What We're Reading:

Russia attacks Ukraine; Putin warns US, NATO: Russian troops launched a wide-ranging attack on Ukraine on Thursday, as President Vladimir Putin cast aside international condemnation and sanctions and warned other countries that any attempt to interfere would lead to “consequences you have never seen.” (BM)

China’s supply chain slows down as global trade shows resilience: One of the biggest economic hits of the COVID-19 pandemic was the complete disruption of the global supply chain. With entire economies shut down as lockdowns spread worldwide, global trade activity screeched to a halt, and the supply chain has yet to recover fully. (Global Trade)

Europe’s risk managers brace for financial fallout from Ukraine invasion: European risk managers must brace for a significant negative economic and financial impact from Russia’s invasion of the Ukraine, just as they help their companies tentatively steer out of the Covid-19 crisis and related supply chain and credit risk problems. (Commercial Risk)

EU prepares ‘strongest, harshest’ sanctions package against Russia: The European Union is planning the “strongest, the harshest package” of sanctions it has ever considered at an emergency summit Thursday, as the Russian military attacked Ukraine. (BM)

New statistics point to bleak outlook for trade growth: Supply chain logjams and macroeconomic headwinds look set to put the brakes on global merchandise trade’s post-Covid comeback, the latest industry data show. (GTR)

NATO to beef up Eastern flank defense, hold summit after Russian attack on Ukraine: NATO agreed at emergency talks on Thursday (24 February) to take additional steps and further beef up the land, sea, and air forces on its Eastern flank after Russian President Vladimir Putin launched a military offensive in Ukraine. (Euractiv)

Supporting oil spill response, liability and compensation in the Pacific Islands region: IMO has been continuing its work to help make oil spill response, liability and compensation a priority on the national and regional agenda in the Pacific Islands region. (HSN)

How Congress can ensure CHIPS act funding advances national security interests: As Congress moves toward conference consideration of major China-related legislation, funding for domestic semiconductor manufacturing will feature prominently. (Lawfare)

Putin to be hit with new US sanctions -Bloomberg reporter, citing Senator Sherrod Brown: Russian President Vladimir Putin will be hit personally with sanctions by the United States, a Bloomberg reporter said on Twitter, citing Senator Sherrod Brown. (U.S. News)

Non-oil exports in Saudi Arabia increase by 54.5% in December 2021: The Kingdom of Saudi Arabia's overall merchandise exports increased by 62.6% in December 2021 compared to December 2020, when international trade was impacted by Covid-related lockdowns and travel bans in numerous countries. (MENAFN)

UK food trade exports severely disrupted by Brexit-related vet shortages, BVA warns: A sharp decline in qualified vets needed to sign off health certificates for certain food products going to EU is causing major disruption. (Food Ingredients)

Economy minister says Germany can do without Russian gas: Economy Minister Robert Habeck said Germany can survive without Russian gas. German Chancellor Olaf Scholz put a halt to the permit approval process for a controversial pipeline to deliver gas from Russia. (DW)

Tunisia's Saied will bar foreign funding for civil society: Tunisia's President, Kais Saied, said on Thursday he will outlaw foreign funding for civil society organizations as he tries to remake the country's politics after establishing one-man rule. (MEM)

Credit professionals continue to struggle with the supply chain, which has wreaked havoc on credit limits for the last two years. “The pandemic has created chaos for supply-chain logistics and credit lines,” said Eve Sahnow, CCE, corporate credit manager with OrePac Building Products, Inc (Wilsonville, OR).

Customers are chewing up more of their limits just so they can order enough product ahead of time, in turn creating more liability for the credit professional. “There is a backlog of about six months, and that’s a problem, especially for commodity heavy customers that need the product now,” Sahnow said during NACM’s Leadership Thought Discussion Group. “[Your customer] might be within reasonable credit lines, but its on-order could be up to four times the amount it has billed, so you’re on the hook for that.”

Supply chains have yet to normalize from labor shortages and booming demanded created by the pandemic, and now they are facing another problem—Russia’s invasion into Ukraine. The conflict has the potential to disrupt the global supply chain even further.

“A Russian invasion of Ukraine has the potential to cause extensive and debilitating supply chain disruption across the globe,” reads an analysis from Interos, a company providing supply-chain risk management solutions. “This may result in rising input costs to a heightened threat of cyber-attacks.”

Cyber-attacks from Russia would stop tens of thousands of companies from being able to effectively manage their supply chains, according to the analysis. More than 2,100 U.S.-based firms and 1,200 European firms have at least one direct supplier in Russia.

“The Cybersecurity Infrastructure and Security Agency (CISA) has been urging U.S. organizations to prepare for potential Russian cyberattacks, including data-wiping malware, illustrating how the private sector risks becoming collateral damage from geopolitical hostilities,” it states.

Disruptions also could come in the form of raw material shortages, especially oil. “Russia is the third-largest oil producer and second-largest oil exporter. Given low inventories and dwindling spare capacity, the oil market cannot afford large supply disruptions,” said UBS analyst Giovanni Staunovo in a Reuters article.

An oil shortage would make it more expensive and complicated to transport goods, resulting in even slower shipping times. “Carriers, freight forwarders and shippers that were dealing with the China to North America trade lanes were already operating in crisis mode. … The invasion will create major new constraints on Asian ocean and air exports with spot container pricing,” reads a recent article from Forbes.

Russia and Ukraine also are major producers of other commodities such as copper, nickel, platinum, barley, rye, wheat and corn. “Food inflation is another risk that may cause supply-chain disruption. Ukraine is on track to being the world’s third-largest exporter of corn, and Russia is the world’s top wheat exporter. Ukraine is also a top exporter of barley and rye. Rising food prices would only be exacerbated with additional price shocks, especially if Russian loyalists seize core agricultural areas in Ukraine,” reads the Interos report.

And if those obstacles weren’t enough, countries around the world are rolling out tough sanctions in response to the invasion, possibly further disrupting the flow of goods. “Not surprisingly, U.S. companies and business groups are urging the government to be cautious in how it applies any new rules,” the Interos report notes. “Extending export controls and sanctions to Gazprom’s subsidiaries, other energy producers, and key mining and steel market firms could further impact supply availability and input costs.”

This environment demands that companies pay close attention to events that impact their customers as things unfold, not only to have more frequent communication with customers but also with the banking community and shippers/freight forwarders.

Companies entered the COVID-19 crisis with record debts they racked up after the global financial crisis when interest rates were low. Corporate debt stood at $83 trillion, or 98% of the world’s gross domestic product, at the end of 2020. Advanced economies and China accounted for 90% of the $8.9 trillion increase in 2020. Now that central banks are raising rates to check inflation, firms’ debt servicing costs will increase. Corporate vulnerabilities will be exposed as governments scale back the fiscal support that they extended to stricken firms at the height of the crisis.

Governments face difficult decisions as they manage these risks to the economic recovery. They may need to continue providing financial support to firms that can recover (but cannot raise the private financing to do so) while withdrawing support from firms that are so badly scarred that they should be restructured or liquidated. Financial support should become more focused amid shrinking fiscal space. Effective insolvency systems make economies more resilient, productive, and competitive. Shoring up these systems is critical as there are shortcomings in many important areas at present and countries may need to tackle many cases at once. There is not much time to prepare.

Corporate vulnerabilities tend to be more pronounced in economies where our indicator shows that there are shortcomings in crisis preparedness. Two-thirds of the emerging market economies whose corporate debt was more vulnerable to adverse economic conditions than the average country also had systems of crisis preparedness that were weaker than average. Almost 40% of advanced economies with vulnerable corporate debt had below-average crisis insolvency systems that could struggle in the event of a large number of restructurings. These countries should step up efforts to improve insolvency systems. But all countries can improve crisis preparedness.

Many countries have continued to strengthen their insolvency systems, either with targeted reforms (Brazil, France, India, Korea, Turkey, and the United States) or with broad reforms affecting key elements of their systems (Germany, the Netherlands, and the United Kingdom).

Policy principles

What strategies should governments put in place to support viable firms and what legal reforms should they undertake to facilitate debt restructuring, liquidation, and reorganization of distressed companies?

• Policy support schemes should set clear objectives to address specific market failures. This was the case with Australia’s and Norway’s public support programs, for example. They should include strong governance and transparency safeguards to mitigate risks and put in place clear exit plans from the start.
• Burden-sharing and debt-restructuring plans should make use of the access to information and skills of private creditors, as was the case with Mexico during the peso crisis of the mid-1990s and France during the COVID-19 pandemic. Public creditors should actively participate in debt restructuring.
• Insolvency systems should be prepared to handle a large increase in cases, with each country facing different priorities in this area. Countries with limited fiscal space and ineffective insolvency systems should rely more on out-of-court or hybrid restructuring (where the courts play a limited role to support negotiations between debtors and major creditors, and which can be implemented relatively quickly). At the same time, they should tackle deeper reforms over the medium-term to improve legal and institutional frameworks. Countries with fiscal space can provide continued support but should be mindful of the risks of moral hazard and “zombie” firms that survive only with state assistance.
• Banks’ balance sheets should remain sound and transparent. Accounting and regulatory forbearance introduced to mitigate the economic impact of the pandemic have increased the potential for hidden nonperforming loans not reflected in banks’ balance sheets. Together with the rise in sovereign debt holdings, bank and government balance sheets have become increasingly intertwined—a phenomenon associated with debt crises. As forbearance ends, the reporting of asset quality should rely on transparent and consistent practices, aided by effective supervision and enforcement. Asset quality reviews can make balance sheets more transparent and support the market for distressed debt—especially after episodes of forbearance. At the same time, banks’ defenses may need to be shored up to absorb the losses from the crisis.

Governments were right to support firms financially through the worst of the pandemic. They recognized the initial large premium on speed over precision and provided rapid support without distinguishing between enterprises that could be saved and those that should not. Now policymakers should calibrate financial support and direct it efficiently to companies that are in need. They should also be prepared to restructure or liquidate badly scarred firms.

Reprinted with permission by IMFBlog.

Inflation has created a difficult situation for credit professionals involved in global trade. Leaders around the world are at a crossroads about how to proceed because inflation culprits—booming demand, supply snags, labor shortages and the Russia-Ukraine conflict—are not the usual ones.

“It’s an absolute lose-lose for central banks because they will have no control whatsoever over inflation risk,” Michael Hewson, senior markets analyst at CMC Markets UK told Bloomberg. “Normal rules don’t apply in a situation like this. And the outlook has gone from dark to very dark, as we sit here trying to mull over what happens next.”

The pandemic response also is having a lasting impact on current inflation, said Fred Dons, director at Deutsche Bank (Amsterdam), during this month’s FCIB Global Expert Brief. “One of the most significant drivers of inflation over the last six months is the way the government treated the COVID crisis,” he said. “Now that the economy is opening up again and those measures are being taken away, people are reluctant to go back to work for the same salary they were paid before.”

So, countries are taking different approaches to fighting record-breaking inflation levels. For example, the U.S. Federal Reserve has hinted to raising interest rates several times throughout the year, but Europe does not plan to increase rates above 0% any time soon.

“Europe’s central bank decided not to raise interest rates right now because it still believes inflation is temporary,” Dons said. “If interests rates crept up right now, some southern European countries, like Spain and Italy, would not be able to repay those debts.”

However, Turkey is taking an opposite approach by actually lowering interest rates, which could be a dangerous move since inflation is sitting near 50%. “The fear is that Turkey will be facing a default situation in the next few months,” Dons said.

Turkey’s government also pushed citizens to use the Turkish lira instead of foreign currencies, but the lira is notably unstable, he added. “There will be shortage of foreign currency in the next few months, and the Turkish government will run out of funds because the lira is depreciating quickly against the U.S. dollar.”

FCIB members can watch February’s Global Expert Brief in its entirety by viewing the archives.

 

Week in Review Editorial Team:

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