“European Union – Bonds for Sale…”

The European Union’s first sale of bonds to finance its SURE unemployment scheme drew record demand of over 233 billion euros ($176.7 billion), lead managers said, kicking off EU fundraising plans that will in time make it one of Europe’s biggest borrowers. The EU will raise 17 billion euros from 10 and 20-year “social” bonds, a type of sustainable debt.

The shorter bond, which will raise 10 billion euros, attracted over 145 billion euros of final demand on its own, lead managers said, the highest level ever seen for a euro zone bond sale.  Tuesday’s sale was the first stage of the EU’s plan to increase its debt pile 15-fold in less than a decade to fund its two coronavirus support programmes for member states.

The bonds are attractive to investors as they offer a yield pick-up over safe-haven German bonds with very similar credit ratings, while offering similar yields to France, which is rated lower, analysts say.  The EU is rated Triple A – the top credit rating – by two of the three main ratings agencies.

The European Central Bank, which currently underbuys bonds from supranational institutions relative to its rules, should be able to soak up a good deal of the debt in the secondary market, another reason for the scale of demand, analysts said.

The 10-year bond will offer a negative yield and the 20-year a positive yield.  The 20-year bond, which will raise 7 billion euros, received over 88 billion euros of demand, lead managers said.  Around 30 billion euros of the up to 100 billion euro SURE scheme will be funded this year, with the rest due next year. 

Market Wrap

European stocks hit their lowest level in almost a month on Thursday.

The German DAX fell 1.3% as a survey showed consumer morale in Europe’s largest economy dropped as fears about a second coronavirus wave made Germans less willing to invest.

The pan-European STOXX 600 slipped 0.9% in its fourth session of losses.

Unilever rose 0.7% after the company reported a stronger-than-expected return to quarterly sales growth, led by emerging markets.

Reckitt Benckiser also reported a much bigger-than-expected rise in third-quarter sales on Tuesday as the coronavirus pandemic lifts demand for cleaning products such as Dettol and Lysol.  The British company also said it may achieve its plan to rejuvenate sales following years of difficulties earlier than expected.

“While there is still more work to do, I’m pleased to say that RB today is in much better shape than it was a year ago,” Chief Executive Laxman Narasimhan, who has been in the role for a year, told reporters.  He is banking on longer-term elevated use of soap and disinfectants beyond the pandemic, as well as the roll-out of products into new areas, such as on public transport and in hotels.

Reckitt shares were up nearly 2%. They had fallen 8% over the past three months.

Pfizer Inc and BioNTech SE announced on Tuesday the start in Japan of combined Phase I and Phase II clinical trials of their mRNA vaccine candidate against the coronavirus.  The study will recruit 160 people aged from 20 to 85.  They have agreed to supply Japan with 120 million doses of their experimental coronavirus vaccine in the first half of 2021.

Pfizer, which is developing the vaccine with German partner BioNTech, has said it may confirm if the vaccine is effective as soon as this month, but also needs safety data from a global trial of 44,000 people that will not be available until next month.   Japan has pledged to secure enough vaccine supply for its entire population by the middle of 2021. In addition to Pfizer, it has struck deals on supplies with AstraZeneca Plc and other overseas makers of vaccine candidates.

Logitech International reported a big jump in second-quarter profit, with its stock gaining more than 18% in early trading on Tuesday.  The maker of keyboards, mice webcams and headsets said it was benefiting from a shift to working from home during the COVID-19 pandemic.  It now expects annual sales to increase between 35% and 40%, up from its previous view for a 10% to 13% increase. 

The company has also plugged in to the rise of so-called esports – where players compete in games like Fortnite and League of Legends – to sell more products.  During the three months to the end of September, Logitech sales rose 75% to $1.26 billion. Net income rose to $266.9 million from $73 million a year earlier.

Nestle organic sales beat third-quarter expectations on Wednesday with 4.9% growth driven by strong demand for pet food, coffee and health products.  The world’s biggest food group has weathered the COVID-19 pandemic better than some as its focus on high-growth categories helped offset a slump in food sales to restaurants and cafes.  Shares in Nestle, up 2.5% so far this year, rose 1.6.

In contrast, French group Danone announced an extensive review this week that could lead to disposals after sales fell 2.5% in the third quarter.  

In the bond market, Getlink, the company which runs the Channel Tunnel linking Britain to mainland Europe, said on Tuesday that it was planning to issue some new “green bonds”, in a further sign of that bond market’s growing importance.  Getlink said it would issue Senior Secured Notes due in 2025, to refinance its outstanding 550 million euros worth of senior secured “green” notes due to mature in 2023, with a 3.625% coupon.

Green bonds are used to finance clean energy and environmental projects such as wind farms and low-carbon transport.

Italian yields rose to a two-week high while core European government bond yields were stable on Thursday.  Italy’s rating is also due to be reviewed by the credit rating agency S&P on Friday.  Italy is rated BBB with negative outlook, a one-notch downgrade would leave Italy’s rating just above a feared junk rating.

Italian 10-year BTP yield rose 1.2 basis points to 0.792%, a two-week high. Yields across older maturities were more subdued, though the 30-year yield also rose to a two-week high of 1.692%.

Greece has mandated investment banks to manage the reopening of a 15-year bond which it plans to launch in the near future.  Greece, rated B1 by Moody’s and BB- by Standard & Poor’s, raised 2.5 billion euros in September with the reopening of a 10-year bond.  Final pricing in that transaction resulted in a yield of 1.21%-1.23%, the lowest ever for the country in any bond tender.

Greece emerged from a decade-long debt crisis in August 2018 having returned to international bond markets in 2017. It has raised 7.5 billion euros from bond issues so far this year.

On Thursday, benchmark German 10-year Bund yield was flat at -0.58%, but close to the -0.56% high it reached the day before, the highest since Oct. 14.

Gold

Gold fell on Thursday as the dollar recovered some lost ground after doubts emerged on whether U.S. lawmakers could reach agreement on a new coronavirus aid package before the November presidential election.

Spot gold fell 0.3% to $1,919.65 per ounce after hitting more than a one-week high on Wednesday. U.S. gold futures slipped 0.3% to $1,923.00.

Widely viewed as a hedge against inflation and currency debasement, bullion has gained 26% this year as central banks and governments globally unveiled unprecedented stimulus measures to cushion the economic fallout from the pandemic.

Elsewhere, silver fell 0.5% to $24.94, platinum gained 0.3% at $888.47 and palladium dropped 0.1% to $2,401.73.

Currency Roundup

Sterling rose by as much as 1.7% versus the dollar on Wednesday after the European Union’s chief negotiator Michel Barnier said that an EU-UK deal was “within reach”. Intensified trade talks between Britain and the EU resumed on Thursday afternoon.

On Thursday the pound, which reached as high as $1.3177 on Wednesday, was at $1.3136, down around 0.1%.  Against the euro, it was little changed at 90.33 pence per euro, having strengthened to as much as 90.115 pence per euro in the previous session.

The US dollar was steady above seven-week lows on Thursday, as hopes of a fiscal package in the United States ahead of the November elections crumbled once again.  In London, the dollar index was a touch lower against various currencies, at 92.612, but holding above its lowest level since 2nd September.

The euro edged 0.16% lower to $1.18420.

Japan’s yen drifted away from Wednesday’s four-week high of 104.345, last sitting at 104.74 against the dollar.

The Australian dollar was down 0.1% against the US dollar, while the New Zealand dollar stood at $0.6664 – up from $0.6551 on Tuesday.

Elsewhere, the Chinese yuan dropped from a 27-month high on signs that the authorities have become increasingly wary over the recent rapid gains in the currency.  The offshore Chinese yuan was down at 6.6548 per dollar.

Oil

Oil prices struggled on Thursday after heavy losses overnight, with a build in U.S. gasoline inventories pointing to a deteriorating outlook for fuel demand as coronavirus cases soar in North America and Europe.

Brent crude futures were down 1 cent, or 0.02%, to $41.72 a barrel having slumped 3.3% on Wednesday.  U.S. West Texas Intermediate (WTI) crude futures were 4 cents lower, or 0.1%, to $39.99 a barrel, after sliding 4% the previous day.

U.S. gasoline stocks rose by 1.9 million barrels in the week to Oct. 16, compared with expectations for a 1.8 million-barrel drop.  Overall product supply averaged 18.3 million barrels per day in the four weeks to Oct. 16, down 13% from the same period a year earlier.

With new daily COVID-19 infections hitting records in several U.S. states and in Europe, new lockdowns and China’s clampdown on outbound travel to help stem the spread of the disease bode ill for fuel demand.  Worsening the outlook, hopes that U.S. lawmakers would reach an agreement with the White House on an economic stimulus package dimmed late on Wednesday after President Donald Trump accused Democrats of holding up a compromise deal.

Adding to the supply concerns, Libyan oil exports are quickly accelerating into October as loading restarts following the easing of a blockade by eastern forces.  Libya has seen production recover to about 500,000 barrels per day and the government in Tripoli expects that to double by year-end.

Malta – 2021 Budget

On 19th October 2020, the Minister for Finance presented the Budget for 2021.  This summary, from EY, highlights some key measures presented to Parliament by the Minister of Finance in the Budget Speech.

INCOME TAX

Extension of tax rebates

Individuals whose income is less than €60,000 will continue to benefit from a refund of tax. Individuals whose income falls within the tax free bracket will also benefit from such refund. This refund will be increased to €45 – €95, with the highest refund being provided to the lower income earners.

Tax rebates for pensioners

The tax rebates on pension income will increase; the first €14,058 of pension income will now be exempt from income tax.  Moreover, the further tax rebate which may be claimed by pensioners bringing to charge their pension income at the married rates and earning another source of income will be increased as well, such as that now the first €3,600 of other income will be exempt from income tax.

Fiscal incentives for private pensions

As from next year, the amount of annual financial investment in a pension scheme in respect of which there is an exemption from income tax will be been increased by €1,000 per annum to €3,000 per annum.

Extension of partial exemption on Property Transfers Tax

The Scheme originally contemplated in Legal Notice 241 of 2020, which provides for a partial exemption on property transfers tax levied on the transfer of immovable property such that tax is levied at the rate of 5% instead of at 8% for the first €400,000 of the amount or value of the consideration for transfers of immovable property, will be extended to promise of sale agreements registered until 31 March 2021 insofar as the final deed of sale is made by 31 December 2021.

Extension of final tax on transfers of promise of sale agreements

With effect from 1 January 2021, a final tax of 15% will apply on all of the gains or profits derived from the transfer of a promise of sale agreements. This extension will apply until 31 December 2021.

DUTY ON DOCUMENTS AND TRANSFERS

Extension of various schemes

The following existing tax schemes will be extended for another year:

– the Scheme originally contemplated in Legal Notice 59 of 2016 providing for a reduced rate of duty of 2.5% on the higher of the amount or value of the consideration paid upon the acquisition of vacant immovable property situated within an Urban Conservation Area.

– the Scheme originally contemplated in Legal Notice 384 of 2016 providing for a reduced rate of duty of 2% on the higher of the amount or value of the consideration paid upon the purchase of residential immovable property situated in Gozo.

–  the Scheme originally contemplated in Legal Notice 131 of 2017 providing for a reduced rate of duty of 1.5% on the real value of shares held in a family business or immovable property used in a family business donated to close family members.

–  the Scheme originally contemplated in Legal Notice 39 of 2018 providing for a refund of a portion of the duty paid by second-time buyers upon the acquisition of their second immovable property situated in Malta.

The Scheme originally contemplated in Legal Notice 240 of 2020 providing for a reduced rate of duty of 1.5% for the first €400,000 of the amount or value of the consideration for transfers inter vivos of immovable property will also be extended for promise of sale agreements registered until 31 March 2021 insofar as the final deed of sale is made by 31 December 2021.

The first-time buyers scheme providing for an exemption from duty on the first part of the consideration introduced by Legal Notice 393 of 2013 has been extended. In addition, the exempt portion has been increased from €175,000 to €200,000.

Those individuals acquiring property for the purpose of establishing their own residence, who are either acquiring the property by inheritance or are not first-time buyers will now be subject to duty at the reduced rate of 3.5% on the first €200,000 instead of €175,000. 

 Increase in exempt portion on donations

Direct descendants who are gifted immovable property for the purpose of establishing their own residence shall now be exempted from duty on the first €250,000 (increased from €200,000) of the value of the property so transferred. The duty to be charged on the remaining value shall remain to be charged at the reduced rate of 3.5%.

VALUE ADDED TAX

Small Undertakings registration threshold increased

Eligibility criteria allowing persons to register under Article 11 of the VAT Act have been relaxed. Taxable persons registering under Article 11, colloquially referred to as ‘VAT exempt persons’, do not charge VAT on their outputs and are not entitled to claim back input VAT. Similarly, Article 11 registrants are subject to a simplified reporting framework (consisting in a single annual declaration of sales/purchases as opposed to the four quarterly VAT Returns filed by Article 10 VAT registered persons). The eligibility turnover threshold has been increased from €20,000 to €30,000 enabling even more taxable persons to qualify for this simpler type of VAT Registration.

Extension of reduced VAT rate on bicycles

The VAT refund scheme associated with the acquisition of Bicycles and Pedelec Bicycles as per Government Notice No. 1,470 dated 15 November 2019 published in Government Gazette No. 20,296 will be extended for another year.

TARGETED COVID MEASURES

Government vouchers

Government vouchers of a €100 will be issued once again to individuals aged 16 or over. €60 of these vouchers may be used for accommodation, hotels and restaurants, whilst €40 may be used in retail stores and for other services.

Wage supplement

The COVID Wage Supplement will be extended until the end of March 2021.

Other measures

The COVID liquidity measures announced by the Government, including the tax deferrals, the moratorium, the Guarantee Scheme and Interest Rate Subsidy Scheme, will be retained. These schemes will be evaluated at the end of March 2021.

OTHER MEASURES

Environmental grants

The Malta Stock Exchange will develop an attractive package for investors to issue ‘Green Bonds’, to be used to finance projects which promote renewable energy and which reduce air pollution.

A number of environmentally friendly schemes will be extended, including:

–   schemes to install PV panels, heat pump water heaters, solar water heaters, batteries to store renewable energy;

–  schemes to restore wells and to install reverse osmosis,

–   schemes to scrap older vehicles and to invest in electric vehicles.

Schemes will be made available for private residences and enterprises to introduce ‘Green Walls’.

Grants equal to the tax due on the sale of produce will be provided to the agriculture and fisheries sectors for sales made at Pitkalija and Pixkerija. The grants will be tied to investment in projects aimed to reduce wastage of produce.

A plan is in the works for tourism establishments to start generating clean energy.

Environmentally friendly vehicles / Registration tax

As from 1 January 2021, the Vehicle Registration Tax and annual license fee will be calculated with reference to the Worldwide Harmonized Light Vehicle Test Procedure (WLTP) Test. The revision should not result in an increase in the existing rates. Actually, the majority of consumers will benefit from a reduction in the relevant rates.

The acquisition of electric vehicles (including electric plug-in vehicles) will be encouraged through vehicle registration tax exemptions and a 5 year annual registration tax exemption. Earlier on this year, Enemalta had launched a pilot project concerning residential charging of electric vehicles. The Pilot Project provided for a fixed (beneficial) rate applicable to the consumption of electricity during the off-peak period.  The Minister announced that the system will remain in force.

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