Week in Review

May 20, 2019

Global Roundup

Saudis blame Iran for drone attack amid calls for U.S. strikes. Saudi Arabia blames Tehran for a drone attack by Yemen's rebels that knocked out a key oil pipeline, as newspapers close to the palace call for "surgical" U.S. strikes on Iran. (US News & World Report)

China central bank to cut funding costs amid U.S. trade row. China’s central bank said on May 17 it will help reduce borrowing costs for companies, especially small firms, as part of a wider effort to support the world’s second-largest economy amid a trade war with the United States. (Reuters)

U.S. poised to remove steel, aluminum tariffs on Canada, Mexico. The U.S. is poised to lift steel and aluminum tariffs on Canada and Mexico in favor of stronger enforcement actions, according to people familiar with the matter, in a move that helps clear the way for USMCA ratification. (Bloomberg)

U.K.’s May to make new push on her Brexit deal next month. British Prime Minister Theresa May will try again next month to secure Parliament’s backing for a Brexit deal so that the U.K. can leave the European Union this summer, May’s office said May 14. (AP News)

Rationing begins, as Cuba braces for economic impact from Venezuela crisis. The U.S. has said Havana’s support for strongman Nicolás Maduro is helping him stay in power in Caracas; as punishment, the Trump Administration has imposed sanctions on Cuba. (Time)

Trump unlikely to ease up on China as U.S. prices hold steady. As the U.S. prepares to slap import duties on another $300 billion worth of Chinese products, expanding its tariff regime on goods from the country and shrugging off retaliation by Beijing, analysts said mainland manufacturers are becoming the main victims of the trade row. (Nikkei Asian Review)

Trump’s trade war is making Mexico great. If high tariffs persuade manufacturers to leave China, they won’t move to the United States. There’s a much cheaper option next door. (Politico)

Inside the ticking time bomb called Indian shadow banking. At the heart of the ticking time bomb that is India’s financial market lies its shadow banking sector. If the financial condition of these non-bank lenders deteriorates, it will spark an economic meltdown. (Quartz)

Angela Merkel says the postwar world order is over and calls for Europe to stand up to China, Russia, and the US. German Chancellor Angela Merkel said in a recent interview with the German newspaper Süddeutsche Zeitung that she thinks the postwar global order built over seven decades is over—and grouped the United States with China and Russia as rivals of Europe. (Business Insider)

In Brazil, reality check for new President Bolsonaro. Bolsonaro’s blockbuster pension reform is a no-show. Investors thought Brazil’s new government would be getting somewhere by now. They’re not. Economic growth forecasts are in decline and now under 1.5%, based on a survey of 81 economists published in the Brazil Central Bank’s weekly Focus report, released on May 15. (Forbes)

IMF reaches deal with Egypt unlocking final $2 billion in aid. The International Monetary Fund (IMF) reached an agreement with Egypt in its final review of the country’s economic reform program, unlocking $2 billion in aid. (Bloomberg)

IMF: Trinidad economy showing signs of improvement. The International Monetary Fund says it believes that the Trinidad and Tobago economy “has started showing signs of improvement” from the second half of 2017. (Nation News)

Now Is It Really a War?

Chris Kuehl, Ph.D.

There will be casualties, assuming this is not just another negotiating ploy of some kind. To note that the talks between the U.S. and China have been a political football from the start would be an understatement.

As we have described many times, the U.S. relationship with China is always tense and complicated. In no sense is China an ally for the U.S. For the most part, the relationship with China has been hostile given our widely divergent political orientations and foreign policy goals.

Furthermore, the U.S. is far from the only nation that finds itself in opposition to China or that struggles to balance a complex relationship. For the Trump administration, China has become public enemy No. 1. There is no appetite for compromise within the ranks of those who support him. Making a deal that doesn’t obviously favor the U.S. would be politically dangerous; but by the same token, the Chinese can’t be seen as having capitulated to the U.S.

The official word from the negotiators is that talks are ongoing and there remains an opportunity to reach a deal, but the decision by U.S. President Donald Trump to impose much higher tariffs on an additional $200 billion worth of goods is a significant escalation of the issue and makes such a deal that much harder to reach.

China has responded as one would expect—it will retaliate with the imposition of its own tariffs. That would very likely set off a series of responses and counter responses from the two nations. What makes the current impasse harder to overcome is the accusation made by Trump that Chinese negotiators have been reneging on promises already made. There is no evidence of this.

It remains to be seen whether China will really honor the commitments it has made as this has been an issue in the past, but there has been no backtracking on the promises made thus far and the Chinese are more than irritated by the assertion.

The Trump approach is based on the perception the U.S. has new leverage. It has been noted China’s economy has been limping along over the last year (although the numbers have improved in the last quarter).

Meanwhile, the U.S. economy has been performing very well with the unexpected 3.2% growth in the first quarter. This seems to give the U.S. the upper hand because it would mean China needs the U.S. more than the U.S. needs China.

That is not a very accurate assessment, however. This round of tariffs will hurt the Chinese—that much is certain. It is also certain that these will hurt the U.S. as well—especially the consumer. The vast majority of the goods that will be affected by the additional tariff will be consumer goods. The hike will be felt squarely by those who buy these products.

Up to this point, the tariffs have been on industrial goods and the consumer impact has been indirect. That is no longer the case. The major retailers have been fighting these tariffs as hard as they can. Now, they will have to decide what their next course of action should be.

Throughout the course of this war, there have been plenty of false starts and lots of disinformation coming from the Trump White House. The most egregious assertion has been that somehow the Chinese government is paying the U.S. money as if the U.S. suddenly had the ability to tax another country. This is not the situation by any stretch of the imagination.

Tariffs are paid by those who purchase the good that is now carrying an additional tax. The producer or seller of the good that has been targeted will have to make a choice as far as reacting to the tariff. The simplest reaction is to hike prices high enough to cover the tariff, but that will mean their product will be more expensive.

If the U.S. consumer has alternatives, the Chinese company will stand to lose market share. It may decide to absorb the cost of the tariff so that the U.S. consumer does not see a price hike, but that will not be a common or long-lasting response. For the most part, the goods affected by the tariff are not available elsewhere. That means the U.S. consumer will be forced to absorb the tariff cost.

In simplest terms, the Trump administration just imposed a 25% tax on U.S. consumers. In time, there will be companies in the U.S. and elsewhere that will start to produce their version of the product that has been hit with the tariff, but this will not be a swift development and the prices of that alternative will be high as well. If the Chinese-made good is 25% more expensive, the alternative good can be 24% more expensive and still a little cheaper than the Chinese good.

Then there is the fact that China will retaliate with tariffs and restrictions of its own. The U.S. doesn’t sell nearly as much to China as China sells to the U.S., but there are several critical areas as far as exports are concerned. The most vulnerable part of the U.S. economy is the farm sector because China has purchased a great deal from the U.S. over the years. This is the sector that China will target; one that has been struggling with other issues this year.

Even more challenging for the U.S. is the fact that many of the nations the U.S. sells to depend on selling to China. It is an issue that cascades quickly. If the Chinese economy slows appreciably due to this latest outbreak of trade hostility, they will be buying less from other nations in Asia or Europe or elsewhere. That will affect the economies of these other nations, and they will be buying less from the U.S. Given that 15% of the U.S. GDP is dependent on exports, this will create a problem. That unexpected growth that took place in Q1 was largely due to export expansion. Now that growth is in question as far as the rest of the year is concerned.

As noted, the talks are ongoing and both sides seem to be leaving the door open for a last-minute agreement that averts the explosion of a real trade war. The fear is that both Presidents Trump and Xi Jinping have been backed into a corner where they will not be able to reach a deal without seeming weak. Neither man can afford for this to take place. Trump is focused exclusively on the coming campaign and keeping his base of support happy. Xi has opposition to his reform agenda within the ranks of the Politburo and can’t afford to appear weak in his interaction with the U.S. It is also important to note there are other sources of conflict.

Global Average DSO Falls One Day

After hitting a 10-year high in 2017, global average days sales outstanding (DSO) fell by one day to 65 days in 2018, a sign of companies becoming more cautious in line with the global economic slowdown, according to a study by trade credit insurer Euler Hermes. As world GDP growth slows further this year, the firm expects DSO to reach 64 days in 2019.

Euler Hermes issued its annual review and forecast of global average DSO based on a sample of 25,000 listed companies across 20 sectors and 36 countries. DSO is a measure of how long it takes companies to collect cash from customers.

In 2017, the re-acceleration of world economic growth led to a noticeable rise in global average DSO, which reached its highest level since 2007 at 66 days, Euler Hermes noted. Companies placed greater trust in customers due to a better economic and financial background.

However, 2018 was marked by global uncertainty, which is expected to lead to a deceleration of global growth in 2019 to 2.9% year-on-year, according to Euler Hermes, compared with 3.1% year-on-year in 2018. Worried companies are tightening their credit conditions. As a result, DSO is likely to continue its downward trend to hit 64 days on average in 2019.

China once again recorded the longest average payment term in the world at 92 days (27 days above the global average), despite reducing its DSO (by one day in 2018 vs. 2017). This reflects the role of Chinese companies as “invisible banks” at a domestic level and for major trade partners, which is consistent with a less mature and less open financial system. But this is dangerous: It makes Chinese companies more fragile.

Despite usually having levels structurally lower than the rest of the world, in 2018, Canada and the U. S. still managed to reduce their DSO to 52 days and 51 days, respectively. This reflects cultural preferences but also shows that cash-rich companies in these countries can adapt rapidly to changing trends in global growth. In spite of weakening economic conditions, Norway (53 days), Sweden (57 days), the U.K. (52 days), Germany (54 days), Poland (59 days) and Belgium (59 days) all managed to lower their DSO, anticipating an upcoming deceleration of growth and adapting to rising difficulties in the car industry.

Mediterranean countries are a case for concern. They are lagging behind, including Greece (91 days), Italy (86 days), Morocco (84 days), Turkey (79 days), Spain (78 days) and France (73 days), where companies are back in the bad habit of getting paid late by their customers.

“This could be another illustration of the delay traditionally taken by European companies to anticipate the economic cycle,” said Maxime Lemerle, head of sector and insolvency research for Euler Hermes. “But it is dangerous to run out of cash as global growth and trade decelerate.”

Business-to-consumer (B2C) industries have a higher capacity, compared with business-to-business (B2B), to impose new terms of payments when needed. So, they are more likely to grant longer terms of payments for commercial reasons if they consider the cycle as not being too deteriorated. Indeed, in a macroeconomic perspective, as we are in a late phase of the cycle, and as they are exposed with a delay to economic fluctuations, B2C companies can be incited to continue proposing laxer terms of payment.

B2B industries are more directly and in an earlier manner impacted by the fluctuation of the economic cycle.

They are more cyclical by nature. They have already observed a global deceleration of growth, meaning upcoming economic hardship; as a result, companies fearful of being paid too late shortened their DSO in 2018.

Although it shows the lowest DSO level compared to all other sectors (30 days), retail must be watched carefully, as its DSO plummeted by 5 days on average last year. As the sector’s business model is turning upside down, it has strongly tightened up its overdraft facilities. Upstream sectors could be affected if retailers were to also increase their own days payable outstanding (DPO).

Companies in the electronics (2 days), machinery (1 day) and construction (3 days) sectors continue to suffer from the longest DSO with 89 days, 86 days and 82 days, respectively, in 2018—well above the global average.

ACH Logs 9% B2B Payments Growth in Q1

Data from the ACH Network shows growth in payment volumes and values across a number of classifications. That’s especially true in business-to-business (B2B) payments, where the numbers show 9% growth year-over-year.

More generally, the network reported that the total number of payments was up 5.8% from the previous year. In all of 2018, there were 27 billion ACH payments, with roughly $51 trillion in value that moved across the network.

Drilling down into the data, the overall average daily payments volume was up 7.5%. In February 2019, there was a daily record set, when the volume was past 100 million ACH payments per day. Online (internet-initiated) payments were up 10.3% to 1.6 billion.

In a statement, Nacha COO Jane Larimer said, “The [Q1] results show that the ACH Network is poised for another year of sustained growth. With additional enhancements to Same Day ACH coming later this year and into next year, the ACH Network will continue to meet the needs of the nation’s consumers, businesses and governments for fast and efficient payments well into the future.”

Separately, JPMorgan Chase has reportedly overhauled its blockchain platform that underpins the JPM Coin. Per reports on FXStreet, the bank’s version of the Ethereum blockchain has been changed to make it easier for firms to adopt and deploy. The company had announced a partnership with the Microsoft Azure blockchain service, through which the bank’s Quorum blockchain is preferred for Azure Cloud.

In other news, Deutsche Bank said it is working with Malaysia’s instant credit clearing system, DuitNow, to process payments for corporate clients. The bank said the real-time fund transfer platform boosts client payment times and transparency in Malaysia. According to commentary from Deutsche Bank, DuitNow serves to help Malaysia move from a check-based payments infrastructure to an instant credit clearing system.

As the bank noted in a release, Jacqueline William, head of global transaction banking for Malaysia, said, “We are supportive of the government’s efforts to modernize the payments infrastructure in Malaysia, and will continue to invest in such initiatives. DuitNow stands to greatly benefit our corporate clients by increasing the speed of local payments.”

By using DuitNow, companies do not have to provide employee bank data to facilitate payments or reimburse expenses. All that is required are national ID numbers. Instant payment by proxy is available in Singapore, Thailand and Malaysia, said Deutsche Bank, which added that cross-border money flows will be set to debut within ASEAN in the next 12 months.

Reprinted with permission from PYMNTS.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations