What We're Reading:

What We're Reading:

To China’s fury, UN accuses Beijing of Uyghur rights abuses. The U.N. accused China of serious human rights violations that may amount to “crimes against humanity” in a long-delayed report examining a crackdown on Uyghurs and other mostly Muslim ethnic groups. (AP)

Russia cuts more gas supplies to Europe as inflation hits another record. Russia has temporarily halted natural gas deliveries to Europe through a vital pipeline and cut off all supplies to a French utility, deepening an energy crisis that has sent inflation in the region to a record high of 9%. (CNN)

Long-term shipping rates stand strong, for now, in the face of softening global demand. Long-term ocean freight rates climbed yet again in August, edging up 4.1% month-on-month to stand 121.2% higher than this time last year. (HSN)

Number of Brazil Amazon fires hits five-year high in August. More fires burned in the Brazilian Amazon rainforest this August than in any month in nearly five years, thanks to a surge in illegal deforestation. (AP)

European shares get September off to bad start as rate hike concerns grow. European stocks got September off to a weak start on Thursday, falling to seven-week lows on deepening worries about economic growth, aggressive interest rate hikes and record-high inflation. (Reuters)

US chip makers hit by new China export rule. Shares of major chipmakers Nvidia and AMD have fallen amid concerns of new US restrictions on the sale of artificial intelligence chips to China. (BBC)

Manufacturing growth remains tepid despite gains in employment. In its latest report on growth in the manufacturing sector, the Institute for Supply Management indicated that its purchasing managers’ index for manufacturing remained static through August at 52.8%. Growth in the employment and new orders indexes offset a drop in production. (IndustryWeek)

Why an epic US dollar rally could be a ‘wrecking ball’ for financial markets. The U.S. dollar is on a tear, hitting historic highs versus major rivals and sending ripples through global financial markets as investors see the Federal Reserve pressing interest rates higher in its bid to get inflation back under control. (MarketWatch)

China revealing its plan for Taiwan invasion, island's foreign minister says. In an exclusive interview with DW, Taiwanese Foreign Minister Joseph Wu said China's growing military aggression toward Taiwan reflects Beijing's future strategy to invade the democratic island. (AP)

Covid in China: Chengdu lockdown after outbreak. Chengdu has become the latest Chinese city to be locked down as Beijing continues to pursue its controversial "zero-Covid" policy. Around 21 million people have been ordered to stay indoors, with just one person per household allowed out for essential shopping. (BBC)

Unicorns are thriving in Latin America. Let’s hear three cheers for Latin America’s entrepreneurs. Despite frequent political turmoil, expanding social unrest, and the ideological twist and turns of government economic policy, Latin America’s private sector and entrepreneurs have shown an uncanny ability to rise above it all and succeed. (Brink News)

Strikes sweep Britain as soaring inflation savages living standards. Workers in the United Kingdom have had enough of falling living standards. Rail workers, journalists, lawyers and postal workers have gone on strike in recent weeks to demand higher pay as inflation soars to its highest level in decades. (CNN)

Pound in biggest monthly fall against the dollar since 2016. Worries over the prospects for the UK economy led the pound to slide by about 5% against the US dollar in August. The last time the pound fell so much against the dollar was in October 2016, in the aftermath of the Brexit vote. (BBC)

Germany’s annual inflation rate rose to its high level in nearly 50 years in August. Records show that as prices surge for energy and groceries, Germany may be on the road to recession. The country’s annual inflation rate rose to 7.9%, “returning to its highest level in nearly half a century after it dipped in the two previous months,” according to ABC News.

Energy prices were up 35.6% year over year in August and food prices rose 16.6%, “while the effects of disruption to supply chains caused by the coronavirus pandemic were still being felt,” the news outlet reported.

And prices will likely climb further as Russia cuts off gas flow to Europe. “First opened in 2011, the 760-mile-long Nord Stream pipeline has been an important source of gas for Germany, Europe’s largest economy,” per The Wall Street Journal. “Before the war, Russia covered over half of Germany’s gas imports, but supply cuts via Nord Stream affect other European customers because Germany exports some of the gas abroad.”

Bundesbank expects inflation to accelerate, and predicts it could peak at more than 10% this fall as Germany is among the most vulnerable to cutoff energy supplies. “Declining economic output in the winter months has become much more likely,” the central bank said. “The high degree of uncertainty over gas supplies this winter and the sharp price increases are likely to weigh heavily on households and companies.”

Despite these issues, credit professionals are not reporting many issues receiving payment from German-based customers. According to FCIB’s July Credit and Collections survey, 33% of respondents who sell into Germany say payment delays are staying the same, and another 33% say payment delays are decreasing. In cases where German-based businesses are late to pay, 58% say it is related to supply chain and shipping issues, and 33% payments delays are related to cash flow issues.

“We have a sales rep that lives in Germany,” one respondent said. “She is great communicating to customers if they start to fall behind. She said it is not part of German culture to pay late, unless there are problems beyond their control.”

However, credit professionals could start to see slowing payments as the German economy tightens. Soaring inflation could prompt action from the European Central Bank to for a large interest rate hike this month. The ECB is expected to make a decision on Sept. 8. 

Please take a few minutes to participate in this month’s Credit & Collections survey, covering China, the Philippines, South Korea and Thailand.

Kamakura Corporation reported that its Expected Cumulative Default Rate for all rated firms world-wide dropped to 8.41% on August 31, more than three full percentage points below the 11.44% level reported at the peak of the Great Financial Crisis in 2008. Despite recent volatility in stock prices and U.S. Treasury yields, the longer-term outlook for expected defaults has returned to moderate levels after the initial shocks of the “covid economy” in 2020 and 2021.

“The impacts of the dramatic covid shocks could be carefully measured, and many astute economic forecasters expect 2022 to be the turning point in this iteration of the credit cycle,” said Donald can Deventer, managing director as Kamakura Corporation, a SAS Company.

Beginning in July, the Kamakura Troubled Company Index^® is reported using the new Version 7.0 default probability models from Kamakura Risk Information Services. The index for August 31 shows that short-term default risk also improved over the month. Credit conditions moved up two percentage points to the 99th percentile of the period from 1990 to the present. The 100th percentile indicates the best credit conditions during that period. The Kamakura Troubled Company Index closed in August at 7.61%, compared to 8.15% the month before. The index measures the percentage of 41,500 public firms worldwide with an annualized one-month default probability over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the end of August, the percentage of companies with a default probability between 1% and 5% was 5.84%. The percentage with a default probability between 5% and 10% was 0.92%. Those with a default probability between 10% and 20% amounted to 0.57% of the total; those with a default probability of over 20% amounted to 0.28%. Short-term default probabilities ranged from a low of 7.20% on August 18 to a high of 8.34% on August 2.

At the end of August, 16 of the riskiest rated public firms worldwide were in the U.S., with one each in Germany, Italy, the U.K. and Luxembourg. The riskiest rated firm was Loyalty Ventures Inc. (LYLT), with a one-year KDP of 48.05%, up 24.80% from the previous month. Despite the good overall credit quality globally, there were five defaults in the KRIS coverage universe in August: Endo International PLC (Ireland: ENDPQ), Avaya Holdings Corporation (USA: AVYA), Unifin Financiera (Mexico: UNIFINA), China Creative Global Holdings (Hong Kong: 1678) and China Shipping Haisheng Co. (China: 600896).

The Kamakura Expected Cumulative Default Rate, the only daily index of credit quality of rated firms worldwide, shows the one-year rate down 0.17% at 0.65%, and the 10-year rate down 1.10% at 8.41%. Note that the 10-year expected cumulative default rate in November 2008, the height of the Great Financial Crisis, was 11.44%. Effective beginning in July 2022, the Expected Cumulative Default Rate is also reported using the KRIS Version 7.0 default models.

Pakistan is battling rampant inflation, which hit a 47-year high in August at more than 27%, along with massive floods that have added stress to the country’s already fragile economy. The full impact of flooding on food and energy prices is yet to be felt.

“Spillovers from the war in Ukraine through high food and fuel prices, and tighter global financial conditions will continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability,” reads a report from the International Monetary Fund (IMF). “Policy slippages remain a risk, as evident in FY22, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting.”

Devastating monsoon floods washed away 45% of Pakistan’s cotton crops, “dealing another blow to a country already standing at the financial precipice,” reads an article from Sourcing Journal. “Capping three months of torrential rainfall, the unprecedented floodwaters have plunged one-third of the South Asian nation underwater, killing more than 1,100 people and destroying a million homes to date. At least 33 million people, or 15% of Pakistan’s population, are impacted by the damage, which early estimates place at over $10 billion of building, infrastructure, agricultural and livestock loss.”

The executive board of the IMF approved nearly $1.2 billion for the country, as Pakistan’s foreign exchange reserves stand at $13.5 billion as of August 19, per VOA News. “However, the funding may not be enough to pull Pakistan out of its deep economic crisis, as the country is dealing with some of the worst floods in over a decade.”

Experts warn the floods will likely worsen the country’s food crisis, leading to social instability, protests and socio-political pressures in the years to come. “All this could affect policy decisions and undermine the program’s fiscal adjustment strategy, jeopardizing macro-financial and external stability and debt sustainability,” reads the IMF report. “Further delays on structural reforms, especially those related to the financial sector (resolving undercapitalized banks and winding down SBPs involvement in the refinancing schemes), could hamper financial sector stability and reduce the effectiveness of the monetary policy. Finally, climate change risks are mounting, including a tendency for more frequent climate-related disasters.”

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate