Week in Review

May 13, 2019

Global Roundup

U.S. hikes tariffs on Chinese goods, Beijing vows retaliation. President Donald Trump’s latest tariff hike on Chinese goods took effect May 10, and Beijing said it would retaliate, escalating a battle over China’s technology ambitions and other trade tensions. (AP News)

Iran to restart some nuclear activity in response to U.S. withdrawal from nuclear deal. Iran will restart part of its halted nuclear program in response to the U.S. withdrawal from a landmark 2015 nuclear deal but does not itself plan to pull out of the agreement, the state-run IRIB news agency reported on April 29. (Reuters)

Federal Reserve warns as risky corporate debt exceeds peak crisis level. Companies with large amounts of debt are borrowing more money at a breakneck pace, prompting the Federal Reserve to flag the trend as one potential risk in the financial system. (New York Times)

South Africa election: ANC hails Ramaphosa for staving off defeat. President Cyril Ramaphosa saved the African National Congress (ANC) from a crushing defeat in this week’s general election, senior officials in South Africa’s ruling party have said. (Guardian)

Russia’s Venezuela motives: It’s about the U.S., not Maduro. Historically, when Washington and Moscow have butted heads over a power struggle in a third-party nation, it’s been in a Cold War context. But the core issue over their divide on Venezuela today is simpler: staking out turf. (CSM)

China state funds prop up stocks. Chinese state-backed funds were active in buying domestic equities on May 10 after they had slumped in the wake of the Trump administration imposing the biggest hit yet to China’s exports to the U.S. (Bloomberg)

New NAFTA: The road to passage looks bleak. The revised version of the North American Free Trade Agreement (NAFTA) looked one step closer to becoming a reality last week, after Mexico adopted a set of major labor reforms which will level the playing field somewhat between its workers and those to the north—a key sticking point for U.S. and Canadian negotiators. (Global Trade Review)

Explaining Argentina's financial crisis: Macri, Cristina and the specter of populism. President Mauricio Macri remains extremely fragile as he looks forward to October’s electoral bout, where he will most probably face off with Cristina Fernández de Kirchner. Is Macri’s political career over unless he steps aside and allows Buenos Aires Province Governor María Eugenia Vidal to take his spot, in order to beat Cristina? (Forbes)

Iran’s oil exports implode as sanctions sting. Waivers on U.S. sanctions for Iranian oil purchases expired earlier this month, and there is evidence that most countries are steering clear of running afoul of Washington. The result is an absolute plunge of oil exports from Iran. (Oilprice)

Ebola outbreak threatens to escalate as violence rises. The Ebola outbreak in the Democratic Republic of the Congo is threatening to spiral out of control, with ongoing violence aimed at the Ebola response workers undermining efforts to stop spread of the deadly virus. (Stat)

Belt and Road: Linking up Europe and Asia. Six years after it launched its “Belt and Road” initiative, China promises to improve the transparency and sustainability of its massive transport infrastructure program as a way to dispel European concerns. (EurActiv)

Escalating Tensions Over Iran

Chris Kuehl, Ph.D.

The Iranian government has started to renege on some of the agreed upon nuclear deal in response to the U.S. decision to pull out of the agreement altogether. The Iranians made it clear this would be their course of action when the Trump administration elected to withdraw, but they delayed the decision for a few months at the request of the Europeans.

The position of the European signatories was in opposition to that of the U.S., and there had been some hope this would be enough to keep Iran in the plan. That now seems less likely. In a nutshell, the Iranians will resume several of the activities that would be required to continue developing nuclear weapons capability, but still stop short of actually building the weapons. If the activity is resumed, it is estimated Iran would be less than a year away from having weapons capability.

The original plan was for Iran to go through a number of phases designed to transition it out of global pariah status. The carrot in all this was economic—lifting the sanctions compromising the nation’s economy. Fully 90% of the national income derives from oil; the sanctions have been squarely aimed at this sector. Most of the effort has been directed at limiting where Iran can sell its oil. In return for limiting its development of nuclear weapons capability, the sanctions would be eased. The Europeans have been OK with this measured approach, but the Trump White House has not.

There are at least three other areas of concern as far as Iran is concerned—at least as articulated by the U.S. The first is Iran continues to support insurgent groups the U.S. and its allies oppose. The money that Iran earns from oil sales will find its way into the coffers of groups like Hamas, Hezbollah and other Shiite-based radical groups. It seems the U.S. places a very high priority on ending that set of relationships.

The second issue for the U.S. is Iran’s opposition to Israel. There has been consistent hostility between the two nations for decades. Israel has promised preemptive strikes against Iran’s nuclear program while Iran backs the Hamas organization in its fight against Israel.

The third issue is Iran has often taken a position on oil production that goes counter to the preferences of the U.S. as it has been aggressive in terms of hiking oil prices. The challenge for Iran is that it can’t afford to cut production as a means by which to push per barrel prices up—it needs the revenue too much. In addition to these issues, there is the fact that Saudi Arabia and Iran are longtime rivals, while the U.S. counts the Saudi Kingdom as an ally.

The U.S. has moved to tighten the sanctions imposed on countries that seek to buy Iranian oil. This has created consternation within Iran and among some of those that buy from Iran. The U.S. has further ramped up the confrontation by moving naval assets into the area and threatening further deployment of bombers. The assertion is there have been provocative moves taking place in Iran. That most likely refers to the ramping up of activity that can impact weapons development. The deployment of U.S. bombers can be seen as a not-so-veiled threat to strike against some or all of these facilities. This would be a clear act of war and retaliation would be expected. The question is whether the Russians would step in and maybe even the Chinese given their need for Iranian oil.

Payment Delays in Mexico Increase for One-Third of Survey Participants

About one-third of the credit professionals who participated in FCIB’s April 2019 International Credit & Collections Survey on Mexico noted an increase in payment delays.

Overall, 55% cited no change in payment delays, 8% experienced no delays and 5% saw delays decreasing. Cash flow issues (29% of respondents) were identified as the leading cause of delays, followed by cultural norms and customs (26%) and billing and other disputes (each at 9%).

The majority of survey participants (95%) sold to existing customers with 93% extending credit terms. More than half of the participants (60%) offered terms of 31 to 60 days, nearly a third (32%) set terms at 30 days or less and the remainder (8%) extended terms of 61 to 90 days. Average days beyond terms were 21.3 days.

Advice from credit professionals conducting business in Mexico included learning about Mexican regulations for imports and payment, asking for financial statements and retaining some type of leverage such as holding orders to motivate customers to pay.

“Understand the law, know what your leverage is and stay on top of balances,” a credit manager advised. Another suggested working with well-established companies. “Mexico has a lot of companies that come and go quickly,” he said. Yet another agreed. “My company is unique in that our customer base in Mexico is primarily long-standing customers that we sell on terms. Our risk is manageable due to this length of doing business.”

The April 2019 International Credit & Collections Survey also covers Australia, Canada and the United States. FCIB members can access the full results of the survey as well as the survey archives via the FCIB Knowledge Center. Nonmembers who participated in the survey will receive the results via email. Participation in the survey guarantees you will receive the results whether you are a member or not and furthers the collective knowledge of global credit professionals by sharing real-time credit and collection experiences. The monthly survey is open to all credit and risk management professionals.

The next survey opens May 20 and will cover Colombia, Ecuador, Trinidad and Uruguay.

Luxury Markets Face New Challenges

Last year, the luxury market grew by 5% (to Eur 1.2 trillion), driven by rising consumption in China with a growing middle class. Chinese consumers now account for 33% of global purchases of luxury products, and they are expected to account for 46% of the global luxury market, representing both an opportunity and a threat to the luxury industry, which will be increasingly subject to the economic uncertainties of this middle class, more sensitive to possible losses in purchasing power.

Luxury also faces other threats such as counterfeiting. In this market, estimated to reach USD 1.8 trillion in 2020, counterfeiting often damages the image in addition to the financial damage to targeted brands. Driven by the same desire for social recognition, the purchase of counterfeit luxury goods impacts both the desirability of the brand and the confidence of buyers. For example, a study in the United Kingdom shows that 66% of consumers who had purchased a counterfeit product without their knowledge no longer had confidence in the brand in question and 44% went so far as to stop buying brand goods for fear of counterfeiting. On the other hand, some counterfeit goods boost the reputation of the original brand, creating a desire to own an original item of that brand.

E-commerce also has a very particular impact in the luxury industry. While it represented only 10% of sales in 2018, it is expected to increase to 25% in 2025. However, many brands resist e-commerce for fear of counterfeiting competition on the one hand (if it is public knowledge that you do not sell online, the buyer will have less chance of being fooled), but above all to preserve the unique bond forged with the customer during the purchase experience in their stores, a key element of loyalty and differentiation.

The health of the luxury market is therefore well linked to various global factors and is not totally disconnected from the rest of the economy. While prospects are good despite the global economic slowdown expected (Coface expects global economic activity at 2,9% in 2019 from 3,2% in 2018). Chinese economic activity, e-commerce and counterfeit products constitute risks that can penalize the luxury market but also create opportunities. It is up to luxury brands to remain vigilant to maintain their specificity while taking into account the evolution of their environment.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations