Week in Review

February 4, 2019

Global Roundup

EU and Japan create world's biggest free trade zone. Almost all tariffs on trade between the European Union and the world's third-biggest economy have been removed. European companies could save around a billion euros in duties each year. (DW)

Pompeo: U.S. will withdraw from nuclear arms treaty if Russia doesn't shift position. Secretary of State Mike Pompeo said Feb. 1 the U.S. is pulling out of a treaty with Russia that has been a centerpiece of arms control since the Cold War. (CBC)

Brexit breakthrough reached on finance, helping avert no-deal rupture. British and European Union regulators agreed to cooperate on oversight of financial firms and share key market information in a move that will help avert problems arising from a no-deal Brexit scenario. (Bloomberg)

EU states move to recognize Venezuela's Guaido. European Union governments will move to recognize Juan Guaido as Venezuela’s interim president starting Feb. 4, but using cautious language for fear of setting a precedent for political crises, two EU diplomats said on Feb. 1. (Reuters)

One in three U.K. firms plan for Brexit relocation, IoD says. Nearly one in three British businesses are planning to relocate some of their operations abroad or have already shifted them to cope with a hard Brexit, according to a leading lobby group. (Guardian)

How can Britain escape the Brexit impasse? Britain’s separation from the European Union saw the government stumble from the resignation of another Brexit secretary, an unsuccessful vote of no confidence against the prime minister and the government being found in contempt of Parliament. Precedent has shown that May isn’t seriously willing to compromise, and the risk of a Corbyn government deters the prospect of an election. (Global Risk Insights)

Supreme Court of Canada says bankrupt energy companies must clean up old oil, gas wells before paying off creditors. When energy companies go bankrupt, the cleanup of their old oil and gas wells must take priority over paying off creditors, the Supreme Court of Canada ruled Jan. 31. (Calgary Star)

Italy fourth quarter GDP contracts, throwing economy into recession. Italy’s economy contracted for the second consecutive quarter at the end of last year, throwing the country into recession in a setback for the new anti-establishment government. (HSN)

India government steps up farm support, gives tax relief in pre-election budget. India’s government pledged 750 billion rupees ($10.56 billion) to support poor farmers and reduced the tax burden for the middle class on Feb. 1, as it looked to rally support from voters with the final budget before a general election. (Reuters)

Vale to cut iron ore production by 10% after Brazil disaster.  Iron ore miner Vale has announced plans to halt 40m tonnes of production—about 10% of its annual output of the steelmaking ingredient—so that it can decommission dams similar to the one that burst last week, killing at least 84 people and leaving hundreds missing. (Financial Times)

U.K. leader seeks Brexit deal changes, but EU stands firm. British Prime Minister Theresa May on Jan. 29 won a few weeks to salvage a Brexit deal but headed toward a clash with the European Union (EU) by promising to overhaul the divorce agreement she spent a year and a half negotiating with the bloc. (Business Mirror)

EU will eliminate industrial tariffs only if U.S. lifts metal duties. The European Commission has made clear to the U.S. administration that the elimination of industrial tariffs will depend on Washington lifting duties it imposed on EU steel and aluminum last summer. (EurActiv)

For U.S.-China trade talks, hopes are high, expectations remain low. U.S. and Chinese negotiators start two days of high-level talks on Feb. 6 aimed at settling a six-month trade war that has weakened both sides, shaken financial markets and clouded the outlook for the global economy. (Business Mirror)

China economy “losing momentum” as first major data of 2019 paints gloomy picture. China’s first major economic announcement of 2019 showed a slight rebound in manufacturing and a stronger-than-expected services sector, but analysts said there were clear signs of pressure on the Chinese economy in January. (HSN)

What Breaks the Stand-Off in Venezuela?

Chris Kuehl, Ph.D.

Thus far, the military is standing with Nicolas Maduro in the confrontation over who is the legitimate leader of the country, but that support is based on two important factors.

The first is whether it would be held culpable for crimes in the event that Maduro is deposed and Juan Guaido is named leader. The many violations that took place under Maduro were executed by the military and the secret police. They do not want to face prison or worse.

The second issue is whether it will continue to be paid. The Maduro regime is very close to being absolutely broke. It seems only a matter of time before it loses the ability to pay. Guaido has been making it clear that amnesty will be granted to those who break with Maduro now, but there will be no such guarantees for those who wait. He has also sought to ensure that money will flow when he takes formal control, but he has only received vague assurances from the U.S. and other nations.

The financial sanctions have been stepped up and are as draconian as they can be. The country has seen nearly all of its assets seized and has been utterly cut off from the global financial community. The only support it can get is coming from three nations that have little spare cash of their own. Cuba is broke, Russia has curtailed its engagement so that it can focus on its activity in the Middle East and now China has been pulling its money back home to shore up its ailing economy. Maduro is rapidly running out of options. If the military elects to abandon him, he will have to flee.

Digital Readiness Dominates Top Risk Concerns for Business in 2019, Protiviti-NC State Survey Finds

Boards and C-suite leaders across the globe are most concerned about their company’s ability to transform operations and infrastructure to successfully compete with organizations that are “born digital,” according to results from the 2019 Executive Perspectives on Top Risks survey.

Succession challenges, followed by heightened regulatory change and scrutiny, rounded out the top three concerns.

Global consulting firm Protiviti in collaboration with North Carolina State University Poole College of Management’s Enterprise Risk Management (ERM) Initiative conducted the survey and assessed the concerns of 825 board members and executives globally across a variety of industries.

This year’s results show a significant increase in digital readiness concerns, jumping from the No. 10 position in 2018 to No. 1 in 2019. This jump provides evidence that digital agility and scalability are top-of-mind for businesses. Traditional companies are struggling to compete with newer digital players that can operate more efficiently, are innovative at their core, digitize and deliver new products and services, enhance the customer experience and operate with agile business models.

The risk of succession challenges and the ability to attract and retain talent moved to No. 2, triggered by a tightening labor market and an increasing need for specialized digital knowledge and subject-matter expertise. Regulatory changes and heightened scrutiny continue to represent a major source of uncertainty, while concerns about economic conditions fell out of the top 10 list of risks for the first time in the seven years during which the research has been conducted.

“Looking forward, digital disruption is a main driver of risk impacting uncertainty over business model viability, customer preferences, the competitive landscape, workplace dynamics, the war for talent and even regulatory demands,” said Patrick Scott, an executive vice president with Protiviti. “Clearly, organizations must align their culture, people, processes and intelligence gathering to embrace this rapidly changing business environment.”

“Whether covert or overt, resistance to necessary change—spawned by disruptive innovations that alter business fundamentals—can be lethal,” said Jim DeLoach, a Protiviti managing director and member of the research team. “Organizations must be willing and able to quickly make necessary adjustments to their business models and core operations. Strategic error in the digital economy can result in the ultimate price, if a company continues to play a losing hand in the marketplace.”

The Top 10 Risks for 2019

Survey respondents were asked to rate 30 risk issues. Following are the top 10 risks identified in the report:

1. Existing operations meeting performance expectations, competing against “born digital” firms
2. Succession challenges and ability to attract and retain top talent
3. Regulatory changes and regulatory scrutiny
4. Cyber threats
5. Resistance to change operations
6. Rapid speed of disruptive innovations and new technologies
7. Privacy/identity management and information security
8. Inability to utilize analytics and big data
9. Organization’s culture may not sufficiently encourage timely identification and escalation of risk issues
10. Sustaining customer loyalty and retention

Survey respondents indicated that the global business environment is somewhat riskier in 2019 compared to previous years. The survey results also suggest that corporations are likely to increase investment in strengthening risk identification and management efforts over the next 12 months relative to the prior year.

US Firms Claim Delayed Payments from Saudi Arabia

PYMNTS.com

U.S. suppliers are growing more vocal about what they have said are lengthy payment terms from government customers in Saudi Arabia, recent reports in The Wall Street Journal (WSJ) said.

The publication reported on Jan. 31 that defense contractor General Dynamics claimed Saudi Arabia has more than $1 billion in unpaid invoices, related to an order of military trucks. Construction firm Bechtel and Boston Consulting Group have also raised concerns about delayed and late payments from Saudi Arabia, according to unnamed sources.

Reports noted that the U.S. Department of State discussed the issue with Saudi officials last year, citing one unnamed source, with the nation now having delayed billions of dollars in payments to U.S. and Canadian contractors.

A spokesperson for the Saudi Ministry of Finance said 99% of invoice value was paid within 90 days last year. However, unnamed Saudi officials said the late payments are a cash flow management tactic, as the country struggles with a government budget deficit linked to high spending and declining oil prices.

“It is a strategy,” the source said. “The government knows they can get away with it, and would not want to have an alarming budget-deficit figure.”

Saudi Arabia Minister of Economy Mohammed Al-Tuwaijri told the publication last month that the government is not intentionally delaying supplier payments. Rather, some supplier contracts are in dispute, while other issues like incomplete work have also delayed payments to vendors.

“We are pushing to pay everyone on time,” he said at the time.

Some corporations in the U.S. and Canada have said the delayed payments from Saudi Arabia have impeded their ability to operate efficiently.

Late payments “significantly impacted the free cash flow we expected last year,” said General Dynamics CFO Jason Aiken during an investor conference earlier this week. According to reports, the public comment was a rare show of tension. The defense industry has historically struggled with late payments from Saudi Arabia, but rarely have industry players made the issue public.

Reprinted with permission from PYMNTS.com

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations