Week in Review

November 19, 2018

Global Roundup

Southeast Asian summit puts focus on trade tensions, trends. The potential damage to global trade brought on by President Donald J. Trump’s tariffs battle with Beijing is looming as leaders of Southeast Asian nations, China, the United States and other regional economies meet in Singapore the week of Nov. 12. (Associated Press)

Europe is ground zero for global credit fears. Profit warnings here, accounting questions there, a missed coupon or two—and suddenly something smells rotten in the state of the market. (HSN)

U.S. belittles EU’s “special purpose vehicle” as companies flee Iran. The United States is not too concerned by Europe’s idea for a special purpose vehicle (SPV) to get around U.S. sanctions with Iran as companies are already withdrawing from the country in droves, the senior official for financial intelligence said. (EurActiv)

Regulators worry as banks step back from international money transfers. Banks are increasingly stepping back from helping one another with international money transfers due to tougher money laundering checks, dealing a blow to countries that rely on remittances and potentially driving some payments underground. (Reuters)

China to outline concessions to U.S. ahead of G-20 summit. Chinese officials have outlined a series of potential concessions to the Trump administration for the first time since the summer as they continue to try to resolve a trade war, according to three people familiar with the discussions. (Business Mirror)

China offer unlikely to spur major trade breakthrough—senior U.S. official. China’s written response to U.S. demands for trade reforms is unlikely to trigger a breakthrough at talks between Presidents Donald Trump and Xi Jinping later this month, a senior Trump administration official told Reuters on Nov. 15. (HSN)

Italy's borrowing costs surge. Italian bond yields have risen steadily since the election of its populist government as investors sell the eurozone country's sovereign debt amid its country's massive pile of debt getting bigger and bigger. (DW)

Brexit deal helps lock U.K. into customs union the EU wanted. For months, the struggle to work out a temporary fix for the Irish border stood in the way of a Brexit deal. Now, it turns out the solution looks neither temporary nor solely for the Irish border. (Business Mirror)

U.S. firms remain confident in the face of growing trade war impact. It took some time, but the negative impact of the U.S.-China trade war has started to make itself felt among U.S. businesses. (Global Trade Review)

Oil’s collapse deepens as supply and demand concerns roil market. Oil showed little sign of recovering from its unprecedented decline as investors flee a market hammered by swelling supplies and a darkening demand outlook. (Business Mirror)

U.S. shale oil forecasts too optimistic, even IEA agrees. The fracking of hard-to-reach oil reserves has helped the U.S. regain its crown as the world's top crude oil producer. But even the International Energy Agency (IEA) is now worried that the shale boom has been overhyped. (DW)

The Brexit endgame: Deal or no deal? On Nov. 14, British Prime Minister Theresa May presented her cabinet with a draft withdrawal agreement and a political declaration on the U.K.’s future relationship with the European Union (EU). But this saga is far from over. (Brookings)

U.K.'s economic outlook in six charts. Growth in the United Kingdom has moderated since the 2016 Brexit referendum. An exit from the European Union without an agreement is the most significant risk to the outlook, the International Monetary Fund said in its latest annual assessment of the economy. (IMF)

China foreign direct investment growth slows in October. China attracted $9.7 billion in foreign direct investment in October, the Ministry of Commerce said Nov. 15. The figure represents a 7.3% increase from a year earlier, but slowed from September’s 8.3% growth. (HSN)

The $1.3 trillion loan market that’s spooking everyone right now. The International Monetary Fund has decided it’s time to sound the alarm about leveraged loans. It’s a $1.3 trillion global market comprised of debt built up by companies in precarious financial positions. (Quartz)

U.S. versus China: The economic model. With the U.S.–China economic rivalry intensifying and “decoupling” becoming the mantra in Washington, what mindset, or economic model, is behind President Donald Trump’s response to China? (Interpreter)

How Real Is This Brexit Deal?

Chris Kuehl, Ph.D.

The deep and convoluted argument over the “great European divorce” has been raging for months. As recently as two weeks ago, the majority of those who have been engaged with the issue were asserting that no real chance for a deal existed.

The U.K. was just going to stumble out of the EU and create chaos for itself, Europe and the world. Now, there is news of a deal of sorts, but there are a number of critical issues that have not been addressed. The success of this arrangement is anything but assured.

It is useful at this point to do a quick review given the intense controversy that has emerged. In 2016, the British government under the leadership of David Cameron and the Tory party put the U.K.’s membership in the European Union on the ballot as a referendum. It was essentially a political ploy to satisfy the Euroskeptics in the party. It was assumed the measure would lose and this would shut the anti-EU forces down for a while. To the shock of most analysts, the measure won and Britain was suddenly on the path to withdrawal.

The No. 1 motivator for the population that supported the break from Europe was immigration because people in the rural areas deeply opposed the open movement required by EU rules. The issue had centered on the waves of migrants from East Europe and the British concern over loss of jobs and the cultural change that was taking place. The communities that actually saw the majority of the migrants were opposed to breaking away from Europe. Once the decision was made, the challenge was to effect an exit that didn’t destroy the British economy. That task was made ever harder by the fact that Europe was furious with the British and adopted a position that could best be described as “don’t let the door hit you on the way out.”

The two stickiest issues have been the future interaction of the British and European economies and what to do about the border between Ireland and Northern Ireland. The U.K. wanted to essentially “have its cake and eat it too”—at least that was the assertion of the Europeans.

The U.K. wanted to halt the free movement of EU citizens to Britain, but wanted to stay in the customs union as that allowed easy trade access for British firms. The EU balked at this and has asserted that Britain should be required to forfeit the advantages of EU membership if it was unwilling to shoulder responsibilities as well.

Ireland has proven to be an even more vexing issue. Northern Ireland was pulling out of the EU because it is part of the U.K., but Ireland was remaining in the organization. In the Brexit vote, the population of Northern Ireland was overwhelmingly in favor of staying in the EU. The British do not want any kind of a hard border between the two Irelands, but the EU has pointed out that a lack of border controls will simply allow British companies access to the EU across that porous frontier. The border that exists now runs through people’s homes and their land. Britain fears that imposing a real border would trigger another round of violence in the region as many in Northern Ireland will have yet another reason to unite with the rest of Ireland.

The plan that is now on the table addresses these issues, but not in a way that will exactly please everybody and possibly nobody at all as the strategy is chock full of compromise that will leave all sides wanting. Mostly, this is a placeholder agreement that gives the Brits and the Europeans time to work on something more lasting.

It keeps the U.K. in a customs union. That avoids a hard border in Northern Ireland. It freezes many of the provisions that would affect the conduct of business between the EU and U.K., but nothing is actually put in place. It just keeps things essentially as they are while talks continue.

The real crisis for Prime Minister Theresa May is that she will have a very hard time steering this through the skeptics in her own party because there is a faction that hates the connection with Europe so much it is willing to risk any economic damage. Meanwhile, the bulk of the population that voted in favor of Brexit has changed its mind and, according to polls, would change their vote if they had it to do over again.

Payment Delays in Egypt on the Rise

Egypt is among the most-improved countries on the World Bank’s latest Ease of Doing Business index. The country jumped from 128 to 120 out of the 190 countries ranked.

The index ranks countries against each other based on how supportive the regulatory environment is toward businesses.

Egypt strengthened legal rights of borrowers and lenders by introducing a new law that broadens the scope of assets that businesses can use as collateral to secure a loan as well as by granting absolute priority to secured creditors or allowed out-of-court enforcement. It also made it easier to resolve insolvency.

Credit professionals recently shared their experiences of doing business there in FCIB’s November International Credit & Collections Survey, which also covers Saudi Arabia, Turkey and the United Arab Emirates.

A third of the survey respondents noted an increase in payment delays, while none saw a decrease, 58% reported no change, and 9% had no delays. Nearly 90% of them sell only to existing customers and 65% do not extend credit.

One-fifth of them attributed cash flow issues for the delays, while a tenth of them noted billing disputes, unwillingness to pay, customer payment policy, foreign exchange rates, central bank issues, cultural norms and customs, or other issues for the delays. “We see a mix of issues,” one respondent said. “For those customers with cash in advance terms, there have delays due to shipping; for customers with credit terms, it seems an inability to pay due to cash flow.”

Payment terms of 0-30 days, 31-60 days and more than 91 days were the most common for survey participants.

Several participants recommended using letters of credit. “Any business done otherwise is a risk,” a credit professional warned. Another said not to “sell on terms where you surrender the bill of lading.” He also noted that is difficult to resell into the country. Others suggested payment in advance.

Other advice included being aware of the bank that a customer uses as well as having a clear understanding of bank requirements. “There are many banks with financial issues. Contact your bank for a list of reputable banks.”

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.

Next month’s International Credit & Collections Survey will cover China, India, Japan and South Korea and opens Nov. 26.

Haiti: Renewed Instability

The PRS Group

The fragility of the welcome political stability that followed a tumultuous and protracted election cycle in 2015– 2017 became apparent in July, when the surprise announcement of a steep hike in fuel prices triggered deadly rioting in the capital, Port-au-Prince. The government retreated in the face of the unrest, and President Jovenel Moïse accepted the resignation of Prime Minister Jack Guy Lafontant, who stepped down in advance of a confidence vote he was expected to lose.

The aborted attempt to hike fuel prices occurred against the backdrop of an unfolding corruption scandal involving the misuse of funds generated from the sale of fuel purchased at a discount from Venezuela under the regional Petrocaribe initiative. The government’s failure to follow up on the findings of a Senate inquiry that implicated, among others, Moïse’s political mentor, former President Michel Martelly, predictably prompted allegations of stonewalling by the Moïse administration, and triggered a fresh wave of protests that once again descended into deadly violence in October. The Petrocaribe scandal has reinforced the suspicions of the international donor community that the Haitian government cannot be trusted to use any funds it receives for the intended purpose, but a genuine effort by Moïse to crack down on corruption would very likely alienate political allies the president needs to win approval of reforms demanded by the IMF. Under the circumstances, it is not surprising that the president has put out feelers to gauge how much China is willing to provide to Haiti as a reward for cutting diplomatic ties with Taiwan.

Haiti is now one of only 17 countries that still maintains diplomatic ties with Taiwan, and the U.S. is applying pressure on those in Latin America to resist Beijing’s overtures. That will be a tough sell unless President Donald Trump is prepared to improve on Taiwan’s most recent offer, which amounted to some $150 million in pledges of investment and financial assistance. At the very least, Moïse would be looking for the Trump administration to reverse its decision to end temporary protected status for some 50,000 undocumented Haitian immigrants living in the U.S., who will become subject to deportation beginning in July 2019. Given the centrality of Trump’s anti-immigration stance to his political brand, such a move is unlikely.

For his part, U.S. Secretary of State Mike Pompeo has taken to highlighting the potential pitfalls for small countries that become economically indebted to the regime in Beijing. Such warnings may ring hollow in Port-au-Prince, where political leaders cannot help but sense the danger inherent in the combination of deep public anger and widespread crippling poverty.

The analysis above is taken from the October 2018 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations