Week in Review

February 11, 2019

Global Roundup

WTO awards South Korea $85 million against U.S. over washing machine tariffs. South Korea can impose annual trade sanctions of $84.81 million on the United States after challenging U.S. anti-dumping and anti-subsidy tariffs on washing machines, a World Trade Organization arbitration panel ruled on Feb. 8. (Reuters)

U.S. and China are committed to reaching a trade deal by March 1 deadline, vows U.S. Treasury Secretary. Both sides in the U.S.-China trade negotiations are making a “big commitment” to reach an agreement by the March 1 deadline, U.S. Treasury Secretary Steven Mnuchin said. (HSN)

Tensions escalate over delivery of humanitarian aid to Venezuela. The international effort to rush food and medicine into this collapsing socialist state was rapidly transforming Feb. 7 into a high-stakes standoff between President Nicolás Maduro and the U.S.-backed opposition, essentially holding hostage lifesaving shipments of humanitarian aid at the border. (Washington Post)

China’s hopes of becoming the world’s largest economy are hitting a major roadblock. China’s economy is growing at its slowest pace in nearly three decades, and some economists say the worst is yet to come. (HSN)

U.K. to ease customs checks on EU goods in event of no-deal Brexit. Most goods arriving from the European Union will be allowed into Britain without full customs checks for at least three months if it leaves the bloc without an exit deal, the British government said Feb. 4. (EurActiv)

Brexit effect on security in the U.K. The downstream effects of Brexit, and particularly a no-deal Brexit, have harrowing consequences for the safety of Britons. If there is no deal on Mar. 29, the U.K.’s counterterrorism and policing operations risk being significantly burdened by borders and hindered by restrictions on intelligence sharing. (Global Risk Insights)

Trump introduces World Bank critic David Malpass to lead it. President Donald J. Trump on Feb. 6 introduced David Malpass, a Treasury official he has nominated to lead the World Bank, as the “right person to take on this incredibly important job.” (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)

Russia is expanding its strategic influence in Africa. Much has been made about China’s role and profile in Africa and the factors underlying its activities on the continent. Less debated is the spread and depth of Russia’s contemporary presence and profile in Africa. (Quartz)

China steps up efforts to close failed zombie companies by 2020, but faces harsh economic reality. Plans to liquidate China’s thousands of “zombie” companies are underway in several of its provinces, according to state media, as the government moves towards an aggressive target of eliminating such firms by 2020. (HSN)

What to expect from the second U.S.-North Korea summit. President Trump and North Korean Leader Kim Jong-un plan to meet for the second time in late February, in Vietnam. What are the key considerations going into the meeting? What might come of it? (Brookings)

Resolving Venezuela's debt default to take years. Venezuela's ongoing political and diplomatic crisis raises the risks of increased near-term economic pain as well as the potential for greater domestic political division, according to Fitch Ratings. (Fitch)

Biotech and pharmaceuticals post-Brexit. Alacrita consulting released an infographic detailing insight from leaders in the pharma and biotech industries and what their predictions are for a post-Brexit market. Survey results indicate what’s to come for leaders and industry players and how attitudes are predicted to change. (Global Trade Magazine)

Germany, France face hurdles in push to rewrite EU antitrust rules. Germany and France want to overhaul EU mergers rules following the European Commission’s veto of efforts by Siemens and Alstom to create a European rail champion to compete with larger foreign rivals. (Reuters)

LC Lite launches blockchain platform to replace LCs. The founders of Singapore-based invoice finance provider Incomlend are launching a blockchain-based platform which will allow importers and exporters to issue, amend, track and execute letters of credit (LCs) without the involvement of banks. (Global Trade Review)

Italy: Toward growth, social inclusion and sustainability. A new government took office in Italy in June 2018 with the goals of jumpstarting growth, fostering social inclusion and securing financial stability. To achieve these goals, the country needs a comprehensive reform package, alongside modest and balanced fiscal consolidation, the IMF advised in its annual review of the economy. (IMF)

New Oil Alliance?

Chris Kuehl, Ph.D.

Over the last few years, there has been more and more cooperation between the members of the Organization of the Petroleum Exporting Countries (OPEC) and Russia, but there has been no desire on the part of the Russians to subsume themselves to the control of the organization.

That several other oil states have had the same attitude as OPEC is generally seen as a proxy for the Saudi oil ministry. It has not been all that sensitive to the needs of oil states not in the Middle East and North Africa. There has also long been tension between the biggest members of the group—Saudi Arabia and Iran.

Russia has created something of an alternative to OPEC—a 10-nation alliance with far looser ties and requirements. It includes some of the former Soviet republics and some small producers in Africa, but the primary members are Russia, Kazakhstan and Mexico. These nations have been working with the OPEC states on a year-to-year basis, but OPEC has wanted a longer-term agreement that would tie the two groups together for as long as 10 to 20 years.

The aim of OPEC and the Russian 10 has been the same for the last year or two—restrict output enough to get oil prices back up. Right now, the Brent crude prices are in the low 60s and West Texas Intermediate (WTI) is in the 50s. These prices have been even lower at times. The preferred price for OPEC and Russia would be closer to $80 or $90. It is not clear that even this grouping would have enough clout to drive prices that high if the U.S. and Canadian oil producers elected to step up their output. It is useful to remember that an ideal price for oil from North Dakota is about $70. These producers are not all that happy with the current price of WTI.

There are many motivations for the creation of an alliance like this one—not the least of which is the opportunity for OPEC to regain some control over the price per barrel. Another factor that has allowed this alliance to move toward completion is politics. Russia had been pushing for this closer relationship, but Saudi Arabia was a little reluctant to get closer to Russia given their long alliance with the U.S.

With the strain between the U.S. and Saudi Arabia after the Jamal Khashoggi incident, the Crown Prince is suddenly far less concerned about what the U.S. thinks. There is something similar taking place as far as Mexico is concerned. It has not wanted to join OPEC, but it also took an arm’s length stand on the Russian alliance—until the election of Andrés Manuel López Obrador. He has been far more interested in relations with Russia and far less concerned about what the U.S. thinks and wants.

It is a long way from forming an alliance to restrict oil output and drive prices up and getting that desired outcome, but the U.S. is now facing a more concentrated set of opponents. The chances are good that price hikes will be taking place, and perhaps as soon as the summer driving season. Worries about inflation have been somewhat subdued over the last year because the price of gasoline at the pump has been down; even hitting 10-year lows. If that trend reverses, it can be expected that inflation will jump quickly. This is the kind of surge that provokes quick Fed action in terms of hiking rates.

Businesses and Credit Managers Not Prepared for Most Future Economic Risks

A new survey released during The World Economic Forum in Davos, Switzerland, revealed many corporate companies—especially in the G20—are not equipped to prevent market risks. If credit managers become aware of the risks facing many corporations, better care can be taken when extending credit to customers, and credit managers can more efficiently handle any risks involved with a company before the risks become detrimental.

FTI Consulting announced the survey results to the company’s inaugural Resilience Barometer report, which analyzed the health of G20 companies in this digital age and the challenges to come throughout 2019. The G20 countries scored a 40 out of a possible 100 on the resilience barometer, which measured geopolitical disruption, adaption to change in the markets, leadership and fraud, and protecting against threats in a digital world.

The score of 40 spells out “a major cause for concern in an environment that is growing more and more challenging,” according to the report. The biggest risk revolved around cyberattacks, with 30% of firms surveyed being victims of the attacks. Less than 50% of companies said they were partaking in preventative measures for cyberattacks, something credit managers need to be aware of when sharing information with another company by digital means. With a shift toward more technology, rather they should be more prepared for pitfalls while working with technology.

“Building resilience in a digital economy isn’t just about managing risk,” said Caroline Das-Monfrais, senior managing director for FTI Consulting, in the report. “It’s also about preparedness, business model innovation, culture and leadership—as well as how to use your data to create competitive advantage.”

When working with customers, credit managers who take a few extra steps to mitigate digital fraud and secure their company’s information will likely be much safer than those who do not. Even just the possibility of a weakness in a company’s system can spiral into a breech or other risks to the company.

Combined with these survey results, 2019 is predicted to be less robust than 2018 in general, according to International Monetary Fund (IMF) data also presented at The World Economic Forum. Several factors contributed to the IMF’s analysis, but with the knowledge that 2019 may be a riskier year, credit managers can take precautions early to avoid bigger problems in the future.

“There is a sense that several factors will combine to make 2019 a lot less robust than 2018, and the IMF has been quick to point out that many of these are self-inflicted wounds,” said NACM Economist Chris Kuehl, Ph.D. “This is not like the downturn that gripped the economy in 2008-09 when it was economic factors and failures in the financial system that combined to send the world into a crisis.”

—Christie Citranglo, NACM editorial associate

Eight Out of 10 CFOs Said UK Will Be Worse off After Brexit

Bija Knowles

The U.K.'s prolonged negotiations to leave the European Union are having a negative impact on U.K. corporates, with chief financial officers (CFOs) adopting their most defensive mix of strategies in nine years. CFOs said that cost reduction is currently a priority, as businesses scale back on recruitment and tighten spending. They are also showing less appetite for capital expenditure and mergers and acquisitions (M&A), as well as introducing new products or services. According to Deloitte’s latest CFO Survey, about 80% of CFOs also said they expect the long-term business environment to be worse as a result of leaving the EU.

“This survey shows that uncertainty over Brexit is driving a marked shift towards defensive balance sheet strategies among British businesses,” said Deloitte's chief economist Ian Stewart. “With the U.K.’s growth prospects heavily dependent on the so-far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring, focusing instead on cost reduction. Corporates are positioned for the hardest of Brexits, with risk appetite at recessionary levels and an intense focus on cost control. Businesses seem to be increasingly pricing in a worst-case outcome. Anything better, including a delay or a deal, could deliver a Brexit bounce in sentiment.”

The survey also found that:

• CFOs expect fellow U.K. corporates to reduce capital expenditure over the next 12 months;
• Risk appetite is at a nine-year low and expectations for revenue growth are down to the lowest level since the EU referendum in 2016; and
• Expansionary strategies such as introducing new products and services, increasing capital expenditure and expanding by acquisition have fallen out of favor.

Deloitte's David Sproul added, “Business urgently needs clarity about the U.K.’s future relationship with the EU. Unless a favorable deal is agreed, it seems likely that this current lack of appetite for investment or recruitment will continue.”

The 2018 fourth-quarter survey was conducted Jan. 8-24 and gathered responses from 110 CFOs, including from 20 FTSE 100 and 41 FTSE 250 companies. The rest were CFOs of other U.K.-listed companies, large private companies and U.K. subsidiaries of major companies listed overseas. The combined market value of the 75 U.K.-listed companies surveyed is £390 billion, or approximately 16% of the U.K. quoted equity market.

Reprinted with permission from Cash & Liquidity Management in Europe.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations