Week in Review
What We're Reading:
Feburary 1, 2021
Mexican economy in 2020 suffers worst slump since Great Depression. Mexico’s economy last year suffered its biggest annual contraction since the 1930s, although it recovered better than expected from the impact of the COVID-19 pandemic during the final quarter, preliminary data showed on Jan. 29. (Reuters)
The Brexit impact so far—paperwork, process and higher prices. Britain’s departure from the European Union has triggered the biggest change in trade since it joined the bloc 48 years ago, with companies grappling with export documents, longer delivery times and the need to re-engineer supply chains. (HSN)
Italian premier resigns, setting off scramble for new allies. Italian Premier Giuseppe Conte resigned on Jan. 26 after a key coalition ally pulled his party’s support over Conte’s handling of the coronavirus pandemic, setting the stage for consultations last week to determine if he can form a third government. (Business Mirror)
Iran says it will not reverse nuclear steps before US sanctions are lifted. Tehran will not accept U.S. demands that it reverse an acceleration of its nuclear program before Washington lifts sanctions, Foreign Minister Mohammad Javad Zarif said on Jan. 29. (Reuters)
Are 2020’s tech IPOs the path to the first post-pandemic crisis? Buyers are pouring their money into “ever-riskier bets, driving valuations of unprofitable start-ups to levels that seem divorced from reality.” Against this background, the “current IPO craze is starting to look a lot like the 1999 tech bubble.” Will it burst? (Global Risk Insights)
The dark side of the democratization of trading. Can stock trading be too easy? That’s been a question since the retail trading boom took off last year. As armies of armchair investors download brokerage apps, stock prices have looked increasingly detached from economic reality. (Quartz)
Turkey, Europe, and the Eastern Mediterranean: Charting a way out of the current deadlock. Greco-Turkish maritime disputes, couched in competing narratives of national sovereignty, are nothing new. Disputes have traditionally taken the form of a frozen conflict, with occasional flare-ups. Given this backdrop, what are the driving factors behind the current dispute, which is the longest-lasting crisis between the two countries since 1974? (Brookings)
Central Asian elections update. As the U.S. reeled from violence at the Capitol, two Central Asian countries held elections that were both uncompetitive and unsurprising. On Jan. 10, voters in Kyrgyzstan and Kazakhstan took to the polls in elections that did not portend a change from the status quo. (Lawfare)
Who is US Treasury Secretary Janet Yellen? Economist Janet Yellen is liked by both Democrats and Republicans. This is a good starting point to her momentous task of getting the American economy back on track after the long COVID-19 derailment. (DW)
Poland: Heading towards ‘Polexit’? Conflicts between the Polish government and the EU have raised concerns over their future relationship. Poland, once a shining example of post-communist recovery, has damaged its international reputation through controversial reforms and political battles with the EU, most recently attempting to block the EU budget. (Global Risk Insights)
Another consequence of COVID: A world without cash. Amid the coronavirus crisis, Americans are abandoning cash almost entirely in favor of “tap and go” transactions. (CNBC)
Argentina: COVID-19 and economic woe. Already struggling with high inflation and a sovereign debt of over $300 billion, the onset of the COVID-19 pandemic confronted the Argentine government with new financial drains and economic hurdles. Faced with this crisis, Argentina’s economy has undergone a severe contraction. (Global Risk Insights)
'Red list' move to deliver 'near knockout punch' to popular UK-Dubai air routes. Industry experts on Jan. 29 said the move by the U.K. government to add the UAE to its “red list” of countries would deliver a “near knock-out punch” for the already beleaguered air route. (Arabian Business)
Bad News Now, Better News Ahead for Europe?
Chris Kuehl, Ph.D., NACM economist
The latest statements from the head of the European Central Bank are best described as a tale of two economies. Christine Lagarde has never been one to sugarcoat much in her years as French finance minister nor as the head of the IMF.
Lagarde has continued that tradition in her role as the head of the ECB. In a nutshell, she has described a pretty miserable start to 2021, but she has expressed some confidence for better news by year end. Most importantly, the ECB is not expected to change its policy on rates or overall support for the time being. That means that rates will not go up anytime soon, but it also means there are no immediate plans to do anything major as far as promotion and stimulation.
As has been the case for nearly every nation, the resurgence of the pandemic is the big news and the most important limiting factor as far as eventual economic recovery. Even nations that appeared as if they were getting a handle on the outbreak have been seeing their numbers rise in terms of hospitalizations, cases and fatalities.
No strategy has really worked. Nations that locked down tight are still getting hit hard, and those that took a looser approach have seen economic growth stifled anyway. There is simply not much that can be done to deal with the virus until and unless there is an aggressive roll out of the vaccine.
Delays and challenges have altered initial optimistic assertions about when the bulk of the population would be vaccinated. The assumption now is that reaching “herd immunity” will have to wait until mid-summer. This means another six months of lost jobs, closed businesses and economic stress.
The ECB plans to buy about $2.25 trillion worth of bonds through March of this year, which the bank elected to do at its December meeting. It will keep its interest rates at 0.5%. Analysts who responded to Lagarde’s statements have been critical to a degree and assert that she has not been as pessimistic as she should be. It is not that the statements assert any real progress at the moment, but they seem to holdout more hope for a solid recovery than might be justified. The entire eurozone has slipped back into recession over the last few months, and that is not entirely due to the pandemic impact.
Brexit has been dragging the EU and U.K. economies into decline even without the impact of the pandemic, and that damage will be a long-term problem. Lagarde pointed to the trade deal that was made in the waning hours of 2020 as a factor in EU recovery. Others don’t seem to share her enthusiasm and assert that the deal will not cover Brexit losses and will be much harder to implement than some assume.
Lagarde also pointed to the new administration in the U.S. as a reason for optimism, but that may also be somewhat overplayed. It is certainly true that Europe will benefit to some degree from the lack of overt hostility under former U.S. President Donald Trump, but there are not many practical changes in the relationship that will occur in the short term. The U.S. will doubtless be more engaged in NATO and other agreements, and the U.S. has rejoined the Paris climate accords. However, thus far, these are more symbolic moves than practical ones.
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Central Asia’s Regional Multi-Peril Risk Assessment Initiative Moves Forward
In continuing efforts to reduce the adverse impacts of natural disasters in Central Asia, the World Bank, together with partners, is launching a multi-peril risk assessment of natural disasters, including earthquakes, floods and selected landslides.
The initiative is being undertaken in close collaboration with the Almaty-based Center of Emergency Situations and Disaster Risk Reduction (CESDRR) and under the EU-Funded Strengthening Financial Resilience and Accelerating Risk Reduction (SFRARR) program, which is managed by the Global Facility for Disaster Reduction and Recovery (GFDRR) and implemented by the World Bank.
The overall objective of the initiative is to strengthen Central Asian countries’ resilience to natural disasters and climate risks by enhancing financial resilience, risk identification capacity, and improved disaster risk management.
In order to improve the assessment’s methodology and scope, during the past two months the World Bank and the CESDRR held discussions with members of the Regional Scientific-Technical Council (RSTC), which included government officials and scientific experts in Central Asia, and National Coordinators for Sendai Framework Program from all five Central Asian countries. The comments from the consultative process were reflected in an inception report, which will guide the implementation of the assessment over the next 21 months.
The multi-peril risk assessment is unique in that it is adopting a regional approach and aims to be consistent across multiple hazards and asset types—the first such attempt in the Central Asia region. Such a regional approach can significantly benefit countries in Central Asia by providing common analytics and metrics and allowing for building coherent and consistent strategic financial solutions across geographical areas and economic sectors.
The assessment will build on existing risk assessment and risk management concepts to provide a better understanding of how natural disaster risk affects the population, buildings and, in general, the economies of all five Central Asian countries. At the end of the process, local governments will also have access to a reliable tool that can be used to inform their disaster risk management strategies. The process will further enhance the understanding of natural disaster risks among the technical and scientific communities of the Central Asian countries.
Currency Impact Report: European Multinationals Hit Hard
European multinational corporations suffered the brunt of the $9.82 billion reported lost due to currency volatility in the third quarter of 2020, according to Kyriba’s Currency Impact Report (CIR).
The report details the impact of foreign exchange (FX) exposures among 1,200 multinational publicly traded companies based in North America and Europe. All companies in the report do business in more than one currency, with at least 15% of their revenue coming from nations that are located outside of their headquarters.
FX losses increased 126% in a single quarter for European companies, causing more than $7.61 billion in FX losses. North American corporations, by comparison, contained their losses as a result of currency volatility to $2.21 billion—the ninth largest impact since 2017, despite a weaker U.S. dollar and low volatility.
Highlights from the Q3 2020 Kyriba CIR include:
- For the first time since 2019, North American companies indicated the euro as the most impactful currency, with 24% of companies referencing the euro in their Q3 earnings calls. The Brazilian real fell out of the top spot and was the third most referenced currency.
- The Chinese yuan renminbi was the third most impactful currency for North American companies, followed by the Mexican peso and Korean won.
- The average earnings per share impact from currency volatility reported by North American companies in Q3 2020 remained at $0.04—four times greater than the industry standard of less than $0.01 EPS impact.
- The top five industries that experienced the greatest impact from currencies in North America were health care, machinery, professional services, technology and biotech. The top five industries that reported the greatest impact for Europe were communication services, electronics, biotech, chemicals and health care.
- Publicly traded European companies that qualified to be monitored in the Q3 2020 report had a collective currency loss of $7.61 billion.
- The U.S. dollar replaced the euro as the currency most mentioned as impactful by European companies during Q3 2020 earnings calls, followed by the Brazilian real, with the euro ranked third.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations