Week in Review

May 6, 2019

Global Roundup

Violent clashes rock Venezuela as Guaidó, Maduro vie for power. Opposition leader Juan Guaidó took a bold step to revive his movement to seize power in Venezuela, taking to the streets on April 30 to call for a military uprising that drew quick support from the Trump administration and fierce resistance from forces loyal to socialist Nicolás Maduro. (Associated Press)

Why is Italy still the sick man of Europe? Since the financial crisis, Italy has struggled to kick start its growth, and is lagging behind its European neighbors. But the causes of the country's malaise date back decades—and hope for change is meager. (Deutsche Welle)

South Africa election: Everything you need to know ahead of the vote. South Africans are preparing to vote for a new national parliament, 25 years after landmark elections ended white-minority rule. The African National Congress (ANC) has won every parliamentary vote since 1994, and polls suggest the ruling party will secure another majority on May 1. (CNBC)

UK auto industry facing financing, supply chain and Brexit woes. Amid a market slowdown and political disruption, a new survey of the U.K.’s mid-sized automotive manufacturers shows that as many as 96% of them are being held back because of insufficient access to financing. (GTR)

The economic outlook of the Middle East, North Africa, Afghanistan and Pakistan in five charts. In the best of times, countries in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region would face a formidable task of creating jobs for the millions of young people entering the workforce. Now, they must tackle this challenge amid a slowing global economy, volatile oil prices and uncertainty around trade tensions. (IMF)

Venezuela’s political crisis exposes divisions in EU. European countries urged restraint in Venezuela on April 30 and called for new elections as a way to settle the political crisis in the South American country, but there wasn’t a unified voice immediately on whether to support or condemn the opposition’s move to oust President Nicolás Maduro. (Business Mirror)

The ongoing US entanglement with Saudi Arabia over Yemen. President Trump’s veto over the Saudi-led war in Yemen represents a sharp divide between Congress and the White House over U.S. foreign policy. This is unlikely to be the last time this divide occurs, raising questions over U.S. leadership and its commitment to human rights. (Global Risk Insights)

Trade war forcing 93% of Chinese companies to transform supply chains. A vast majority of companies in China are being forced to reconsider their supply chain and production functions due to the trade war with the United States, a new survey has found. (HSN)

Agriculture is still vital to US trade talks—for now. Agricultural sectors in several countries will likely retain high levels of influence for another decade or so, but demographic change and technological advancements will eventually exert a stronger and more consistent influence, eroding farming's ability to shape trade priorities. (Stratfor)

Under Trump change, Cuba business partners can now be sued. The Trump administration’s decision to activate a provision of the U.S. embargo on Cuba allows Americans, and Cubans who later became Americans, to sue almost any company deemed to be “trafficking” in property confiscated by Cuba’s government. (Associated Press)

Maduro’s End?

As this story was being written, there is a long-awaited coup attempt in Venezuela. It is likely to be something that will unfold in layers for days. The news thus far is Juan Guaidó has called for the population to take to the streets to overthrow Nicolas Maduro. He made this announcement while flanked by various military officers and troops at a military base not far from the capital. The Maduro government has dismissed the activity as minor and fanciful and has called for loyalists to rally at the presidential palace. It has become a matter of who one chooses to believe as far as Maduro’s stability.

The desire on the part of the general population is clear enough. After years of worsening poverty, declining standards of living, widespread crime and the collapse of the oil economy, much of the country wants Maduro gone. What is not clear is who they want to replace him with.

The popularity of Hugo Chavez has not dimmed and many of those who oppose Maduro do so because they believe he failed and perverted the legacy of Chavez. They do not want a return of the oligarchs that once ran Venezuela.

Those who support and follow Guaidó want a more wholesale change from Maduro and the vestiges of Chavez. The most important consideration right now is the status of the military. The assertion by Maduro has been that the military is united behind him, but Guaidó claims that the majority of soldiers back him and have just been waiting for the opportunity to revolt.

These claims appear to be close to a final test. For the senior officers, the issue has been potential retribution. Will they be held accountable for actions carried out under either Chavez or Maduro? Even though Guaidó has tried to reassure the military leaders they will not be made to pay for their actions, the officers are well aware those in Guaidó’s camp are not yet comfortable with giving these military leaders a pass. There is also the not-so-small matter of losing power in the event of Maduro’s downfall.

The reaction of other nations will be key from this point. The U.S. has made it clear it wants Maduro gone, and the man who has been developing the U.S. response is National Security Advisor John Bolton. He has refused to rule out any kind of direct military assistance for Guaidó, but the fact that Russian troops have been placed in Venezuela has complicated these options immensely.

The Chinese have been pouring money into the country, but it doesn’t have the commitment Russia has. China is interested in preserving access to the region’s oil, but China also enjoys the fact that they can irritate the U.S. with this policy. The regional player with the most at stake is Colombia since they are being overwhelmed by the refugees—the latest estimate is that almost 2 million people have fled to Colombia in just the last couple of years. Every nation in Latin America has been on edge over the collapse of a nation that was once a legitimate economic engine due to its oil production.

At this point, the two most likely scenarios are equally risky and unpleasant. Option one is that Maduro is forced out to some degree but refuses to capitulate. He will take up a position in some regional stronghold, and his supporters will continue to fight and, thus, create a civil war environment for the country as a whole.

Option two is that Guaidó is defeated and his supporters will resort to the same kind of civil strike as they operate from their safe locale. Either of these options would likely bring outside forces to the fray. The U.S. may elect to try helping Guaidó directly and Russia might elect to assist Maduro directly. They elect to work through proxy nations as well, with the U.S. turning to Colombia and Russia turning to Cuba. The one thing that is certain is that chaos will prevail if Maduro chooses to try to stay in power.

Real-time Payments Arrive in Saudi Arabia

International payment systems provider Vocalink, a Mastercard company, has partnered with the Saudi Payments, a fully owned subsidiary of the Saudi Arabian Monetary Authority (SAMA), to launch real-time payments in the Kingdom.

The partnership will enable financial institutions, businesses and consumers to make account-to-account payments instantly, a market-first in the country.

The new technology will upgrade the Kingdom’s payments infrastructure, significantly speeding up digital commerce and enabling newer fintechs and financial institutions to take advantage of the benefits of a digital economy, according to the partnership.

“Real-time payments are transforming the financial services sector globally, showcasing tremendous potential in creating efficiencies across national economies and redefining the overall experience for users in Saudi,” said J.K. Khalil, general manager of Saudi Arabia & Bahrain, Mastercard. “Our partnership with Saudi Payments will foster further innovation across the Kingdom. We see this is a significant step in enabling the Kingdom’s transition towards a more digital economy.”

The new real-time payments platform will enable credit transfers, e-invoicing and billing, real-time payment acknowledgement, remittances and bulk payments instantly. The technology will also enable instant peer-to-peer money transfers between friends and family from their smartphones and without the need of the recipient’s bank details.

The payment system will use technology that is built on the latest ISO messaging standards, fostering further innovation and integration across the globe, the two partners added. It will reach the majority of financial institutions and accounts, working with Saudi Payments’ third-party services, supporting anti-fraud and compliance processes.

“This doesn’t appear any different than PayPal and other money transfer services we have in place today,” said Ed Bell, ICCE, senior manager, credit administration for W.W. Grainger, Inc. “I would need to see the details, but I’m sure you have to set up an account and pay fees on both ends to use this service. My company receives offers similar to this frequently. We simply determine costs vs. reward and proceed if it makes good business sense.”  

In theory, this sounds promising, added Tony Gregoras, fore-sight credit and collections manager for Edwards Lifesciences. “Throughout the Middle East, we’re constantly having to follow up on payments so this sounds good.” The bank fees associated with these instant payments could, however, make it less attractive, he added. “We would have to weigh that against wire transfer fees.”

The Pitfalls of Unsustainable Supplier Payment Terms

Lengthening payment terms between corporate buyers and suppliers have built up a bad reputation in the B2B space—thanks, in part, to payment practices deployed by large entities like Carillion in a demonstration of buying power abuse over smaller vendors.

However, the practice of negotiating B2B payment terms is not about companies getting away with delaying invoice payments as long as possible. At least, it’s not supposed to be, says Brian Shanahan, founder of working capital advisory firm Informita.

Shanahan also formed a database of supplier payment terms, Termscheck, as a way to provide visibility into existing agreements between buyers and suppliers, and to inform future corporate customers’ payment-term negotiations moving forward. Such a solution may raise concerns about how companies are wielding their buying power to lengthen payment terms, but when organizations focus on the importance of the buyer-supplier relationship, and prioritize the sustainability of payment agreements, both sides can win.

“It has to be beneficial to both sides,” Shanahan told PYMNTS of the process of negotiating supplier payment terms. “The buying company wants longer payment terms, but the seller wants to make sure they’re paid on time. Otherwise, customers are not reliable, and it endangers the financial investment they’re making in the relationship long term.”

While regulators and industry participants have raised the issue of longer payment terms for small suppliers as of late, Shanahan explained that doing so actually makes little financial sense for large companies. Small businesses (SMBs) make up only a fraction of a large organization’s overall procurement spend volume, so risking a negative reputation and supplier relationship for the sake of minimal capital expansion isn’t the smartest cash flow move.

Negotiating payment terms with larger suppliers, however, can offer cash flow predictability and reliability for both customer and vendor, he said, but it must be done correctly. That means customers must stick to agreed-upon terms (i.e., no late payments), and must wield their buying power appropriately and responsibly (i.e., no outlandishly long payment terms).

Of course, the reality of today’s market is far from ideal.

A History of Lengthening Payment Terms

Shanahan explained that B2B payment terms have gradually lengthened over the years, particularly in developed markets like the U.S., and in the wake of the 2008 global economic downturn. In many respects, payment terms lengthened simply because corporate customers were forced to do so to stay afloat. The problem, he said, is that, amid the economic rebound, those payment terms never bounced back to pre-downturn time frames.

Today, with concerns of a recession ahead, there is again the risk that organizations will stretch out payment terms even longer. In the U.S., for instance, it’s already common to see 120-day payment terms. Shanahan warned that, if and when another economic downturn emerges, companies cannot stretch their payment terms out any longer.

“Whatever you do,” he said, “it has to be done in a sustained way. Otherwise, it could spell big financial trouble.”

Not only are ultra-long payment terms an unsustainable strategy, but an over-reliance on supply chain finance can be as well, he explained.

In the U.S., low interest rates have opened the supply chain finance doors for organizations to extend payment terms, and offer affordable supplier financing so vendors can continue to ensure their own healthy cash flows. However, the threat and expectation of rising interest rates can make this strategy unsustainable.

“Particularly in the U.S., large corporates have implemented supply chain finance programs quite aggressively, and more often than not, they’re extending out terms to 120 days — which is very long, indeed,” Shanahan said. “But that effectively means the [vendor] has to pay a price to get their cash, or has to wait longer for it. There’s no security in the scheme.”

Rising interest rates mean supply chain finance would no longer be affordable for many firms. There is also the risk that a bank or other finance provider would back out of an agreement, or a corporate customer would be acquired, leaving vendors stuck with that 120-day payment-term agreement.

“If you look at some large U.S. corporations, particularly the ones that have gone the supply chain finance route, they’re stretching balance sheets to the limit,” Shanahan said, adding that many companies are paying back debt or issuing share buy-backs with the extended capital float, rather than investing in their organizations. “When they give it back to shareholders or pay off debt, that cash is gone,” he continued, again raising the issue of a lack of sustainable practices, especially with many predicting a recession.

Sustainable Agreements

With organizations increasingly viewing their vendor relationships as strategic partnerships, negotiating payment terms is part of the bigger picture of cash-flow management on both sides of a B2B transaction.

Businesses that use a solution like Termscheck are able to see data offered voluntarily by other businesses about the payment terms they have achieved with their suppliers. This gives a window into whether it would be possible to achieve a 30- or 60-day agreement with a specific vendor, which can often be impossible to know without such a database, said Shanahan.

Yet, organizations need to ensure that whatever agreements, financing programs and payment practices they set into motion are sustainable in the long term, through economic downturns and periods of growth. They must also work for both sides.

“Many years ago, someone said to me, ‘You can talk about relationships all you’d like, but if you don’t pay me, then I don’t have a relationship with you,'” Shanahan recalled. “It’s the fundamental building block of any buyer-supplier relationship.”

Reprinted with permission by PYMNTS.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations