Week in Review
What We're Reading:
August 17, 2020
World shares sink as data points to tepid economic revival. Global shares dipped on August 14 as euro zone data offered little cheer for investors already worried about lackluster Chinese economic numbers and a delay in U.S. fiscal stimulus. (Reuters)
UK enters recession after GDP plunged by a record 20.4% in the second quarter. GDP (gross domestic product) expanded by 8.7% in June as government lockdown measures eased, having shown a meek 1.8% recovery in May following April’s 20.4% contraction. (CNBC)
Lebanese government resigns after Beirut blast, public anger. Lebanon’s prime minister stepped down from his job on August 10 in the wake of the catastrophic explosion in Beirut that has triggered public outrage, saying he has come to the conclusion that corruption in the country is “bigger than the state.” (Business Mirror)
Egypt: Foreign currency takes a hit amid pandemic. The impacts of the coronavirus pandemic are being felt on Egypt’s main hard-currency earners. (AhramOnline)
Belarusian opposition leader calls for new protests and vote recount. Belarusian opposition politician Sviatlana Tsikhanouskaya on August 14 asked supporters to sign an online petition demanding a recount of the August 9 presidential election, in which she believes she was cheated out of victory. (Japan Times)
US risks China’s ire by raising prospect of Taiwan trade deal. Visiting Trump health secretary takes swipe at Beijing while praising Taipei’s democracy. (Financial Times)
Moody’s: COVID-19 may accelerate shift in global trade relations. Moody's Investors Service on August 11 said the coronavirus pandemic is likely to accelerate fundamental shifts in trade relationships and global supply chains. (Deccan Herald)
COVID-19 highlights need for digitizing and automating trade in South Asia. While the pandemic is undoubtedly changing our way of life—from social distancing norms, remote working and greater reliance on e-commerce—it may also act as a catalyst to make trade more resilient and less costly by digitizing and automating the trade process. (World Bank Blog)
Total collapse: Lebanon’s currency crisis explained. If your salary was 750,000LP or $500 this time last year, it’s worth 750,000LP or $75 now. (Gulf News)
Iran's trade woes in the time of coronavirus crisis. Seven countries, including China, Iraq, Afghanistan, the UAE and India, account for 75% of Iran’s foreign trade. Over 50% of Iran’s non-oil exports are headed to Iraq and China, all indicative of its export vulnerability. (Financial Tribune)
Nigeria dollar shortage puts pressure on black-market rate. Nigeria’s dollar shortage is worsening, with the local currency weakening in the parallel market and banks restricting the ability of customers to spend greenbacks abroad using naira cards. (Bloomberg)
United States Postal Service makes sweeping changes to its leadership as lawmakers call for an investigation into delayed mail. The nation's public mail service USPS announced a sweeping overhaul to its organization on August 7 that displaced the agency's two top executives. (Business Insider)
Low rates will hold back recovery in EM currencies, say investors. Fund managers get paid less for higher risks and more volatile trading patterns. (Financial Times)
ABN Amro to exit trade and commodity finance after losses. ABN Amro is ceasing all trade and commodity finance activities following exposure to fraudulent activity in Singapore and Germany, a historic crash in oil prices and a slowdown caused by COVID-19. (Global Trade Review)
Carve-outs are attractive for M&A, but complications can decrease value. The increased complexity of a cross-border carve-out creates both opportunity and risk for buyers. (Global Trade Magazine)
Will Turkey Precipitate
The Next Big European Crisis?
Chris Kuehl, Ph.D.
The situation in Turkey deteriorates almost daily. The lira has now fallen to an all-time low against the dollar as it lost 12% of its value overnight. It rallied a little after that but remains down by 35% over the course of the past year. The government of Recep Tayyip Erdogan claims to be engaged in serious efforts to bolster the economy, but thus far, it has been to no avail.
Yields on the government’s bonds are now at 20% and still climbing. This is at least as bad as it was in Greece a few years ago, and Europe has as much of the same concern as was manifested during that crisis. The most immediate concern is that Europe and banks are exposed to all this because they have done a lot of lending in Turkey and possess a lot of assets.
So far, the European Central Bank does not see this situation as threatening to the entire European banking system as was the case with the Greek crisis, but it has warned that select banks are dangerously exposed. These include BBVA in Spain, UniCredit in Italy and BNP Paribas in France. There are many other banks in Europe that have exposure to these three, making their relative health a big deal.
The situation that has precipitated this crisis has been laid squarely at the feet of the Erdogan regime. Since his recent election, Erdogan has become increasingly autocratic and immune to criticisms from outside his own inner circle and certainly from the rest of the world. He has appointed his son-in-law to head the Finance Ministry; and by all accounts, he has been significantly out of his depth. The central bank has been all but emasculated and is no longer really seen as independent.
Erdogan has been resorting to old tricks to shore up his power and his base. The government is spending vast sums of money on social programs and development projects that are in areas where his support has been strong or where he wants to make inroads. The problem is that Turkey doesn’t have the money to do all this, therefore, forcing them to borrow it. That borrowing has rapidly swung out of control. The government has created a massive deficit and debt issue, and has dragged the entire financial system down in the process. The Erdogan regime has been leaning heavily on the central bank to keep rates very low, despite the fact the inflation rate has been climbing steadily. The previous bank heads wanted to try to slow that rate down, but they were accused of trying to stall the economy, which was deemed unacceptable to Erdogan.
The other problem is that Erdogan has become more and more imperious, and has been making enemies of countries he needs as allies. The U.S. is upset with him over the arrest of an American who was linked to the movement that earlier tried to overthrow Erdogan. That abortive coup attempt was snuffed out in days, but it is still being used as an excuse to go after anything and anyone that would venture a critique of Erdogan’s policies. He has alienated the U.S. and Europe, and has not made any strides as far as replacing the largesse these nations were responsible for. The issues in Turkey are not serious enough to drag Europe down because there has not been the same level of bank engagement with Turkey as there was with Greece. Turkey has always been more peripheral to Europe than Greece. Still, a wholesale collapse will have a major impact on those large banks that were engaged with Turkey.
Hong Kong: Risks Rise as Beijing Stirs Controversy
Public protests by students and other pro-democracy activists triggered by a controversial extradition bill subsided for the most part in early 2020 as democracy activists adhered to social distancing rules aimed at containing the spread of COVID-19. However, the pro-Beijing regime headed by Chief Executive Carrie Lam has stoked the flames of discontent by moving forward with the implementation of a long delayed national security law, which significantly erodes the legal autonomy that is an essential element of the “one country, two systems” model, and a key contributor of Hong Kong’s appeal as a destination for foreign investment.
The pro-democracy parties made significant gains at local elections held in November 2019, and the negative economic fallout from the pandemic and the restrictive rules imposed to contain the spread of the disease creates the potential for a similar result at legislative elections scheduled for September. However, the security law creates a legal basis for cracking down on the more militant anti-government elements ahead of the vote. Along with Beijing’s criticism of recent decisions by Hong Kong’s top court, the implementation of the security law signals the intent of Chinese authorities to exert more overt influence with the special administration region, a risk amplified by the fact that Chief Justice Geoffrey Ma, a staunch defender of an independent judiciary, is due to retire in 2021.
The fallout from the global pandemic will produce a real contraction of the economy in 2020, but the stimulus from emergency fiscal and monetary measures creates the potential for a rebound in the second half of this year and into 2021. However, the size and timing of any rebound is a matter of uncertainty, not least owing to the very real risk that local authorities might tighten or delay the easing of health-related restrictions in the hope of dampening the threat of a revival of widespread disruptive protests.
The U.K. and some other commonwealth states, including Australia, have overtly sought to woo businesses and skilled professionals currently residing in Hong Kong to relocate, a strategy that has drawn threats from China of unspecified countermeasures. Capital outflows increased last year amid rising political unrest, and anticipating an acceleration of outflows, Beijing has sought to dampen the impact by stepping up the local listing of Chinese firms and increased inflows of financing via mainland exchange links in Shanghai and Shenzhen. The appreciation of the local dollar, which is pegged to the U.S. currency, has prompted Financial Secretary Paul Chan to issue an unequivocal affirmation of commitment to the peg in hopes of dampening speculative pressure on the Hong Kong dollar.
The analysis above is taken from the July 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.
On Sept. 22, PWC’s Christopher So will present Insolvency Law in Hong Kong. Visit the FCIB event calendar to learn more.
Cash Flow Forecasting Importance
Highlighted in Survey
Ben Poole, CTMfile
A survey of treasurers conducted by the European Association of Corporate Treasurers (EACT) has again reflected the importance of cash flow forecasting to treasurers during the COVID-19 pandemic. The survey of 200 treasurers, conducted between 11 March and 15 April 2020 found that, over the next 12-24 months, cash flow forecasting is the highest priority for treasury, indicated by 55% of respondents. This was by far the top priority, coming in some 16% ahead of the next priority, treasury technology infrastructure review/replacement (39%). Other priorities in the top five for the next couple of years included working capital management (37%), digitization of treasury (33%), and funding (31%).
In terms of innovation, 62% of treasurers use, or plan to use, data analytics over the next 12 months. This is a significant increase from 2019, where 43% indicated this was the case. Other popular innovations included robotic process automation (RPA) at 46%, and application programming interfaces (APIs) at 35%. A mere 2% of treasurers indicated that they use or plan to use cryptocurrencies in the next year.
Over half of treasurers (52%) are interested in the opportunities to exchange information in real-time, while real-time liquidity, and real-time payments and collections, both are of interest to 47% of treasurers. This reflects the changing pace of treasury, driven by developments in real-time payments infrastructures.
The EACT survey also found that 37% of treasurers report that working capital management is a significant priority for treasury. Despite this, only 30% say that treasury is responsible for working capital management. The biggest trend is for treasurers to have influence over working capital but no direct responsibility (45%). While 13% say they have partial responsibility for working capital, for 12% this is outside of the scope of treasury completely.
Centralization and ESG challenges
Although treasury centralization has been a long-term trend, it remains a priority for 28% of treasurers who responded to this survey. Difficulties in standardizing processes and controls (43%), multiple bank relationships (33%), and a lack of resources (29%) remain the biggest challenges to centralization.
Treasurers are motivated to support their companies’ environmental, social and governance (ESG) agenda, but most of this involvement is at an operational level, such as shifting from manual, paper-based processes (50%), and reducing business travel by encouraging home working (41%). Tactics on the financial management and hiring side look like lower priorities at the moment. Just over one-quarter (26%) of treasurers said that they are issuing or planning to issue green bonds or other sustainable borrowing, while 20% said they are investing in sustainable investment instruments or are developing a plan to do so. Only 17% of treasurers said they are proactively encouraging applications and career development in under-represented groups.
Assessing the COVID-19 impact
In a survey conclusion on its website, the EACT notes that the COVID-19 crisis has highlighted the importance of treasury’s role in managing existential issues around liquidity and risk, the value of digitization to support automated processes and decision-making, and the potential for real-time data and transactions to accelerate supply chains and cash cycles. Real-time and on-demand intelligence also enhances treasurers’ visibility over, and response to, fast-changing conditions. The crisis has also rapidly changed the way that treasury functions operate, perhaps heralding a more permanent change in working practices.
The conclusion also notes that treasurers have been adaptable and responsive to the immediate demands of the crisis. At the same time, their priorities, challenges and areas of interest have remained largely consistent. This suggests that treasurers are motivated by a longer-term, strategic view of the needs of their business, as opposed to reacting impulsively to the day-to-day demands of the crisis. The survey results illustrate, however, the growing role that technology innovation is likely to play in equipping treasurers with the automation and decision-making tools they need to fulfil their responsibilities more effectively, and deliver greater value to the organization. Reprinted with permission from CTMfile
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations