Week in Review

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ExtraCredit enews block jun22

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EXPLAINER: China’s relaxed ‘zero-COVID’ brings big changes. In a move that caught many by surprise, China announced a potentially major easing of its rigid “zero-COVID” restrictions, without formally abandoning the policy altogether. (AP)

Iran protesters say unrest ‘to get worse’ after execution. Iran has executed a prisoner convicted for a crime allegedly committed during the ongoing nationwide protests. Students vow to continue demonstrations and demand change. (DW)

UK banking rules face biggest shake-up in more than 30 years. The government is set to announce what it describes as one of the biggest overhauls of financial regulation for more than three decades. (BBC)

Lebanese banks battered by meltdown struggle to survive. Lebanon’s once burgeoning banking sector has been hard hit by the country’s historic economic meltdown. It has suffered staggering losses worth tens of billions of dollars and many of the small nation’s lenders now face possible closures or mergers. (AP)

German investment in Africa stalls despite government push. Germany's potential to invest in Africa was trumpeted at the 2022 German-Africa business summit in Johannesburg. But German foreign direct investment on the continent is stagnant. (DW)

Peru swears in a new president amid constitutional crisis. Vice President Dina Boluarte was sworn in Wednesday as Peru's next president after Congress voted out President Pedro Castillo shortly after he dissolved the legislative body. (NPR)

UK aims to double US gas imports under new deal. The U.K. has agreed to double imports of US gas over the next year as it tries to stabilize soaring energy prices. (BBC)

Global insurance pricing increases moderate again in third quarter 2022. Global commercial insurance prices increased 6%, on average, in the third quarter of 2022, compared to the 9% increase seen in the second quarter. It was the twentieth consecutive quarter of rising average pricing in the Marsh Global Insurance Market Index. (Brink News)

Fitch Ratings: Global shipping outlook worsens on lower container freight rates. The main risks include the potential for a harsher recession than expected and the continuation of pandemic-related lockdowns in China that could lead to further weakness in demand and manufacturing. (HSN)

Mexico to cut elections funding, ease online voting. Mexico’s ruling party quickly pushed through an electoral reform Wednesday that reduces funding for the country’s electoral oversight agency. (AP)

Taiwanese chip giant invests $40bn in US plant. Computer chip giant TSMC says it will more than triple its investment in a giant U.S. plant to $40bn (£33bn). (BBC)

China's Xi Jinping visits Saudi Arabia to assert power and rival US influence. China's leader, Xi Jinping, is in Saudi Arabia for a visit showcasing Beijing's ambitions to expand its influence in the Gulf, a region traditionally seen as a close U.S. security partner. (NPR)

US hits prominent Turkish executive with Iran oil sanctions. The Biden administration is imposing sanctions on a prominent Turkish businessman reportedly close to Turkey’s President Recep Tayyip Erdogan for violations of U.S. restrictions on the sales of Iranian oil. (AP)


Foreign Exchange Risk ‘Very High’ in Ukraine and Turkey

Jamilex Gotay, editorial associate

Foreign exchange (FX) risk should be on the forefront of every creditor’s mind when extending credit globally in today’s economy. For example, in Turkey the FX rate increased in proportion to inflation rates. “In order for us to be able to compete and sell our goods, if inflation is for example 60%, then the exchange rate should move by 60%,” said Mustafa Gultepe, chairman of the Turkish Exporters Assembly (TIM), per Reuters.

Banks in Ukraine and Turkey face a “very high” risk of restrictions on capital flows, weak international reserves and a high level of foreign currency debt, according to Moody’s. “High dollarization causes multiple problems when the local currency drops sharply in value,” reads the Moody’s report. “The banks become vulnerable to an increase in defaults on foreign currency loans granted to unhedged borrowers which hurts the banks' profitability, while their liquidity and capital can also come under pressure.”

You can learn everything you need to know about FX risk by enrolling in FCIB’s International Credit and Risk Management (ICRM) online course. This class is for the curious credit professional at any level who wants to help their company navigate global trade, said David McAnally, CICP, credit analyst at Toshiba Global Commerce Solutions (Wake Forest, NC). “I don’t think I could’ve been exposed to as much international credit information, especially for Latin America, if it wasn’t for the ICRM,” he explained. “If you want to improve your knowledge and ability to help your company and grow your career, ICRM is a good opportunity to do that.”

Being well-versed in complicated areas such as foreign exchange risk would be beneficial for any credit professional, especially as the credit profession expands to cover different roles. Tiffany Kwan, CICP, credit controller at Spencer Ogden (Singapore) recently passed the ICRM course and earned a designation. “I now have a more in-depth understanding of the credit structure, from decision making to benchmarking. I have learned various tools that will be put to good use in my daily job duties,” she said.

ICRM Instructor Val Veneable, CCE, CICP, ICCE, emphasizes the importance of this course because even if your company is not selling globally today does not mean it won’t in the future. “Your company may not be doing international trade right now but maybe a year or two down the road, your career could easily shift towards international credit,” she said.

Venable not only has the on-the-ground experience, but she uses the mistakes she made as learning tools to help course participants gain invaluable insights into the risks of global trade. Although the online course depends upon each participant to work through the written content and test their knowledge with short quizzes, audio content also supports learning. The course instructor monitors responses to discussion questions, responds to questions and manages team progress to ensure that students are working through course modules at the same time. Scheduled live content reviews bring the course participants and the instructor together.

The ICRM’s online, 13-week format allows flexibility for credit professionals in any time zone. Students who recently passed the ICRM course hailed from around the world—including India, Singapore, the Netherlands, the U.S., Saudi Arabia, Brazil, United Arab Emirates, Mexico and China. By passing the ICRM, you will permanently become a part of a global expert network filled with credit friends who you can count on for years to come.

Register for the Winter 2023 course by Jan. 6. The class starts on Jan. 9 and ends on April 16.


US Is World's Top Destination for Foreign Direct Investment

Jannick Damgaard and Carlos Sánchez-Muñoz, IMF Blog

The U.S. recorded the largest increase of inward foreign direct investment of all economies in 2021. The latest release of the IMF’s Coordinated Direct Investment Survey shows the U.S. position increasing by $506 billion, or 11.3%, last year.

For the 112 economies that reported data, inward FDI positions rose by an average of 7.1% in national currencies. In dollar terms, this global growth figure translates to only 2.3%, due to the recent strengthening of the greenback.

The U.S. is now the world’s top destination for FDI, while China has moved up to the third position. It also shows how smaller economies take prominent positions among the global top 10. The Netherlands, Luxembourg, Hong Kong SAR, Singapore, Ireland and Switzerland all appear on this list even though none of these economies rank among the top 10 when it comes to gross domestic product.

The apparent disconnect between FDI data and the real economy comes down to the fact that these numbers are fundamentally a set of financial statistics. They show cross-border financial flows and positions between entities tied to each other by a direct or indirect ownership share of at least 10%. Such flows can end up as investments into productive activities within a country, like funds going into new factories and machinery, but they can also be purely financial investments with little to no link to the real economy.

For instance, many multinational companies set up special purpose entities in offshore financial centers where funds just flow through the economy, as an intermediate step towards their final destination. These entities are often established to obtain tax or regulatory benefits and can inflate FDI data considerably even though they have relatively little tangible impact on the host economy.

Research by Damgaard, Elkjaer, and Johannesen and Lane and Milesi-Ferretti shows how offshore financial centers play an outsized role in global FDI statistics, which increased even further in the years following the 2008 global financial crisis. The latest data from the CDIS shows that offshore financial centers still account for a disproportionately high share of global FDI. However, their share has gradually declined since 2017, while that of the largest economies such as the U.S. and China has increased.

The exact drivers of this development are hard to disentangle, but are likely linked to several policy initiatives. For example, the fall in the offshore financial centers’ share of global FDI comes after the U.S. Tax Cuts and Jobs Act took effect in 2018.

This legislation reduced incentives to keep profits in low-tax jurisdictions and led to a substantial U.S. repatriation of funds from foreign subsidiaries. Additionally, sustained international efforts to reduce tax avoidance, like the OECD/G20 Base Erosion and Profit Shifting initiative, may have halted some flows to offshore financial centers.

This highlights the continued need for comprehensive and timely statistics to better understand these developments and to guide policymakers in their decision-making on international investment and tax policies. In addition to the CDIS, the IMF has launched an initiative to collect data on special purpose entities and released the first set of SPE statistics earlier this year. Country reporting of comprehensive FDI statistics was also an important part of the second phase of the G20 Data Gaps Initiative, with 19 out of 20 member economies now reporting data.

Even more policy-relevant data are in the pipeline. In close collaboration with its members and other international organizations, the IMF is updating the balance of payments manual to strengthen its relevance for surveillance and policy analysis.

The CDIS is the only worldwide survey of FDI positions and is conducted annually by the IMF. The database presents detailed data on bilateral FDI relations among economies. It aims to provide a geographic distribution of inward and outward FDI worldwide, contribute to a better understanding of the extent of globalization, and support the analysis of cross-border linkages and spillovers in an increasingly interconnected world.

Reprinted with permission; IMF Blog.

Kenya’s Economic Recovery Remains Strong, Although Slowed by Drought and Inflation

The World Bank

Kenya’s economy continued to rebound from the pandemic in 2022 with real gross domestic product (GDP) increasing by 6% year-on-year in the first half of 2022, driven by broad-based increases in services and industry. This recovery was dampened by global commodity price shocks, the long regional drought, and uncertainty in the run up to the 2022 general elections.

The 26th edition of the Kenya Economic Update (KEU)  notes that the ongoing drought and the cost-of-living increases have affected households throughout the country. The agriculture sector contracted by 1.5% in the first half of 2022 and, with the sector contributing almost one fifth of GDP, its poor performance slowed GDP growth by 0.3%. A recent rapid response phone survey that monitors the impact of shocks on households shows a rise in food insecurity, most severely in rural areas whereover half of households reduced their food consumption in June 2022. Most households reported an increase in prices of essential food items and with many being unable to access core staples, such as beans or maize. In response to the inflationary pressures, the Central Bank of Kenya (CBK) has raised the policy rate thrice since May 2022 by a cumulative 175 basis points to reach 8.75%.

“Kenya can further leverage the agriculture sector to spur growth, poverty reduction, and food security,” said Keith Hansen, World Bank Country Director for Kenya. “Boosting food resilience through community interventions in arid and semi-arid lands while supporting farmer groups to link into sustainable value chains will help to better feed Kenya during periods of drought.”

Kenya’s medium term growth prospects remain positive with GDP projected to grow by 5.2% on average in 2023–24 notwithstanding current global and domestic shocks. The baseline assumes robust growth of credit to the private sector, continued low COVID-19 infection rates, a near term recovery in agricultural production, and high commodity prices favorable to Kenyan exports. These developments are in turn expected to catalyze private investment to support economic growth over the medium term.

 “Private sector led growth is critical to job creation and a steady increase in household living standards over time,” said Naomi Mathenge, World Bank Senior Economist for Kenya.

The government reduced the budget deficit in fiscal year (FY) 2021/22 from 8.2% to 6.2% through revenue measures and expenditure moderation. Total revenue increased to 17.3% of GDP in FY2021/22 from 15.7% in FY2020/21, reflecting the pick-up in domestic demand and a range of tax reforms as well as improvements in tax administration and the use of technology. These have yielded a reduction in tax expenditures through harmonization of exemptions, enhanced compliance through voluntary disclosure programs for previously undeclared tax, and easier access to the Kenya Revenue Authority (KRA) web system. The reduction in the fiscal deficit has contributed to the stabilization of the debt-to-GDP ratio at about 67.3% in FY2021/22, thereby underlying the importance of fiscal consolidation.

The report recognizes that responding to the rising cost of living and climate change shocks, amid limited fiscal space are some of the immediate challenges facing the government. The KEU recommends the need to prioritize policy options that help to raise both productivity and resilience, at the household, producer, and national levels. The special focus section of this edition delves into policy priorities to advance productivity improvements in agriculture where a large number of Kenyans remain employed, spur economic transformation and job creation through the digital economy, while ensuring support for the most vulnerable households.


ICRM fall22 email


Week in Review Editorial Team:

David C. Anderson, Director, FCIB Member Relations

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate