Week in Review

October 15, 2018

Global Roundup

South Korea considers lifting some sanctions on North Korea. Seoul is considering lifting some of its unilateral sanctions against Pyongyang to create more momentum for diplomacy aimed at improving relations and defusing the nuclear crisis, South Korea’s foreign minister said on Oct. 10. (Business Mirror)

Sudan devalues pound by 39% amid foreign-currency shortage. Sudan devalued its currency for the third time this year amid an acute shortage of foreign exchange. (Bloomberg)

India seen escaping Argentina's fate as remittances curb deficit. India’s vast army of overseas workers should cap the country’s current-account deficit and keep it from joining emerging-market counterparts that have struggled with currency crashes this year, according to Capital Economics. (Economic Times)

Return to center-right tradition likely as Luxembourg votes. Luxembourg may revert to political tradition on Oct. 14 if an election confirms opinion polls showing a resurgence for its long-dominant center-right party at the expense of the liberal-led coalition. (Reuters)

Empty shelves, rationed bread ring alarm bells in Zimbabwe. A currency crunch and a new tax on electronic transactions has spawned fears that Zimbabwe’s wrecked economy is about to endure a fresh bout of chaos. (Mail & Guardian)

Brexit negotiators eye Oct. 15 breakthrough, Northern Irish party ups the ante. British and EU negotiators making headway on the Irish border hope for a Brexit deal breakthrough on Oct. 15, diplomats said, though the British prime minister’s Northern Ireland ally has stoked uncertainty by warning it could vote against her. (Reuters)

North Korea’s APT38: The biggest cyber threat to global trade finance. APT38 is an aggressive and destructive North Korean hacking group that has used the Swift network to steal millions of dollars from banks worldwide, and which is now considered to be the highest-profile cyber threat to trade finance banks around the world. (Global Trade Review)

External risks threaten Sub-Saharan Africa's steady recovery. Sub-Saharan Africa’s economic recovery is expected to continue, reflecting a combination of domestic policy adjustments and a supportive external environment. Growth is projected to increase from 2.7% in 2017 to 3.1% in 2018, the IMF said in its latest Regional Economic Outlook for Sub-Saharan Africa. (IMF)

The Special Purpose Vehicle and the future of the Iran deal. In yet another sign of the U.S.’ waning global leadership role on the Iran nuclear deal, the EU, Russia and China have set up an alternate payment mechanism called the Special Purpose Vehicle as a means to bypass any additional U.S. sanctions. The move is an important step in upholding the Iran nuclear deal by the remaining signatories, an agreement that President Trump, his national security advisor and Secretary of State strongly oppose. (Global Risk Insights)

China bond defaults to rise in 2019 despite policy easing. Chinese corporate bond defaults are likely to continue to rise in 2019 due to high refinancing pressures, the government's greater tolerance for defaults and tight credit availability—despite the recent shift in the policy stance towards easing. (Fitch)

Request to pay: The next chapter in collections innovation. While the media may be full of talk of cryptocurrencies and blockchain, a quiet revolution in payments is gathering momentum: the emergence of real-time Request to Pay (RTP) collections. (TMI)

New Caledonia: The independence vote looms. One month out from New Caledonia’s Nov. 4 independence referendum, the French State has announced a number of steps it has taken to ensure a credible and peaceful process. The campaign is generally proceeding smoothly with some tensions. (Interpreter)

British PM May says U.K. ready to join trans-Pacific trade pact. British Prime Minister Theresa May said her government was ready to join up to a trans-Pacific trade agreement, following remarks made earlier this week by her Japanese counterpart who said he would welcome Britain into the deal with open arms. (HSN)

Top 7 risks to global economy. Is the global economy heading toward yet another crash? At least, there's been enough market turbulence to think so. The number of potential risks has increased in recent months—here are the greatest perils. (Deutsche Welle)

What Would Making China a Real Enemy Cost?

Chris Kuehl, Ph.D.

It has become obvious the issue with China goes far beyond trade and deficits. At the start of the Trump Administration, it seemed that all trade relations with every nation were under the same level of scrutiny.

The U.S. mantra seemed to be that every nation in the world had been taking advantage of the U.S. and all of them had to stop. It was a blanket condemnation as the “America First” policy emerged.

Today, that situation has altered quite a bit with deals on the table for a rework of NAFTA that leaves much of it intact, deals with Brazil, South Korea and Argentina that exempted them from steel tariffs, serious progress on talks with Europe, and so on.

It is now just China that has become the focus of U.S. ire, and the confrontation goes far beyond just issues of trade. The list of confrontations has been growing over the last few years. It is now a question of how far this animosity goes. Is the U.S. determined to make a real enemy of China? Is China willing to be placed in that position or will it work to reduce the animosity? What happens to the U.S., China and the world if there is another full-on Cold War developing between two of the most powerful nations on the planet? Is there a scenario where this Cold War becomes a hot war?

There is not enough space in this short piece to really answer all of these questions. Today, we can try to detail the issues that lead analysts to conclude the U.S.-China confrontation is over much more than trade.

It is useful to review the development of the trading relationship that has grown between the U.S. and China and between China and the rest of the world. When Mao Zedong died and Deng Xiaoping took control, there was a sense that China was on the edge of major change—it could be shaped by the reaction of the western world. The acceptance of major elements of capitalism (to get rich is glorious) seemed to suggest other elements of the western system would follow.

An engaged China meant a more democratic China, a nation taking its place in the global community. It was thought doing business with China would open it up to western norms and ideas; the world would be the richer for it. That China would evolve a whole different form of capitalism with an autocratic leadership was not considered. The U.S. (and many other countries) welcomed the ability to import from China as it would be cheaper and more efficient than the system in place.

The vast majority of the goods the U.S. imported from China had always been imported but from a wide variety of nations with vastly different infrastructure capabilities, differing currencies, rules and regulations. It was so much simpler to buy all this stuff from one nation. The U.S. did indeed lose some of its manufacturing to China, but this was manufacturing that would be lost to other foreign exporters in any case. The big losers from the emergence of China were the many other nations that once supplied the U.S. consumer sector.

The trade issue with China is not all that complicated. That leads many to assume there is more to the current levels of anger and tension. In the simplest of terms, the Chinese supply relatively cheap consumer goods and parts for other manufactured goods, while buying farm products and some high-level manufactured goods. The U.S. has been happy with this arrangement for quite a while; but over the last few years, the U.S. has watched China start to manufacture its own version of the goods the U.S. once exported to them. Also, China has been buying less of the U.S. agricultural output. The U.S. is actually far more interested in getting China to buy more from the U.S. than it is getting China to sell less in the U.S.

Beyond trade, there are other issues and the question is how important they are. The Chinese are attempting to aggressively expand their military influence in the Pacific with their interventions in the South China Sea, their disputes with Japan over the Senkaku/Diaoyu islands and the stepped-up threats against Taiwan. The Chinese have become more aggressive against internal ethnic communities such as the Tibetans and the Uighurs. China has backed North Korea for decades.

In other foreign policy areas, the U.S. and China consistently clash as Africa has become an area both nations seek to make into a sphere of influence. China backs the leftist regimes in Latin America as well as in parts of Asia. Are these areas enough to provoke a confrontation with the U.S.? Bear in mind, the Chinese have the largest standing army in the world and nuclear weapons along with missiles and other delivery systems. They have been building a “blue water” navy and they have aircraft carriers as well as submarines. The Chinese are a credible global threat and gain more capability every day.

Payment Delays in Argentina on the Rise

Nearly half of the credit professionals who participated in a recent FCIB survey on payment behavior and collection experiences in Argentina noted an increase in payment delays, and the other half noted no change in behavior, while only 4% experienced no delays. None of the participants found a decrease in delays.

“It can be challenging to import here,” one credit manager noted in the October International Credit & Collections Survey, which also covers Brazil, Guatemala and Mexico. “The central bank carefully controls transactions. If things are not done exactly correct, it can easily cause delays.”

Cash flow issues (40%) and foreign-exchange rates (25%) were identified as the top two reasons for delays, followed by billing disputes, cultural norms and customs, and other such as inflation or exchange rate fluctuations (each 10%).

Survey participants shared a range of advice for doing business in the country, including using trade credit insurance to cover transactions. “Get credit insurance, [and] only extend to old customers financially stable with low debt,” one respondent advised.

Another credit manager recommends using a credit report agency that specializes in Argentina and a 50% deposit on orders or prepayment.

“Now is not a good time to go into this market,” cautioned yet another. “It is extremely volatile with more volatility predicted for the future.”

Of the credit managers who noted that they extend credit to customers, half of them gave up to 30 days; 5%, 31-60 days; 36%, 61-90 days; and 9%, 91 days or more. The average days beyond terms was 27.5.

Several participants advised steering clear of credit terms due to a variety reasons such as foreign-exchange constraints, deteriorating economic conditions, currency devaluation and rampant inflation.

If a company extends credit terms, include a provision for inflation, a credit manager shared. Other advice includes starting small, asking for guarantees and using letters of credit for larger orders.

FCIB members can access the full results of the survey as well as the survey archives via the FCIB Knowledge Center. Nonmembers who participated in the survey will receive the results via an email. Participation in the survey guarantees you will receive the results whether you are a member or not and furthers the collective knowledge of global credit professionals by sharing real-time credit and collection experiences. The monthly survey is open to all credit and risk management professionals.

The next survey opens Oct. 26 and will cover Egypt, Saudi Arabia, Turkey and the UAE.

Country and Sector Risks Worldwide, Some Emerging Economies Becoming Increasingly Vulnerable

Coface

Argentina and Turkey, two countries already hampered by major external imbalances and their dependency on external financing, are experiencing a deepening in their currency crises.

Against a backdrop of rapidly tightening credit conditions, Coface has downgraded six of Argentina’s business sectors suffering from a severe downturn in economic activity (with a forecast of a 2.4% drop for 2018). The automotive, transport, paper and chemicals sectors are now assessed as high risk, while the ICT and textiles sectors are evaluated as very high risk.

Turkey is also facing a wave of sectorial downgrades. The automotive, paper and wood sectors have joined the high-risk category, mainly because of a fall in domestic demand; and the country’s energy sector, which is particularly vulnerable to currency exchange risks due to the huge investments involved, has fallen into the very-high-risk category. The downgrade of its metals sector to very high risk has been provoked by new U.S. protectionist measures targeting Turkey.

The other main emerging economies—South Africa, Brazil, India and Indonesia—appear to be particularly susceptible to risks linked to capital outflows. These vulnerabilities result from similar factors at play as in Argentina and Turkey: developed capital markets, current account deficits and political environments that are likely to fuel caution from the markets, elections scheduled before the end of the year or in 2019. Nevertheless, risks of contagion are somewhat mitigated, due to lower dollarization and overall high levels of foreign currency reserves in these economies.

Some of the smaller emerging countries should also be watched. This quarter, Coface has downgraded the country assessments for Pakistan and Nicaragua to D. Pakistan is facing default and a sharp depreciation of the rupee, while Nicaragua is undergoing a political crisis.

In contrast, business risks are improving in Central Europe and the CIS countries. Croatia’s assessment has been upgraded by a notch, to A4. The country is no longer under EU excessive deficit proceedings and is benefitting from an environment of dynamic household consumption. Slovakia (now A2) has registered a steady improvement in business insolvencies (down 27% in 2017) and an acceleration in investments in its automotive industry. Armenia has been upgraded to C and is benefitting from the economic recovery in Russia (which represents 25% of its exports).

Join Bierens’ attorney, Omer Faruk Celik, as he reviews the legal, credit and collection environment in Turkey in an upcoming FCIB webinar, Doing Business in Turkey. Omer has been a registered member of the Istanbul Bar Association since 2011 and is the lead attorney for all commercial, litigation and bankruptcy matters throughout Turkey on behalf of all Bierens clients.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations