Week in Review

November 5, 2018

Global Roundup

U.S. to expand China tariffs if meeting with Xi falls short. The U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald J. Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said. (Bloomberg)

Angela Merkel says she will not seek re-election as German chancellor. German Chancellor Angela Merkel announced two weeks ago that she would not seek re-election when her term expires in 2021. (CNN)

U.K. faces prospect of recession and downgrade, S&P warns. A leading credit ratings agency has warned that Britain faces the prospect of recession if it crashes out of the European Union in March without a deal on future relations. (Business Insider)

China signals big shift in economic course due to U.S. trade war headwinds. China’s ruling Communist Party sent a strong message on Oct. 31 that it will significantly alter its economic policy course to respond to growing economic headwinds resulting from the trade war with the United States. (SCMP)

China likely to rely on fiscal stimulus measures for economy. Economists expect China’s government to rely more on fiscal stimulus to boost the economy out of the current slowdown, due to the limitations faced by the central bank. (Bloomberg)

Pacific rim trade pact goes ahead after Australia ratifies. The Pacific rim trade pact abandoned by President Donald Trump will take effect at the year’s end after Australia became the sixth nation to ratify it. (Washington Post)

Turkey has U.S. waiver on Iran sanctions: Minister says. Turkey has been told it will receive a waiver on U.S. sanctions against Iranian oil sales, Turkish Energy Minister Fatih Donmez said on Nov. 2. (Reuters)

New Caledonia’s independence referendum explained. On Oct. 28, 174,154 voters voted on the future of New Caledonia, a territory only a couple of hours flight east of Australia. How and why has this moment arrived and what will happen next? Here is what you need to know about the referendum. (Interpreter)

Brazil elects Jair Bolsonaro as its next president. In the most polarized election in the history of Brazil, the second round of the presidential election featured a far-left and a far-right candidate and split the electorate. In the end, dissatisfaction with the political establishment pushed hardliner Jair Bolsonaro over the finish line to victory. (Global Risk Insights)

Bolsonaro faces deep fiscal challenges. The victory of Jair Bolsonaro in the second round of Brazil's presidential election marks a significant political transition, but uncertainties remain over the pace and depth of reforms at a time when deficit and debt pressures are high. (Fitch)

Khashoggi and Saudi relations with the West: How much damage has been done? The murder of Saudi journalist Jamal Khashoggi on Oct. 2 at the Saudi consulate in Istanbul triggered an international crisis that has put Saudi Arabian relations with the U.S. and other important allies to the test. (Global Risk Insights)

The U.S. imposed sanctions on one of Venezuela’s last viable industries: Gold. Even as Venezuela has descended further into economic crisis, its gold sector has remained surprisingly robust—until now. On Nov. 1, Donald Trump signed an executive order authorizing new sanctions on the country’s gold sector, ostensibly targeting corruption. (Quartz)

If war comes to Venezuela, who would back the Maduro regime? While Maduro enjoys a friendly relationship with both Russia and China (largely based on oil exports), it appears unlikely that Beijing or Moscow would back him militarily, in the unlikely event of a 2019 invasion. (PanAm Post)

Trade finance fintech for dummies. If you’re struggling to get your head around the endless fintech buzzwords and jargon in trade finance, you are probably not alone. (Global Trade Review)

Brazil Gets Its New Strongman

Chris Kuehl, Ph.D.

Although this outcome was obvious weeks ago, the second round of voting in Brazil confirmed it. Jair Bolsonaro is the new president of Brazil as he defeated the candidate of the ruling Worker’s Party by more than 11 points.

The success of the far-right politician has shocked the region as well as many other nations throughout the world. It has come as a shock to many in Brazil as well. He is the polar opposite of the leaders that have been in power in Brazil for the better part of two decades.

When Inazio “Lula” da Silva won the election for president in 2003, it was seen as a power shift as far as Brazil was concerned. The left-leaning Worker’s Party had never finished better than a distant third, but the population had grown weary of the two traditional groups that were loosely categorized as center-left and center-right.

Lula had tried three times before; but in 2003, he changed from a fringe candidate of the left to one determined to break through. He remained popular to the end of his second term; but by then, it was already obvious patience was wearing thin and his designated successor—Dilma Rousseff—was never able to capture the attention of the public. It was also at the end of his term that corruption allegations began to swirl around many members of the ruling party. Eventually, the accusations reached Lula himself, and he was sent to prison.

To be frank, Brazil has long been a highly corrupt society—at every level. The population has tolerated this corruption for decades, but it has always been with a caveat. It expects its political leaders to be corrupt. That is basically acceptable as long as the problems facing the average Brazilian have been addressed. For the last 10 years, they have not been.

The country sagged into a lengthy and bitter recession under Rousseff. She was, however, unable to do anything to ameliorate the impact. The country once hailed as the leader of the BRICs (Brazil, Russia, India and China) had fallen to new lows with double-digit unemployment and widespread poverty. This soon developed into a significant crime problem as desperate people did what they had to. The crime rate soared as the country fell deeper into economic distress. This has been the perfect environment for yet another outsider offering to reverse the course of the nation.

The commentary by voters illustrates the depth of the resentment for the Worker’s Party. It has projected onto Bolsonaro everything the voters want to change regardless of what he has actually said or done.

He has been revealed to be deeply bigoted and highly dismissive of women. He has a very fond recollection of the days when generals ran Brazil and longs for the return of those martial law days. He is antagonistic toward most businesses, but vows to maintain the majority of the country’s economic policy. He asserts addressing crime and corruption will be his priorities, but he has provided no detail as far as what these policies would look like. He has openly supported the approach taken by Rodrigo Duterte in the Philippines. The police and various vigilante squads in that nation have killed some 60,000 people thus far on suspicion of being engaged with drugs or other illegal activity.

Right now, the Brazilians have been essentially ignoring what their new leader says and claim he is really a different person than he appears to be. They are expecting what amounts to a miracle as far as corruption and crime are concerned. Most assume the public will turn on him sooner than later.

Doing Business in Russia Challenging, But Not Impossible

The increased risk of sanctions and instability associated with Russian banks over the past couple of years has made trade in Russia more difficult, credit professionals say.

“We won’t trade if we are unable to obtain appropriate security and the customer refuses to prepay,” shared Kade Davies, group credit manager for Samuel Smith & Son in Adelaide, Australia.

Davies explained that his company trades with Russian companies using credit insurance when it can. Otherwise, it uses bank underwritten letters of credit if insurance is not available.

His business aims to have one or two distributers per country so invested options, such as a local financing company, would not be suitable, he explained.

Another company takes on the risk directly, while another uses standby letters of credit. And yet another conducts business on standard Net 30 days and cash against documents (CAD). “CAD terms are preferred because the customer is required to have its bank issue payment upon reviewing our merchandise and documents,” he said. “Once we receive the funds, we give ownership of the merchandise to the client,” said Jeyson Rivera, CICP, C2C manager for AdvanSix in Parsippany, NJ.

“Being in the oil and gas business, our relationships have become constrained due to heightened U.S. sanctions and recent product analytics and labeling requirements imposed by the Russian government,” said Esther Hale, ICCE, senior analyst in global credit at Phillips 66.  “Complying with their new requirements is expensive and time consuming, so at the moment, we are not shipping to Russia.  Once all certifications are complete and new labels are available, we expect to resume.

 “When I partner with Russian firms, I make sure they are fully vetted,” Hale added. “I run reports and scour the internet for details.  I have the salesmen meet with the customers and get a good feel for their business acumen and understanding of how to do business with U.S. companies.  We do not factor, insure or have any security due to the expense, but we do insist that our business partner have an investment in our brands before extending credit.  This may mean paying for the first containers in advance, having building signage in place prior to shipment and any number of other requirements.”

Another credit professional pointed out that his company has not been able to sell into Russia for a while due to the sanctions. “While understanding there are business segments and groups of businesses that can, in theory, market into Russia, I would consider the risk of banking issues to be extremely high” due to ties between the oligarchs and the government with primary banks in Russia such as SberBank, said Tim Bastian, ICCE, senior director of risk for Western Oilfields Supply Company dba Rain for Rent in Bakersfield, CA.

“Russia is trying to establish a system to compete with SWIFT in part because the financial sanctions are making it all but impossible for companies in the West to do business in Russia—but also from the fallout related to sanctions related to Crimea in the Ukraine and more recently, the actions taken on behalf of Britain because of the attack against the Russian ex-pat critic of Putin,” Bastian added.

 “The cost of funds for SMEs is extremely high within Russia,” Bastian said. “This has been a planned maneuver by the government and the central bank to manage currency needed for foreign currency debt still needing to be serviced, which has also been the driver of the oil and gas sales to international partners that are not following the sanctions such as China and Cuba.

“For those non-sanctioned business lines, the question becomes how long can they continue to feed the supply chain if zero currency can move out to the West,” Bastian added. “You could end up in circumstances like the cold war days where Coca Cola would trade soft drinks for vodka in a barter-to-move product.”

His response, he points out, does not even address the vetting process for compliance with OFAC or U.K. guidelines that businesses need to follow if they sell into or operate in the United States or United Kingdom. “There are no easy answers right now. It can be done, but not easily.”

One FCIB member, however, is looking for some answers. He recently posted a question on the FCIB Discussion Board asking for some insight about expanding into the Russian market. Specifically, his company wants to explore setting up a partnership with a floor financing/factoring company that currently operates in Russia. He points out that credit insurance and LCs are currently not options for his business. FCIB members can log into the discussion board and share their thoughts on the subject.

Late Payments A Growing Problem in Western Europe

PYMNTS.COM

Late payments are back to bedevil firms in Western Europe—and Eastern Europe, too, for that matter. A series of reports over recent days shows evidence that collecting on business-to-business (B2B) receivables remains a stubborn problem.

In one study, through its Payments Practices Barometer, Atradius found that, across respondents from Western Europe, there has been a boost in past due invoices after only a slight increase seen from 2016 to 2017. The proportion of past due invoices now stands at 41.8% after having boosted from 39% in 2016 to 40.7% in 2017. Germany and Great Britain are among the countries with higher past-due invoices than had been seen previously. The average days sales outstanding (DSO) ratio was 44 days in 2018, unchanged from 2017.

A majority of respondents, the survey finds, have been hit by the fallout from those invoices, as they have had to postpone making their own payments, experiencing a ripple effect. The main reason for those payment delays, as noted this past week: insufficient funds availability. Write-offs were stable at about 1.3%, with customer bankruptcy the main culprit.

Credit sales waned a bit this year, at least on the B2B side, as that activity was 37.4% in the most recent reading, down from 38.8% in 2017. Within that headline number, credit sales were off in Ireland by 7.2% and Great Britain by 6.7%.

The U.K. was the country with the highest proportion of past due invoices, at 48.8%, followed by France at 47.5%.

In a statement that accompanied the report, Andreas Tesch, Atradius N.V. chief market officer, said, “The outlook for global growth is forecast to lose steam, warranting a more cautious outlook for 2019. This will likely put the brakes on the downward trend in global insolvencies with only a 1% decline forecast for next year. All this points to deterioration of the worldwide outlook for trade credit risk on the horizon. Protection of receivables is, therefore, of paramount importance for businesses. Credit insurance enables businesses to manage the inevitable risks of selling on credit, and can help them grasp growth opportunities through safe and profitable trade.”

Other Studies Show the Same Tale

Drilling down a bit, other metrics and studies tell roughly the same tale. As noted by EOS KSI through its own European Payments Practices 2018 survey, as many as “every fourth” payment—or 27%—is delayed to Slovak companies or never gets paid. This is the highest among all countries in both Western and Eastern Europe, the SITA newswire wrote last week—3,400 companies from 17 European countries responded to the survey.

In Romania, that tally is 26%, which means those respondents are among the worst when it comes to late payments. The survey noted that, on average, 21% of payments are done late or not done at all. The east leads the west when it comes to late payments, at 22% versus 19%.

“There may be several reasons why Slovak companies have the biggest problem with payments,” said EOS KSI Slovensko Economic Manager Peter Hetteš to SITA. “For example, our survey has shown that in the long term, they offer slightly longer maturity than average, which may lead to worse payment discipline.”

On the flip side of the coin, Denmark has the lowest late payment tally at 15%. Switzerland, Spain and Germany are each at 18%.

Reprinted with permission from Pymnts.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations