Week in Review

September 30, 2019

Global Roundup

Brexit endgame: Supreme Court overrules Boris Johnson. In the latest twist of the Brexit drama, Britain’s Supreme Court found that Prime Minister Boris Johnson unlawfully advised the queen to suspend Parliament for five weeks at a critical juncture for the country. (Brookings)

China's economic slowdown: How bad is it? China's economy has been slowing for the better part of the past decade, but a recent run of poor data has prompted fresh concerns. What is making investors nervous, and how China has responded? (BBC)

Global recession a serious danger in 2020, says UN. Report calls on policymakers to ward off threat by refocusing on jobs, wages and investment. (The Guardian)

India, U.S. fail to seal trade deal over differences on import duties. Differences over reduction in import duties on high-value U.S. smartphones and gadgets have held up efforts by India and the U.S. to finalize a trade package. (HSN)

Cost of Thomas Cook collapse becomes clearer. Thomas Cook’s collapse could land the government and the travel industry’s insurance scheme with a bill of more than £500m, according to official estimates. (Financial Times)

Christine Lagarde is sounding the alarm on the U.S.-China trade war, calling it a “big, dark cloud” over the global economy. In an interview Sept. 24, the incoming president of the European Central Bank labeled the dispute's projected 0.8% hit to global growth in 2020 as a "massive number." (Markets Insider)

U.S., Latin America allies invoke treaty to pressure Venezuela's Maduro. The goal is to find and freeze assets in countries where government insiders may be hiding the illegal proceeds from corruption or drug trafficking. (NBC News)

EU and Japan join forces to counter U.S. and Chinese initiatives. The EU and Japan signed on Sept. 27, a holistic partnership to promote investment projects based on rules-based and sustainable principles, and to counter the risks posed by the U.S. and China. (EurActiv)

Italy: New coalition government takes charge. The fall of Italy’s populist coalition on Aug. 20 sparked fears of snap elections and a renewed bout of political and economic uncertainty. However, the far-left Five Star Movement and the center-left Democratic Party formed a new coalition government to stave off the threat of a rapidly rising far right. (Global Risk Insights)

Russia grows impatient with Turkey in Syria. On Aug. 2, Syria’s warring factions announced a ceasefire to fighting in the last remaining stronghold of Idlib. It did not last long as three days later fighting resumed between the government and its opposition. (Global Risk Insights)

Is your supply chain prepared for potential U.S. tariffs on EU goods? Transatlantic tariffs came closer to reality in recent months after the United States Trade Representative (USTR) proposed tariffs on a list of products from the European Union (EU). Unfortunately, even if you’ve already gone through something similar with goods imported from China, the same strategy may not be effective for the tariffs on EU goods. (Global Trade Magazine)

Slowing global economy reveals debt distress as biggest threat to international stability. The world economy is heading into troubled waters, with recession in 2020 now a clear and present danger, according to UNCTAD’s Trade and Development Report 2019 released Sept. 27. (HSN)

Methods of payment in international trade: Documentary collections. There are five primary methods of payment in international trade that range from most to least secure. Of course, the most secure method for the exporter is the least secure method for the importer and vice versa. They key is striking the right balance for both sides. This article focuses on documentary collections. (Shipping Solutions)

More Brexit Drama

Chris Kuehl, Ph.D., NACM Economist

It seems almost impossible, but the drama of Brexit had been chased from global headlines for a week or two. The attack on the Saudi oil facilities coupled with the ongoing trade and tariff war between the U.S. and China have been enough to take a bit of the spotlight off the U.K. struggles.

The issue is now back, front and center as Prime Minister Boris Johnson has watched his entire plan blow up in his face. The British Parliament had already rebuked his attempts to dissolve the assembly and force a hard exit on Oct. 31, but the final blow came from the Supreme Court as it ruled definitively that his maneuvers were patently illegal.

He has also evoked the wrath of Queen Elizabeth II as it was revealed that he had lied to her about the reasons he wanted Parliament suspended. He is now facing an utter collapse of the effort and is faced with options he declared he would never agree to.

Thus far, he has asserted he will not resign. Given the near certainty that he will be required to break these promises, however, he may decide his reputation as a Brexiter is at risk and that he would rather resign and let somebody else execute the plan.

Now that all of Johnson’s maneuvers have failed and he has been rebuked, the options remaining for the U.K. are very limited. If there is to be an agreement with the EU, it will have to happen in the next two weeks, and there is no sign of EU compromise. It appears the U.K. would have to agree to the plan that was set out under former Prime Minister Theresa May and rejected by the Parliament.

At the time, the assumption was that Europe would offer a better arrangement, but that has not been the intent as far as the EU is concerned. The U.K. could ask for a further extension of the deadline, but the Europeans will demand some evidence this extra time would be put to good use and a different offer would be forthcoming.

The EU will not allow Northern Ireland to function as some kind of backdoor to the EU. Cutting off the Irish from the Northern Irish would very likely trigger a resumption of the hostilities that marked this region for decades.

The business implications are disastrous for the majority of British companies, and there will be plenty of pain in Europe as well. Germany has already seen severe damage from reduced trade. That situation would only be amplified in the event of a full break. The Johnson assertion is there are other nations where the U.K. can trade. This would replace what is lost from Europe, but thus far there have been only vague promises from President Donald Trump about a trade deal with the U.S. There have been no details at all. Engaging with the various commonwealth states such as India or Canada has been mentioned, but these countries have not expressed much interest in doing more than is currently being done.

Argentina: Political Earthquake

The PRS Group

Voters went to the polls on Aug. 11 to cast ballots in mandatory primary elections staged by all parties planning to participate in the October general election. In addition to weeding out minor parties, which must obtain at least 1.5% of the total primary vote in order to appear on the ballot in two months, the open primaries amount to a dress rehearsal for the October vote, and are seen as a better gauge of voter sentiment than ordinary polls.

It has long been expected that the presidential election would be a closely fought contest between the incumbent, Mauricio Macri, an advocate of market-based economic policies, and Alberto Fernández, the candidate of the Everyone’s Front coalition, which proposes the restoration of Kirchnerism, the leftist-populist model championed by the late Nestor Kirchner and his widow, Cristina Fernandez (no relation), who is Alberto Fernández’s running mate. However, the results of the primary voting told a very different story, one that is deeply troubling for investors.

The final tally showed Fernández winning 47.7% of the vote, compared to just 32.1% for Macri. A similar result in October would ensure a first-round victory for Kirchnerism in the presidential election, and, assuming a fairly strong coattail effect in the concurrent legislative elections, a congressional majority for Everyone’s Front.

A leftist government will undoubtedly seek to renegotiate the terms of the $57 billion bailout agreement concluded with the International Monetary Fund (IMF) in 2018, very likely using the threat of default as leverage to obtain less onerous terms (and some outright debt forgiveness). Not surprisingly, the primary result touched off a market rout that has itself heightened the risk of a default, as the steep fall in the value of the peso has contributed to a sharp rise in the cost of Argentina’s large pile of dollar-denominated debt.

Macri has expressed confidence that he can still win the presidential election, pointing to the market turmoil as evidence for the case against electing Fernández. However, for the average voter, the near-term manifestations of the volatility will be a worsening of the same negative factors—high inflation, an economic downturn and fiscal austerity—that have raised doubts about Macri’s chances of winning a second term, and his status as the incumbent will diminish the resonance of a campaign based on the principle of “the least bad option.”

Alberto Fernández is considered a moderate among the Kirchnerists, but there is every reason to expect that Cristina Fernández would have outsized influence over policy as vice president. It is worth remembering that the Kirchnerists came to power having inherited the largest-ever sovereign default, and flourished politically. As such, anyone counting on a Fernández administration to cave in a battle of wills with the IMF could be in for a rude awakening.

The analysis above is taken from the August 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.

Global Payments Landscape Undergoing Evolution

As global noncash transactions boom and competition flourishes, many banks remain reluctant to embrace Open Banking via data sharing, ecosystem partnerships and open platforms, with multiple incumbents still being cautious of change.

Instead, they perceive Open Banking as a potential challenge when it is a necessity for improved customer experience and retention in the long-run. That’s according to Capgemini’s World Payments Report 2019, which tracks and analyzes noncash transaction volume, regulatory and industry initiatives and digital transformation across the global payments market.

The report finds that the transaction volume of noncash payments is growing rapidly, particularly in developing markets within Asia (32% growth) and CEMEA: Central Europe, Middle East and Africa (19% growth).

It is projected to top 1,046 billion noncash transactions globally by 2022, which equates to a compounded annual growth rate of 14%. Yet in a market defined by innovation, many incumbents are more fearful than optimistic about the pace and direction of change. In numerous cases, they cite the threat of BigTech challengers alongside only embracing Open Banking to the extent that regulators require, rather than seeing it as an opportunity for offering differentiation, customer retention and market leadership.

Key findings of the report include:

• Growth of noncash payments is set to skyrocket. Developing markets are leading the growth in the noncash payment sector, projected to rise by a compound annual growth rate (CAGR) of 23.5% between 2017 and 2022. Emerging markets will soon dictate and shape the global payments landscape in terms of innovation, transaction capacity handling and industry trends.

• In 2017, these markets accounted for 35% of global growth, a share expected to rise to 50% in the coming years. Key contributors include Russia, where noncash transactions grew by 40% in 2017, India (39%) and China (35%).
• By contrast, mature markets including APAC, Europe and North America saw a steadier growth rate of 7%. Globally, noncash transaction volume rose by 12% in 2016-17 to 539 billion.
• Debit cards were the fastest-growing noncash payment instrument, with transactions up by 17% in 2017, ahead of credit cards (11%) and credit transfers (10%).

• Market incumbents are wary of Open Banking and new competition. The payments landscape is growing more complex as new market participants and emerging technologies spur disruption. In addition, changing consumer expectations and regulatory demands are forcing banks to evolve their business models for payments, but many remain wary of change.

• Less than half (48%) of those surveyed in the report said they are planning to use open APIs beyond the level needed for regulatory compliance.
• While a clear majority (63%) identified BigTech competitors leveraging their global reach, brand equity, customer trust, great customer experience and finally payments infrastructure as a leading threat.

Although banks are gradually, though too slowly, moving towards a more open, data-led and cloud-based approach, there remains a reluctance to fully embrace Open Banking. Ninety percent identified ecosystem-based business models as key to long-term success, yet only 44% expressed interest in building and orchestrating an ecosystem of their own.

• Regulation is forcing change, but pace is slow. The shift towards a converged payments ecosystem has partly been driven by regulatory changes focused on standardization and interoperability. These have included a shared digital identity platform, interoperability guidelines and real-time payments clearing.

Most digital transformation efforts at 60% of banks are in response to regulatory compliance. Adoption of APIs beyond what regulation requires has been sluggish: A majority of banks have no plans to implement APIs that expose data in areas including intra-bank statement (53%), conditional payments (53%) and branch/ATM location (67%). Where banks are not being mandated to share more data, they are generally choosing not to do so. Open API is seen as a regulatory compliance game rather than a growth opportunity.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations