Week in Review

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Week in Review

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February 15, 2021

UK economy slumps by record 10% in 2020 after COVID hit. Britain’s coronavirus-ravaged economy suffered its biggest crash in output in more than 300 years in 2020 when it slumped by 9.9%, but it avoided heading back towards recession at the end of the year and looks on course for a recovery in 2021. (Reuters)

Putin’s hopes for economic revival threatened by shortage of workers. Vladimir Putin’s hopes of getting his economy growing again quickly are likely to be dashed by Russia’s shrinking work force. (Business Mirror)

UK and EU in standoff over Northern Ireland Brexit deal. The U.K. and the European Union remain locked in a standoff over how to implement the Brexit deal in Northern Ireland, despite more than three hours of talks between top officials on Feb. 11. (AJOT)

International banks barred from Taiwan currency market after controversial grain trades. Taiwan’s central bank has taken enforcement action against six banks, including Deutsche Bank, ING and ANZ, for letting commodity traders route transactions through Taiwan to speculate on local currency rates. (Global Trade Review)

German businesses dismayed by further lockdown extension. The German business community expressed consternation on Feb. 11 after Chancellor Angela Merkel and regional leaders agreed to extend the coronavirus lockdown until March 7. (HSN)

Five questions about Nigeria’s road to recovery. The COVID-19 pandemic has placed Nigeria at a critical juncture. The country entered the crisis with falling per capita income, high inflation, and governance challenges. Policy adjustments and reforms designed to shift the country from its dependence on oil and to diversify the economy toward private sector-led growth will set Nigeria on a more sustainable path to recovery. (IMF)

Russia warns EU it’s ready to break off ties over sanctions. Russian Foreign Minister Sergei Lavrov warned that his country is ready for a break in ties with the European Union if the bloc imposes sanctions that damage Russia’s economy. (AJOT)

Portugal defends ‘geopolitical’ importance of EU-Mercosur trade deal. Portugal’s secretary of state for internationalization, Eurico Brilhante Dias, defended the importance of the EU-Mercosur agreement, not only in the field of trade, but also at “geopolitical and geostrategic” level. (EurActiv)

Front companies, forged documents and vessel spoofing: US takes aim at Iranian oil. U.S. authorities say companies in Iran are using forged shipping documents, vessel impersonation techniques and UAE-based front companies to circumvent sanctions and export oil. (Global Trade Review)

Assessing the Turkish government’s olive branch to Israel. Following the election of Joe Biden as the next U.S. President, Turkish President Recep Tayyip Erdoğan has set the eyes of an increasingly diplomatically isolated nation on its regional neighbour and former ally. Israel, spurred by the threat of Iran in the region, has also sent signals that rapprochement with Turkey is on the cards. Can the two countries mend their fraught relationship? (Global Risk Insights)

Pakistan and Saudi Arabia reconcile amid shifting alliances. For Riyadh, the road to Beijing goes through a friendly Islamabad. (Interpreter)

Lunar New Year serves up mixed fortunes for food exporters grounded by tariffs, lockdowns. Lobster prices have dropped by more than half ahead of Lunar New Year celebrations. (ABC.AU)

Venezuela cedes control of companies. As nation starves, investors join with public food companies. New managers expected to hand over part of production, profits. (Bloomberg)



New Articles


Euler Hermes:

Wells Fargo:

Draghi Starts to Gain Support

Chris Kuehl, Ph.D., NACM Economist

The suggestion that Mario Draghi be charged with forming the next government in Italy was met with some opposition from the two populist parties at first, but they seem to be softening their opposition. The reality is that Italy is crashing and fast.

It has one of the worst pandemic outbreaks and looks to be on the edge of losing control. The economy is hurtling toward a very deep recession that could take years to climb out of, and the two dominant parties have been spectacularly inept while being preoccupied with internal battles and ideological conflicts. If the situation is not reversed, they will take the blame for the Italian collapse.

In meetings with Draghi, there has been an understanding of sorts. It appears that Draghi has reassured these political leaders that he is not interested in power as a means to create his own political base.

He is there to rescue the nation and will focus on the pandemic and the economy to the exclusion of everything else. This rescue can’t happen without extensive EU support. Right now, there is not much enthusiasm for bailing out a nation that has been so self-destructive.

Draghi is the man with the EU connections and trust. He may be the only leader that can get the other Europeans engaged in Italy’s rescue. This ability to communicate with the powers that be in Europe seems to have convinced the skeptics.



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Brazil: Bolsonaro Under Pressure

The PRS Group

President Jair Bolsonaro has now passed the midpoint of his four-year term and public calls for his removal are becoming louder amid revelations of serious missteps by the government in its handling of the COVID-19 pandemic. The government has only belatedly initiated a vaccination program, and public anger with the government has been stoked by the revelation that the Ministry of Health rejected Pfizer’s offer to deliver 70 million doses of vaccine and the release of a report that contends officials pursued a strategy of acceleration the spread of infection with the aim of fully reopening the economy as quickly as possible.

Although victories for the president’s preferred candidates in upcoming congressional leadership elections are not assured, he can probably count on enough support to avoid the threat of impeachment. However, with his approval rating sagging to near 30%, Bolsonaro may struggle to revive his stalled program of structural reforms. Unfortunately, failure to make headway on tax reforms and privatization will greatly complicate the task of reining in a budget deficit swelled by emergency spending and revenue shortfalls related to the health crisis.

Much of the pandemic-related spending was executed under a declaration of “public calamity,” and so was not subject to the fiscal cap established in 2016 with the aim of creating a policy anchor. Economy Minister Paulo Guedes, among others, has warned that policymakers cannot continue to ignore the statutory brake on spending without risking a damaging bout of market volatility.

That point is currently a topic of debate among factions within the government and the Congress, and the lack of consensus is already contributing to anxiety among investors. With some $270 billion of debt due to mature over the next 12 months, it looks increasingly as though the government will face a reckoning sooner rather than later if Bolsonaro cannot make progress on the reform agenda.

The recent market volatility and the uncertain impact of a fresh wave of COVID-19 infections in the U.S., Europe, and elsewhere on external demand has cast doubt upon the government’s expectation that a favorable base effect will fuel real GDP growth of 5.5% or more in the second quarter of 2021. The central bank has signaled its intention to maintain an accommodating monetary stance, despite signs of building inflation. That may be enough to push real GDP growth above 2% this year, but a late start or otherwise inadequate effort to rein in the deficit would increase the risk of a loss of confidence that triggers damaging market volatility. In that event, the perceived need for simultaneous tightening of fiscal and monetary policy would have a significant negative impact on the growth forecast.

The analysis above is taken from the January 2021 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.


Election Guide

Islamic Republic of Iran, President, June 18

Armenia, Armenian National Assembly, June 20

Nearly 60% of Global Bank Rating Outlooks Are Still Negative

Fitch Ratings

A newly updated interactive country-by-country map of bank rating trends from Fitch Ratings shows that nearly 60% of bank ratings were still on negative outlook at yearend 2020, with just a marginal decrease from the end of the first quarter (end-1H20). The proportion of ratings on rating watch negative, reflecting near-term risks, fell significantly to just over 1% from 10% at end-1H20, but most of the affected ratings ended up on negative outlook. There were virtually no ratings on positive outlook or rating watch positive.

The high proportion of negative outlooks may persist well into 2021. While immediate risks to bank ratings after the onset of the coronavirus pandemic have been largely avoided, medium-term risks remain from the gradual withdrawal of government support for the economy and for borrowers. A slower-than-expected economic recovery due to recurring lockdowns or vaccine deployment setbacks could exacerbate these risks.

Latin America still had the highest proportion of banks on negative outlook/watch (87%) at end-2020. This reflects difficult operating environments across the region, which we generally expect to worsen, and pressure on sovereign ratings and country ceilings, to which most of the negative outlooks/watches for banks are tied.

Western Europe had 78% of its banks on negative outlook/watch, reflecting material downside risks to our baseline forecast of a solid economic recovery in the region in 2021. Setbacks to the recovery could weaken the asset quality, earnings, and ultimately the capitalization of many banks.

The proportion of banks on negative outlook/watch was lower in North America (60%) and in Asia-Pacific developed markets (55%). While banks in these markets face similar risks to those in other regions, they generally have more headroom in their ratings.

About half (52%) of bank ratings in the Middle East and Africa were on negative outlook/watch. This is less than the global average, reflecting the significant proportion of stable outlooks linked to sovereign ratings in the Gulf Cooperation Council, and the fact that many African banks have seen their outlooks stabilize after being downgraded amid the pandemic.

Negative outlooks/watches were less widespread in emerging markets in Europe (40%) and the Asia-Pacific region (24%). Stable outlooks were more common in these markets, mostly due to the prevalence of ratings driven by our belief that banks would receive support, if needed, from a sovereign or parent institution that itself was on stable outlook. In addition, many banks had headroom in their viability ratings.

Globally, there were 29 bank downgrades and nine upgrades in 2H20. Downgrades were concentrated in the Middle East and Africa (18; all but one linked to sovereign downgrades), followed by Latin America and Western Europe. The upgrades were linked to the Argentina and Ecuador sovereign upgrades following their sovereign debt restructurings.

Reprinted with permission by Fitch Ratings.



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 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations