Week in Review

November 12, 2018

Global Roundup

China has more distressed corporate debt than all other emerging markets. In the span of just 11 months, China went from having no distressed dollar-denominated corporate bonds to having more than any other emerging market. (Bloomberg)

SWIFT to disconnect messaging for some Iranian banks. SWIFT will disconnect some Iranian banks on Nov. 10 and 11, the Belgium-based financial messaging service’s Chief Executive Gottfried Leibbrandt said on Nov. 9, adding it was regrettable. (Reuters)

U.S. government’s borrowing binge poses global risks. The U.S. government’s finances are on an unsustainable trajectory and are likely to worsen further after the midterm elections, adding to the list of problems facing the global economy and oil markets in 2019/2020. (HSN)

EU firms face “more comprehensive” U.S. sanctions regime than pre-Iran nuclear deal. European firms doing business in Iran could face a more comprehensive sanctions regime than that before the Iran nuclear deal was agreed, experts warn. (Global Trade Review)

Moody's sees escalation of U.S.-China trade war, dip in global growth. Credit rating agency Moody’s warned on Nov. 8 that global economic growth was likely to slow down in the next two years and that it expected the trade war between the United States and China to escalate further. (Express Tribune)

U.K. economy grows strongly, but with hints of tougher times ahead. Britain enjoyed its fastest economic upturn since late 2016 during the third quarter, spurred by a surge in consumer spending over the hot summer and the soccer World Cup, which now appears to be tailing off ahead of Brexit. (Reuters)

Mexico's economic outlook in five charts. Mexico's economy grew moderately this year, supported mainly by domestic demand, with growth projected at 2.1% for 2018, the IMF said in its latest annual economic assessment. (IMF)

North Korea postponed U.S. talks because “they weren't ready.” North Korea postponed talks with the United States on Nov. 8 “because they weren’t ready,” U.S. Ambassador to the United Nations Nikki Haley said as she urged Pyongyang to implement a June deal between the two countries. (Reuters)

EU business lobby dismisses China’s latest opening pledge. The EU business lobby in China has dismissed President Xi Jinping’s latest market-opening pledge as a rehash of earlier unkept promises, saying European companies had become “desensitized” to Chinese vows. (EurActiv)

Europe's economic outlook in six charts. Europe’s economy continued to expand in the first half of 2018, although at a slower-than-expected pace, specifically in advanced Europe. Driven by domestic demand, economic activity continued to expand in the first half of 2018, the IMF said in its latest health check of Europe’s economy. But the outlook is less favorable, with several forces likely to hamper economic growth. (IMF)

Two years after demonetization, India is still struggling to create jobs. Two years since the Narendra Modi government derailed the Indian economy with the note ban, it is still limping, at least on the jobs front. (Quartz)

Key global events to watch in November. At the start of every month, the Global Observatory posts a list of key upcoming meetings and events that have implications for global affairs. (Global Observatory)

Figures of the week: Doing business in sub-Saharan Africa. Countries with good and bad regulatory practices can be found across every region of the globe, with a spectrum of high and low performers in between. As a region, sub-Saharan Africa has the greatest range between highest scoring countries and lowest scoring countries. (Brookings)

Eurozone economy seen cooling as risks to growth mount. The eurozone economy will cool over 2018 and the coming years as global demand for its exports wanes, with a sharper slowdown possible if the U.S. economy overheats or trade tussles escalate, the European Union said on Nov. 8. (HSN)

How Democrats could help or hurt Trump’s next trade policy moves. President Donald Trump may be encouraged to pursue more protectionism and could even get a hand from Democrats on his trade agenda—a rare area of potential cooperation that will test his willingness to bargain with a new negotiating partner, likely to be Democratic leader Nancy Pelosi. (HSN)

Eight tips for getting paid with a letter of credit. For those of you who have worked with letters of credit in your export business, you know how complicated these transactions can sometimes become. However, if done the right way, getting paid this way has numerous advantages. (Shipping Solutions)

Expectations Dim for G-20 Breakthrough

Chris Kuehl, Ph.D.

There are messages flying around that will provide support for almost any position on the U.S.-China trade dispute. The optimists can look at the comments by President Donald Trump after his “very good” phone conversation with Xi Jinping, while the pessimists point to the fact that no similar declaration came from Xi. Instead, the Chinese leader raked the U.S. over the coals with assertions that the U.S. was employing the “laws of the jungle.” The global markets rallied last week on the assumption Trump was engaged in his usual “head fake” style of negotiating as he sounds hard line at the same time he gives concessions. Now, it is unclear what kind of concessions might be offered and whether any of them will be accepted by the Chinese. After months of bombast and blather, the reality of the tariff and trade policy has started to manifest. Many think it has gone too far for the two nations to back away.

There are several facts that have emerged, which may have an impact on the course of the future conversation. China is in far worse shape economically than the U.S. at this point. This has placed limits on the leverage the Chinese can enjoy. Their growth rate has sagged to just over 6%. In China, that is tantamount to recession. The country has to grow fast enough to create at least 1.2 million jobs a month just to keep pace with population growth, while the U.S. has to create 250,000. The Chinese require growth of at least 6% to achieve this goal. The U.S. can meet its goals with 2.7% growth. China is not in a position to tolerate much more slowdown.

The Chinese government has been engaged in a lot of stimulation of late, but in the past, this has led to higher rates of inflation as well as various financial bubbles. They remain wary of this developing again. The Chinese essentially have two choices when it comes to furthering growth at this stage. They will need to dramatically expand their own internal market so Chinese consumers can support the Chinese economy. The other option is Chinese companies will have to find other places to sell. Neither of these options will be easy, considering the realities of a trade war with the U.S. If the Chinese are not exporting, they are not making money. That limits what the Chinese consumer can contribute. No place in the world consumes like the U.S. The U.S. will get hurt by these tariffs, but it is likely to be a shorter-term issue because the U.S. will seek other sources of supply—a much easier challenge than those facing China.

If there were to be a breakthrough at the G-20 meeting when Xi and Trump are supposed to talk, what might it look like? Realistically, it would either be a shift in Trump’s position, which has happened many times before, or it would involve some kind of capitulation by the Chinese. This is not all that likely. Analysts assert something important has been missing from Trump’s set of tactics. His approach has been all stick and no carrot. If the U.S. wants to close the deficit gap, it has to sell more to China as opposed to buying less. Importing less from China will not mean U.S. manufacturers will replace these goods—the U.S. will simply import them from another nation. However, the prices will likely be higher. The U.S. should urge greater engagement in the U.S. economy. That is a far more nuanced strategy than the blunt instrument of a tariff war.

The Passing of a Beloved Friend, Mentor and Colleague

The credit world lost one of its staunchest supporters and advocates. Gary Gaudette, a beloved friend, mentor and colleague, died Tuesday, Nov. 6, following a courageous five-year battle with cancer.

Gary gave tirelessly of himself despite his personal battle and already very full schedule. His commitment to and passion for the credit profession was endless.

He viewed a credit manager’s position as much more than managing accounts receivable. He envisioned it as a way to help solve problems. “There’s constant change in the global markets and being able to provide ways to help our companies grow business is key to what we do,” he once told Business Credit magazine. “There are new tools out there for us to learn, understand and use, and we need to be able to guide our organizations through those.”

Gary was a strong advocate for professional development, and he led by example. He earned his CICP international designation in 2007 and went on to attend NACM’s Graduate School of Credit & Financial Management in 2008 and 2009, where he earned his CCE designation. In 2012, Gary earned his ICCE designation and his Certified Treasury Professional designation in 2018. In 2014, Gary was honored with one of NACM’s highest honors, the O.D. Glaus Credit Executive of Distinction Award.

He also believed strongly in taking responsibility and trying to make a difference. He served on the Board of Directors of the National Association of Credit Management, having served as chairman in 2016. He was also on the FCIB Advisory Board and the Board of Directors of the Association of Credit and International Business.

Gary’s commitment and dedication went beyond his profession, however. He served on United Way’s Grant Review committee and Financial Review committee. Gary further dedicated his time to his town of Enfield, New Hampshire, serving the Enfield Village Association and the Mascoma Lake Association as treasurer, the Conservation Commission, and the Town of Enfield Capital Improvement Committee. He was honored in September for his astounding service to the community with United Way’s Volunteer of the Year award.

Professionally, Gary was an associate owner of Hypertherm for more than 16 years and served as senior treasury analyst on the Financial Services Team. He served as an insightful and impactful member of the HOPE (Hypertherm Owners’ Philanthropic Endeavors) Team for six years and simultaneously continued to serve on the Community Service Time Participation Committee, the Grant Review Committee and the United Way annual campaign committee.

To honor him, the HOPE Foundation has created the “Gary Gaudette Exemplary Service Award” to recognize someone who exhibits the distinguished character traits so clearly observed in the way Gary lived his life.

What Do US Midterm Elections Mean for the Trade War?

The votes are in, and the American voters have come back with a split decision—Democrats won back the House of Representatives, while the Republicans maintain control of the Senate. There’s no question that the results will change the course of policy creation in Washington and impact both small and large businesses, said trade credit insurer Euler Hermes.

Republicans strengthened their position in the Senate but Democrats won control of the House of Representatives for the first time in 10 years, said trade credit insurer Atradius.

The change in the House means Trump’s party no longer controls both congressional bodies and will have a more difficult time pushing through legislation, Atradius pointed out. This could slow his political agenda and stop some plans in their tracks. It may also restrict the government’s ability to cushion the economy in case of a downturn.

“From trade wars to tax cuts, these last two years have certainly been filled with ups and downs for businesses,” said Dan North, chief economist at Euler Hermes North America. “With the results of the midterm elections in, it’s important for leaders to refocus and think about how to best rise to a new set of challenges and opportunities.”

Things will still be rocky, but as evidenced by the new USMCA agreement with Mexico and Canada, Trump is more flexible on trade than he initially indicates, Euler Hermes said. A likely scenario is that with a few concessions from the Chinese (think tariffs on U.S. agriculture and ending the requirement for technology companies to form joint ventures to operate in China), he could agree to a return to prior trade conditions. This would be a win for tech, agriculture, wholesalers and retailers. That said, there could be lasting damage. The Chinese have already looked for new food supply sources, and U.S. manufacturers, either exporting products to China or having their facilities there, face new burdens that make this market less appealing.

Atradius provided a slightly different view. “We do not expect this to have a significant impact on trade policy uncertainty or the U.S.-China trade war. First and foremost, the president has significant power in trade policy and in many instances does not need congressional support to take action. Furthermore, there is a general consensus in Washington for a tougher stance on China concerning unfair trade and intellectual property practices.

There is, however, a downside risk that this could spell an escalation of the trade war with China, Atradius explained. With the loss of the majority in the House, the administration may double down on its trade agenda where it has the power in order to please its voter base ahead of the next presidential elections in 2020.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations