COVID-19 International Developments: Daily Scan, May 7, 2020
Prerna Gandhi, Associate Fellow, VIF
Dollar strength exposes cracks in Asian emerging-market debt

The resilient U.S. dollar and the resulting weakness in emerging-market currencies amid the coronavirus pandemic is increasing the risk of default on Asian companies' corporate debt, potentially triggering a wider credit crisis. Analysts say emerging Asia should tread with caution as domestic debt markets cannot rival the dollar bond market. About $115 billion in Asian emerging-market debt is set to mature this year and $200 billion next year, according to data from Dealogic. The dollar's 7% climb this month against a basket of currencies and a 243-basis-point blowout in Asia ex-Japan credit spreads could complicate the task of refinancing, and analysts are predicting that some stretched companies will have to seek restructurings with bond holders. While no one is predicting a systemic crisis just yet, investors are watching. Companies in Indonesia and India, where fiscal pressures and a widening coronavirus outbreak could further squeeze currencies, are also on the focus list. The Indian rupee touched a record low last week against the dollar, and Indonesia's rupiah has slid to its lowest level since the Asian financial crisis in 1998.

Swiss National Bank’s swollen balance-sheet poses risk to ‘credibility’

When the Swiss National Bank followed last year’s $50bn profit with a record $39bn first-quarter loss, it was a stark illustration of the volatility created by a decade of unconventional monetary policy. The SNB has long used currency interventions alongside the lowest interest rates in the world, minus 0.75 per cent, as its main tools to control the franc. SNB’s balance sheet is dominated by investment in equities, rather than government bonds. At one point in 2018, the central bank owned more of Facebook’s standard shares than even Mark Zuckerberg. Interventions have not always been well received. In January, the US threatened to label Switzerland as a currency manipulator, warning that actions in currency markets equivalent to more than 2 per cent of gross domestic product in any given year would trigger such a designation. Earlier in 2015, the SNB’s credibility took a knock when it dramatically abandoned its peg for the franc against the euro. The SNB has since avoided giving firm guidance on where it believes the currency should be, keeping speculators guessing. The SNB believes an overvalued currencydue to safe haven seeking amid pandemic could create deflation and spell disaster for Swiss exporters.

Turkey in swap talks with G20 members: Finance Minister

Turkey is conducting talks to establish swap lines with members of G20, with more than one swap line possible, said the country's treasury and finance minister. "We are doing one-to-one swap negotiations with G20 countries with which we have a trade deficit and a free trade agreement," Berat Albayrak said in a closed-door online meeting with international investors. He also said Turkey did not plan to negotiate swap lines with the International Monetary Fund (IMF). The country's reserves are sufficient, Albayrak stressed, adding that banks and the private sector were easily able to roll over their debt. He noted that economic activity would return to normal in the second half of this year at the latest. Previously, Murat Uysal, the Turkish Central Bank governor, denied that the country was not in negotiations with the IMF for resource or swap lines, but was in contact with its global counterparts to establish new swap agreements amid the coronavirus pandemic.

China’s central bank, finance ministry at odds over funding for economic recovery

China’s top economic policymakers have been engaged in heated debate over whether the country’s central bank should directly buy special bonds issued by the finance ministry to help the government’s economic support measures. The discord reflects the differing schools of thought in China over how best to help the world’s second largest economy recover from the coronavirus. The National People’s Congress (NPC), which is due to meet in less than three weeks, is expected to provide clearer signals on Beijing’s economic policy. Purchases of bonds are technically taboo in China as central bank law forbids it from directly bankrolling government spending due to hyperinflation fears. The “monetary financing” of government fiscal plans means the central bank is creating additional money supply to buy the debt, which could lead to higher inflation. The US Federal Reserve, the European Central Bank and the Bank of Japan now purchase government bonds as part of their “quantitative easing” policies, though they make the purchases from secondary markets, not directly from the government.

US looks to step up economic action against China

The White House and Capitol Hill are looking to match the anti-Beijing rhetoric with steps to curb supply chains and investment flows, according to public remarks by administration officials, congressional aides, and industry lobbyists in Washington. However, it is unclear how far they are willing to go, given fears of inflicting more damage to the US economy. Trump on May 06 said his administration would assess China’s compliance with the agreement within the next two weeks. “We are watching closely,” Mr Trump said. “They understand. They have a deal. Hopefully they are going to keep the deal. We’ll see. They may, they may not. We are going to find out.” US officials have ruled out radical steps such as cancelling Treasury debt-related payments to China. However, potentially disruptive proposals to reduce the US’s dependence on Chinese supply chains, particularly in the technology and healthcare sectors, are back on the radar, along with the possibility of a new tariff flare-up.

China-US phase-1 deal may not be carried out 100%, but won’t return to square one: expert

Full implementation of the phase one trade agreement between China and the US is highly unlikely, despite China's efforts to carry out its end of the bargain, due to obstacles posed by the coronavirus pandemic, but it won't return to square one, Chinese trade experts close to the government said on May 06. "At the moment, it appears that there are certain difficulties for implementing the [phase one agreement] 100%, not because China lacks the initiative to carry out the deal; rather, it is because of the emergence of the coronavirus pandemic, which has posed serious challenges for both countries as well as global trade”, according to Huo Jianguo, vice chairman of the China Society for World Trade Organization Studies in Beijing. The phase one trade pact contains a force majeure clause, whereby the two parties should start consultations in the event of a natural disaster or "other unforeseeable events outside the control of" of the two parties. Chinese officials stressed as recently as last month that China has been carrying out the phase one deal, despite the COVID-19 pandemic. China's efforts translated into a 110-percent year-on-year increase in imports of US agricultural products in the first quarter, which reached 33.56 billion yuan ($4.73 billion).

Brussels plans new anti-money laundering authority

Brussels will detail plans for new pan-European powers to crack down on money laundering after a series of scandals rocked the region’s banking sector and exposed patchy enforcement across the bloc. Valdis Dombrovskis, the EU executive vice-president who oversees financial services, said the European Commission would start consulting EU members from May 07 over whether to create a new supervisor to oversee the anti-money laundering fight or instead hand additional powers to the European Banking Authority. The need to act on money laundering has intensified with the coronavirus crisis. There had been an increase in cyber-crime, and also virtual money laundering, in line with a more general trend related to widespread lockdown measures which are driving more activity on to the web. The proposal for a new enforcement body, which would conduct on-site inspections and assess how legislation is implemented, would mark a significant ramping up of Europe’s response to a wave of money-laundering scandals. In 2018, US law enforcement authorities uncovered institutionalised money laundering at the now-defunct Latvian bank ABLV — much of it linked to Russia. Even Deutsche Bank was ensnared in a scheme that illicitly shifted criminal funds from Russia to the west.

Almost all industry sectors in Germany introduce short-time work: ifo

Almost all industry sectors in Germany had introduced short-time work for their employees, according to a company survey published by the ifo Institute on May 05. Only German energy suppliers, sewage disposal and pharmaceutical companies had not set their employees to short-time work during the coronavirus pandemic. In Germany's gastronomy, almost every business, or 99%, had introduced short-time work. In the hotel industry, 97% of companies had set their employees to short-time work. Germany's important car industry also reported 94% of companies implementing short-time work, according to the survey. Other industries, such as aviation and clothing manufacturers, also showed figures of more than 90%. "This tops all figures from the 2009 financial crisis," said Klaus Wohlrabe, head of surveys at ifo. Some German industry sectors still reported comparatively low levels of short-time work. In the chemical industry, for example, only 30% of companies reported short-time work. Last week, the Federal Employment Agency (BA) had announced that more than 750,000 companies in Germany had applied for short-time work for a record 10.1 million employees by late April due to the coronavirus crisis. During the financial crisis in 2009, Germany's employment agencies had only received applications for short-time work for 3.3 million people.

Swiss Parliament pays to keep vital air links open

Since Swissair was grounded in 2001, the Swiss civil aviation sector has been in foreign hands. Air transport is mainly provided by German airline SWISS – founded in 2002 from the ashes of Swissair and sold to Lufthansa three years later – and British airline easy Jet. Airport and technical services are managed by Swissport and SR Technics, whose parent company is China’s HNA. Catering is provided by Gategroup, controlled by the Asian fund RRJ Group. Last week, the Swiss Parliament approved the government’s request for loans totalling CHF1.875 billion to guarantee loans to airlines operating in Switzerland and CHF600 million to support aviation companies at national airports. “The aviation sector is of systemic importance to Switzerland. The aviation industry generates around 5% of GDP, which is equivalent to the value of the banking sector,” Finance Minister Ueli Maurer pointed out during the debate. Around 40% of exports and 20% of imports are transported by air. In addition, more than half of all foreign tourists fly to Switzerland. Without SWISS and the network offered by Lufthansa, Switzerland would have four or five intercontinental connections, whereas today there are 20 to 30, he said.

Coronavirus curbs LNG demand in China, Japan and South Korea

Asian demand for liquefied natural gas, which was driving growth in the global market, is slowing after the novel coronavirus brought industrial activity in the region to a standstill. The super-chilled natural gas, which emits less greenhouse gas than coal, has become increasingly popular over the past decade in Asian countries from China to Japan and South Korea as a fuel for use in the industrial and electricity sectors. Global demand reached 354.7 million tons in 2019, increasing 13% from the year before. However, the global pandemic has influenced demand among major Asian importers, due to the halting of factory operations and sluggish demand for electricity. The weak demand in Asia will influence investment in LNG projects involving contracts in the region. Moreover, the recent crash in the oil market will have a negative impact on LNG investment, since the price of the gas is linked to the oil price in many contracts. Plummeting revenues have forced oil super majors to slash investment in LNG.

Beyond Multilateralism: The Pauli Principle

Rather than generalizing the end of multilateralism, we need to start analysing many institutions and agreements in terms of day-to-day content, rather than which states were involved and how they interacted. To do so otherwise, would open us to Wolfgang Pauli’s celebrated putdown of a scientific paper: “It is not even wrong”. The first is it is extremely difficult to criteria for judging whether any particular institution or agreement should be classified as multilateralist. When the US pushed most favoured nation in trade, one of key principles of multilateralism, was this because it was a generalised principle of conduct or because, believing that trade disputes could lead to wars, US leaders were determined not to get dragged into a third European war several decades down the road? Second,two of the three prime examples of multilateralism – the Bretton Woods agreements, the United Nations Charter, and the North Atlantic Treaty- are located in Washington, one which has been headed continuously by US citizens, the other of which has a weighted voting scheme in which the US has a de facto veto. Add to this the formal veto power in the Security Council, and the clear deference in NATO and it is evident that a more accurate label for these arrangements would be “the United States and the others”. The third and final point about the formal definitions of multilateralism is that they are resolutely focused on coordinated policies by states. What they ignore is the point of those policies, namely actions by both state employees and by others.

WHO plans mission to China

The World Health Organisation (WHO) is considering a new mission to seek the source of the coronavirus in China, amid growing controversy over the origin of a pandemic that has killed more than a quarter of a million people. “Without knowing where the animal origin is, it’s hard to prevent it from happening again,” Maria Van Kerkhove, a WHO epidemiologist, said at a press briefing on May 06. “There is discussion with our counterparts in China for a further mission, which would be more academic in focus, and really focus on looking at what happened at the beginning in terms of exposures with different animals,” she added. Van Kerkhove in February participated in a previous mission to China, which concluded that the virus was zoonotic in origin. Bats appeared to be the “reservoir” for the virus, but an intermediate host could not be determined, the report said. Talk of a new mission comes as debate grows over the source of the outbreak, which was first detected in Wuhan, China, more than four months ago. The Trump administration has said the virus likely escaped from the Wuhan Institute of Virology, which runs a laboratory that studies dangerous pathogens. Some intelligence agencies are casting doubt on that theory, and China has repeatedly denied the claim.

Trump to refocus coronavirus task force on economic revival, concedes risks

President Donald Trump said on May 06 his coronavirus task force would shift its primary focus to reviving U.S. business and social life, while acknowledging that reopening the economy could put more lives at risk. In a series of tweets, Trump said the White House task force he formed in March would not wind down, as he suggested earlier, but would instead add some advisers and centre its attention on “SAFETY & OPENING UP OUR COUNTRY AGAIN.” Trump changed his mind after the reaction to his May 05 announcement showed how popular the task force was, he said. Asked later if Americans will have to accept that reopening will lead to more deaths, Trump told reporters: “You have to be warriors. We can’t keep our country closed down for years and we have to do something. Hopefully that won’t be the case, but it could very well be the case.” Governors have faced mounting pressure to ease stay-at-home orders and mandatory business closures that have ravaged the economy, throwing millions of Americans out of work, even as those measures succeeded in fighting the virus.

Merkel cautiously optimistic as she announces lockdown rollback

German Chancellor Angela Merkel opened her much-anticipated press conference on May 06 by thanking the country for observing social distancing rules to help drastically slow the spread of the novel coronavirus. "We have achieved the goal of slowing the spread of the virus…because our citizens have behaved responsibly and saved the lives of others." Merkel welcomed the news that across Germany, hospitals were never overwhelmed, that the virus reproduction rate was now steady at less than one, and that daily new infections were under 1,000 cases. She said these factors made a loosening of lockdown restrictions possible. However, she also cautioned that should infection rates spread to more than 50 acute cases per 100,000 people in a given area, new lockdowns would be put in place. While more sectors of the economy will be allowed to reopen, they will only be allowed to do so if hygiene and social distancing rules are enforced — this will continue until at least June 5. Following Merkel's announcement, much of the responsibility for determining the next stages of the lockdown will be handed down to the individual federal states rather than united under a strict national strategy.

U.S. rearms to nullify China's missile supremacy

Having shed the constraints of a Cold War-era arms control treaty, the Trump administration is planning to deploy long-range, ground-launched cruise missiles in the Asia-Pacific region. The Pentagon intends to arm its Marines with versions of the Tomahawk cruise missile now carried on U.S. warships, according to the White House budget requests for 2021 and Congressional testimony in March of senior U.S. military commanders. It is also accelerating deliveries of its first new long-range anti-ship missiles in decades. The People’s Liberation Army (PLA), China’s military, has built up a huge force of missiles that mostly outrange those of the U.S. and its regional allies, according to senior U.S. commanders and strategic advisers to the Pentagon, who have been warning that China holds a clear advantage in these weapons. And, in a radical shift in tactics, the Marines will join forces with the U.S. Navy in attacking an enemy’s warships. Small and mobile units of U.S. Marines armed with anti-ship missiles will become ship killers. In a conflict, these units will be dispersed at key points in the Western Pacific and along the so-called first island chain, commanders said. The first island chain is the string of islands that run from the Japanese archipelago, through Taiwan, the Philippines and on to Borneo, enclosing China’s coastal seas.

State-run China Daily newspaper censors opinion article by European Union ambassadors

China has censored an opinion article in a state-run newspaper co-authored by all European Union ambassadors in Beijing, removing a mention insinuating China as the origin of the coronavirus, the EU confirmed on May 06. This comes as the top Chinese diplomat overseeing operations at the World Health Organisation rejected the idea of arranging an international investigation mission to Wuhan, the city where the first outbreak occurred last year. The European Union has been leading efforts to draft a resolution for the upcoming World Health Assembly at the WHO, though it faces opposition from China over the inclusion of origin in a probe that the resolution is expected to call for. Co-signed by the EU Ambassador to China Nicolas Chapuis and the 27 member states’ counterparts in Beijing, the article was initially barred from publication due to the Chinese foreign ministry’s objection, the EU said. In question were the words: “But the outbreak of the coronavirus in China, and its subsequent spread to the rest of the world over the past three months, has meant that our pre-existing plans have been temporarily side-tracked.”

Fighting pandemic gives EU chance to be stronger

COVID-19 is changing the world and Europe. The pandemic is accelerating the EU crises, but also gives the bloc a historical opportunity to walk out of the plight. As the crisis brews, the Franco-German axis as the traditional pillar of the EU has begun to play a stronger role. French President Emmanuel Macron tried to deliver inspirational voices to stir up ambition and courage by warning that the EU is facing "a moment of truth." German Chancellor Angela Merkel, as rational and calm as always, said her country was ready to make "significantly higher" EU budget contributions to help the bloc cope with fallout from the coronavirus pandemic "in the spirit of solidarity." In addition, contrary to the US inaction, Merkel and Macron have pledged to accelerate cooperation on a coronavirus vaccine and to share research, treatment and medicines across the globe. The different anti-virus measures taken by the US and Europe illuminate the contrasting moral qualities of the two. It is predicted that the post-pandemic world pattern will become more complex. Fiercer major power competition will inevitably take a toll on Europe. Europe's own interests and the pride on its culture make it hard for Europe to pick a side. The discussions of how to play a mediating role between major powers is gaining momentum among Brussels and EU members.

United States' Khalilzad to meet Taliban in Qatar, visit India, Pakistan

The U.S. special envoy on Afghanistan is on a mission to press Taliban negotiators in Doha and officials in India and Pakistan to support reduced violence, speeding up intra-Afghan peace talks and cooperating on the coronavirus pandemic, the State Department said on May 06. U.S. Special Representative Zalmay Khalilzad’s trip comes amid concerns that surging Taliban attacks and the coronavirus pandemic could deal potentially fatal blows to his stalled efforts to end decades of strife in Afghanistan. At each stop, Khalilzad “will urge support for an immediate reduction in violence, accelerated timeline for the start of intra-Afghan negotiations, and cooperation among all sides in addressing the COVID-19 pandemic in Afghanistan,” the State Department said. The statement did not disclose the exact schedule of Khalilzad’s trip that began on May 05. It is the second trip he has made since April 12 in the midst of the pandemic to salvage a Feb. 29 accord that he and the Taliban’s second in command, Mullah Abdul Ghani Baradar, signed for a phased withdrawal of U.S. troops from America’s longest war. A successful initiative could help U.S. President Donald Trump as he seeks re-election in November.

Taiwan keeps its borders shut despite virus success

Taiwan’s borders will remain sealed to foreigners as it prepares to loosen some restrictions on key economic activity, with officials indicating travel will only return to normal when a vaccine is found. Chen Shih-chung, the health minister, said on May 06 that while the government would try to gradually allow some foreigners to enter for important economic activity that could not be conducted remotely, the country was not even close to discussing a broader lifting of an entry ban on foreign nationals imposed to keep the disease out. Taipei’s caution, despite its early success at containing the virus, serves as a stark reminder of the difficulties countries face when mapping exit strategies from epidemic prevention regimes, as governments in Europe, some US states, Australia and New Zealand attempt to ease lockdowns.

Coronavirus vaccine: where profit and public health collide

United Nations Secretary-General António Guterres recently declared a future COVID-19 treatment to be "a public good" that must be made available to everyone. The perception is shared by German Chancellor Angela Merkel, who hopes for multilateral negotiations to reach global agreement on the issue. However, specific details about what commercial agreements between the industry and governments could look like are still being kept under wraps. But David Loew, executive vice president of Swiss drug maker Sanofi Pasteur, already demanded a "risk pact" between business and politics to share the financial burden. "What we need are assurances from politics that a certain volume [of the coronavirus vaccine] will be bought for a specific price," he told German newspaper Frankfurter Allgemeinen Zeitung recently, noting that companies would have to prepare for production now, in order to meet the huge demand there would be for a coronavirus vaccine. At the moment, hopes in the global fight against the virus pandemic rest primarily on the shoulders of four major vaccine developers and a large number of smaller biotech companies. Altogether, they've launched almost 80 different vaccine projects, with many of the firms having entered into joint ventures to share the burden. German start-up Biontech, for example, has teamed up with US pharmaceutical giant Pfizer.

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