Week in Review

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Russia sees 'no grounds' for more security talks with US, NATO. Russia says it sees "no grounds" for continued talks with the U.S. and NATO as the alliance seeks to avert a second Moscow invasion of Ukraine. (The Hill)

US intelligence indicates Russia preparing operation to justify invasion of Ukraine. The US has information that indicates Russia has prepositioned a group of operatives to conduct a false-flag operation in eastern Ukraine, a US official told CNN on Friday, in an attempt to create a pretext for an invasion. (CNN)

Growing congestion at world’s biggest port. Ships looking to avoid Covid-induced delays in China are making a beeline for Shanghai, causing growing congestion at the world’s biggest container port. (Business Mirror)

North Korea kicked off internet by suspected DDOS attack. Crucial servers inside DPRK offline for hours, taking down websites and email servers. (NK News)

What happens when a country goes bankrupt? Sri Lanka is in the midst of a rising financial and humanitarian catastrophe, with predictions that it could declare bankruptcy in 2022 as inflation reaches new highs, food prices skyrocket, and the country's finances dry up. So what happens if Sri Lanka, or any other government, declares bankruptcy? (India Times)

Climate seen as top risk to world economy. The climate crisis will be the top risk during the next decade, according to the World Economic Forum’s latest Global Risk Report, which also listed cybersecurity and growing social divides as emerging threats to the global economy. (HSN)

India, Britain launching talks on free trade deal. India and Britain are launching talks on pursuing a free trade deal that is expected to boost bilateral trade by billions of dollars in one of the most ambitious negotiations to take place after Brexit. (Business Mirror)

Russia: Next Moves? There are growing concerns that Russia is preparing to invade Ukraine, with satellite imagery confirming the build-up of the Russian military on the eastern border of Ukraine and Russia. Fears have been raised about the potential escalation of conflict by senior officials in both the United States and the EU. Would Russia invade Ukraine? (Global Risk Insights)

Latin American sovereign ratings stabilizing below pre-pandemic levels. Latin American sovereign ratings have begun to stabilize after better-than-expected GDP growth and government revenue rebounds in 2021. The additional pressure on public finances and increased debt burdens from the pandemic have driven the average regional rating down by one notch to "BB-." (Fitch)

Why warehouses are Asia’s new hot property. They are not glamorous, there are no chandeliers or luxury furnishings, yet warehouses are hot property around the world. (HSN)

Pharma industry calls for stronger IP protection in free trade agreements. Amid global criticism for holding on to vaccine patents during the pandemic, a new study commissioned by the European pharmaceuticals industry claims that integrating stronger intellectual property protection into free trade agreements would benefit the EU economy. (EurActiv)

US inflation hasn’t been this high since the early 80s. Who doesn’t like a bit of nostalgia for the 1980s? But the inflation rates, like shoulder pads, are probably something we would prefer to do without. (HSN)

What the French philosopher Albert Camus would have made of the Great Resignation. The stone we are pushing uphill through the absurdity of these pandemic times will inevitably roll back down. But the Great Resignation should be viewed mainly as a moment of hopeful ascent. Don't worry that the boulder could reverse course on you. Just strive. (Quartz)

11 trends that will shape work in 2022 and beyond. We’ve been living through the greatest workplace disruption in generations and the level of volatility will not slow down in 2022. (HBR)

Poll Question


UK Business Insolvencies to Spike at 33% on Pre-Pandemic Levels

U.K. business insolvencies are set to rise 33% on pre-pandemic levels, according to trade credit insurer, Atradius. The Atradius Insolvency Forecast reports U.K. business insolvencies declined 27% in 2020 as a result of fiscal support schemes and anti-bankruptcy measures.

As these measures continued in 2021, buffering businesses from the impact of the pandemic, insolvency rates have been kept artificially low. However, as fiscal support schemes are withdrawn, Atradius expects the long-awaited surge in insolvencies to be on the horizon, peaking in 2022.

This year, annual insolvencies are forecast to spike by as much as 70% year on year. Analysis by Atradius economists of the latest forecast against a baseline insolvency level in 2019 reveals U.K. insolvencies will be 33% higher in 2022 than they were pre-pandemic—one of the highest rates in the world. Only Italy has a higher cumulative insolvency rate with a forecast increase of 34%, followed by the U.K. and Australia with a forecast increase of 33%.

On a macroeconomic scale, Atradius forecasts global insolvencies will rise 33% year on year in 2022 after two years of decline. Global insolvencies fell by 14% in 2020 and by a modest 1% in 2021, despite the world economy being plunged into recession. This is a significant downward adjustment to earlier forecasts, suggesting that fiscal support packages have been particularly effective.

However, Atradius warns that the sharp decreases in most countries also suggest potentially many so-called zombie companies have been created whose financial situation is too weak to survive once economic circumstances return to normal. These zombie firms may be able to buy themselves time by running down their cash, but Atradius economists expect them to materialize into bankruptcies within the four quarters of fiscal support ending.

In the report, Atradius details that the surge in insolvencies is shaped by three forces. First is the delayed effect of bankruptcies that would have occurred in 2020 in the absence of fiscal schemes and changes to insolvency proceedings. Secondly, the phasing out of support schemes is expected to trigger an increase of insolvencies toward normal pre-pandemic levels. The third force is the elasticity of insolvencies to GDP changes, which has been effectively suspended throughout the pandemic to date.

“The most important thing businesses can do now is to be prepared,” said Damien Dawson, Southern regional manager, of Atradius U.K. “In such an uncertain and potentially volatile trading environment, information is critical. Businesses must build up comprehensive insights into buyers and their ability to pay, through real-time monitoring alongside a robust credit management strategy, flexibility to adapt should warning signs arise and non-payment protection.”


Chile: Presidential Election Victory Is Break from Past, but Radical Policies Are Unlikely

Jolyn Debuysscher, analyst, Credendo

Gabriel Boric, a former student leader and leader of the far-left Frente Amplio coalition, won the presidential elections on 19 December 2021 by a wide margin. This election victory represents an important break away from three decades of a two-coalition system with centrist parties.

Originally, Boric’s election campaign promised far-left ideas, declaring to bring the current neoliberal system to the grave. However, the president-elect has already moderated his program and tone over the past month. Still, his economic agenda includes higher taxes, a bigger role for the government in the economy, strengthening unions and new environmental regulations. Another remarkable policy pledge is the introduction of state pensions and the overhaul of the pension system, which has been relying on private pensions.

Boric represents the more moderate wing of his coalition, but it is unclear how much influence the far left will have when he takes office on 11 March. In any event, the new president will likely struggle to pass radical policies. One main obstacle is that the congress is evenly divided between left and right.

The Andean country is known for its neoliberal economic policies, which have led to a high level of income (USD13,470 per capita in 2020), a high level of foreign-investor trust, high openness to trade and fairly low public debt—estimated at 34% of GDP at the end of 2021. This also is reflected in the fact that Chile has the strongest sovereign-bond rating in South America. Nevertheless, Chile’s income inequality is among the worst in the OECD and has been a source of unrest in the past years, especially before the worldwide Covid-19 pandemic.

Boric’s plan to increase taxes on high earners and (mining) companies—and in return improve the quality of education and healthcare, while also increasing social spending—could improve this uneven income distribution. Nevertheless, the proposed reforms are expensive while the president-elect promised to adhere to fiscal consolidation after two years of fiscal expansion to tackle the Covid-19 pandemic. Moreover, economic growth in the coming years is expected to be low. In 2022 and 2023, economic growth should be at 2.5% and 1.9% respectively, after an impressive 11% in 2021. Hence, Boric will have difficulties to implement expensive fiscal reforms without deteriorating public finances.

Also, the fight against climate change is high on Boric’s agenda. Mainly mining projects could come under scrutiny, as almost half of the 2020 current account revenues came from ores and metal exports. Furthermore, Chile is by far the biggest copper producer in the world and the second-largest lithium producer after Australia. Considering how much the global green transition relies on these metals, Boric’s possible proposals will be closely followed both nationally and internationally in the coming years.

Chile’s short-term political risk—which represents the country’s liquidity—is in the lowest risk category 1/7. The outlook is stable after the recent upgrade in September 2021. Credendo’s MLT political risk is in category 3/7. The biggest downside risks are the volatility of the financial markets and the exchange rate, and foreign investors’ risk aversion, which could put pressure on Chile’s already elevated external debt—estimated at 72% of GDP and about 225% of current account revenues at the end of 2021. If radical policies are introduced, foreign investors’ risk aversion could rise, leading to capital outflows and a depreciation of the Chilean peso. The currency has already lost about 17% vis-à-vis the U.S. dollar year-on-year due to political uncertainty (last observation date: 4 January).

Reprinted with permission Credendo.

Omicron Wave Poses New Risks for Hong Kong’s Economy

Fitch Ratings

The Hong Kong government’s sudden tightening of restrictions on travel and social activity in response to the threat of an outbreak of Omicron variant Covid-19 infections highlights the risks to the territory’s economy and credit metrics that further waves of the virus may pose if the authorities seek to adhere strictly to a so-called “zero Covid” approach, says Fitch Ratings.

A new wave of restrictions on various social activities within Hong Kong and a further tightening of controls on international travel, announced on 5 January, are likely to dampen economic growth prospects relative to our baseline assumptions, posing downside risks to our current forecast that the economy will expand by 3% in 2022. The measures have been instituted for two weeks, but may be extended. Previous rounds of social distancing were relaxed gradually over a period of months.

Notably, the authorities have clarified that recent developments are set to push back the start date for the planned quarantine-free travel corridor with the Chinese mainland, a scheme we had previously expected to commence this month. The delay will dampen the near-term outlook for cross-boundary leisure travel and business, as well as Hong Kong’s retail sector. Retail has been a laggard in the labor market recovery, given its prior reliance on mainland tourist spending. For now, we still expect the authorities to begin a cautious phase-in of the corridor during 1H22.

We believe the tightening of restrictions on international arrivals will create further obstacles to the territory’s ability to serve as a regional headquarters for foreign multinationals, a trend which has taken shape since 2019. The latest policy moves include temporary bans on arrivals from several G7 economies. However, it remains unclear how long the restrictions will remain in place, and the extent to which they will affect the foreign business community. Over the longer term, we believe the economic impact of any diversion of multinational business operations will be largely offset by firms from the mainland, which are likely to further increase their presence.

The government has not yet announced any additional fiscal measures to cushion the impact of the renewed tightening of social distancing measures. However, we believe that these remain a distinct possibility, particularly if the restrictions need to be extended or tightened further. Hong Kong has adequate fiscal savings to accommodate additional pandemic-related expenditures, but these buffers have already seen a marked decline since the onset of the pandemic in 2020.

Risks to Hong Kong’s growth prospects and public finances will be compounded if the territory experiences further threats from subsequent waves of the Covid-19 pandemic over the next one or two years, assuming the government continues to adhere to its zero-Covid approach.

Nonetheless, downward pressure on Hong Kong’s ‘AA-’ rating, which we affirmed with a Stable Outlook in April 2021, is likely to remain limited unless we assess that the pandemic—and the policy response to it—has eroded Hong Kong’s long-term economic competitiveness, for example by diminishing its role as a center for international finance and commerce.

Reprinted with permission Fitch Ratings.

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Week in Review Editorial Team:

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