Week in Review
August 5, 2019
Trump escalates trade war with more China tariffs. U.S. President Donald Trump has said he will impose a fresh 10% tariff on another $300bn (£247bn) of Chinese goods, in a sharp escalation of a trade war between the two countries. (BBC)
Risk of Iran conflict forces U.S. Gulf ally to rethink policy. The U.A.E.’s plan to scale back its role in Yemen is the clearest sign yet that it’s reevaluating its entanglement in Middle East conflicts against the backdrop of a U.S.-Iranian confrontation that has threatened to tip the Persian Gulf into a regional war. (Bloomberg)
Pound heads for worst slump since 2016 as Johnson sets ultimatum. The pound headed for its worst run of losses in almost three years after U.K. Prime Minister Boris Johnson raised the stakes over a no-deal Brexit, issuing an ultimatum to the European Union that he won’t start divorce talks unless the withdrawal agreement is reopened. (Business Mirror)
Venezuela’s economic decline among most severe globally. The International Monetary Fund (IMF) says the cumulative decline of the Venezuelan economy since 2013 will surpass 60% and is among the deepest five-year contractions the world has seen over the last half century. (Associated Press)
Fed cuts key rate for first time in more than a decade. The Federal Reserve cut its key interest rate on July 31 for the first time in a decade to try to counter the impact of President Donald J. Trump’s trade wars, stubbornly low inflation and global weakness. (Business Mirror)
Bolsonaro’s environmental policy: An increasing risk. President Jair Bolsonaro’s inauguration in January marked Brazil’s entry into the ranks of nations recently electing far-right leadership. In the first five months of his term, Bolsonaro has drawn particular ire for altering environmental policies. These moves will have devastating effects on Brazil’s environment, indigenous communities and ultimately, on Brazilian political stability. (Global Risk Insights)
Hong Kong protests highlight economic, governance risks. Disruptions to economic activity from recurring protests in Hong Kong present a downside risk to GDP growth forecasts, but are unlikely to undermine the territory's considerable financial buffers in the near term, Fitch Ratings says. (Fitch)
European manufacturing slump keeps economy under pressure. Manufacturing in the euro area shrank for a sixth month at the start of the third quarter, dragged down by Germany’s worst slump in seven years. (HSN)
Argentina can’t escape its economic curse. The 1890 Barings Crisis was the biggest sovereign debt meltdown of the century—and history just keeps repeating itself. (Bloomberg)
Italy’s economy struggles to transcend long-run stagnation. Global trade tensions have hit the eurozone’s industrial sector hard, and Italy—whose export-dependent economy emerged from its third recession in a decade at the start of this year—is particularly badly affected. (Financial Times)
Things are looking up for creditors with customers in the Middle East. According to the most recent FCIB International Credit & Collections Survey, more credit is being extended and fewer respondents are seeing increased payment delays. Saudi Arabia, Turkey and the United Arab Emirates each saw an increase in extensions of credit, while Egypt saw a slight decline in the number of respondents that extend credit to customers.
Saudi Arabia respondents increased credit extension to 70% of customers compared to 58% in the previous survey in November 2018. The existence of 0–30 terms was also established with one in four creditors offering the timeframe after no respondents reported those terms in November 2018. This is coupled with a huge drop in 91-plus-day terms (28% vs. 6%). Average days beyond terms also fell from 60 days to 44 days. As far as payment methods, wire transfer dropped significantly, making way for electronic funds transfers (EFT). More than half of respondents reported no change in payment delays, few respondents reported increasing delays. “If you choose to do business with [Saudi Arabia], it will be on their terms only. I would definitely consider cash in advance only,” warned one respondent.
Meanwhile, Turkey saw its average days beyond terms cut in half after being at 25 days in November 2018. Payment terms of 0–30 days also increased to nearly half of respondents offering the time period, resulting in less offerings for terms of 31–60 days, 61–90 days and 91-plus days. More than two-thirds of creditors said there is no change in payment delays, and only about a fifth said payment delays are increasing. Wire transfers and letters of credit are still the go-to method of payment, with slight increases in checks and EFT. Respondents cautioned others about doing business in Turkey, saying the country is on the verge of bankruptcy and that you should think twice about offering open terms to new customers.
In the UAE, only 10% of respondents are facing increased payment delays, while nearly three-fourths reported no change. Average days beyond terms declined by about a third to less than 22 days. Customer payment policy was the top issue for payment delays. Terms of 0–30 days and 61–90 increased, and 31–60-day and 91-plus-day terms declined. Much of the commentary on the UAE reverts to knowing your customer and establishing relationships with customers.
Egypt, the only nation of the four to have a decrease in credit extension, also reported lower average days beyond terms, dropping about 20 days. Wire transfer payments increased substantially countered with a sharp drop off of letters of credit in this survey. Just under three-fourths of creditors said there is no change in payment delays, and 13%, down from 33% from November 2018, said payment delays are increasing. Two-thirds of creditors grant payment terms of 31–60 days, while the other periods are each at 11%. Cash flow issues was the No. 1 cause of payment delays in Egypt. “It is very difficult to do business in Egypt. Make sure you know your customer very well and that they are credible, even if you have a [letter of credit],” said one respondent.
The International Credit & Collections Survey for Asia—China, Hong Kong, India and Singapore—is now open.
—Michael Miller, NACM Managing Editor
Credit Congress Spotlight Session: Take Your Game
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Speaker: Jake Hillemeyer, Dolese Bros. Co.
Duration: 60 minutes
Credit Congress Spotlight Session:
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Moderator: Chris Ring, Panelists: D'Ann Johnson, CCE, A-Core Concrete Cutting, Inc. and Eve Sahnow, CCE, OrePac Building Products
Duration: 60 minutes
Get Yourself Ready for 2024 - Goal Setting & Future Planning
Speaker: Hailey Zureich, zHailey Coaching
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Global Expert Briefings: Trade Credit Risks
Speaker: Jay Tenney, Trade Risk Group
Duration: 30 minutes
Chris Kuehl, Ph.D., NACM Economist
So much for those renewed trade talks. The U.S. delegation returned from China with nothing much to show for their efforts. The immediate reaction on Trump’s part was to ratchet up the tension and impose more tariffs on goods that had not been subject to restrictions before. The market reaction was immediate and negative as stocks fell dramatically and government bonds gained in value as investors sought financial havens. There is an emerging assessment that is creating a great deal of worry. This latest round of tariffs may be the straw that breaks the camel’s back given all the worrying data that has been issued regarding the global economy. Strategically, there seems very little to be gained by this latest escalation; however, the Trump reaction seems more petulant and personal and unrelated to any kind of trade goal.
As a tactic designed to alter China’s trade behavior, the imposition of tariffs and other restrictions had already made their point—without having a major impact on the U.S. economy and U.S. consumer. Intensifying the attack risks doing real damage to the U.S. economy without adding appreciable pressure on China. The trade wars have already been a major factor in the overall decline of the Chinese economy as it has seen its GDP growth fall to levels not seen in 20 years. The U.S. tariffs have been targeted to a degree and have affected the Chinese more than the U.S. The Chinese retaliations have stung the U.S., but there has been some wiggle room of late as U.S. farmers have been able to sell more soybeans and other goods to the Chinese. That resumption of agricultural import is now coming to a screeching halt. The most significant impact from the trade dispute thus far has been the marked slowdown in the overall global economy and global trade. The latest manufacturing data coming from the Asian states shows a universal slowdown as these countries lose their market in China. The Chinese economy has slowed dramatically, but when the second-largest economy in the world falters, it is going to take a lot of other nations with it.
The assumption had been that Trump was going to let talks and negotiations drag on for months so as not to compromise the 2020 reelection effort. There are those who still believe he will present a solution to the trade war later this year or early next as a means by which to boost the U.S. economy. Others are asserting that too much damage will have been done by the end of the year and a solution might not be enough to reverse the trend. All eyes will be on the data that gets released in the next several weeks. Three factors will be watched carefully; it is assumed they will be the most sensitive.
One of the most important will be the job market. This trade move is too recent to have an impact on the jobs data released this week, but there will be attention paid to hiring decisions going forward. There is already an expectation that job growth will be more anemic this month than it has been—maybe around 145,000 jobs. There are many reasons for slower job creation, but the sector most affected has been manufacturing. Companies have already been citing a reduction in export activity as a major reason for their reluctance to hire. Some are even starting to reduce the size of their workforce.
The second factor that will grab attention will be the reaction of investors and that has obviously been the first indicator of concern. There was already a great deal of nervousness in the markets as investors contemplated the meaning of the inverted yield curve, the timing of the current economic cycle and the decision by central banks to cut rates in anticipation of a slowdown. The rush to bonds and the stumble in equity markets suggests investors expect more of this defensive behavior, and that ensures the slowdown.
The third area to be watched is manufacturing in general. There has already been cause for worry as many of the indicators have been trending lower. The Purchasing Managers’ Index (PMI) has been down to levels close to contraction. In many countries, the PMI has already fallen below 50. Capacity utilization shows slack in the economy and durable goods orders have been down. The U.S. manufacturing sector depends heavily on exports and the trade wars are affecting companies throughout the U.S. It is not that the U.S. sells a lot to China, but the U.S. sells a lot to those nations that sell to China. These trade partners now have less money to spend on U.S. goods.
The U.K.’s Big Four corporate accountancy and auditing firms—Deloitte, PwC, KPMG and EY—saw nearly three times as many fines last year as they did in 2017, according to the Financial Times.
The publication reported Wednesday (July 31) that the Big Four were hit with a combined $52.3 million in fines in 2018, issued by the Financial Reporting Council (FRC), compared with $18.86 million levied against the firms in 2017 (those 2018 and 2017 figures are reduced to $38.9 million and $15.8 million, respectively, once accounting for settlement discounts).
The surge in fines comes amid rising calls to boost competition in the sector and improve audit quality following several high-profile corporate collapses in the U.K. The government is gearing up to replace the Financial Reporting Council with the Audit, Reporting and Governance Authority, which will reportedly have greater powers than those of the FRC.
The number of fines levied by the FRC also rose from 11 to 27 between 2017 and 2018, reports said, while more investigations and closed cases were notched last year, too.
“The purpose of the sanctions is to deter bad behavior and send a message to the market,” said Elizabeth Barrett, FRC director of enforcement, in an interview with the Financial Times. “A large fine that has both a monetary and reputational impact is important.”
Last year also saw the FRC’s largest-ever fine levied against an auditor, with a $12.17 million penalty (later reduced to $7.91 million) issued against PwC after the watchdog uncovered misconduct in its audit of department store chain BHS.
But while the industry’s Big Four has faced increased pressure—including calls by some policymakers for a forced breakup—similar scrutiny has been placed on the FRC itself. The release of these figures is part of the watchdog’s efforts to heighten transparency into its investigations and enforcement activity, reports said, and were published as part of its first annual enforcement review.
Legal & General Chairman John Kingman led a government probe into the FRC’s effectiveness last year and concluded that the regulator has “limited transparency.”
Reprinted with permission by PYMNTS.com.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations