Week in Review

July 22, 2019

Global Roundup

Turkey appears poised to retaliate against the U.S., prompting Pentagon warning. Ankara has dispatched forces to its border with Syria, analysts say, in an attempt to gain leverage as Congress pushes for sanctions over Turkey’s purchase of a Russian missile system. (US News)

U.S. says Navy ship “destroyed” Iranian drone in Gulf. The United States said on July 18 that a U.S. Navy ship had “destroyed” an Iranian drone in the Strait of Hormuz after the aircraft threatened the vessel, but Iran said it had no information about losing a drone. (Reuters)

Europe dived into negative rates and now it can’t find a way out. Europe’s unconventional experiment with negative interest rates to spur economic growth and inflation is looking like a trap. (HSN)


Making Sense of Robotic Process Automation

We hear a lot about robotic process automation, or RPA, in the news lately, but do we really understand how it has and will impact the global business-to-business credit department in the near future?

Find out exactly what RPA is and what it means for credit professionals by attending the FCIB International Credit & Risk Management Summit, Oct. 14-16, in Hamburg, Germany. The session, Making Sense of Robotic Process Automation,  will help identify credit functions that are ripe for RPA, how the technology affects workflows and much more, including the lessons learned through one credit manager’s journey toward optimization.


EU slaps sanctions on Turkey over gas drilling off Cyprus. European Union foreign ministers on July 15 turned up the pressure on Turkey after approving an initial batch of sanctions against the country over its drilling for gas in waters where EU member Cyprus has exclusive economic rights. (Business Mirror)

Venezuela’s black market comeback hints at looming devaluation. After months looming in the background, Venezuela’s black market is back. The difference between the black-market price to buy dollars and the official rate is blowing out after months of relative stability. In just one week, the bolivar has depreciated 18% against the dollar on the streets where the currency is traded informally. (Bloomberg)

EU farm chief struggles to dispel concerns over Mercosur trade deal. The EU’s Agriculture Commissioner, Phil Hogan, sought to address national concerns over the proposed EU-Mercosur trade deal during a meeting with the bloc’s 28 farm ministers on July 15. (EurActiv)

EU, Canada trade warm words at bilateral summit. Canadian Prime Minister Justin Trudeau launched the Canada-EU summit July 17 by praising the “progress” resulting from CETA, their free trade deal, while European Council President Donald Tusk called Ottawa the bloc’s “closest transatlantic partner.” (EurActiv)

Amid the U.S.-China trade war, Vietnam emerging as a rising star. As the U.S.-China trade war continues to escalate with no relief in sight, American businesses are scrambling to find solutions to avoid the hard-to-swallow 25% tariffs on imported Chinese goods. One silver lining from the protracted conflict is China’s neighbor to the south and, at one time, one of America’s staunchest enemies, Vietnam. (Global Trade Magazine)

Five Charts explain Vietnam's economic outlook. Despite rising trade tensions and volatility in emerging economies throughout 2018, Vietnam’s economy saw broad-based growth and low inflation. Government spending and debt remained in check and bank capital rules were strengthened. Current economic risks relate to geopolitics, trade policy uncertainty and domestic reform implementation. (IMF)

Hong Kong’s economy starts to feel effects of protest chaos. Hong Kong is beginning to reckon with the economic cost of ongoing protests against the government’s extradition bill, as the disruption risks driving away local shoppers and deterring tourists from mainland China. (Bloomberg)

Trump and Xi struggle to find path forward in trade war talks. Slow progress on key initial demands from Presidents Donald J. Trump and Xi Jinping is raising doubts about whether the U.S. and China will actually return to the negotiating table to overcome their much deeper differences. (Business Mirror)

Building value with blockchain technology: How to evaluate blockchain's benefits. This practical framework helps organizations identify the value of blockchain technology and build a corresponding business case. (World Economic Forum)

What Brexit could mean for the U.S. economy. After three long years of negotiations and the possibility of a no-deal Brexit rising every day, economists have predicted what it could all mean for the U.S. economy and its financial markets when the U.K. does finally leave the EU. (HSN)



Why Have the Trade Threats Not Been an Issue?

Chris Kuehl, Ph.D.

Statements from almost every analyst and economist have been consistent—even the White House has been warning there would likely be price hikes, but these would be worth it in the end.

Comments from Fed Chair Jerome Powell have been direct enough—the only factor that would persuade the Fed to lower interest rates would be the struggles of the global economy and the impact that a trade war would have on the U.S. economy.

The data has been clear enough, or so it would seem. The U.S. depends on exports for around 15% of its GDP. The tariffs that have been leveled have affected billions of dollars of goods. The U.S. has seen a decline in imports from China and other countries and has seen a decline in demand for U.S. goods, but not to the levels that had been anticipated. Why not? Have all these threats been overblown? Have the tariffs really been on anything important? There are three reasons that have been posited for the lack of response.

The first is based on the fact that tariff policy has been very uneven and has been far more talk than action. There were threats to end imports of foreign steel, but then the four-largest importing nations were all given exemptions and hundreds of U.S. companies no special exemptions that allowed them to buy that imported steel. Threats were made to place additional tariffs on China, but there was no follow through. The Europeans were threatened with tariffs on cars and car parts, but that never reached implementation either. Tariffs have been threatened against Mexico, but they were not executed. In fact, there have been very few tariffs imposed on anyone although almost every country in the world has been threatened with them. The end result is that consumers have not seen a reduction in the product mix they are accustomed to and have not seen much in the way of higher prices.

The second rationale is companies that have been affected by the tariffs have not passed on the additional costs to the consumer. The tariffs imposed have mostly been on Chinese goods. The expectation was these prices would escalate due to the tariffs. The companies affected have been more concerned with market share and have resisted the price increase that would be triggered by the tariff. This is not a position that can be maintained forever, but given that many of the Chinese companies are state owned, they will have the support of the government to a degree. That allows them to hold the line on pricing longer than would be the case for companies without that backing.

The third reason for the lack of response has been the quick reaction from competitive nations eager to chew into that Chinese market share. Vietnam has seen a 60% increase in exports to the U.S. and India has seen a similar ramp up. Many assumed there would be a reaction from China’s competitors, but few assumed it would be this swift. The tariffs that have gone into effect thus far have been targeted at the industrial community and replacing Chinese production has been relatively simple. If the tariffs on consumer goods are imposed, it may be harder for the rival nations to react, but they will certainly try.

The bottom line is that trade wars and tariffs remain a threat, but the uneven execution of the policy combined with the development of alternatives has limited the impact for the moment. That could change quickly should these threats actually become reality. Nobody really knows what would trigger this.




Mexico’s Populist Initiatives Dent Confidence

At the general election held in mid-2018, Andrés Manuel López Obrador (AMLO) became the first presidential candidate to win an outright majority of the popular vote since Mexico held its first truly competitive democratic election in 1988, and the three-party left-right coalition backing his bid secured comfortable majorities in both chambers of the Congress. As such, there was every reason to expect that AMLO would be able to govern pretty much however he pleased upon taking office in December, a fact that contributed to both very high expectations among his supporters and deep concerns on the part of his opponents.

Efforts to assuage the latter by portraying AMLO as a pragmatist have been undermined by the ample evidence that the president much prefers to don the mantle of populism, and the resulting damage to private-sector confidence increases the likelihood that the prosperity anticipated by his supporters will fail to materialize. While diversions such as AMLO’s diplomatic sparring with U.S. President Donald Trump may help to delay the onset of disappointment, unmet expectations will eventually produce discontent, creating an incentive for the president to ramp up his populism.

AMLO promised to strengthen the social safety net, boost spending on public investment and reduce economic inequality while holding tax rates steady and maintaining a surplus in the primary budget balance. The 2019 budget released in December more or less fulfills that pledge, but the projections for the fiscal balance assume real GDP growth of 2%, a target that is almost universally seen as unrealistically optimistic, and a boost in oil revenues resulting from increased investment by the state-owned oil company, Pemex. In fact, oil production fell to just 1.65 million barrels per day (bpd) in January, the lowest figure reported by the company since such data was first made public in 1990, an ominous development for a company that accounts for one-fifth of the national budget financing, and is already in debt to the tune of more than $100 billion.

Expectations that Pemex will require even greater financial assistance from the government prompted downgrades to the company’s credit rating, which in turn has raised concerns about sovereign creditworthiness. The doubts about Pemex’s financial stability have been reinforced by AMLO’s decision to halt his predecessor’s program of energy-sector liberalization. Although the government has pledged to honor contracts concluded with foreign firms under the previous administration, AMLO has imposed a three-year freeze on new auctions for oil and gas prospecting rights.

The analysis above is taken from the June 2019 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.


Beyond Correspondent Banking—Time for Cryptos and Blockchain?

There has been, seemingly, a parade of announcements geared toward bringing business-to-business (B2B) payments into the digital age, bringing about the end of paper, speeding the time for settlement of transactions and making payments across borders cheaper and more transparent.

In some cases, blockchain is being deployed, sometimes with cryptocurrencies as part of the equation. In one example, Visa’s B2B Connect launched in June, uses fiat currencies and elements of distributed ledger technologies (DLT). In another example, also in June, MoneyGram and Ripple struck a two-year strategic partnership to use Ripple’s xRapid product, where the goal is to leverage the XRP cryptocurrency for foreign exchange settlements in MoneyGram’s cross-border payments.

As cryptocurrencies gain, well, currency, and as heavyweights such as Facebook gear up to bring digital coins beyond being tools of speculation and volatility—might they help transform B2B beyond the way it has always been done, and disrupt the correspondent banking process?

In an interview with PYMNTS, Sonny Singh, chief commercial officer at BitPay, said that in terms of the broader landscape, commerce has become ever more global, and the standard system tied to correspondent banking is anything but efficient.

Consider that a payment that makes its way from Thailand to America can involve several different banks handling the transaction—and each bank assesses fees along the way.

Singh noted, too, that transactions can take two to five days to complete, and foreign exchange (FX) fees are not standardized. In the hypothetical transaction that moves from Thailand to the U.S.—let’s say it’s a million dollars’ worth of Thai baht—the U.S. side of the equation may receive the equivalent of $980,000, once fees are carved out.

Maybe it’s even more than $980,000. Maybe it’s less.

It should be evident that there is value in taking the guesswork out of the equation—and value lies, too, Singh asserted, in using cryptos and blockchain in B2B. His own firm, he noted, allows businesses to settle transactions for a variety of currencies and digital coins across a guaranteed exchange rate, for a 1% fee. Transactions settle in one business day, he said.

The corridors that are seeing the most uptake in using the blockchain/crypto offering for international payments include Asia to Europe, Asia to the U.S. and Latin America to Europe, especially among importers and exporters. In some cases, firms may find value in the model as they move funds internally, across far-flung units within the firm that span the globe.

In one example, he said one large firm, Avnet, has used BitPay for large transactions, and total costs have been cheaper than bank wires.

The Volatility

Cryptocurrencies have proven to be nothing if not volatile—and bitcoin, of course, has over the past few years been worth as much as nearly $20,000, as little as around $3,000 and now, at this writing, sits north of $11,000. There is also the likelihood, of course, that regulatory scrutiny in how, when and where cryptos can be used is only going to increase.

“We think regulation is great, actually,” Singh said. “We want to work with regulators and we do work with regulators. We want them to make it transparent as to what is legal and not legal, and the right way of doing [transactions].” He added that the firm performs routine checks to ensure that bitcoin (with transparency across the blockchain) is not being sourced from the dark web or other questionable locations.

In reference to volatility, Singh noted that a locked-in exchange rate helps protect against volatility. He said that BitPay’s B2B payments grew by 250% in 2018, despite the fact that bitcoin, at the same time, plunged 80%. Recent announcements of initiatives such as the JPMorgan stablecoin and Facebook’s Libra have helped validate the move to bring cryptocurrencies more broadly into international payments.

In terms of mechanics, BitPay receives the bitcoin payments from, say, a firm in Brazil and converts them to local fiat currencies on the other side of the transaction—in this case, in the United States (and into U.S. dollars), less the 1% fee. The settlement timeframe of a single day means, too, that there is no chargeback risk. If a customer wants a refund, they have to deal directly with the direct counterparty in the transaction, Singh said.

“It’s essentially like paying cash,” he told PYMNTS, as liabilities shift from sellers to buyers across the international stage.

The Challenges

Of course, challenges still lie ahead, chiefly focused on education, Singh maintained—where treasurers and corporates may be worried about holding bitcoin on balance sheets (here, they don’t), or for smaller firms that may find it hard to buy bitcoin in the first place. On that latter point, Singh maintained that cryptocurrency exchanges are proliferating globally in tandem with some regulatory oversight.

The uptake may accelerate with new rollouts of crypto and blockchain projects by marquee names, as has been seen with JPMorgan and Facebook (where executives are familiar with and trust those firms through everyday interactions). But in the end, the crypto and blockchain model has a leg up over the thus-far entrenched correspondent banking system.

“We can tell you exactly how long it’s going to take and how much you’re going to make at the other end,” Singh told PYMNTS.

Reprinted with permission by PYMNTS.com.



Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations