WASHINGTON – The United States should extend electric vehicle (EV) tax credit benefits to Vietnam if it wants to encourage a landmark investment from the country in US-based manufacturing, the head of the main US business lobby for Southeast Asia said.

Rules included in the US Inflation Reduction Act (IRA) aimed at reducing US dependence on Chinese EV battery supply chains currently only benefit countries that have free trade agreements with Washington – a list that excludes Vietnam.

Vietnamese automaker VinFast last week began construction on a $4 billion plant to produce EVs in North Carolina for the US market, but could struggle to compete without the tax break, said Ted Osius, a former US ambassador to Vietnam who heads the US-ASEAN Business Council, a lobby group.

VinFast responded to President Joe Biden’s call for electric vehicles to be manufactured in the United States, Osius told Reuters in an interview on Thursday, “Now they will have some asks. They will want to be part of the EV supply chain and they won’t want to be discriminated against in favor of other EV producers.”

There was “no clear path” for Vietnam to get the tax benefits at present, but the fact VinFast was moving ahead with construction shows “a certain amount of confidence that this is going to be worked out – and I share that confidence,” Osius said.

Whether Biden’s administration can work out a solution for the Vietnamese automaker could be a test of how far the benefits of the IRA can be extended.

The IRA awards a $7,500 tax credit on EVs bought in the United States provided that a percentage of critical minerals that go into making the batteries are sourced from the United States or a free trade partner.

The United States signed a deal in March with Japan on critical minerals that ensures Japanese cars will benefit from the tax credit. Now, both the EU and Britain are looking for the same.

Biden said last week he could meet Vietnam’s leader at the G20 summit in New Delhi in September, where the two are expected to agree steps to deepen a relationship that has blossomed in recent years amid rising US tension with China.

Osius said Washington should extend the tax benefit to signatories to the Indo-Pacific Economic Framework (IPEF), a trade imitative that involves 14 countries, including Vietnam and nearby Indonesia, which has vast reserves of the minerals found in batteries.

The Biden administration launched IPEF as part of efforts to step up economic engagement with Asia after former President Donald Trump pulled out of a pan-Pacific trade pact, but it lacks the market-access provisions ASEAN states want. — Reuters

Euro zone yields rose on Friday after German industrial orders jumped in June, while investors await crucial United States data after Thursday’s numbers failed to provide further clues about whether the Federal Reserve would hike rates one more time this year.

German orders rose against expectations for a drop, driven by gains in the aerospace sector that left analysts divided over whether the reading represented a sustainable upturn.

A Reuters survey of 80 economists expects US payrolls to increase by 200,000 jobs last month after rising 209,000 in June. Thursday’s data showed the number of Americans filing new claims for unemployment benefit rose slightly last week, while layoffs dropped in July as labor market remained tight.

“Our base case remains that Fed rates have already peaked for the cycle. But with two more consumer price inflation readings and two more monthly jobs releases before the Fed’s next policy meeting in September, investor sentiment could continue to shift,” Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, said in a research note.

Germany’s 10-year government bond yield, the euro area benchmark, rose 4 basis points (bps) to 2.60%, a 3-week high.

The German yield curve slightly deepened its inversion after reaching the least inverted level since mid-June on Thursday.

The gap between 2-year and 10-year yields was at -60.7 bps after hitting -59.2 bps the day before.

Analysts said the spread between short-dated and long-dated yields might further narrow its inversion as more apparent signs of a global economic slowdown or falling inflation are required to justify the rate cuts that are currently reflected in the inverted yield curves.

Investors have been focused on US government bonds markets after Fitch downgraded the US credit rating and the Treasury Department’s announced offering of $103 billion in Treasuries as it faces a growing deficit and the need to balance the overall profile of its debt issues.

A bond selloff drove US 10-year yields up by around 20 bps since the announcements, affecting the euro area bond market.

As Deutsche Bank analysts put it “the bond vigilantes have camped out on the lawn of the US fixed income market this week as the selloff entered its third consecutive day on Thursday in the shadow of US Treasury credit quality jitters and confirmation of increased Treasury supply.”

Italy’s 10-year yield, the benchmark of the euro area’s periphery, rose 3 bps at 4.28%, with the spread between Italian and German 10-year yields roughly stable at 168 bps. — Reuters

PARIS – The United Nations food agency’s world price index rebounded in July from two-year lows as vegetable oil markets jumped on renewed tensions over exports from war-torn Ukraine and concerns over global production.

The Food and Agriculture Organization’s (FAO) price index, which tracks the most globally-traded food commodities, averaged 123.9 points in July against a revised 122.4 for the previous month, the agency said on Friday.

The June reading was initially given as 122.3.

The July score was nonetheless almost 12% lower than a year ago and 22% below an all-time peak reached in March 2022 following the start of Russia’s invasion of Ukraine. — Reuters

LONDON – Russia has doubled its 2023 defense spending target to more than $100 billion – a third of all public expenditure – a government document reviewed by Reuters showed, as the costs of the war in Ukraine spiral and place growing strain on Moscow’s finances.

The figures shed light on Russia’s spending on the conflict at a time when sector-specific budget expenditure data is no longer published.

They show that in the first half of 2023 alone, Russia spent 12%, or 600 billion roubles, more on defense than the 4.98 trillion roubles ($54 billion) it had originally targeted for 2023.

Defense spending in the first six months of 2023 amounted to 5.59 trillion roubles, 37.3% of a total 14.97 trillion roubles spent in the period, the document showed. Russia’s budget plan envisages 17.1% of total funds spent on “National Defense”.

Russia’s government and finance ministry did not respond to requests for comment on the numbers.

Rising war costs are supporting Russia’s modest economic recovery this year with higher industrial production, but have already pushed budget finances to a deficit of around $28 billion – a figure compounded by falling export revenues.

Higher spending on defense, as Moscow prosecutes what it calls a “special military operation” in Ukraine, could widen the deficit further, while the boost in output could cannibalize other sectors and crowd out private investment.

Reuters calculations based on the document showed that Russia had spent 19.2% on defense in the first six months of all initially planned budget expenditure for 2023 as a whole.

The last publicly available data showed Moscow had spent 2 trillion roubles on the military in January and February.

In the first half of this year, budget expenditure was 2.44 trillion roubles higher than the same period of 2022. Based on the document, 97.1% of that extra sum was directed to the defense sector.

The document provided a new estimate for annual defense spending of 9.7 trillion roubles, one third of the total spending target of 29.05 trillion roubles, which would be the highest share in at least the last decade.

Between 2011 and 2022, Russia spent a minimum of 13.9% and a maximum 23% of its budget on defense.

Russia has already spent 57.4% of its new annual defense budget, the document showed.

FULL CAPACITY?

Military production has driven a strong recovery in industrial output, and analysts say that state defense contracts have been a key driver in Russia’s economic recovery to GDP growth so far this year from a 2.1% contraction in 2022.

Specific defense funding falls under closed expenditures, but some data, though no longer public, is circulated. For example, the document shows that Russia spent almost 1 trillion roubles on military salaries in the first half, 543 billion roubles more than in the same period last year.

Deputy Prime Minister Denis Manturov said in July that the defense industry was now producing more munitions each month than it did in the whole of 2022.

Funding for schools, hospitals and roads was already being squeezed this year in favor of defense and security, but as the share of defense spending grows, other areas could face cuts.

“The military industrial complex is enabling industrial growth, ‘civilian’ industries are slowing down again,” said Dmitry Polevoy, head of investment at Locko-Invest, after last week’s industrial output data for June.

That showed a 6.5% year-on-year increase, largely thanks to last year’s low base effect. When excluding seasonal production, growth stopped altogether.

CentroCreditBank economist Yevgeny Suvorov said the military industry was running at full capacity.

“We don’t know what the potential for a further increase in the output of tanks and missiles is,” Suvorov said on his MMI Telegram channel.

“But we know that increasing this output even further is possible only at the expense of haemorrhaging more staff from other sectors of the economy.”

Net exporter Russia typically posts budget surpluses, but will post a deficit for the second year running, with the value of energy exports down 47% year-on-year in the first half.

Higher budget spending adds to inflation risks. The central bank hiked rates to 8.5% in July and analysts expect the cost of borrowing to rise further.

The Bank of Russia forecasts GDP growth at 1.5%-2.5% this year, in line with analysts polled by Reuters last week. The International Monetary Fund in April forecast 0.7% growth this year, but with global isolation to dampen Russia’s prospects for years to come.

“Abundant fiscal ‘steroids’ are helping fairly well for now, but are hardly improving the economy’s medium- or long-term position,” said Polevoy.

“As soon as fiscal consolidation becomes unavoidable, there will be a rapid economic slowdown.” — Reuters