From Japanese government to Italian banks, demand for debt insurance rises. The cost of insuring exposure to sovereign as well as corporate debt rose almost across the board on Mar. 6 as the spread of coronavirus raised the prospect of debt distress and government bailouts. (Reuters)

Coronavirus is plunging the global economy into its worst crisis since 2009. The coronavirus is plunging the world economy into its worst downturn since the global financial crisis, according to the Organization for Economic Cooperation and Development, which warned Mar. 2 that growth could be cut in half if the outbreak continues to spread. (CNN)

India’s chaotic bank seizure sends shockwaves through markets. India’s attempt to buttress its financial system by taking control of the country’s fourth-largest private lender has instead triggered widespread confusion and signs of investor panic. (Bloomberg)

Coronavirus: Eight charts on how it has shaken economies. The coronavirus outbreak, which originated in China, has infected tens of thousands of people. Its spread has left businesses around the world counting costs. (BBC)

The coronavirus is hammering China’s economic outlook. The fate of China’s economy is of crucial importance to a world with few solid drivers of growth. (WSJ)

A global outbreak is fueling the backlash to globalization. As the coronavirus spreads around the world, companies are seeking alternatives to making goods in China, while right-wing political parties fulminate against open borders. (NY Times)

Federal Reserve retools capital rules for largest U.S. banks. The Federal Reserve retooled capital rules for the largest U.S. banks, completing one of the biggest changes to the postcrisis rulebook for Wall Street during the Trump administration. (HSN)

Central banks urge G20 to back cheaper payments “roadmap.” Central banks will ask world leaders to back a “roadmap” for cutting the cost of cross-border payments, the Bank for International Settlements said Mar. 3. (HSN)

Can Pakistan’s economic decay be halted? Expectations were sky-high when Imran Khan took over Pakistan’s reins in 2018 with most voters hoping that their financial well-being would improve. The Pakistan Tehreek-e-Insaaf (PTI) government has now been in power for approximately 18 months, and therefore, it would be a good time to gauge whether the hopes of their voters were misplaced or warranted. (Express Tribune)

Key global events to watch in March. At the start of every month, the Global Observatory posts a list of key upcoming meetings and events that have implications for global affairs. (IPI Global Observatory)

In Afghanistan, peace or fragmentation? A potential U.S.-Taliban deal and a shaky presidential re-election stir both hope for the future and fears of the past. (Interpreter)

Germany: Race for Merkel’s succession. The dominance of the German people’s parties has waned considerably in recent years. Growing fragmentation in the political landscape and within parties has increased the risk of political instability. (Global Risk Insights)

Incoterms 2020 DAP: Spotlight on Delivered at Place. Incoterms 2020 rules outline whether the seller or the buyer is responsible for, and must assume the cost of, specific standard tasks that are part of the international transport of goods. In addition, they identify when the risk or liability of the goods transfers from the seller to the buyer. This article discusses the Incoterm DAP, also known as Delivered at Place. (Shipping Solutions)

The decision by the Federal Reserve to cut rates in response to the coronavirus crisis will almost certainly trigger the other central banks to follow suit. The pressure is now on the European Central Bank as well as the other major players. They had already indicated they favored a coordinated policy.

The impact of the central bank is limited in this particular crisis, so the natural question is what else can be done to insulate the world from a global economic meltdown. The bottom line is there will have to be attention paid to restoring the supply chain, which has supported that global economy for the last 20 years. That means paying attention to what China needs.

The trigger for the global economic collapse was the almost total shutdown of the Chinese export economy. The effort to control COVID-19 meant mass quarantines and isolation. Virtually nothing has been produced from one of the largest industrial areas in the country. This has affected every economy in the world because there are simply no immediate substitutes for these parts, assemblies and products. The best-case scenarios indicate it would take upwards of three years to develop alternative suppliers for about 80% of what is or was coming from China. The recovery of the global economy will require the recovery of the Chinese economy.

This would be a monumental task under the best of conditions because China is still faced with the virus threat and the need to continue policies of quarantine, isolation and restriction of travel. The additional problem is that China has been subject to a concentrated attack on its trade policies by the U.S., Europe and Japan. The last two to three years of the Trump administration have been marked by overt hostility towards China along with numerous moves to restrict trade. There have been billions of dollars’ worth of tariffs imposed. These efforts have worked in the sense that Chinese imports into the U.S. have been blunted. There are, however, still many good reasons to want to reset the trade relations between the U.S. and China. These same reasons exist as far as China trade with the rest of the world.

The fact is the world is not in a position to do without Chinese output. Unless there is significant recovery in China’s export economy, the rest of the world will be staring at a supply-side-led recession. Now is the time for nations to rethink their tariff policies and their antagonism towards China—at least on a temporary basis. There seems very little desire to do any such thing, however. Rather, there is talk of further inhibition as far as Chinese exports are concerned, motivated by fears of the virus. In the bigger picture, this episode makes it very clear that global supply chains are far too dependent on China. This should prompt extensive long-term planning as to how to diversify in anticipation of the next such crisis.

The UAE’s effort to put some daylight between itself and Saudi Arabia with regard to its involvement in various diplomatic disputes in the region has become more challenging of late, amid a ratcheting up of tensions between the U.S. and Iran that has heightened the risk of armed conflict between the Islamic republic and its regional rivals. An expansion of the zone of conflict on the Persian Gulf beyond the borders of Yemen would have significant negative connotations for the UAE’s economic diversification efforts, which took a big step forward with the final approval of the law on foreign investment in October 2018.

As hoped, the law ended the prohibition on majority shareholding by foreign investors in firms operating outside of the country’s free zones. However, while authorizing up to 100% foreign ownership in specified sectors, the exact percentage will be left to the discretion of the individual emirates and will be influenced by such considerations as the reputation of the investing firm and the environmental impact of any given project. Other rights afforded under the FDI law include national treatment, no restrictions on profit repatriation or salary remittances, intellectual property protection, and freedom to restructure the ownership of a firm without losing the privileges afforded under the law.

Overall, pledged FDI in Dubai rose by 35% (year-on-year) in the first half of 2019, and figures from the Dubai free zone showing the highest number of fourth-quarter business registrations in four years suggest that heightened regional tensions have not yet dented investor confidence. That bodes well for a significant rise in investment flows in 2020 that will help to offset the negative impact of OPEC’s recent decision to deepen production cuts on the near-term performance of the oil sector.

Earlier this month, the Cabinet approved changes to the 1981 Agency Law. Officials have stated that the amended rules will expand opportunities for foreign investment in the provision of services and create incentives for the public listing of smaller firms, many of which are family owned businesses.

Oil producers have agreed to tighten global supplies further (by a combined total of 500,000 barrels per day) at least through March 2020. An emerging health crisis in China has renewed fears that a slowing Chinese economy could create a drag on global growth that dampens demand for oil. Geopolitical risks may contribute to shocks that push prices higher, but on balance, it is unlikely that the oil sector will produce much of a lift for the economy this year. Liberalization of investment rules figures to attract a higher volume of FDI, generating demand and job creation that in combination with the government’s stimulus measures will underpin faster growth of 2.4% in 2020.

The analysis above is taken from the January 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.

Despite the economic slowdown, Coface’s latest survey on business payments in Poland shows that payment delays have systematically shortened since 2017, but the impact of the coronavirus outbreak on the Polish economy remains to be seen.

Poland’s GDP growth reached 4.1% in 2019, a slowdown from the 5.1% recorded in 2018, and the trade credit insurer expects it to slow further: Coface anticipates GDP growth in Poland to reach 3.3% in 2020.

A relatively favorable macroeconomic environment has created supportive conditions for businesses in previous years, the firm said. However, the full impact of the COVID-19 coronavirus remains to be observed, notably concerning trade partners. The coronavirus’ knock-on effects could further impact the economic outlook for Poland, it added.

Half of the Polish companies surveyed declared that they impose average credit periods of up to 30 days. Declining payment terms were observed particularly in the 91 to 120 days range, with a decrease of 1.3 percentage points and an overall average decrease in the credit period: from 47.3 days in 2018 to 47 days in 2019.

In this context, 59% of surveyed companies expect that the credit periods offered to small- and medium-sized clients will not change in the coming months. By contrast, credit periods granted to large clients were expected to increase for 60% of surveyed companies.

With 9 in 10 companies experiencing payment delays in 2019, they appear to be standard practice in Polish business, the survey finds. Nevertheless, the average payment period (57.2 days in 2019) has slightly shortened: nearly three days shorter than reported in 2018. In neighboring Germany, Poland’s main trading partner, average payment delays were three weeks shorter: 35.5 days, according to the latest Coface Germany Payment Survey. In Turkey, average payment delays equaled 40.7 days for domestic sales, and 58.1 days for export sales according to the latest Coface Turkey Payment Survey.

However, the various sectors of the economy continue to face significant payment delays at different degrees. Although the transport sector was one of the five surveyed to report reduced delays—along with agri-food, chemicals, automotive and construction—70% of transport companies reported payments that were overdue by more than half a year while the average in the transport sector reached 121.7 days. The average payment delays in the construction sector also surpassed 100 days (104.2). Both sectors were among the most generous in offering long average credit periods (50% of the transport companies surveyed and 38% in construction offered credit periods of more than 90 days).

Among the sectors experiencing an increase in payment delays (textile, paper-wood, pharmaceuticals, retail, metals, ICT and energy), the metals sector recorded the highest increase: almost 13 days from 53 to 66 days. This deterioration in the metals sector was already highlighted when Coface downgraded its risk assessment for the sector in Poland from Medium Risk to High Risk.

Despite a further slowdown of GDP growth, 50% of companies responded during the survey that they expected their profitability to rise in the short-term, and 10% of companies expected their profitability to remain at the current level. At that time, the textile-clothing, automotive and energy sectors were the ones that expected the largest improvement in sales. Conversely, the pharmaceuticals, metals and construction sectors forecasted lower sales in the coming months. According to the Poland Payment Survey, a large majority of sectors anticipate that the number of outstanding receivables will decrease over the following months. Although Poland has not yet been strongly affected by the COVID-19 outbreak, entrepreneurs might have offered less optimistic responses had the survey taken place in early 2020, due to the negative shock that this health crisis has had on the global economy.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations