US-China trade war to weigh on South Korean economy

Exports account for more than half of the South’s economy, with more than a quarter of exports shipped to China and about 12 percent to the US. (AFP)
Updated 18 July 2018
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US-China trade war to weigh on South Korean economy

  • The South Korean economy is expected to grow 2.9 percent this year, lower than an earlier estimate of three percent
  • The International Monetary Fund said this week the growing trade confrontation is the ‘greatest near-term threat to global growth’

SEOUL: South Korea’s finance minister warned that an all-out trade war between the US and China would have grim implications for the country, as he lowered this year’s growth outlook Wednesday.
The world’s 11th largest economy is expected to grow 2.9 percent this year, lower than an earlier estimate of three percent, Kim Dong-yeon said, citing slowing demand at home and abroad as well as rising unemployment.
The latest estimate is also lower than last year’s figures, when the export-reliant economy expanded 3.1 percent, and comes as the South’s top two trading partners China and the US engage in a bitter spat that has seen them impose hefty tariffs on billions of dollars in goods.
“The economic situation down the road does not seem to be bright,” Kim told reporters.
“The situation may get worse if anxiety in the international financial markets spreads due to the US-China trade dispute... and market and corporate sentiment does not improve,” he said.
Overseas shipments account for more than half of the South’s economy, with more than a quarter of exports shipped to China and about 12 percent to the US.
Kim vowed to “closely monitor international trade situations including the US-China trade row” and announced measures to encourage job creation and spur domestic spending.
US President Donald Trump has taken a confrontational “America First” stance on trade policy, imposing steep tariffs on steel and aluminum, which angered allies and prompted swift retaliation, as well as 25 percent duties on $34 billion of Chinese goods, with more on the way.
China has matched US tariffs dollar-for-dollar and threatened to take further measures, while US exports face retaliatory border taxes from Canada, Mexico and the European Union.
The International Monetary Fund said this week the growing trade confrontation is the “greatest near-term threat to global growth” and in the worst case could cut a half point off world GDP.


India’s small renewables firms fighting consolidation wave

Updated 21 August 2018
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India’s small renewables firms fighting consolidation wave

  • With many smaller operators being gobbled up or offering themselves for sale, the number of projects being developed could fall
  • Besides loans, other funding options have been dead ends for the smaller companies, further limiting growth opportunities

MUMBAI: Small to mid-sized renewable energy companies in India are starting to look like attractive takeover targets as lenders and investors withhold funds, worried by the stiff competition, weak bond markets, low tariffs and high debt besetting the sector.
The small companies’ difficulty in raising cash is keeping them away from government power project auctions, restricting their growth and crippling their ability to refinance loans, said a consultant from a top global consultancy firm.
With many smaller operators being gobbled up or offering themselves for sale, the number of projects being developed could fall, potentially keeping India from its renewable energy targets, said the consultant, who did not wish to be named as he is directly involved with a company that canceled a bond issue.
“India’s solar industry is becoming a big boys’ club,” said Rahul Goswami, managing director of Greenstone Energy Advisers.
In a few years, there may be only a few big companies and a few regional firms active in India’s renewable sector, he said.
The trend goes back at least to 2016, when Tata Power bought solar and wind company Welspun Renewable Energy, but the pace is expected to pick up.
“Smaller players are being squeezed out ... due to two main factors: cost of equipment and ... financing,” said Alok Verma, executive director at Kotak Investment Banking, an arm of Kotak Mahindra Bank.
One of India’s largest renewables companies, Greenko Group, said in June that it was buying 750 megawatts (MWs) of solar and wind assets from Orange Renewables, because the Singapore-based company saw few opportunities for growth. The deal has yet to be closed.
Essel Infra, with a renewable power capacity of 685 MWs, and Shapoorji Pallonji Group’s 400-MW solar arm are also in talks to sell off their assets, one firm and two banks doing the due diligence for these companies have said.
Besides loans, other funding options have also been dead ends for the smaller companies, further limiting growth opportunities.
ACME Solar postponed an initial public offering (IPO) announced in September last year as the proposed share issue did not generate enough interest from investors, confirmed a banker who was directly involved in the listing attempt.
Mytrah Energy, a major mid-sized renewables company, called off a $300 million to $500 million bond issue earlier this year as that option also went dry for the sector, and it canned IPO plans as well, said a separate banker directly involved there.
The companies have all declined to comment.
This dearth of financing and trend toward consolidation could be a significant threat to India’s target of 175 gigawatts (GWs) of renewables capacity by 2022, up from 71 GWs now, some analysts said.
Others said a concentration of bigger players, with more cash and better financing, could mean things move faster.
“Consolidation in the renewable energy industry augurs well for the overall success of the program ... Large players have access to required capital at reasonable rates and can procure the latest technology,” said Debasish Mishra, head of Energy, Resources and Industrials at Deloitte Touche Tohmatsu India.
Tata Power, one of India’s largest power generators, said in May it plans to invest $5 billion to increase its renewable capacity in India fourfold over the next decade to 12 GWs.
More than doubling India’s renewables capacity by 2022 will require $76 billion, including debt of $53 billion, the Ministry of New and Renewable Energy said in July.
Another problem in India’s renewable sector is debt.
“Many mid-sized firms have taken debt to fund their equity,” the partner of an investment firm said, adding that many such companies will need financial restructuring or have to put themselves up for auction.
This model of financing debt through equity is called mezzanine financing and tends to involve high interest rates and an option to convert debt to equity in future.
Both ACME and Mytrah are funded by Piramal Finance Ltd. via mezzanine financing, according to statements by the companies at the time of funding.
For lending banks, this quasi-equity is seen as debt, making the liabilities of these companies look higher than usual, said the partner, who asked not to be named. The investment firm handles all kinds of financing, including mezzanine.
When companies with mezzanine financing go to banks for funds for upcoming projects, banks ask them for higher collateral or offer less cash in loan, said Kotak’s Verma.
Fitch Solutions said in a note last week that India would likely miss its renewable capacity targets due to “risks stemming from bureaucratic, financing and logistical delays.”