Week in Review

Global Roundup

November 11, 2019

IMF warns Europe to make emergency plan for economic slump. “Given elevated downside risks, contingency plans should be at the ready for implementation,” the IMF said. “A synchronized fiscal response” may be necessary, the fund said in the report, highlighting the dangers from trade protectionism, a chaotic Brexit and geopolitics. (Bloomberg)

Trump says no agreement to roll back tariffs on China. President Donald Trump on Nov 8 told reporters he has not agreed to roll back tariffs on China after officials from both countries on Nov 7 agreed to roll back tariffs on each others’ goods in a “phase one” trade deal if it is completed. (Reuters)

Lebanese importers struggle as banks impose credit controls. Lebanese traders are struggling to pay for imports of everything from pasta to nappies as banks impose restrictions on lines of credit in response to concerns about tighter liquidity after weeks of street demonstrations. (Reuters)

U.S. Paris Agreement withdrawal prompts new thinking on how to exert pressure. America’s withdrawal from the Paris climate accord might only be temporary if a Democrat wins the White House in 2020. The effect on trade policy could be significant in the meantime. (EurActiv)

Europeans eye China as global trade partner, shun U.S. President Emmanuel Macron’s visit to China last week suggests that the United States risks being sidelined on the global stage under President Donald Trump. Macron portrayed himself as an envoy for the whole European Union, conveying the message that the bloc has largely given up on Trump, who doesn’t hide his disdain for multilateralism. (Business Mirror)

The IMF, Argentina and Ecuador: Have lessons been learned? Following the global financial crisis of 2007-08, the International Monetary Fund (IMF) went through a period of self-examination. There was talk of a “new IMF” that had learned from its old mistakes. Recent events in Argentina and Ecuador have raised the question of whether the IMF has failed to learn the right lessons from the past. (Americas Quarterly)

China reshapes global meat markets as swine fever rages. China is scouring the world for meat to replace the millions of pigs killed by African swine fever (ASF), boosting prices, business and profits for European and South American meatpackers as it re-shapes global markets for pork, beef and chicken. (Reuters)

Spanish election: Five face off in race to run Spain. Voters in Spain headed to the polls Nov 7 for the country's second general election since April—and its fourth in four years. (BBC)

Why are so many countries witnessing mass protests? Blame economics, demography, a sense of powerlessness ... and social media. (Economist)

Getting to grips with working capital. Working capital conversations between banks and corporates have typically focused on individual bank products, rather than the specific needs and challenges of the corporate—leaving opportunities and efficiencies on the table. But that’s all changing now. (TMI)

Beijing’s cryptic blockchain gambit. The technology has enormous potential to support good governance. The Party may have something else in mind. (Interpreter)

Why quantum computing could be a geopolitical time bomb. Late last month, Google confirmed that a special kind of rig known as a "quantum computer" had performed an amazing feat. In just a few minutes, it managed to perform a calculation that would have taken the world's most powerful supercomputers thousands of years. The race to develop these computers is in, and it's not just computer nerds who are hyped up about this—the fight for "quantum supremacy," could one day have huge geopolitical implications too. (GZero)


Fading Hopes for Moderate Approach in Argentina

Chris Kuehl, Ph.D., NACM Economist

During the recent campaign in Argentina, some observers hoped the emerging leader of the Peronists was the more moderate and pragmatic one.

Alberto Fernandez was the supposed voice of compromise as compared to the former president, Cristina Fernandez-Kirchner. There may yet be time for that side of him to develop again. For the moment, however, Fernandez sounds as radical as his running mate.

Statements made regarding foreign policy are straight out of the past with praise heaped on other leftist leaders such as Evo Morales and Nicolas Maduro. At the same time, there have been attacks on Brazil’s Jair Bolsonaro and demands that former Brazilian leader Luiz Inácio Lula da Silva, who began serving a 12-year sentence in 2018 for corruption, be released from detention.

The political risk thus far is minimal because many other nations share a distrust of Brazil’s new leader, Jair Bolsonaro, but there have been hints that Argentina might try to intervene in countries such as Chile or Colombia. That would provoke some very angry reactions.

All of this commentary is coming at the same time that Fernandez needs to court the institutions and governments on which Argentina is financially dependent. The country is teetering on the edge of default again. It has been warned not to pursue the same path that Cristina Fernandez and Nestor Kirchner pursued.

The defaults made this nation a financial pariah for many years and made recovery under Mauricio Macri that much harder. Another round of defaults will mean Argentina will be cut off from access to money for decades—at least money at a decent price.

The country is highly dependent on exports and mostly commodity exports at that. It can ill afford to alienate the world it plans to export to, but this tactic has been tried before. The hope still remains that Fernandez has a pragmatic side and that all this foreign policy commentary is just to keep his left-wing supporters in line while he tries to work out financial rescues.



China Trade War Has ‘Trickle-Down’ Effect on US Hardwood Lumber

Reciprocal protectionist actions between the U.S. and China have long reaching affects on the businesses and industries caught in the middle. The U.S. hardwood industry is one such sector being impacted by tariffs already in place.

U.S. hardwood exports are down nearly $500 million in 2019 compared with the same time period in 2018, according to the mid-year Hardwood Export Report from the American Hardwood Export Council (AHEC). Exports to China are down roughly 40% during the first half of 2019 compared with 2018.

“In the 12 months since tariffs on U.S. hardwood were announced (July ’18 to June ’19), lumber exports to China are down $615 million,” the report states.

The affects and challenges to the industry are wide spread. “My job is made more difficult because of the economic impact in China, caused partially by the tariffs and trade war,” said Andrea Wolfe-Turosik, director of credit and accounts receivable for Northwest Hardwoods.

Tariffs have hurt her department, her company and the hardwood industry as a whole, she said. “It’s a trickle-down effect. Sales are down, causing receivables to be down, impacting cash receipts, employees, and it just keeps going.

“… there is a definite change in the way we are doing our day-to-day jobs,” Wolfe-Turosik added. “The stability of companies in China has changed from what we previously knew. There is higher risk; customers are holding onto their money longer.” The devaluation of the dollar makes it more difficult for customers to move lumber off the docks because funds are limited.

Companies have begun buying less, resulting in price drops, increased inventory levels and plant closures. Tariffs are “impacting collections across the board. Sales are down because customers are afraid to buy, nervous as to the unknown with the tariffs,” Wolfe-Turosik said.

Northwest Hardwoods recently shut down two U.S. mills, and they are not the only business impacted. “Hardwood suppliers across the U.S. are pushing higher inventory volumes into the domestic market, just as we are, impacting domestic customers’ cash flow, inventory volumes, etc.,” she said. “With lower sales volumes in China, the impacts to the industry segments such as cabinets, furniture, etc., makes it difficult for them to generate sales, creating cash flow impacting their ability to pay their suppliers for previous orders.”

Finding a place for product is paramount. Companies are opening plants in other countries to avoid tariffs. One of those countries alleviating some pressure for hardwood manufacturers is Vietnam, which has a market share about one-tenth the size of China. Vietnam has seen 14% growth, states the AHEC Report.

While businesses and industries try to find ways to keep their heads above water, credit departments keep churning. “Credit departments are facing many challenges from tariffs,” Wolfe-Turosik said. “With fewer orders being placed for China, credit begins looking for other ways to help facilitate the sale and move inventory elsewhere. Domestic markets are being pushed to take more volume, impacting credit limits, exposure, collections. You must really think about putting that product on the water and what will happen when it reaches the receiving port.”

Selling customers on documentary collection terms such as cash against documents (CAD) or deposits may result in delayed cash receipts due to product sitting at ports longer, she added.

Have the Debt Markets Reached a Tipping Point?

With trillions of dollars of global debt due to mature in the next five years, investors should begin preparing for a large wave of defaults, financial research suggests. For the moment, however, the Kamakura Troubled Company Index® remains relatively stable.

It ended October at 13.01%, a decrease of 0.29% from the prior month. The index reflects the percentage of 40,500 public firms that have a default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of October, the percentage of companies with a default probability between 1% and 5% was 10.27%, a decrease of 0.32% from the prior month. The percentage with a default probability between 5% and 10% was 1.81%, an increase of 0.07%. Those with a default probability between 10% and 20% amounted to 0.71% of the total, a decrease of 0.04%; and those with a default probability of over 20% amounted to 0.22%, the same as the prior month.

The index ranged from 14.93% on October 2 to 12.45% on October 30. Volatility moderated to 2.48%. For the year to date, the index has ranged from 10.11% on April 22 to 16.72% on August 5.

At 13.01%, the Troubled Company Index now sits at the 42nd percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in October, seven are in the U.S., with one each in Spain, Switzerland and the U.K.

Ascena Retail Group Inc. remained the riskiest-rated firm, with a one-year KDP of 54.62%, up 4.46% over the previous month. During the month, there were three defaults, with two in the U.S. and one in Thailand.

The Kamakura expected cumulative default curve for all rated companies worldwide widened as the one-year expected default rate decreased by 0.12% to 1.19% and the 10-year rate increased by 0.76% to 15.62%.

The Federal Reserve cut its benchmark interest rate on Oct. 30, but Fed Chief Jerome Powell made it clear that only a “material reassessment” of the economic outlook would cause the Fed to consider further cuts, said Martin Zorn, president and chief operating officer for the Kamakura Corporation, in his commentary for the latest report. “Though the corporate default rate remains benign, real risks are on the horizon.”

Over the next five years, Oxford Economics analysis shows that $4 trillion of debt will mature. “With this much debt requiring refinancing, it is not a surprise that the Kamakura expected cumulative default curve displays a bulge in expected defaults over the next five years,” Zorn said. “Economic slowing, especially if it’s combined with a slide in investor confidence, could very quickly produce a jump in defaults. Energy, retail and telecommunications remain the riskiest sectors.

“Analysis of unrated global issues, however, reveals a spectrum of broader risk. While 70% of the riskiest-rated firms are American issuers, 60% of the riskiest firms are international and 20% are from Hong Kong, demonstrating broader risk for the global markets. Rollover risk should be one of the primary concerns among debt buyers and lenders over the next several years.”


 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations