Week in Review

September 2, 2019

Global Roundup

U.S. tariff hike on $300 billion China goods to go ahead. The U.S. trade agency has confirmed President Donald Trump's higher tariffs on $US300 billion worth of Chinese goods will proceed as previously announced. (SBS News)

China’s companies have unseen foreign debt that’s maturing fast. The foreign debt built up by Chinese companies is about a third bigger than official data show, adding to the pressure on the country’s currency reserves as a wave of repayment obligations approaches in 2020. (HSN)

German inflation eases, joblessness rises as economy sputters. German inflation slowed in August and unemployment rose, data showed on Aug. 29, adding to signs that Europe’s largest economy is running out of steam and cementing expectations of a new European Central Bank stimulus package next month. (HSN)

G-7 summit set to end without an agreement for the first time in history. It will be the first time since meetings began in 1975 that the forum has failed to end a summit without an agreed statement, laying bare the deepening rift between heads of state from seven of the world’s largest economies. (CNBC)

Nigeria to slash funds for essential imports while currency crisis looms. Rice, fish and wheat are Nigeria’s top-three food imports, but foreign exchange for these staple food imports is about to end by order of President Muhammadu Buhari. (Charleston Chronicle)

Wide implications as Germany seen wobbling toward recession. Germany, Europe’s industrial powerhouse and biggest economy—with companies like Volkswagen, Siemens and BASF—may be entering a recession, according to a gloomy report from the country’s central bank last week—a development that could have repercussions for the rest of the eurozone and the United States. (Business Mirror)

France and Ireland threaten to vote against EU-Mercosur deal. Irish Prime Minister Leo Varadkar has threatened to vote against a trade deal between the EU and South American trade bloc Mercosur unless Brazil, where wildfires continue to devastate the Amazon rainforest, takes its environmental obligations more seriously. (EurActiv)

Data exclusive: Tariffs and trade wars won’t dent China. The U.S.-China trade war has cost both countries billions so far. But new data GTR shows this hasn’t been detrimental to the world’s largest trading nation. (Global Trade Review)

China slowdown would hit banks in Asian developed markets most. Banks in Asia's trade-dependent developed markets would face the most pressure on their credit profiles in the event of a sharp slowdown in the Chinese economy, Fitch Ratings says in a new report. (Fitch)

The guessing game for Singapore’s elections. With a vote due to be called before 2021, the guessing game for when Singapore’s next general election will take place has begun. (Interpreter)

On the brink: Britain’s economy braced for Brexit ‘Shock.’ With Boris Johnson insisting the U.K. will leave the EU with or without a deal on the scheduled departure date of October 31, Britain is braced for a potentially large economic shock. (Financial Times)

South Korea to withdraw from Japan intel pact. South Korea said it would withdraw from an intelligence-sharing agreement with Japan, extending their feud over trade measures and historical grievances into security cooperation and raising alarm in the U.S. (Bloomberg)

Italian Government Collapses

Chris Kuehl, Ph.D., NACM Economist

The Italian government has been living on borrowed time for a while now. The coalition that formed a year or so ago was never based on anything other than the fact the parties were considered outsiders in the Italian political world.

Italy is no stranger to collapsed regimes; the average lifespan of an Italian government since the end of the Second World War has been less than two years. The coalition between the League and the Five Star Movement was a marriage of convenience and a rocky one from the start. The League is the successor to the Northern League and a party that is extremely right leaning and preoccupied with immigration.

There has always been intense hostility toward the southern half of Italy, and this put it at odds with the Five Star politicians from the start because the populists have been generally popular in the poorer south. It took months of wrangling to get a government in place with Giuseppe Conti as prime minister and the League’s leader, Matteo Salvini, as interior minister. Now the issue is whether the Five Star Movement can cobble together another coalition, or will there have to be new elections—a course that Salvini is counting on.

Over the last year, the League and Salvini have gained popularity in the polls, while the Five Star leaders have seen their influence wane. The two issues that have driven Salvini’s rise have been immigration and his resistance to the EU. Italy has been a front-line state for the waves of immigration coming from Africa and the Middle East, and this influx has terrified the Italians—especially those in the north as they have little actual contact with the refugees and have tended to believe every outlandish assertion made by the right-wing parties.

The conflict with the EU centers around the Italian budget. Only Greece has a more serious debt problem, and the Greeks have been working with the EU to gain control over that broken economy. The Italian government has not been working with the EU, although Conte has tried to make some conciliatory gestures. Salvini has been defiant and has suggested the best course of action for Italy would be to pull out of the EU the same way that the U.K. is doing.

Italians are opposed to the austerity plans the EU wants imposed as they have been enjoying government largesse for years. The idea that pension payments would be cut, social programs pared, state employees fired and government spending in general curtailed is extremely unpopular. The government in Italy provides more assistance to a broader base of people than any nation in Europe—the result of years of weak governments appeasing whatever group of voters was needed to stay in power. The thought that Italy will need to pay its bills fills the population with dread and Salvini asserts that Italy will not have to. He is vague regarding how this day of reckoning is to be avoided.

The sense is President Sergio Mattarella will first try to get the Five Star Movement to form another coalition because he has indicated he doesn’t want to see another election. The politician that has emerged as the “kingmaker” is a familiar name in Italian politics, but forming an alliance with former PM Matteo Renzi would be a bitter pill for Five Star because it formed in opposition to him a few years ago. He would likely demand a very prominent role if he was to bring his center-left group into the fold. Lurking even further in the background is Silvio Berlusconi and his Forza Italia. He could pull some of the right-wing support from the League or he could decide to form a coalition with them as he has in the past.

Payment Delays in India Rise for a Quarter of Survey Participants

Just more than a quarter of respondents (26%) to FCIB’s recent International Credit & Collections Survey on India noted an increase in payment delays—down from 33% in the December 2018 survey on India. The number of survey takers who reported a decrease in delays also increased—from 0% to 11%.

In both surveys, most of the credit professionals found no change in payment behavior. And although every December 2018 respondent reported that they were experiencing some type of delay, 16% in the current survey acknowledge they were not experiencing any delays.

Unwillingness to pay ranked highest (25%) as the reason for payment delays, followed by cash flow issues (18%), and thirdly inability to pay and customer payment policy and government approval (tied at 13% each). Cultural norms and customs, cash flow issues and unwillingness to pay were the top-three reasons for delays in December 2018.

One credit professional explained some customers strictly follow payment rules. For example, if payments are to be made on the 30th of every month and the 30th happens to fall on a nonwork day, then the payment will not occur until the 30^th of the following month.

The majority of respondents (92%) in both surveys sold to existing customers. In general, however, payment terms have lengthened—though not in all categories. Zero to 30 days dropped from 28% to 21% and 31-60 days from 55% to 32%. Terms of 61-90 days grew from 17% to 32% and 91 days or more from 0% to 15%. Average days beyond terms increased slightly from 24.4 to 27.6.

In both surveys, respondents identified wire transfers as the No. 1 payment method used followed by letters of credit (LC). Cash against documents doubled from 8% in December 2018 to 16% in July 2019.

When using an LC, a credit manager recommended confirming it outside of India. Another credit manager suggested not even using LCs because India banks are controlled by the government. “LCs are not safer than actual open terms,” he said. “Always require payment up front, or you will be at the mercy of the customer to pay when they feel like it.”

The July 2019 International Credit & Collections Survey also covers China, Hong Kong and Singapore. 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 has opened and covers Greece, Italy, Spain, and the United Kingdom.

Report Finds Global Headwinds Drive $23 Billion in Cumulative FX Losses for North American Companies

Ongoing market volatility stemming from Brexit, trade wars and other supply chain disruptions resulted in $23.39 billion in foreign exchange (FX) losses for publicly traded North American companies during the first quarter of 2019, according to the new Kyriba Currency Impact Report (CIR).

The CIR details the impact of FX exposures among 1,200 publicly traded companies in North America and Europe, with median revenue of $1.027 billion in the first quarter. In addition, all companies in the report are doing business in more than one currency, with at least 15% of their revenue coming from other nations.

This is the fourth consecutive quarter of increasing losses for North American companies, the report states. In addition, the average negative currency impact per company in North America jumped 12% to $88 million in Q1 of 2019, equal to nearly $1 million per day.

For the 10th consecutive quarter, North American companies indicated the euro as the most impactful currency, with nearly one-half of companies mentioning it during their first quarter earnings calls, according to the report. Business services and the medical equipment industries experienced the greatest impact from currencies, as those industries continue to be impacted by Brexit and other volatile geopolitical events around the globe.

European Companies See Increasing Currency Impacts

Publicly traded European companies monitored in the Q1 2019 report indicated a collective currency loss of $3.31 billion, up from $3.08 billion compared to the previous quarter. This translates into an average of $276 million per company during the first quarter, equal to more than $3 million per day.

The euro also topped the list as the currency most mentioned as impactful by European companies during Q1 2019 earnings calls, with the U.S. dollar identified as the second most mentioned currency. The chemical manufacturing along with the biotechnology and drug industries experienced the worst impact from negative currency adjustments across European sectors.

“Global volatility is now impacting North American and European corporates who are not applying best practices in currency risk management with greater force,” said Wolfgang Koester, chief evangelist for Kyriba. “This is a new trend as we typically see a binary relationship in FX impacts. Taking an initial look into Q2 2019, we don’t see these trends reversing anytime soon.”

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations