Week in Review

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What We're Reading:

What We're Reading:

China’s spike in COVID-19 cases strains factories. With so many people falling ill so quickly, many factories throughout the country found themselves short staffed and struggling to maintain normal operations. (Supply Chain Dive)

After weeks of violent protests, what is happening in Peru? Thousands of protesters in Peru have converged in the capital Lima to show support for ousted former President Pedro Castillo and to demand the resignation of current President Dina Boluarte. (Aljazeera)

US Treasury buys time for Biden and GOP on debt limit deal. The U.S. government bumped up against its debt limit Thursday, prompting the Treasury Department to take “extraordinary” accounting steps to avoid default. (AP)

Middle East round-up: Egypt economy pounded. The Egyptian pound has certainly seen better days. In less than a year, the currency has lost almost half its value against the dollar. (Aljazeera)

Wholesale inflation in US slowed further in December to 6.2%. Wholesale prices in the United States rose 6.2% in December from a year earlier, a sixth straight slowdown and a hopeful sign that inflation pressures will continue to cool. (AP)

Trade costs rise as war risk cover cancellation takes effect. Shipowners are seeing the cost of carrying out trade in the Black Sea region increase after protection and indemnity (P&I) clubs pulled cover for war risk exposure in Russia and Ukraine, with higher rates expected to be passed on in commodity prices. (Global Trade Review)

Cost of living: Japan inflation jumps to new 41-year high. Japan's inflation rate has jumped to a fresh 41-year high as businesses pass on higher costs to their customers. (BBC)

Google is cutting 12,000 jobs, adding to a series of Big Tech layoffs in January. The job cuts represent about 6% of Google's global workforce. It is not clear how many of those jobs are in the U.S. (NPR)

Top Fed official: Inflation is easing, but our work isn’t done. The Federal Reserve is seeing progress in its battle to bring down US inflation and remains laser-focused on reaching the Fed’s 2% target—but policy will have to remain restrictive for “some time” to come. (CNN)

US hits its debt limit and now risks defaulting on its bills. The U.S. has reached its debt limit, and has begun resorting to "extraordinary measures" so the government can continue paying its bills. (NPR)

Global interest rate hikes are ‘yet to bite,’ says IMF head. The world economy is still in a sticky spot, according to the head of the International Monetary Fund, despite cautious optimism among economists and business leaders that slowing inflation means the worst of last year’s crises may be over. (CNN)

Iraq Economy Reels as US Moves Against Money Flows to Iran. A slide in the value of Iraq's currency has caused the price of food and imported goods to rise and led to protests in the capital Baghdad. (WSJ)

 
 

Greece: Maintain Reform Momentum as Recovery Slows amid Global Headwinds

OECD

Greece’s strong economic rebound from the COVID-19 crisis is being put to the test by surging energy and food prices and renewed global uncertainty, according to a new OECD report. 

The latest OECD Economic Survey of Greece says continued policy reforms over recent years have been a key factor behind the country’s robust post-pandemic recovery and have put the economy in a stronger position to face current headwinds.

GDP has returned to pre-pandemic levels, helped by effective government support, a revival in tourism and exports, and improved investor and consumer confidence. Employment growth has been strong, creating over a quarter of a million new jobs since before the start of the pandemic, reducing the unemployment rate to a 12-year low of 11.6%.

To sustain the recovery, the Survey recommends to better allocate public spending, strengthen public revenues, improve the functioning of the labor market and keep up efforts to create a more dynamic business sector. 

“Greece’s robust and targeted policy response to the COVID-19 pandemic secured a strong and rapid recovery. The government’s ‘Greece 2.0’ recovery plan is already laying the strong foundations for Greece’s ability to tackle future challenges,” OECD Secretary-General Mathias Cormann said, presenting the Survey alongside Greek Prime Minister Kyriákos Mitsotákis. “Ensuring the ambitious reform and investment agenda is fully implemented will help to further improve opportunities for businesses and households and will be essential for the Greek economy to navigate past the current headwinds towards a path of sustainable growth.” 

Structural reforms are the key to continued economic and social progress, the Survey says, as high energy and other key commodity prices, especially since Russia’s war of aggression against Ukraine, are slowing Greece’s recovery. Inflation peaked at 12.1% in October 2022—its highest rates in 25 years—which is weakening demand, delaying investment and setting back recent gains in purchasing power for households. GDP growth is expected to moderate from 5.1% in 2022 to near 1% in 2023 and recover to approach 2% in 2024.

To buffer the inflation shock, the government has expanded energy and fuel price subsidies. This has, however, delayed the return of the primary budget surplus to its medium-term target of 1.5% to 2% of GDP, which weighs on Greece’s ability to access less expensive financing for investment.

While reducing high rates of poverty, the Greek economy still leaves many people behind, the Survey says. The share of youth in work lags other OECD countries, despite recent improvements.  Legal reforms are improving gender equality but, in practice, and despite progress, relatively few women earn an income from work. Greece benefits less than it could from the skills of its foreign-born workforce, even as employers across a growing number of sectors report increasing difficulties recruiting staff.

The government’s ‘Greece 2.0’ reform and investment plan for 2021-26 aims to address many of the economic challenges facing the country through measures to improve the business climate, advance digitalization, support the green economy transition and improve training and skills. The Survey says realizing the full potential of the plan will require concerted effort to improve how the public sector operates and delivers but, if well implemented, it will substantially raise growth prospects and incomes. 

The Survey sets out a number of recommendations to help sustain the recovery, raise incomes and achieve the transition to a net zero emission economy.

They include keeping debt-to-GDP ratios on a downward path by returning the primary budget balance to surplus from 2023 and to better allocate funding to areas that support economic growth such as education, infrastructure and active labor market policies.

Promoting flexible work arrangements and encouraging young fathers to take-up the new paid paternity leave would encourage more women to get jobs, including in areas where skills are in short supply. Engaging more adults in higher-quality retraining programs can ensure that the workforce has the skills to make the most of the opportunities offered by the digital and green transitions.

Continued efforts to foster banks’ health, by clearing remaining non-performing loans and rebuilding their capital bases, are needed to finance private investment and sustain economic growth. Encouraging firms’ investment and growth are important to ensuring a stronger economy over the longer-term.

With a special focus on achieving the transition to a net zero emission economy, the Survey points out that greenhouse gas emissions remain significant in Greece. Replacing fossil fuels with renewable energy sources will require energy consumers to invest and adapt. Transforming the energy system cost-effectively will be essential given the large investment needs of the transition to net zero. 

The Survey identifies and discusses three key policies that could make substantial cuts to Greece’s greenhouse gas emissions—higher and more consistent prices for CO2 emissions, housing renovations and making public transport more attractive.

See an overview of the Survey, with key findings and charts.

UPCOMING WEBINARS




Spain: PP Poised for a Comeback

PRS Group

The minority center-left government composed of Prime Minister Pedro Sánchez’s PSOE and the leftist populist UP depends on the backing of smaller, mainly regional parties, including Catalonia’s ERC, to remain in power. The risk of the premature demise of Sánchez’s government has diminished after the governing coalition in Catalonia collapsed in November, leaving the minority government headed by the ERC dependent on the regional counterpart of the PSOE to remain in power. Assuming the two parties reach an agreement under which the ERC backs passage of the national budget in exchange for the Socialists’ help in approving a regional budget, Sánchez’s administration should survive until a general election falls due in December 2023.

What happens beyond that point is less certain. The most recent polls show the main opposition PP running slightly ahead of the PSOE, at around 30%, a level that if sustained through the election could position PP leader Alberto Núñez Feijóo to form a government with the backing of the far-right Vox, which is favored by around 15% of voters. The PP has teamed up with Vox (albeit reluctantly) to govern in the Castille-Léon region, but the centrist Feijóo has made clear his aversion to a similar partnership at the national level. The revived PP managed to win an outright majority of seats at regional elections in Andalusia in May, a performance Feijóo no doubt hopes to replicate in the general election. Failing that, the PP’s return to power could require a formal partnership with Vox if the latter refuses to support a minority PP government on a confidence-and-supply basis.

Municipal elections scheduled for May will provide a more reliable gauge of public sentiment than the polls, and the outcome will guide the strategy of the main parties heading into the national campaign. In the meantime, Sánchez faces significant distractions, including Spain’s scheduled turn in the EU presidency in the second half of 2023 and a brewing turf battle between the executive and the judiciary.

The Constitutional Court, which is dominated by justices appointed by PP-led administrations, recently issued a ruling that bars the Senate from debating legislation approved by the lower house that reformed the process for electing the members of various judicial bodies. Sánchez contends that the unprecedented intervention by the judiciary impedes fulfillment of the constitutional requirement to refresh the composition of the top court, and risks raising rule-of-law concerns that could complicate Madrid’s relationship with EU officials in Brussels.

Spain continues to enjoy the favor of the financial markets, thanks in no small part to the guarantee provided by the ECB as purchaser of euro-zone government bonds and the country’s eligibility for some $72.8 billion in financing from the EU’s massive pandemic recovery fund, which enhances the credibility of the government’s pledge to balance economic growth and fiscal discipline. Even so, there is cause to doubt the government’s ability to absorb the extraordinary financing, especially at the regional level. Moreover, disbursements are conditioned on the implementation of reforms, which could hit roadblocks if the populist and euro-skeptic Vox influences the policy agenda.

The yield on the benchmark 10-year bond has risen steadily against a backdrop of stubbornly high inflation, hitting 3.5% in late December. The trend is putting added pressure on officials to redouble their efforts to reduce a debt burden that remains uncomfortably high at an estimated 112% of GDP.

The economy performed above expectations through the third quarter of this year, boosted by robust growth of exports and the post-pandemic revival of tourism. Tightening measures implemented by the ECB to combat inflation will dampen consumer spending and private investment throughout the euro zone, reinforcing the weakness of domestic demand and contributing to a slackening of demand for exports. Access to EU investment financing will put a floor under the slowdown and create a basis for a rebound in 2024, but real GDP growth is forecast to decelerate from 4.6% in 2022 to just 1%–1.5% next year.

The analysis above is taken from the December 2022 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB. 

Christopher McKee, Ph.D., economist and CEO of The PRS Group, is FCIB's newest global expert. Members can watch his most recent Global Expert Briefing on political risk on-demand.

What Risks Confront Asian Economies in 2023?

Bart Édes, distinguished fellow at Asia Pacific Foundation of Canada

Over the past 12 months, Asia has been buffeted by overlapping international crises, including the COVID-19 pandemic and the Russia-Ukraine conflict. 

But there is a good case for cautious optimism about Asia’s prospects for 2023. China has taken measures to stabilize the real estate market and reversed course on a zero-COVID strategy that imposed great economic costs. In Japan, substantial household savings will support consumption. India’s economic boom looks set to continue—propelled by massive investments in physical and digital infrastructure and manufacturing capacity, and tourists are returning to Southeast Asia. Bangladesh, the Philippines, India and Vietnam are among the countries expected to record the region’s highest growth rates next year.

Yet there are potential obstacles to regional recovery, including soft global demand that could hold back economies with a high dependence on exports, like the Republic of Korea and Taiwan. Following are five major risks to Asia’s growth prospects and stability in 2023.

Monetary Tightening 

The Fed’s campaign to control inflation through a series of interest rate rises has impacted Asian currencies and markets. The rise in food and energy prices has caused inflation to exceed central bank targets in most Asian economies. Tight labor markets are contributing to higher wages and more inflationary pressures in some parts of the region. 

Continued monetary policy tightening in the U.S. and other OECD member countries could lead to large exchange rate depreciations, financial instability and balance-of-payment difficulties in economies with vulnerable fundamentals. There remains some threat of capital flight. Consumer and business confidence are likely to be impacted by high inflation and interest rates.

If Asian governments seek to shield households and businesses from higher prices through subsidies, price controls and easier lending, the result could be the trapping of resources in unproductive firms and a diversion of spending away from investments in physical and social infrastructure. Increased government expenditures could exacerbate inflation. 

Mitigating this risk are indications that U.S. inflation may be peaking and that future interest rate hikes by the Fed will be smaller. These developments could create some space for Asian central banks to slow the increase in their own interest rates.

More Energy Shocks

The energy sector could experience further volatility in the coming year. Fuel prices in Asia remain high despite the decline in global oil prices from their peaks in early 2022. Power generators, gas importers and public utilities in Asia are preparing for fuel supply disruptions over the coming months. 

In 2022, drought in China’s Yangtze River system negatively impacted hydropower production during the year. Both China and India depend on hydropower for more than 10% of their electricity. Heatwaves and drought in the coming year could lead to power shortages and blackouts.

To mitigate against a drop in energy supplies, several Asian countries are stockpiling fuel, diversifying their sourcing of oil and strengthening demand management. Some are also ramping up oil-fired generation capacity.

Russia and Ukraine

Russia’s invasion of Ukraine in February 2022 shook global markets and caused chaos in commodity markets and supply chains. In Asia, prices of nickel, corn, wheat, oil and other commodities soared. Several economies experienced a deterioration of their terms of trade. Western sanctions on Russia have added to supply chain disruptions and price volatility. Most Asian countries are net oil importers, making their economies vulnerable to fluctuations in oil prices.

An escalation of the war would unsettle global commodity markets, with implications for Asia. Rising oil prices could drive up consumer and business costs in other sectors, like transport, housing and electricity. Another surge in food and fuel prices would impact low-income groups the hardest, perhaps leading to social unrest. 

Debt Burdens

Higher interest rates outside Asia have led to capital outflows and currency depreciations in some Asian countries. These developments have increased the burden of servicing debt and shrunk fiscal space, hurting countries that entered the pandemic with a high debt burden.  

China has contributed to developing country debt problems through opaque lending practices and an unwillingness to collaborate with other creditors to restructure the debts of countries taking loans. Rising costs of international borrowing are making it difficult for Asian states to secure funds to invest in climate mitigation and adaptation measures. Countries like Pakistan and Sri Lanka that borrowed heavily when interest rates were low are now struggling to fund projects to respond to weather-related disasters and enhance resilience.

The United Nations Development Program has identified dozens of low- and middle-income countries with severe debt problems and urged the international community to undertake a comprehensive restructuring of debt, including write-offs. Impacted Asian states include Afghanistan, the Kyrgyz Republic, Laos, the Maldives, Pakistan and Tajikistan. 

Cyberattacks

Cybercriminal groups and state-sponsored cyberattacks will present a substantial risk to doing business in Asia in 2023. Automation of cyber threats will grow substantially, testing the resilience of networks and systems. Susceptibility to ransomware will be a particular concern as its profitability continues to attract new market entrants and the level of sophistication continues to grow. Global ransomware attacks increased by 28% in the third quarter of 2022 compared to the same period in 2021. 

Relative to companies in the United States and Europe, Asian enterprises tend to underestimate vulnerabilities in the areas of cybersecurity and data protection. Company management gives inadequate attention to the need for training and investment in cybersecurity. Infrastructure remains a popular target for cybercriminals.

State-backed perpetrators of cyberattacks will keep up their nefarious activities from bases in China, Iran, North Korea and Russia.

A growing area of concern is the use of deep fakes, which enable cybercriminals to gain someone’s trust by closely imitating a person they know. Social media scams are also expected to surge.

Other Risks to Watch

Natural disasters, like severe flooding and typhoons, are regular occurrences in Asia, and are likely to bring at least localized disruptions in the coming year. Beijing will continue to keep pressure on Taiwan, but military and intelligence analysts see the short-term risk of military action as very low. A consistent concern here, as with North Korea, is that an incident, perhaps stemming from some miscalculation, could balloon into a major crisis. The border dispute between China and India in the Himalayas will continue to simmer, while unrest in Myanmar could degenerate into all-out civil war with implications for neighbors (like a surge in refugees).

Beijing is confronting several serious challenges. A shrinking workforce, decline in productivity and weakening private consumption could limit China’s rebound potential as COVID restrictions are removed. The sudden course change in Beijing’s approach to dealing with the virus will lead to hundreds of thousands of fatalities. A slow or bumpy recovery in China’s economy would negatively impact growth prospects in other Asian countries. Further, Western measures targeting Chinese access to advanced technology could further disrupt supply chains. 

Elsewhere, Iran is enriching uranium at the highest levels in its history, a trend that could trigger external intervention if diplomacy cannot achieve an international agreement over the country’s nuclear program. Finally, while the worst of COVID-19 appears to be behind us (except in China), the possibility that new variants slow Asia’s economic recovery cannot be fully discounted.

This article originally appeared on Brink News.

 

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