Week in Review

August 13, 2018

Global Roundup

Trump’s Iran sanctions deadline: What businesses need to know. Firms doing business in Iran “risk severe consequences” as Donald Trump’s first batch of secondary sanctions against the Middle Eastern country went into effect Aug.7. (Global Trade Review)

High suspense in Brazil’s general election. October’s general election, in which voters will choose Brazil’s president, all members of the lower house of congress and two-thirds of the 81-seat senate, plus governors and legislators in the 26 states and the capital, is different from any that has come before. (The Economist)

Turkish credit risk overtakes Greece’s as drama unfolds. The cost of insuring against a debt default in Turkey overtook that of Greece, which is rated four notches lower by Moody’s Investor Service. The lira slumped against the dollar to record lows last week, fueled by concern about the nation’s worsening relationship with the U.S. and authorities’ ability to anchor the nation’s assets. (Bloomberg)

U.S. is losing FDI. It has been reported that Chinese investments in the United States are on the decline. Now it’s become apparent that President Donald Trump’s trade war with allies and adversaries alike is taking a toll in business investments in the United States globally. (Global Trade Magazine)

Ending hyperinflation in Venezuela is so easy and so hard. Inflation is so bad in Venezuela that the country will knock five zeros off the bolivar this month in a vain effort to restore its buying power. Is there any way to stop hyperinflation? Yes, actually. But President Nicolas Maduro almost certainly won’t resort to it. (Bloomberg)

Trump doubles tariffs on Turkish steel and aluminum, says relations 'not good.' U.S. President Donald Trump said on Aug 10 he had authorized higher tariffs on imports from Turkey, imposing a 20% duty on aluminum and 50% one on steel, as tensions mount between the two NATO allies over Ankara’s detention of an evangelical pastor and other diplomatic issues. (Reuters)

Why can’t Turkey stop its economic nose-dive? Turkey’s economic outlook has deteriorated so much that bankers and traders are starting to talk about the need for an International Monetary Fund rescue—a taboo topic until recently. What’s gone wrong with Turkey’s economy? (HSN)

Euro tumbles as investors fear bank exposures to Turkey. The euro sank to its lowest against the dollar in more than a year on Aug. 10 after a report that the European Central Bank (ECB) was growing concerned about the exposure of banks to a dramatic slide in the Turkish lira. (Reuters)

EU tries to soften impact of U.S. sanctions against Iran as they re-enter into force. As a result of the Trump administration’s decision to withdraw from the Iran nuclear deal, Washington’s re-imposition of sanctions hit European companies operating in the country from Aug. 6 onwards. The EU has updated its ‘blocking statute’ to temper the impact. (EurActiv)

The U.S. lagging behind global data regulation. The U.S. has been hesitant to enforce collective data regulation. Europe’s new digital privacy laws may serve as a model for U.S. policymakers looking to protect users of electronic communication services. Europe has been quick and efficient in pioneering regulation in this area—but America lacks a law that unifies the methods for handling data about American users. (Global Risk Insights)

European companies respond to latest Iran sanctions. New U.S. sanctions against Iran took effect on Aug. 7 and President Donald Trump, who defied Washington’s allies to impose them, pledged that companies doing business with Tehran would be barred from doing business with the United States. (HSN)

Impact of U.S.-China trade tariffs on U.S. companies. U.S. companies are putting in place measures to cushion the impact of escalating trade tensions between the United States and China. The world’s two largest economies have already imposed tariffs on $34 billion worth of each other’s imports. (HSN)

Xi Jinping's path for China. Since assuming power, Chinese President Xi Jinping has taken many steps to reshape his country, de-emphasizing growth to build a more sustainable economy and engaging in more proactive diplomacy. He has also been rewriting political rules to establish himself as a strongman. (Stratfor)

Zimbabwe's opposition leader Chamisa challenges election result in court. Zimbabwe’s main opposition leader, Nelson Chamisa, filed a Constitutional Court challenge on Aug. 10 against President Emmerson Mnangagwa’s election victory, he wrote on Twitter. (Reuters)

Egypt foreign debt up by over 10%. The Egyptian central bank said on Aug. 6 its foreign debt has climbed more than 10% in less than a year, reaching $88.2bn in March. This is despite a raft of painful austerity measures aimed at cutting government spending. (Africa News)

India's strong economy continues to lead global growth. India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax. Accounting for about 15% of global growth, India’s economy has helped to lift millions out of poverty. (IMF)

Clouded outlook for global mining due to trade tensions. The outlook for the mining sector has become more clouded in recent months due to trade tensions between the U.S. and China, Fitch Ratings says. Prices for several commodities, including copper, nickel and zinc, fell sharply in July due to investor concerns about global growth. (Fitch)

Debunking derivative myths: Tips for finance professionals. Derivatives aren’t available for every risk source, but they do cover many categories affecting the concerns of large numbers of commercial enterprises. Ultimately, the underlying issue is knowledge and understanding—or possibly misunderstanding. (AFP)

Trade War Options

Chris Kuehl, Ph.D.

Over the course of this past year, it has appeared that President Trump is locked on and committed to a series of trade wars with every nation where the United States has ever done business. The standard mantra is that all of the deals made in the past were the “worst ever” and that the U.S. has been systematically exploited by every nation on the planet—evidence to the contrary.

It has made for good campaign fodder for a section of the U.S. population that has been feeling more than a little insecure about its economic future. These insecurities are real and justified—even as the economy sets new records for growth, but the culprit identified by the administration is not the right one. If the trade policy followed by the U.S. now matched the president’s rhetoric, it would be a fairly simple matter of learning how to function in semi-isolation with a highly protected and disengaged economy. But the policies developed thus far wander far from the bombast and the tweets. It is hard to tell if there is a policy in place, or if this is more of an ongoing series of negotiations leading to some unspecified outcome.

This was most evident with the steel and aluminum tariffs. The initial announcement held that all imports into the U.S. would be subject to the tariffs. Then several nations were granted exemptions for a month or so. These exemptions were subsequently withdrawn. Since then, there have been vague promises that they might be lifted again for certain countries provided they did something the U.S. wanted. What exactly that something is has not been specified as of yet, but it appears Europe, Japan, Canada and Mexico are exploring the possibilities.

Canada and Mexico are engaged in a long, drawn-out process to determine the future of NAFTA. That is expected to be a bigger issue now that Mexico has a new president—one that has not been a big fan of the U.S. in the past. There was a very angry threat issued against Europe over the export of cars to the U.S. It simply vanished over a weekend in July when the head of the European Union met with President Trump. Of course, there is nothing to keep Trump from bringing it up again and re-imposing the tariffs and threats, but for now, the action has at least been delayed.

The most consistent trade conflict has been with China. That battle escalates every day—at least in terms of threats. The U.S. has taken steps to impose tariffs on over $60 billion of Chinese imports to the U.S. China has matched these tariffs each time so that more than $60 billion of U.S. goods have been affected. The accusations between the two states have become acrimonious. It certainly looks like a real trade war has emerged that will affect the two nations for years to come.

Neither China nor the U.S. has felt the impact of the dispute yet. In fact, the threats have stimulated a great deal of business for both and led to one of the biggest deficits the U.S. has run with China in years. This has been due to the number of exporters and importers rushing to get their goods where they want them before the tariffs kick in. The U.S. has never sold so many soybeans to the Chinese as it has this year, but these sales will end abruptly in a matter of weeks. The same process will take place as far as all the Chinese goods coming to the U.S. right now.

The question that hangs over everybody is whether this is a real fight to the end or just another positioning play. Does President Trump really want the U.S. to stop importing from China altogether? What is the real desire of the U.S. as far as these trade conflicts are concerned? Is it protection for intellectual property? Is it more access to the Chinese consumer? Is it protection from the subsidized Chinese manufacturing sector?
These are all issues that can presumably be negotiated and discussed. The fear is that Trump really has no goals or desires as regards China or any other nation for that matter. This is all pandering to a political base that has come to believe that all of their ills can be blamed on China and on trade in general. If the motivation for President Trump is the latter, he will have no issue with destroying the global trading system and putting the U.S. economy at great risk. That is the most nerve-wracking part of all.

Risks Are Crystallizing

François Faure, BNP Paribas

In emerging countries, the risks to economic growth are crystallizing. Exports are slowing and portfolio investment flows have dried up, reflecting worries about the extent of the upturn in U.S. long-term rates, the strength of the U.S. dollar and trade war threats. Several central banks have raised their benchmark rates to counter the U.S. dollar’s appreciation. Tariffs levied by the United States and the retaliatory measures that have followed in their wake can only accentuate the slowdown in exports. They will not only have adverse effects on world trade, but also threaten the recovery of private investment in emerging countries.

After accelerating in the first half of 2017, aggregate real GDP growth levelled off at about 5.4% between third-quarter 2017 and first-quarter 2018 for our selection of 26 emerging economies. A slowdown can be seen in central Europe (with the exception of Poland) and Turkey, and this trend is bound to spread to more countries in the second quarter. After accelerating strongly during the summer 2017, the dynamics of foreign trade have faltered in central Europe and Latin America as of year-end 2017, as well as in Asia starting in March, in keeping with the cyclical downturn in electronic goods.

Since April, emerging financial markets have also been hit by nonresident portfolio investment outflows, reflecting doubts about the extent of the upturn in U.S. long-term rates, the strength of the U.S. dollar and the threats of a trade war. For the moment, these outflows are similar in size to those that followed the Fed’s announcement that it would reduce its balance sheet in spring 2013, and Donald Trump’s election in fall 2016.

This can be a healthy movement because the inflow of portfolio investment had fueled an excessive upturn in asset prices. Yet the U.S. dollar’s appreciation and the increase in the cost of USD refinancing are factors of financial weakness. This is notably the case for most of the South American economies as well as the African countries that resorted to international bond market issues, whose external solvency ratios (external debt and/or USD denominated debt over export revenue) continued to rise despite the rebound in commodity prices. Faced with the U.S. dollar’s appreciation, several central banks also raised their key rates to counter inflationary pressures (India, Indonesia and Turkey) or to defend their currency (Argentina).

Most importantly, the international environment has changed. Contrary to previous bouts of stress reflecting the anticipation of monetary tightening and protectionist threats, these two risks have now materialized. The decline in portfolio investment is likely to last.

The United States has effectively raised tariff barriers on Chinese exports (25% on steel and 10% on aluminum, in the name of national security; 25% on other products in the name of unfair competition), and China announced retaliatory measures, which can only accentuate the slowdown in emerging country exports. It is very hard to evaluate the adverse effects of a trade war between the two countries: the trade war not only disrupts bilateral trade and potentially drives up costs and prices for American consumers, but it also affects global supply chains by obliging companies to reorganize, generating extra costs. Looking solely at trade, the adverse effects can be huge. According to estimates of CEPII (Centre d’Etudes Prospectives et d’Informations Internationales, the main French institute for international economics research), tariffs were raised on USD 50 bn in Chinese goods, to which we must add USD 3.4 bn of steel and aluminum imports taxed since March. At first sight, that represents only 3% of China’s total exports and 0.4% of its GDP. Yet CEPII has also calculated an extreme scenario in which the trade war between the United States and China leads to a 25% tariff on all products: In this case, trade between the two countries would be reduced by about 60%. The net loss for China would be about USD 272 bn (a USD 281 bn decline in exports to the United States, partially offset by an increase in exports to the EU), or 2.3% of GDP.

In the June issue of Global Economic Prospects, the World Bank also provided an order of magnitude of the impact of a trade war, but at a global scale. In a very extreme scenario in which all countries worldwide raise their customs duties by the maximum authorized amount, trade in emerging and developing countries would contract by 14%, which is comparable to the impact of the 2008-2009 recession.

Of course, the probability of these scenarios is very low. Even so, they show that a trade war is a negative sum game in which everybody stands to lose. Again, according to CEPII estimates, measures taken under section 301 (unfair competition) in the United States would have an inflationary impact of about 0.5% on consumer prices. For emerging countries, that would mean an additional increase in the cost of USD financing, if the Fed were to adjust its key rates to counter the extra increase in inflation. Hopes of economic growth strengthening in emerging countries depend on private investment. However, the downside risks to the determinants of private investment are accumulating, given the slowdown in exports and demand, higher interest rates, and a high level of corporate debt, notably in USD.

Printed with permission from BNP Paribas.

François Faure will serve as the keynote speaker at FCIB’s International Credit & Risk Summit, 16-18 September, in Dublin. Faure heads BNP Paribas’s emerging economies and country risk team and helps shape the international banking group’s lending policies for risky countries and case-by-case operational support for the various business lines as well as works on country risk methodology. Faure will present specific issues that concern his firm about the current economic landscape, including the developing trade wars, debt and external vulnerability in emerging markets, and a closer look at Turkey and Argentina.Visit the summit website, https://fcibglobal.com/summit-home.html, to learn more or to register.

China Corporate Bond Defaults Balloon, Complicating Debt Picture

PYMNTS.com

As China continues to weigh how to approach rising corporate debt, new data reveals rising corporate bond defaults this year, according to Reuters on Aug. 9.

Sixteen Chinese corporations, most of them private, have defaulted on 34 corporate bonds, reports said. The defaults are now worth $5.5 billion this year, a trend that adds tension to the complex issue of accelerating business borrowing. Reuters compared the 2018 data to last year’s, which saw 30 defaults worth $3.81 billion for the entirety of 2017.

Corporate bond defaults seem to be accelerating in China, with more than 40% of defaults this year occurring since early June. That rise is, in part, due to multiple missed payments from a single borrower. For instance, Wintime Energy Co., Ltd. missed four payments, reports said, while CEFC Shanghai International Group Ltd. has missed three since June.

The nation is struggling to balance easing credit requirements for corporate borrowers in an effort to jumpstart economic growth, and weighing the potential economic downside of rising debt, defaults and bad loans. Analysis by Fitch last June warned that efforts to curb corporate debt levels could have an adverse impact on the nation’s economy.

“China’s corporate debt challenges remain a key downside risk to medium-term growth,” said Fitch Chief Economist Brian Coulton in a report. “Investment needs to slow sharply to reduce corporate borrowing. Such an adjustment would take a big toll on GDP growth, given that business investment is equal to a quarter of GDP.”

The China Banking Regulatory Commission (CBRC) had previously described the nation’s corporate debt situation as “grim and complicated” in an issued January report, citing the address of ballooning corporate debt as a top priority for the year.

“Regulators must keep clear heads and cannot be blindly optimistic,” the CBRC noted, proposing that corporates should have a cap on credit availability when they have already added significant levels of debt on their books. Regulators are also looking to curb lending for high-risk borrowers, an effort that could lead to restructuring among some large corporate players.
Reprinted with permission from PYMNTS.com

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations