Week in Review

October 1, 2018

Global Roundup

U.S., Japan agree to negotiate a free trade agreement. The United States and Japan announced Sept. 26 they will open negotiations on a bilateral trade agreement between the world’s first- and third-largest economies. (Associated Press)

Greece to end limits on cash withdrawals. Restrictions on amount of money transferred overseas will also be lifted as capital controls eased. (The Week UK)

WTO downgrades outlook for global trade as risks accumulate. Trade will continue to expand but at a more moderate pace than previously forecast. The new forecast for 2018 is below the WTO’s April 12 estimate of 4.4%, but falls within the 3.1% to 5.5% growth range indicated at that time. (HSN)

U.S. sanctions drive revolt against the dollar in trade. The U.S. dollar’s long global dominance in trade took a blow this week, as the European Union unveiled plans to bypass the American financial system in order to continue to trade with Iran amid a ramping-up of sanctions by the U.S. (Global Trade Review)

EU plan to sidestep Iran sanctions: How will it work? The EU's vow to keep trading with Tehran despite new U.S. sanctions is causing further friction with Washington. The creation of a special purpose vehicle (SPV) will help facilitate payments between Iran and Europe. (Deutsche Welle)

ECB warns U.S. most at risk from trade war escalation. An escalation of the global trade war to engulf the U.S. and all its major trading partners would hurt America much more than the rest of the world, economists at the European Central Bank have warned. (Financial Times)

U.S.-Mexico trade deal text to exclude Canada, irritating U.S. lawmakers. The Trump administration is expected to release the text of its trade agreement with Mexico as early as Sept. 28, launching a contentious congressional approval process as it tries to coax Canada into a revamped North American Free Trade Agreement. (Reuters)

The NAFTA saga will continue—even after September. With the deadline upon us, the question is, what happens if Canada and the U.S. don’t sign a deal? As has been the case throughout the NAFTA negotiations, the answer isn’t black and white. (Global Trade Magazine)

Argentina, IMF reach deal to boost financing to $57 billion. The International Monetary Fund (IMF) agreed on Sept. 26 to increase a lending package with Argentina by $7.1 billion to a total of $57.1 billion, seeking to calm markets over the country’s ability to meet its debt amid growing economic turmoil. (Business Mirror)

Norway’s government faces crisis as support party considers defection. The leader of the Christian Democrats called on his party to end its support for Norway’s Conservative-led government, threatening Prime Minister Erna Solberg’s minority coalition just one year into her second term. (Bloomberg)

The Philippines' economic outlook in six charts. The Philippine economy continues to perform strongly, due in part to robust public investment, with growth projected at 6.5% for 2018, and 6.7% in 2019, the IMF said in its latest annual economic assessment. (IMF)

Can Spain’s new government resolve the issue of Catalan independence? Spain’s new Socialist-led government has adopted a more diplomatic approach to the question of Catalan independence, but is defiant that Spanish unity will not be compromised. How will this strategy balance out and affect the political landscape in Catalonia and across Spain? (Global Risk Insights)  

Sliding rupiah causes Jakarta jitters. The rupiah has fallen about 10% since the start of the year and is now plumbing lows not seen since the Asian financial crisis. This has prompted much concern in Indonesia, where the scars from that crisis still run deep. (Interpreter)

Using blockchain for intercompany transactions. So far, blockchain solutions that apply directly to corporate treasury have been few and far between. But that may be changing. (AFP)

Global trade growth slowly losing steam as business feels pinch. Global trade is continuing to lose a little steam amid an escalating tariff battle between the world’s two biggest economies. (HSN)

Middle East week in review. Iran attacked by separatists; Nuclear deal takes center stage at United Nations; Israel and Russia spar over downed plane. (Lawfare)

Beginning of the End of Merkel’s Dominance?

Chris Kuehl, Ph.D.

For almost a decade and a half, Chancellor Angela Merkel was clearly the dominant figure in Europe and certainly in Germany. She extended this influence to the world in general on many occasions and was assumed to be on a par with any of the major leaders of the developed world. That position is now in some serious doubt as she has been losing significant control over the German government and has been unable to forge the alliances globally that boosted her influence both at home and abroad.

There has not been one single event or development that has affected her, but rather a series of developments that have undercut her authority. She might well have fallen further by this time, but there is no real rival emerging in Germany or in Europe. Even as essentially a lame duck, she has more clout than her would-be challengers.

Analysts tend to point to four factors that have weakened her hold. The most important and likely reason for the slide to start when it did is the immigration debacle. What started out as a simple humanitarian gesture designed to help stabilize the crisis in Syria and the Middle East cascaded out of control and saddled Germany with millions of refugees and economic migrants from all over the world. Most were forced from their homes by violence and economic deprivation and thus have little desire to assimilate into the new countries where they now reside. The antagonism towards this wave of migrants has divided Germany like few other issues. It has sparked the creation of a right-wing populist party called Alternative for Germany (AfD). The party has been gaining enough seats in the Bundestag to complicate Merkel’s legislative agenda. This has also emboldened her critics within the traditional center right. That is now her second biggest challenge.

Just this week, one of her closest aides was bounced from his position in the Bundestag. Volker Kauder had been the head of the CDU/CSU parliamentary group since 2005 and was Merkel’s most trusted aide. His removal has many thinking she could be next if the opposition is able to coalesce on a candidate. The junior partner in this coalition is the CSU based in Bavaria. They are the more conservative and have already tangled with Merkel over the status of the spy chief who has been accused by the Social Democrats of being too easy on the far right. If all this chaos results in bad election outcomes in two key regions next month, the blame will fall on Merkel. That could trigger a demand that she resign along with the rest of the government.

A third factor is that Merkel doesn’t have the international allies she once had. Prime Minister Theresa May of the U.K. is fighting for her political life due to Brexit. The person who has thrown up the most aggressive of barriers to the U.K. has been Merkel. There was some warming between France and Germany with the election of President Emmanuel Macron, but his popularity is waning and his focus has become more domestic. President Trump hates Merkel and the feeling is mutual. There will be no resumption of good relations between these states until one or the other of them is gone.

The fourth factor is not specific to Merkel—it is simply that she is now a lame duck as everybody knows this is her last term as chancellor. The race would be on to develop her replacement even if she was at the height of her power and popularity. Her major challenge will be trying to ensure that whoever replaces her will not try to undo what she has implemented over the last 15 years.

Curbing Trade Questionable Way to Manage Deficits

An escalated tariff war between the United States and China is a losing game, warned Jean-Luc Proutat, chief economist and head of OECD for BNP Paribas (Brussels, Belgium), as he opened the FCIB International Credit & Risk Summit on Sept. 17 in Dublin, where he gave a keynote economic overview of the United States, emerging markets and the eurozone.

Increasing taxes on exports brings retaliation from other countries, Proutat pointed out. “Putting tax and retaliating with tax is a game that is not easy to win. We know that if we look at history.”

If the trade war goes too far, corporate America will feel it first because most of the products assessed with additional taxes are part of its supply chain, he cautioned.

Of the $50 billion Chinese products initially taxed, 80% of these products are going into the U.S. company processes, he noted. “They are part of their value-added chain; they are inputs.” In the end, Proutat added, the consumer will be penalized with higher prices.

Proutat also questioned whether raising tariffs was an effective way to address surpluses and inequalities. “It is more complicated than that,” he said. “If you raise tariffs on trade, you put a brake on trade. But, there is no correlation between the openness ratio of trade, which is how much you trade with your partners … and recovering with surpluses. … Countries that are open with trade are not necessarily experiencing big inequalities in their revenues.”

The most open countries often generate current account surpluses, he said. For example, northern European countries are highly inserted in world trade, which seems to work to their benefit without generating excessive inequalities.

So, in Proutat’s opinion, unless a country is completely self-sufficient, curbing trade is not the best way to eliminate deficits. The solution is more complicated, he said. “Increasing tax is not the best way, certainly not the best way.”

The U.S. relies largely on international trade flows. “There is a very, very strong correlation between the U.S. business climate and the dynamics of world trade,” he told attendees. “If you hurt world trade, you hurt the U.S. economy.”

Although global trade was strong at the start of the year, he continued, “we are already seeing the dynamics of world trading slowing down … maybe this could start to be a problem.”

Emerging countries are highly sensitive to U.S. policy, he explained. Over the past 10 years, emerging country debt has risen, especially in U.S. dollars due to low interest rates and the value of the dollar. “The change in U.S. monetary policy stance is having a negative impact on their financing conditions.”

For now, the European economic cycle has been fairly resistant to both the prospects of Brexit and the protectionist tendencies of the U.S. administration.

Since the start of 2018, a few “clouds” have emerged, he said. For example, Germany’s Ifo business climate index has fallen as well as foreign orders, and Italy’s sovereign debt spread has widened.

Thanks to major efforts to boost competitiveness, the southern countries, such as Spain, Portugal and Italy, have regained dynamic momentum as part of a catching-up movement, he added.

The European Central Bank will extend its very accommodating monetary policy, Proutat said. Corporate lending is picking up very slowly in the midst of a tighter regulatory environment. Notwithstanding volatile energy prices, the official 2% inflation target remains out of reach for the moment, notably because the downturn in unemployment has been slow to trigger wage acceleration.

FCIB’s annual International Credit & Risk Management Summit brought together credit professionals from around the world Sept. 16-18 in Dublin, Ireland, for three days of networking and education. The gathering provided opportunities for in-depth peer-to-peer discussions regarding issues and trends relevant to credit managers who work internationally. Managing country risks and technological innovations were at the forefront of such discussions.

Geopolitical Tensions Create Significant Increase in Political Risk Losses Up from 2017

Geopolitical concerns are causing a rise in political risk exposures, according to a survey from Willis Towers Watson and Oxford Analytica.

The survey finds 55% of the global organizations with revenues greater than $1 billion experiencing at least one political risk loss exceeding $100 million in value. In addition, it reveals that the political risk implications of emerging market economic crises are increasing, reflecting the market reaction to a flare up in emerging markets—most notably in places such as Turkey and Argentina.

In the annual political risk survey, senior executives of 40 leading global firms across different industry sectors were interviewed to determine their response to ongoing global political volatility.

Other key survey findings outlined in the report, How are leading companies managing today’s political risks?, include the following:

• The most frequently reported political-risk-related loss was exchange transfer, which impacted nearly 60% of those experiencing losses, followed by political violence (48%) and import/export embargos (40%).
• The key geopolitical threats were seen as U.S. sanctions policy, emerging market crises, protectionism/trade wars, and populism and nationalism. While Russia and Vietnam were most frequently cited as countries where losses occurred, losses were recognized throughout Europe, Latin America, APAC, Africa and the Middle East.
• 60% reported that political risk levels had increased since last year, and nearly 70% stated that they had scaled back operations in a country as a result of political risk concerns or losses.
• More than 70% reported holding back from planned investment as a direct result of political risk concerns.

Larger companies were more likely to report using avoidance strategies. Among companies with more than $1 billion in revenues, 82% stated that they had scaled back investments, and 86% had avoided future investments. Companies most frequently reported scaling back investments in Nigeria, Iran, Russia and Venezuela.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations