Week in Review

Global Roundup

October 28, 2019

Argentina central bank bleeds reserves to defend peso ahead of election. Argentina’s central bank kept selling dollars in defense of the beleaguered peso on Oct. 25, with concerns rising about the bank’s falling reserves ahead of an Oct. 27 presidential election dreaded by the financial markets. (Reuters)

U.S. and China are close to finalizing some sections of trade deal, U.S. trade representative says. The Office of the U.S. Trade issued a statement outlining the state of discussions following a conversation that U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin had with Chinese Vice Premier Liu He. (CNBC)

Brexit: EU agrees to Brexit delay, but no date yet. EU ambassadors have agreed to delay Brexit, but will not make a decision on a new deadline date until this week. (BBC)

Canada’s Trudeau wins reelection but faces a divided nation. Prime Minister Justin Trudeau begins his second term facing an increasingly divided Parliament and country, with his rock-star appeal from four years ago diminished by scandal and unmet expectations. (AP News)

Political risk is revived in Latin America as protests spread. Latin America, the traditional poster child for political risk in financial markets, is back as a source of concern for investors. (Bloomberg)

China’s economic growth slows to a 30-year low, but is it the U.S. trade war? China released a raft of economic data Oct. 25, but the headline figure was 6%. That’s the rate of GDP growth in the third quarter as compared to the same period last year, and it’s lower than the 6.1% growth analysts polled by Reuters had anticipated. But is China's slowing growth coming from the trade war? (Fortune)

Putin enters contest for Africa after humbling U.S. in Mideast. After restoring Russia as a key power in the Middle East, President Vladimir Putin is turning his attention to Africa to raise Moscow’s profile in the struggle for geopolitical influence. (Business Mirror)

U.S. withdrawal from Syria: What next? Changes in U.S. foreign policy in the Middle East took another turn when President Donald Trump announced that U.S. troops were to withdraw from Syria. As the most reliable ally to the U.S. in the fight against ISIS, the YPG is feeling betrayed and abandoned. (Global Risk Insights)

Just 30% of SMEs say access to finance is “good,” Brexit and U.S.-China war dominate growth worries. Only a third of small- and medium-sized enterprises (SMEs) across the globe believe their ability to access finance is “good” and those that think access to funding is poor cite lengthy documentation and high interest rates as key factors for this, according to new data. (Global Trade Review)

IMF: Prolonged uncertainty weighs on Asia's economy. Asia’s strong trade and financial integration is a manifestation of the region’s success. However, this can also be a source of vulnerability amid continuing weakness in global trade and investment, and the region is caught in prolonged global policy uncertainty. (IMF)

India's credit squeeze pushes growth to a six-year low. The Indian economy is being held back by a large squeeze in credit availability emanating from non-bank financial companies (NBFCs). (Fitch)

Corporate FX hedging in evolving African markets. Unprecedented economic shifts in global markets have created uncertainty across the board, fueling currency volatility particularly in emerging market economies. As a result, African currencies tend to take the brunt the most, when compared to that of developed countries. (TMI)

In Chile, APEC vs. anarchy. With heavy street protests leading the president to declare a state of emergency, Chile’s big showcase is looking iffy. (Interpreter)



Trade War with Europe Postponed Again?

Chris Kuehl, Ph.D., NACM Economist

For the last several months, a threat has been hanging over the European auto industry, and the U.S. counterpart for that matter. The Trump administration has been promising to impose tariffs and other restrictions on the industry in Europe despite the fact the European and American sectors are very closely aligned.

The U.S. auto industry has had its issues with foreign imports over the years, but the majority of that concern has been directed at the imports from Asia rather than the vehicles that come from Europe. Furthermore, considerable investment has been in the U.S. from Europe—establishing manufacturing operations for Volkswagen, BMW, Mercedes and the merger between Chrysler and Fiat.

The fact is tariff threats have had little to do with the auto sector itself. President Donald Trump has threatened them because he has been unhappy with a variety of EU positions on subjects such as Iran’s nuclear deal, the stance on Brexit, opposition to Russia and the like. These are politically motivated tariffs masquerading as economically driven tactics.

The deadline has been approaching, and the question was whether the Trump threat would be carried out this time. The latest word on the issue comes from Commerce Secretary Wilbur Ross who is now suggesting that the next step will be further negotiations rather than the imposition of these restrictions.

There is more positive news here than meets the eye. It is very unlikely the Europeans will alter their political positions to thwart the tariff plan. There will be no change in Brexit strategy because of the U.S. and no shift in position on Russia, Iran or any other geopolitical concern. That means talks will be over the actual industry itself.

There are areas where the two sides could agree—more purchases from the U.S., fewer imported parts from Europe, more investment in the U.S. and so on. These would be concessions the Europeans and Americans could agree on.

To note that relations between the U.S. and Europe are strained would be an understatement, and that has been costly to both. Germany is in recession and France teeters on the edge. The struggling southern tier states such as Spain, Italy, Greece and others are still in distress and starting to backslide again. The U.S. is hurting as its export sector takes a hit from the tariff and trade war. The two sides really need to bury the hatchet and resume normal relations.


Congo Republic: IMF’s Confidence Seems Misplaced

The PRS Group

In July, following nearly two years of negotiations, the International Monetary Fund (IMF) approved an Extended Credit Facility (ECF) that makes available a total of close to $450 million in budget financing over three years, contingent on the implementation of reforms aimed at improving the transparency and efficiency of the public sector. Naturally, securing the IMF’s support will enhance Congo’s appeal to foreign investors and open a path to other sources of credit, to the political benefit of the incumbent Congolese Labour Party (PCT) regime headed by President Denis Sassou-Nguesso.

Critics are perplexed by the IMF’s willingness to extend a lifeline to a regime that shows no interest in tackling widespread corruption—the president’s son and daughter, both elected members of the legislature, are alleged by good-government watchdogs to have stolen tens of billions of dollars in public funds—and has refused to clear a debt of $1.35 billion to Commisimpex, a now-defunct firm whose owner has won a series of favorable court judgments in a dispute dating back to the 1980s. During negotiations, the IMF made clear that it was most concerned about Congo’s debt to China and arrears to oil traders, and was satisfied that a deal struck with China in April that extends the timeline for repayment will be sufficient to ensure longer-term debt sustainability.

Of course, experience has shown that it is best to maintain a healthy skepticism about any promises made by political leaders in the Brazzaville. Perhaps tellingly, Sassou-Nguesso’s mid-August Independence Day speech included no mention of improving governance or tackling corruption.

Reflecting the heavy economic dependence on the oil industry, the economy returned to positive growth in 2018, following two annual contractions, and the pace of real expansion is forecast to accelerate to 4.6% in 2019, from 1.6% last year. The recent announcement of a major onshore oil discovery by two local firms, if confirmed, could conceivably underpin a nearly three-fold increase in daily output, generating an additional $10.5 billion in annual income for the state.

Of course, that is completely speculative at this point, and at least one industry observer has suggested that the size of the discovery may have been exaggerated in hopes of attracting greater interest in exploration from larger international firms. The fact that the reported find would positively dwarf previous onshore discoveries, and the lack of concrete information to provide a basis for independent assessment of the report would seem to justify a reservation of judgment.

The analysis above is taken from the September 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.

More German Customers Missing Payment Deadlines

Germany is in a phase of change, according to a Coface 2019 payment survey. Pressure on companies from international competition is increasing, it finds.

This is one of the reasons why the pressure on their cash flow continues to increase, the trade credit insurer noted. The Germany payment survey includes responses from 442 companies in the country.

On average, German companies saw their payment terms increase from 29.8 days in 2017 to 35.9 days in 2019, the results show. Even if credit risks are insured, companies' confidence in their customers has declined.

Short- and medium-term credit periods still dominate the market. Survey responses indicate that 87% of companies request that payments be made within 60 days—a very short time in terms of international comparison. Clients missing payment deadlines now affects 85% of German companies, compared to 78% two years ago.

The largest increases in the number of companies in arrears were recorded in the textile-clothing sector (from 58% to 78%), wholesale and retail trade (from 75% to 89%) and the automotive sector (from 73% to 81%). The extension of payment terms is also noticeable in the fields of pharmachemicals and metals.

The transport sector, for its part, has seen payment terms shorten, although they remain high: from 86% to 81%.

The reasons for delays are mainly clients’ financial difficulties due to management problems, but also increased competition and lack of funding. Moreover, data shows that German business confidence in the future has deteriorated considerably, with only 20% of companies considering 2019 as a positive year.

The only sector that is particularly optimistic is ICT (information and communication technologies), with almost half of the companies in the sector reporting that their business prospects in 2019 were better than those of in 2018.

Among the reasons for this deterioration in German companies' optimism, Coface highlights the political risks on a global scale: Nearly 20% of companies considered President Donald Trump's protectionist policies and the U.S.-China trade dispute as the main risk for their export activities. This was followed by Brexit at 15%, compared to 2017, when only 3% of companies had concerns regarding the United Kingdom's exit from the European Union.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations