“Supporting Ukraine comes at a high cost, but freedom is priceless.”
— European Commission’s Chief, Ursula Von der Leyen
In 2021, The Economist magazine devised a “global normalcy” index — which tracks indicators such as transport use, leisure time, and commercial activity for 50 countries (90% of the world’s GDP). The index registered a low of 34 during the first wave of Covid lockdowns. Now, the index is almost back to it’s starting point of 100. In 8 of the 50 countries measured, economic activity is higher now than when Covid arrived. But longer-term shifts are occurring. People are traveling less — to work or for vacations. More time is being spent at home in front of screens. As the Economist magazine staff member reflects, “The new normal could have been worse.” Yes. But ugly inflation statistics and the stresses of war have had stock markets around the world riled up. Worries centre around the risk of policy mistakes and whipsaws in market sentiment. As the World Bank is warning, “Central banks risk sending the global economy into a devastating recession next year if policymakers raise interest rates too high over the months ahead.” As to the consequences for the poorest countries in the world, Covid-19 has hit many emerging markets hard. More than 100 million people have been driven into extreme poverty according to the World Bank. The IMF’s managing director said this month that “About a quarter of emerging countries and more than 60% of low-income countries, face difficulties in paying their debts.”
Coming back to rates and inflation, in the US it seems that the FED’s tough stance on rates is bearing fruit with the July Core PCE cooling off to show just a 0.1% monthly increase. The FED is not done yet, however, after it hiked the funds rate by a further 75 bps in September to a new target range of 3.00 – 3.25%. It also signaled that they would likely go up to 4.6% next year in their efforts to stomp out inflation. Whilst this is welcome news for inflation concerns, the latest hike came with a warning from Powell that a soft landing is becoming increasingly elusive for the US and that, in all likelihood, a recession will ensue, which will tame inflation. Some Economists have gone as far as to suggest that the unemployment rate, which is still at historical lows, would need to increase to more than 5% for inflation pressures to abate.
Outside of the US, other developed economies are also increasing rates as they struggle to control inflation. The Bank of England hiked by 50 basis points, Sweden delivered a 100 basis points increase and the ECB, at long last, signaled an intent to raise rates above neutral levels. The strong dollar continues to cause pressure on emerging market economies.
At AGC, our mission is to continue to support SMEs with their working capital needs. No-one is exempt from interest rate increases, with price hikes working their way down the supply chain, finally ending up with the consumer. In terms of our portfolio, about 70% has moved to floating rates. We have encountered little resistance to this from our partners, with the reality of the market environment finally kicking in, particularly over the last several months. As we have always done, we ensure that no usury rates are being applied to the underlying SMEs.
Some of our SMEs are being creative in how they manage these price increases — for example, an SME in North Macedonia has bought a large surplus of supplies early so that they don’t have to pay higher prices in the coming months.
As ever, our mission of providing liquidity to SMEs and providing a stable return for our investors’ capital remains our priority. Supporting the working capital needs of SMEs is particularly needed in times of stress and there is a much higher need now for investor capital.
As always, if you have any comments, suggestions or concerns, please do not hesitate to contact Sudha Bharadia, Co-CEO at firstname.lastname@example.org.