What We're Reading:

Eurozone interest rates set to rise for first time in 11 years. The European Central Bank has said it intends to raise interest rates for the first time in more than 11 years next month as it tries to control soaring inflation in the eurozone. (BBC)

Biden is hosting the Summit of Americas, but Mexico’s president won’t be there. The agenda has been overshadowed by who won’t be at the table. Several leaders, including Mexican President Andres Manuel Lopez Obrador, turned down the chance to meet with President Biden in Los Angeles. (NPR)

The bad vibes economy. There’s this nagging sentiment that we’re in a precarious spot, that there’s some economic boogeyman lurking around the corner. This sense of dread is so pervasive that it might surprise you to hear that many aspects of the U.S. economy are generally in good shape right now. (VOX)

Are we entering a new dawn for antitrust enforcement? Two titans in the book publishing world are joining forces, but there’s a tiny roadblock in the way … ok a big one, the Department of Justice. The DOJ filed a lawsuit against the proposed merger between Penguin Random House and Simon & Schuster. The accusation? Monopsony. (NPR)

Worry about stagflation, a flashback to the ‘70s, begins to grow. Stagflation is the bitterest of economic pills: High inflation mixes with a weak job market to cause a toxic brew that punishes consumers and befuddles economists. (AP)

Indonesia launches scheme to speed up palm oil exports. Indonesia has launched an export acceleration scheme aimed at shipping at least 1 million tonnes of crude palm oil and derivatives following a recent export ban, according to a trade ministry regulation made public on Thursday (Jun 9). (HSN)

South Africa’s President says ‘I have never stolen money,’ as missing cash mystery deepens. South African President Cyril Ramaphosa has hit back at allegations of improper conduct over large amounts of cash stolen from his wildlife farm in 2020. (CNN)

Is Russia exporting grain from Ukraine? Russia is sending grain from Ukraine overseas, Russian-appointed officials in occupied southern Ukraine say. (BBC)

‘Biggest protest in Pakistan’s history’ within next few days: Imran Khan. Former Pakistan Prime Minister Imran Khan has said that he would within the next few days finalize the date for the “biggest protest in Pakistan’s history.” (Times of India)

Poland’s PM pushes for more coal to lower heating costs. Poland’s prime minister vowed Thursday to support higher production at the nation’s coal mines in order to bring down heating and energy prices that have soared amid the war in neighboring Ukraine and the European Union’s efforts to reduce its dependency on Russian energy sources. (AP)

China, Russia defend N Korea vetoes at UN General Assembly. China and Russia have accused the United States of stoking tensions on the Korean Peninsula during a landmark meeting held to explain their decisions to veto new global sanctions over Pyongyang’s renewed ballistic missile launches. (Aljazeera)

It’s no secret the credit profession is as much about relationships as it is about setting credit limits and collecting payments. It is nearly impossible to succeed at everything else in business credit without developing a strong connection with your customers. But doing so can be difficult if your customers live around the world.

“Challenges in developing relationships with people from different cultures certainly existed before the pandemic, but the rising popularity in virtual calls has made it even more difficult,” said Mercedes D’Angelo with Cultural Awareness International during NACM’s Credit Congress session on Communicating Across Cultures. “Our brains can so easily miss the complexity in culture when interacting with others, especially without being in person.”

D’Angelo compared culture to an iceberg. The aspects of culture that are clear sit on the surface: language, food and music. But as you look deeper, some traits are less noticeable. “These are the guts of culture and are the values that drive behavior,” she explained.

95% of people say cultural differences can keep all parties from meeting the full value of their contract, and 79% of cross-border mergers fail, according to D’Angelo. That’s why as a credit manager, you need to learn what social cues are normal for customers in different countries and communicate with them in a way that they feel comfortable.

Culture is on a spectrum. One major difference between cultures that often causes issues in business relationships is whether those relationships are approached transactionally or interpersonally. According to D’Angelo, the following countries are mostly transactional:

• Australia
• Germany
• United Kingdom
• United States

These countries are viewed as both transactional and interpersonal:

• France
• India
• Italy
• Liechtenstein
• Russia
• South Africa
• Switzerland

And the following countries are mostly interpersonal:

• Brazil
• China
• Japan
• Malaysia
• Mexico
• Nigeria
• Saudi Arabia
• Turkey

“Our brains are biased machines and often perceive social cues through a lens of culture,” she added. “Try shifting your communication style and changing the way you approach relationships depending on who you are interacting with rather than taking a ‘my culture is the best’ stance.”

Russia’s invasion of Ukraine immediately slowed the recovery from the COVID-19 pandemic and set the global economy on a course of lower growth and rising inflation. The OECD’s latest Economic Outlook projects global growth to decelerate sharply to around 3% this year and 2.8% in 2023, well below the recovery projected in the previous Economic Outlook last December.  
The economic and social impact of the war is strongest in Europe, with many of the countries hardest hit in Europe, given exposure through energy imports and refugee flows. 
High inflation is eroding household incomes and spending, hitting vulnerable households particularly hard. The risk of a serious food crisis remains acute for the world’s poorest economies because of the high risk of supply shortages and elevated costs.
Further increases in food and energy prices and persisting supply-chain bottlenecks are key factors causing consumer price inflation to peak at higher levels and remaining high for longer than previously projected. In some advanced economies, inflation is now expected to reach levels not seen since the 1970s. Cost pressures should start to ease with the impact of rising interest rates beginning to be felt through 2023. However, core inflation is still projected to remain at or above central bank target ranges in many major economies.
“Countries worldwide are being hit by higher commodity prices, which add to inflationary pressures and curb real incomes and spending, dampening the recovery,” OECD Secretary-General Mathias Cormann said during the presentation of the Outlook. “This slowdown is directly attributable to Russia’s unprovoked and unjustifiable war of aggression, which is causing lower real incomes, lower growth and fewer job opportunities worldwide.”
Uncertainty around the outlook is high, marked by prominent downside risks. We don’t know how much longer Russia’s war against Ukraine will last and how much worse it may get. Many low-income and emergingmarket economies will be challenged even more by rising food and energy prices, slower demand growth in their export markets, and the potential for capital outflows as interest rates rise in the advanced countries.

Furthermore, the pandemic is not over—more aggressive or contagious variants may emerge, and zeroCovid policies in China may continue to disrupt supply chains. “The Outlook is sobering, and the world is already paying the price for Russia’s aggression,” said Chief Economist Laurence Boone said. “The choices made by policymakers and citizens will be crucial to determining how high that price will be and how the burden will be shared. Famine is not a price the world should pay.” 

Greater international cooperation is essential to help avoid a food crisis. Curbing export restrictions, which drive up global prices, boosting efforts to transport commodities out of Ukraine and targeted direct aid would help countries hit by the current disruptions. Protecting low-income households from the costs of the war must be an urgent priority for governments. However, the best policy option to provide such support to cushion the impact of higher prices is through temporary, well-targeted, means-tested fiscal measures.  

In most economies with healthy growth and employment, the level of inflation no longer warrants an accommodative monetary policy stance. The more widespread and entrenched inflation has become, the faster the removal should be. Further policy rate increases will likely be needed in many emerging-market economies, to help anchor inflation expectations and avoid destabilizing capital outflows.
The war has again underscored the importance of energy security. Accelerating the green energy transition would both improve energy security and help lower carbon emissions. Regulatory and fiscal incentives can stimulate movement towards alternative energy sources, but large-scale renewable energy investments will require copper, rare earths and other materials that are concentrated in a few countries. Open international trade is therefore essential to achieve the transition and energy security.

Various economic conditions, support measures and legal changes have affected insolvency trends in the Central and Eastern Europe (CEE) region over the last two years. The COVID pandemic triggered an economic downturn, with a 4% drop to regional growth. Although corporate insolvencies in CEE countries dropped during this contraction, this was thanks to massive state support measures for households and companies. 

“In 2021, the region saw increased growth (5.5%), but this momentum is expected to dissipate this year with a forecast growth rate of 3.2%,” said Grzegorz Sielewicz, Coface economist for Central and Eastern Europe. “All CEE countries are likely to suffer from the consequences, direct and indirect, of the Russia-Ukraine war. The Baltic countries are set to record the weakest growth rates due to their trade links with Russia.”

Drop in Support Measures, Challenging Environment Trigger Rise

After a drop of business insolvencies in the region in 2020, insolvency proceedings increased in 2021, almost returning to pre-pandemic levels. This surge was expected, due to governments’ intentions to wind down the massive scale of support measures. The regional GDP weighted average calculated from countries’ insolvency dynamics indicated an increase of 34.7% in 2021 compared to the prior year (1.5% increase excluding Poland where the total number of proceedings soared mostly due to new procedures).

Seven countries experienced a higher number of insolvencies than in the previous year (Bulgaria, Czech Republic, Hungary, Lithuania, Poland, Romania and Slovakia), and five countries recorded a decrease (Croatia, Estonia, Latvia, Serbia and Slovenia). Poland experienced an almost doubled number of proceedings, in large part due to a surge of dedicated procedures implemented to support companies suffering from liquidity difficulties due to the pandemic. Even despite such a surge, the insolvency rate in Poland, i.e., the share total number of proceedings in the total number of active companies reached 0.06%, meaning that only six out of 10,000 companies in Poland went through available official procedures. 

Much higher insolvency rates were recorded in countries where the usage of insolvency procedures is more popular, i.e., 1.61% in Croatia and 3.31% in Serbia.

The global economic situation over the past two years presented a challenging environment for CEE companies. The economic recovery that started mid-2020 was faster than expected and triggered soaring demand, especially from the manufacturing sector. Prices of energy commodities, transport and various metals and inputs used in the production process shot up. In some cases, shortages limited output levels. The most evident example comes from semiconductors, the shortages of which led to a decreased number of shifts and temporary closures of the vehicle plants of various automotive brands. Higher energy and fuel costs amid increased production input prices reduced companies’ profitability. These global developments have applied to CEE companies due to their inclusion in various supply chain issues, and the region’s significant trade links with Western Europe. 

From One Crisis to Another

Even though the coronavirus pandemic is ongoing, there is another challenge affecting economies and businesses: Russia’s full-scale invasion of Ukraine contributed promptly to soaring energy prices, as Europe remains dependent on oil, natural gas and coal imports from Russia. Moreover, both countries are significant producers and exporters of agricultural commodities. Agri-food production is also subject to fertilizer prices, which accelerated as well, and the CEE region is dependent on fertilizers imported from Russia and Belarus. Additionally, higher global prices and shortages of metals due to the war further exacerbated supply chain disruptions. These factors have led to a further increase in energy and input prices for businesses, including those in CEE. Furthermore, household purchasing power erosion is also a concern for their possible client base. CEE economies have experienced accelerated inflation mostly due to increased energy prices, but also growing food prices.

Russia remains an important trading destination for the CEE region, especially for the Baltic countries. Total exports and imports with Russia represented 15.1% of Lithuania’s GDP in 2021. Moreover, the Russian invasion of Ukraine triggered a huge humanitarian crisis with economic repercussions. Although all CEE countries are expected to record lower growth rates in 2022 compared to those estimated before the war, the influx of Ukrainian refugees could support regional growth at least in the short term. 

“Considering these challenges, we expect the rise in corporate insolvencies to continue over the next quarters”, explains Jarosław Jaworski, regional CEO for Coface Central and Eastern Europe. “The consequences of the Russia-Ukraine war will accelerate this increase, especially as the large scale of support programs for local companies is unlikely to be implemented as was the case during the coronavirus lockdowns.”

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate