Week in Review

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What We're Reading:

Croatia takes final steps into EU with open border and euro switch. Croatia has adopted the euro and joined the European Union’s borderless Schengen zone, two steps that its prime minister said represented a historic moment. (The Guardian)

Russia sends more troops to Belarus as fears of new attack grow. A train carrying Russian troops and equipment has arrived in Belarus amid concerns that Moscow could use its ally’s territory to attack Ukraine from the north. (Aljazeera)

US economy sees robust jobs growth in December. Employers added 223,000 positions in December, pushing the jobless rate down to 3.5%, from 3.6% in November. (BBC)

Survey finds bleak outlook for Japanese companies in 2023. Major Japanese companies have grown more pessimistic about the economy, given higher costs and a weaker yen, according to a survey by Kyodo News. (AP)

China may ease ‘three red lines’ property rules: Bloomberg. China is planning to relax restrictions on borrowing for property developers to support the troubled sector by dialing back the “three red lines” policy. (Aljazeera)

Europe’s inflation slows again but cost of living still high. Europe ended a bad year for inflation with some relief as price gains eased again. While the cost of living is still painfully high, the slowdown is a sign that the worst might be over for weary consumers. (AP)

Brazil markets stabilize as doubts over Lula's economic plans linger. Brazilian markets improved on Wednesday even as criticism of President Luiz Inacio Lula da Silva's economic policies grew, with analysts and a leading newspaper slamming ministers after markets tanked in the leftist's first two days in office. (Reuters)

China COVID crisis: Beijing hospital runs out of beds, families burn bodies in streets as deaths spike. China has watched as cases of COVID-19 spiked following the rollback of the country’s "zero-COVID" policy as the abrupt shift occurred without any increase in vaccinations. Instead, officials tried to simply bolster hospitals in anticipation of a new COVID-19 wave by establishing hundreds of "fever clinics" to increase testing. (FOX News)

German factory orders down sharply, continuing trend. Factory orders in Germany dropped 5.3% in November compared with the previous month, on a sharp drop in foreign demand, official figures showed Friday. (AP)

Fresh fragility in global trade set to be revealed in 2023. As these supply chain shocks begin to dissipate this year, the next fragility to be exposed will reveal how outdated the global trading system is in an era where the world’s largest nations are stepping back from the founding principles of globalization. (Transport Topics)

Taiwan's Tsai visits base as China protests US ship passage. Taiwanese President Tsai Ing-wen visited a military base Friday to observe drills while rival China protested the passage of a U.S. Navy destroyer through the Taiwan Strait, as tensions between the sides showed no sign of abating in the new year. (AP)

Dubai announces $8.7 trillion economic plan to boost trade, investment and global hub status. Dubai aims to double the size of its economy in the next decade and become one of the "top 3 economic cities around the world," Sheikh Mohammed bin Rashid al Maktoum, the ruler of Dubai, tweeted. (CNBC)


Credit Risk in Europe Is Getting Worse. Stay Informed.

Jamilex Gotay, editorial associate

Europe’s economy has been hit especially hard by high inflation, an energy crisis and shockwaves from the Russian-Ukraine war—and so far, 2023 is looking bleak. Some areas of the European economy have improved while others have worsened, which is why it is critical for credit professionals to have the most current information to mitigate risk for their companies.

Over the last year, many European countries hit double-digit inflation rates, said Markus Kuger, Germany-based economist who served as Chief Economic Adviser for Baker Ing. “At the end of last year, Europe’s inflation rate reached 10%, which is far above their target rate of around 2%,” Kuger said. “This year, the inflation rate will decrease to 6 or 7% in many European countries.”

In terms of GDP, the economy will worsen in 2023. “A lot of European countries will fall into recession while others are already in one,” Kuger explained. Despite the growing recession risk, the labor market is tighter than ever. “Normally, when countries enter recession, unemployment rates rise—but many European countries are close to full-employment with unemployment rates at a multi-year low.”

When it comes to Europe’s rising credit risk, inflation is to blame. High interest rates are raising the number of business failures and bankruptcies. “Companies are closing because they’re not making enough money or have to pay loans taken out during the pandemic,” Kuger said. “On the bankruptcy front, that is quite daunting but for credit managers, this is the time to be more aware of what’s happening in that field because if your customer isn’t paying you, it will create a cash-flow problem for you.”

All of these factors combined makes credit management much more difficult. “But it’s not only the cost of credit, it’s also the access to credit,” Kuger explained. “Banks have tightened their loan conditions, so it’s much harder to go to a bank now and ask for credit. Banks are more reluctant now to give you the money. That is having a ramification in the credit risk world and that is certainly something that will remain enforced in 2023.”

FCIB's European Credit Executive Network will feature guest speakers, help members address challenges and risks, and find new opportunities. On the 3rd Thursday of each month at 1500 CET, FCIB will provide you with a platform to ask questions, talk directly to experts and engage with other European credit and risk managers.

Reserve your spot now for the first European Credit Executive Network meeting on Jan. 19, 2023 at 1500 CET. All FCIB members are welcome, but European members are strongly encouraged to attend. 


China’s Economy in 2023—a Post-COVID Rebound?

Sarah Tong, senior research fellow, National University of Singapore

In November and December, China’s State Council announcements reducing COVID restrictions and enhancing targeted pandemic prevention and control marked the beginning of the end of China’s three-year-long fight against COVID-19. In his new year’s address President Xi acknowledged that the country still faced difficulties ending the pandemic: “We have now entered a new phase of COVID response where tough challenges remain,” he said.

An important question is what this means for China’s economy in the coming years. The swift and decisive move away from zero-COVID indicates that supporting growth is back at the top of the government’s policy agenda once again.

COVID and related measures have caused considerable damage to China’s business environment. Therefore, economic normalization will be gradual and incomplete in the short run. Growth is likely to mirror its pre-COVID gradual deceleration, underlined both by long-term factors, including population aging and economic restructuring, as well as emerging new challenges, including rising geopolitical tensions.

Zero-COVID Policy Dragged Down the Economy

China’s economy has been on a rough ride since early 2020, when COVID-19 first hit China. Following a sharp downturn in 2020, China’s economy achieved a healthy recovery in 2021. 

In 2022, however, the economy under-performed, especially in the second quarter. One key factor was the surge of COVID cases since mid-March and the resulting lockdowns and other severe restrictive measures, which lasted at least until late November. Between mid-March and the end of April, the number of new COVID cases rose to around 2,100 a day, on average, up from 540 in the first half of March. 

This triggered a series of city-, district-, or community-wide lockdowns, including in coastal commercial hubs, such as Shanghai, Guangzhou and Shenzhen. Although the number of average daily new cases has since declined, to below 400 in May, various pandemic control measures remained in place, under China’s zero-COVID policy. 

Prolonged mobility restrictions have had a serious and direct impact on the economy, causing disruptions to supply-chain related logistics and in-person services. In April 2022, the worst affected month, highway freight traffic and turnover contracted by 14.3% and 6.6% year-on-year. Despite gradual improvement since, the figures remained negative in October, at -7.8% and -3.0%, respectively. 

Consumption was also hurt badly. For the first 10 months of 2022, total retail sales of consumer goods grew by a mere 0.6% year-on-year, in which catering actually contracted by 5%, compared to 2019, when total retail sales and catering grew by 8.1% and 9.4% during January to October. 

Such disruptions damaged China’s investment environment. Yearly growth of fixed-asset investment decelerated from 9.3% in the first quarter to 5.9% for the first nine months. Weakness in investment was particularly acute for the non-state sector, including domestic private enterprises and firms with foreign investment. 

What Comes Next Is Unclear 

The measures announced by the Joint Task Force on Pandemic Prevention and Control of China’s State Council reversed the previous mass testing- and mobility restriction-centered approach to one that emphasizes vaccine protection. Mandatory PCR testing and centralized quarantine have been gradually abolished, while vaccination for the elderly and other vulnerable groups are to be actively promoted. Such a move is badly needed and a clear plus to the economy. 

While we expect a healthy recovery in 2023, the extent of the economic rebound remains uncertain. First, it takes time and effort to implement the new policies and to normalize the economy. Second, COVID-related disruptions to the economy may be long-lasting, lowering China’s growth trajectory. Third, economic growth had been decelerating in the pre-COVID decade, and will likely continue. Lastly, China’s economic performance will be dependent on the world economy and the various emerging challenges it faces. 

The Economic Deceleration Is Likely to Continue

The government’s policy shift on COVID management occurred quite swiftly and seemed ill-prepared. Anecdotes suggest that supply shortages in antigen test kits and fever medications are common. 

There are also questions regarding whether the new economic policy-makers are ready for the challenging tasks ahead. Although the recently concluded Party Congress has identified Li Qiang as likely the new premier, his team will only take office in March, at the national congress. It is unclear when a comprehensive and coherent economic blueprint will be announced, which will affect 2023’s economic outcome. 

Business confidence has been negatively affected by long and strict COVID restrictions, in addition to other challenges. In 2022, Purchasing Managers Index (PMI) dropped from 51 in the first two months to 48.8 in March and 42.7 in April. After a brief bouncing back to above 50, it has since declined consecutively, to 47.1 in November. 

What Will China’s Growth Be in 2023?

Some multinational corporations have reportedly started or accelerated their efforts to diversify suppliers to reduce supply-chain disruption, lowering China’s growth potential in the coming years. Moreover, China’s future economy will be constrained by various structural factors, such as population aging and industrial upgrading. The global economic slowdown and China’s uncertain external environment also add uncertainties to its future economic growth. 

So, what can we expect for China’s growth in 2023? Hypothetically, we assume that, had there not been a three-year-long pandemic, China’s economy would have continued its gradual deceleration seen between 2012 and 2019. This would result in a 2023 GDP 22.8% larger than that of 2019. 

Given that the economy grew by 2.2% in 2020 and 8.1% in 2021 and is expected to expand by 3% to 3.3% in 2022, how big a bounce back is needed for 2023 to achieve the above 22.8%? The answer is more than 7.5%—that’s a difficult task by any means. 

Given the numerous challenges and uncertainties, we believe a more realistic projection would be between 5% and 6%. This is lower than China’s pre-COVID growth of 6% to 7%, but in the range of the government’s growth target for 2022. 

This article originally appeared on Brink News.

Oil Prices Remain Volatile amid Demand Pessimism and Constrained Supply

Peter Nagle, senior economist & Kaltrina Temaj, research analyst, World Bank Prospects Group

Crude oil prices have fallen by about one-third from their June highs but remain extremely volatile. Slowing global growth and concerns about a global recession have thus far outweighed worries about insufficient oil supply. Oil prices are forecast to average $92/bbl in 2023 and $80/bbl in 2024, down from a projected $100/bbl in 2022. However, prices will remain well above their recent five-year average of $60/bbl. The forecast is highly uncertain, with a variety of factors that could materially alter global supply or demand. For supply, these include EU sanctions on Russia and the G7 oil price cap, OPEC+ production capacity, the outlook for U.S. shale oil and the use and refilling of strategic oil inventories. For demand, they include a potential global recession and the easing of COVID-19 restrictions in China. This blog investigates these risks.

Russian oil production is expected to fall in 2023 as additional sanctions kick in. Russia’s total oil production has seen a modest decline of about 0.3 mb/d since its invasion of Ukraine, much less than the 2.5-3.0 mb/d decline anticipated in the International Energy Agency’s April 2022 Oil Market Report. Production has been supported by the rerouting of exports from G7 economies to other countries, including China, India and Türkiye. Russia’s exports are likely to decline in 2023, however, because of additional sanctions. The EU has banned most of its imports of Russian crude oil (starting December 5, 2022) and will ban imports of oil products from February 2023. Rerouting these exports may prove more difficult for Russia, especially for pipeline exports which have few alternative transport options. In addition to this ban, the U.K. and EU banned the provision of maritime services, particularly insurance, to ships carrying Russian crude oil, unless they abide by the G7 oil price cap. As the cap was set at a fairly high level of $60/bbl which was above the price of Urals (the Russian benchmark) at the time, countries importing oil from Russia will already comply with the cap and will therefore be able to access U.K. and EU insurance services.

OPEC+ production will remain subject to quotas in 2023. OPEC+ members agreed to cut their production target by 2 million barrels per day starting in November 2022 and lasting through end-2023. The actual reduction in production in November was much smaller than that (around 0.5 mb/d), largely because many members were already producing well below their target due to operational issues and capacity constraints. Indeed, even after the reduction in the production target, the group’s actual production was still short by 1.7mb/d. Spare production among the group remains low by historical standards, at around 3.5 mb/d or 3.5 percent of global oil demand.

The outlook for crude oil production in the U.S. may be too optimistic. About half of global oil production growth in 2023 is expected to come from the United States, where total production is forecast to increase by about 1 mb/d. However, there is a risk that production growth disappoints. Production increases in 2022 have been heavily supported by a drawdown of drilled but uncompleted wells, which has reduced the number of uncompleted wells available to support production going forward. In addition, producers have been focusing on returning cash to shareholders amid investor pressure, and they are also facing rising input costs and shortages of key components which will constrain future drilling.

Strategic oil inventories are near a 40-year low in the U.S. The United States and other OECD countries have released large amounts of oil from their strategic reserves, equal to about 1mb/d since March. These releases have sharply reduced the level of strategic reserves—for example, the U.S. Strategic Petroleum Reserve (SPR) is currently at its lowest level since 1984—reducing available buffers in the event of future disruptions to supply. Conversely, the U.S. administration has announced it intends to start to refill the SPR at a price of about $70/bbl, potentially putting a floor under prices.

Global economic growth forecasts have been revised down for 2023. Global growth for 2023, which has been revised downward repeatedly since January, is expected to further slow in 2023 due to synchronous policy tightening, worsening financial conditions and declining confidence. The prospect of a global recession could lead to much weaker oil consumption.

Recovery in demand in China hinges on an easing of COVID-19 restrictions. About half of the growth in oil consumption in 2023 is expected to be accounted for by China, as the country gradually reduces pandemic restrictions. A key risk to the demand forecast is that COVID-19 restrictions remain in place for longer, or prove more restrictive, than expected.

This blog is the sixth in a series of 11 blogs on commodity market developments, elaborating on themes discussed in the October 2022 edition of the World Bank’s Commodity Markets Outlook.

This article originally appeared on World Bank Blogs.


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