Week in Review

May 21, 2018

Global Roundup

Europe rules out generous quotas as solution for Trump trade dispute. EU leaders demanded on May 17 “permanent” and “unlimited” exemption from U.S. President Donald Trump’s tariffs as a precondition for any trade negotiation with his administration, including market access. (EurActiv)

U.S., China launch trade talks to avert tariff war, economic damage. The United States and China launched a second round of trade talks on May 17 to try to avert a damaging tariff war, with the Trump administration demanding a $200 billion cut in China’s U.S. trade surplus and greater protections for intellectual property. (HSN)

NAFTA deadline arrives with little prospect for an agreement. House Speaker Paul Ryan warned a new NAFTA deal had to be completed by May 17, but President Donald Trump’s trade chief told lawmakers he expects that deadline will not be met. (Bloomberg)

Why Turkey and Argentina are the main emerging market weak links. Running the numbers on foreign exchange reserves and general exposure to the dollar throws up some of the reasons why Turkey and Argentina have been at the heart of the recent emerging market sell-off. (Reuters)

Will Argentina’s problems destabilize Asian economies? Argentina has taken the politically drastic step of calling in the International Monetary Fund for help and is clearly in deep trouble. What does this mean for other emerging economies, particularly those in the Asian region? (Interpreter)

Growth risks mount in Malaysia with economic policy in flux. Malaysia’s economy grew at its slowest pace since 2016, underscoring risks that will only heighten this year as the newly installed government of Mahathir Mohamad overhauls policy. (Business Mirror)

EU considers Iran central bank transfers to beat U.S. sanctions. The European Commission is proposing that EU governments make direct money transfers to Iran’s central bank to avoid U.S. penalties, an EU official said, in what would be the most forthright challenge to Washington’s newly reimposed sanctions. (Reuters)

How the U.S. withdrawal from the Iran nuclear deal will affect Iran's economy. Donald Trump’s decision to unilaterally pull the U.S. out of the Iran nuclear deal doesn’t just have important political and security implications. Because sanctions are at the heart of the deal, it will also have a significant economic impact. Just how big this is depends on the response of the European signatories to the deal – the U.K., France and Germany. (EconoTimes)

International organizations that play a role in importing and exporting. In an increasingly globalized world, international organizations play an important role in importing and exporting. Whether you’re new to international trade or a seasoned veteran, understanding the part that these organizations play is key to clear communication and compliance with both import and export regulations. (Shipping Solutions)

Survey: Fewer than 1 in 3 companies ready for May 25 GDPR deadline. The General Data Protection Regulation (GDPR) compliance deadline looms five days away, but only 29% of companies will be ready, according to a new global survey conducted by ISACA. (BusinessWire)

U.S. seeks to weaken China’s high-tech global ambitions. In the midst of trade war threats between the U.S. and China, Trump’s latest trade tariffs emerge as the new American strategy to weaken Xi Jinping’s plans to transform China into a major high-tech player. (Global Risk Insights)

Risk and reward in the Israeli–Palestinian conflict. After 70 years of waiting, Israel has finally achieved the international recognition it has long sought for Jerusalem as its capital. Though only a handful of staff will work from there initially, the opening of a United States Embassy in Jerusalem is deeply symbolic. It is certain to reshape the dynamic of the Israeli–Palestinian conflict – and, potentially, for the better. (Interpreter)

 

Election Calendar

Malaysia
House of Representatives | May 31 (Date not confirmed)

French Polynesia
Assembly | May 31 (Date not confirmed)

Malta
House of Representatives | June 20 (Date not confirmed)

Luxembourg
Chamber of Deputies | June 30 (Date not confirmed)

Mexico
Senate | July 1 (Date not confirmed)

Will EU Expand into the Balkans?

Chris Kuehl, Ph.D.

Six of the more troubled states in Europe have ambitions to be part of the European Union (EU), but not everybody within the organization is supportive. There have been deep concerns expressed by Germany, the Netherlands and France as regards crime and corruption as well as the perceived weakness of many of the civil institutions in these nations.

However, some are considered further along than others. All but Albania were once part of Yugoslavia. These countries have been at the center of massive disputes since the breakup of that nation. Serbia, Croatia, Bosnia, Macedonia and Montenegro all wish to be part of the EU (as well as Albania), but Europe is wary. The fact is that all of these nations will need a lot of help from Europe. It will be a long time before they are contributing much. That worries the nations that do most of the European support now.

The reason these nations are even under consideration is more geostrategic than economic. There is a desire to see more development here simply to reduce the tension that has led to many conflicts already. Just as when Yugoslavia existed, there is a desire to balance Russia with this region, or at least to keep Russian influence to a minimum. Then, there is the issue of migration.

This is a twofold challenge as Europe has been resistant to more migration from these nations. Now, there is the added pressure of those migrants that have crossed their porous borders as a first step towards reaching the rest of Europe. The EU wants these states to step up and deal with this migration, but that takes money and resources these countries lack. The dilemma is fundamental—there are very good reasons to keep these countries out of the EU and good reasons to let them in. Which argument is most compelling depends on the issue under discussion and which nation one is talking about.

A Look at China

Documentation accuracy and compliance are critical when doing business in China, according to some credit professionals who participated in FCIB’s May International Credit & Collections Survey, which also covers India, Japan and Singapore.

“Customers have no flexibility for even the smallest variance in the documentation,” a credit manager explained.

Payment delay increases in China were noted by 18% of the respondents, while 2% said they were decreasing, 48% found no change and 32% were not experiencing delays. Nearly 30% of the survey takers identified billing disputes for the delays, followed by cultural norms (18%) and cash flow issues, government approval and regulatory issues tied for third place (11%).

Credit professionals provided a range of advice for doing business there, from conducting customary due diligence on customers and country risk to restricting foreign-exchange exposure. “There is a heavy control in some provinces for FX trade,” one credit manager shared. “Therefore, restrict your exposure. For example, in the province of Guangzhou it’s $50K per month. So, adjust your bills accordingly.”

Respondents recommended using cash in advance and letters of credit (LC). A question regarding LCs recently was posted on the FCIB Discussion Board. (The board is a secure place for members to raise questions and share advice about global credit-related concerns. To receive notices regarding ongoing discussions, sign in and subscribe using the link on the top right.) A credit professional was told by his sellers that LC at sight 60 days is standard, meaning payment would be made to the seller 60 days after the remitting bank has looked at, reviewed and accepted the documents.

“To me, this very unusual,” he said. “I’m used to LC at sight or LC 60 (or 30, 90, etc.) days from bill of lading date, but not sight, which is a moving target in terms of payment date.” The credit manager has requested feedback about what other credit professionals are experiencing in China as standard.

One respondent agreed that the terms seemed “strange.” She noted that her company sells with open payment terms, typically 120 days after the bill of lading date and that credit insurance covers credit risks.

FCIB members can also access the Doing Business in China guide for even more information and resources regarding business there. Other guides currently available include Mexico and the United Arab Emirates, with Canada under construction. The guides were developed with the help of credit professionals so they have pertinent information and resources. Each comprehensive guide contains basic information about a specific country.

Highlights of the guides include:

  • General information on GDP, currency, imports, lending and more.
  • Credit application checklists and information that you should request from a customer as well as what you should receive.
  • Bankruptcy information, including filing deadlines and documentation requirements.
  • Collections processes, costs and court proceedings.
  • Payment security, including information on liens and collateral.
  • Payment methods and terms, local and corresponding banks, and common payment methods.
  • Import requirements such as needed documentation, import regulations, custom brokers and contact information.

The next International Credit & Collections Survey opens May 22 and will look at payment behavior in Australia, Canada, Mexico and the United States. At 10 a.m. EDT, on June 5, FCIB will offer the Doing Business in China webinar, which will look at the current market situation and provide practical credit policy for managing customers in China.

Turkey: Early Elections

THE PRS GROUP

Under changes to the constitution approved by a narrow margin in a national referendum held in April 2017, the current parliamentary system of governance will be replaced by a presidential model following the next general election. Earlier this month, President Recep Tayyip Erdoğan accelerated the timetable for the transition by calling for a snap election that will be held in June, nearly 17 months ahead of schedule.

Erdoğan announced the election date shortly after Devlet Bahçeli, whose MHP formed the People’s Alliance with the governing party in February, proposed holding elections no later than August 2018, noting the already evident economic headwinds that are expected to grow stronger over the coming months. It is also probable that Erdoğan set the date with the intention of disqualifying the Iyi Party, a new nationalist party formed by a faction of the MHP that broke away to protest Bahceli’s cooperation with Erdoğan. However, the attempt to sideline the new party was foiled, and the Iyi Party is currently negotiating the terms of a possible electoral alliance with the opposition CHP that might also include the moderate Islamist PS.

The formation of an opposition alliance greatly increases the potential for a competitive presidential election and creates a risk that the People’s Alliance might fail to win a majority of legislative seats. But the fact remains that the deck is stacked in the incumbents’ favor. The recent sale of Dogan Media to a company owned by a close political ally of President Erdoğan has effectively left the government controlling, either directly or indirectly, all of the major mainstream news sources. The ability of the opposition to spread its message will be likewise constrained by moves to tighten state regulation of the internet and restrictions on the political activity imposed under the state of emergency that were first introduced following a failed coup attempt in July 2016 and renewed for another three-month period shortly after the election date was announced.

A combination of heavy government spending and an accommodating monetary policy powered very rapid real GDP growth in 2017, with the annual pace of expansion topping 7% and the 11.3% (year-on-year) advance in the third quarter setting a record for Turkey. However, the credit-driven boom has contributed to double-digit inflation and a worrisome widening of the current-account deficit. The failure of the central bank to respond with tightening measures has fueled concerns that monetary authorities are bending to political pressure.

Indeed, it appears that monetary authorities are reluctant to act without Erdoğan’s blessing, and the president has made it clear that he sees sustaining rapid growth as a higher priority than containing inflation. The situation leaves Turkey very vulnerable to a risk-averse outflow of the short-term capital on which the country depends to finance its large current-account deficit, the danger of which has increased along with the potential for a damaging trade war between the U.S. and China. Indeed, that danger was among the factors that prompted Moody’s to downgrade Turkey’s credit rating to junk status in March.

The analysis above is taken from the April 2018 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.

 

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations