Week in Review

June 25, 2018

Global Roundup

Asian export hubs brace for fallout of ‘full-blown’ trade war. As the U.S. and China edge closer to an all-out trade war, analysts are scrambling to assess the impact on Asia’s export hubs. (Global Trade Review)

China vows to retaliate against U.S. ‘blackmail’ as Trump targets $200 billion in tariffs. Trade tensions between the world’s two biggest economies intensified, with China vowing to retaliate “forcefully” against President Donald Trump’s threatened tariffs on another US$200 billion in Chinese imports. (Financial Post)

Eurozone to decide on Greek debt relief as bailout exit nears. Eurozone finance ministers decided on June 21 how much cash and debt relief to give Greece in return for compliance with economic reforms, to ensure Athens can finance itself after it exits its bailout in August. (HSN)

Brazil central bank sees currency swap volume as unsustainable. Brazil’s central bank cannot sustain its current campaign to combat currency volatility until general elections in October, according to a central bank official familiar with the board’s thinking. (Bloomberg)

Frontier no more, Argentina regains emerging market status. MSCI is moving Argentina out of the frontier market category and back into its emerging markets portfolio. (LatinFinance)

Colombia election signals policy continuity. The victory of Iván Duque in Colombia's presidential election should support economic policy continuity, including the inflation-targeting and flexible exchange rate regimes, but boosting growth and fiscal consolidation will be key challenges for his administration. (Fitch)

Duque wins runoff in Colombia. Which parts of Peace Plan are vulnerable? With the triumph of Iván Duque in June 20’s presidential election runoff, the main question for Colombia lies in the future of the peace process signed by the government and the guerrilla movement Fuerzas Armadas Revolucionarias de Colombia (FARC). (Global Observatory)

Germany, France agree on harmonization of corporate tax systems. Germany and France have agreed on a joint proposal for corporate tax harmonization among EU member states to fight tax avoidance and level the playing field for companies doing business in the bloc, the German finance ministry said on June 20. (HSN)

U.K. business can overcome tariff wars, say trade experts. Amid sirens of trade war, companies are becoming sidetracked from what matters most: asking themselves whether their product is right for export, and, if so, to which markets? (Global Trade Review)

U.S. slaps preliminary antidumping duties on aluminum sheet from China. United States Secretary of Commerce Wilbur Ross has announced the affirmative preliminary determination in the first antidumping duty (AD) trade case the federal government initiated since 1985. This self-initiated AD investigation concerns imports of common alloy aluminum sheet from China. (Global Trade Magazine)

Hedge-fund boss who predicted ‘87 crash says next recession will be ‘really frightening.’ Paul Tudor Jones, a hedge-fund luminary, said on June 18 that the next economic downturn confronted by the U.S. could be an ugly one. (HSN)

Iraq's Supreme Court rules in favor of election recount. Iraq's supreme court on June 21 ordered a manual recount of last month's legislative elections that resulted in a surprise victory for a populist Shiite cleric. (France24)

Turkey's master campaigner, Erdogan faces biggest election challenge. After dominating Turkish politics for a decade and a half, President Tayyip Erdogan now faces his biggest electoral challenge, from a combative former teacher who has revitalized a dispirited opposition in less than two months. (Reuters)

The U.S has neglected an imperative consequence of withdrawing from the Iran Nuclear Deal: Cyberattacks. Following the U.S. decision to withdraw from the Iran Nuclear Deal, retaliation in the form of cyberattacks could have potentially devastating results. (Global Risk Insights)

Minorities pose threat to Iranian stability. The diversity of ethnic groups and religions present in Iran belies its stereotype as a Shia Persian state. GRI reports on some of the more significant minorities in Iran and examines the potential problems they could pose for the state. (Global Risk Insights)

Bank of International Settlements releases doomsday report on cryptocurrency. Many financial analysts, experts, economists and institutions are investing in cryptocurrency. However, the Bank of International Settlements (BIS) just released a report indicating its reservations on the matter. This might be putting its stance mildly, as well. (EconoTimes)


Election Calendar

Mexico, Chamber of Deputies, President, Senate, July 1

South Sudan, President, Council of States, July 9 (tentative)

Pakistan, National Assembly, July 25

Cambodia, National Assembly, July 29

Mali, President, July 29

Zimbabwe, National Assembly, President, Senate, July 30

Rwanda, Chamber of Deputies, Sept. 2

Sweden, Parliament, Sept. 9

Oil Wars Fought in Earnest

Chris Kuehl, Ph.D.

If there were any doubt as to the state of tension within the ranks of the Organization of the Petroleum Exporting Countries (OPEC), these latest meetings put an end to the speculation. The organization is as divided and contentious as it has ever been. Even those states that are not part of OPEC have been profoundly affected by the state of interaction. There have always been built-in tensions that stem from the diversity of the membership. There is nothing these nations have in common other than that they are all oil producers.

There are very rich oil states that have quite ostentatious lifestyles fueled by oil, and there are very poor states that have their entire budget tied to the per barrel price. There are states that despise one another forced to cooperate in the context of oil policy. There are nations that are very close to the U.S. and Europe and those that have very deep enmity towards the places that buy the majority of the oil they produce. Then, there are the states that are not members of OPEC, but who sell oil and are deeply affected by the decisions made by the cartel. Right now, every single division within the ranks is on full display.

Perhaps the most intense confrontation is between Iran and Saudi Arabia. The divisions between these countries are as deep as any could possibly be. The Iranians are Persians, and the Saudi ethnicity is Arabic. Over the centuries, the Persian Empire oppressed the Arabs, which only compounds the differences caused by religion. The Saudi Kingdom is the seat of influence for Sunni Isla, while Iran is the heart of the Shiite belief. They are apostates to one another and conflict between them has lasted centuries.

The two nations are fighting proxy wars in Yemen as well as Syria, and there have been terrorist attacks launched on each other. The split between states like Venezuela and the Gulf oil producers like Kuwait and Abu Dhabi and others are stark as well. The one thing that can unite these disparate communities has been the price per barrel of oil. It was universally held to be too low a couple of years ago when it was languishing in the $40 to $50 range. All agreed to reduce output as a means by which to get these prices up. Russia threw its support behind this strategy as well—even though it has never been an OPEC member.

Now that oil prices have nearly doubled to $80, the Saudi position has been that production should start up again and keep that price from going any further. It is not that it is averse to making more money on its oil and it is not because it has become a stooge for the U.S. as the Iranians have been asserting. The Saudi Arabian Oil Ministry is well aware of the fact the U.S. has become the world’s largest oil producer (when it wants to be).

At around $90 to $100 a barrel, the U.S. shale oil producers kick into high gear and start taking a large share of the market for oil away from Saudi Arabia and other OPEC states. They do not want to invite that competition by allowing prices to rise too far and too fast. Iran doesn’t see it this way because it thinks demand will hold steady enough to support the higher prices. It also has no desire to cut the U.S. a break on anything—especially the price of crude oil.

Russia will be the dealmaker here. Right now, it is siding with the Saudi position and is preparing to increase its production to levels last seen two years ago. It has much the same motivation—a desire to keep the U.S. oil producers on the sideline to some degree.

Argentina: Macroeconomic Imbalances Despite Transition to More Orthodox Policies


Argentina, the third-largest economy in Latin America, is a country rich in natural resources but with a relatively difficult political and economic context.

"Since the election of President Mauricio Macri at the end of 2015, marking a break with 12 years of Kirchnerian populism, and the settlement of the country's debt to its debtors in early 2016, Argentina seems to have turned the page of its exclusion from international markets,” explained Nabil Jijakli, group deputy CEO of Credendo. “However, despite the efforts, economic performance does not seem to meet the expectations of the government.”

In view of the current political situation, Credendo ranks short-term political risk in category 4/7. Although the increase in foreign exchange reserves improves liquidity, the rapid rise in short-term debt is worrying. In the medium and long term, the credit insurer ranks the political risk in category 5/7. High interest rates and inflation, the sharp depreciation of the peso and the relatively difficult business environment explain Argentina's classification of the commercial risk in Category C.

According to Credendo experts, three downside risks cloud the economic outlook. The first risk relates to the current-account deficit, which has increased in recent years and is expected to deteriorate further to -5.1% of GDP this year due to the severe drought affecting soybean exports (the country's main export, accounting for about 20% of current-account receipts), and rising oil prices. Over the next few years, the current deficit is expected to continue to widen to around -6% of GDP, due to the slowdown in the Chinese economy, relatively low price forecasts for major exports, and imports of investment goods.

The second risk results from the rapid increase in the external debt. It is at a relatively modest level relative to GDP (around 36% of GDP at the end of 2017) but, compared to current-account receipts, it stands at a relatively high level, about 300%. In addition, external debt ratios are expected to rise in the near future as a result of the current-account deficit and budget deficit as well as the peso's fall.

Finally, the third risk concerns the country's high inflation. It is even the highest inflation in Latin America, behind Venezuela. After falling in 2017, inflation is expected to be above 20% this year, a level that remains high.

Visit FCIB’s website to learn more about the upcoming Doing Business in Argentina webinar scheduled for August 30, which will include both legal and credit perspectives to mitigate risks when doing business there.

U.K. Records Highest Number of Trade Credit Insurance Claims Since 2009

The number of claims made by U.K. firms in the first quarter of the year to cover nonpayment of debts were at their highest level since 2009, according to data published this month by the Association of British Insurers (ABI).

Corporate insolvencies rose by 13% on the previous quarter in England and Wales, with several recent high-profile company restructures further highlighting how challenging the trading environment remains.

ABI’s figures show that in the first quarter of 2018, the number of new trade credit insurance claims notified at 3,966 was up by 50% on the previous quarter as the insolvency of Carillion hit. This equated to 44 new claims every day during the quarter, the highest quarterly figure since the third quarter of 2009. The value of U.K. domestic claims paid (£54 million) was a record amount for the first quarter of a year.

This is a tough time to be in business, and it is not getting any easier,” said Mark Shepherdan assistant director with ABI. “The collapse of Carillion was one of a number of high-profile major insolvencieswhich dramatically highlighted how the ripple effect of a company failure can have a devastating impact throughout the supply chainThe commercial environment remains a challenging one for customers, suppliers and insurers.”

The ABI UK Trade Credit Data Report compiles data from nine trade credit insurers: AIG, Atradius, Coface, Euler Hermes, Markel International, QBE, Tokio Marine HCC, XL and Zurich.



Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations