of inaction.
He said he has directed the new Transnet board members to act on the findings of the Werksmans investigation and to review the legality of the locomotive contract.
So far, the bribery allegations have focused on a Chinese company, China South Rail, one of the four manufacturers to receive contracts in the locomotive deal. The company paid about US$320million in “consulting fees” – about 20 per cent of the value of its contract – to a Gupta-controlled company in Hong Kong, according to leaked e-mails cited in the South African media.
In 2015, when Canadian export agency EDC announced US$450million in financing for Bombardier’s US$1.2-billion contract to produce 240 locomotives for Transnet, it hailed the deal as a “showcase” for “Canadian capability to build and deliver on landmark projects worldwide.”
Brian Molefe, the chief executive of Transnet at the time, said the EDC loan was “a massive thumbs-up for our country.”
Today, however, the locomotive contract is years behind schedule, partly owing to South Africa’s decision to require Bombardier’s locomotives to be assembled by a less experienced Transnet company in the port city of Durban, and only a small fraction of Bombardier’s planned 240 locomotives have been delivered to Transnet.
A separate investigation in 2016 by South Africa’s Public Protector, an anti-corruption watchdog with official powers, found evidence of a “cozy relationship” between Mr. Molefe and the Guptas, including 58 phone calls in a seven-month period between the Transnet CEO and a senior member of the Gupta family.
Several weeks before the locomotive contract announcement in 2014, Bombardier agreed to sell a US$52-million luxury jet to the Guptas, with EDC providing 80 per cent of the financing. This year, EDC cancelled its financing for the airplane deal and is fighting a court battle to recover the plane.
“At Transnet, governance structures were repurposed to enable corruption and rent-seeking,” Mr. Gordhan said in a speech to Parliament last week.
“There is evidence that contracts were awarded to people with close links to some of the Transnet officials,” he said. “There were clear conflicts of interest. The directors of Transnet as well as senior executives were derelict in their duties and there were regular violations of the Public Finance Management Act, the Companies Act and the Prevention of Corruption and Criminal Activities Act.”
Police investigators and criminal prosecutors are reviewing the evidence from the Werksmans report and other forensic reports on Transnet and other state-owned companies, Mr. Gordhan said.
“We shall not only be satisfied with putting the criminals in jail,” he said. “The money that have stolen from the state-owned companies and the things they have bought with them – expensive houses, flashy cars, jets – must be recovered and returned. They belong to our people, not to crooks.”
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LGCJ.:
