Week in Review

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What We're Reading:

Electronics industry faces labor shortages as chip deficit drags on. Around 60% of electronics manufacturers and other industry players project the global chip shortage to last until at least the second half of 2022, according to the most recent survey by trade group IPC. (SourceToday)

Central banks parse inflation risk as turn from pandemic policy begins. Central banks that launched massive emergency support to fight the pandemic last year are now planning a global turn in the other direction, with gaps already emerging in their perceived risk of inflation, the need to respond to it, and the pace of the likely return to normal monetary policy. (HSN)

China’s power cuts may lead to shortages of global goods. Global shoppers face possible shortages of smartphones and other goods ahead of Christmas after power cuts to meet official energy use targets forced Chinese factories to shut down and left some households in the dark. (Business Mirror)

Afghan central bank drained dollar stockpile before Kabul fell. The Afghan central bank ran down most of its U.S. dollar cash reserves in the weeks before the Taliban took control of the country, according to an assessment prepared for Afghanistan's international donors, exacerbating the current economic crisis. (Reuters)

EU and US hold first trade and technology talks amid tensionsThe new EU-US Trade and Technology (TTC) is set to hold its first meeting in Pittsburgh on Wednesday (29 September), in the shadow of the submarine dispute between France and Washington, which had put the transatlantic relationship to the test. (EurActiv)

North Korea says inter-Korean communication lines will be restored in early October. North Korean leader Kim Jong-un said that cross-border communication lines with South Korea will be restored in early October as part of efforts to improve chilled relations but warned that it is entirely up to Seoul to determine the future trajectory of their ties, state media reported Thursday. (YNA)

Towards a digital euro: What does it mean for the safety of Europe? The currently proposed design possibilities of a digital euro reveal vulnerabilities to compliance with anti-money laundering and counter-terrorist financing regulations, as well as pose a significant threat to the safety of children in the digital space.(Global Risk Insights)

US economic statecraft adrift as China seeks to join mega Asian trade deal. China’s decision to formally seek to join the Comprehensive and Progressive Trans-pacific Partnership (CPTPP), the world’s most important Asian trade deal, presents the U.S. with an enormous set of economic and diplomatic challenges. (Brookings)

Myanmar currency drops 60% in weeks as economy tanks since February coup. Myanmar's currency has lost more than 60% of its value since the beginning of September, driving up food and fuel prices in an economy that has tanked since a military coup eight months ago. (Reuters)

China: What is Evergrande and is it too big to fail? Global financial markets have been on high alert as cash-strapped Chinese property giant Evergrande faces several key tests in the coming days. (BBC)

China to keep Taiwan out of Pacific Rim trade group. Beijing said Wednesday it will block Taiwan’s application to join a Pacific Rim trade initiative, citing as its reason the island’s refusal to concede that it is a part of China. (Business Mirror)

BIS: Central bank digital currencies could slash costs for cross-border payments and speed transactions to seconds. The BIS outlined results of testing a prototype of a digital currencies platform under the mCBDC Bridge project. The prototype showed payment transactions could be made in seconds instead of days. (Markets Insider)

Erdogan is certain that peace in Middle East depends on Turkey-Russia relations. Peace in the Middle East depends on the relations between Turkey and Russia. This is what President of Russia Vladimir Putin said during talks with his Turkish counterpart Recep Tayyip Erdogan in Sochi, TASS reports. (EIN)

Global supply disruptions could still get worse, central bankers warn. Supply constraints thwarting global economic growth could still get worse, keeping inflation elevated longer, even if the current spike in prices is still likely to remain temporary, the world's top central bankers warned on Wednesday. (Reuters)

El Salvador has just started mining bitcoin using the energy from volcanoes. President Nayib Bukele—who has banked his political future on a nationwide bitcoin experiment—tweeted early Friday morning that this is the country’s maiden voyage into volcano-powered bitcoin mining. (CNBC)

 

The Biggest Risks in Global Trade Today May Not Be Exactly What You Think

Annacaroline Caruso, editorial associate

The driving forces behind global trade risks are always a moving target. That is why credit professionals must constantly update their arsenal of information so they can make smart credit decisions. 

One of the biggest risk drivers today is inflation because it has such a broad trickle-down effect, said Jay Tenney, managing director at Trade Risk Group (Irving, TX), during FCIB’s Global Expert Briefing. “Inflation touches absolutely everything. This is a global phenomenon.” 

For example, the obvious impact from natural gas and fuel price increases is more expensive transportation costs for goods. However, inflation effects on the global market are less evident, he said. “Byproducts of natural gas, like fertilizer, also will become more expensive, leading to an increase in food prices across the globe.”

The labor shortage is creating another type of inflation: wage inflation. Companies are struggling to find workers so they increase wages to try and attract new employees. However, companies need to compensate for the wage increase by passing those costs down to their consumers. 

“I have yet to come across a company that hasn’t had some problems trying to recruit labor,” Tenney said. In a survey of 45,000 employers across 43 countries, 69% of employers reported difficulties filling roles, according to Bloomberg

China possibly is struggling the most with a labor shortage and skilled workers’ gap. “China has more serious labor issues because they have one of the oldest populations in the world without people coming to fill the empty spots,” Tenney explained. 

What happens in China will have repercussions everywhere, so it is important to keep the nation on your radar. The largest property developer in China, the Evergrande Group, defaulted earlier this month and it is already hurting the Chinese economy. “[Evergrande] alone makes up 2% of China’s GDP and real estate makes up 80% to 90% of the net worth of China,” Tenney said “The effects of this will continue for a while.”

If the fallout from the Evergrande default spreads, “what might affect everyone credit-wise is you will see a fall in commodity prices, a rapid drop like we saw in July of 2008.” Tenney warned. “It is not that this is expected, but it is something to be aware of.”

As always, you should constantly monitor all tiers of your customers to ensure you have a total view of potential risks. Find out what businesses have a high exposure to China right now and keep a close watch. “You could have a great customer but if they are in a high-risk country, then you automatically have a high-risk customer,” Tenney said. 

FCIB will not hold a Global Expert Briefing this month, but we will pick back up in November with Fred Dons, who will provide an update on foreign exchange issues as we wrap up 2021.

 

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The Long and Windy Road to an African Free Trade Area

Afke Zeilstra, senior economist, Atradius

Similar to other economies, COVID-19 has had a negative impact on African economies, with most of the countries suffering economic contractions as others manage to record small growth rates. Countries were affected by a drop in trade, fewer tourists and lower foreign investments, among other challenges. Additionally, strict lockdowns impacted domestic economic activity. 

The recovery that started in late 2020 continues this year, in line with the global economic recovery and higher commodity prices. Economic growth for the Sub-Saharan African region is expected to reach 1.3% this year, which is moderate and uneven. Outlooks for African countries are diverse and uncertain based on their economic structure, vaccination processes and the spreading of the delta variant. In the meantime, the African Continental Free Trade Area (AfCFTA) poses a long-term opportunity. It could help boost Africa’s growth potential as trade becomes more liberal across the continent in the coming years.

The AfCFTA was started to create more opportunities for African companies, as well as international companies, and can contribute to accelerating African growth rates. Established in early 2021 by 54-member states of the Africa Union, except for Eritrea, the AfCFTA officially began to ensure a single continentwide market for goods and services and to make trade more accessible and attractive. 

This trade agreement aims to eliminate tariffs on most goods and services, liberalize trade of key services and address the nontariff obstacles for intra-trade. The goal to have a single market with free movement of labor and capital may take years to achieve, especially with the slow implementation of the plan in most African countries. 

The first phase of AfCFTA focuses on the trade of goods and services, and dispute settlement. The plan calls for tariffs being cut to zero for 90% of the goods in the next five years. However, some small and less developed countries will have a longer time to cut tariffs and are allowed to liberalize fewer goods. 

Although services also are included in this first phase of the AfCFTA, it will take longer to liberalize services. Members have agreed on financial services, transport, travel, communications, business services and tourism as the five priority areas. The AfCFTA does offer opportunities for service suppliers to easily access other markets. 

In general, African countries do not trade much with each other and mainly trade with the rest of the world. In recent years, African intraregional trade in goods and services only accounts for 17% of total exports, one of the lowest shares in the world. South Africa, with the largest share of intra-African trade, has established an important position. As one of the countries with a relatively open and diversified economy and well-established trade links, South Africa will likely benefit the most from AfCFTA. Other regional hubs such as Kenya, Senegal and Cote d’Ivoire also would be in a good position if AfCFTA is implemented as currently planned.  

Different sectors of goods and services also differ widely when it comes to tariffs. The highest average tariff in Africa applies to the manufacturing sector, closely followed by the agricultural sector. These two sectors also experience the highest non-tariff barriers, therefore tackling these issues is crucial for a successful implementation of the AfCFTA.

There are many factors to consider, but most African economies stand to benefit from the careful implementation of the AfCFTA, especially when it comes to the elimination of the non-tariff barriers. If fully implemented, it could boost the African continent’s potential and create opportunities for local and foreign companies. However, there are still several challenges facing African countries in the implementation of the AfCFTA before they can enjoy the benefits. Protectionist tendencies in different countries, weak infrastructure, political uncertainty, weak government finances and banking sectors are all factors that may delay the process and limit the outcomes. While ripe with opportunities, there is a long road ahead for African economies, with much effort. 

Afke Zeilstra is a senior economist for Atradius and responsible for country risk analysis and advice on countries in Africa, Middle East and China.

Guinea Coup Puts Global Aluminum Supply Chain at Risk

Matthieu Depreter, analyst, Credendo

The early September military coup in Guinea is shaking the global aluminum market. Guinea is the second largest producer of bauxite in the world, with 22% of the world’s production in 2020, behind Australia (30%), and has the largest proven reserves in the world (25%). 

Bauxite is the main ore used to produce aluminum. Guinea is China’s main supplier of bauxite—the world's largest producer and consumer of aluminum. Likewise, the Russian company Rusal, the second largest aluminum company in the world, has a bauxite refinery in Guinea. Therefore, the coup raises concerns about the supply of bauxite to the world.

For the time being, the takeover does not appear to affect Bauxite mining operations in Guinea. However, bauxite exports could be disrupted by the coup plotters or, less likely, targeted by international sanctions. In addition, the authorities could increase the royalties paid by mining companies and demand a renegotiation of export contracts. Furthermore, this could increase uncertainty over the country's mining sector and therefore slow down foreign investment. Finally, if bauxite production had to stop—even for a short period—it would hamper aluminum production. 

Therefore, Chinese companies are willing to secure their bauxite supply, to keep their aluminum production intact, while China’s total inventory of aluminum is at its lowest level. China will therefore have to turn to Australia to secure its bauxite supply chain. Despite tensions between the two states, bauxite trade is expected to remain fluid.

These rising uncertainties have led to an increase in aluminum prices. While the price of aluminum had increased by nearly 40% since the start of the year—because of the economic recovery that followed the Covid-19 crisis, led by the Chinese manufacturing sector—aluminum prices have further increased by 2% over the first days of September. This highlights a key fragility in the global supply chain of aluminum due to the high geographical concentration of bauxite extraction.

Matthieu Depreter is a country and sector risk analyst at Credendo. Reprinted with permission by Credendo.

 

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Week in Review Editorial Team:

Diana Mota, editor in chief, and David Anderson, member relations