Week in Review

March 25 2019

Global Roundup

U.S. sees China trade pushback as Trump touts progress. Some U.S. negotiators are concerned that China is pushing back against American demands in trade talks, according to people familiar with the negotiations, even as President Donald Trump sounded optimistic about reaching a deal. (Bloomberg)

EU urges China to progress on demands to dispel “frustration.” The EU will give Chinese leaders a comprehensive list of demands next month to address the growing “frustration” among Europeans, and to improve bilateral cooperation as it reaches a critical junction, various senior EU officials explained. (EurActiv)

EU offers Brexit delay to May, steps up pressure on London. European Union leaders offered on Mar. 21 to delay Brexit until May 22 at the latest—but only if Prime Minister Theresa May can turn around massive Parliamentary opposition and win MPs’ backing this week for her withdrawal plan. (Reuters)

New pirates of the Caribbean: Growing instability in Venezuela. We often associate pirates with Blackbeard’s cutlass or a Somali fisherman’s Kalashnikov. However, their next hotspot could well be the turbulent coast of Venezuela. Globally, the threat of piracy, particularly that posed by armed groups from Somalia in the Indian Ocean, has been tackled with impressive and effective joint international efforts. In some parts of the world like the Caribbean, however, instability is growing. (Global Risk Insights)

Venezuela detains top aide to Guaido in move U.S. calls “big mistake.” Venezuelan opposition leader Juan Guaido said on Mar. 21 intelligence agents had detained his chief of staff during a pre-dawn raid, a move by President Nicolas Maduro that the Trump administration said would “not go unanswered.” (Reuters)

Transatlantic economy faces adverse conditions and slower growth in EU. The transatlantic economy of the U.S. and the EU has been increasingly stressed by potential tariffs on imports and changes in global stability, according to a new report by the American Chamber of Commerce to the EU. (EurActiv)

Fitch Ratings: Sharp deterioration in growth outlook but no global recession. Global growth prospects have deteriorated significantly since Fitch Ratings' last Global Economic Outlook (GEO) in December 2018, but while we have quite aggressively cut our forecast for 2019, we do not see the onset of a global recession, says Fitch's economics team. (Fitch)

Almost all U.S. employers still consider H-1B talent a lifeline. The Donald Trump administration may have narrowed the path for foreigners to enter the U.S., but nearly all American employers believe overseas talent is integral to their business. (Quartz)

The three R’s of export compliance: FTR, EAR and ITAR. You all know about the three academic R’s, of Reading wRiting and aRithmetic. But are you familiar with the three R's of export compliance: the FTR, the EAR and the ITAR? (International Trade Blog)

Michel Temer: Brazil ex-president arrested in corruption probe. Former Brazilian President Michel Temer has been arrested in São Paulo as part of a massive corruption investigation. (BBC)

In Argentina, President Macri needs to keep lid on peso or it's "Hola Cristina 2020." All eyes are on the Argentine peso as the gauge to measure whether or not incumbent Mauricio Macri can beat the expected challenger Cristina Kirchner in October. If the peso weakens yet again, Macri is a goner. (Forbes)




Crisis Continues to Spread in France

Chris Kuehl, Ph.D.

President Emmanuel Macron has been trying to regain some of the initiative he once commanded, but this has proven very hard to do. It has become clear that his mandate was weak from the very start and that he has made mistakes that have further complicated the situation. His victory was less about his real appeal and more about the fact that many citizens in France could not bring themselves to accept a government led by National Front candidate Marine Le Pen.

His reform ideas were not well developed until after the election was over. Once the French looked at them closely, there was intense opposition from a variety of groups. The labor unions had not been pleased to see the former Rothschild’s banker become president in the first place and have been ardent opponents from the start. He has not been able to capture the conservatives either. That leaves a rather fractured group in the National Assembly as his main support.

For the last several months, he has been trying to regain control over the protests and demonstrations that broke out when he suggested a hefty hike in the tax on fuel. This was supposed to advance the French in their quest to be more sensitive to climate change issues and was a nod to the left, but the gesture was utterly rejected by the unions and the left as they complained that the tax would be paid by the poor and working class. The protests have taken on a life of their own. Those that have hit the streets are demanding dozens of concessions and some are just interested in destruction for its own sake.

At the same time that Macron has been fighting to gain some traction in his own nation, he has been trying to position himself and France as the hero of Europe by pushing back on the populists and their anti-EU rhetoric. His calls for a stronger EU have not been embraced by the Germans and others, but many of these nations that have been affected by economic crisis in the past have long held that only the EU can protect them from the vagaries of the global economy.

Macron has almost completely reversed course when it comes to the U.S. and President Donald Trump. Once upon a time, there was an assumption by Macron that he had some kind of connection to Trump given that they were both essentially outsiders with a business background. It had seemed in early meetings between the two that Trump was willing to take some guidance from Macron, but the summit between the U.S. and France was a complete bust, and it made Macron look weak. That was the end of that relationship. Since then, the French leader has been very critical of the U.S. and is now attacking the proposed trade deal as far too one-sided in favor of Trump.

It is not clear what Macron can do to manage the violence. He has already made several concessions to the unions and the left in general, but it has not quelled the anger that keeps spilling into the street. He agreed to raise pensions, add various benefits to the workday and has tried to expand public services without altering the tax situation appreciably. This has been welcomed by some, but rejected by others as too little. The dilemma is the same as has faced every government in the EU and the world in general. The public wants more and more in the way of services, but is not willing to pay anything more in the way of taxes.




Brexit Delayed Again: What Does This Mean for Creditors?

The U.K. has received another extension on the deadline for a Brexit referendum. If members of Parliament approve Prime Minister Theresa May’s plan for leaving the EU, Brexit will be delayed from March 29 until May 22. If they do not, the U.K. has until April to develop a new one.

Creditors and financial markets continue to react to the fluctuating news, with several companies and creditors learning to adjust to the lack of certainty in the U.K.’s market.

“Ask the right questions. When you’re dealing in areas where there is some turmoil, conflict or any significant business change, ask standard questions, then ask a lot more to go with it,” said David Bernardino, ICCE, director of customer credit solutions at McNichols Company. “Drill down and really understand where the money is coming from. Understand what can impact your ability to get paid, and along with that, what has changed since you last did business with this customer?”

Amid further Brexit delays, the British Chambers of Commerce (BCC) downgraded its growth expectation for the U.K. economy, according to a recent article by Supply Chain Dive. This new forecast—down 0.1% for 2019—also assumes the U.K. will leave the EU smoothly with a deal. Lowering the expectations comes after fewer business investments and lower trade with companies in the U.K., meaning creditors may be seeing less of their U.K. customers, or those customers may have more difficulties paying.

But larger companies, according to a recent article by Bloomberg, have been experiencing less trouble. Since companies like BP and Plc do not rely heavily on the local economy, they likely will not have issues paying back creditors. Small businesses in the U.K. have carried much of the economic burdens from Brexit, and these companies will likely continue to struggle paying creditors.

Despite the hazy future for the U.K., according to a recent article by CNN Business, “Companies in Britain and the European Union have spent months preparing for a chaotic Brexit.” Fears loom around trade barriers shifting, something many companies have been keeping in mind, especially given all the time the markets have with each extension.

But like all credit decisions, a creditor should practice due diligence when working with a creditor in the U.K. Each company and market will be affected differently, and creditors should keep that in mind moving forward.

“Know where the finances are coming from. For example, you may be doing business with someone in England for years, and you think you have nothing to worry about,” Bernardino said. “And then you find out maybe their financing is largely supported by an international bank that resides in the European Union. This particular bank may be pulling out its financing due to Brexit.”

—Christie Citranglo, NACM editorial associate

On Tuesday, March 26, at 10 a.m. ET, London-based Jack Woodruff of Equinox Global Limited, will present the FCBI webinar, Doing Business in the U.K., which will consider the U.K.’s prospects and what happens next, among other topics.



Longer Payment Delays as Economic Growth Falters


The Chinese economy experienced some headwinds in 2018, and slower economic growth had implications for Chinese companies, according to Coface analysts.

For instance, the amount of corporate bond defaults quadrupled, reaching USD 16 billion, while the number of bankruptcy cases settled through the Supreme Court of the People’s Republic of China spiked to 6,646.

These pressures should be understood in the context of deleveraging efforts during the first half of 2018, which led to tighter liquidity conditions. This coincided with an escalation of trade tensions between the United States and China, which eroded consumer sentiment, in turn resulting in weaker consumption. Reflecting these adverse conditions, a majority of respondents believe it is unlikely that growth will improve in 2019 (59% vs. 33% a year ago). This is the first time this has happened since Coface started conducting China payment surveys in 2003.

Chinese companies have resorted to using longer payment terms to sustain business levels. Average payment terms increased to 86 days in 2018, up from 76 days in 2017 and in line with a trend that began in 2015, with terms being longest for the automotive and transportation sectors, followed by construction and energy.

Payment delays also deteriorated in 2018: 62% of companies experienced payment delays in 2018, with 40% reporting that they recorded an increase in 2018 (vs. 29% in 2017). More worryingly, the proportion of respondents experiencing ultra-long payment delays (more than 180 days) exceeding 2% of their annual turnover increased to 55% in 2018 from 47% in 2017. In Coface’s experience, 80% of ultra-long payment delays are never paid. When these constitute more than 2% of annual turnover, a company’s cash flow may be at risk.

The largest proportion of respondents experiencing ultra-long payment delays exceeding 10% of their annual turnover was in the construction sector (28%), followed by automotive (27%), and information and communication technologies (25%). The pharmaceutical sector recorded the lowest proportion (7%), ahead of the agri-food sector (12%). In addition, almost 60% of respondents admitted to using banker acceptance drafts and/or commercial acceptance drafts in place of cash for payments.

“After a period of buoyant growth, it seems that unavoidable structural headwinds are finally catching up with China’s economy,” explains Carlos Casanova, Coface’s economist for the Asia-Pacific Region. “The results of our survey of 1500 Chinese companies confirm that payment behaviors have deteriorated as a result of tighter liquidity and fierce competition, squeezing profit margins. As economic growth slows further, risks will intensify in sectors where a large proportion of companies suffer from high debt service.”


Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations