Week in Review

June 17, 2019

Global Roundup

Dublin risks driving U.K. into no-deal Brexit, DUP says. The Irish government is pushing the U.K. toward crashing out of the European Union without a deal, according to Jeffrey Donaldson, a key lawmaker representing the Democratic Unionist Party, which holds the balance of power at Westminster. (Bloomberg)

Protesters scuffle with Hong Kong police, government offices shut. Scuffles broke out between demonstrators and police in Hong Kong on June 13 as hundreds of people kept up a protest against a planned extradition law with mainland China, a day after police fired tear gas and rubber bullets to break up big crowds. (Reuters)

Tankers struck near Strait of Hormuz amid Iran-U.S. tensions. Two oil tankers near the strategic Strait of Hormuz came under a suspected attack June 13, setting one of them ablaze in the latest mysterious assault targeting vessels in a region crucial to global energy supplies amid heightened tension between Iran and the U.S. (Associated Press)

Trade tensions boosted international role of euro, ECB reports. Trade tensions, challenges to multilateralism and unilateral sanctions might be bad for the economy but they have helped boost the global use of the euro, the European Central Bank reported on June 13. (EurActiv)

Tariffs are forcing Big Tech to move production out of China. In response to the Trump administration's trade war with China, major tech companies are preparing to relocate key manufacturing operations. (Engadget)

U.S. and Russia: Developments in Venezuela. On May 14, 2019, Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State Mike Pompeo met in Sochi. The main topic of discussion was the conflict in Venezuela, which has recently strained Russia-U.S. relations. (Global Risk Insights)

Pentagon warns Turkey of sanctions over Russian missile system. The decision to start “unwinding” Turkey from the F-35 fighter jet program is the latest sign of strained ties between the two nations. (Foreign Policy)

The risks are rising that the dollar could lose its special global standing. Even exorbitant privileges can be lost. There are a number of factors suggesting that, over time, the U.S. dollar may be at risk of surrendering its lead, if not its role, as the world’s preeminent reserve currency. (CNBC)

Tour of China shows a nation girding for protracted trade war. Even as Trump threatens to raise import duties to painful levels, 10 days of meetings with Chinese officials, academics, entrepreneurs and venture capitalists revealed a nation rewriting its relationship with the U.S. and preparing to ride out a trade war. (Bloomberg)

Head of East Libya Parliament rules out talks before Tripoli captured. The head of a Parliament aligned with forces trying to seize the Libyan capital Tripoli from the internationally backed government said on June 13 there could be no peace talks until they had captured the city. (Reuters)

The growing risk of Saudi arms trade. Saudi Arabia is undergoing a difficult public relations crisis after the murder of journalist Jamal Khashoggi, affecting its arms trade with allies. People have been a lot more critical of the Saudi regime, which also includes its role in the Yemeni civil war. The issue is also bringing along strikes and protests. This may lead Saudi Arabia to act in a more aggressive way using rhetoric against Iran to shore up support. Global Risk Insights)

The fog of trade war: Can China outlast the U.S.? During the week of June 10, in response to mounting trade pressure from the U.S., Chinese President Xi Jinping called on the Chinese people to prepare for a “new Long March.” On June 11, Chinese state media cited the Korean War in touting China’s ability to dig in and grind down U.S. resolve. If it’s not clear, Beijing expects the trade war to devolve into a protracted, bloody slog. (Geopolitical Futures)

G-20 Concerns Build

Chris Kuehl, Ph.D.

The G-20 is a semiformal organization that is notorious for its diverse opinions on most major issues. After all, the 20 members are from all over the world and sport a wide variety of economic and political systems.

It is made up of the 20-largest economies, accounting for 90% of global GDP and 80% of global trade. Members include Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States and the European Union.

Group meetings vary as far as attendance, but regularly feature involvement by finance ministers and central bankers. The heads of each nation also attend from time to time. The next set of meetings will take place at the end of this month. In most cases, the agenda ends up looking like a litany of complaints aimed at various members. This time the agenda is unified and most of the ire is directed at the U.S.

Trade is the topic du jour. Global growth has been anemic over the last several months. For some of these nations, the slump has been measured in years. The reasons for this slowdown are complex to a degree, but there has been one factor that has attracted the most attention: U.S. trade policy.

Nearly every nation in the G-20 group has been subject to some kind of U.S. trade restriction or tariff under the Trump administration. This has slowed growth dramatically for some and has affected all of the member nations to one degree or another.

At the top of this list of concerns has been the ongoing rift between the two-largest economies in the world. It is not much of an exaggeration to note that the U.S. and China are the real engines of global growth because the rest of the world either sells to or buys from them.

The fact that some kind of deal has seemed tantalizingly close over the last several months has just added to the angst. The perception is that neither nation has been negotiating on the basis of economics.

It would seem obvious that both nations need the economic engagement of the other and that should be the basis of an agreement. The U.S. needs Chinese output, and the Chinese certainly need U.S. consumers. Politics has played a more prominent role than in the past. Both Presidents Donald Trump and Xi Jinping have domestic constituents that must be mollified and who are hostile to the idea of giving ground to their rival.

The old adage—When elephants fight, it is the mice that suffer—seems highly appropriate when discussing the reaction of the G-20. The slowdown in global trade has been profound. It appears there will be further revisions downward as the year progresses.

China has been affected by the trade war and has seen growth slow to around 6%—near recession in Chinese terms. The U.S. had been somewhat immune to all of this or so it seemed. Now, there is mounting evidence that exports are dropping quickly. That has affected the manufacturing sector as well as agriculture. The expectation is the U.S. economy will be lucky to grow at 2% for the rest of the year. That pace does little for the world as a whole.

Corporates’ Role in Helping Banks Tackle the Trade Finance Gap

There are a lot of factors that have converged to create a whopping $1.5 trillion in trade finance availability in the global economy today.

Banks’ risk appetite has lowered, while regulations, some financial institutions argue, have forced financiers to reallocate resources to compliance and risk mitigation efforts, draining the trade finance pot. Geopolitical issues like Brexit and trade disputes have complicated the risk factor as well. At the same time, continued use of paper in global business-to-business (B2B) trade, via invoices, contracts and paper checks, makes the process of monitoring and validating trade transactions more difficult for providers of trade finance (while also heightening the risk for fraud).

One of the most effective ways of combating all of these issues simultaneously is also one of the biggest challenges for banks in the trade finance space: digitization.

FinTechs have emerged into the space in an effort to bring technology and efficiency into the market, but according to previous analysis from the Asian Development Bank, FinTech hasn’t been able to make a dent in the trade finance gap yet. With traditional banks retaining the top position as source of corporate financing, these financial institutions (FIs) are facing growing pressure to address the gap—a feat that will require further digital overhauls.

Hardly a simple task for banks that often have decades-old systems in place, says Lyron Wahrmann, head of digitalization at trade finance technology company Surecomp.

“Banks are challenged in that they have implemented their trade finance systems 30 years ago,” he told PYMNTS in a recent interview. “These are complex systems that have since evolved a lot. They’re based on old and expensive technology, and going through a technological transformation is a very costly project.”

As such, multinational banks have taken a unique approach to digitization that may have less disruption to their back offices (and their wallets). Rather than ripping out the old, financial institutions are seeking technology that can act as a layer between legacy systems and the customer, enabling a way for corporate clients to interact with those systems in a digital, modern way.

Propelling this strategy is open banking and an API ecosystem, according to Wahrmann. APIs (application programming interfaces) enable data stored within siloed and disparate back-end systems to move more freely between each other and into those platforms that act as a bridge between the bank and the client. It’s a strategy proving successful in areas like payments, noted Wahrmann, and now the financial services sector is looking to apply it to trade finance, too.

He pointed to an array of use cases for APIs to grow banks’ trade financing activities, with the technology promoting transparency that can mitigate the risk of fraud, thus lowering the cost of financing. APIs also enable banks to deploy more sophisticated data analytics technologies that can also address risk and allow for more affordable, lower-value trade financing deals, thus broadening trade finance to smaller companies.

Getting Corporates Involved

Perhaps the biggest opportunities in APIs and open banking is the ability for banks’ systems to integrate directly with corporate clients’ systems. For trade finance that means being able to seamlessly integrate information from invoices and trade contracts, for example.

In order for that to happen, though, it is essential that corporates participate in the digital transformation. In their own back offices, that could mean embracing solutions that enable electronic invoicing and payments in global trade.

Wahrmann said he’s recently seen corporates participating in this environment by pushing for their banks to adopt technologies in a “let me help you help me” strategy.

This is also encouraging the FinTech community to get involved, both by providing technology to the banks directly, and by providing technology for the banks to offer their own corporate clients in order to address any interconnectivity friction that could stifle trade financing.

Ultimately, banks must evolve and embrace digitization in order to not only address the trade finance gap, but improve the customer service across their entire range of products and services. In the trade finance space, that doesn’t necessarily mean a complete overhaul of those legacy systems. Rather, technology can mitigate much of the friction of working with those existing tools, Wahrmann said.

But banks can’t do it alone. Whether by encouraging their financial service providers to adopt digital tools, or by going through their own digital transformations, global traders have a major hand in addressing the trade finance gap, too.

“The success of these types of bank-led initiatives ultimately depends on the collaboration from the corporate,” said Wahrmann, “because ultimately, they are the ones receiving the service by the bank.”

Reprinted with permission from PYMNTS.com.

Australia Plans for Faster Government Payments

Australia is continuing the process of cutting down government payment time to small businesses. Like several countries, including the U.S. and U.K., Australia is fighting a battle to pay its suppliers on time and within the allotted timeframe. New South Wales is currently in the middle of leading the charge to pay small businesses faster.

"We should be a model debtor," said Damien Tudehope, NSW small business minister, in an article with the Sydney Morning Herald (SMH). NSW is the first state to commit to paying suppliers within one week; however, others have also implemented prompt payment practices. Through the end of the year, NSW government agencies must pay invoices within 20 calendar days. Starting January 1, 2020, invoices must be paid within five business days of receiving a “correctly rendered invoice.” However, only 80% of eligible supplier invoices from registered small businesses need to be paid within the previously stated timetable.

“Big businesses [have been] using small businesses as banks—by the way, governments weren’t perfect either," Australian Small Business and Family Enterprise Ombudsman Kate Carnell said in the SMH article.

Instant credit card payments are being used for invoices up to AU$10,000, while payments between $10,000 and $1 million will fall into the 20-day, soon-to-be five-day, category. The new policy “contains ambitious targets, well ahead of contemporary business-to-business practices in Australia. Eligible small businesses can benefit from this policy by adopting electronic invoicing practices,” the NSW Small Business Commissioner Faster Payment Terms Policy states.

Small businesses do not have to register under the policy, however, and agencies are not required to pay all small businesses under the policy timeframe if invoicing requirements are not met. “Small businesses that elect not to register, or continue to submit paper-based invoices, will be processed in accordance with an agency’s general supplier payment policy,” according to the NSW Small Business Commissioner.

In the most recent FCIB International Credit and Collections Survey for Australia in April 2019, nearly a quarter of respondents said payment delays are increasing, while the same number reported they had no payment delays. Much of the delays are due to cultural norms and customs, but some stem from customer payment policies. Three-fourths of respondents grant payment terms within 60 days. The average days beyond terms was 19 days, up roughly a week-and-a-half from the prior the Australia survey in June 2018.

FCIB members can access the complete results of the survey and past surveys via the Knowledge Center. The monthly survey is open to all credit and risk management professionals, and participation in the survey guarantees delivery of the results. The information collected furthers the collective knowledge of global credit professionals by sharing real-time credit and collection experiences. The next survey will cover the following countries: Egypt, Saudi Arabia, Turkey and the UAE.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations