Week in Review

What We're Reading:

June 1, 2020

NAFTA vs. USMCA: The North American Free Trade Agreement and the U.S.-Mexico-Canada Agreement. There is no grace period or overlap with USMCA when companies can use either agreement to claim preferential duty rates for qualifying goods. That means companies that utilize the benefits of NAFTA need to begin reviewing their products to make sure they qualify under the terms of USMCA. (Shipping Solutions)

U.S. says Hong Kong’s autonomy gone, sowing China trade doubt. The Trump administration said it could no longer certify Hong Kong’s political autonomy from China, a move that could trigger sanctions and have far-reaching consequences on the former British colony’s special trading status with the U.S.  (Business Mirror)

India and China face off along disputed Himalayan border. Chinese troops hold ground as Beijing's conciliatory tone fails to ease tensions. (NikkeiAsianReview)

Coronavirus pushes global credit rating downgrade threat to record high. The number of companies or countries at risk of having their credit ratings cut has been pushed to an all-time high by the coronavirus pandemic, S&P Global analysis shows (HSN)

What happens to Hong Kong now? What could China’s move to strengthen control over Hong Kong with new security laws yield? And why did it propose this now? Some answers on these and other issues. (New York Times)

EU and Japan commit to avoiding “unnecessary barriers” in times of COVID-19. Leaders of the EU and Japan agreed to avoid “unnecessary travel and export restrictions” to counter the COVID-19 pandemic, and to work together to defend multilateralism. (EurActiv)

Venezuela: The risk to the Maduro regime’s stability. Venezuelan President Nicolas Maduro Moros and several top-level officials in Venezuela were indicted on charges of “narco-terrorism” by U.S. Attorney General William Barr on March 26, 2020. This indictment follows a months-long escalation of tensions between Caracas and Washington, DC. (GlobalRisk Insights)

EU-Vietnam Free Trade Agreement: Vietnam’s competitive gains  The EU-Vietnam Free Trade Agreement (EUVFTA) and the EU-Vietnam Investor Protection Agreement (EUVIPA) is expected to be ratified by the Vietnam government by May 2020 and will consequently enter into force. The agreement, which includes significant commitments on tariff reductions, investor protection and trade facilitation will have a tremendous impact on exporting firms, foreign investors and consumers in Vietnam. (GlobalRisk Insights)

Global accounting body eases lease rule to help during pandemic. Firms leasing property will be given an optional accounting exemption for rent reductions during the coronavirus crisis by the International Accounting Standards Board (IASB) (HSN)

A new Cold War is brewing. Markets are up, but there are headwinds in the medium and long term when it comes to brewing tensions between China and the rest of the world, particularly the U.S. (SeekingAlpha)

How the coronavirus crisis has hit the U.K.’s economic outlook.  Markets rally on economy optimism; Road trips are climbing; Business slump recovers slightly; First steps into recession taken; Retail sales plunge during lockdown; Unemployment begins to spiral; Tumbling oil price sinks inflation. (HSN)

Debts and deficits have been ramping up for many years; there has been no good reason for this pattern of profligacy. The reality is that every government, every company and every person might need to run a deficit and to go into debt for a period of time. There are emergencies that must be dealt with regardless of the cost. Nations face natural disasters, wars, economic calamities and (oh yeah) viral outbreaks. Business faces those emergencies as well and so do people.

There are times that preparing for the future means incurring some debt now. These are all justifiable moments, but when debt is simply added to year after year for no apparent reason other than a lack of will, the result can be catastrophic. The world has hit a massive crisis that requires massive outlays of money. The lack of preparedness globally left no other alternative to a lockdown that has lasted the better part of three months and robbed every nation on the planet of the revenue needed to contend with the crisis. This has necessitated even more reliance on debt, which has been a major concern as far as the Europeans are concerned.

It is expected that budget deficits will rise to more than 8% this year. That far exceeds the limits the EU once tried to establish for its members. It was assumed that a budget deficit of 3% was excessive and unsustainable. Now, the region is looking at percentages that have not been seen since the 2008 recession. The aggregate government debt for the EU is set to rise from 86% of the collective GDP to over 100%. That begins to rival the debt the U.S. has managed to accumulate (115% of GDP at last estimate). These nations, however, lack the ability the U.S. has to shove the crisis down the road.

Every other nation in the world has to reconcile its balance of payments issue with its hard currency (its store of dollars). The U.S. has that same requirement, but it is the nation that essentially “prints” these dollars. The way that governments borrow is to sell bonds. The yield on these bonds will be determined by the market.

In the aftermath of the 2008 recession, there were nations such as Greece, Spain, Italy and Portugal that were considered bad risks by the investment community. Their bonds carried high rates in order to attract anyone to buy them. The same process is manifesting now.

The public debt in many of the southern-tier nations has been out of control for years and now threatens to reach crippling levels. Greece is nearing 200% of GDP, Italy is at 160% of GDP and Portugal is at 130%. In order to deal with the creditors that purchased their bonds, these nations will be facing massive debt service numbers. That is money that comes straight off the top of each year’s spending.

This has been an issue for the U.S. as well. Demand for treasuries has continued to be solid, but that means debt service is a bigger and bigger share of the federal budget every year. It now costs the U.S. around $400 billion a year. The entire defense budget is around $700 billion. When one adds the additional debt incurred by the reaction to the pandemic, the level of debt service comes very close to that total defense outlay.

Fitch Ratings has made further cuts to world GDP forecasts in its latest global economic outlook (GEO), but the slump in global economic activity is close to reaching its trough.

The firm now forecasts world GDP to fall by 4.6% in 2020, compared with a previous prediction of 3.9% in its April outlook.

“This reflects downward revisions to the eurozone and the U.K. and, most significantly, to emerging markets, excluding China,” said Brian Coulton, chief economist, Fitch Ratings.

Eurozone GDP is now expected to fall by 8.2% in 2020, a 1.2% increase over previous expectations. This reflects incoming data that point to larger-than-anticipated falls in activity in France, Italy and Spain amid lockdowns that were more stringent than those in some other countries.

Fitch now expects the GDP of Spain to fall by 9.6%, by 9.5% in Italy and by 9% in France in 2020, compared with 7.5%, 8% and 7%, respectively. The firm also notes that the lockdown in the U.K. looks set to last longer than previously assumed; with a sharp fall in GDP published by the Office for National Statistics for March, Fitch now expects the economy to contract by 7.8% this year, compared with a previous prediction of 6.3%.

Output in emerging markets (EMs), excluding China, is expected to fall by 4.5% this year, an increase of 2.6% over the prior prediction. This large revision reflects the deterioration in the health crisis in many of the largest EMs over the past month or so, including in Brazil, India and Russia. Fitch’s biggest forecast cut was to India where a 5% decline is now expected in the current financial year (ending March 2021) in contrast to an earlier forecast of growth of 0.8%. India has had a very stringent lockdown policy that has lasted a lot longer than initially expected and incoming economic activity data have been spectacularly weak. Infections accelerated sharply in Brazil and Russia from mid-April, and Fitch now sees GDP falling by 6% in Brazil (revised from 4%) and by 5% in Russia (previously 3.3%) this year.

Forecasts for 2020 GDP growth for China, the U.S. and Japan are unchanged since late April at 0.7%, 5.6% and -5%, respectively. Fitch also affirms its forecasts for Australia, Korea and South Africa, so its assessments of global economic prospects are starting to stabilize, following a succession of downward forecast revisions in recent GEO updates.

Fitch notes that this concurs with other evidence that the collapse in global economic activity may be close to bottoming out. A number of early monthly economic indicators for May have improved slightly on their April values and daily mobility data show consumer visits to retail and recreation venues have increased in the eurozone and the U.S. since lockdowns started to be eased in late April/early May. Fitch’s weekly U.S. growth tracker has edged up slightly in the past two weeks and is consistent with its earlier forecast of a 10% year-on-year decline in 2Q20. Fitch notes that these are all tentative signs, but China's recent experience suggests that activity will rise after lockdowns are eased. Industrial productionis now back to December 2019 levels and fixed asset investment and credit growth are rising.

Moreover, global macroeconomic policy stimulus has been increased further over the past month or so, beyond the already announced huge commitments. The U.S. has announced an additional fiscal package valued at more than 2% of GDP (with more being discussed), Italy unveiled a second wave of easing measures, the U.K. extended its job-subsidy scheme, and Fitch now expects China's general government fiscal deficit to widen to 11.2% in 2020 from 4.9% in 2019. The firm predicts that global quantitative easing (QE) will reach USD6 trillion in 2020, equivalent to half of the cumulative QE purchases by the Fed, European Central Bank (ECB), Bank of England and Bank of Japan combined in 2009-2018. This explosion in central bank liquidity has helped to secure a pick-up in bank credit to the real economy (specifically, to firms) in the past couple of months, a development that contrasts with the pattern in 2009.

Nevertheless, the return to economic normality is likely to be a slow and bumpy process, Fitch says. The rupture in the labor market—with U.S. unemployment now expected to peak at 20% in May—and ongoing social distancing will weigh heavily on consumer spending post-crisis, while firms will be very cautious on capital spending.

"We foresee a 'technical' pick-up in global GDP growth to 5.1% in 2021—with U.S. and eurozone output rising by around 4%—but pre-virus levels of GDP are unlikely to be reached until mid-2022 in the U.S. and significantly later in Europe. This is despite massive policy stimulus," Coulton added.

An aggressive resurgence of the virus that necessitated greatly extended or renewed nationwide lockdowns would lead to an even worse outcome. Fitch’s downside scenario sees GDP falling by 12% in the U.S. and Europe in 2020 and global GDP down by more than 9%.

Despite some drawbacks, legacy rails have mounds of potential to tackle a multitude of business-to-business (B2B) payments friction points.

For payments technology players, finding the opportunities to build upon existing infrastructure continues to open up new doors in B2B payments improvements.

This week’s look at the latest in payments rails innovation finds players including Mastercard, Aflex and Paycor targeting existing card and ACH rails to expand their use for corporates, with a focus on reconciliation, data capture and transparency. Meanwhile, credit unions (CUs) are growing more interested in embracing an entirely new rail for their clients and themselves: The Clearing House’s RTP.

Mastercard Track Business Payment Services Launch

In a significant step toward building upon existing rails to improve B2B payments, Mastercard recently announced that its Mastercard Track Business Payment offering is now live in the U.S.

Operating on the card and other rails, the service aims to provide greater control and transparency in the B2B payments ecosystem, targeting suppliers with streamlined and automated reconciliation capabilities without forcing clients to pay via card. Buyers, meanwhile, can capture early payment discounts, gain payment choice and automate reconciliation, too.

“When we started work on Mastercard Track Business Payment Service, we looked at the persistent problems in B2B payments and asked ourselves how we could solve them for the benefit of buyers and suppliers,” said Mastercard Executive Vice President of Global Commercial Products James Anderson in a statement.

“What we’re building with our partners is a fully digitalized and extremely efficient way for businesses to pay and get paid using multiple payment rails so that buyers and suppliers each capture new and demonstrable value from their payments activity,” he continued.

Mastercard is planning to expand the service into new markets with new partners and into other account-to-account payment rails, the company said.

Adflex Eyes Card Rails for B2B

There is no such thing as a silver bullet in B2B payments, a single card rail that will address all friction points for all buyers, sellers and stakeholders. But according to payments processing company Adflex, the card rails hold a particularly large opportunity to mediate friction points, especially when it comes to adopting virtual cards and cloud technology.

In a recent interview with PYMNTS, Adflex CEO Pat Bermingham said while purchasing cards can be complex when it comes to integrating data and payment workflows in the back office, virtual cards support seamless data connectivity and back-end integration when combined with the adoption of cloud-based platforms like accounting and enterprise resource planning (ERP) solutions.

Paycor Certified by NACHA

Payroll and human capital management solution provider Paycor recently revealed that it secured NACHA Certification through its ACH processing. In an announcement on its website, Paycor said the certification means the company has demonstrated robust compliance and risk management capabilities, adherence to NACHA’s Operating Rules, and adequately addressed disaster recovery and business continuity needs of business clients.

“Becoming NACHA Certified provides Paycor the opportunity to demonstrate to our customers and banking partners that we perform at the highest standards of ACH processing, compliance and payroll security,” said Paycor Chief Financial Officer Adam Ante in a statement.

CUs Move Closer to RTP

In an embrace of one of the newest payment rails in the U.S., CUs are beginning to explore the value proposition of looping into The Clearing House‘s RTP network. Doing so can be challenging, however, particularly for smaller financial institutions (FIs) with limited resources.

Corporate One Federal Credit Union CEO Melissa Ashley recently discussed that challenge in an interview with PYMNTS, pointing to the opportunity for CUs to work with an industry service provider to tackle the logistical burden of connecting into the payment rail. Doing so, she said, not only means CUs can offer RTP services to their own customers, but they can actually wield the real-time payments capability for themselves when it comes to internal transactions like payroll.

Reprinted with permission from PYMNTS.com.

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 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations