Edition #02 - 1st SFWG meeting, Cash rate hike in AU, MSME support in Indonesia, and more!
In today’s edition
1st SFWG meeting held under the G20 Summit
The G20 Summit is a gathering of the 20 most influential economies of the globe, the European Union, and other guest countries that deal with economic and socio-political affairs. The deliberations in this summit play an essential role in shaping the world order and helping all of us move forward as a species in the right direction.
The G20 Summit 2023 is being held in India and will be hosted by Brazil in 2024. The first SFWG(Sustainable Finance Working Group) under the G20 Summit was held in Assam. It was a meeting that spanned the course of 2 days from 2nd February to 3rd February 2023.?
The meeting was attended in person by 95 delegates from G20 member countries, 10 invitee countries, and 14 international organizations like IMF, NGFS, World Bank, UNDP, UNEP Fi, ADB, NDB, and FSB among others. Many other international organizations joined the meeting virtually.
The G20 Sustainable Finance Working Group (SFWG) in Guwahati discussed 3 priority areas:
Priority number 1 - This issue was met with a wide range of support from all the members and an agreement was made that the public sector and MDBs play would play a critical role in the mobilization of finance at scale and reasonable cost.?
Priority number 2 - This meeting was to enable financing for the Sustainable Development Goals. The domestic financing gap for SDGs faced by several countries has increased over the years. With only seven years left to achieve Agenda 2030, scaling up sustainable finance is urgently needed to respond to the challenges of a changing world. The SFWG would develop an analytical framework and compile case studies of best practices for financing SDGs by different jurisdictions, the private sector, and international organizations to find the best way forward.
Priority number 3 - While the first and second priorities are important, there are many countries that lack the knowledge and resources to carry out the tasks necessary to achieve the first and second priorities. This is where the third priority of building an ecosystem for financing sustainable development and supporting countries that lack adequate knowledge and skilled professionals in sustainable finance comes into play.
To address these challenges, in 2023, the SFWG will develop a G20 Sustainable Finance Technical Assistance Action Plan (TAAP). It would include the identification and analysis of existing capacity-building activities and identifying the existing sustainable finance skill gaps.
Based on this, SFWG would give recommendations for IOs, MDBs, International NGOs, and country authorities on how to scale up capacity-building services and explore ways to form a global network for sustainable finance capacity building.
Cash rate hike in Australia. Risk of increased bankruptcies?
The RBA(Reserve Bank of Australia) made the decision on the 7th of February 2023 to increase the cash rate by 0.25% leading to the current cash rate of 3.35%. This decision was the ninth consecutive time that the rate was hiked. RBA governor Philip Lowe, the decision was made due to global inflation at a constant high and the expectation of below-average growth in the country’s economy.?
It is predicted that the country will experience further cash rate hikes in the coming months to battle inflation and bring down the rate eventually to the target after this temporary increase. While the cash rate affects the amount banks and lenders have to pay to their lenders, it indirectly also affects the common man and businesses that are borrowing money from such institutions as they have to carry the burden of this increase in the form of increased interest rates.?
In the past, trends have shown that cash rate hikes, cost of living pressures and surging inflation leads to a possible corporate insolvency risk. The graph below shows that whenever the cash rate has seen a hike, it has also increased corporate insolvency.
(Source)
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If the patterns are to repeat themselves, we might see businesses going bankrupt and homeowners having a tough time managing personal finances.
Angel tax or Devil’s tax?
After the Union Budget 2023 in India last week, many changes were made to different rules and regulations. One such area that affects startups in India was the amendment made to the angel tax(taxation of funding received by a startup) from April 1, 2023.?
What is the angel tax?
Back in 2012, a whitepaper was released by the then Finance Minister Pranab Mukherjee which outlined different ways in which people converted their black money into white money including a method called round-tripping.?
Round-tripping is essentially a person with illegal money i.e. undisclosed income investing outside India and then bringing it back into the country as foreign investment to pay someone by investing in shell companies(inactive companies used as a vehicle for various financial manoeuvres).?
When a domestic investor decided to buy shares in an unlisted company at a much higher value than its market value, it may indicate something fishy. So in 2012, the angel tax was implemented to deal with such shady transactions.?
But not all such cases were illegal. Many of them were legitimate. But the implementation of this law meant that small startups had to save a significant chunk of their capital raised to pay the angel tax. The government did implement exemptions over the years to help these startups with conditions such as:
Cut to the Union Budget 2023, the current Finance Minister announced that the exemption that allowed foreign investment to not be taxed was removed. While the exemptions still hold true, now any investment in a startup that is above the fair market value of the company, whether it is domestic or foreign will be taxed.?
This is bad news for many new-age startups as they would have to start shelling out taxes on funding received which leaves them with less capital to carry out operations and grow their business. This change may also hinder foreign investors to invest in Indian startups.?
Another tricky aspect of this situation is how the valuation of a company is determined. The interpretation of both the Foreign Exchange Management Act and the Income Tax Act results in different valuations for a company. Clarifications are yet to be given by the government on this subject.
Startup founders and entrepreneurs may soon decide to set up their domestic residence for companies in other countries such as Singapore or the UAE that have a more business-friendly environment and tax laws.
MSMEs in Indonesia receive financing relief from the state budget
Amidst a globally unstable financial environment, MSMEs in Indonesia are receiving help from the government in the form of access to capital & financing and subsidy schemes on the interest rates for borrowed money. Subsidy schemes include lower interest rates on People's Business Loans (KUR).
KUR is a working capital loan for productive individual debtors, business entities, and business groups that either have yet to possess additional collateral or have insufficient collateral.
This push from the government will help promote competitiveness, improve the employment rate, and support economic growth. The government also uses its state budget for the Ultra Micro financing program (UMi), which is aimed at the lowest-level micro businesses. These are businesses that cannot be part of the credit programs provided by banks due to various reasons.?