LIBOR to be phased out by 2021!

By Abin Daya

The LIBOR is dead! Well, not quite. But in the next 4 years, it could be. The The Financial Conduct Authority (FCA) announced this week that it intended to phase out the LIBOR by 2021. Post that, banks would no longer be compelled to provide interest quotes to the Inter-Continental Exchange, and in the absence of these, the benchmark would die a natural death. What comes after that? We don’t know yet.

But the first item this week is something closer home – India’s foreign trade numbers for the month of June. Apart from what is included in the update, I also tried to explore if there was some sort of correlation between industrial production growth and export performance. It is difficult to do, particularly since IIP growth is calculated on production volumes, while export performance is against values. Still, it feels only logical that industrial production increases when export performance improves; or vice versa.

The public finance numbers have started to come in, and while it might be early days to comment on the same, it is interesting to note that the Revenue Deficit has already crossed the budgeted numbers in the first two months of the fiscal year. While it is typical to have high deficit numbers in the beginning of the year due to the slow revenue realisation in the initial months of the fiscal, what is also notable is that the deficit numbers are 63% more than what it was during the same period last year. However, this should moderate as the year progresses and the revenue numbers pick up.

Finally, the policy related to commodities always seem to follow a zig-zag path. While during one week we might be talking about protecting domestic producers and support prices, very shortly, the discussion could turn to capping price rises and considering imports to improve the supply position. We have seen this in pulses, and now we are seeing this in sugar. Would let you read for yourselves.

Read on for a detailed update.

While you are doing so, please also take a note of the historically high levels of FX reserves that we are seeing now. In fact, over the past 4 weeks, reserves have increased by $8.8Bn!

Foreign Trade performance

• India’s merchandise exports grew for the ninth straight month in Jun 2017, but at a slower rate of 4.4% y-o-y, compared to 8.3% in May
• The momentum of export growth has been slowing for some time now; after hitting a peak of 27.6% growth in Mar 2017, the growth rate has been on a declining path
• Export of engineering goods, petro products and chemicals have registered an increase, while a drop has been seen in exports of pharma, leather and gem & jewellery
• In rupee terms, exports registered a negative growth of -0.04%, indicating the impact of a stronger rupee on export performance
• Imports growth for June 17 at 19% is also lesser than the previous month’s 33%, but is significantly higher than the growth rate for exports
• While oil imports have grown by 12%, non-oil imports have grown by 21% y-o-y, supported by electronics, pearls & precious stones and machinery; Gold imports have doubled to $2.45Bn
• The current rise in imports is clearly driven by a spike in non-oil imports, and hence independent of the levels of crude prices

• The trade deficit for merchandise trade widened to $13 bn in June, as against $8.1 bn, an increase of almost 60%
• Year-to-date, the trade deficit has more than doubled from its levels of $19.2 bn to $40.1 bn in three months

• Imports, which had fallen by -14.5% during the Apr – June period last year, has increased by 32.8%
• Exports, however, have grown only by 10.6% which has led to a 108% y-o-y growth in the trade deficit
• It appears likely that after two consecutive years of drop, the trade deficit would grow this year, spurred on by the higher import growth numbers

LIBOR

• The Financial Conduct Authority, UK’s financial regulator, announced this week that they plan to scrap the benchmark LIBOR by 2021
• London Inter-Bank Offered Rate (LIBOR), created in 1986, is one of the most widely used benchmarks today, underlying close to $400 trillion worth of assets
• It is calculated by the Inter-Continental Exchange or ICE by using rates submitted by banks at which they would be willing to lend to each other, in various currencies, and for different maturities
• However, the benchmark has been plagued by scandals with banks accused of falsifying their submissions to manipulate the same
• The resulting investigations have led to approximately $9 billion in fines on many leading banks, and convictions and imprisonment of some of the bankers involved
• From 2021, the FCA will not compel banks to submit interest rates for the various tenors to ICE and that could lead to the benchmark dying a natural death
• However, the transition will not easy, and we still do not know what will replace the outgoing benchmark
• In India, regulatory ceilings for many of the FCY borrowings such as export credit, trade credits and ECBs are linked to LIBOR
• It is unclear at the moment if there will be any impact on loans which are currently set to mature beyond 2021
• It is also unclear regarding the impact it might have on new loan proposals with tenor of 5 years or more, which are linked to LIBOR
• Watch this space for further updates on this topic

Revenue deficit crosses budget estimate in two months of the FY

• Revenue receipts for the first two months of the Fiscal Year have recorded a healthy growth of 24% y-o-y, supported by a 36% in net tax collections
• An amount of Rs. 67,688 cr have been realised as net tax collections during Apr-May 2017, as against Rs. 49,960Cr during the same period last year
• This translates to about 5.5% of the budgeted figure of Rs.12.27 lakh crores for the entire year
• Total revenues, including non-tax revenues and capital receipts, have been recorded at Rs.85,665 cr during this period, an increase of 24% from the same period last year
• However, expenditure has grown significantly faster than revenues, with total expenditure of Rs.4.59 lakh crores being 54% higher than during same period last year
• Out of this, Revenue Expenditure has been incurred for Rs.4.06 lakh crores, growing y-o-y by 53.5% from the same period last year
• This has led to the Revenue Deficit to hit Rs. 3.23 lakh crores in the first two months of the fiscal, thereby crossing the Budget Estimate of Rs.3.22 lakh crores

• The strong growth in net tax collections has come on the back of a 43.5% growth in direct tax collections, particularly Corporate Taxes
• Apr 2016 saw refunds of Rs.2,818 cr under Corporate taxes, which were not fully made up by collections in May 2016, which led to negative collections in the first two months of FY17
• Against this, recoveries have amounted to Rs.13,482 cr as corporate taxes in Apr-May 2017, which has spurred the growth in direct tax collections
• Along with this, Customs duty collections have grown by 17.6% y-o-y from Rs.36,626 cr to Rs.43,058 cr
• The almost 100% growth achieved in Central Excise collections in the first two months of last year would be almost impossible to achieve now considering the limited scope of increasing duties further
• Despite this, excise duty collections have grown by 15.9% y-o-y during Apr-May 2017 to hit Rs.30,778 cr

• With all indirect taxes to be subsumed under GST from 01 July, the individual numbers would change and the Budget Estimates could be changed accordingly
• However, there might not be a large impact on overall estimates, and these are likely to be maintained at the same level, at least for the time being

Stock limit on sugar mills?

• Barely weeks after it raised the import duty on sugar to 50% from 40% to support prices, the government might be considering more duty-free import of sugar, as well as imposing stock limits on mills
• Sugar prices have already started rising across the country and are expected to rise further due to the tight supply position, and increased demand ahead of the festival season
• The government had already permitted duty-free import of 500,000 tonnes of sugar this season, to control prices
• It had also increased the FRP payable to farmers, and this had prompted demands for measures to support prices in the domestic market
• Stock limits on sugar traders are being stringently implemented to prevent any artificial shortage leading to price rise
• In Maharashra, wholesalers and retailers will not be allowed to hold more than 500 tonnes and 50 tonnes of sugar, respectively, for a period of one month after they receive the stocks
• Globally, there are also calls for protection of the local industry in other countries
• Post Brexit, the British sugar industry wants the government to put up new tariff structures for imports from non-EU countries such as Thailand and Brazil, which might resort to dumping of sugar
• While the twists and turns in policy might be a little confusing to keep up with, we will keep track of the same and keep you posted

Abin Daya the author of 'Basics of Trade: An India Perspective' is a FEMA expert, a career transaction banker, with close to 15 years of experience in corporate and transaction banking, in India.