Week in Review

October 29, 2018

Global Roundup

Canada's US envoy says tariffs dispute will be settled soon. Canada’s ambassador to Washington on Oct. 26 struck an optimistic tone over a dispute with the United States over steel and aluminum tariffs, saying he thought both sides would resolve their differences “sooner rather than later.” (Reuters)

Hong Kong sources report political purge within Chinese military. Chinese military officials are currently being investigated for corruption as part of a greater political purge. (Epoch)

Loss of China, Mexico dairy trade could cost US dairy producers. A study by Texas A&M University shows the impacts of trade tariffs and the potential loss of the Chinese and Mexican markets would be extremely costly to U.S. dairy producers. (Dairyherd)

US pork exports to China 'not viable' due to trade war: Smithfield CEO. The U.S. pork trade to China is “not viable” after Beijing imposed tariffs on imports of American pork amid the trade war between the world’s two largest economies, said Ken Sullivan, chief executive Smithfield Foods. (Reuters)

Swift declares instant cross-border payments trial a success. SWIFT successfully trials instant cross-border payments service using the New Payments Platform, together with banks in Australia, China, Thailand and Singapore. (Business Insider)

China-US ties sinking amid acrimony over trade, politics. The White House’s move to expand Washington’s dispute with Beijing beyond trade and technology and into accusations of political meddling has sunk relations between the world’s two largest economies to the lowest level since the Cold War. (Business Mirror)

Ecuador to rally banana exporters to fight hard discounter Aldi. Ecuador, the world’s largest banana exporter, is urging Latin American producers to fight German hard discounter supermarket chain Aldi’s bid to pay one euro less per case in 2019. (EurActiv)

Europe looks toward Russia in response to US foreign policy. President Trump’s use of economic sanctions as foreign policy has led European leaders to consider following in Russia’s footsteps. This includes setting up financial institutions beyond American influence to safeguard their interests. (Global Risk Insights)

Japan’s Abe heads to China vowing to lift ties to ‘new level.’ Japanese Prime Minister Shinzo Abe set off for Beijing on Oct. 25, seeking to further cement a recovery in relations with China that were wracked by a territorial dispute six years ago. (Business Mirror)

The party is over. The mass political movements that once dominated Europe are fading fast—and the nationalist populists and upstart parties taking their place are here to stay. (Foreign Policy)

Brexit, trade tensions weigh on German economy. German business morale deteriorated slightly more than expected in October as rising trade tensions and the possibility of Britain leaving the European Union without a deal dampened confidence. (Reuters)

Jair Bolsonaro’s victory is likely to see Brazil slash its many Africa interests. Bolsonaro’s views on Africa are narrowly informed by the prism of Brazil’s uneasy, strained and unresolved racial question. As a result, his government can be expected to scale back Brazil’s engagements with the continent. (Quartz)

Why were Brexit forecasts so wrong? When British voters decided in July 2016 to leave the European Union, virtually every governmental economic unit, bank and private forecast predicted a disaster for the UK. The reality has been much different. (AFP)

A Bolsonaro victory will put Brazil’s democracy to the test. Hatred for Lula, the disgraced former president, pushes voters towards autocracy. (Financial Times)

The Collapse of the MBS Reputation

Chris Kuehl, Ph.D.

The more that is revealed regarding the death of Jamal Khashoggi, the more bizarre this whole incident becomes. The impact on Saudi Arabia has already been profound, but it is expected to get far worse as the months drag on.

The man at the center of all this is Crown Prince Mohammad bin Salman (MBS). He has been hailed as the new face of the Saudi royal family and was rapidly becoming the darling of the Western world for his seeming commitment to reform and progress. It has been under his direction that women have been making slow progress in Saudi society—gaining the right to drive and to vote and otherwise participate in the civil affairs of the country.

Although his father remains king, the crown prince has been granted an enormous amount of power. His No. 1 mission seemed to be shifting the economy from its dependence on oil. That has spurred Western investment into the country as MBS plunged ahead in his quest to diversify the economy. All of this is now challenged by the events of the last few weeks.

It is almost beyond understanding. In what way could Jamal Khashoggi have been such a threat to MBS that killing him would be suggested—much less carried out? He was an ardent critic of the crown prince as a columnist for the Washington Post, but it was not as if any of these criticisms had slowed the interest in Saudi Arabia.

He had next to no voice in Saudi Arabia itself. Even those who counted themselves followers of the Post barely recognized the name. He was a gadfly to be sure, but he was no threat in any real sense. It is now obvious he was lured to the consulate in Turkey and killed. The half-baked stories and lame assertions have been disproved one after another, and MBS is connected very directly.

It has now been revealed that U.S. and Western intelligence agencies have been suspicious of the crown prince since his elevation by the king. The man who was the intelligence chief in Saudi Arabia was Mohammed bin Nayef. He was well respected and trusted by the allies in Europe and the U.S. His was a steady hand, and he seemed to have a grasp of where Saudi interests coincided with those in other nations.

The knock-on MBS was that he was headstrong, reckless, egomaniacal and utterly intolerant of dissent. His expectation was that he would be loved by his people for all of the reform efforts he made. Likewise, he would be loved by the Western nations for his efforts to thwart the machinations of Iran and terrorism in general. As has happened so many times in history, the love that reformers expect is rarely granted.

The reaction to the reforms in Saudi Arabia has either been overtly hostile or frustrated. The traditional Saudi society has been horrified by the actions freeing women to get engaged with society. The women themselves have been less grateful and more annoyed that it has taken this long, while they demand more rights and privileges.

The Western reaction has been mixed as well—praising one day and complaining about high oil prices the next. These reactions have annoyed MBS, and his reactions have been petulant. His adventures in Yemen have been roundly condemned by those in and out of Saudi Arabia. That quagmire has become the most serious thorn in his side. It has been humiliating that his army has failed to rout an insurgency made up of poor Houthi minorities. He has bristled at the critique leveled at him.

Everything now seems to be unraveling. His father has started to engage and looks set to reduce his authority. Those who have opposed his reforms in the country are gaining more support. His Western friends have backed away and are unlikely to reengage as long as this issue remains. The death was very badly handled. It seems that MBS was utterly naïve when it comes to Turkey and its intelligence service. The Turks see Saudi Arabia as a threat and monitor them as such. They have details regarding the assassination that have torn gaping holes in the Saudi explanations.

PIIE: Long-Term Prospects Are Worrisome

Peterson Institute for International Economics

The global economic expansion has become less even. Overall global growth is expected to reach 3.8% in 2018 and 2019, led by a fiscal-driven pickup in U.S. GDP growth.

However, most other advanced economies are likely to see slower growth than they did in 2017. Furthermore, the risks of economic growth being derailed have risen in some emerging-market countries with weak fundamentals and in the United Kingdom, where doubts about a smooth exit from the European Union have increased.

The global economy is expected to grow 3.8% through 2019 driven largely by the United States, which is expected to reach nearly 3% percent growth in 2018 and decline to 2.5% growth in 2019, according to Karen Dynan, nonresident senior fellow at PIIE and former assistant secretary for economic policy at the U.S. Department of the Treasury.

Inflation will likely modestly overshoot the Federal Reserve’s target of 2% in 2019 and 2020 amid further tightening in the labor market, with unemployment expected to fall to 3.5% next year. The Federal Reserve is expected to continue its gradual normalization of monetary policy with four rate hikes in 2018, three in 2019, and one in 2020, though interest rates will likely remain low by historical standards. Dynan cautions that the outlook could be downgraded if a trade war spills into the financial markets, inflation rises more sharply than expected, or U.S. asset prices experience a material decline.

Jason Furman, nonresident senior fellow at PIIE and the former chair of the Council of Economic Advisors, argues that sluggish productivity growth likely explains the “wage puzzle” of why wages in the United States have not increased as they did in the late 1990s, even as the labor market continues to tighten. Additionally, lower nominal wage growth may reflect lower inflation expectations. Another “wage puzzle,” the fact that wage growth has not increased more dramatically in the last few years, is more puzzling and may reflect a continued process of downgrading expectations for productivity growth. Furman maintains that lawmakers should enact policies to raise productivity growth and ensure the benefits are more broadly shared.

The major emerging-market economies are in precarious states, with Argentina, Turkey, and Brazil the worst affected, according to Monica de Bolle, PIIE senior fellow. Argentina and Turkey’s current account balances, reserves, exchange rates, and high levels of corporate debt leave both countries with no policy room to improve their economies and more vulnerable to economic shocks.

Mexico’s economy remains strong, and the newly announced United States–Mexico–Canada Agreement (USMCA) on trade staves off investment concerns in the coming months. Brazil is proving to be a major concern because of a chaotic presidential race in which the major candidates support policies that would exacerbate the country’s fiscal and debt problems.

Ongoing Diversification to Balance Oil Dependence

Coface

In the last three decades, the United Arab Emirates (UAE) has developed into the second largest and most diversified economy in the Gulf Cooperation Council (GCC) area through the implementation of specific policy frameworks regarding regulations, investments, trade barriers and restrictions allowing the expansion of the private sector.

Between 2000 and 2017, the share of oil revenues in total budget revenues declined by 7 percentage points to 53%. Exports of oil and oil products declined to 16% of total exports in 2016 against 76% in 2000. Exports of plastics, wood and paper, precious stones, cement, transportation products and metals increased over the period.

Despite these positive outcomes, the UAE still does not seem to have integrated global value chains (GVC); only fuels, metals, minerals and stones rank, representing a very small portion of the manufacturing sector, are integrated. This situation is preventing UAE companies from implementing a production process across different countries, resulting in limited integration in GVC despite the country’s continuous economic and trade diversification efforts.

UAE has signed various agreements with many other economies in trade and investment, favoring China, also due to the Belt and Road Initiative (BRI) launched in 2013. These agreements could boost commerce and investments and allow the country to access wider markets, especially regarding construction, metals, trade, logistics and hydrocarbon sectors.

The value of bilateral trade between the UAE and China reached USD 52.7 billion in 2017, up 15% against the previous year. Non-oil trade volume stood at USD 3.5 billion while imports reached USD 31.9 billion. The UAE’s main exports to China are currently aluminum ingot, chemical fertilizer, petroleum, and polytene, while imports mostly target textile goods, apparel, metal products, machinery and electronics. In 2018, within the BRI, the volume of non-oil trade between China and the UAE is expected to rise to USD 58 billion as the initiative would give the federation the opportunity to enforce its regional hub position for exports and investments. Overall, the UAE and China have already signed 13 agreements and memoranda of understanding in several segments allowing the UAE to attract more investments from China, which is not currently ranked among the top 10 foreign direct investors of the federation.

However, several concerns still arise over BRI. The geopolitical instability and political tensions experienced by many countries involved in this initiative could impact the UAE in the event of widespread regional crisis. At the same time, the Chinese economy slowdown could also weigh on UAE industry, as this would drag down the demand for UAE oil and petrochemical products. Moreover, any U.S. additional protectionist measures against China, in the current trade war, could negatively impact the UAE’s trade and logistics sectors.

FCIB’s November International Credit & Collections Survey is assessing payment behavior in the following Middle East countries: Egypt, Saudi Arabia, Turkey and the United Arab Emirates. The monthly FCIB International Credit & Collections Survey is open to all credit and risk management professionals who can share their real-time business experiences, and both members and nonmembers will receive the results of the survey in which they participate. Members, however, have full access to reviewing historical benchmarks in the survey archives.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations