Week in Review

What We're Reading:

July 13, 2020

Venezuela opposition cries foul as Maduro takes over political parties. Government-controlled court forces new leader on Juan Guaidó’s party. (Financial Times)

UK economy to slump over 10%, debts to surge: Moody's. Britain will suffer the sharpest peak-to-trough economic slump of any major economy this year, rating agency Moody’s warned on Friday, and ramp up national debt as a share of GDP by nearly a quarter. (Reuters)

America’s economy is taking another hit as coronavirus cases surge and businesses shut down again. A growing wave of new coronavirus cases in the United States—which brought a record 60,000 new cases on July 7 alone—and the new restrictions that are accompanying the resurgence of the virus have the potential to derail an economic rebound until the fall, analysts from Goldman Sachs say. (HSN)

Allies, China denounce US pullout from WHO. Top US allies on July 8 denounced the planned pullout of the United States from the World Health Organization, with the Italian health minister calling it “wrong” and a political ally of Germany’s chancellor warning that the withdrawal could make more room on the world stage for China. (Business Mirror)

Trade experts urge heads-up approach for businesses as USMCA comes into force. Experts and ambassadors across the continent are urging North American businesses to keep their heads up and their eyes open for both growth opportunities and perils in the fine print as the new U.S.-Mexico-Canada Agreement comes into force. (CTV)

Reopening from the Great Lockdown: Uneven and uncertain recovery. Over 75 percent of countries are now reopening at the same time as the pandemic is intensifying in many emerging market and developing economies. Several countries have started to recover. However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven. (IMF)

Brazil’s President Bolsonaro tests positive for coronavirus. Brazil’s President Jair Bolsonaro said on July 7 he has tested positive for the new coronavirus after months of downplaying its severity while deaths mounted rapidly inside the country. (Business Mirror)

Eyeing United States, EU lawmakers seek quicker trade retaliation. EU lawmakers overwhelmingly backed a proposal on July 6 to allow the European Union to retaliate more quickly in trade disputes, with a clear eye on the tariffs imposed by U.S. President Donald Trump. (EurActiv)

Remittances could fall by $100 billion because of COVID-19—here’s why that matters. Remittances—the money sent home by individuals to family and friends—are in crisis because of the global economic downturn. (World Economic Forum)

India-China conflict: A move from the Himalayas to the high seas? A risky naval blockade in the Indian Ocean is touted by some as a way to pressure China’s vital energy routes. (Brookings)

The Economic Implications of a Coronavirus ‘Second Wave’. There is going to be some economic impacts of a second wave in states that already wrestled with this, like New Jersey, for instance, where the state is now back to closing indoor dining at restaurants. One step forward, half a step backward. (HSN)

The post COVID-19 world: Economic nationalism triumphant? Is the future one of deglobalization, decoupling, and reshoring of economic activity? (Brookings)

Pandemic-proofing: Insurance may never be the same again. Insurers are creating products for a world where virus outbreaks could become the new normal after many businesses were left out in the cold during the COVID-19 crisis. (Reuters)

It would seem this is a pretty easy question to answer. After all, this has not been referred to as a lockdown recession for no reason. The governments of the world elected to shut down business operations as a means by which to reduce human contact with the hopes that such isolation and quarantine would limit the spread of the COVID 19 virus.

The subsequent collapse of dozens of economies worldwide was attributed to this set of edicts. But now that we are in July and there has been a significant lifting of the restrictions in many nations, it is not so easy to pin the blame on the lockdown alone.

It seems that much of the problem is that people are fearful and are unwilling to resume their old habits regardless of the rules and regulations. At the start of the pandemic, the number of people worried about the disease was significant but far from universal. The percentage of people who listed the virus as a major concern hovered at around 40%. Today that number is between 80% and 90%.

Fully half of the individuals polled asserted that the virus is the No. 1 threat to them, their family and their country in general. These percentages change drastically from nation to nation and with the nations as well. The most worried people have been in Europe (especially harder hit states such as Italy and Spain). The least worried have been in countries that pursued more aggressive measures early on, including Germany, Austria, Denmark, Australia and Japan. Generally speaking, people in urban areas have been more concerned and older people have more worries than younger people.

An economic rebound was thought to depend on the decision by governments to lift the lockdowns, and this still remains an important factor. Businesses that can’t operate can’t make any money, employ people or buy anything from other businesses. It is now becoming obvious that allowing a resumption of business is not going to be enough. It is also going to require a willingness on the part of the consumer to resume old habits and patterns. It is no longer obvious that this will take place any time soon. There has been evidence emerging throughout the U.S. and Europe that consumers are still shunning stores and restaurants and a wide variety of service industries even when these have reopened.

Sweden has become a lab rat due to the decision not to restrict the population and business community when the rest of Europe elected to do so. It was assumed that Sweden would suffer more infections, hospitalizations and fatalities than other nations, but it was also assumed that its economy would fare better and the country would avoid the damage caused by the lockdown. It was also assumed that Sweden would suffer less from a renewed wave of outbreaks because it would be closer to some kind of herd immunity. Some of these assumptions have proven accurate but others have not.

There have been more than 5,400 deaths thus far; and in a nation of some 10 million people, that is a 40% higher rate than in the U.S., 12 times more than Norway, seven times more than Finland and six times more than Denmark. The problem is that Sweden’s economy has also suffered as the central bank expects a contraction of 4.5% for the year as unemployment has jumped to 9.0%. These are figures comparable to Denmark, a nation that engaged in a serious lockdown from the start and only recently elected to start reopening. To be fair, the Swedish economy is dependent on its neighbors and they have been restrictive in terms of how they relate to Sweden but the bigger concern is the Swedish consumer. Even as they have been allowed to visit stores and eat at restaurants and even attend events, they have been reluctant to do so. Traffic numbers in the retail community have been half what they were last year, and attendance at events has been down by more than 75%.

The bottom line is that people are not confident regarding the virus and have been isolating themselves regardless of any official proclamation. There are certainly some that have attempted to retain their old patterns and have chafed at the restrictions, but it has become apparent that it is not just the lockdown that has kept people at home. They are afraid of the infection and are not prepared to venture out as they once did until the threat has been seriously reduced. It is hard to determine what that really means. Will a declining fatality rate be enough? Will it take the development and widespread dissemination of a vaccine before people feel able to resume old activities? Have people changed their habits permanently?

It has now been more than six months since Jeanine Áñez assumed presidential duties on an interim basis, amid a political crisis ignited by allegations of electoral fraud that led to the forced departure of the longtime leftist incumbent, Evo Morales. Hopes that the holding of fresh elections on May 3 might bring a restoration of stability and certainty in their wake have been undermined by the onset of the COVID-19 pandemic, which has necessitated the postponement of the elections, even as Áñez’s critics allege that she is exploiting the health crisis to claim powers far beyond those implied by her interim status, thereby revealing her autocratic inclinations. Indeed, Áñez claims that she is not bound by recently approved legislation requiring elections no later than Aug. 2, insisting that a vote will be held only when it is safe to do so.

The most recent meaningful polls of voter preferences, conducted in early March, indicated that Morales’ hand-picked stand-in, former Economy Minister Luis Arce, was favored by about one-third of voters, while Carlos Mesa, the candidate of the centrist CC coalition, and Áñez were battling each other for second place, both with less than 20% support. There is no credible data for assessing the impact of the pandemic and the government’s response to the crisis on voter opinion, nor is there any strong basis for making assumptions about how voter sentiment might have been affected over the past two months. The crisis has provided Áñez with an opportunity to display her leadership skills, but many of her actions have contributed to increased polarization.

Significantly, Áñez’s entry into the race after initially pledging that she would not seek an extension of her interim presidency has alienated Mesa’s supporters, which might become an obstacle to uniting the antiMAS forces to defeat Arce in the likely scenario that one of them proceeds to a run-off against the MAS candidate.

Such considerations, along with the polarizing effect of Áñez’s controversial reference to Morales, an Aymara Indian, and his inner circle as “savages” and her blatant appeals to Christian chauvinism, create a high risk that the post-election political climate will be marked by an abundance of bad blood. Consequently, even if MAS is denied power, it is probable that the next president, regardless of political affiliation, will face a hostile opposition majority in the legislature.

The analysis above is taken from the May 2020 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.

A survey into business-to-business payment behavior has revealed a massive increase in late payments across the United States, Mexico and Canada.

The annual USMCA Payment Practices Barometer is a poll of businesses throughout the USA, Mexico and Canada by credit insurer, Atradius. This year’s survey results reveal compromised cash flows and an increased reliance on bank finance, as businesses grapple with COVID-19 containment measures.

Across the region, 43% of the total value of invoices issued were unpaid by the due date, a sharp increase from 25% last year. The value of long overdue invoices (invoices more than 90 days overdue), has doubled. In addition, 4% of the total value of outstanding invoices has been written off.

Businesses throughout the U.S. reported a 72% year-on-year increase in payment defaults. Individual sectors also revealed signs of economic stress. Mexico’s paper industry, for example, had to write-off 8% of the total value of receivables as uncollectable. 40% of the total value of B2B invoices in Canada’s agri-food and chemicals sectors were overdue.

With all three countries now in recession, the outlook is bleak, Atradius noted. Despite this, the majority of businesses surveyed expect growth in the coming months. This optimism was grounded in the belief that banks will continue to provide credit and will cushion the effects of poor cash flow.

In addition, the majority of businesses polled plan on tightening their credit control procedures. They reported that this will involve outsourced risk management, such as credit insurance, together with in-house techniques including reducing risk concentrations and increasing debt collection resources.

The 2020 Atradius Payment Practices Barometer for the USMCA was conducted in Canada, Mexico and the U.S.

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 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations