Week in Review

January 7, 2019

Global Roundup

U.K. trade secretary: Brexit may not happen. The chances of Great Britain leaving the European Union are split if Parliament rejects Prime Minister Theresa May’s withdrawal agreement, U.K. International Trade Secretary Liam Fox said in a Sunday Times newspaper interview. (Business Mirror)

The biggest problem for the global economy in 2019 won’t be the U.S.-China trade war. The biggest problem for the global economy in 2019 won’t be the trade war between America and China. It will be massive business failures. Perhaps bank failures, too. (HSN)

Brazil's Bolsonaro signals weaker pension reform. Brazil President Jair Bolsonaro on Jan. 4 called for minimum retirement ages significantly lower than those proposed by his predecessor, sparking concerns among investors that he will back watered-down pension reform legislation. (Reuters)

U.K. plans rehearsals for no-deal Brexit amid fears of road, port chaos. Britain will begin rehearsals for the possible chaos of a no-deal Brexit on Jan. 7 by testing how the road network copes with a tailback of around 150 lorries caused by disruption at its most important trading gateway to continental Europe. (Reuters)

No one knows what Venezuela’s petro cryptocurrency is actually worth. The value of Venezuela’s oil-backed cryptocurrency, the petro, is seemingly currently unclear, and even taking a look at official government sources yields inconclusive results, given substantial price differences. (CCN)

Ireland intensifying preparations for a no-deal Brexit: PM Varadkar. The Irish government is intensifying preparations for the possibility that Britain crashes out of the European Union without an exit deal even though it expects agreement in the coming weeks, Prime Minister Leo Varadkar said on Jan. 4. (Reuters)

From Belt and Road to stars and stripes. As part of its strategy to counter rising Chinese influence abroad, the U.S. recently unveiled the International Development Finance Corporation (IDFC), a development finance agency with a $60 billion war chest. (Global Trade Review)

Why slowing economies could prod U.S. and China to reach deal. The Trump administration and China are facing growing pressure to blink in their six-month stare-down over trade because of jittery markets and portents of economic weakness. (Business Mirror)

China’s central bank revises rules to encourage more small business lending. China’s central bank tweaked its rules on bank lending to the country’s cash-starved small businesses, the latest move to support the private sector in an economy that faces growing headwinds. (HSN)

British Prospects for 2019 Not Good

Chris Kuehl, Ph.D.

The optimism that accompanied the initial decision to exit the EU has completely faded and has been replaced with varying levels of doom and despair. Even those who still think Brexit is a good idea have conceded that they did not expect the impasse that now exists. It looks more and more likely that there will be a hard exit—one that isolates almost all of the U.K. from the EU and that leaves the fate of Ireland in limbo.

Even if there is a last-minute deal of some kind, the expectation is that 2019 will be a very weak economic year. If the break is as dramatic as now appears likely, the country is going to sink into a full-fledged recession.

The future for the U.K. economy has rarely been this uncertain. It is just 100 days before the U.K. leaves the EU, and there is nothing approaching a real deal in sight. Prime Minister Theresa May negotiated the best deal available with an EU that was angry with the British and fully prepared to deal with a very hostile breakup. It is the opinion of the EU members that Britain has far more to lose in this breakup than they do. They have been unwilling to give the British any sort of economic edge.

The consensus view among economists is that the U.K. economy will struggle to reach 1.5% growth in 2019 and only if there is some kind of deal on Brexit. If there is a chaotic ending, the growth in the U.K. could well enter negative territory. The future of the economy will come down to how willing the government and the Bank of England will be to stimulate the moribund economy in a significant way.

The problem is that much of the British economy remains tied to Europe—in terms of both exports and imports. It had been hoped that the U.S. would substitute for the Europeans, but the U.S. today is an isolationist and protectionist country with no interest in sacrificing anything for the U.K. There had been hope that Commonwealth nations might offer a substitute market, but these nations know that the U.K. is in a bind and there are no good deals on offer.

Imports will rise in price as the pound falls in value, but exports will not see a corresponding increase as Britain is not a consumer-export nation. The demand for the industrial goods that Britain produces has been sagging as the world economy starts to slow. There will likely be an exodus of British expatriates from the various European nations now that their tax status has altered. They will be the population the British least covet—the elderly and retired.

Perhaps the most worrisome issue is Ireland. If nothing is worked out, it will become necessary to impose formal border controls between Ireland and Northern Ireland. This will cut straight through towns and villages as well as farms and residents. The Irish on both sides of the border are furious. Britain, as a whole, worries that this brings back all the tension and violence from past years as there will be even greater pressure to unite. At the same time, the British will want that unity to stay intact so as not to invite the resumption of activity around independence for Northern Ireland or unification with the rest of Ireland.

Tighter Liquidity in Asia: Not All Gloom and Doom in 2019

Coface

As central banks globally resume monetary policy normalization, there come the risks of liquidity outflows. To limit its associated risks, central banks in the region have been forced to follow the tightening stance of monetary policy set by the U.S., despite being in very different stages of their respective business cycles.

Asian emerging markets have also experienced depreciatory pressure during most of 2018. As a result, the Philippines, Indonesia and India intervened on currency markets to smooth out exchange rate fluctuations. Indonesia and Pakistan took measures to limit imports in order to counter the pressures induced by widening trade deficits resulting from weaker currencies. All of this has brought back memories of past instances when the region struggled with portfolio outflows, namely the Asian Financial crisis of 1997 and the “Taper Tantrum” of 2013.

The region is in a better position to resist outflows as a result of many factors including floating exchange rates, current account surpluses, an increase in Foreign Direct Investment (FDI) inflows and expatriate remittances. FX reserves have also increased and remain at adequate levels in most cases. However, the relative sustainability of the real external position remains a concern in some cases. FX reserves can be used to finance this external position, but this is not a sustainable solution and Coface expects that some Asian emerging markets will struggle going forward as a result of such imbalances.

Coface’s index for measuring relative vulnerability to outflows points to a divergence in the exposure to external pressures amongst Asian emerging markets. The level of exposure varies depending on existing vulnerabilities, as well as the degree to which buffers are able to fend off those risks. It is likely that investors may have gotten ahead of themselves in some cases. Current valuations may not be justified in the context of strong fundamentals, proactive monetary policies and the fact that some of these markets have plenty of ammunition, especially on the FX reserves front, to resist outflows in the foreseeable future.

That being said, some Asian emerging markets will feel the squeeze more than others, as the region remains subject to some pressures. Markets have been grappling with risk-on modes once again, a consequence of escalating trade war threats between the U.S. and China. This explains outflows from countries that have otherwise been doing well. Moreover, higher oil prices in 2018 contributed to slower growth, a scenario that can’t be discounted in 2019.

Coface expects that Brent prices will remain close to USD 75 per barrel on average in 2019. Capital outflow dynamics will also remain conditioned by the pace of monetary policy tightening in the U.S. Our baseline scenario implies a slowdown in the pace of Fed hikes (two hikes in 2019 compared to four in 2018), as inflation has already slowed below the Fed’s 2% target.

The Risks of Switching Export Payment Terms

Chris Lidberg

Let’s assume that you’ve been selling goods to a particular buyer for the last couple of years on a letter of credit basis. All in all, everything is going well.

Whenever discrepancies are discovered, your customer cooperates and provides the appropriate waivers in a timely manner and payment is made. The buyer knows that you’ll ship on time and present the required documents. You’ve established a business relationship that appears to be working.

Since the letter of credit process is the most expensive and most structured payment method you can choose, you may want to consider an alternative payment term: the collection.

If you never incur any discrepancies when using a letter of credit, you can be absolutely assured that you’ll receive payment from the issuing bank. A collection offers no such assurance. However, if you have experienced discrepancies in a letter of credit, your risk in switching to a collection is not dramatically different.

Whether you use a letter of credit that has some discrepancies or a collection, your risk of not getting paid is about the same. In both cases, you must wait for the beneficiary to approve payment.

Payment Using a Sight Draft

Let me explain the process of a collection using a sight draft. First, the buyer and seller must agree that the collection is an appropriate payment term. The seller ships the goods to the buyer and then sends all documentation to the buyer’s bank using the seller’s bank’s direct collection form.

When the buyer’s bank receives the documentation, they will follow the instructions on the direct collection form.

In this case, they will release the documentation to the buyer only upon receiving payment. The buyer will receive a copy of the invoice from their bank and then must decide to authorize payment. Once this is done, the buyer’s bank then transfers the payment to the seller’s bank. Last, but not least, the seller’s bank makes payment to the seller.

It all sounds pretty easy!

But a collection does have some risk. When the buyer receives the invoice from their bank, they may decide not to authorize payment and instead delay, or even worse, refuse payment.

At this point, the seller has three options:

• Negotiate for Payment—Find out what is wrong and try to come to an understanding that will result in being paid.
• Find Another Buyer—If the buyer can’t be persuaded to make payment, the seller can try to find another buyer. Ideally, the seller will find a new buyer in the same country as the old buyer so the goods don’t have to be moved again.
• Have the Goods Returned—This is not the best solution since the seller has already incurred a lot of expenses with no hope of recovering them. However, that may be a better alternative than writing off the entire cost of the goods.

Payment Using a Time Draft

An alternative to the sight draft is a time draft, which is always drawn on the buyer. When a time draft is being used, the collections process is a little different.

When the buyer’s bank sends the copy of the invoice to the buyer, they also enclose a time draft telling the buyer that they will need to accept the draft and return it to their bank in order to obtain the documents. By accepting the draft, the buyer makes a promise to make payment when the draft comes due. However, they are not yet authorizing payment.

Once the buyer accepts the draft and returns it to their bank, the bank releases the documents to the buyer enabling them to get the merchandise. When the time draft matures, hopefully the buyer will instruct their bank to make payment. However, they still have the right to refuse payment if they wish.

Unlike the sight draft that gave the seller three options, if the buyer refuses to pay, a time draft only gives them one: negotiate for payment. The buyer has the merchandise, so the seller can’t try selling it to someone else, nor can they have the goods returned. For this reason, a time draft collection is considered one step away from open account.

It’s important to remember that the buyer’s and the seller’s banks will only follow the instructions of their customers. They have no responsibility or liability in the collection transaction. If a dispute should arise, the buyer and seller have to work out their differences without the assistance of their banks.

Reprinted with permission from ShippingSolutions.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations