Infosys seems to be in the limelight of controversy this week after an anonymous group called ‘Ethical Employees’ complained to the board and the SEC (US Securities and Exchange Commission) alleging that the Chief Executive Officer Salil Parekh instigated employees to inflate profits, misrepresent deals and abused travel privileges. The group offered emails and recordings to back up their claims but little has been proved so far. However, the repercussions have already begun with the company losing $7 billion in market value and the stock plummeting 16.2% on Tuesday, this being its steepest single-day drop since 2013.
The government, on Wednesday announced the merger of BSNL and MTNL. The government plans to revive the two loss making PSUs by raising sovereign bonds, monetising assets and voluntary retirement schemes (VRS) for employees. Post the merger, MTNL will act as a subsidy of BSNL but both the firms will be pushed to be more competitive through an investment of Rs 29,937 crore according to telecom minister Ravi Shankar. However, the primary concern should be to clear the losses made by BSNL this fiscal year which racked up to Rs 14,000 crore. The ailing company having around 1.76 lakh employees is also yet to pay off its outstanding wages and a monthly bill of Rs 850 crore.
This week, we’ll be focusing on two major reports published by the International Monetary Fund (IMF) that analyse global economic developments and financial system & markets.
1. Global Financial Stability Report (GFSR):
The Global Financial Stability Report (GFSR) provides an assessment of the global financial system and markets, and addresses emerging market financing in a global context. It contains analytical chapters or essays on issues relevant to international financial stability. Some of the important points to be noted from its most recent report published on October 16th are as follows.
• The GFSR identifies rise in corporate debt burdens, higher risks by institutional investors and growing reliance on external borrowing as the current key vulnerabilities in the global financial system.
• The report proposes a method of reducing these risks by implementing stricter supervision and macroprudential oversight of firms. It also proposes to policymakers that they must strengthen oversight and disclosure for institutional investors.
• The report states that large interest rate declines have prompted investors to search for further yields, leading to stretched valuations in some asset markets. Policy makers must urgently tackle these financial vulnerabilities to prohibit an economic downturn.
• On the other hand, Corporate sector vulnerabilities are already high in several countries as a result of rising debt burdens and weakening debt service capacity. The reason being that easy financial conditions prompt investors to take more financial risk further building up vulnerabilities in some sectors and countries.
• High return guarantees drive an increase in cross-border investments by some investors, sometimes leading to large concentrated exposures and higher risk of spill overs of shocks across borders.
• Equity flows have suffered the most from the twists and turns of trade disputes, and further escalation remains a serious risk for emerging and frontier markets. With private and public debt already high in some countries, easy financing conditions may encourage excessive build-up of debt, raising rollover and debt sustainability risks.
• US dollar funding costs are associated with financial stress in the home economies of global non-US banks. Emerging markets borrowing in US dollars are particularly vulnerable to cutbacks in cross-border lending, because their ability to substitute into alternative funds in US dollars or even other currencies is limited.
• Environment, Social and Governance (ESG) issues may materially affect corporate performance and give rise to financial stability risks via exposure of financial institutions and large losses from climate change.
• Policy makers must develop standards, foster disclosure & transparency and promote integration of sustainability considerations into investments and business decisions.
2. World Economic Outlook:
The World Economic Outlook is a survey by IMF that gives an analysis of global economic developments during the near and medium term. The survey is published twice a year and takes into account issues that affect industrial and developing countries. It also addresses topics of pressing current interest. The most recent survey published on 15th October notes the following points.
• The pace of global economic activity remains weak. Momentum in manufacturing activity, in particular, has weakened substantially, to levels not seen since the global financial crisis. Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation.
• A resilient service sector has supported employment growth while a notable shift toward increased monetary policy accommodation cushioned the impact of these tensions on market sentiment and activity.
• Global growth is forecast at 3.0 percent for 2019, its lowest level since 2008–09 and a 0.3 percentage point downgrade from the April 2019 World Economic Outlook. Growth is projected to pick up to 3.4 percent in 2020.
• The projected growth reflects an improvement in economic performance in a number of markets in Latin America, the Middle East and some parts of Europe.
• To eliminate these clouds of uncertainties, policies should decisively aim at defusing trade tensions, reinvigorating multilateral cooperation, and providing timely support to economic activity where needed.
• Significant tariff increases between the United States and China have been hurting business sentiments and confidence globally.
• Argentina, Iran, Turkey, Venezuela, and smaller countries affected by conflict, such as Libya and Yemen, have been or continue to be experiencing very severe macroeconomic distress.
• India experienced a fall in growth as corporate, environmental uncertainties coupled with an ailing nonbank financial sector weighed on demand. Growth has also weakened in China too, where the regulatory efforts needed to rein in debt and the macroeconomic consequences of increased trade tensions have taken a toll on aggregate demand. Growth is projected to continue to slow gradually in coming years, reflecting a decline in the growth of the working-age population.
• At the multilateral level, countries need to resolve trade disagreements cooperatively and roll back the recently imposed distortionary barriers. Curbing greenhouse gas emissions and containing the associated consequences of rising global temperatures and devastating climate events are urgent global imperatives.
• Considering the precarious outlook and large downside risks, fiscal policy can play a more active role, especially where the room to ease monetary policy is limited. In countries where activity has weakened or could decelerate sharply, fiscal stimulus can be provided.