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Spain’s largest banks face additional payments to the government that could impact third-quarter earnings after a review found they underpaid a windfall tax.

The country’s financial sector has paid around €3 billion (RM14.14 billion) in the last two years, after Madrid in 2022 imposed an extra levy to syphon off some of the profits banks were making on the back of higher interest rates.

But a review ordered by the government concluded that lenders paid less than they should have, according to people familiar with the matter. Banks now face extra payments, they said, asking not to be identified discussing private information.

A spokesperson for the budget ministry declined to comment.

The demands could exacerbate tensions between the country’s largest lenders and the government, which turned to the finance industry two years ago to help fund relief for consumers struggling with high inflation. Banks have criticised the tax — a levy on their net interest income and fees obtained in Spain — because it was imposed on revenue rather than profit and singled out their industry.

The biggest banks had excluded some of their income from the tax, for instance, from foreign units and businesses such as insurance, after seeking an opinion on the tax, the people said.

Across Europe, extra money is needed to fill the hole caused by multiple crises — the cost of Covid support, helping households with energy bills during the inflation spike and funding Ukraine’s resistance to Russia’s invasion.

Measures that target cash-rich firms and the wealthy help governments avoid austerity on the scale seen during the euro-area debt crisis. They also allow politicians to tell frustrated voters that the burden of repairing government finances doesn’t all fall on them.

Source: Theedgemarkets

What were you hearing from telecom executives during the European Communacopia conference?

What kind of growth numbers are we talking about?

Why has this sector’s growth been low in the past? 

Why do you think market concentration regulation might be changing?

Is this why Mario Draghi, former head of the European Central Bank, kept coming up at the conference?

What did speakers at the Communacopia conference say about this?

How bullish is this for the stocks?

Pre-Market U.S. Stock Movers

Source: Barchart

“The markets aren’t dictating our moves,” said the Slovenian official, whose central bank is hosting the ECB’s Oct. 16-17 gathering. “However they are valuable information to our deliberations.”

Source: Bloomberg

For the first time since 2007, the deposit level in Malaysia’s foreign currency account (FCA) saw a significant drop in the month of August.

Based on Bank Negara Malaysia’s data, the deposits declined by RM11 billion to RM246 billion in that month. Prior to August, deposits in the FCA, which are primarily the proceeds brought back into the system by Malaysian exporters but not converted into ringgit, always rose.

Bank Negara’s historical data shows that the FCA level was only RM21.4 billion in January 2007. Ten years later, it had swelled to RM146 billion in January 2017. In January this year, the amount stood at RM247 billion and rose in the next few months before tapering off.

FCA deposits have dropped before, especially when the global economy slowed and the US dollar was weak. One instance was a few months in 2016, when the US-China trade war erupted. However, the quantum then was not as large as the RM11 billion recorded this August.

Generally, the deposits in the FCA have risen because exporters tend to keep their proceeds in US dollars for ease of taking the money out with minimal Bank Negara approvals. As such, the sharp decline in August does not indicate a trend.

But going forward, exporters are likely to convert more of their proceeds into ringgit considering the weakening US dollar.

According to one exporter, Bank Negara played a role in encouraging exporters to convert their proceeds in the FCA. It is learnt that the central bank gave assurances of easy approval for the ringgit to be converted back into foreign currency should there be a need to do so.

The weakening US dollar, Malaysia’s political stability and Bank Negara’s action in encouraging exporters to convert their proceeds are among the main reasons for the ringgit’s strengthening against the greenback.

The dollar’s weakness is a reflection of the slowing US economy, which has prompted the Federal Reserve to cut interest rates. The Fed lowered rates by 50 basis points last month and is expected to reduce them further to a band of between 4.5% and 4.75%.

The ringgit has been the best performer among emerging market currencies so far this year, appreciating almost 10% against the US dollar.

The writing was on the wall for the weakening US dollar in March. Nevertheless, the speed at which the ringgit gained strength against the greenback caught even the most optimistic of exporters off guard.

Among those already feeling the impact are firms in the electrical and electronics sector, oil and gas companies and selected manufacturers. The sharp rise of the ringgit will show in their results in the next few months.

What’s ironic is that while the local currency’s appreciation against the US dollar is generally welcomed by Malaysians and is a positive for the government, it will hurt the economy in the long term. This is because Malaysia’s export sector plays a large part in the country’s economic growth.

In the second quarter, the local economy recorded a growth rate of 5.9%, among the highest in Asia. The strong second quarter growth has prompted some economists to forecast a full-year economic growth of 5%.

One of the reasons for the strong growth is the buoyant export sector, which grew 8.4% in the second quarter, compared with 5.2% in the first.

If the ringgit continues to rise at the current pace, it could have an impact on the economy a year from now. And regulators, in particular Bank Negara which is the guardian of the ringgit, know that. Towards this end, currency traders say the central bank has been buying dollars in exchange for the ringgit to stabilise the local currency at current levels.

Does this mean the ringgit’s appreciation against the US dollar has reached its peak for now? In all probability, it has.

If anybody is expecting the ringgit to continue to strengthen and return to the RM3.80 level against the US dollar, they will have to wait much longer.

Going forward, everything points to the ringgit appreciating further in the next one year, unless there is a change in the local political landscape.

Sentiment on the dollar is weak due to the slowing US economy. Another reason is the US presidential election. Donald Trump advocates a weak dollar to export the US out of a slowdown and if he wins, the fear of a global trade war is real.

The ringgit should also appreciate in the longer term as Malaysia is fast becoming a draw for foreign investments. Another reason is the government’s commitment to fiscal reforms. There is no denying that Prime Minister Datuk Seri Anwar Ibrahim has been the best salesman for Malaysia since 2018, and he has maintained good ties with both the US and China.

There are reports of the ringgit reaching RM3.55 against the US dollar by the end of next year. Nobody should be surprised if that happens as in 1996, the exchange rate was RM2.50 to the US dollar.

But the appreciation of the ringgit should be a gradual process in line with the growth of the economy, reforms in government policies and growth of higher-value export items. A sharp appreciation, such as that witnessed in the last six weeks, is not healthy for the economy.

Source: The edge markets