UK recession fears mount after Bank of England hikes borrowing rates by more than expected. Fears that the British economy is heading for recession mounted sharply Thursday after the Bank of England raised borrowing costs by more than anticipated. (AP)

Modi touts democracy, denies discrimination in rare press conference. Indian Prime Minister Narendra Modi, who rarely takes questions from reporters, issued an emphatic defense of India's democracy in a press conference alongside President Biden. (Axios)

Turkey forges new economic policies but lira’s plunge continues. Hiked interest rates and lira’s new record low marked an eventful week for Turkey’s economy. (Al Jazeera)

Infighting among Putin’s lieutenants hurts Russia’s war footing, if not his hold on power. While there are no indications that Putin is losing influence, “there are growing signs of deep dysfunction, anxiety, worry about the war and real problems in marshaling the resources necessary to fight it effectively.” (AP)

Fed’s Powell reinforces likelihood of more rate hikes because of persistently high inflation. Chair Jerome Powell reiterated Thursday that the Federal Reserve will likely raise interest rates at least once more this year because of persistently high inflation in the economy’s service sector and the surprisingly tight job market. (AP)

Guatemalan elections test country's troubled democracy. Guatemala’s young democracy will be further tested during Sunday's elections, which experts say have been plagued by illegal use of government funds and secretive rulings on which candidates qualify to run. (Axios)

Italian oil giant will pay $4.9 billion to buy Neptune Energy. This is the largest all-cash European energy merger in years, and comes amid two countervailing trends: The need to replace lost Russian imports, and the need to reduce carbon emissions. (Axios)

Protesters rally in front of Lebanon’s central bank. Demonstrators demand access to their savings and for the bank’s governor to be held accountable for the economic crisis. (Al Jazeera)

Pakistan PM Sharif requests IMF release $1.1bn tranche. Pakistan is facing a dire economic situation in an election year with multiple challenges mounting. (Al Jazeera)

Zambian President Hichilema's $6bn debt deal hailed as historic. Zambia’s President Hakainde Hichilema can finally breathe a sigh of relief as the outlines of a deal aimed at lifting his country out of its debt crisis have been unveiled. (BBC)

Vice Media set to be acquired out of bankruptcy by its creditors for $350 million. Vice Media, the once-high flying digital media company valued at billions of dollars, is set to be acquired out of bankruptcy by three investment companies, including Fortress Investment Group, for $350 million. (CNN)

What it will take to deter China in the Taiwan Strait. The sources of instability are growing in one of the world’s most dangerous hot spots: diplomacy is fraying, deterrence is eroding, and China’s risk tolerance is increasing. (Foreign Affairs)

China's economy is undergoing a structural transition, so don't expect a massive stimulus package, analyst says. Waning growth in China won't be solved by massive stimulus, as the country's economic challenges are not cyclical hiccups, according to UBS Investment Research economist Tao Wang. (Markets Insider)

Beware of Risk in These Global Hotspots

Jamilex Gotay, editorial associate

The war in Ukraine and a global pandemic has impacted even the strongest economies, leading to inflation, recession and in extreme cases, default. And now, some countries are facing severe economic and geopolitical tensions, further impacting international trade.

When assessing risk for international customers, you must differentiate the types of risk. You can pinpoint nine factors and separate them into three parts, said David Kinzel, vice president of structured credit and political risk at Marsh, LLC (Denver, CO) during a Credit Congress 2023 session, A Look at Current Global Hotspots: Where Are They and What’s Next? Determining the type of risk can determine how you assess your customers in their ability to pay you. “Security risk which is war, civil commotion and terrorism attacks. Trading risk, which is currency convertibility, transfer risk and sovereign debt risk,” Kinzel said. “And expropriation risk where the government confiscates foreign assets, applies unfair taxation and cancels key licenses for companies to operate overseas.”

Trade credit professionals should beware of risk in the following global hotspots:

Turkey is a country with high currency convertibility and transfer risk. On April 19, 2022, Turkey’s Ministry of the Treasury and Finance published amendments to the country’s foreign exchange regulations. According to their press statement, in Law No. 6362 on Capital Markets, the ministry must continue to take measures prioritizing the use of the Turkish lira in the context of the free market and combating dollarization in the economy. “The amendments to the foreign exchange rules were made following the high increase in inflation in the Turkish economy and the rapid depreciation of the Turkish lira, which has been characterized as a currency crisis by some observers,” reads an article by the Library of Congress.

Reelected President Recep Tayyip Erdogan has reversed his approach on interest rates to reduce inflation in Turkey. “Turkey steadily lowered its policy rate from 19% in late 2021 to 8.5% in March as inflation concurrently ballooned, breaching 80% in late 2022,” reads an article from CNBC. “Turkey's central bank jacked up the country's key interest rate Thursday, almost doubling it from 8.5% to 15% as the new economic administration of recently reelected President Recep Tayyip Erdogan embarked on a dramatic monetary policy U-turn.”

“There is hope as he has appointed new advisors that will help him turn that around but Turkey is a high-risk area for trade and is only going to get worse,” Kinzel said. “The political risk insurers, part of the market that we work in, have stopped insuring Turkey for quite a while for that specific type of coverage for that convertibility risk.”

Argentina has a high currency and convertibility risk as their government makes measures to tame inflation and support their currency. In May, the country made rate adjustments, more interventions in the exchange market and expedited deals with creditors, per Reuters. According to the ministry, the central bank will also increase its intervention in the foreign-exchange market and double down on its currency devaluation plan.

China is a global hotspot for expropriation risk after their collaboration with Russia for de-dollarization. Now, many U.S. customers are unwilling to work with China and imports from China have decreased as more U.S. companies turn to nearshoring.

“We’ve seen some issues, such as Micron being restricted from doing business with China and Sound Point Capital not being comfortable being a U.S. company operating in China, so they divided their company into three different segments to be a stand-alone entity,” Kinzel said. “We encourage you to look downstream at your customers and their supply chain. If you have a customer where they’re outsourcing their supply chain to a Chinese-owned manufacturer, the risk isn’t as high. Depending on the industry that they’re in, like tech or electric vehicles, that's a higher risk for the expropriation element than a standard automotive industry.”

Fred Dons, director and head of CTF flow Netherlands at Deutsche Bank (Amsterdam, NL) cautions that in China, there is severe price distortion. “The LCs in China are 50 basis points, which should be at 2% but the market isn’t there,” Dons said. “It’s 2.5% when it should be 5%. Knowing that there is a risk and the interdependence of these countries, you should be able to price it but reign in your sales. It’s easy to sell but managing risk and compliance is more important.”

South America is a high security risk with a dramatic increase in strikes, riots and civil commotion. Trade creditors must keep in mind the security risks in countries in South America that can cause payment delays or defaults.

In Peru, the imprisonment of President Alejandro Castillo for alleged rebellion after trying to dissolve Congress in December caused an uproar of protests and riots in April and May. After the riots, Peru experienced economic fallout. “More instability will hinder mineral investment and deter tourism—economic engines which account for 10% and 3.9% of the nation’s gross domestic product (GDP), respectively,” reads an article by Al Jazeera.

It is important for trade creditors with high-risk customers to be aware how high the stakes are, especially in our economic climate. Many businesses are still recovering from the failure of Silicon Valley Bank (SVB). “We are essentially borrowing on very expensive rates for the short term and low rates for the long term,” said NACM Economist Amy Crews Cutts, Ph.D., CBE. “The bond market believes that inflation will come down if the Fed cuts interest rates. But the underlying message is that we’re headed for recession.”

 

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate