Trump and the MDBs: a high-stakes game?

Economic

Summary:

On 4 February, President Donald Trump signed an executive order for a review of all intergovernmental organisations in which the US is a member and to withdraw from some United Nations organisations. This comes after the administration announced plans to shut down the US Agency for International Development, withdraw the US from the World Health Organisation and pause all US government foreign development assistance for a 90-day period in late January.

US review of international aid could reduce support for development banks

The orders raise questions about the risk of a marked change in US policy towards multilateral development banks. The US is a key shareholder in a number of rated MDBs, so it would be credit-negative if it materially reduced its commitment to them.

However, while it is too early to come to definite conclusions, it is unlikely that the US would take drastic steps regarding its participation in key MDBs.

Large shareholdings give the US significant influence over MDBs’ policies (Figure 1). During the first Trump administration, the US government advocated for an increased focus at the Inter-American Development Bank on private sector lending, which supported the expansion of the group’s private-sector arm, IDB Invest.

Trump and the MDBs: a high-stakes game?_1

The US is also the single-largest shareholder in the various World Bank Group institutions, with a share of around 19% of subscribed capital in the International Development Association and International Finance Corporation. The US shareholding in the International Bank for Reconstruction and Development, the largest entity in the World Bank Group, is somewhat smaller at 16%.

But the US is not the only highly rated shareholder with a large stake in these MDBs and other shareholders are expected to remain strongly committed to these institutions (Figure 2). It is also worth noting that the last – and largest – capital increase for the IBRD was agreed in 2018, during the first Trump administration, including $7.5bn in paid-in capital and an increase in callable capital of $52.6bn.

Trump and the MDBs: a high-stakes game?_2

Most of the large MDBs are focused on increasing their lending capacity without the need for a capital increase from shareholders, and mobilising private capital instead. This should in principle be broadly aligned with the Trump administration’s focus on improving government efficiency. MDBs will most likely make this argument forcefully in their interactions with the Trump administration.

Withdrawing will not be straightforward

Withdrawal from MDBs is feasible, but it is a lengthy and potentially costly process that would open the door to others to gain more influence.

The statutes of agreement of most MDBs allow for an orderly withdrawal of a shareholder from the institution. The statutes of the IBRD and IADB clearly state that when a government withdraws it will remain liable for its direct and contingent liabilities to the MDB as long as any part of the loans and guarantees contracted before it ceased to be a member are outstanding. In IBRD’s case, the US paid in capital of around $3.7bn and has callable capital commitments of $49.2bn, compared to disbursed and outstanding loans and guarantees of around $263bn.

The average maturity of its loan portfolio is 8.4 years, but there is a wide divergence in loan terms, with some having maturities of up to 50 years. Similar to the UK’s withdrawal from the European Investment Bank as a consequence of Brexit, the US would remain on the hook for IBRD’s lending portfolio for many years to come. Also, the withdrawing member is likely to only be entitled to get its share of paid-in capital back, but not the accumulated reserves, which are substantial for many MDBs and serve as a material financial disincentive.

Political implications

A key political argument against any US withdrawal is that other shareholders may seize the opportunity to increase their own stakes. Those shareholders include China, which has long coveted a larger share in the IBRD, a desire strongly opposed by consecutive US governments.

Despite the high uncertainty around the administration’s policies towards MDBs, some entities are currently in the process of a general capital increase or rely on regular contributions from donors. The Trump administration’s stance towards those could give first indications of the risk of a broader disengagement of the US from MDBs.

Source:OMFIF

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Warren Takunda

Stocks

London stocks were set to nudge up at the open on Monday ahead of what was likely to be a quiet session, with US markets closed for the Presidents Day holiday.

The FTSE 100 was called to open around five points higher.

On home shores, the latest data from Rightmove showed that house price growth slowed in February as the stamp duty deadline loomed, but activity remained "robust".

House prices rose 0.5% on the month following a 1.7% increase in January. On the year, meanwhile, house prices were up 1.4% in February, down from 1.8% growth the month before.

The average price of a home stood at £367,994 this month, versus £366,189 in January.

Colleen Babcock, property expert at Rightmove, said: "New sellers are showing some pricing restraint after a fast start to the year, being mindful of both the high level of seller competition, and in England also of the looming stamp duty deadline and extra costs for some buyers. Agents report that some of the steam is coming out of new sellers’ price expectations to fit the changing market conditions, which is a sensible reaction to attract buyer interest, and it will also help to support activity levels.

"The upcoming stamp duty deadline in England remains a key talking point, and while some movers may not be affected at all, others will be more severely impacted. We’ve previously suggested reforms such as regional variations in stamp duty charges to try and address some of the inequities in the current system. With the predicted conveyancing log-jam likely to cause some buyers to miss the deadline and end up paying more tax through no fault of their own, it would seem justifiable for the government to announce a short extension before the end of March."

In corporate news, Assura confirmed that it has received four non-binding acquisition proposals from Kohlberg Kravis Roberts (KKR), most recently offering 48p per share, valuing the company at £1.56bn, although its board had unanimously rejected all of them.

The FTSE 250 company said the proposal represented a 28.2% premium to Assura’s closing share price on 13 February, but a 2.8% discount to its EPRA net tangible asset value per share.

KKR was reportedly considering whether to continue pursuing discussions, and would need to decide by 14 March whether to make a firm offer or withdraw its interest.

Elsewhere, GSK said the US Food and Drug Administration has approved its Penmenvy drug to treat meningitis for use in individuals aged 10 - 25 years.

The vaccine targets five major serogroups of Neisseria meningitidis (A, B, C, W, and Y) which commonly cause invasive meningococcal disease (IMD).

The vaccine combines the antigenic components of GSK's two meningococcal vaccines, Bexsero and Menveo.

The regulatory application was supported by positive results from two phase III trials, which evaluated its safety, tolerability, and immune response in more than 4,800 participants.

Source: Sharecast

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Warren Takunda

Stocks

Asian shares traded mixed on Monday as investors continued to watch economic data and policy moves from President Donald Trump, as both are likely to impact upcoming global central bank moves.

Japan’s benchmark Nikkei 225 rose in early trading after the Cabinet Office reported that the economy grew at a better-than-expected annual rate of 2.8% in October-December, underlined by steady exports and moderate consumption.

But the benchmark quickly fell back and then recovered to be little changed, up 0.1% in afternoon trading at 39,197.87.

On a quarter-to-quarter basis, the world’s fourth largest economy grew 0.7% for its third straight quarter of growth. Japan marked its fourth straight year of expansion, eking out 0.1% growth last year in seasonally adjusted real gross domestic product, which measures the value of a nation’s products and services.

In other regional markets, Australia’s S&P/ASX 200 slipped 0.2% to 8,537.10. South Korea’s Kospi surged 0.7% to 2,608.97. Hong Kong’s Hang Seng reversed course in afternoon trading to slip 0.7% to 22,473.83, while the Shanghai Composite declined 0.2% to 3,338.97.

Wall Street ended last week edging back from its all-time high after mixed profit reports from big companies, including Airbnb and Wynn Resorts.

The S&P 500 barely budged and slipped by less than 0.1%, a day after rallying within 0.1% of its record set last month. The Dow Jones Industrial Average dipped 165 points, or 0.4%, while the Nasdaq composite rose 0.4%.

The S&P 500 still closed out its first winning week in the last three thanks in part to reports showing companies made even fatter profits at the end of 2024 than analysts expected. They’ve helped the market power through a range of worries centered on higher interest rates and stubborn inflation.

All told, the S&P 500 slipped 0.44 to 6,114.63. The Dow Jones Industrial Average dipped 165.35 points to 44,546.08, and the Nasdaq composite rose 81.13 to 20,026.77.

U.S. markets will be closed on Monday for a holiday.

Last week featured a couple of disappointing reports that showed inflation unexpectedly accelerated last month. Besides squeezing tighter on U.S. households’ budgets, such stubbornly high inflation is likely to keep the Federal Reserve on hold on lower interest rates.

Inflation may feel more upward pressure from tariffs that Trump has announced recently. But analysts now think Trump may ultimately avoid triggering a punishing global trade war.

His most recent tariff announcement, for example, won’t take full effect for at least several weeks. That leaves time for Washington and other countries to negotiate.

In the bond market, the yield on the 10-year Treasury fell Friday to 4.47% from 4.54% late Thursday. It’s been swinging sharply since the Federal Reserve began cutting its main interest rate.

The Fed warned at the end of 2024 it may not cut rates by as much in 2025 because of worries about inflation staying stubbornly high. Its goal is to keep inflation at 2%, and lower rates can give inflation more fuel.

In Monday’s energy trading, benchmark U.S. crude edged up 1 cent to $70.75 a barrel. Brent crude, the international standard, rose 12 cents to $74.86 a barrel.

In currency trading, the U.S. dollar declined to 151.49 Japanese yen from 152.25 yen. The euro cost $1.0494, inching down from $1.0495.

Source: AP

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Michelle

Economic

Forex

GBP/JPY continues its losing streak for the third consecutive session, trading around 191.00 during the European hours on Monday. An analysis of the daily chart showed the pair remains within the descending channel pattern, indicating a prevailing bearish bias.

Additionally, the 14-day Relative Strength Index (RSI), a key momentum indicator, falls below the 50 level, strengthening the bearish momentum. However, the GBP/JPY cross trades around the nine- and 14-day Exponential Moving Averages (EMAs), suggesting short-term price momentum is neutral.

Regarding its support, the nine-day EMA at the 191.00 level acts as immediate support for the GBP/JPy cross. A break below this level could weaken the short-term price momentum and lead the currency cross to navigate the region around a five-month low at 187.05, which was recorded on February 7, followed by the lower boundary of the descending channel around the psychological level of 186.00.

On the upside, the GBP/JPY cross could test immediate resistance at the 14-day EMA at 191.17. A break above these levels could weaken the bearish bias and support the pair to test the descending channel’s upper boundary at the 192.50 level.

Source: FXSTREET

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Glendon

Commodity

(Feb 17): Gold advanced, following its biggest one-day decline in two months, on nervousness over US President Donald Trump’s latest trade threats.

Bullion traded near US$2,900 (RM12,844) an ounce, after tumbling 1.6% last Friday. The gains on Monday came even after the 14-day relative strength index — a gauge of the pace and intensity of moves — showed the precious metal reached overbought levels in recent sessions.

Market participants are waiting for more insights on Trump’s reciprocal tariff plans, which could heighten global trade tensions, said Manav Modi, an analyst at Motilal Oswal Financial Services Ltd. “President Trump kept alive his drumbeat of tariff threats, saying levies on automobiles would be coming as soon as April 2,” he said.

Despite the trepidation over what Trump might do next, there is speculation that the tariff threats are mainly being used as a negotiating tool. His administration’s trade policies have become increasingly muddled due to delays and exclusions, with geopolitical and economic uncertainties tending to add to bullion’s haven appeal.

Traders were also studying the latest US economic data for clues about the Federal Reserve’s likely easing path, after a report last Friday showed retail sales slumped by the most in nearly two years. The figures prompted traders to restore bets that the central bank will cut interest rates by September. Lower borrowing costs typically benefit gold, as it doesn’t pay interest.

Money managers cut their bullish wagers on gold to a four-week low in the week ending Feb 11, according to the latest Commodity Futures Trading Commission report last Friday.

Despite last Friday’s fall, gold still notched its seventh consecutive weekly advance, the longest winning streak since 2020. It’s been helped partly by continued buying from central banks including China’s, along with rising holdings in bullion-backed exchange-traded funds. Bullion posted an all-time high of US$2,942.68 an ounce last Tuesday.

Source: Theedgemarkets

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Owen Li

Economic

Central banks and finance ministries should work in tensile tandem

The general consensus on how best to run the monetary side of an economy has been to have an autonomous central bank – an entity with sole responsibility for controlling inflation and using standard monetary policy tools.

However, in the UK, and following the high inflation of 2021-23, it is now time to reexamine the arguments for the Bank of England’s independence nearly 30 years after Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown set up the Monetary Policy Committee in 1997.

I favour making the UK’s management of inflation in 2021-23 the subject of a full public inquiry. An investigation should build on the largely technical findings of the 2024 review conducted by former US Federal Reserve chairman Ben Bernanke. In addition, the House of Commons Treasury Committee reported on quantitative easing in 2024 and the House of Lords Economic Affairs Committee completed a separate inquiry on independence in 2023.

Such a review should extend beyond the operation of the Bank in isolation. It should consider the Bank’s place in national economic policy conduct and examine its interaction with the Treasury. The aim should be to redesign and strengthen the Bank’s political oversight as well as its public accountability.

Social and political pressures

After a period of high inflation, we should examine afresh some key questions. Should the role of central banks be narrowly defined and treated as ‘merely technical’? Should their actions be isolated from the rest of national economic management? Should their governance continue to be at arm’s length to the political process?

The standard defence of keeping central banks at one remove from the political process is powerfully entrenched. As central bankers are keen to point out, the period of widespread central bank independence neatly coincided with the period of low inflation of the 2000s and 2010s. But the thesis can be challenged.

The idea that monetary policy is too important to entrust to politicians – because they have short horizons driven by the electoral cycle – begs a question. What makes decisions on interest rates so unusual? What should we do with real life-and-death decisions, such as the declaration of war? Should they too be considered too important to entrust to politicians?

The suggestion that monetary policy is merely a technical matter without political or social consequences cannot be maintained either. Changing interest rates creates winners and losers in society just as much as any move the chancellor might make in the budget. The extended period of ultra-low interest rates up to late 2021 favoured asset-owners and existing homeowners. And the very sharp increase in interest rates since then has wrought havoc with the finances of many borrowers, most obviously, young families seeking to buy a home.

Tighter co-ordination between central bank and finance ministries

The clinching defence is that low inflation for 20 years proves that central bank independence works. The problem with this defence is that it collapses completely the moment it ceases working – which many would say that in 2021, it did.

Managing the monetary side of an economy is important. But this makes it even more crucial that it should be an integral part of an economy’s management, particularly in co-ordination with other actors.

In practice, central banks cannot ignore what finance ministries do. They often find themselves responding to finance ministry policies and decisions in an effort to restore stability after the politicians have done their worst, such as September 2022’s ill-fated UK budget.

A far better solution would be for central bank and finance ministries to work together, planning fiscal and monetary policy as a coherent whole. This is surely likely to prove more successful than working without reference to each other, sometimes pulling in opposite directions.

The advent of QE makes the idea untenable that monetary policy is a ‘technical matter’. In the UK, extensive QE has radically changed the size, tenor and interest cost of the national debt, as well as the distribution of winners and losers. All of these factors are political, not merely technical and they impact directly on the Treasury and its fiscal management.

We can justifiably query how much central banks really understand inflation at all. The long period of low inflation from the mid-1990s to 2020 is open to various interpretations. Were central banks responsible? Did they create the low inflation or did they merely preside over it? How much was due to external factors such as the end of the cold war, the increase in globalisation, new technologies and above all, China’s entry into the world economy?

Central banks tried for 10 years between 2010-20 to increase inflation with almost no success – but at huge cost. If they could not increase inflation when they wanted to, why are they credited with the power to decrease it?

Furthermore, central banks spent much of 2021 and 2022 saying they were not responsible for the then-high inflation. ‘Not a monetary phenomenon’, they said, and with some justification – though they proceeded to use monetary methods to attack it. We know why this is: working in isolation of other organs of government means monetary methods are all they have at their disposal. But would it not have made more sense to work with their respective finance ministries on an all-economy response, when the full range of policy tools could be considered and deployed?

Absence of an alternative?

The final issue to resolve is the question of democratic accountability. How can a democracy align commonly accepted societal objectives – stable prices – with oversight through the electoral process and the actions of an unelected agency? And, more directly, how does the electorate express its views and concerns over central bank policy?

Let us go back to those young families whose finances were upended by the rise in interest rates and mortgage rates in 2022 and 2023. What is their political remedy? How do they express an electoral preference for an alternative approach? It is not good enough for central banks to say, in effect, ‘There is no alternative. You must just accept what we decide.’

All of these questions go to the heart of the decision to free monetary policy from the hand of government. The ability to subject generally accepted theses to rigorous questioning is the hallmark of democratic societies. It is time for a reappraisal of the system, in the hope that we can find better answers to crises that, sooner or later, are bound to reappear.