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)


The Future of Order to Cash


This open forum explores what lays ahead for corporates to further automate the order–to–cash cycle so that credit managers can focus more on value–added services within their organizations.

This is just one of the many sessions you’ll find at this year’s FCIB's International Credit & Risk Management Summit in Hamburg, Germany, centered around the theme of credit management in transition. Visit the summit website to see the full programme and register at the early rate.



India to woo foreign firms like Apple to capitalize on U.S.-China trade war. India is targeting companies including Apple, Foxconn and Wistron Corp. with a charm offensive aimed at encouraging them to shift business out of trade war-hit China, according to a source and a document seen by Reuters. (Reuters)

U.K.: Johnson corners Brexit foes and the EU alike. Prime Minister Boris Johnson's decision to suspend Parliament intensifies pressure on the British opposition and the European Union by narrowing the window of opportunity for avoiding a hard Brexit on Oct. 31, increasing the chances of one occurring on that date. His rivals in the British Parliament and the governments of the European Union still have a few cards to play in their effort to prevent a disorderly Brexit. (Stratfor)

Chinese military sends new troops into Hong Kong. The Chinese military began sending a new group of troops into Hong Kong on Aug. 29, a move it described as a normal annual rotation of its garrison in the city, but one that was being closely watched because of the local political turmoil. (NY Times)

Japan’s move to lower South Korea trade status takes effect. Japan’s downgrading of South Korea’s trade status took effect on Aug. 28, a decision that has already set off a series of reactions hurting bilateral relations. (Business Mirror)

South Asia brief: Is India facing an economic crisis? Why a top think tank official says India’s fiscal problems are “unprecedented,” plus other stories from Afghanistan, Pakistan and Sri Lanka. (Foreign Policy)

France’s Macron says no formal mandate from G7 on Iran. French President Emmanuel Macron said he had not been given a formal mandate from G7 leaders to pass messages to Iran, but that he would continue to hold talks with Tehran in the coming weeks to defuse tensions, Reuters reports. (Middle East Monitor)

China's corporate social credit system spooks European companies. China's system of collating "reputation" scores for both individuals and companies in a monumental database has been in the offing for years but European companies aren't ready, says a new report. (DW.com)

How blockchain can fight counterfeiting and fraud. A recent report shows that imported counterfeit goods raked in $509 billion in 2016—nearly 3.3% of all global imports for that year. To fight back against the rising tide of knockoffs threatening their brands, companies are turning to blockchain technology to create more transparent supply chains. (Global Trade Magazine)

Beefing up open account trade with blockchain technology. Moving and marketing in excess of 100,000 tonnes of meat products annually throughout the world, GPS Food Group was keen to find an innovative way to make its open account trade transactions faster, safer and more competitive. (TMI)

Seven essential resources for completing export documents. Here are seven resources that can make completing your export documents easier. With these sources, you’ll be able to finish your paperwork more quickly, get answers to many of your questions, and learn information to help you in future exports. (Shipping Solutions)



Is Africa Poised for a Breakthrough?

Chris Kuehl, Ph.D., NACM Economist

In many respects, the situation in Africa looks a lot like China at the end of the 1990s. Nobody really thought China was on the verge of dramatic expansion despite the fact it had rapidly urbanized and had started to attract significant levels of investment.

It offered what the developed world wanted—a manufacturing platform that would allow the lifestyle desired by the developed world consumer. It had quietly improved the health of its population, and there had been an expansion of education. The country had invested in infrastructure and was better able to feed its population. The rest, as they say, is history. Today, China has surpassed Japan, Germany, France and the U.K. as the second-largest economy in the world. Will that be Africa at the end of this decade?

The fastest-growing population in the world is now Africa. By the year 2050, the population will reach two billion and outnumber those in China. In past years, that would be seen as an enormous burden, but improvements in education and health have made that growth of a young population into an asset as compared to the rapidly aging populations of the developed world. By 2050, there will be only one working person for every retired person in the developed world of Europe, Japan and the U.S. In Africa, there will be five or six working people for every retired one.

One of the major reasons for all this recent growth has been China. In 2000, the trade between China and Africa amounted to about $10 billion. By 2015, the amount was $200 billion. During that same period, the Chinese government invested another $148 billion into various African states—mostly on development initiatives that looked a lot like the ones that China invested in 20 or 30 years ago.

Not everything has been smooth for the Chinese, however. Some African leaders complain that China behaves like new colonialists because it mostly invests in the extraction of needed raw materials with the bulk of the labor from China. The managers and technocrats are certainly Chinese. They have seen Africa as a source of raw materials and as a place to sell Chinese goods, but there has also been evidence China is investing in making Africa a place for production.

The trade wars that now mark the relationship between the U.S. and China have accelerated this process as Chinese companies can produce in Africa and escape the tariffs. In many cases, they can take advantage of special trade privileges that were designed to encourage exports from Africa into the U.S. and Europe.

Politics, war and corruption have long hampered the development of Africa, but that shows signs of change as well. In 1990, 12 of the African leaders held their position due to military coups, while only six had been elected. In 2019, there are 45 leaders that gained their position through a multi-party election of some kind. Institutions are still often weak and corruption remains a major problem, but many sectors are far less subject to that graft and abuse. There are certainly miserable war-torn nations such as Somalia, the Democratic Republic of the Congo (DRC) and Burundi. There are also nations that have been hamstrung by their own ineptitude such as Nigeria and South Africa. The six fastest-growing nations in the world are all in Africa. Many of them are unfamiliar to most people—Ghana, Ivory Coast, Tanzania, Ethiopia, Djibouti and Senegal.

The challenges faced by the 54 nations of the African continent are still daunting, but the same was believed of China in the 1990s. The growth of China has become a model for many of these states. They will be gaining in importance with every passing year.



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Corporate Treasurers Look at New FX Risk Mitigation Strategies

Corporate treasurers are exploring the use of more complex risk management techniques to better minimize foreign exchange losses and balance liquidity and earning risk, according to recent Bloomberg survey findings.

More than 100 corporate treasurers, financial analysts and risk managers responded to the poll, which found that cash flow at risk (CFaR) and earnings at risk (EaR) have gained recognition as the latest risk management solution.

Results show that 34% of respondents already use CFaR or value at risk (VAR), 29% are considering using it, and only 8% have never heard of it. The poll also revealed that 64% of respondents said they need to improve or are considering improvements to their company’s current hedging policy.

However, when asked what obstacles stood in the way of adopting a CFaR-based hedging policy, 66% of respondents cited the difficulties of explaining the policy internally and to the board. Another obstacle is technology: 41% of respondents cited that their company is reluctant to change its current technology. The discussion also surrounded the importance of key performance indicators (KPIs).

“For cash flow and earnings volatility, companies are shifting away from the outdated percentage hedging model to a risk management perspective, as they are not able to tie their old strategies to the KPIs the board is demanding,” said Mark Lewis, corporate treasury product manager at Bloomberg.

Explaining the policy internally and updating technology were not the only challenges respondents cited in implementing CFaR and EaR. Respondents were also concerned that such a policy would be too complex (29%), that it could be too costly to implement and run (26%), or that it would not provide sufficient benefit (13%).

The poll was conducted during Bloomberg’s recent online webinar, The Benefits of CFaR and EaR for Corporate Risk Management, to discuss how CFaR and EaR can better explain the risk of earnings and cash flow volatility to their financial statements.


Global Cross-Border Payments Expected to Grow


Cross-border payments are expected to surge over the next few years as the economy becomes increasingly global and interconnected. These transactions reached $144 billion in value in 2014 and could hit $240 billion by 2024.

The latest Smarter Payments Tracker looks at the infrastructure developments that are making cross-border payment systems faster, more seamless and interoperable.

Financial institutions are facing increased pressure to make cross-border payments fast and seamless as consumers grow used to instant peer-to-peer (P2P) payments and such products in other sectors.

A Call for Transparency

Recent American Express research found that greater transparency is one of the top priorities for firms that regularly make international payments. Forty-seven percent of treasurers said they want visibility into the cost and deductions from a transaction, and 64% want real-time tracking capabilities to help reduce the rate of reconciliation errors.

As the global economy becomes increasingly interconnected, smaller businesses and consumers will also need access to systems that enable easy cross-border payments.

Khun Sarintorn, VP of international remittance business solutions for Thailand-based Kasikornbank (KBank), explained how the bank’s collaborations with fintechs are helping to make overseas transfers more transparent and efficient.

“The pain point was that the customer never knew when the money [would arrive], when the beneficiary [would] get the money or the fees,” she said. “We asked, ‘How can we achieve full payment so the beneficiary can get the money in full … and the senders know how much they’re going to be charged and [everyone] knows exactly when it gets there?’”

Cross-border payments have gained prominence for a few related reasons. Remittances to developing nations continue to grow, which has spurred many global markets to pursue efforts to enable more efficient cross-border payments.

Remittances on the Rise

World Bank data show that remittances to low- and middle-income nations reached a record high last year, with migrants sending $529 billion to their home countries. That figure is expected to reach $550 billion this year, with global remittances to all markets reaching $689 billion in 2018.

The global average cost of sending money cross-border remains high, at around 7% in the first quarter of 2019. Banks were the most expensive remittance channels, charging an average fee of 11% in that same timeframe.

This might not affect large, multinational corporations that can negotiate rates and transaction fees for high volumes, but small businesses and individuals sending and receiving money don’t have similar resources.

Global Developments

Several countries are tackling more efficient cross-border payments on their own.

In 2017, the European Payments Council launched the pan-European Single Euro Payments Area (SEPA) Instant Credit Transfer System, and Southeast Asian countries Indonesia, Malaysia, Singapore, Thailand and Vietnam agreed to establish a real-time cross-border payments network.

Many are choosing to implement ISO 20022 as a common messaging standard to achieve greater interoperability between payment systems, with the system seeing more than 80 implementations in more than 40 markets, including with TCH’s RTP system in the U.S. and Australia’s NPP.

SWIFT, a global member-owned cooperative and provider of secure financial messaging services, got involved in January 2016 when it launched its global payments innovation (gpi) initiative to increase the speed, transparency and tracking of cross-border payments. More than 110 banks from Europe, Asia Pacific, Africa and the Americas are part of the SWIFT gpi, which has been in a pilot stage.

Last month, SWIFT released its first set of guidelines for financial institutions using the ISO 20022 payments messaging standard to complete cross-border transactions.

Challenges Aren’t Universal

Despite ISO 20022’s potential, there are barriers to it becoming the universal standard. Private-sector firms may be hesitant to adopt such a system, because they have limited budgets and there are potentially more compelling technologies in which they would like to invest.

Corporations are unlikely to adopt ISO 20022 until they experience the downsides of holding out.

Despite all of the technological innovation in the financial industry, businesses in the American Express study expressed interest in tackling issues with cross-border payments before investing in new technology. They were also skeptical of partnering with fintech companies. Just 8% of corporations are using alternative providers to make cross-border payments, and 55% have no plans to do so.

That resistance doesn’t reflect the needs of smaller, regional banks. Cross-border payments of the future will not likely be based on legacy systems and traditional correspondent banking, though.

Sarintorn said KBank stands out by embracing fintechs’ assistance and innovations. These partnerships have also opened up new opportunities for financial institutions that can’t afford to take it slow.

“Previously, we had to start with big things, plan for a long time and then do them one by one,” she said. “Fintechs look at customers’ needs right away, find the pain points … and work to fulfill that need right away.”



 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations