Week in Review
August 6, 2018
Mexico sees key NAFTA issues with U.S. resolved next week. Mexico’s Economy Minister Ildefonso Guajardo said on Aug. 3 there were “very good probabilities” Mexico and the United States could resolve key issues between themselves in NAFTA trade talks this week. (Reuters)
China plans tariffs on $60 billion of U.S. products. China has announced plans to put tariffs of up to 25% on U.S. products worth $60 billion, the latest salvo in an escalating trade war. (CNN)
Tunisia: Fall in foreign currency reserves in Central Bank. Tunisia’s foreign currency reserves have fallen to record levels, according to data released on Aug. 2 by the Central Bank of Tunisia. (Middle East Monitor)
Here's what a no deal Brexit would mean for the British economy. The prospect of a no deal Brexit reared its head again last week, as the government admitted it is stockpiling food and medicines in preparation for such an occurrence, and Trade Minister Liam Fox told Business Insider that Britain should "leave without a deal" if one has not been secured by the end of the Article 50 period. (Business Insider)
Turkey needs foreign funds as short-term debt looms. Turkey’s embattled financial system needs foreign investors. Its plunging currency shows only the bravest are choosing to stick around. (HSN)
Mugabe's gone, but Zimbabwe still has a serious cash shortage. Zimbabwe has been facing a major cash shortage for the past two years, a symptom of the country's larger and longer economic crisis. After Robert Mugabe was ousted from power by the military last November, his replacement, Emmerson Mnangagwa, has claimed that Zimbabwe is now "open for business." But getting cash into the country is complicated, and access to physical currency hasn't improved with the leadership change. (NPR)
Key global events to watch in August 2018. At the start of every month, the Global Observatory posts a list of key upcoming meetings and events that have implications for global affairs. (Global Observatory)
Economists hike 2018 Argentina inflation forecasts, see negative growth. Economists hiked their median expectations for Argentina’s 2018 inflation to 31.8% this year, according to the central bank’s monthly survey, up from 30% last month. (Reuters)
Turkish banks' negative outlooks reflect multiple risks. The multiple risks to Turkish banks that led to widespread rating downgrades in July continue to threaten their credit profiles, Fitch Ratings says in a new report. (Fitch)
India’s central bank flags currency wars as it hikes rates. India’s central bank governor raised the prospect of global currency wars as he led policy-makers in raising interest rates to the highest in two years to shore up the rupee and tackle inflation pressures in the world’s fastest-growing major economy. (Business Mirror)
Factories from Asia to Europe put on the brakes amid trade spats. Manufacturers in some of the world’s biggest economies are putting the brakes on production as they watch trade disputes with the U.S. unfold. (HSN)
U.S. hits Russian bank with sanctions for North Korea-related activity. The United States imposed sanctions on Aug. 3 on a Russian bank it said had facilitated a transaction with a person blacklisted by Washington for involvement with North Korea’s nuclear weapons program. (Reuters)
Trade war hurts China while U.S. economy booms. New evidence emerged July 31 that China is feeling the pain from the escalating trade war with the United States, with a key index falling to an 11-month low. (HSN)
U.S. sanctions against NATO ally Turkey put ties at crossroads. Turkey’s alliance with the U.S. is in crisis over its detention of an American pastor on espionage and terrorism-related charges, and rare U.S. sanctions meant to force it to back down. The measures, and Ankara’s vow to retaliate, sent Turkish markets reeling. (Bloomberg)
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A positive global trend to strengthen corporate balance sheets and reduce company debt levels is masking a rise in leverage in vulnerable sectors and regions, according to Euler Hermes. In turn, this is creating hotspots of increased risk for cross-border trade, the trade credit insurer explained.
The findings are part of the firm’s latest research on global corporate debt, which examines the net gearing ratio, or leverage of nonfinancial listed companies. The research covers only those businesses with net debt on their balance sheet and excludes those with net cash, giving a precise view of change amongst indebted companies.
Despite a general rise in global debt, the average net gearing ratio for businesses fell to 53% in 2017, down 3.2 percentage points (pp) year-on-year. Sustained earnings growth has strengthened balance sheet structures.
“An abundant lake of liquidity is supporting high levels of corporate debt globally,” said Maxime Lemerle, head of sector research for Euler Hermes. “But, thanks to strong earnings growth, net indebtedness has been largely kept in check. However, diving under this calm surface reveals some bubbling hotspots of potential risks both for companies and their suppliers in a number of sectors and regions.”
The research highlights areas of significant risk and divergence from the global average of 53%. Euler Hermes found that risk is concentrated in sectors that face structural change, notably disruption from climate change, digitalization, changing customer needs or challenging economic performance. The sectors most at risk include paper, transportation and textile, and businesses are increasing leverage to see themselves through challenging conditions and respond to these changes.
From a regional perspective, the research found that Southern Europe was particularly vulnerable to over-leveraged corporates. Portugal (96%), Turkey (72%), Spain (68%) and Greece (69%) all recorded the highest net gearing ratios. This is compared to the lowest average levels found in South Africa (38%), Australia (41%), Hong Kong (42%), Poland (43%) and the U.K. (43%).
“When pressures mount, companies can allow leverage to creep up to help manage the problems,” said Catharina Hillenbrand-Saponar, sector advisor at Euler Hermes. “If this can’t be matched by earnings growth it may make them more vulnerable to the very issues they are trying to contain or other, unexpected shocks.”
High risk sectors
The paper industry is a highly capital-intensive industry and requires considerable leverage. As it tackles structural challenges of digitalization, the issue is compounded and has led to the sector recording the highest average net gearing ratio, at 172% for the top 25% (top quartile) comprising the highest leveraged constituents. According to the research, net gearing reduced by 7.6pp for 2017 against 2016 levels.
While leverage is high and energy input price pressures remain, margins should still improve by 20 bps in 2018 as demographics and consumption patterns boost growth in tissue and packaging production.”
The transport industry is exposed to considerable structural change and has little financial cushioning to weather the risk. With 144% average net gearing for the top 25% of companies, leverage is high, while cashflow is weak. The industry is facing the challenges of rising oil prices, a need to invest in new technology and fleets to drive fuel economy and meet climate change regulations.
Textile is a high-risk sector with a combination of significant leverage, 144% in the highest quartile of indebted companies and weak cash generation. Intense competition is the mainstay of structural headwinds, notably for industries in U.S., Japan, Singapore and India.
Medium risk with great improvement
Commodity prices have greatly improved earnings and financial structures in the energy sector, even though the outlook for the sector remains challenging. The main risk factors relate to economic and financing conditions. Despite promising market dynamics, the average net gearing ratio is 137% for the top 25%.
Metals remain a riskier sector with an average 119% gearing ratio for the top 25%. The favorable commodities environment prevails overall, driving earnings and cashflow growth, supporting a 4pp net reduction in global net gearing year-on-year. That said, some metal categories affected by protectionism tariffs will be at risk and could see rising net gearing ratios.
Chris Kuehl, Ph.D.
It turns out that this is good advice in China as well as in the United States. Over the last several years, the aim of Xi Jinping has been to consolidate power to a degree not seen since the days of Mao Zedong.
He now holds all the levers of significant power and can stay in office as long as he chooses. The problem with this kind of accumulation is that he no longer has anywhere to shift blame if things don’t go well. He is now facing a few major issues that will serve to undermine his agenda, if not his ultimate power. The two that seem to be haunting him now include the trade war with the U.S. and a developing scandal around vaccines for children that have not been properly made. The blame for these problems has been falling squarely on his shoulders.
The trade war may be the most vexing because China is not really losing this battle with the U.S., but neither is it winning. The fact is that no nation really wins or loses these battles. The U.S. will be hurt by the trade war; several parts of the economy have already been negatively affected. Regardless of the handouts that have been promised to the farmers affected by Chinese tariffs, they stand to lose a great deal of money and market access. Many will go out of business and most will just barely limp through the year. There will be export sectors that will miss out on what was once their bread-and-butter market. At the same time, there will be U.S. companies that will benefit from the lack of competitive pressure. It is also certain that U.S. consumers will be negatively affected as they will see higher prices almost across the board given the ubiquitous nature of Chinese exports to the U.S.
China is feeling some of that heat as well; it has become a game of chicken to some degree. The Chinese have an almost insatiable need for soybeans and other agricultural commodities as the nation gets wealthier and the population demands more meat. The bulk of the soybeans purchased by China go to cattle feed as this country has some of the largest cattle operations in the world. It has been a major buyer of U.S. soybeans, and the tariff that China is imposing on this commodity will force it to look elsewhere for that supply in the near future. Unfortunately for the Chinese, this is a bad year to have to seek out a new supplier as many of the nations that grow this commodity have had bad years and production is way down. China will either not be able to find the soybean crops it needs or it will have to pay dearly for them.
Farm commodities are not the only thing that China buys from the U.S., and imposing tariffs on these imports almost hurts the Chinese economy more than the U.S. The tariffs that the U.S. is imposing on China will fall into two categories. There will be some goods the U.S. now gets from China that can be obtained elsewhere. This will do major damage to the Chinese economy. There are also many goods that are not so easily replaced, and the U.S. will continue to buy from China even with the imposition of the tariff. China will not be affected at all, but the U.S. consumer will end up paying that tax.
The other issue that has landed in Xi’s lap is the vaccine scandal. These are childhood vaccines that are required by the government and have been administered to millions of children. It turns out that many have been improperly made and are ineffective, leaving these kids vulnerable to all manner of diseases. The parents of these at-risk kids are furious. They have been far more vocal than is usually the case in China because they lay the blame squarely on the Beijing leadership.
For much of the world, electronic invoicing is taking off—not only for the benefits it offers, such as enhanced cash flow visibility, but largely because jurisdictions are implementing eInvoicing regulatory requirements to crack down on tax evasion.
These legislative initiatives are why Latin America, a market not necessarily known for its FinTech innovation, has one of the strongest penetrations of eInvoicing in the world. Europe and Australia have eInvoicing mandates in place as well. The U.S., however, is a different story. Data from FEDmanager estimates that of the 19 million invoices issued in the U.S. every year, less than half are electronic. Without a regulatory requirement (so far), eInvoicing simply isn’t top of mind for many U.S. firms, said Jared King, founder and CEO of accounts receivable firm Invoiced.
“A lot of businesses here want to adopt eInvoicing, but it’s hard,” King told PYMNTS in a recent interview. “The fact that there are no regulations that require them to do so means it pushes eInvoicing lower on the to-do list. I think what’s really driving [eInvoice adoption] is customer demand.”
Customers, be they businesses or consumers, show increasing preference for a digital invoice, he noted. It’s an emerging trend, for B2B invoices in particular, as corporate billing and payments become “consumerized,” King said, adding that customers of all types today expect a digital experience, and those preferences are spilling into the B2B market as well.
“People are no longer comfortable having a paper invoice,” he said.
The customer voice isn’t only influencing how an accounts receivable (AR) department issues invoices, either. King said payers are calling for better ways to pay.
However, both legal requirements and customer preference can emerge as top barriers to global growth for businesses that are struggling to ensure their eInvoicing practices remain compliant and gain traction as they expand across borders. Take credit cards, for instance. While card payments are a popular way to pay digital invoices in the U.S., customers in Europe more often prefer to pay via bank account transfers, King said.
Failing to offer payment rails that local customers prefer, and failing to meet the nuances of individual markets’ regulatory requirements, can prevent a business from entering new markets, or lead to fines or lost customers. King explained that, typically, businesses take a manual, friction-heavy approach to deal with these challenges.
“Traditionally, businesses adopt solutions for each individual country they operate in,” he said. “That could mean 10 different billing or ERP systems, where there’s really no centralization. It’s an operational challenge we see across the board.”
Adequately addressing these hurdles, however, can significantly ease the friction of expanding across borders. The benefits outweigh the burden of implementation, King said, and companies may be making a mistake by failing to prioritize adoption. The benefits to the technology are vast, and go beyond the obvious like improved cash flow management and saved money. According to King, some of the biggest opportunities in eInvoicing exist in the data digitization offers.
“Having all of this data is benefitting companies. Finance teams are adopting machine-learning technology across all facets of financial operations, and that applies to billing as well,” he said. “You may have hundreds or thousands of invoices per month you’re dealing with—you can’t just keep that in your head.”
Technology can use that data to make more accurate predictions about cash flow, or identify a particular customer at risk of late payment.
Electronic invoicing’s potential to address late payment issues is a particularly strong selling point. Using eInvoicing data to see which customer has viewed an invoice and when, as well as past payment history, can provide a more accurate prediction of future payment behavior. Plus, recent research from eKEPLER found that it takes an average of 55 days for a paper invoice to be paid—a timeframe that gets cut to 10 days when businesses implement an eInvoicing solution.
King noted that eInvoicing data can also guide businesses in their contractual agreements with corporate customers. Customers with a history of late payments, for instance, may prevent a supplier from lengthening payment terms.
“These eInvoicing systems can make a huge impact on cutting down on late payments,” he explained. “It’s about having better payment mechanisms, being able to accept electronic payments and being faster than waiting for your customer to cut you a check.”
Businesses across Europe, Latin America, Australia and elsewhere are recognizing these benefits since regulatory requirements led to eInvoice adoption. While the U.S. has yet to adopt eInvoice mandates, any business looking to trade across borders will not only have to comply with local eInvoice regulations, but adhere to customer payment preferences. When companies go-it-alone, King said, they can quickly be overwhelmed with managing individual systems for each individual market.
Embracing eInvoicing—and addressing the unique characteristics and regulatory requirements for each market—offers compliance, meets customer needs and arms businesses with the financial data they need to thrive.
Reprinted with permission from PYMNTS.com.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations