Week in Review

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

 
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What We're Reading:

Chile's president has been impeached over the Pandora Papers allegations. President Sebastián Piñera was impeached Tuesday by the lower house of Chile's congress, setting up a trial in the nation's Senate over whether to remove him due to allegations he favored the sale of a family property while in office. (NPR)

US to announce new Nicaragua sanctions 'very soon,' official says. The Biden administration plans to announce new U.S. sanctions and other punitive actions "very soon" in response to Nicaraguan President Daniel Ortega's re-election in a vote that Washington has denounced as a sham, a senior State Department official told Reuters on Tuesday. (Reuters)

Surprise US-China climate deal breaks through superpower standoff. It was a bilateral deal between the two countries that paved the way for the landmark Paris Agreement. (Bloomberg)

US inflation is no longer just about used cars. US consumer prices rose at the fastest pace in 30 years in October, as pandemic-related supply chain issues and surging demand lifted prices of everything from gasoline to homes by an overall 6.2% from last year. (Quartz)

Neighbors of Belarus say migrant crisis risks military clash. Countries bordering Belarus on Thursday warned the migrant crisis on the European Union's eastern borders could escalate into a military confrontation while Ukraine said it would deploy thousands more troops to reinforce its frontier. (Reuters)

China’s plan to manage Evergrande: Take it apart, slowly. Beijing is working on a controlled implosion of the real-estate giant, selling off some assets while limiting damage to home buyers and businesses. (WSJ)

Vestager’s court win opens way for more Google cases. Ruling strengthens the hand of regulators to take a tougher approach on Google and other tech giants. (Politico)

UK’s Brexit losses more than 178 times bigger than trade deal gains. All trade deals combined worth less than 50p per person a year, analysis of government figures shows. (Independent)

A rare port success story. Bottlenecks and failures abound in the U.S. supply chain. Then there’s the Port of Baltimore. (Bloomberg)

GE to end its run as a conglomerate, split into 3 companies. General Electric will divide itself into three public companies focused on aviation, health care and energy. (ABC News)

New OECD down payment requirements set to boost ECA support in emerging markets. The OECD has relaxed down payment rules for transactions involving export credit agencies (ECAs) in emerging markets, in the wake of what it calls a “market failure” in the private sector. The policy increases the maximum amount participating ECAs can officially support of the total export contract value. (GTR)

Shipping companies are turning to a container alternative: industrial bags. To handle the supply chain issues in container shipping, companies are switching back to bulk vessels. That means demand for bulk bags is increasing. While many consumers are familiar with the bulk bags that dry goods like rice and coffee are often shipped in, there is another larger bag that shippers are using. (Quartz)

Kazakhstan to buy Russian electricity as cryptocurrency miners cause energy shortage. With Kazakhstan facing an electricity shortage caused by the sharp increase of cryptocurrency miners operating in the country, Nur-Sultan is now turning to its northern neighbor Russia to provide extra energy capacity. (RT)

US inflation spreads like wildfire to China. The world’s top two economies haven't decoupled much at all when it comes to fast-rising inflation risks. (Asia Times)

Rebuilding relationships across teams in a hybrid workplace. The coming year of inventing our way toward whatever our workplaces will look like offers a marvelous opportunity to refresh and reinvent cross-functional relationships. Working to rebuild these bonds is especially important because most people won’t be returning to work as the same people they were before the pandemic; the last 18 months have changed all of us in some way. (Harvard Business Review)

Blinken says Qatar to act as U.S. diplomatic representative in Afghanistan. The United States and Qatar signed an accord on Friday for Qatar to represent U.S. diplomatic interests in Afghanistan, an important signal of possible future direct engagement between Washington and the Taliban after two decades of war. (Reuters)

Has country risk finally bottomed out? In the summer, Export Development Canada’s Economics team noted that the global economy was in full—if uneven—recovery mode. But the growing gap between advanced and developing countries, reflected in the latest Global Economic Outlook, is becoming ever clearer this quarter. (EDC)

 

Global Supply Chain Crisis Is Impacting Credit Terms and More

Annacaroline Caruso, editorial associate

Supply constraints have rattled businesses around the globe, leaving many struggling to navigate product shortages and slow delivery times. These supply chain disruptions are impacting credit terms and credit decisions, said Jay Tenney, managing director with Trade Risk Group (Irving, TX). 

“This is such a confluent event that no one has ever seen before,” Tenney said during an FCIB webinar, The Current Headache of International Supply Chain Issues. “Labor shortages, product shortages and inflation all affect credit so we need to pay close attention to what is going on.”

Gaging credit risk during the supply chain crisis is even more difficult with international trade because the supply situation varies greatly from country to country. “You might have a zero-Covid tolerance area like Australia or China, which can lead to ports being shut down completely,” he added. “Or you have some states like Texas that are more flexible.”

Some customers may ask to change payment terms from what your company is usually used to due to the supply chain snags, said John LaRocca, CICP. “As a credit manager, if you don’t extend credit terms, you disappoint the customer and the sales organization,” he said. “But if you do extend terms, you start a wildfire inside your company and the next thing you know you have chaos on your hands.”

John Loy, managing director of Invre Capital, LLC (Chicago), said, increasing credit terms increases credit risk and slower payments. However, liquidity is not currently an issue globally, with the exception of Asia, Loy added. 

“There’s more liquidity in the banking market than anyone would’ve anticipated,” he explained. “There’s enough liquidity that banks can be flexible. Treasurers have some tools that can offset an extension of payment terms, but only if they are aware of what’s going on prior to it happening.”

Supply chain struggles was a hot topic during FCIB’s new Global Credit Leaders Discussion Group last week. During the call, several credit professionals shared their challenges and how they are handling the crisis. “Learning from the mistakes and accomplishments of others is key to creating your own successes,” said discussion group member, Kevin Chandler, CCE, director of customer financial services at Zachry Industrial, Inc. (San Antonio, TX). “Getting to know people and their backgrounds creates a sense of ‘you’re not in this alone’ going forward.” If you would like to know more about the FCIB Global Credit Leaders Discussion Group, contact Education Director Tracey Lerminiaux at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Supply Chain and Inflation Headwinds Hamper the Global Recovery

Coface

In light of the continued economic recovery, trade credit insurer, Coface, upgraded its risk assessments for 26 countries, including Germany, France, Italy, Spain, Switzerland and Belgium.

Strong exports of manufactured goods to advanced markets are prompting upgrades for export-oriented economies in Central and Eastern Europe (Poland, Hungary, Czechia), in Asia (South Korea, Singapore, Hong Kong) and in Turkey. After downgrading 78 country risk assessments last year, these upgrades are in addition to the 16 already implemented in the first half of 2020. They are accompanied by 30 sectoral assessment upgrades.

However, signs that the global recovery is losing momentum are accumulating, the firm noted. Pandemic outbreaks in critical links of the supply chain have resulted in supply disruptions, feeding price pressures. These disruptions are starting to affect manufacturers’ production and sales across the globe. Headwinds represented by supply concerns, labor shortages and inflation, alongside the lingering threat of COVID-19, add to the list of risks and uncertainties.

Progress with the vaccination still supports the recovery

Progress with the vaccination in Western Europe and North America has helped avoid new waves of strict mobility restrictions and is fueling optimism that a repetition of last year’s lockdowns will be avoided. However, the threat of COVID has not disappeared: Lower vaccination rates in emerging markets—particularly in low-income countries—still pose the risk of the emergence of variants resistant to currently available vaccines.

The global manufacturing sector has recovered fast since mid-2020, prompted by increased spending on consumer goods. Because of robust households’ demand, strong trade flows continue to be a key support for economic growth, notably in Asia-Pacific. Demand for electronics and commodities are indeed benefiting several markets in the region such as South Korea and Taiwan. The economy of several key commodity exporters such as Russia, Ukraine, South Africa, Chile and Algeria also are supported by higher prices. In Central and Eastern Europe, the region’s competitive exports and the wide integration in European supply chains also support export growth.

In terms of sectoral trends, the easing and lifting of restrictions in countries where vaccination rates are the highest is contributing to a shift of household spending towards high-contact services such as retail, hospitality and recreation. The recovery of the tourism sector remains more challenging.

Supply chain issues and inflation hamper the recovery momentum

Nevertheless, headwinds are accumulating, particularly on the supply-side of the economy. High level of savings in high-income countries prompted a rapid recovery in consumer spending. At the same time, pandemic disruptions created breaks in the supply chain that are hampering business activity. Competition for commodities and input goods is strong, hindering industrial production at the global level and, in some instances, having an impact on sales. This is notably true for the shortage of semiconductors, which is impacting a wide-array of industries from the automotive to information and communication technologies sectors both in advanced and emerging economies.

Commodity prices, input costs and freight rates have surged since the summer of 2020. Many commodities broke record levels. This has been notably the case with energy—particularly as European and Asian gas prices soared—metals, lumber and food prices. Widespread price increases for commodities and inputs have also translated into increasing consumer prices. The harmonized inflation rate in the Eurozone reached 3.4% in September, the highest level in 13 years. This echoes a rise in inflation observed in most parts of the globe, most notably in the U.S., where the inflation rate has also been hovering a 13-year high of 5.4% in the last 4 months to September.

A peak in inflation is expected soon in advanced economies, but risks are tilted to the upside. The inflation conundrum could be complicated by reports of labor shortages, as businesses offer higher compensations to fill job vacancies. An increase in labor costs could mean more persistent inflationary pressures. Faced with this risk, some central banks—including the US Federal Reserve and the UK Bank of England—have already signaled that the end of ultra-accommodating monetary policies is approaching.

In Europe, while the ECB is closely monitoring the inflation dynamic with concern, tightening remains a more distant prospect. In emerging economies, several central banks had to hike their benchmark policy rates in recent months, due to concerns over rising inflation. The fiscal side of the equation will remain supportive in advanced economies. In Western Europe, while many national governments will continue to support their economy further until the end of the year, the EU recovery fund (worth EUR 750 billion) will slowly be paid out. In the U.S., the next steps of the fiscal response are still uncertain, as key parts of President Joe Biden’s economic agenda are still being debated in Congress.

The Chinese economy is experiencing some turbulence

Also of importance for the global economy, China’s economy showed signs of a slowdown heading into the 2nd half of 2021. In the third quarter, GDP was up 4.9% from a year ago, the slowest pace since the third quarter of 2020. On a quarterly basis, activity merely expended (0.2%). Coface forecasts China’s economy to grow by 7.5% this year, expecting GDP growth to remain low in the last quarter. Several factors are behind the deceleration in Chinese economic activity: policy tightening in credit growth, softening domestic consumption, and energy rationing for industries. Another factor is related to China’s “dual carbon” goals, leading to the imposition of policies constraining steel production, as the sector accounts for around 15% of the country’s carbon emissions. As a result, the volume of monthly steel output has been falling from nearly 100 million tons in May to 83.2 million in August, with further steel output cuts are expected in 2021.

Considering the role of China in international trade and in regional supply chains, an economic slowdown would pose significant downside risks to Asian economic activity, but also in other emerging markets in Latin America, Middle East and Africa.

Soaring Energy Prices Pose Inflation Risks as Supply Constraints Persist

The World Bank

Energy prices soared in the third quarter of 2021 and are expected to remain elevated in 2022, adding to global inflationary pressures and potentially shifting economic growth to energy-exporting countries from energy-importing ones, according to the World Bank’s latest Commodity Markets Outlook.

The forecast expects energy prices to average more than 80% higher in 2021 compared to last year and will remain at high levels in 2022. However, they will start to decline in the second half of the year as demand eases and supply improves. Non-energy prices, including agriculture and metals, are projected to decrease in 2022, following strong gains this year.

“The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries,” said Ayhan Kose, chief economist and director of the World Bank’s Prospects Group, which produces the report. “The sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession.”

In 2021, some commodity prices rose to or exceeded levels not seen since the spike of 2011. For example, natural gas and coal prices reached record highs amid supply constraints and rebounding demand for electricity. However, additional price spikes may occur in the near-term amid very low inventories and persistent supply bottlenecks.

Crude oil prices (an average of Brent, WTI and Dubai) are expected to average $70 in 2021, an increase of 70%. They are projected to be $74 a barrel in 2022 as oil demand strengthens and reaches pre-pandemic levels. The use of crude oil as a substitute for natural gas presents a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.

As global growth softens and supply disruptions are resolved, metal prices are forecast to fall 5% in 2022, after rising by an estimated 48% in 2021. Following a projected 22% increase in 2021, agricultural prices are expected to decline modestly next year as supply conditions improve and energy prices stabilize.

“High natural gas and coal prices are impacting the production of other commodities and pose an upside risk to price forecasts,” said John Baffes, senior economist in the World Bank’s Prospects Group. “Fertilizer production has been curtailed by higher natural gas and coal prices, and higher fertilizer prices have been pushing up input costs for key food crops. The production of some metals such as aluminum and zinc has been reduced due to high energy costs as well.”

More broadly, the events of this year have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply. From an energy transition perspective, concerns about the intermittent nature of renewable energy highlight the need for reliable baseload and backup electricity generation. These will increasingly need to be from low-carbon sources, however, such as hydropower or nuclear power, or from new methods of storing renewable power. At the same time, the surge in natural gas and coal prices this year has made solar and wind power even more competitive as an alternative energy source. Countries can benefit from accelerating the installation of renewable energy and reducing their dependency on fossil fuels.

The report notes that forecasts are subject to substantial risks—including adverse weather, the uneven COVID-19 recovery, the threat of more outbreaks, supply-chain disruptions and environmental policies. Furthermore, higher food prices, along with the recent spike in energy costs, are pushing food-price inflation up and raising food-security concerns in several developing economies.

Special Focus: Urbanization and Commodity Demand

As the global shift from rural to urban living continues, the report’s Special Focus section explores the impact of urbanization on commodity demand. Although cities are often associated with increased demand for energy commodities (and hence greenhouse gas emissions) the report finds that high-density cities, particularly in advanced economies, can have lower per capita energy demand than low-density cities. As the share of people living in urban areas is expected to continue to rise, these results highlight the need for urban planning to maximize the beneficial elements of cities and mitigate their negative impacts. Cities are at the forefront of climate change, and strategic planning, particularly for transport links, can help reduce their resource consumption and, crucially, their greenhouse gas emissions.

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Week in Review Editorial Team:

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