Week in Review

June 18, 2018

Global Roundup

Italy’s flagging economy may scupper radical coalition’s plans. Signs of economic weakening in Italy and the wider eurozone are complicating the new, anti-establishment coalition’s plans for deep tax cuts and higher welfare spending. (HSN)

Erdogan’s lira problem. Turkey is facing one of the most serious monetary crises of its recent history. Are Erdoğan’s populist politics to blame? (Global Risk Insights)

U.S.-Canada dispute escalates after tense G7, Europeans criticize Trump. The United States and Canada swung sharply on June 10 toward a diplomatic and trade crisis as top White House advisers lashed out at Canadian Prime Minister Justin Trudeau a day after U.S. President Trump called him “very dishonest and weak.” (EurActiv)

Weakened, U.K.'s May defeats final Brexit challenges in parliament. Prime Minister Theresa May defeated the final challenges to her Brexit blueprint in parliament on June 13, leaving plans for Britain’s departure from the European Union still largely on track but her authority weakened. (Reuters)

Treasurers don’t trust fintechs, says report. A survey has revealed a lack of trust in fintech companies among corporate treasurers. (Global Trade Review)

National cynicism and foreign outcry overshadow Lebanese elections. Having postponed elections twice, Lebanon now has a new parliament after nine years. The results of the elections raise questions about the internal and external issues that threaten Lebanon’s stability and prosperity. (Global Risk Insights)

Turkey's currency turmoil and upcoming election. With elections on the horizon, this is a trying time for the Turkish economy—despite the fact that the country’s GDP grew by an impressive 7.4% in 2017. So what’s going on? (EconoTimes)

Reaching a trade deal with China. What’s more important: redressing the U.S. trade deficit with China or addressing economic issues between the world’s two largest economies going forward? Framed that way, the answer is fairly obvious, and we have previously reported that measuring the success of trade on the basis of trade deficits alone is faulty. (Global Trade Magazine)

China’s growing role in Asian trade and its impact. The ongoing trade dispute between the U.S. and China is of particular concern for emerging Asian economies which have prospered by being active participants in regional and global value chains (GVCs). (HSN)

Trump–Kim summit: Moon’s conflicted achievement. In addition to the credit North Korean Chairman Kim Jong-un and U.S. President Donald Trump received for their meeting June 12, South Korean President Moon Jae-in should also be recognized for his tireless efforts to make this summit a reality. However, the outcome of the summit may not live up to Moon’s expectations. (Interpreter)

U.S. Fed lifts rates amid stronger inflation, drops crisis-era guidance. The Federal Reserve raised interest rates on June 13, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession. (Reuters)

Argentina’s IMF package could trigger ugly blowback. Markets welcomed the International Monetary Fund’s (IMF) $50 billion rescue stabilization package June 8, which seems to be stabilizing the peso. But the financial umbrella will be costly. Rightly or wrongly, Argentines blame the IMF for precipitating their country's worst economic crisis. In the eyes of many voters, the mere association will damage President Mauricio Macri’s standing. (Bloomberg)

How Mexico's López Obrador has become the man to beat in his 3rd run for president. If the polls are right, Mexico's next president will be a veteran leftist for whom the third time may very well be the charm. (NPR)

Breakthrough or Height of Being Naïve?

Chris Kuehl, Ph.D.

To be fair, the world of diplomacy and politics is full of hyperbole and grand statements. This is the world as defined by sound bites after all. Even so, the statements made regarding North Korea strain credulity.

President Donald Trump’s declaration that there was no longer a nuclear threat from North Korea may go down as the most naïve statement since the fabled “mission accomplished” declaration by President George W. Bush during the early days of Iraqi involvement. The North Koreans have done absolutely nothing to this point. There has been no inspection of their nuclear facilities and not even a promise to allow such an inspection.

It is unknown how many missiles the North Koreans have. Nobody knows if they already have nuclear capability with those missiles, although it has been assumed they do. Kim Jong-un has made no pledge, made no promise and has not outlined anything approaching a verification system. The contrast between Iran and North Korea is stark on this point. Iran has complied with every aspect of their nuclear deal and has allowed unfettered access to everything connected to these weapons. Still Trump elected to call off the deal. Kim has agreed to nothing and has the deal of the century.

The Kim regime has all that it wanted and more. The dictator who was a global pariah just a few months ago now rates a personal summit with the U.S. president. The U.S. has called off any military exercises with the South Koreans indefinitely. This seems to ignore the fact that North Korea’s conventional army is massive and threatening. The exercises have been directed at the fact that North Korea has an air force of over 458 fighter planes, 516 attack aircraft, 5,000 tanks, 9,335 armored attack vehicles, 4,330 artillery pieces and over six million people in the armed services. Nothing at all has even been hinted at as regards reducing this capability. These assets dwarf those of South Korea. That nation would be overrun in a matter of hours if the U.S. was not present as an ally. Now, we are an ally with no experience of supporting the South Koreans.

The North Koreans have stated the U.S. is going to lift sanctions, but thus far, the U.S. has only hinted at this. Should this be the case, the North Korean leader got the grand prize without offering a thing in return. The U.S. has not extracted a promise as to who North Korea sells to either. In the past (all of five months ago), the North Korean government was accused of selling arms and technology to elements of both al-Qaeda and ISIS. They have consistently been willing to sell weapons and technology to any who request them. There has also been ample evidence of their engagement in cyber warfare.

It is a mistake to look at the travails of the North Korean economy and conclude that this is a wholly backward state. As the USSR was once described, it is a third-world economy with a first-world military. All the emphasis goes into the military with a budget of $7.5 billion. The country carries a $5 billion external debt. The armed forces account for over half of the national budget. The latest weapon of choice has been the cyber-attack. There have been many high-profile assaults on South Korea as well as the U.S. There is even evidence of collusion between North Korea and criminal operations that are seeking financial data.

It is quite right to assert that talking and promising more talks is better than threatening one another with nuclear annihilation, but there has been nothing to reduce the threat thus far. Perhaps Kim really has had a change of heart and wants to be a world citizen, but it is also very likely that he got all that he wanted and now plans to keep developing his offensive capabilities in secret so that he maintains even more leverage.

Asia-Pacific Working Through Payment Delays

The Asia-Pacific region is still bogged down with poor payment behavior, according to the latest Atradius Payment Practices Barometer. The credit insurer reviewed the region as a whole as well as eight other locations.

Poor payment behavior and a lack of information about the business or payment performance of customers were among the reasons the proportion of business-to-business (B2B) sales on credit terms declined throughout the region. Australia and Singapore were the only two countries to not see a decrease compared to 2017. The proportion of B2B sales made on credit in the region was 43.6%. Japan and Hong Kong each dipped under 50% in 2018. China offered the lowest amount of sales on credit at 39.8%.

Asia-Pacific businesses are still having a difficult time converting B2B invoices into cash, and bad debt is mostly due to customer bankruptcies or customers going out of business. The region reported roughly 2% of B2B receivables are uncollectable. Other than bankruptcy and going out of business, the age of the debt and collection failures were also stated as reasons for uncollectable B2B receivables.

Late payments continue to be a major factor in the region despite a slight decline from last year. The proportion of overdue invoices also saw a modest drop in 2018, yet nearly half of those surveyed are dealing with the issue. Days sales outstanding (DSO) remained the same in the region at 40 days. Indonesia, Singapore and India were the worst offenders of late payments, with roughly nine out of every 10 respondents reporting the problem. Japan’s payment delays fared much better, with only 70% of respondents reporting payment delays.

Reasons behind payment delays include insufficient funds for domestic B2B customers and the complexity of payment procedures for foreign B2B customers. The second-most cited reason for payment delays for both domestic and foreign customers was that the goods or services were not what was agreed upon in the contract.

Japan and Taiwan offered customers the longest payment terms (mid-40s), while Indonesia offered the shortest at 23 days. On average, the Asia-Pacific payment duration was 57 days, up from 55 days in 2017. India respondents reported a payment duration of 74 days, the longest in the region. Singapore was the fastest in the region at 43 days.

Electronic invoicing is an option to speed up the payment process. However, less than two-thirds of respondents report they are using e-invoicing. Meanwhile, nearly four-fifths of respondents report using e-invoicing in India, but less than a third of respondents in Japan use the online invoice. The majority of every location, including the region as a whole, report invoices are paid quicker when e-invoicing is used.

Risk in Supply Chains Differs by Industry, New Report Finds

A new joint report published last week by Cranfield School of Management and Dun & Bradstreet investigates the level of supply chain risk faced by European companies with international supplier relationships.

The report uses four key metrics—supplier criticality, supplier financial risk, global sourcing risk and foreign exchange risk—to assess overall supply chain risk and provides businesses with a view of trends within their industry sector and across the wider economy. By analyzing trends by sector, the report highlights areas for monitoring and consideration in procurement decisions.

Analysis indicates that there are significant differences across sectors, requiring varying risk management practices across industries. The construction sector reduced its supply chain risk in the first quarter of 2018, while transportation saw an increase across all four of the risk metrics, including a 20% increase in reliance on key suppliers. When added to data from the previous quarter, this marks a 62% rise since the beginning of October 2017, suggesting the sector as a whole might benefit from more systematic risk assessment in supplier selection.

Global sourcing risk, the risk posed by country-wide factors on the predictability of export payments and investment returns, rose 10% between the fourth quarter of 2017 and the first quarter of 2018, thanks to significant increases in the manufacturing (12%), transportation (18%) and wholesale (11%) sectors. This indicates greater exposure to high-risk countries and to fluctuations in the global market place, potentially due to continued outsourcing and offshoring to low-cost economies.

Overall, reliance on critical suppliers increased by 10% over the past two quarters; 3% in first-quarter 2018 and 7% in the prior quarter. The manufacturing sector recorded the lowest supplier criticality risk (36.6%) and retail, the highest (75.2%), suggesting a trend towards partnership relations rather than transactional ones.

“Supply chains are becoming longer, more fragmented and increasingly complex, increasing the level of risk exposure for businesses,” said Heather Skipworth, senior lecturer in logistics, procurement and supply chain management at Cranfield. “Alongside natural disasters and geopolitical events like Brexit, there are also other—relatively low-profile—events like fluctuations in exchange rates, changes to rules and regulations, or the bankruptcy of a key supplier that can impact organizations’ supply chains.”

Analysis was carried out using proprietary commercial data supplied by Dun & Bradstreet, which included around 600,000 anonymous transactions between European buyers and their suppliers located in more than 150 countries worldwide.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations