Week in Review
What We're Reading:
November 23, 2020
‘Attack of the Debt Tsunami’: Coronavirus pushes global debt to record high. Among advanced nations, debt surged above 432% of GDP in the third quarter—a 50 percentage points increase from 2019, while in emerging markets, debt levels rose to over 248% of GDP. (CNBC)
Expect more stability from Biden trade policy. While there is a risk of escalation from the current administration ahead of President-elect Joe Biden taking office, we expect a more conciliatory and multilateral approach from the incoming administration, reducing a major source of market instability during the Trump presidency. (UBS)
Who gains from RCEP, Asia’s new trade pact? Critics claim it will be dominated by China; but that is only part of the story. (Economist)
UK, Canada on brink of trade deal in Brexit boost for Johnson. The U.K. is poised to sign a new trade agreement with Canada to replace the existing deal it has through European Union membership, a step ministers say they hope will pave the way to even closer links with Britain’s 12th-biggest trading partner. (Bloomberg)
US Fed’s Powell signals emergency credit programs should be extended. Federal Reserve Chair Jerome Powell said on Nov. 17 it was not time to shut down emergency programs aimed at battling the economic fallout from the coronavirus pandemic, with cases again surging and the economy left with “a long way to go” to recover. (HSN)
The looming US withdrawal from the Open Skies Treaty. The Trump administration’s antipathy toward arms control will strike again on November 22, when the United States withdraws from the Open Skies Treaty. That is a mistake. While Russia has violated the treaty, the United States has reciprocated. NATO allies support the treaty—which focuses first and foremost on enhancing European security — and wish the United States to remain a party. (Brookings)
Investors welcome change of tack as Turkey unveils big rate rise. Central bank signals return to more conventional policy as it seeks to boost lira. (Financial Times)
Saudi Arabia says it will develop nuclear weapons if Iran cannot be stopped from making one. Adel al-Jubeir said it is “definitely an option” for the Middle-Eastern state to develop nuclear capabilities if its rival Iran could not be stopped from making one, according to reports. He reportedly told DPA news agency that other countries would also likely do the same. (Daily Mail)
EU and UK enter tension-filled week seeking post-Brexit deal. European Union and British negotiators on Nov. 16 entered yet another tension-filled week as they sought a belated post-Brexit trade deal that needs to be vetted and get legislative approval before a January 1 cutoff date. (Business Mirror)
Biden says world democracies must unite on trade policy. President-elect Joe Biden on Nov. 16 said the United States must join forces with other world democracies to present a united front in global trade policy as a counterweight to China. (EurActiv)
G20 urged to protect trade finance ‘lifelines’ as insolvency fears rise. The International Chamber of Commerce (ICC) is calling for “urgent” intervention by G20 governments to increase the availability of trade finance, as concerns grow over widespread insolvencies. (GT Review)
The clock is ticking for the Iran nuclear deal. Seven days into 2020 it appeared that President Donald Trump had pushed the U.S. and Iran to the brink of war. A few weeks later, an unprecedented global pandemic put a stop to that. Where do Iran and the U.S. stand now, and what does the future hold for their contentious nuclear agreement? (Global Risk Insights)
The Three Seas Initiative: A European answer to China’s Belt and Road? A quest to modernise dilapidated infrastructure in Central Europe has quickly transformed into a geopolitical contest. (Interpreter)
Delta skirts Trump tariffs by sending Airbus jets on world tour. Delta Air Lines Inc. is sidestepping millions of dollars in U.S. tariffs on European jetliners by initially routing them far outside the country to such places as Amsterdam, Tokyo and El Salvador. (AJOT)
How AI-driven technology can make expense management faster, smarter, and easier. Now more than ever, finance chiefs and their teams are looking to technology to redefine finance management, freeing up time from manual tasks to focus greater attention on analytical matters. Yet, given the vast array of existing and emerging technologies, it’s often difficult to know where to start. (Global Trade Magazine)
Chris Kuehl, Ph.D.
The experience of 2020 for China has been volatile in the extreme. At the start of the year, the nation experienced a drastic decline as the pandemic started. The initial impact of the outbreak was felt in China, causing its economy to dip first. Soon the pandemic spread to the rest of Asia. From there, it metastasized to the U.S., Europe and the rest of the world.
Today, China is among the first nations to experience an economic recovery and that process is accelerating at the same time that Europe, the U.S. and much of the developing world is sinking further to decline.
Foreign investment in China has risen by 18% this year, and the economy is expected to notch growth of more than 2%, a remarkable feat given the steep declines that will mark the economies of Europe and the U.S. in this same period.
China has been touting itself as a safe harbor for investors and businesses. The expectation had been that China would continue to slump in reaction to the pandemic and the anger that many nations have expressed toward the way that China has handled the outbreak. The assumption that business would turn away from China has been proven inaccurate along with many other assumptions made this year. There are three reasons cited for the resumption of growth in the country.
The first is the development of the Chinese consumer class. The estimate is that China now has a middle class of roughly 400 million people (as compared to a total U.S. population of 330 million). This has been a goal for Xi Jinping since he took control. He wanted to shift the nation from being dependent on exports to relying on its own consumer base and that has been largely successful. In past years, all that investment would be going toward the export economy and now most of the new investment is targeting the domestic sector, especially the logistics area. Many of the Asian states have drastically increased their exports to China as that consumer demand spiked. This demand for imports has been the driving force behind the new trade pact that was just signed between Asian states and China. The U.S. walked away from the TPP under the Trump administration, and China has essentially resurrected it. Now it is the U.S. that has been excluded and has lost access to Asia-Pacific trade.
The second major motivator has been the ability of the Chinese to gain control over the pandemic, but this has been controversial. The data from China has been suspect since the beginning. It has been obvious that there was obfuscation and outright deception regarding the disease. It is harder for the Chinese to hide numbers now, but there is still doubt that their infection rates have fallen as much as they claim. On the other hand, the Chinese have had more success with mandates because they have enforced mask wearing and isolation.
The third motivation has been the isolationist policies pursued by the U.S. Many former U.S. trade partners have been disillusioned by the anti-trade positions taken in the last four years, and China has taken advantage of these shifts. China has been able to move aggressively into Latin America and the entire Asia Pacific. There have even been inroads into Europe. The U.S. was once the free trade advocate, but that halted with the Trump administration and China has picked up market share as a result. It has helped immensely that China now has an appetite for imports and can attract nations that were seeing demand from the U.S. dwindle.
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Turkey: Foreign Distractions
The resumption of hostilities between Azerbaijan and Armenia over the Armenian-controlled territory of Nagorno-Karabakh has opened a new front in President Recep Tayyip Erdoğan’s efforts to establish Turkey as a key regional power. The ferocity of the fighting so far suggests that a full-scale war between Azerbaijan and Armenia is a real possibility. Erdoğan will try to avoid an active role for Turkish forces on the ground, but Ankara’s outspoken support for Azerbaijan’s stated aim of recapturing the breakaway enclave creates a risk of escalating tensions between Turkey and Armenia’s backers in Moscow that could complicate efforts to avoid clashes between the Turkish and Russian military forces currently deployed in Syria and Libya.
Erdoğan’s critics have accused the president of using foreign military adventures to distract the Turkish public from his government’s less-than-stellar handling of the COVID-19 pandemic. But an active involvement of Turkish forces against an enemy that poses little direct threat to Turkey’s security could quickly erode public support for Erdoğan’s position. In any case, it is doubtful that the stoking of nationalist sentiment will spare the government from the wrath of the Turkish public if it fails to halt a steep slide of the currency that has contributed to persistent double-digit inflation.
Turkey’s central bank hiked the one-week repo rate from 8.25% to 10.25% in late September, a surprise move that went against Erdoğan’s longstanding push for lower rates, and the banking regulator shortly thereafter reversed its April decision to reduce the cap on foreign banks’ foreign exchange transactions from 10% of equity to 1%. The moves signal the abandonment of efforts to prop up the lira without restoring to monetary tightening, a strategy that became unworkable against the backdrop of a widening current account deficit and the exodus of foreign capital.
The average policy rate remains negative when adjusted for inflation, which stood at 11.75% in September. With investors unconvinced, the lira tumbled to a fresh low of 8.34 against the dollar by late October. Going forward, the central bank appears to have little choice but to raise interest rates by at least a percentage point or two above inflation in the coming months, with negative implications for the strength of any economic recovery in 2021.
The analysis above is taken from the October 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.
WTO Goods Barometer Signals Trade Resilience Amid COVID Concerns
World merchandise trade appears to have rebounded strongly after plummeting in the midst of the COVID-19 pandemic, but whether growth can be sustained going forward is unclear, according to the WTO’s latest Goods Trade Barometer released Friday.
A sharp rise in the barometer index was driven by a surge in export orders, but the WTO notes mixed readings in other components and the resurgence of COVID-19 could weigh on trade in the coming months.
The Goods Trade Barometer’s current reading of 100.7 marks a dramatic improvement from the 84.5 recorded last August, which reflected collapsing trade and output in the second quarter as lockdowns and travel restrictions were employed to fight the virus. The latest reading indicates a strong rebound in trade in the third quarter as lockdowns were eased, but growth is likely to slow in the fourth quarter as pent-up demand is exhausted and inventory restocking is completed.
Trade-related uncertainty remains high. A second wave of COVID-19 infection is already underway in Europe and North America, leading to renewed lockdowns that could trigger another round of business closures and financial distress. On a more positive note, progress has been reported in the development of a vaccine, but when and how it might be deployed is not yet known.
The Goods Trade Barometer is designed to gauge momentum and identify turning points in world trade growth in real time. Readings of 100 indicate expansion in line with medium-term trends; readings greater than 100 suggest above-trend growth, while those below 100 indicate below-trend growth.
All of the barometer's component indices were rising in the latest months, with some climbing above their medium-run trends while others remained depressed. The recovery in the overall barometer index was driven by export orders (113.5) and agricultural raw materials (103.6), both of which finished firmly above trend. The indices for container shipping (102.0) and automotive products (94.6) also recovered substantially to near trend, while those for air freight (88.5) and electronic components (94.6) remained below trend.
The latest reading is consistent with the WTO’s revised trade forecast of Oct. 6, which predicts a 9.2% decline in the volume of world merchandise trade in 2020. This outcome would require a sharp rebound in the third quarter following the 17.2% year-on-year decline registered in the second quarter.
Typically, the barometer anticipates turning points in world trade by a few months, but new sources of uncertainty related to the COVID-19 pandemic may have reduced the predictive value of its component indices, the WTO stated. Under these circumstances, higher-frequency (i.e., daily or weekly) statistics may provide additional signals of economic activity and trade to complement the standard set of indicators. These indicators point to a stalled recovery of international flights and container shipping in October, but improved economic sentiment as reflected by copper futures and press reports.
Going forward, the need for liquidity and risk mitigation will be greater than ever. And this illuminates the potential promise gained from factoring, known as invoice or accounts receivable financing.
Join FCI’s Peter Mulroy as he presents his 10 factoring predictions for the post COVID-19 world. The FCI secretary general expects to see a significant rebound in 2021 and the years follow.
Other topics of the webinar include:
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations