Week in Review

January 28, 2019

Global Roundup

China’s economic growth sinks to three-decade low. China’s economic growth hit a three-decade low in 2018, adding to pressure on Beijing to beef up stimulus measures and settle a tariff war with Washington. (Diplomat)

U.S. diplomats leave Caracas embassy as Washington backs Maduro rival. Some U.S. diplomats left the embassy in Caracas for the airport on Jan. 25 in a convoy escorted by police, according to a Reuters witness, after Venezuelan President Nicolas Maduro broke off relations with Washington and ordered American personnel out. (Reuters)

Brexit forces equity, foreign-exchange markets to leave London. Two key markets are moving out of the U.K. as Brexit forces finance firms to put more of the region’s trading infrastructure on the continent. (Bloomberg)

Venezuela military brass pledges loyalty to Maduro, decries coup. Venezuela’s top military officials took to the airwaves on Jan. 24 to swear their support to embattled President Nicolas Maduro after the U.S. and a dozen other nations recognized his main political rival as the rightful head of state. (Business Mirror)

Brazil and U.S. push for less regulation and lower taxation in Davos. Less regulation and lower taxation rank at the top of their respective political agendas, Brazil’s President Jair Bolsonaro and U.S. Secretary of State Michael Pompeo successively told participants at the World Economic Forum annual meeting in Davos (Switzerland) on Jan. 22. (EurActiv)

Tumbling commodity prices cut Latin American and Caribbean export growth. Exports from the Latin American and Caribbean region lagged the rest of the world in 2018, despite reaching their highest level in six years, according to a report by the Inter-American Development Bank (IADB). (Global Trade Review)

Argentina: Economic doldrums pose electoral risk. Argentina’s economy and political turmoil are on full display at the start of 2019. The country is in the midst of a difficult economic situation, which has led to a call for help to international creditors. The G-20 summit was a good opportunity to bring some stability and optimism to the country, but it did not deliver the expected results. The situation writes a difficult ending chapter for Mauricio Macri’s 2018, which will affect his re-election aspirations in 2019. (Global Risk Insights)  

With a $57 million fine against Google, France kicks off the post-GDPR era. France’s data-privacy watchdog, known as the CNIL, slapped Google with a €50 million ($56.8 million) fine on Jan. 21, claiming the U.S. tech giant was in breach of Europe’s new General Data Protection Regulation (GDPR), which was designed to protect consumers’ rights to privacy and anonymity when it comes to the data they share with businesses. (Quartz)

U.S., China “miles and miles” from trade deal—Ross. The United States and China are “miles and miles” from resolving trade issues but there is a fair chance the two countries will get a deal, U.S. Commerce Secretary Wilbur Ross said on Jan. 24. (HSN)

Bitcoin is worth less than the cost to mine it, JPMorgan says. The production-weighted cash cost to create one Bitcoin averaged around $4,060 globally in the fourth quarter, according to analysts with JPMorgan Chase & Co. (Bloomberg)

Asian Developments

Chris Kuehl, Ph.D.

The challenge of keeping pace with global events is that there is always competition for those lead headlines. For the past several weeks, the attention of the world has been held by the U.S. government shutdown and the Brexit deadlines that are looming in the U.K. and Europe.

The activity in Asia has not broken through other than a few remarks regarding the slowdown in China’s economy. In fact, there has been quite a lot taking place in Asia, and much of that activity has implications for the rest of the world.

China has attempted to reach out to the U.S. on trade talks before the March deadline, but it has been rebuffed by the Trump team. Japan’s Shinzo Abe has not been able to push through his wage hike plan; the level of exports from Japan has fallen to lows not seen in two years. The North Koreans are pushing for another meeting with President Trump, but they have done little to make good on previous promises. India is facing an election that has suddenly become far closer than had been expected. The Asian states that do business with China have been positively and negatively affected by the confrontation between the U.S. and China, while the U.S. has been alternately engaged and disengaged in what has been happening in Asia.

A few weeks ago, it seemed there was some room for the U.S. and China to reach a deal on trade—at least on a few issues. The U.S. had shown some willingness to delay the next round of tariffs and restrictions, while China seemed to be taking this gesture as an invitation for more consultation and movement.

Thus far, the U.S. has refused to get engaged in more of these interactions and the global markets sagged a little on that news. There has been deep concern that the U.S. will be unable to reach a deal with China because such a gesture would disappoint Trump’s base. In a recent move over immigration, he tilted ever so slightly toward a deal with Democrats and was vilified by the right-wing commentators as a traitor offering amnesty to illegals. Given his near-total dependence on that base, he can’t stray very far from their position.

One of the countries inadvertently hit by the U.S.-China trade dispute is Japan. The two most important markets for Japan are the U.S. and China. The export machine that drives Japan relies on sales to these two. That makes their problems a problem for Japan. The slowdown in the Chinese economy has meant a dramatic reduction in imports from Japan. At the same time, the U.S. has been making it harder for some Japanese products to enter the U.S. The steel tariffs were imposed on Japan, which damaged their steel output. The revisions to the NAFTA deal—creating the new USMCA—meant newer domestic content laws. That limited the importation of many industrial goods to the U.S. from Japan.

North Korea is eager to get attention from the U.S. again and is pushing for more nuclear talks. The Trump position has been encouraging and statements have been made that suggest Kim Jong-un has been taking steps to denuclearize the country. Unfortunately, the Trump administration has been the only one to see that progress. North Korea has failed to live up to any of the promises made at the previous summit.

Just a few weeks ago, it looked certain that Narendra Modi and his Bharatiya Janata Party would sweep back to power in this election. After five years in power, Modi was still very popular and still considered incorruptible. His opposition was fragmented among several parties that showed no desire to work together. Suddenly, that has changed and now there is the possibility he could lose power over parliament and be forced to create a coalition. His opponents have managed to unite and are attacking him in his most supportive regions: the poor Hindu states in the north that have been referred to as the “Cow Belt.” He has doubled down on his campaign and is still ahead in most polls, but by a very narrow margin.

Payment Terms in Turkey

About 82% of the credit professionals who recently participated in an FCIB International Credit & Collections Survey on Turkey extend credit to customers when doing business in the country. The top three payment methods used were wire transfer (82%), letter of credit (27%) and credit card (18%).

An FCIB member posted on the members only discussion board last week that his firm currently offers Turkish customers cash against documents payment, which he noted is costly. The credit department is now weighing the pros and cons of open account.

One member who responded to the posting pointed out that his company sells on open payment terms to regular customers only. “If we offer open payment terms, we always have credit insurance in place,” he added. “For new customers, it is nearly impossible to get an insurance coverage so we sell on advance payment condition or confirmed letters of credit basis only.”

Another member said whether to sell on open account depends on the type of goods that are being sold. “When I used to work for a premium casual-wear brand company, our Turkish customers were all on BG or SBLC valid for a year,” he explained. “Now I am working in the packaging industry and it depends on the types of goods we are selling; a packaging machine will be part deposit with order and the other part before delivery. If we are selling spare parts, most of them are in prepayment; only a few are part prepayment part open terms.” He advised caution because the quality of the financial data on a Turkish company is often unreliable. 

Yet another member shared that his company has been selling into Turkey for several years on open account terms without incurring any unusual or extraordinary write-off exposure. “The key to success in Turkey is to know your customer and require proof of the customer's financial condition before accepting open terms,” he said. He suggested starting with smaller credit limits until customers prove worthy of more.

Advice from credit professionals who took the survey ranged from using letters of credit for new customers and standby letters of credit for existing customers, securing payment prior to shipment, not offering open account terms to new customers and using wire transfer.

 “The most secure way is cash against documents,” said Bierens Group attorney, Omer Faruk Celik, who will present the webinar Doing Business in Turkey on April 30. “We do not recommend trading with open accounts in Turkey—especially nowadays, then the control is with the buyer! The seller does not have the control of the open account. Cash against documents might be costly, but the costs are never higher than the risk of not getting paid!”

The discussion board is an invaluable tool for members to ask questions and share insight among their peers. The monthly International Credit & Collections Survey 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. FCIB members can access the full results of the survey as well as the survey archives via the FCIB Knowledge Center. Nonmembers will receive the results via an email for the surveys in which they participate.

The latest International Credit & Collections Survey opened Jan. 25 and covers Argentina, Brazil, Ecuador and Peru.

Corporate Insolvencies in France: Rebound Expected to Continue in 2019

In 2018, 52,665 French companies went bankrupt, 2.9% fewer than in 2017, thus hitting the lowest level of insolvencies since 2008. Although the first half of the year saw insolvencies decrease (7.2%), the second half recorded an increase (2.3%) which should continue in 2019.

At the end of December, the consequences of disruptions related to the "yellow vest" movement were not very evident on insolvencies. December even saw a decline in insolvencies (3.6% compared to December 2017).

Among the sub-sectors of retail, the main sector with potential exposure, only retail clothing recorded an increase of 22% (15 more insolvencies than in December 2017). The movement seems to have had slight impact in catering (+6%, but slightly better than for the second half of the year as a whole) and the hotel industry (+39%, i.e., 9 more cases), given the small number of insolvencies. However, the effect of the movement on insolvencies should be more noticeable at the beginning of 2019.

Two categories of companies were particularly affected by increasing insolvencies: predictably, micro-enterprises with revenues of less than €250,000 (1%) and, more unexpectedly, companies with revenues of more than €10 million (16%). Average revenue of an insolvent company is €311,600.

In the second half of the year, all the sectors that traditionally generate insolvencies suffered an increase: construction (1.5%, after a 7.1% decline in the first half), personal services (4%, after 6.2% drop in the first half) and automotive (7.5%, after a 0.3% increase in the first half).

Regionally, Ile-de-France (5.2%) and Hauts-de-France (1.3%) stand out, both regions being distinguished by a rebound in insolvencies.

The financial cost of insolvencies fell more sharply (4.4%, for a total of €3 billion in trade payables) than the number. As a result, the average financial cost of an insolvency fell to €57,700.

For 2019, Coface forecasts a French economic situation penalized by a deteriorating international environment, linked in particular to increasing protectionism and the slowdown of its main partners, and by production and labor supply constraints. French GDP growth will slow to 1.4% (after 1.5% in 2018). In this context, the upward momentum of insolvencies will continue but its magnitude (1%) will not be sufficient to cancel out the improvements of 2017 and 2018.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations