Week in Review

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Week in Review

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March 22, 2021

Greensill’s future receivables product a ‘rogue outlier,’ industry says. The future receivables product at the heart of Greensill’s controversial dealings with GFG Alliance is highly unusual and beyond the risk appetite of the wider trade and supply chain finance industry, insiders say. (Global Trade Review)

US, Chinese diplomats clash in first high-level meeting of Biden administration. The first high-level U.S.-China meeting of the Biden administration got off to a fiery start on Thursday, with both sides leveling sharp rebukes of the others’ policies in a rare public display that underscored the level of bilateral tension. (Reuters)

Irish assets worth 100 billion euros leave London due to Brexit. Securities settlement for Irish assets worth more than 100 billion euros ($119 billion) has left London for the European Union in the latest adjustment in markets to Brexit. (Reuters)

UK ports suffering post-Brexit container logjams. Post-Brexit trade disruption and ongoing congestion are causing critical build-ups of containers at U.K. ports, according to the latest data from Container xChange. (Global Trade Magazine)

Lebanon crackdown on black market money-changers fails to stem dollar crisis. The dollar exchange rate against the Lebanese pound rose again on Tuesday despite the measures taken by the security forces to pursue black market money-changers. (Arab News)

Cashless Venezuela? Maduro mulls digital payments amid shortage. Venezuelan President Nicolas Maduro has targeted the public transit system—where roughly three-quarters of all circulating cash is spent—as the first stage of his ‘digital bolivar’ plan. (Aljazeera)

Troubles ahead for the US–South Korea alliance. Biden’s efforts to nudge Seoul into the Quad may be self-defeating unless Moon Jae-in’s North Korea hopes are engaged. (Interpreter)

The US’s schizophrenic recovery: Banks’ earnings on the rise as the government bails out families. Talks of a “K-shaped” recovery after the pandemic crisis started in 2020, predicting that some sectors of the economy will benefit disproportionately by the pandemic, while everyone else bears the costs for it. Banks and the world of finance are surely to be on the benefiting end. (Global Risk Insights)

Authorities issue fresh guidance on trade finance money laundering risks. Financial crime authorities are upping efforts to tackle trade-based money laundering (TBML), urging lenders to watch for complex corporate structures or trade flows, circular payment arrangements and inconsistencies in documentation. (Global Trade Review)

The new EU trade strategy: What’s actually new? The new EU trade strategy unveiled by the European Commission contains much to be welcomed, but not much that is new. (EurActiv)

US warns banks over ties with sanctioned Chinese officials. The U.S. added more than a dozen Chinese officials to a list of people that banks must avoid, putting global financial institutions on notice that they risk running afoul of American sanctions. (AJOT)

7 Common Mistakes When Preparing Letters of Credit. You’ve established that a letter of credit is the best form of payment for your international sale. Now, you must pay special attention to make sure you correctly complete not only the letter of credit, but the entire process. Here are the common mistakes exporters make when completing letters of credit. (Shipping Solutions)

The digital bots coming for office jobs. Software bots are getting smarter and more capable, enabling them to automate much of the work carried out in offices. (Axios)

 

 

New Articles

Credendo:

Euler Hermes:

Wells Fargo:

Europe’s Economic Recovery Falls Further Behind

Chris Kuehl, NACM economist

Over the next several years, a great deal of analysis will be directed at 2020 as reactions to the pandemic are assessed. Nations that were hailed for their quick and aggressive lockdown actions are already under attack because economic recovery has been slow to manifest.

The U.S. had been viewed as cavalier regarding the threat, but now it stands to see much faster recovery in its economy. The U.S. expects to see a rebound to 2019 levels between late this year and early 2022, while Europe may be years from achieving those results. There have been many factors contributing to this divergence, but pandemic response has been at the top of the list.

The three dominant differences have involved public spending, restrictions on business and the distribution of the vaccine. China and the U.S. seem to be emerging from the pandemic at a rapid clip. Both countries have poured money into the economy. China has been the most aggressive in terms of public support and has paid little attention to what this has meant for its debt load. Now the U.S. has joined that club with the $1.9 trillion package. Europe and Japan have also spent, but at nothing close to the levels of the other nations, leaving many of the harder hit nations moribund and months away from any sort of recovery.

More importantly, the lockdown in Europe was generally more severe. The list of affected businesses was very long. The U.S. tended to focus on the service sector and shutdown restaurants and events as well as travel and tourism, but left much of retail alone. Many outlets were declared vital and remained functional. That allowed the consumer to shift spending more easily from services to goods. Many European orders affected retail, manufacturing, construction and a host of professional services. The populations were very tightly restricted and economic activity nearly ceased. Even now the decisions to reopen have been slow and incomplete.

The third factor is likely the most problematic. The vaccine distribution plan has been a mess from the start. There has not been enough vaccine produced, and the distribution system has been chaotic due to the fact 40 different nations have 40 different systems. The latest blow has been the controversy over the Astra-Zeneca vaccine. It has had side effects the others have not, and several nations have decided not to continue distribution. Given that this was to be the dominant vaccine option in Europe, this has been a major blow to the effort.

Beyond all of this is the fact Europe has not been prepared for this recovery as well as the U.S. The U.S. has accumulated extra savings equal to 14% of nominal private consumption, while key countries such as Germany, Italy, France and Spain have between 3% and 7% of that consumption level in excess savings. The U.S. is about to see that percentage swell even further with the stimulus and is now seen growing at around 6.5%, while Europe is looking at 3.5% at best.

 

 

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Supply Chain Finance Solutions Remain Key to Trade and Recovery

Scott Ettien, Willis Towers Watson

“Supply Chain Finance (SCF) refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain." The term is also used to define the financial relationship linking the buyer and the supplier together in terms of payables and receivables. Source: ITFA Supply Chain finance Paper 2018

There has been significant recent press coverage of supply chain finance (SCF) and trade credit insurance (TCI), much of it negative following the recent demise of a high-profile provider of supply chain capital.

But as we look toward economic recovery, both SCF and TCI remain critical tools to help facilitate trade while providing needed liquidity; and to promote their wider use, it is important that the role of these products is understood. This article provides additional information on this asset class (and insurance) to help demonstrate the nature of this area of the credit insurance market and the opportunities they provide for buyers and sellers.

Background and Explanation

SCF has become an increasingly valuable tool allowing corporations to monetize their accounts receivable by receiving early payment on invoices, while in many cases also providing extended payment terms to their customers. These programs help corporations manage concentration risks and mitigate unexpected payment issues and defaults. Today, many of the world’s largest banks have invested in supply chain finance teams to manage these facilities.

The Role of Trade Credit Insurance

As in any downturn, liquidity is key to survival and having SCF programs established in stronger economic times may be a suitable strategy to sustaining a business through unforeseen downturns and difficult economic times.

Given the growth in SCF facilities, TCI has become increasingly important to both banks and asset managers (who also recognize the value of this TCI enhanced financing method). This has resulted in this area becoming a key growth area for the trade credit insurance market.

When deployed properly, a well-managed, well-structured SCF facility is the key to a sustainable and profitable insurance program allied with the trust and cooperation between the insured, the insurer and the broker in onboarding, maintaining, increasing, decreasing and managing credit limits. All parties need to fully understand the transaction, desired impact, and how they can come together to minimize losses when past dues occur. To aid banks in reviewing potential programs, the International Trade & Forfaiting Association (ITFA) produced a 2018 paper that identifies some of the underwriting “red flags.”

Recommendation

We do not expect to see the market contract based on current events, but we do expect insurers to make program adjustments, whilst further developing their knowledge and widening their portfolio within this sector. As in any insurance line, underwriters will focus on maintaining rigor and consistent underwriting will help to build sustainable capacity and more profitable long-term business. One of the key learnings from this recent episode is for the insurers to delineate the different approaches institutions may have when utilizing SCF.

Moving forward, asset managers and financial institutions will see closer scrutiny of their motivation for purchasing trade credit insurance. Institutions that continue to demonstrate credit evaluation rooted in fundamentals and using TCI as a risk mitigation tool first, and sales enhancement second, are likely to find a receptive insurer audience. In addition, banks who have historically purchased the product for purely risk mitigation or capital relief purposes are also likely to find continued support from the TCI insurance market.

In comparison, a new market entrant who deviates from these fundamental elements will likely find it much harder to secure trade credit insurance capacity. Furthermore, where there is insurer interest, greater scrutiny will be applied to understanding the dynamics of the parties (the insured, the buyers, and the seller) as they establish these programs and policies.

Conclusion

Whilst the consequences and repercussions of recent events will continue to run their course, we believe that SCF and TCI will remain critical tools for trade and economic recovery. But it is worth remembering that ambitious growth goals, without best practice, may create an exposure to much higher risk and a subsequent dilution of credit quality.

Going forward, we see the choice of an experienced broker partner to be even more important to both financial institutions and asset managers as they seek to build sustainable, balanced TCI solutions, which will enhance and compliment their SCF facilities and objectives.

Scott Ettien is global head of trade credit for Willis Towers Watson.

 

Election Guide

Islamic Republic of Iran, President, June 18

Armenia, Armenian National Assembly, June 20

China: Moving Forward with New Agenda

The PRS Group

The seemingly successful containment of COVID-19 has paved the way for a return to rapid economic growth that will limit the risk that either domestic security or the stability of the CCP regime might come under serious threat in the near term. Although it is fair to say there is some doubt about the efficacy of locally manufactured vaccines and concerns about the slow pace at which the population is being vaccinated, President Xi Jinping and the CCP look set to survive the crisis with their legitimacy intact.

The 14th Five-Year Plan for 2021–2025 emphasizes a “dual circulation” strategy aimed at leveraging domestic capacity in the areas of production, distribution and consumption, while pursuing preferential access to international markets. The shift to a paradigm that implies a substantial measure of self-reliance reflects frustration with the impediments to development created by the trade dispute with the U.S. and is consistent with the ongoing transition to a growth model that relies on consumption as the main driver of sustainable economic expansion and job creation.

One question going forward is whether misgivings among the western powers over China’s geopolitical ambitions and human rights failures can be disentangled from fundamental trade and investment issues. The EU appears to be willing to give it a try, but an agreement under negotiation will need to be approved by the European Parliament, where it is likely to meet resistance.

China stands to benefit diplomatically from Brexit, as Prime Minister Boris Johnson lobbies hard to conclude bilateral trade and investment agreements that ensure British access to key international markets following the U.K.’s withdrawal from the EU.

However, Australia is digging in deeper in defense of Hong Kong’s autonomy and in resistance to China’s expansive claims of maritime sovereignty, creating tensions that are already raising questions about the viability of the RCEP, a 15-nation free-trade area that also includes Japan and South Korea.

As for the U.S., it remains to be seen how much of an impact the change in administration in Washington will have on relations with China. President Joe Biden has surprised investors by signaling that he is content to leave the punitive tariffs imposed by President Donald Trump in place, and the clash of interests that is an inevitable outgrowth of the two countries’ competition for status as the predominant global power will encourage the U.S. to align itself more closely with India, Japan and Australia among the regional heavyweights.

The analysis above is taken from the February 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.

 


 

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 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations