Week in Review

What We're Reading:

October 26, 2020

China’s export control law provides legal guarantees for fair trade principle. China has passed the Export Control Law of the People’s Republic of China on Saturday. The law, which will take effect on December 1, stated that if any country or region abuses export control measures to endanger China’s national security and interests, China can take reciprocal measures based on actual conditions. (HSN)

Time running short, UK and EU get back down to Brexit business. With time fast running out, Britain and the European Union were starting intensified daily talks on Thursday in a final push for a deal to protect billions of dollars of post-Brexit trade. (Reuters)

Argentina passes 1 million cases as Covid-19 slams Latin America. Across Latin America, three other nations are expected to reach the 1 million case milestone in the coming weeks—Colombia, Mexico and Peru. The grim mark comes as Latin America continues to register some of the world’s highest daily case counts. (Business Mirror)

U.S. banks sweat regulatory exposure from pandemic loans. As taxpayers begin to take on the cost of forgiving those loans, lenders are girding for what is likely to be years of regulatory scrutiny for their role in doling out the money, according to industry insiders, securities filings and government watchdogs. (HSN)

Only 18% of IT pros confident in current password risk management. Many are having trouble maintaining the security of their employees’ log-in information, resulting in serious risks to their networks and private information. (Risk Management Monitor)

Hong Kong oil traders ‘unable to obtain finance’ after Singapore fraud scandal. Two Hong Kong-based oil traders say banks have reacted to the fraud scandal in Singapore’s commodities finance sector by restricting credit to the wider market, resulting in substantial financial losses. (Global Trade Review)

Resentment, smoke linger in Nigeria’s streets after unrest. Resentment lingered with the smell of charred tires Friday in Nigeria’s relatively calm streets after days of protests over police abuses, as authorities barely acknowledged reports of the military killing at least 12 peaceful demonstrators earlier this week. (AP News)

The future of the transatlantic alliance. Will the Transatlantic Alliance survive the Trump Era? The answer is a nuanced, yet resounding, ‘yes’. However, crucial changes in the Transatlantic Union will likely take effect as a result of a shifting world order wherein China, Russia and India represent serious threats to a US-led Free World. (Global Risk Insights)

Supply chain finance in the time of Covid. Ratings agencies and regulators have long feared that supply chain finance (SCF) might not survive an economic downturn, not least if liquidity-starved banks start pulling funding lines. However, since the outbreak and rapid spread of Covid-19, demand for SCF has soared and funding appears to have remained resilient. (Global Trade Review)

Argentina: A second Falklands brewing? The Falklands are once more set to be the centre of a dispute between Argentina and the United Kingdom if Argentina does not recover from its economic woes. Fears of possible new tensions rise with a president that is seeking to divert attention and use the Falklands to refocus the Argentine mindset. (Global Risk Insights)

Why are UK and EU still arguing over Brexit? As negotiators from the two sides hunker down for their final weeks of talks on an elusive trade agreement, Britain and the EU still don’t know whether they will begin 2021 with an organized partnership or a messy rivalry. (AP News)

Trump vs Biden on trade: addressing the major issues. Americans have had a chance to review Trump’s approach to trade over the course of his first term, but where Biden stands on issues such as handling China, onshoring supply chains, applying tariffs, and participating in the World Trade Organization (WTO) is perhaps less clear. (Global Trade Review)

‘Suganomics’: What can we expect? Japan’s new Prime Minister Yoshihide Suga, who took up office on 16th September, faces the challenge of revitalizing an economy still reeling from the effects of COVID-19. There are indications that Suga will continue many elements of his predecessor Shinzo Abe’s ‘Abenomics’ policy. Nevertheless, his economic policies are likely to diverge from Abe’s in a few key areas. (Global Risk Insights)

The next global economic threat: Old-age. While the world wrestles with a deadly pandemic and how to confront climate change, there’s another, long-term global challenge that no one really knows how to deal with: Population aging. (HSN)

Divorce proceedings between the U.K. and the EU rival the most bitter contests one can conjure up. It has been a series of ultimatums and furious reactions.

Delegations have been reduced to shouting at one another. There have been many episodes marked by the two sides breaking off all contact and walking away. The problem is that these parties must reach a deal if they want to avoid a crisis that will affect them all for years.

The pandemic has raised the stakes dramatically. Neither the U.K. nor the EU can afford much more economic stress.

The sticking points are the same as they have been from the very beginning, and after years of talks and maneuvers there has been little progress. Ireland remains the most vexing issue. The EU does not want to allow a “back door” to Europe through Ireland, and the U.K. doesn’t want to create another opportunity for an outbreak of sectarian violence.

The two sides have many reasons to develop a trade deal, and the need to do this has intensified with the lockdown recession. The U.K. is by far the more vulnerable, but Europe needs the deal as well. It looked as if the two parties would just walk away and let the chips fall, but at the last minute, there has been an opening with negotiations back on. Not that there is an expectation of much progress, but at least there is going to be a discussion again.

The year started on a sour note for President Carlos Alvarado, who in mid-February became embroiled in a controversy stemming from the executive’s creation of a data analysis department within his office that appears to have been granted unlimited access to confidential information about Costa Rican citizens. The furor over the scandal receded as attention turned to addressing the COVID-19 pandemic, but the issue could come back to haunt the president if the spirit of cooperation engendered by the health crisis gives way to acrimony between the executive and the legislative opposition.

The rising number of COVID-19 cases in recent weeks has dimmed hopes for a rapid economic recovery following a pronounced second-quarter downturn. With the fiscal deficit on track to exceed 10% of GDP in 2020, debt pressures that were eased following the passage of a fiscal reform package in 2018 are once again building toward a crisis, which the president is hoping to stave off by securing a lending agreement with the IMF.

Alvarado has decided that the potential political costs of his government’s tax-hike proposals are a fair price to pay for access to desperately needed financial support on manageable terms and the boost to investor confidence that would presumably accompany the IMF’s imprimatur. However, legislators, who, unlike the president, are eligible to seek re-election in 2022, do not seem open to persuasion on the matter.

None of which bodes well for either political or economic stability in the near term. Fitch, Moody’s, and Standard and Poor’s all downgraded Costa Rica’s credit rating deeper into junk territory in the first half of the year, and all three have assigned a negative outlook, indicative of a bias toward another downgrade in the event of any further setbacks in efforts to contain the deficit and the public debt.

The reopening of the country’s borders to tourists and other steps to ease restrictions gave the economy a lift in August, but a steep rise in COVID-19 cases creates a risk that some restrictions might be restored, and will likely deter many potential tourists from traveling to the country in the near term. The economy is forecast to contract by 5% in real terms this year, and with the budget deficit now expected to exceed 10% of GDP, the public-sector debt burden is projected to hit 70% of GDP by the end of 2020, three years earlier than previously forecast. The Legislative Assembly approved the use of $504 million in spending made available under the IMF’s rapid financing instrument in August, but additional support will be required if debt risks are to be kept in check.

The analysis above is taken from the September 2020 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.

Businesses need to have smooth, steady income flows in today’s volatile economic climate. Swiftly delivering business clients error-free invoices and ensuring that payments are received in a timely manner can be difficult enough for sellers operating within national borders. Those difficulties are only compounded when working globally, however.

International B2B sellers must tackle a variety of accounts receivable (AR) concerns to ensure that business partners from around the world will be able to reliably and easily pay them. One key hurdle often challenging businesses is the need to specially tailor invoices based on partners’ home countries’ local norms and regulations, said Jeff Edwards, CEO and founder of Energy Control Systems (ECS).

Corporate sellers must also determine how to handle situations in which they and their clients use different currencies, he explained in a recent PYMNTS interview. ECS sells primarily to overseas distributors and has had to familiarize itself with these challenges as its operations have grown to reach 43 countries. Tackling these complications requires careful attention to each markets’ particularities and thoughtful strategizing around risk.

Invoicing and Risk

Partnering with businesses from around the globe can unlock new opportunities but also pose new challenges. ECS sells mainly in Latin America, Africa and Asia, emailing invoices that average $5,000 to $7,000 each, and finds that countries vary widely over what details they require to appear on the documents. One-size-fits-all approaches do not work: One country’s regulators might insist on seeing delivery addresses while others might need to know the weight of the shipment, for example. This makes it essential for businesses like ECS to adopt software tools that can create and store different invoice templates that can be modified to suit each client.

“[Invoices require everything] from actual sales numbers to weights and [dimensional weights],” he said. “Sometimes it’s really in-depth specificity on delivery addresses or different packaging requirements on what they need to see in terms of box sizes, [or the] makeup of containers [and] enclosures. ... All our shipments need modified invoices.”

Successfully expanding to serve a new country not only entails learning different invoicing requirements but also confronting different levels of risk. ECS has faced challenges in finding international AR solution providers that can support working with clients in countries like Argentina, Nigeria and Venezuela, where solution providers often perceive there to be greater likelihoods of nonpayment or losses due to monetary volatility, Edwards said.

This leaves the seller to determine how to manage such risks. ECS has chosen to approach business relationships with a greater potential of nonpayment by requiring customers to make partial or full payments upfront rather than waiting for clients to pay 45 to 60 days after receiving invoices. The company maintains this method until enough history has been established between the two parties that ECS can trust that the client is likely to keep its end of the bargain if offered net payment terms.

“My biggest risk factor is when do I decide, ‘OK, we’ve got a long enough term history, do I roll the dice [on allowing them to pay later]? And what kind of credit line do I establish for them to be on net payment terms? Do I want to risk losing money?’” Edwards said.

There is no way to be certain a client will come through, but such a strategy helps minimize the chances of such a painful eventuality.

Tackling FX Challenges

International sellers also must determine strategies for serving clients that use other currencies. This can be a gamble, and businesses could find themselves in a position in which they have to take on FX risks themselves and accept that they could lose money should conversion rates change by the time the payments come due. They could instead require clients to handle the conversions and hope that this friction does not turn off too many prospective customers. This is a serious consideration for Texas-based ECS, which needs to receive funds in U.S. dollars, and the company knows it can be challenging for clients in some countries to get their hands on the currency.

“For [some clients in] Argentina, Brazil [and] several African nations ... the ability for them to get [U.S.] dollars to pay is probably the biggest challenge we have right now,” Edwards said.

ECS previously experimented with working with a partner that would accept local currencies from its foreign distributor clients, convert the funds into USD and deliver them to ECS. The intermediary charged clients for the conversion, however, and these fees ultimately proved more painful to distributor clients than any frictions involved when handling currency conversion themselves, Edwards said. ECS has since dropped this approach.

Devising the right cross-border AR approach can be a learning experience that involves some trial and error. Attentiveness to clients’ individual situations and to sellers’ and buyers’ particular needs can help companies minimize that error, however, and guide them in choosing the AR partners and software tools that best support smooth cash flows.

Reprinted with permission from PYMNTS.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations