Vladimir Putin has set the clock ticking for possible defaults on about $150 billion in debt as the Russian economy slumps and its currency collapses under the pressure of sanctions, including on its foreign-currency reserves
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast app, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 7 in our series for 2022 and today’s date is Friday March 18.
First, I’ll be talking to Zaheer Jappie, the founder and CEO of Car Clarity, Australia’s first true car loan platform with an easy online application process.
And I’ll be talking to economist Saul Eslake about the impact of the war in Ukraine on the Australian and global economy.
But now, let’s talk to Zaheer Jappie.
Vladimir Putin has set the clock ticking for possible defaults on about $150 billion in debt as the Russian economy slumps and its currency collapses under the pressure of sanctions, including on its foreign-currency reserves. Russia’s economy is fraying and its debt is junk. Next up is a potential default that could cost investors billions and shut the country out of most funding markets. Warning lights are flashing as the government kickstarts the process of paying $117 million in interest on dollar bonds Wednesday, a key moment for debt holders who’ve already seen the value of their investments plunge since Russia invaded Ukraine last month. The Russian government says that all debt will be serviced though it will happen in rubles as long as sanctions — imposed because of the war — don’t allow dollar settlements. Failure to pay, or paying in local currency instead of dollars, would start the clock ticking on a potential wave of defaults on about $150 billion in foreign-currency debt owed by both the government and Russian companies including Gazprom, Lukoil and Sberbank. Such an event will revive memories of previous crises, including Russia in 1998, when it defaulted on some ruble-denominated debt, and Argentina three years later. Russia is already a commercial pariah, crippled by sanctions and the exodus of foreign firms such as Coca-Cola Co. and Volkswagen AG since the war started. The government has responded with capital controls, restricting outflows of money to protect the economy and the ruble. Businesses and households are facing a double-digit economic slump and inflation accelerating toward 20%
Russia’s invasion of Ukraine is threatening to derail the production of a range of medical devices from pacemakers to sleep apnoea machines, as the war exacerbates a global semiconductor shortage. A supply chain crunch of the essential computer chips has already plagued the automotive industry, blowing out wait times for some new cars beyond six months. Now the healthcare sector is facing a similar crisis, potentially disrupting production at companies such as ASX-listed sleep apnoea machine maker ResMed and triggering price rises. Production of vital raw materials for the silicon chips — which are key components in essential healthcare devices including MRI machines, pacemakers and blood-sugar monitors for diabetes — are concentrated in Russia and Ukraine. About half the world’s supply of neon gas, which is used to fuel the lasers that print circuitry on semiconductors, is produced in Ukraine. And more than 30% of the world’s palladium — which is used in the later manufacturing stages of semiconductors — comes from Russia.
Russia’s invasion of Ukraine and the OPEC cartel’s refusal to boost crude oil production, combined with recovering oil demand as countries relaxed COVID-19 restrictions, pushed February prices for both international refined petrol and average retail petrol in Australia’s five largest cities to an eight-year high. The ACCC’s latest petrol monitoring report reveals that daily average retail petrol prices in Sydney, Melbourne, Brisbane, Adelaide and Perth hit 182.4 cents per litre in late-February 2022, which was the highest inflation-adjusted (real) level since 2014. Prices have risen further in the first two weeks of March. The last time prices in Australia were as high as they were in late-February was in January 2014, when strong international demand, conflicts in the Middle East and Ukraine, and a lower AUD/USD exchange rate pushed real daily average petrol prices to 182.7. In June 2008, in the period before the Global Financial Crisis, daily average prices reached a record high equivalent to 212.9 cpl in today’s dollars. Quarterly average petrol prices in the five largest cities were 162.8 in the December quarter 2021, an increase of 10.3 from the September quarter 2021 (152.5).
Spikes in fuel prices have fed into an increase in consumer expectations that inflation will rise over the next two years. Household inflation expectations jumped to 5.6% last week, its highest level since November 2012, according to the latest ANZ-Roy Morgan consumer confidence survey. It is a prospect that consumers are finding disconcerting despite Australia’s strong economic growth. Confidence has been trending down since mid-February but as consumers last week experienced first-hand the petrol hit to their wallets, combined with the war in Ukraine and the floods in Queensland and NSW their confidence level plunged back into negative territory.
The cost of common dairy products could rise by double digits this year, according to cheese, yoghurt and flavoured milk maker Bega, as Australia’s peak retail body warned business input costs are at a tipping point. Shoppers have been warned they could be paying more for everything from Tim Tams to Tip Top bread in the coming months as major food suppliers prepare to raise prices in the face of severe inflationary pressures. Sharp spikes in the cost of major commodities such as wheat and fats, coupled with huge increases in transport costs due to rising fuel prices, are likely to drive the price of some everyday goods to new heights and place a further strain on shoppers’ wallets. These will include biscuits, bread, beer, canned goods, rice and fresh fruit and vegetables, with producers warning that prices on some products are set to increase for the first time in more than a decade. Baked beans and tinned spaghetti are among about 100 Australian staple food items that are expected to be hit by price rises of as much as 20%, Robert Giles, the chief executive of canned good producer SPC, said. The cost of living for Australians has come under increasing attention as inflation stalks the global economic recovery. The topic is likely to feature strongly in the run-up to a national election that’s set to occur before the end of May. On the weekend, the government said it would focus on households under strain in its upcoming federal budget, due later this month.
Josh Frydenberg has shelved plans to bring forward the stage-three tax cuts for middle and higher-income earners, worth $17bn a year, in favour of more targeted assistance to ease cost-of-living pressures in the face of rising inflation. Broader tax relief and a freezing or cutting of petrol excise are options being considered by the federal government in this month’s budget to defuse voter anger over the rising cost of living. Although the government intended to extend for another the $8 billion-a-year Low and Middle Income Tax Offset an end of year rebate of up to $1080 for low and middle income earners, there is a growing school of thought within the government to scrap the extension and spend the money up front on relief. Otherwise, the money would not roll out until 2023-24. As the New Zealand government slashed its excise and road user charge to lower petrol by 50c per litre for three months on Monday, Prime Minister Scott Morrison all but confirmed further consumer relief would be contained in the March 29 budget.
The Reserve Bank says the “supply shock” from the Ukraine war that has triggered a spike in fuel costs will lead to “lower growth and higher inflation” around the world, and preached “patience” on rates despite surging consumer prices. In newly released minutes to the RBA’s March 1 board meeting, at which the cash rate was held at its record low of 0.1%, members said “the economic implications of the war depended on the scale and duration of the conflict and the nature of any second-round effects”. Economists now anticipate that headline consumer price growth will accelerate to 5%, from 3.5%, over coming months as record petrol prices and severe flooding on the east coast feed through to higher food prices. The war in Ukraine and the associated increase in energy prices had created additional uncertainty about the inflation outlook. Members noted headline inflation would increase by more than underlying inflation in the near term because of the effect of global developments on petrol prices
The surging price of building materials such as timber and steel will be exacerbated by the recent floods in Queensland and NSW, which have destroyed and damaged thousands of homes, as well as the war in Ukraine. Timber prices have already risen by 50 to 100% steel by 30 to 60% and concrete by 20 to 40%. The recent floods in south-east Queensland and northern NSW have left about 5000 homes destroyed and thousands of others requiring urgent attention. There has been a big spike in requests for subcontractors – from electricians and plumbers to tilers and roofers – in the past few weeks as people assess the damage on their properties. Builders who focus on insurance work are also run off their feet as their job books spill into next year. Association of Professional Builders co-founder Russ Stephens said the big jump in demand for building supplies after COVID-19 lockdowns, which pushed up the prices of renovations and new builds, was only going to get worse after the floods and the impact of the war in Ukraine.
Super fund returns sunk about 1% in February and are now at risk of suffering their second negative financial year since 2020. New data from research group SuperRatings shows the median balanced superannuation option dropped 0.8% for the month as Russia’s invasion of Ukraine increased geopolitical tensions and global supply chain pressures. Balanced funds are still in positive territory for 2021-22 – up 1.4%.. Growth super options – where 77-to-90% of members’ money is in growth assets such as shares and property – fell 1.1% in February, SuperRatings says. Super funds last had a negative financial year in 2020, one of only four since 1992, but if the war-induced weakness persists this would be two out of three bad years.
The $76bn superannuation fund Hostplus is the latest industry fund to commit to carbon neutrality by 2050, as it becomes an anchor investor in a Victorian renewable energy park to help offset closure of the state’s giant Yallourn coal-fired power station in 2028. Hostplus, the industry fund for tourism and hospitality workers, has invested more than $1.2bn in clean technology and climate solutions. It has now allocated $15m to the 3000ha Gippsland renewable energy park, along with $8.5m from the commonwealth-owned green bank Clean Energy Finance Corp, and Octopus Group, one of the world’s biggest investors in clean energy which has $6bn deployed in 300 projects across the world. Octopus operates the Darlington Point solar farm in NSW, the biggest solar facility connected to the national electricity grid with a capacity of 330 megawatts.
Two of Australia’s richest men, Mike Cannon-Brookes and Andrew Forrest, have emerged as key financial backers of one of the country’s biggest renewable energy projects – a solar farm providing up to 15% of Singapore’s electricity needs. Sun Cable said it had raised $210m of new funding to push ahead with its signature clean energy scheme – the $30bn Australia-Asia PowerLink development – with fresh funds ploughed in by the Atlassian co-founder and the Fortescue Metals chairman. The increased support from the founders of Atlassian and Fortescue Metals Group, respectively, is a ringing endorsement of the audacious project to export solar power from the Australian outback to the Asian financial hub. The venture aims to start supplying clean power to Singapore in 2027 and has attracted worldwide attention. It may get further momentum from heightened concerns around energy security as a result of the war in Ukraine. The capital raising provides enough funding for the project to hit financial close and paves the way for a set of renewable developments, with Sun Cable saying it is working on “multi-gigawatt”-scale facilities, underlining the company’s plans to become one of Australia’s biggest clean energy producers. The solar project in the Northern Territory, which is estimated to deliver carbon emissions abatement of 8.6 million tonnes per year, will help power Darwin and Singapore. It includes the world’s largest battery and a 4200km high-voltage undersea cable from Darwin to Singapore, the longest in the world. Mr Cannon-Brookes is backing Sun Cable just a week after putting on ice an $8.1bn takeover bid for AGL Energy, pitched as one of the biggest decarbonisation projects in the world today.
The Federal Environment Minister Sussan Ley has no duty of care to protect children from the negative impacts of climate change when assessing fossil fuel projects, the Federal Court has ruled Federal Environment Minister Sussan Ley has successfully argued she does not have a duty of care to protect young people from climate change when assessing fossil fuel projects. A group of eight children launched the class action in 2020. The initial judgement agreed the minister had a “duty of care” when assessing fossil fuel projects. Experts say the children are likely to appeal against the decision in the High Court, but in the meantime, the ruling removes the duty of care that was established by Justice Mordecai Bromberg. The class action, led by teenager Anj Sharma, argued that the environment minister had a duty of care to protect young people from climate change, and that this needed to be a consideration in the approval process for projects that would produce greenhouse gas. The original class action also argued that digging up and burning coal would make climate change worse and harm young people in the future. The earlier win, now overturned, led to headlines around the world. The world-first case relied on common-law principles to establish the duty of care, and so was relevant to other common-law countries including England, the United States and New Zealand.
The $14.5 billion inland rail link between Melbourne and Brisbane will help ease freight costs over the longer term, according to a new CSIRO report which forecasts an annual $213 million saving. The rail link will also help ease road congestion and emissions by taking 200,000 trucks off the road each year, or 150 B-doubles for each train travelling between Melbourne and Brisbane. The report, prepared before the recent spike in fuel prices, models the impact of the rail link, which as an off-budget project is meant to make a commercial return for its owner – the government. It is due to be completed by 2027.
Cumulative insurance claims from flooding across Queensland and NSW exceed $2 billion. The Insurance Council of Australia has received more than 135,000 claims across the two states./In NSW alone, there was an 11.8% increase in claims over the weekend.
And that’s it for this week.
And next week, I’ll be talking to Brendan Doggett, Country Manager for Sharesies AU, on how investors are now responding to market upheaval. And I’ll be talking to Indeed economist Callam Pickering about the latest jobs figures.
In the meantime you can catch me on Facebook, Twitter Instagram and LinkedIn. And if you want leave a comment.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.