Week in Review
February 17, 2020
Global shipping has been hit by the coronavirus. Now goods are getting stranded. The arteries of global trade are clogging up. Shipping companies that carry goods from China to the rest of the world say they are reducing the number of seaborne vessels, as measures to stop the spread of the coronavirus crimp demand for their services and threaten to disrupt global supply chains. (CNN)
As coronavirus stifles China, economic logjams build worldwide. A tumble in commodity markets reflects the spreading ripples of an outbreak. (New York Times)
Philippines notifies U.S. of intent to end major security pact. The Philippines notified the United States on Feb. 4 it would end a major security pact allowing American forces to train in the country. (Associated Press)
Coronavirus, bird flu, swine fever: Why China is still so susceptible to disease outbreaks. China has become an epicenter for disease outbreaks, and the problem lies in its food supply. (Fortune)
Chinese government hackers charged with massive Equifax hack. Four members of the Chinese military have been indicted over the huge hack of credit agency Equifax, which led to the personal data of nearly 150 million Americans’ information being stolen in 2017. (Equifax)
China’s hurting banks brace for worst-case economic scenario. Just as it looked like Beijing was starting to get a handle on its regional banking crisis, a much more severe threat is engulfing the world’s largest banking system as a deadly new virus hits the country’s economy. (Bloomberg)
U.S. financials see rising risk from cash products amid Libor sunset. The transition from U.S. dollar (USD) London Interbank Offered Rate (Libor) to its likely replacement, the Secured Overnight Funding Rate (SOFR), presents heightened risks for U.S. financial institutions (Fitch)
Stormy U.S.-Europe relations, as top officials head to Munich. Secretary of State Mike Pompeo and Defense Secretary Mark Esper’s visit to Munich comes as the U.S. appears close to signing a truce in Afghanistan, is pushing for renewing sanctions on Iran, has introduced a new Israeli-Palestinian peace plan and is trying to discourage allies from allowing the Chinese company Huawei to be part of next-generation wireless networks. (Business Mirror)
Trump opens a new front in the trade wars. With a new currency rule, the U.S. president will try to fix the damage caused by the very tariffs he imposed. But he could end up wreaking more havoc. (Foreign Policy)
France says goods entering EU from Britain must meet bloc’s standards. France wants to ensure that all goods entering the European Union from Britain comply fully with EU standards under any post-Brexit trade deal. (HSN)
Domestic vulnerabilities lie behind China’s aggressive expansion. As it props up state-owned enterprises to counter slow domestic growth, China could find itself increasingly exposed. (Interpreter)
U.K. economy grew in final year of EU membership. The British economy picked up a little speed in 2019 despite registering no growth at all in the final quarter of the year, as the U.K. outpaced both France and Germany in its final year as a member of the European Union. (HSN)
Export invoice vs. accounting invoice: What's the difference? When completed properly, the invoice provides important information to the buyer, freight forwarder, customs, the bank and other parties in the international transaction. Done wrong, it can cause confusion, delays and disagreements. (Shipping Solutions)
Pakistan Faces Locust Devastation
Chris Kuehl, Ph.D., NACM Economist
The locust infestation affecting much of South Asia as well as parts of Africa has been hitting Pakistan especially hard and threatens to devastate the entire farm sector. The richest agricultural areas have already been badly damaged.
The country will need to import considerable amounts of food if it is to avoid famine. The biggest challenge is distributing the food that is produced as well as the food that will be imported. The impact of the infestation goes beyond the purely economic because the areas that have been affected are the same ones that have been experiencing political unrest.
The situation has been made far worse by the arrival of rampant inflation. Much of this has been attributed to very poor decisions by government officials. There were supposed to be limits on the amount of wheat exported as the impact of the insect invasion became obvious. However, local officials were often highly corrupt and the ban was not enforced.
The majority of the wheat produced was sold out of the country. That left severe shortages that triggered very sharp price hikes. The inflation has ripped through the region and most of the population has been unable to keep pace.
Prime Minister Imran Khan was seen as a leader who could unite the nation, but his party has been struggling to gain control. That has led to widespread disillusionment. It has not helped his cause that India’s Prime Minister Narendra Modi has reverted to his past patterns of Hindu nationalism and has been forcing Khan to engage in more military activity than he had intended. The Kashmir region is once again a hotspot that threatens to explode at any moment.
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Coronavirus Adds to Global Automakers' Structural Woes
The coronavirus outbreak is likely to lead to lower new vehicles sales in China and disruptions to global supply chains that will add to auto sector challenges in 2020, Fitch Ratings says. The credit impact is likely to be limited as long as the outbreak is fairly short-lived and its influence is only felt in the next few months with sales and earning rebounding afterwards.
The greatest impact on the sector is likely to come from lower sales during the outbreak. China is the world's largest market for new vehicles (about 30% of global sales). The country's new vehicle sales are likely to be depressed until the outbreak is under control. We expect sales to start recovering from April and accelerate in 2H20. This drop in demand in China is unlikely to be the sole rating driver for automakers in our portfolio, but it adds to the challenges that the sector is already facing.
Car and component production were halted in China due to extended holidays and mobility restrictions amid the outbreak. Most automakers aim to resume production in a few days, but disruptions related to labor or supply chains will continue until end-February or early March. The production halt could last longer in hard-hit Hubei (8.8% of the country's auto production in 2019). Chinese auto production is likely to register a high-single-digit decline in 1H20, assuming that disruptions will end in 1Q20 and production will gradually ramp up from 2Q20.
The net credit impact over 2020-2021 is likely to be limited as we expect demand and production to pick up as soon as the outbreak is under control. We believe that some lost sales have only been postponed and that orders will rebound in the coming months.
German automakers and suppliers are the most exposed in Europe. The risk comes chiefly from lost sales rather than immediate disrupted production, since BMW, Daimler and VW have no factories in Hubei. Daimler and BMW derive just under 30% of total unit sales from China, while VW derives about 40%. China accounts for 10%-15% of large European suppliers' overall sales, but their share of earnings made in China is higher as these operations are typically more profitable.
The ratings of Chinese producers, including FAW, Dongfeng and BAIC Group/Motor, are linked to the sovereign and unlikely to be affected by the outbreak. Honda has a significant share of sales in China, which has been growing in previous years. The company's performance in other markets is fairly weak this fiscal year, which emphasizes the importance of a quick Chinese business recovery. Toyota's sales exposure is modest, although it has recently pursued aggressive expansion in China, which has underpinned its sales performance.
In addition to production halts in China, HMC's and Kia's plants in Korea were affected through disrupted supply of a component sourced from China, which halted or reduced production on various lines for several days. Korean production has been gradually recovering since, but it is unclear when it will be back up to full capacity.
Both Ford and General Motors (GM) will be affected in 1H20 through their sales and production joint-ventures in the country. GM is more exposed than Ford as China accounted for about 40% of its 2019 vehicle sales. GM manufactures several models in Hubei via its SAIC-GM joint-venture, although most of its vehicles sold in China are produced in other provinces. China generated about 10% of Ford's global wholesale volumes and reportedly began limited production at its joint-venture plants in Chongqing and Hangzhou on Feb. 10 (it has no assembly in Hubei).
Trade Credit Insurer Adds ESG Risks into Its Country Risk Ratings
Environmental, social and governance (ESG) issues have reached a tipping point in the global economy. These issues will impact growth, market share and profitability for companies and investors, said trade credit insurer, Euler Hermes.
For nonpayment risk, the correlation between nonpayment and severe climate-related events (supply chain interruptions), or between insolvencies and social unrests (looting, profit loss) are increasing over time, Euler Hermes noted. New payment risks could come from more difficult access to financing for companies with a higher carbon footprint or with assets at risk of stranding because of regulatory decisions.
In this context, Euler Hermes decided to augment its country ratings with a set of indicators related to environmental sustainability (E-block) and to add sentiment analysis crawling from social media in its political risk rating (S-block). Governance issues (G-block) such as the regulatory and legal frameworks and control of corruption have already been included in the country ratings since 2003. Hence, Euler Hermes says it is the first trade insurance company to include ESG indicators for all ESG-related issues into its rating methodology.
What does it change in the methodology?
The Euler Hermes country risk rating methodology measures the risk of nonpayment by a company in a given country due to conditions or events outside its control. It is composed of three medium-term components, which measure macroeconomic imbalances, political risk and the structural business environment (SBE). Two additional short-term components (cyclical risk indicator and financing flow indicator) allow analysts to detect recessions and balance of payment crises.
The SBE component will now be complemented by six indicators assessing environmental sustainability:
- Energy use per GDP: kg of oil equivalent per USD1,000 GDP, constant 2011 PPP
- Renewable electricity output: share of total electricity output
- CO2 emissions per GDP: kg per 2011 PPP USD of GDP
- Water stress: annual freshwater withdrawal as a proportion of available freshwater resources
- Recycling rate: share of total waste
- Climate change vulnerability: people affected by climate-related disasters, per 100,000 population, five-year average
The political risk component will include sentiment analysis from social media in an attempt to help capture risks of social unrests as recently field-proofed in the Middle East and Latin America.
“Our new country risk rating methodology aims to capture the vulnerabilities related to climate change and social unrests on companies, which could face higher costs of financing and disrupted supply chains, and business interruption,” said Ludovic Subran, chief economist of the Allianz Group and Euler Hermes Group. “Small island developing states, countries with a carbonated energy mix, or countries where floods risks are high are on the watch list for their impact on business-to business (B2B) trade. These exogenous shocks are often a blind post for providers who do not think of extending their due diligence on their clients to include these risks of nonpayment. In the future, as awareness increases, I would not be surprised if some countries exhibit lower nonpayment risks thanks to successful adaptation policies.”
Reprinted with permission from IMFBlog.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations