Week in Review

March 18, 2019

Global Roundup

EU importers prepare to cut ties with U.K. suppliers to avoid Brexit delays. British exporters face losing contracts, being forced to slash prices or denied payment if Brexit causes delays to deliveries of goods, according to a survey of supply chain managers. (GTR)

Singapore, Malaysia take steps to defuse tension at their ports. Neighbors Singapore and Malaysia took steps toward resolving a dispute over port limits, even as tensions remain over water supply. (Bloomberg)

Canada’s no-sex, no-money scandal could topple Trudeau. There’s no money, no sex and nothing illegal happened. This is what passes for a scandal in Canada. (Associated Press)

Britain’s parliament rejects prime minister’s Brexit deal. With just 17 days to go, Britain’s departure from the European Union was thrown into chaos and doubt on Mar. 12 as Parliament delivered a crushing double blow to Prime Minister Theresa May’s Brexit divorce deal and to her authority as leader. (Business Mirror)

European Parliament rejects opening trade talks with Trump. The European Parliament failed to pass a resolution on Mar. 14 supporting the start of negotiations with the U.S. on removing tariffs for industrial goods, worsening the prospects of de-escalating trade tensions between Brussels and Washington. (EurActiv)

Greece: Economy improves, key reforms still needed. Greece has now entered a period of economic growth that puts it among the top performers in the eurozone. It must now persevere with efforts to address crisis legacies and pursue needed reforms to ensure continued success, says the IMF in its recent assessment of the country’s economy. (IMF)

Italy: Likelihood of general elections. The recent regional elections in Abruzzo and Sardinia have highlighted the contrasting political fortunes of the two populist parties that make up Italy’s coalition government.(Global Risk Insights)

Spain election outcome unclear; risks Catalonia tensions. The outcome of early Spanish elections and prospects for greater political stability remain uncertain, while current political positions point to greater tensions over the Catalonia regional government's policy of independence. (Fitch)

Payments innovation: Debunking the myths. Head of International Payments and Collections, BNP Paribas Cash Management, Bruno Mellado, shares his views on some of the most exciting developments in the payments space today, whilst explaining how new technologies can work in harmony with existing infrastructures to drive innovation. (TMI)

China’s new investment law puts foreign firms on notice. China planned to approve new rules for foreign investment in the country last week, a sweeping overhaul of regulations that will affect corporate titans from Ford to Alibaba and Tencent. (HSN)

Iraq and Iran build economic ties as a sidelined U.S. looks on. In the contest for Iraq’s loyalty, geography is proving irresistible. Baghdad is being urged to take sides in the U.S.-Iran confrontation that’s escalated into one of the Middle East’s top flashpoints. (Business Mirror)

Reaching Consensus on Europe’s Future Will Be Tough

Chris Kuehl, Ph.D.

Last week, French President Emanuel Macron put forth an impassioned plan to unite Europe—a very deliberate attack on the movements that have been collectively labeled populism. His vision was of an expanded European Union that would move the region even closer to common goals related to everything from the environment to immigration to economic development.

It was a direct challenge to the populism that has led to the Brexit move by the U.K. and the rise of parties like the National Front in France, the Five Start Movement in Italy and the Alternative fur Deutschland (AfD)in Germany. It was an ambitious manifesto to say the least, but it will go nowhere unless there is support from Germany. Given the comments by the new leader of the Christian Democratic Union (CDU), that support will not be forthcoming anytime soon.

Annegret Kramp-Karrenbauer was Chancellor Angela Merkel’s chosen successor to head the CDU. If the center right is able to hold onto power in the Bundestag, she will become chancellor. In winning control of the CDU, she had to fight off a serious challenge from Friedrich Merz, a much more conservative leader who still commands a loyal following in the CDU. His supporters will keep the CDU focused on some of their key issues—immigration and assertions of national sovereignty. There is not much support in this group for the kind of visions that Macron has been espousing.

In one of her first speeches on the subject she all but laid out a point-by-point rebuttal of Macron’s plan. “European centralism, European statism, communitising debt and Europeanising social security systems and the minimum wage would be the wrong approach”—words she put to paper in an opinion piece published in Germany’s major paper. The assertion is that individual nations should be protecting their individualism, their culture and most of all they need to protect their budgets.

In the last 10 to 20 years, it seems that Germany is the European bank of last resort as it is continually asked to foot the bill for everything from a Greek bailout to stemming the tide of immigration. This has been a major issue for the more conservative elements of the CDU and their sister group in Bavaria. It has also been a major recruiting tool for the populist AfD party. There is a sense that any sort of European unity will simply mean more burdens heaped on Germany. There is little support for this now that the German economy has been slipping into growth of less than 1%.

The rest of Europe is essentially being asked to pick sides between France and Germany, but the reality is that until and unless these two nations agree on a plan, there will be very little progress in either direction. The populists are still influential in all of the major EU states, but all have reached their natural boundaries as far as political influence is concerned. They are unlikely to rule unless as part of a broader coalition, but they are able to play the role of spoiler even when they are kept on the outside looking in—as has been the case in both France with the National Front and Germany with the AfD.

Russia: Putin Playing Defense at Home

The PRS Group

President Vladimir Putin won a six-year extension of his tenure as president by a landslide in an election held in March 2018, and his allies in United Russia control a comfortable majority in the national legislature. However, Putin’s stock has diminished in recent months, amid rumblings of discontent over the hardships resulting from a combination of weak economic performance and fiscal austerity, as well as the perceived corruption of a ruling class that shows little obvious concern for the plight of ordinary Russians.

A poll undertaken in January by the independent Levada Center revealed a first-ever instance of majority support for the dismissal of Prime Minister Dmitry Medvedev and the rest of the Cabinet. Given the very close connection between the president and Medvedev, disapproval of the prime minister can probably be assumed to be a rough proxy for sentiment toward the president.

There is in any case little immediate threat to the regime’s position. Elections for seats in the State Duma do not fall due until September 2021. Were discontent to persist to a point where United Russia’s continued dominance in the Duma is endangered, Medvedev could be called upon to take one for the team. If nothing else, firing the prime minister would send a signal that Putin recognized the depth of popular discontent.

It is an open question whether simply embarking on new foreign policy offensives would be enough to boost the government’s sagging popularity. Upcoming elections in Ukraine, where a presidential contest is scheduled for next month and parliamentary elections are required by late October, will provide a perfect opportunity for Putin to test that hypothesis. Russian security and intelligence agencies can be expected to use various cyber-related methods in an effort to influence the outcome of the Ukrainian elections, and toward the same end will be inclined to encourage a heightening of conflict in the Donbas, where a fragile truce has been breached repeatedly. Moscow has warned that it is prepared to take direct military action in Ukraine, if necessary, but Putin’s troubles on the home front are nowhere near a magnitude where the risk of provoking military retaliation by the NATO partners could be justified as politically expedient.

The economy has benefited from a moderate recovery in oil prices and the stimulus from infrastructure projects related to Russia’s role as host of the FIFA World Cup in 2018, but real GDP growth averaged just 1.6% in 2017–2018. Russia will be obligated to limit oil production under the latest OPEC-plus agreement, but the anticipated price rise may fail to materialize if the rapid growth of the North American shale supply undermines OPEC’s strategy. The pace of expansion is forecast to slow to 1.5%, and a recession is possible in the event of a significant tightening of international sanctions or a prolonged slump in global oil prices.

The analysis above is taken from the February 2019 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.

FCIB will present a webinar, Doing Business in Russia, that will include perspectives of credit professionals who do business in the country, including one credit manager who is based there. The webinar includes an economic overview and best practices for managing risk.

Trade Disputes, Fraud Aren’t Treasurers Biggest Concerns

PYMNTS.com

Corporate treasurers are increasingly concerned about a complex regulatory environment, according to the latest analysis from Strategic Treasurer and TD Bank.

The two published their newest Treasury Perspectives survey this week, a report that polled corporate treasurers and finance executives about their plans and economic outlook. The 340 survey respondents, based mostly in North America and Europe, revealed their rising concerns over political gridlock in the U.S. and challenging monetary policy, which contributed to an overall decline in corporate confidence.

Both corporates and banks have said Know Your Customer (KYC) regulations are their most pressing compliance concerns, with nearly three-quarters of businesses with more than $1 billion in revenues pointing to KYC as their top challenge. Slightly more than half of respondents said current regulatory pressure is higher than historically considered to be the norm (while only 2% said it’s lower), and half said they expect those regulatory restrictions and oversights to increase in the next year or two.

Taking a deeper look into the current regulatory and political climate, Strategic Treasurer and TD Bank found that rising interest rates are the greatest concern, as is a “gridlock in DC” and an overall rise in complexity of current regulations. Trade concerns and the risk of an economic recession also made the top-five list of biggest concerns among treasurers and finance executives.

Unfortunately, the report finds, recent tax reform in the U.S. has only had a minimal impact on the corporate community. While 42% of treasurers surveyed in last year’s report said they expected U.S. tax reform to provide a significant benefit, nearly half said in 2019 that there has been no significant impact on their companies at all. Only 15% said tax reform boosted their total income, while 12% said financial performance has improved.

With regards to trade disputes, analysts noted that the conflict is expected to make “ripples, not waves.” Most businesses said trade disputes have not had an impact on their organizations so far, while only 18% said the conflict has made doing business more expensive, whether through an increase in the cost of procuring goods or of their own products sold to customers.

On the whole, corporate sentiment has deteriorated since last year’s report, according to Strategic Treasurer and TD Bank.

“Ten percent fewer organizations expect the GDP of their headquarter country to increase in 2019 than they did in 2018,” the companies noted in the announcement of the report. “In addition, 7% fewer businesses reported optimism in their organizations’ outlook than last year. These year-over-year swings show that organizations are increasingly wary of an economic slowdown following years of low rates and high growth.”

Technological Troubles

Separate from issues of politics and regulation, corporate treasurers are facing challenges related to the digitization of their organizations.

Strategic Treasurer and TD Bank found in their survey that the majority of respondents said manual processes are their biggest operational challenges today, more so than issues like fraud, regulatory changes or staffing. Most also said payments management is the most time-consuming process, followed by cash forecasting.

More than one-third admitted that they lack sufficient time to adequately perform all their responsibilities, with cash forecasting and risk management processes put on the back burner most often.

Continued challenges related to manual processes reflect the struggle organizations are facing to digitize. While 75% of treasurers said they are excited about technological innovation (and that they would rather upgrade technology than add new staff), actual adoption of automated technologies remains low. Furthermore, more than one-third of survey respondents said they are not adequately preparing for technological disruption, with only 7% having adopted artificial intelligence. Even fewer—5%—have adopted blockchain, and only 2% use cryptocurrencies.

Reprinted with permission from PYMNTS.com.

Learn about some of the common due diligence pitfalls and how to avoid them by attending the session, “Conducting International Due Diligence,” at the 123^rd NACM Credit Congress in Aurora, CO. The session will also consider how to supplement information found in credit reports and what steps to take to conduct a comprehensive credit investigation as well as include a checklist of best practices and tips from credit professionals who conduct due diligence regularly.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations