Week in Review

What We're Reading:

June 22, 2020

India cautions China against untenable sovereignty claims. India, on June 18, cautioned China against making “exaggerated and untenable claims” on the sovereignty of the Galvan Valley area even as both nations tried to end a standoff in the high Himalayan region where their armies engaged in a deadly clash. (Business Mirror)

Central banks pump more cash into economy to fight recession. The Bank of England launched another burst of stimulus and the European Central Bank said lenders across the region had tapped its loan program for a record EUR1.3 trillion ($1.5 trillion), signs that central banks’ efforts to fuel a recovery aren’t yet done.  (HSN)

The new world disorder. If America pulls back from global institutions, other powers must step forward. (The Economist)

Hezbollah leader says dollar injections needed, accuses U.S. of deepening shortage. Lebanon’s Hezbollah leader Sayyed Hassan Nasrallah said on June 16 that dollar injections were needed to shore up the pound currency and accused the United States of preventing dollars from reaching the crisis-hit country. (Reuters)

EU seeks to beef up its defenses against foreign subsidies. The European Commission outlined, on June 17, new tools to address the disruption caused by subsidized foreign companies operating in the single market, including the possibility to block the acquisition of European firms. (EurActiv)

U.S. seeks lower tariffs, fewer duty-free imports. The Trump administration plans to carry on with its confrontational approach to world trade, pressuring other countries to lower their tariffs on U.S. products and perhaps making it harder for imports to enter the United States duty free. (Business Mirror)

Europe to push ahead with digital tax despite U.S. “threats". The European Commission plans to put forward a proposal for a digital tax if international efforts fail this year after the withdrawal of the U.S., ignoring Washington’s threats if Europe moves ahead. (EurActiv)

China’s economic figures inspire hope for global recovery. The newly released data from China’s National Bureau of Statistics has shown that the country’s economic recovery gained momentum in May as positive indicators keep growing. (HSN)

Understanding international sales contract. Differences in exporters’ and importers’ traditions and backgrounds, as well as laws and regulations governing international sales, can cause complications you may not have thought about. (International Trade)

U.S.-European trade talks stalled over “unsafe” American food. U.S. trade talks with the European Union and Britain have stalled in part due to suspicions of poor American food standards, Washington’s chief negotiator said June 17. (EurActiv)

Argentina, creditors dance around debt deal as temperature rises. Argentina’s debt deal is hanging in the balance with creditors and the government at an impasse, though most analysts still expected the two sides to find a way to bridge the divide after having made significant progress over the last month. (Reuters)

Reopening America and the world. The coronavirus has imposed a heavy toll on people’s lives, livelihoods and connections with one another. As America and the world reopen from this devastating pandemic, it is important to examine how the process is taking place. (Brookings)

Survival of the fittest means faster innovation for retail. Retail as an industry has reached an “evolve-or-die” moment. But will the industry be able to innovate while there’s still time? (Forbes)

The population of Latin America is around 8% of the global population, but at the moment, this region is experiencing over half of the world’s viral infections and deaths. The economic damage has been equally disproportionate. It has left many nations in the region close to utter devastation and with no reasonable path out of the crisis.

This has come despite some very extensive lockdown efforts. Peru was one of the first nations to take action. President Martin Vizcarra was hailed for his swift response. He called out the army to enforce the lockdowns and quarantine and poured $32 billion into a rescue package designed to provide a lifeline for the population and the overall business community. Despite this effort, the country has reported 200,000 cases and a death toll that is twice that of Germany.

In stark contrast, there has been Brazil where President Jair Bolsonaro has asserted that COVID-19 is all in one’s head. The numbers that have been coming from Brazil have been 90% less than those that are coming from global health authorities. Based on reports from hospitals and health authorities, it is estimated that Brazil has 800,000 cases and has had 40,000 deaths—the highest percentage in the world. Most assert that Brazil has not reached a peak yet.

There are three factors that have made this region the most vulnerable in the world to date. The first issue is poverty. The majority of these populations are poor and live in dense and underserved slums. The instructions to practice social distancing and wear protective gear have been met with derision. Neither of these responses are possible in countries where people are so closely packed together and where people lack the ability to even acquire things like masks. The hospitals were almost immediately overwhelmed by patients needing respirators. The medical personnel often caught the virus as well. There have been acute shortages of everything needed to deal with the outbreak—from masks to testing kits.

The second factor has been political—the fact that many of the leaders in these nations have been unwilling to even acknowledge the seriousness of the issue. Brazil’s Bolsonaro has been labeled one of the “Ostrich Alliance” along with Daniel Ortega of Nicaragua who has asserted that only those who do not believe in his Sandinista ideology will get the virus. Bolsonaro urges people to get the virus as soon as they can and “take it like a man.” Mexico’s Andres Manuel Lopez Obrador was in that dubious collection until very recently. Even now, he has made only small gestures. He has grossly underreported the number of cases. It is asserted that there have been four times the number of deaths than have been reported. He continues to urge people to ignore social distancing as being “un-Latin.”

The third factor is the economic one, and this builds on the first. These are nations that have weak economies at the best of times. They are now very near total collapse. There is no money for government assistance or for medical attention. The rates of unemployment now exceed 40% in Mexico, Brazil, Argentina and Bolivia. The rates of joblessness in Venezuela and Nicaragua exceed 60%. The level of desperation makes it nearly impossible to address the virus in any of the ways that have been attempted in Asia, Europe or the U.S. There is no way to isolate and quarantine.

The destruction of the Latin economies poses a very serious threat to the world as a whole. The U.S. will see a massive influx of migration as people attempt to flee both the economic collapse and the ravages of the virus. The already hostile attitude towards these migrants will be intensified by the health concerns.

The output of the region is key to the global agricultural supply chain. That production has been curtailed drastically. The progress that had been made in this region has all but reversed.

A few weeks after the first containment easing measures, economic activity seems to be picking up in most European countries, says trade credit insurer, Coface. However, about two months after China, this gradual and partial recovery will not erase the effects of containment on global growth.

In this context, Coface forecasts that the recession in 2020 (a 4.4% drop in world GDP) will be stronger than that of 2009. Despite the recovery expected in 2021 (5.1%)—assuming there is no second wave of the coronavirus pandemic—GDP would remain two to five points lower in the United States, the eurozone, Japan and the United Kingdom, when compared to 2019 levels.

The lack of a rapid catch-up is mainly due to two issues: persistent uncertainty about the evolution of the pandemic leading to an expected rise in household precautionary savings and cancellation of business investment, and the irrecoverable nature of production losses in some sectors (particularly service activities and raw materials used as fuel). Measures taken by central banks have helped to stabilize financial markets since April, especially those of countries (particularly in Western Europe) that have, so far, contributed to maintaining some companies’ production capacities, mainly by increasing debt. Nevertheless, they are also postponing adjustments in employment and corporate cash flow problems.

Despite the public support measures, the rise in business failures already highlighted in the previous Coface barometer (Q1 2020) will likely affect all of the main mature economies: United States (43%), United Kingdom (37%), Japan (24%), France (21%) and Germany (12%). However, many emerging economies (44% in Brazil and 50% in Turkey) will also be affected by the economic consequences of lockdown measures, as well as the fall in tourism revenues, expatriate workers' remittances and revenues linked to the exploitation of commodities, of which prices have fallen.

This sharp rise in insolvencies reflects an increase of short-term corporate credit risk (six to 12 months). This rise in country risk, as assessed by Coface (using macroeconomic, financial and microeconomic data), is reflected by 71 country risk assessment downgrades, i.e., slightly more than 40% of the economies covered worldwide. In terms of sector risk assessments, around 40% of the 13 business sectors in 28 countries assessed by Coface (representing 88% of global GDP) have been downgraded. Unsurprisingly, transport is the most affected sector in the current context, followed by automotive and retail, which were already in a weak position last year. At the other end of the spectrum, pharmaceuticals and, to lesser extent, agri-food and ICT are the most resilient.

A new information note published by the World Trade Organization (WTO) Secretariat looks at how the COVID-19 pandemic has affected the participation of least-developed countries (LDCs) in global trade. The note stresses that LDCs have seen a significant decline in export earnings due to decreasing demand in key markets, falling commodity prices and a decline in remittances and are likely to be the hardest hit by the crisis due to their limited resources to stimulate growth.

Most LDCs have experienced a significant decline in export earnings since the outbreak of COVID-19. The report anticipates that the downturn in world trade in 2020 will continue to be particularly severe for LDCs.

LDC exports of textiles and clothing have been badly affected by declining global demand and supply chain disruptions. In addition, LDCs that depend on tourism revenues are being hard hit by the slump in this sector. The full list of LDCs can be found here.

The note underscores that the pandemic is undermining the development gains of countries such as Angola, Bangladesh and Vanuatu that are expected to graduate from LDC status in the near future.

The note also collates the measures that LDCs have taken to combat the pandemic, ranging from strengthening health care systems to providing stimulus packages to export-oriented sectors and liquidity support for small- and medium-sized enterprises.

In early May, the LDCs group called on other WTO members to refrain from imposing export prohibitions or restrictions on medical goods and food. They urged governments to facilitate trade in these goods, including by implementing the provisions in the WTO’s Trade Facilitation Agreement.

The report notes that the international community is seeking to support LDCs’ participation in world trade by providing debt relief and strengthening social sectors.

Key Points:

• Among the COVID-19 pandemic’s far-reaching consequences for the global economy, LDCs face the most daunting challenges. A lack of resources to support an economic rebound is compounded by LDCs’ dependence on a limited range of products exported to a few markets, some of which have been those worst affected by the COVID-19 outbreak. The pandemic threatens to derail hard-won development gains in LDCs.
• The year 2020 started against the backdrop of a subdued trade performance in 2019. The value of LDC exports of goods and services declined by 1.6% in 2019, a greater decline than that of world exports (1.2%). Consequently, the share of LDCs in world exports also registered a marginal decline, falling to 0.91% in 2019. The expected downturn in trade in 2020 is likely to be even more severe for LDCs than at the global level.
• The pandemic has accentuated the slump in oil prices seen in 2019. Declining demand, as well as supply disruptions, have weighed significantly on LDC exports, especially exports of textiles and clothing products. LDCs dependent on tourism revenues have seen the sector come to a virtual standstill. As migrant workers from LDCs return from host countries affected by the pandemic, flows of remittances—a critical source of foreign exchange for many countries—have dramatically dried up. All of these factors are predicted to worsen further in the coming months.
• The ongoing pandemic may affect the near-term prospects for some countries to graduate from LDC status. Angola and Vanuatu, which are scheduled to graduate soon, and LDCs such as Bangladesh, which are on the path to graduation in the next few years, have been experiencing unavoidable declines in economic growth and export earnings.
• The LDCs have called for countries to refrain from export prohibitions and restrictions on medical goods and food, of which many are net importers. Several LDCs have lowered duties on medical goods to ensure their availability at more affordable prices to their citizens.
• Since the start of the pandemic, at least two-thirds of LDCs have put in place a variety of lockdown measures. Some LDCs have announced stimulus packages, which have covered export-oriented sectors. They have also strengthened health care systems and ensured social relief packages and liquidity support to small- and medium-sized enterprises (SMEs).
• The international community has announced support measures ranging from debt relief to strengthening social sectors and providing social safety nets for the most vulnerable. Maintaining this momentum, while redoubling coordination efforts, remains vital as the world moves towards economic recovery.

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 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations