Week in Review

July 23, 2018

Global Roundup

Trump threatens tariffs on all $500 billion of Chinese imports. President Donald Trump said he was ready to impose tariffs on all $500 billion of goods the U.S. imports from China, remarks that sent financial markets retreating and threatened to escalate a trade clash with the Asian giant. (Reuters)

Trade, political risks may jolt Euro-area economy’s soft landing. Euro-area growth appears to have peaked. The region could be up against threats including trade tensions, a disruptive Brexit and political shocks across the currency bloc, the International Monetary Fund warned. (HSN)

EU and Japan strike out against protectionism with FTA. Trade and trade finance players have welcomed the free trade agreement between the EU and Japan, the largest such deal the EU has ever signed. (Global Trade Review)

Just about everyone seems to be preparing for the Brexit nightmare scenario. Just about everyone seems to be doubling down on preparations for the Brexit horror scenario: Britain crashing out of the European Union with no deal. (Quartz)

EU-Mercosur pact could be ready in September, says Argentine minister. A trade pact between the EU and South American bloc Mercosur could be agreed in early September, Argentine foreign minister Jorge Faurie said on July 19. (EurActiv)

LATAM sovereign risks, vulnerabilities have risen. Tightening external financing conditions, idiosyncratic domestic risks and global trade protectionism are likely to continue challenging Latin American (LATAM) and Caribbean sovereigns in the second-half of 2018. (Fitch)

South Korea slashes jobs outlook, downgrades growth forecast. South Korea’s government dramatically cut its outlook on the job market while slightly lowering its growth forecast July 18, boding ill for President Moon Jae-in’s jobs-first agenda. (Associated Press)

What comes after tariffs: An IEEPA primer. Several times in recent months, news reports have indicated that the president is considering invoking the International Emergency Economic Powers Act (IEEPA). The statute allows the president to take aggressive unilateral action against Chinese economic activity in the U.S. To understand why the act so appeals to President Trump, one first has to understand what IEEPA is, how past presidents have used it, and why its potential invocation in a new context is likely explosive enough that Trump decided against invoking it—for now. (Lawfare)

What the falling rupee means for India's economy. A strengthening U.S. dollar is causing the rupee to depreciate as the cost of India's hefty, dollar-denominated oil imports are rising. (Stratfor)

Japan exports to U.S. fall, business mood sours amid fears of trade war. Japan’s exports to the United States fell for the first time in 17 months and Japanese business sentiment soured amid worries about U.S. President Donald Trump’s protectionist trade policies. (HSN)

North Korea’s economy is no longer booming. Sanctions are biting North Korea hard. That’s according to South Korea’s central bank, which said on July 20 that North Korea’s GDP contracted 3.5% in 2017, after growing by 3.9% the previous year. (Quartz)

China flirts with easier monetary policy amid slowing growth. China’s banks are being offered cash and given instructions to boost lending, adding to evidence of a shift toward greater official support for the economy. (HSN)

Egypt moving forward: Key challenges and opportunities. The most important issues that face Egypt over the coming years are tied to a rapidly growing population, the modernization of its economy and how best to ensure a modern social safety net to protect the most vulnerable in society. (IMF)

 

Election Calendar

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

Will China Shift Gears and Will It Help?

Chris Kuehl, Ph.D.

There is mounting evidence that all of these trade war preparations are dragging the Chinese economy down a degree. The growth notched in the last quarter was still within China’s comfort zone, but it is down from where it was just a few months ago—6.7% vs. 6.8% growth.

The watchword for the last year or so was credit restraint because the government had been getting worried about too much debt and the potential for more bubbles bursting. Now, there is a desire to ramp things up with some type of stimulus to offset the impact of the tariffs and trade wars.

The big question is whether this new policy will be able to move fast enough. The banks will have to reverse course, while the business community will have to react to the new availability of funding but at a time when there may be less business activity due to the restraints on trade.

The Chinese are certainly equipped to survive a trade war and for an extended period of time, but it is also clear the tariffs will have an impact on certain industrial areas. It has become a matter of which nation can handle the pain longer.

The bets are on China if only because the government can mandate more cooperation than can the United States. The next step from the Chinese business community is to find other nations with which to do business, but that is far easier said than done. The United States is the consumer-driven market that made China what it is today. Without that U.S. demand, it gets tougher.

Is the Growth Peak Behind Us?

Euler Hermes

Global economic growth should accelerate to 3.3% in 2018 versus 3.2% in 2017. The momentum remains positive, but the drivers of the global economy could desynchronize this year. For example, U.S. growth should accelerate, while a slowdown is expected in Europe and China.

Three shocks, however, could impact the current global growth cycle: inflation as prices rise at a global level following the rise in oil prices; interest rates due to a likely tightening of the Fed's monetary policy to stem the risk of overheating in the U.S. economy; and uncertainty about the stability of economic policies, resulting from the rise of American protectionism.

Euler Hermes believes that the global economy can absorb these shocks to limit their impact. The trade credit insurer forecasts an economic slowdown in 2019, suggesting that the global growth peak has passed. However, this deceleration should be moderate, and global growth should reach 3.1%.

Although the U.S. economy is responding well to the fiscal stimulus (tax cut) put in place by the Trump administration, the Fed will certainly have to tighten its monetary policy faster than expected to avoid overheating the economy. Euler Hermes expects two rate hikes in the remainder of 2018 and two more in 2019, which would slow down residential investment and household consumption. The budgetary generosity of the American state authorities also weighs heavily on the public deficit: While it amounted to 3.7% of GDP in 2017, it is expected at 4% in 2018 and 4.5% in 2019. In the future months, the priority could therefore be given to fiscal rebalancing. For all of these reasons, Euler Hermes estimates that U.S. growth should slowdown in 2019 to 2.4%.

After a strong growth rate in 2017 (2.6%, the highest in 10 years), the European economy should slow down in 2018 and 2019 to 2.1% and 1.9%, respectively. Intra-zone trade and more generally domestic demand will offset the external slowdown. But the resurgence of protectionism, even if it is currently under control, weighs on business confidence. Internally, political uncertainties (Italy, Brexit) announce a high volatility regime. Finally, the ECB will end the QE program in December and is expected to announce a first increase in the deposit rate in September 2019. Euler Hermes estimates that a rise of 50bp in the key interest rate will increase the interest charge by 60 billion euros for companies in the eurozone, and 14 billion euros for French companies. In this context, an acceleration of institutional reforms in Europe will be key to reassure about its capacity to integrate further.

Nevertheless, the region still benefits from important safety mattresses, which protect growth: a fiscal policy that will become expansionary in 2019, particularly in Germany, Italy and to a lesser extent in Spain; consumption, supported by the acceleration of wages coupled with contained inflation, which means greater purchasing power as early as the second half of 2018; company margins that remain high; revenue growth which stands above pre-crisis levels; and more than 890 billion euros in cash available. Excesses are more noticeable in Eastern Europe, where balanced growth has made way to overheating. This is particularly the case in Turkey, where growth is expected to halve in 2018 to reach 3.7%.

In Asia, China will play a stabilizing role, thanks to the controlled transformation of its growth model. This transformation will benefit the entire region, the gradual decline of the Chinese current account surplus (expected at 1% of GDP in 2018 against 10% in 2007) being favored by exports from neighboring countries. The restructuring of the Chinese economy is accompanied by an intelligent policy mix that allows for progressive deleveraging and a reduction of overcapacity without severely penalizing domestic demand. This soft landing of the Chinese economy, coupled with the proliferation of commercial cooperation initiatives, will benefit all of Asia, which should grow at a rate close to 5% in 2018 and 2019 (vs. 2017).

Vigilance, however, is needed on the financial side. The tightening of the U.S. monetary policy (i) creates pressures on the currencies of countries with twin deficits (such as India and Indonesia), and (ii) encourages their central banks to adopt a proactive policy of increasing rates. These tensions on the exchange rate and this tightening of interest rates (external and domestic) could endanger not only the indebted companies of the region, but also their suppliers.

For Latin America, the takeoff expected for the end of last year is delayed. Growth should accelerate to 2% in 2018 and 2.4% in 2019 (1.2% in 2017), but less than initially expected. This is mainly due to downward revisions in growth in Argentina and Brazil. Indeed, the rise in U.S. interest rates has highlighted the region's vulnerabilities, starting with Argentina: Inflation more than 25% and twin deficits have led to market sanctions (the Argentine peso is depreciated by 45% since the beginning of the year). The situation should remain under control, with growth expected at 1.4% in 2018 and 1.7% in 2019 (2.9% in 2017), thanks to IMF support until 2020.

In Brazil, the recovery will be slower than expected, but the country should resist volatility thanks to a favorable external position, with growth expected at 1.9% in 2018 (1% in 2017). The medium-term outlook remains degraded due to drifting public finances, while no candidate in the presidential election foresees pension reform at the height of the stakes. Finally, Mexico, despite a resilient economy (2.5% growth in 2018 after 2% in 2017), a proactive monetary policy and a responsible fiscal policy, will continue to be under pressure from the markets. The uncertain renegotiation of the NAFTA treaty in 2019 and the future of the energy sector, a potential target of the new Mexican president, will be a source of prolonged volatility.

The Middle East countries remain convalescent, the period of low oil prices having forced a massive budget consolidation. However, with the rebound in oil, growth prospects are improving, as in Saudi Arabia (1.7% in 2018). In Africa, the recent rise in commodity prices is expected to have a stabilizing influence for the region as a whole, notably with the expected strengthening in Nigeria (2.5% in 2018). Overall, Euler Hermes expects African growth to accelerate to 3.9% and 4.3% in 2018 and 2019 (3.4% in 2017). The problem is not growth itself. Infrastructure projects (hydroelectric dams, ports, roads, rails) remain legion, particularly in East Africa (Ethiopia, Kenya) or West Africa (Côte d'Ivoire, Senegal). But the way these projects are funded is sometimes a problem and can lead to over-indebtedness.

Blockchain is Much More Than Cryptocurrencies

Innovation in a host of technologies is making it possible for faster and more efficient ways for trade credit professionals to work across borders.

Blockchain technology sits at the top of that list. The technology got its start in 2008 and continues to make headlines daily. While it began as the public transaction ledger for the cryptocurrency bitcoin, developers continue to find new ways to use it. Expectations for the technology include shorter cross-border payment transaction times, digital agreements and increased transparency.

The technology has great potential to improve supply chain management, including the processing of payments, according to a recent report by third-party logistics company, Cerasis.

“The application of blockchain promises to increase visibility, renew viability, reduce inconsistency, increase payment processing accuracy and eliminate compliance problems,” the firm states in its whitepaper, An Introduction to Blockchain and Its Potential Benefits and Drawbacks in Supply Chain Management & Logistics. “Even though the technology is still new, its potential cannot be ignored, and supply chain executives need to know why.”

The paper lists the following as some of the benefits gained from the technology:

  • The creation of smart contracts to hold vendors and suppliers accountable, maintaining adherence to duties and responsibilities defined within service level agreements (SLAs).
  • Integrated payment solutions, reducing the time between ordering and payment processing, ensuring the proper, timely movement of products. Payment processing also has major ramifications for avoiding violations of international and domestic trade agreement, preventing illicit payments from countries and entities that are sanctioned from doing business with other parts of the world.
  • Ability to create public and private blockchains, protecting proprietary, if not private, information from unauthorized parties.
  • Recording all activities throughout the supply chain, including the quantity and transfer of assets, regardless of the motive transit. This will grow more important as new technologies, including unmanned, autonomous trucks, drones, and even Amazon’s proposed floating fulfillment center, emerge.
  • Better customer service levels and far-reaching scalability, resulting from the ability to provide more information regarding a product’s manufacturer, origin, transfer, and use.

The report also outlines five steps for supply chain executives to take in order to prepare for a blockchain-based future: conduct a thorough review of their business to identify core competencies and weaknesses; automate technology to allow for seamless integration of blockchain technologies; integrate systems; use data analytics; and stay educated.

“Blockchain has the potential to powerfully disrupt many aspects of how businesses and economies work; even how societies are organized,” PwC states on its website. The technology, however, continues to raise a lot of questions as the public tries to decipher what it is and what it is not.

Understanding what blockchain is and how it can help support credit management and corporate financing needs is important, says Antje Seiffert-Murphy, Equinox Global’s vice president of trade credit and political risk.

Seiffert-Murphy and Steve Davies, PwC’s global blockchain leader, will tackle the subject at FCIB’s International Credit & Risk Management Summit in Dublin, which takes place Sept. 16-18. Visit the FCIB website, www.fcibglobal.com, if you would like more information about the conference.

 

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations