Week in Review

April 22, 2019

Global Roundup

Venezuela skirts U.S. sanctions by funneling oil sales via Russia. President Nicolas Maduro is funneling cashflow from Venezuelan oil sales through Russian state energy giant Rosneft as he seeks to evade U.S. sanctions designed to oust him from power, according to sources and documents reviewed by Reuters. (Reuters)

Japanese manufacturing's steep downturn extends into April. Japan's manufacturing economy remained stuck in a downturn at the start of the second quarter as the global trade slowdown continued to take its toll on the country's exporters. (IHS Markit)

U.S.-Korea SME trade encouraged through new agreement. U.S. SMEs expanding into South Korea are set to benefit from a new government-sponsored help centre, which aims to demystify challenges related to the Korean market. (GTR)

EU and Canada to fight new US sanctions on Cuba. The European Union and Canada issued a joint warning against the United States Wednesday after Washington reported that it would enforce Title III of the controversial Helms-Burton Act, which will permit lawsuits against foreign investments in Cuba. (Global Research)

India cancels polling in southern constituency over 'vote buying.’ Indian election authorities have cancelled voting in a constituency in the southern state of Tamil Nadu after seizing more than 110 million rupees ($1.6m) they believe was meant to influence the outcome. (Aljazeera)

Heavylift shipping outlook clouded by slowing world trade. The multipurpose and heavylift shipping sector will see strengthening rates through 2019 fueled by rising project cargo traffic, but prospects thereafter are muted by an anticipated slowdown in world trade. (HSN)

U.S.-China trade deal will be more substantial than expected. After months of diligent negotiations, the U.S. and China are nearing an end to trade talks. Investors are expecting a resolution, but most assumed the deal would be unsubstantive. That’s where markets could be surprised. (Forbes)

Kim Jong Un turning up heat in North Korea with new military posturing. North Korean leader Kim Jong Un is cautiously turning up the heat after his unsuccessful summit with President Donald Trump in Hanoi two months ago. (USA Today)

What the Mueller report tells us about Russian influence operations. The redacted Special Counsel report released Apr. 19 confirms that the Russian government, through various proxies, carried out a multi-pronged campaign against the United States before, during and after the 2016 election. (Brookings)

Kremlin says Mueller report shows no evidence of Russian meddling. The Kremlin said on Apr. 19 that U.S. Special Counsel Robert Mueller’s long-awaited report did not contain any evidence the Russian state had meddled in the 2016 U.S. presidential election. (Reuters)

The Philippines’ shifting stance towards the South China Sea dispute. Philippines president Rodrigo Duterte has been known for his conciliatory approach towards China in relation to the South China Sea dispute, preferring to engage with Beijing as close trade and investment partner rather than a threat to its sovereignty. However, recent Chinese activities in the Spratly Islands are putting this stance into question. (Global Risk Insights)

Indonesia's president poised to secure another term. Early election results from Indonesia show the incumbent president easily securing victory against his old-guard challenger in the world's most populous Muslim-majority country. (NPR)

Commission: New NAFTA would deliver modest economic gains. President Donald Trump’s new North America trade agreement would give the U.S. economy only a modest boost, an independent federal agency has found. (AP)

Trade disputes make long-lasting mark on global supply chains. While the U.S. and China continue the tedious process of smoothing out trade tensions, possible new trade disputes are emerging between the U.S. and Europe, with analysts warning of long-lasting impacts on the world’s supply chain routes. (PYMNTS)

German Economic Recovery on Horizon?

Chris Kuehl, Ph.D.

There is little argument among analysts when it comes to assessing the state of the German economy in 2018. As well as the U.S. economy performed, the Germans seemed to face the opposite issues.

There was no real stimulus effort made by the inflation-wary Germans, and the majority of the economic players seemed to retreat into caution. Consumers were down and so were the majority of business people. The closely watched ZEW index was weak all year. This was bad news for the Germans and for the rest of the EU.

Now there appears to be a reversal under way as monthly economic survey readings are as high as they have been in months. In April, the ZEW index rose to 3.1, the first time it has been in positive territory since March of last year. Last month, it was a negative 3.6 reading, so this marks a six-point reversal. This poll looks at the consumer, manufacturers and the financial community.

The issues that dragged the economy down last year have not gone away, and the export sector is continuing to stall. The German manufacturing community remains stressed by the Brexit debacle because Germany was the U.K.’s biggest European trade partner. The economic travails in the eastern sectors of Europe affect the Germans most of all because Germany has been the biggest investor in this emerging region. The export sector is more than 50% of the total German GDP. That slowdown affected the whole country and by extension all of the eurozone.

The factors that have led to greater levels of confidence have been a combination of a resurgent consumer and government engagement in some crucial areas. The consumer has perked up due to the increase in wages that have taken place in the country as unemployment levels have fallen. In contrast, the U.S. has not seen the expected wage hikes that come with low levels of joblessness, but Germany has. The U.S. has struggled with people being hired for jobs for which they are not qualified. That means they are not getting paid as well as might be expected. This has not been an issue in Germany, and wage gains have translated into higher levels of consumer spending.

The government has engaged in some stimulus activity, but it has not gone overboard. There have been some lowered taxes and efforts to put people to work. The most interesting development has been the concentrated effort to get the migrants and refugees into jobs. The initial waves of immigrants were entirely dependent on state aid and were a clear drain on the economy. Now, the country has found jobs for them, and many have started businesses—making them contributors in terms of spending and taxation.

Massive Finance Gap Stunts Global Trade

Trade finance rejection rates are increasing in a third of institutions and underscore the challenge many businesses face when it comes to accessing funding for trade, according to a new BNY Mellon survey.

The trade finance gap remains a significant issue for global trade, the survey finds. The $1.5 trillion gap is affecting development and investment flows and financial inclusion, and businesses appear to be facing an increasingly uphill struggle in accessing the resources and support needed to fulfill their trade needs.

The survey report, Overcoming the Trade Finance Gap: Root Causes and Remedies, states that trade finance rejection rates accelerated in more than one-third (33%) of institutions surveyed in the past year. Additionally, nearly three-quarters (71%) of respondents cited compliance constraints and the inability of applicants to provide quality know your customer (KYC) data as a key factor influencing the volume of rejection rates. As a result, banks have had to be more selective in who they do business with and subsequently move away from geographies and sectors that appear to hold greater risk for less reward.

"Our survey has shown that a significant proportion of institutions are increasingly unable to provide trade finance due to heightened regulatory requirements as well as several other trends," said Joon Kim, head of global trade product and portfolio management, BNY Mellon Treasury Services. "This could have serious implications such as potentially widening the trade finance gap, compounding the lack of access to finance already being experienced by many businesses in emerging markets, and impacting the strength of global trade."

Participants also identified technology and regulatory revision as two potential approaches that could help narrow the trade finance gap. Specifically, centralized KYC databases could provide a technology-based solution, according to nearly two-thirds (61%) of respondents, while regulatory revision would most benefit from greater collaboration between banks and regulators, according to more than half (55%) of respondents. Additionally, risk-sharing partnerships with correspondent banks is seen as the most effective way of encouraging additional financing capability, while educating local banks and acting as advocates for trade finance are also key roles for correspondent banks in helping to alleviate the gap.

The survey took place between April 2018 and January 2019 and included responses from 100 global, regional and domestic banks, specialist trade providers and other market participants.

Turnaround in Industrial Cycle Hits Chemicals Sector in Europe, North America

Coface

The longest industrial boom in the last 30 years in the eurozone ended last November. The impact of this was felt in the first quarter of 2019. Global trade is slowing (2.3% forecast, against 3% in 2018), global GDP growth is expected to be the lowest since 2016 (forecast of 2.9%, down 0.3 percentage points from 2018) and companies are much less confident and are pushing back their investments. This year, the number of business insolvencies is expected to increase in 26 out of the 39 countries analyzed, compared to only 19 in 2018.

Unsurprisingly, European companies are the weakest. Coface anticipates a 3% increase in insolvencies in Western Europe and 4% in Central and Eastern Europe. In Germany, the erosion of business confidence in the manufacturing sector is much stronger than among its neighbors. The German economy's high degree of openness, combined with its exposure to risky destinations, such as Turkey, the United Kingdom, China and, to a lesser extent, the United States, are holding back international sales. Orders have dropped by more than 4% in March for manufacturers, which is the lowest since January 2017.

After the automotive sector, the assessment of which in Europe, North America and Latin America was downgraded by Coface earlier this year, it is now the turn of the suppliers of its inputs to suffer the consequences of falling automobile sales. Chemicals are particularly impacted. Petrochemical businesses are also sensitive to: rising oil and ethane prices; changes in the regulatory framework; and the behavior of consumers, who are increasingly concerned about the environment. This trend pushes Coface to downgrade the chemicals sector in the United States, Germany and the Netherlands to medium risk and to high risk in France, the United Kingdom and Italy.

The rise in oil prices (which should remain at a comfortable level, $65 on average in 2019, according to Coface) and the recent reorientation of the U.S. Federal Reserve’s monetary policy are helping to stabilize credit risk in the Middle East. Saudi Arabia's assessment is therefore upgraded to B. The textile-clothing and wood sectors are also benefiting from increased budget spending, explaining the upgrade of their assessments to medium risk. In the United Arab Emirates, the country assessment of which was improved last February, three sectors fall into the medium risk category: automotive, notably in response to the many infrastructure projects, including Expo 2020; retail, driven by stronger growth, investment and tourism; and textile-clothing, related to increased purchasing power and changing consumer behavior.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations