Sales into which country this week presents the greatest credit or political risk to your company?   Answer Here!

What We're Reading:

Lebanon pauses amid tense calm after deadly gun battles. Schools, banks and government offices across Lebanon shut down Friday after hours of gun battles between heavily armed militias killed six people and terrorized the residents of Beirut. (Business Mirror)

Watershed moment for supply chain risk as disruption set to worsen. Mounting global supply chain disruption is likely to be the catalyst for a radical overhaul of supply chain risk management and could lead to increased regulation. (Commercial Risk Online)

Trade finance gap hits new high amid Covid-19 “panic and uncertainty.” Rejection rates for trade finance hit new heights during the Covid-19 pandemic in 2020, according to research by the Asian Development Bank. (Global Trade Review)

Wave of Italian protests against mandatory work pass. Dockers at three big ports have staged protests at the requirement for all Italian workers to show a Covid pass. (BBC)

EU-UK talks, fishing threat kick Brexit back into high gear. The Brexit brawl has kicked into high gear, almost a year after a deal on a free trade agreement was supposed to have officially sealed the separation between the European Union and the United Kingdom. (USNews&WR)

China’s economy shows strain from property to energy crises. China’s economy is being hit from all sides—a property slump, energy crisis, weak consumer sentiment and soaring raw material costs—and government data Monday will show just how bad things are looking. (Business Mirror)

Microsoft shuts down LinkedIn in China amid government pressure. The professional networking site was the only major US social media platform that had been left operating in China. (DW)

G7 finance officials endorse principles for central bank digital currencies. G7 finance officials on Wednesday endorsed 13 public policy principles for retail central bank digital currencies, saying they should be grounded in transparency, the rule of law and sound economic governance. (HSN)

LatAm sovereign downgrades slow but negative outlooks persist. The pace of sovereign downgrades has slowed in Latin America, but the high proportion of Negative Outlooks shows that ratings remain under pressure, Fitch Ratings says. (Fitch)

Trade insurers ‘cautiously optimistic’ as new business rebounds. Trade credit insurers are eyeing 2022 with “cautious optimism” after data for the first half of this year showed strong growth in short term business, buoyed by a recovery in merchandise trade, although there are lingering weaknesses in other product areas. (Global Trade Review)

Biden signs bill raising U.S. debt limit, averting default. U.S. President Joe Biden on Thursday signed legislation temporarily raising the government’s borrowing limit to $28.9 trillion, pushing off the deadline for debt default only until December. (HSN)

Britain sees trans-pacific trade deal next year, no date yet for U.S. Accord. Britain does not know when it might get a full trade deal with the United States but is hoping to join a Trans-Pacific trade partnership next year, British trade minister Anne-Marie Trevelyan said on Wednesday. (USN&WR)

Turkish lira at new low after Erdogan sacks bank officials. Turkish President Recep Tayyip Erdogan had fired three central bankers via decree. Turkey's currency has lost a fifth of its value against the US dollar this year. (DW)

Industry takes step towards harmonization on trade credit insurance. The International Trade and Forfaiting Association (ITFA) has released a harmonized Basel III-compliant trade credit insurance policy form to help banks and insurers negotiate deals. (Global Trade Review)

What if central banks issued digital currency? Over 97% of the money in circulation today is from checking deposits – dollars deposited online and converted into a string of digital code by a commercial bank. (Harvard Business Review)

The trade relationship between China and Latin America (LatAm) has expanded considerably over the past two decades, gradually standing out compared to the United States and LatAm relationship, according to trade credit insurer Coface. The reasons behind this sustained trend range from the difference in growth rates observed in the world’s two largest economies to the trade policies implemented by the U.S. and Chinese governments in recent years.

Looking ahead, and considering the six largest Latin American economies (Argentina, Brazil, Chile, Colombia, Ecuador and Peru—excluding Mexico [1]) as a group, Coface observes that these countries’ foreign sales growth rates are expected to exceed their domestic demand expansion. Indeed, the region’s activity rebound should be lower than the global average recovery, and more specifically lower than the Chinese and U.S. recoveries. Therefore, sales to China and the U.S. should post a bright performance in 2021. In terms of significance for Latin American exports, China should continue to gain ground over the U.S.

China overtook the U.S. as the main export market for the group’s exports in 2010. The Asian giant's significance continued to gain strength even after the end of the commodity price bonanza in 2014, while the U.S. contribution to their exports remained fairly stable from 2010 to 2019. Regarding the United States, their lagging share can be attributed to the lack of interest in digging into trade relations with Latin America, which became clearly more prominent during Donald Trump's term in office (2017-2021) as his administration's focus on reducing the U.S. trade deficit with Mexico and China, as well as an overall lack of engagement with the region, have created a space that China has filled. 

Finally, the U.S.-China trade war under Trump has also caused the transformation of some “export routes” of the global agri-food sector, benefiting Latin American producers, like Brazil, to the detriment of U.S. producers. Currently, the U.S. has trade agreements with Chile, Colombia and Peru, while China has agreements with Chile and Peru. Argentina, Brazil and Ecuador do not have broad agreements with either of the two giants.

The weight of goods exports in GDP diverges among the six selected LatAm countries. In 2020, Chile registered the highest participation of exports to GDP (29%), followed by Peru (21%), Ecuador (20%), Brazil (15%), Argentina (14%) and Colombia (11%).

Moreover, the ranks of the U.S. and China in foreign sales vary from one country to another. China is the main market for Brazil, Chile, and Peru, while the U.S. is the major export destination for Colombia and Ecuador. Regarding Argentina, Brazil is the main buyer of goods, followed by the 

European Union (EU), China and then the U.S. Furthermore, in Brazil, Colombia and Ecuador, the EU is also the second main export destination, with the U.S. coming third in the first country and China third in the latter two. It is also worth noting that the U.S. and China receive together over 50% of Chile's foreign sales and more than 40% of Brazil and Peru's exports. In fact, exports to the U.S. and China outweigh intraregional trade.

Latin America's export composition to China and the U.S. is poorly diversified overall and highly commodity dependent. This dynamic is even stronger for trade with China. Overall, exports of metals (40%), agri-food (35%) and energy (18%) account for 93% of the six countries’ foreign sales to China. Exports to China are heavily concentrated in agri-food in Argentina and Ecuador, metals in Chile and Peru, and energy in Colombia. There is also a prevalence of the same three commodity groups regarding the U.S even though this dependence is relatively lower (72%).

Latin America was not immune to the impact of the COVID crisis on global foreign trade. The six countries registered a drop of 8% YoY in total exports in 2020. Last year, exports to the U.S. were generally more impacted than the ones to China. While the former dropped by 19% YoY, the latter rose by 4%. The stronger resilience of exports to China is explained by the fact that its economy rebounded faster than the U.S. Moreover, the basket of goods exported also played an important role, such as the high prevalence of agricultural exports to China. Demand for food, as an essential good, has proved resilient or even increased during the crisis.

Amid the prolonged and painful pandemic, risks to global financial stability have remained contained—so far. But with economic optimism fading, and with financial vulnerabilities intensifying, this is a time for careful policy calibration. To an unprecedented degree, the world’s central banks, finance ministries, and international financial institutions have asserted—for a year and a half—policy support for economic growth. Now they must craft strategies that safely approach the next stage of monetary and fiscal policy action.

The world’s systemically important central banks know that any unintended consequences of their actions could put growth at risk—and could, conceivably, lead to abrupt adjustments in the world’s financial markets. Uncertainty is especially intense because of the persistent pandemic-stricken atmosphere where society confronts the challenges inherent in “the three Cs”: COVID-19, crypto and climate change, as discussed in our latest Global Financial Stability Report.

Fading optimism
Massive monetary and fiscal policy support for the economy in 2020 and 2021 helped limit the economic contraction that began at the start of the pandemic and that—for much of this year—supported a strong economic rebound. In many advanced economies, financial conditions have eased since the initial months of the pandemic. Nonetheless, the sense of optimism that had propelled markets in the first half of the year is at risk of fading.

Investors have become increasingly worried about the economic outlook, amid ever-greater uncertainty about the strength of the recovery. Uneven vaccine access, along with the mutations of the COVID-19 virus, have led to a resurgence of infections—fueling concerns about more divergent economic prospects across countries. Inflation readings have been above expectations in many countries. And new uncertainties in some major economies have put markets on alert. Those uncertainties are triggered by financial vulnerabilities that could increase downside risks, surging commodity prices, and policy uncertainty.

The deterioration in market sentiment since the April 2021 Global Financial Stability Report resulted in a significant decline in global long-term nominal yields in the summer, driven by falling real rates, reflecting concerns about long-term-growth prospects. In late September, however, investor anxiety about inflationary pressures pushed yields higher as price pressures then started to be seen as potentially more persistent than initially anticipated in some countries—entirely reversing the earlier declines.

If investors, at some point, reassess abruptly the economic and policy outlook, financial markets could endure a sudden repricing of risk—and that repricing, if sustained, could interact with underlying vulnerabilities, leading to a tightening of financial conditions. This could put economic growth at risk.

Risks also bear close monitoring in other key areas. Crypto asset markets are growing rapidly and crypto asset prices remain highly volatile. Financial stability risks are not yet systemic in the crypto ecosystem, but risks should be closely monitored, given the global monetary implications and the inadequate operational and regulatory frameworks in most jurisdictions—especially in emerging market and developing economies. Likewise, as the world continues to seek ways to speed up the transition to a low-greenhouse-gas economy in order to avoid the negative economic and financial stability outcomes associated with climate change, a promising opportunity is emerging in the financial sector. While assets under management in climate-themed investment funds remain relatively small, inflows have surged, and there is a promise of cheaper funding costs for climate-friendly firms, as well as greater climate stewardship by funds.

A not-so-easy trade-off
Amid still easy financial conditions overall, our analysis finds that financial vulnerabilities continue to be elevated in several sectors—but are masked, in part, by the massive policy stimulus. Policymakers are now confronted with a challenging trade-off: They must continue to provide near-term support to the global economy, even as they must simultaneously try to avoid the buildup of medium-term financial-stability risks. Managing this trade-off is a key challenge confronting policymakers.

A prolonged period of extremely easy financial conditions during the pandemic—which certainly has been needed to sustain the economic recovery—has allowed overly stretched asset valuations to persist. If that overstretch continues, it may, in turn, intensify financial vulnerabilities. Some warning signs—for example, increased financial risk-taking, as well as rising fragilities in the nonbank financial institutions sector—point to a deterioration in the underlying foundations of financial stability. If left unchecked, such vulnerabilities may persist into the longer term and become structural issues.

Policy action
Policymakers will need action plans that guard against unintended consequences. Monetary and fiscal policy support should be more targeted and tailored to country-specific circumstances, given the varying pace of the recovery across countries. Central banks will need to provide clear guidance about their future approach to monetary policy, aiming to avoid an unwarranted or abrupt tightening of financial conditions. Monetary authorities should remain vigilant, and if price pressures turn out to be more persistent than anticipated, act decisively to avoid an unmooring of inflation expectations. Fiscal support can appropriately shift toward more targeted measures and be tailored to country-specific characteristics.

Policymakers should take early action and tighten selected macroprudential tools to target pockets of elevated vulnerabilities. This is critical for addressing the potential unintended consequences of their unprecedented measures, given the possible need for prolonged policy support to ensure a sustainable recovery.

Policymakers in emerging and frontier markets should, where possible, begin to rebuild fiscal buffers and implement structural reforms. While facing several domestic challenges (higher inflation and fiscal concerns), some of those economies remain exposed to the risk of a sudden tightening in external financial conditions.

In a context of higher price pressures, investors are now pricing in a rapid and fairly sharp tightening cycle for many emerging markets, although the increase in inflation is expected to be temporary. Rebuilding buffers and implementing enduring reforms to boost economic growth prospects will be pivotal to protect against the risk of capital-flow reversals and an abrupt increase in financing costs.

Tobias Adrian is the Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department. He leads the IMF’s work on financial sector surveillance and capacity building, monetary and macroprudential policies, financial regulation, debt management, and capital markets. 

Reprinted with permission by IMFBlog.

Consumers and businesses alike are expressing more curiosity surrounding emerging payment methods after a year of rapid change to common shopping and banking practices. Both groups are making a larger amount of their daily transactions online nowadays, a trend that led merchants to examine the current payment method they offered and their current benefits with more scrutiny. Interest in emerging payment tools such as cryptocurrencies is rising as businesses and financial institutions (FIs) look for ways to stay competitive.

One recent report found 40% of companies in the Americas, Africa and the Middle East plan to tap digital currencies to make purchases within the next year, for example, indicating businesses are examining their use for business-to-business (B2B) as well as consumer-facing payment applications. Such currencies could represent an intriguing opportunity for companies making cross-border payments, as they could potentially lower the settlement time and ease costs for firms seeking to grow their global presence.

In The Cryptocurrency Payments Opportunity: Driving Crypto Adoption And Use Around The Globe, PYMNTS examines how attitudes and perceptions of cryptocurrencies are changing worldwide, as well as how businesses, banks and other financial players can take advantage of the opportunities these changes present. It will also analyze what tools and technologies may prove key for such entities to do so.

Around the Global Cryptocurrency World
Consumers and businesses are eying cryptocurrencies with more interest—investments in digital currencies among Americans have increased, for example, with one recent study finding 48% of investors in the country bought such alternative currencies in the first half of 2021. Younger consumers especially are growing increasingly intrigued by digital currencies. The report found 37% of investors 18 to 44 years old who have not yet bought digital currencies are either “very” or “somewhat” interested in doing so. This compares to just 19% of those over 60 years old who said the same, potentially indicating younger consumers are more comfortable with these alternative currencies.

This bodes well for cryptocurrencies’ continued status as a digital asset, but acceptance of these currencies as a form of payment will require merchant and consumer support. Recent reports show cryptocurrency payments have been steadily rising, with more than $12 billion transferred over the bitcoin, Ethereum and Litecoin networks daily—representing approximately 1.5 million transactions each day. Transaction volumes are set to continue to expand, but this will require more businesses to trust and support these currencies. Sixty-seven percent of cryptocurrency owners agree that there is a current lack of merchants who accept payments via digital currencies, for example. Gaining merchants’ trust therefore appears key to ensuring future growth.

Developments inside of the global cryptocurrency space are unfolding quickly as the attention on such currencies increases. Chinese authorities recently declared all cryptocurrency transactions and mining illegal within the country, for example—a declaration that saw bitcion’s value nosedive. The impact of China’s decision will likely reverberate throughout the global cryptocurrency market, and comes as the country’s central bank continues with its plans to develop a digital currency of its own within the nation. The bank announced in March it was testing out an electronic version of the Chinese yuan and also noted that both Bitcoin and ether were issued by “non-monetary authorities.” This indicates that central bank-backed cryptocurrencies or stablecoins may play a more noticeable role in the future global payments ecosystem.

Reprinted with permission by PYMNTS. 

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations