Week in Review

July 30, 2018

Global Roundup

Trump, Juncker voice desire to reduce tariffs, trade tensions. U.S. President Donald Trump and the European Union’s chief executive, Jean-Claude Juncker, both expressed a desire on July 25 to cut tariffs and ease transatlantic trade tensions as a high-stakes White House meeting got underway. (Reuters)

Trade tensions threaten global economic growth, G-20 cautions. Trade tensions threaten global growth as the engines of leading economies fall out of sync, the world’s top finance chiefs warned on July 22. (Bloomberg)

Pakistan's Imran Khan declares victory, on verge of becoming prime minister. Pakistan’s cricket legend Imran Khan declared victory on July 26 in a divisive general election and said he was ready to lead the nuclear-armed country after a long delay in ballot counting and allegations of vote rigging by most opponents. (Reuters)

Venezuela to remove five zeroes from currency. Venezuelan President Nicolas Maduro on July 25 announced the removal of five zeroes from the country's currency—two more than originally planned—amid hyperinflation the International Monetary Fund (IMF) said could reach one million percent this year. (Business Times)

Cambodia's banned opposition party calls for boycott of 'sham' election. With most senior opposition figures now banned from politics for five years and no realistic prospect of minor parties mounting a serious challenge, the ruling Cambodian People’s Party appears set to secure an easy victory in the national balloting. (Los Angeles Times)

Mexico turns to Russia for cheaper wheat amid trade tensions with U.S. Mexico's grain millers are reportedly shifting their trade priorities to be less dependent on U.S. exports ahead of possible retaliatory tariffs by the Mexican government in response to the Trump administration's trade moves, a decision that could have a major effect on the domestic grain market. (The Hill)

Trade war escalation would knock 0.4% off world growth. An escalation of global trade tensions that results in new tariffs on USD2 trillion in global trade flows would reduce world growth by 0.4% in 2019, to 2.8% from 3.2% in Fitch Ratings' June 2018 "Global Economic Outlook" baseline forecast. The U.S., Canada and Mexico would be the most affected countries. (Fitch)

Xi urges fellow BRICS countries to reject go-it-alone trade. Chinese President Xi Jinping said there would be no winner in a global trade war, urging fellow developing powers on July 25 to reject unilateralism in the wake of tariff threats by U.S. President Donald Trump. (Reuters)

The moment for Mercosur's trade agenda is now. Mercosur's window of opportunity to conclude free trade negotiations is closing because of Brazil's presidential election in October and Argentinian President Mauricio Macri's declining political capital. (Stratfor)

Trade tensions making banks in Asia “more conservative.” Rising geopolitical tensions in Iran, as well as the U.S.-China trade war, are making banks more conservative when it comes to lending decisions. (Global Trade Review)

EU prepares retaliatory tariffs on $20 bn of U.S. goods. The European Commission is drawing up a list of $20 billion of U.S. goods to hit with duties if Washington imposes tariffs on imported cars, Trade Commissioner Cecilia Malmström said on July 25, on the eve of her boss’s meeting with U.S. President Donald Trump. (EurActiv)

Belt and Road Initiative increases sovereign debt risks in Tajikistan. At the People’s Bank of China-IMF joint conference in Beijing, IMF head Christine Lagarde warned about potential debt risks for countries involved in China’s Belt and Road Initiative (BRI). (Global Risk Insights)

Sealing the deal: The rise of blockchain-powered trade finance platforms. Global trade has long been viewed as one of the most conspicuous areas for instrumental application of distributed ledger technology. While some reports estimate the whole trade finance market at $9 trillion, a recent survey suggests there is an additional $1.5 trillion of unmet demand for such services worldwide. Closing this gap will require sweeping changes, but the potential payoffs are huge. (Cointelegraph)

Imran Khan Finally Gets His Chance

Chris Kuehl, Ph.D.

One way or the other, Pakistan is headed for a new era unlike anything it has seen for years. Whether that era will be successful remains to be seen; but for the first time, the country will not be led by one of the two dominant political families of the country (Sharifs and Bhuttos).

Imran Khan has been trying to reach this position for many years. In the last election, he finished a distant third and was thought to be leaving politics altogether. He has always been far and away the most charismatic of candidates as the country’s former champion cricket player. But he never seemed to be able to move past his fame and personal appeal.

This time, he focused on building alliances with important factions within Pakistan. That included the still very powerful military. However, he has denied that he is close to the security services. It has tried to soft-peddle its support, but there were reports that elements of the military had been pressuring voters to support him at the polls.

There will be challenges to the vote as the opposition parties assert they were discriminated against at the polls. It would be unusual if there had not been this kind of meddling, but it doesn’t appear to be any worse than has been the case in prior elections. Even the opposition admits they have little chance of succeeding in their appeal. The big loser in this campaign was Nawaz Sharif. He was forced to campaign from jail at times because he had been convicted of corruption. This was the issue that motivated the bulk of voters—a sense of being completely fed up with the rampant corruption.

Now that Khan has the prize he has sought for these many years, he will face more than a few daunting tasks. The list of highest priorities is very long. He has to find a way to galvanize the weak economy and attract investment while coming to grips with the terrorism practiced by the Taliban and other Islamic radicals in the nation. The elections themselves were targets of several bombing campaigns that killed hundreds. This violence inhibits foreign investors and even forces the domestic businesses to look outside the country for expansion opportunity.

Corruption is rife—he promised an end to it during the campaign. This has been the promise of every leader that has taken power over the years; however, none have been able to do much about it. It pervades the country from the bottom up. There are even supporters of Khan who have been accused of being part of the problem.

Khan must also contend with many issues involving Pakistan’s neighbors. There had been overtures between Sharif and Narendra Modi of India at the start of Modi’s rule, but these have faded. There is still a great deal of tension over the disposition of the Kashmir; Khan will be expected to weigh in very soon. The connection between Pakistan and Afghanistan is a complex one. The intelligence service in Pakistan has long backed the Taliban, which alienates the U.S. It sees the Taliban as a buffer against the Indians. Then, there are the relations between Pakistan and China, as well as with the U.S.

Pakistan is far too large and strategically significant to ever be labeled a failed state, but there are elements of this status that any new leader will have to manage. Lurking behind the civilian leadership is always the threat of a military takeover as has happened many times in the past. The current situation favors Khan as he seems to have the backing of the army, but it is still tenuous. If there is some kind of security threat, the military can easily use that pretext as a reason to seize control. Khan can’t appear to be subservient to the military, but it has to support him enough to continue to back him.

Innovation Supports Trade Finance

Artificial intelligence (AI) and other new technology can change how businesses integrate information, analyze data and improve decision-making.

In particular, trade finance and credit management is seeing an increase in innovative technology, shared André Casterman, formerly with SWIFT and current chairman of the ITFA Fintech committee and CMO INTIX (Brussels), in an interview with Week in Review.

“Community-based platforms exist between corporates and bankers, bankers and investors, and corporates and investors,” Casterman said.

The technology manages data, automates trade documentation and promotes corporate-to-investor receivables financing as well as allows originating banks to sell down trade assets to nonbank investors.

New technology is modernizing factoring and making it an attractive proposition, he pointed out. The technology gives corporates alternatives and helps navigate a shortage in corresponding banks. This innovation is much needed because “banks have become so averse to risk—and for good reason,” Casterman pointed out.

Financial institutions have “been trying to digitize and automate the documentary trade processes for at least two decades,” Casterman wrote in a blog for the IFTA. “Manual document checking and processing exposes trade finance to human error and the operational and credit risks associated with it.

“Trade finance has become one of the top focus areas for blockchain technology use,” he added. “The number of pilots that are looking into the opportunities of blockchain technology for trade finance and supply chain has intensified in 2018.”

Another area gaining interest focuses on platforms that support corporate-to-investor receivables. “Corporates and SMEs are being offered an increasing number of ways to sell their receivables,” Casterman said.

An April 2018 Brookings Institution report, How Artificial Intelligence is Transforming the World, points out, however, that many business professionals are not familiar with the concept of artificial intelligence. They do not understand what it is or how it could affect what they do. “They understood there was considerable potential for altering business processes, but [they] were not clear how AI could be deployed within their own organizations.”

You only have to Google “AI and international trade” to realize the technology is already impacting global trade with expectations for an even greater impact in the near future.

Casterman is one of several experts who will speak during part one of FCIB’s open forum at the Sept. 16-18 International Credit & Risk Management Summit in Dublin. The session will provide credit professionals with an invaluable opportunity to explore this topic further.

To learn more about the summit, visit the web page, https://fcibglobal.com/summit-home.html.

Egypt and Algeria Pose High Credit Risks in First Half of 2018

Moving into the second half of 2018, Atradius published a country report on Middle Eastern and North African countries. Egypt and Algeria pose the two highest and most polarizing risks, both coming in at a six out of 10, negatively and positively, respectively.

Political instability in both nations presents future risks, with Egypt’s President Sisi placing the military in strong control of the national government and the possibility of Algeria’s 81-year-old President Bouteflika stepping down without warning at the end of his 2019 term. Both countries remain at high risk for terrorist attacks. In neighboring Libya—Jihadist forces have been “stirring unrest,” according to the survey—dragging the neighboring countries into risks for attacks. Egypt remains reliant on support from the IMF and Gulf-states, further disrupting political harmony, while Algeria continues to isolate itself from other countries, leading to a homogenous and more-handicapped economy.

Perhaps the most startling find between the two countries is Egypt’s inflation rate in 2017, coming in at 29.5%. In 2015, it was as low as 10.4%. This sudden spike likely stems from Egypt’s economic downfall in November 2016 with a budget deficit of 12%, low levels of foreign exchange, big financing requirements and lack of USD. In order to jump start the economy, Egypt accepted 12 billion USD from the IMF over the course of three years. As the country attempted to piece together its economy, inflation rose; subsidies on electricity, fuel and food fell; and taxes went up, causing the Egyptian pound to depreciate by 50%. But as Egypt works to fix its market, inflation is expected to rise by smaller margins in the upcoming two years.

Algeria, while still at a risk level six out of 10, is predicted to have a positive oil and gas outlook in the future. Most of the country’s economy relies on the oil and gas sector, accounting for 60% of the government budget and 95% of exported revenues. Oil prices have rebounded since a drop in 2015-16, and GDP growth will likely see only a modest recovery as the year rounds out, but a recovery nonetheless. Conversely, the paper industry in Algeria boasts a much higher credit risk compared to other industries operated in the country.

Unlike Egypt, Algeria remains independent from other nations, favoring a homogenous economy over a diversified one. Since about 90% of Algeria’s GDP is controlled by the state, government intervention, corruption, rigid labor markets, etc., these factors “still hamper private enterprise initiatives and foreign investment,” which in turn slows down economic transition. The study speculates that if the government decided to borrow money from the international market—such as Egypt has done—domestic financing pressures could be relaxed.

Both countries do not see a positive outlook in the long term. Egypt will continue to see recovery in the medium term as it heals from a crash in 2016, and Algeria will only see a modest recovery in 2018 as it steers away from diversifying its market.

Christie Citranglo, NACM editorial associate

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations