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Week in Review

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October 19, 2020

Brexit brinkmanship: Johnson says prepare for no-deal, cancels trade talks. Prime Minister Boris Johnson said on Oct. 16 it was now time to prepare for a no-trade deal Brexit unless the European Union fundamentally changed course, bluntly telling Brussels that there was no point in talking any more. (Reuters)

Tariff threats back on the table in fight over plane aid. The U.S. has reportedly made an offer to the EU to remove a host of tariffs if Airbus repaid European governments billions of dollars in aid, but retaliation is also in the cards after the most recent WTO ruling. (Seeking Alpha)

The US debt is now projected to be larger than the US economy. As the United States continues its struggle with the pandemic-induced economic recession and a sputtering recovery, the country's burgeoning debt is not anyone's top concern these days. (CNN)

Crisis besets Venezuela. Economic downturn, trading tensions with the USA, and international sanctions have all begun to play a role in the destruction of the Maduro regime. The possible results of this are civil unrest, economic collapse and ultimately, a failed state. (Global Risk Insights)

Greece, Cyprus told to wait for EU action on 'provocative' Turkey. Greece and Cyprus pushed for a tougher European Union response to Turkey’s natural gas exploration in contested Mediterranean waters at an EU summit on Oct. 16 but were essentially told to hold off until another leaders’ meeting in December. (Reuters)

The biggest US banks show the worst is yet to come for the economy. America’s largest banks are steeled for a wave of loan defaults and missed payments that still haven’t arrived. Thanks to an initially immense amount of support from Washington, that pain appears to have been pushed out to next year. (Quartz)

Market is tight for trade credit insurance; policy prices inflated from pandemic’s uncertainty. COVID-19 and the resulting economic struggles have impacted the trade credit insurance market through the rising of policy pricing and the increased difficulty of securing such coverage, area experts say. (Rochester Business Journal)

G-20 suspends poor nations’ debt payments for six months. The Group of 20 nations, representing the world’s biggest economies, agreed on Wednesday to extend the suspension of debt payments by an additional six months to support the most vulnerable countries in their fight against the coronavirus pandemic. (Business Mirror)

Contour goes live, making blockchain-based trade finance a reality. Blockchain trade finance initiative Contour has now left beta, bringing the decentralised, digital trade finance platform into full live production. (Global Trade Review)

China's central bank unveils changes to laws for commercial banks. China’s central bank issued on Oct. 16 a draft of revisions to laws for commercial banks, improving the mechanisms of risk disposal and market exit for lenders, it said, and set a Nov. 16 deadline for public comment on the changes. (Reuters)

From protests to constitutional crisis: Boyko’s latest gamble. After years of stability and growth, Bulgaria is navigating a turbulent crisis while no one seems to be paying attention. What’s next for this small European country? (Global Risk Insights)

Recognizing the technological revolution and preparing for the ‘next economy.’ Wholesale shifts to economies are pretty easy to recognize when you’re looking in the rearview mirror. The beginning of one isn’t so easy to spot while it’s in progress. The global pandemic has succeeded in pointing out that we are indeed in the middle of a technological revolution. (HSN)

Checklist for ensuring your company gets paid. While managing cash flow is always important, the recent economic turbulence has renewed interest in this topic. Businesses have begun to focus on ensuring that clients and customers pay what they owe when it is owed. This article outlines techniques that can be utilized in developing a system to decrease bad debts. (DLA Piper)




Expanded Economic Crisis Management

Chris Kuehl, Ph.D.

It is safe to say that almost nothing that was assumed regarding the pandemic has panned out as expected. It is useful to do a bit of a review at this juncture to get an idea of what was expected and what the options are now.

At the start, this virus was seen as not especially different than many of the other maladies the world has had to contend with. It was not nearly as deadly as SARS, MERS or the bird flu, and it was expected to behave similarly to other coronavirus outbreaks. It didn’t.

It was vastly more contagious and often hid in people who had no symptoms. It didn’t fade with the arrival of warmer temperatures and it morphed quickly. The original control was expected to be akin to previous efforts. SARS, MERS and others were thwarted by containment and quarantine. However, COVID-19 spread too fast, and the nations of the world were too slow to react. The lockdown was supposed to be a matter of a few weeks and was slated to be over by May. Midway through October, the virus is spreading faster than ever. Lockdowns are being extended and reimposed as the world waits for a vaccine. The economic implications have been massive and destructive, and there is intense debate over what to do now.

There is urgency among the policymakers. At the start of the crisis, there was near unanimity among world leaders because they have all been through recessions before knew the standard drill. Throw as much money as one can at the consumer so their spending levels remain stable. Put together packages of tax cuts and spending plans so people hang onto their jobs and continue boosting the economy. That strategy was hampered by the lockdown itself as the consumer was restricted and couldn’t engage in their usual patterns. The billions poured into the global economy were not as effective as had been hoped. The bigger issue is the lockdowns did not work as well as hoped in terms of the pandemic. Each time there has been a cautious reopening of activity there has been a surge in the number of infections. This begs the question: Will there ever be a safe time to resume normal activity?

Governments of the world now face another crisis. The economic recovery that started to appear in the summer months has started to fade significantly. The initial enthusiasm of the consumer was a welcome boost, but the lockdowns remained as do peoples’ concerns. The millions of people who had been laid off in March and April had been expected to get their jobs back by May and June, but they didn’t. Now the U.S., Europe, Japan and every other nation has been affected by high rates of unemployment. The expectation was that governments would fire off another round of stimulus support through tax reductions, business assistance, extended unemployment and outright payments. There were problems with this strategy.

The first is that none of the governments were in a good financial position. The U.S., Europe, Japan and many others were in serious debt and deficit crisis even before the pandemic, and that meant that those stimulus efforts were financed with borrowed money. The U.S. deficit is staggering at this juncture—close to $4 trillion. Adding to that sum is not popular with the fiscally conservative. To add more complexity, the decision on the next stimulus has been caught up in political campaign priorities as the competing parties are far more interested in how these decisions play to their electoral base than they are in how it affects the economy of the country.

Economists and analysts at the IMF and World Bank are united in their assertion that another stimulus is urgently required, and they agree that it has to be big. The economic rebound that was starting to gain momentum this summer has slowed and will continue deteriorating. Given the likelihood of extended lockdowns and continued public concern over the pandemic, there will be millions more people laid off and tens of thousands of businesses closed if there is not a substantial effort by governments around the world. But as of this moment, the political leaders do not seem convinced that such an effort is in their electoral interests.





Payment Firms Pushed into Transformation

In concert with larger transaction volumes, increased competition and heightened risk factors, payment firms are being pushed into transformation, according to Capgemini’s World Payments Report 2020.

Although payment volumes had reached new heights prior to the pandemic, the pace will now reflect increased reliance on noncash transactions and the effect of a dampened global economy, the report states.

It predicts that a compound annual growth rate (CAGR) of 12% is expected for global noncash transactions for 2019-23. Global noncash transactions surged nearly 14% from 2018-19 to reach 708.5 billion transactions, the highest growth rate recorded in the past decade.

For corporate treasurers faced with business-to-business challenges and inefficiencies, the pandemic has required them to look to digital as the solution to address counterparty risk, connectivity solutions, payments automation and cybersecurity. Corporate treasurers now are looking for their bank and payments firms to provide enhanced API integration, risk management, and real-time payments and tracking.

While bank executives ranked client-visible innovation (79%) and digital transformation (75%) as the top drivers of their strategic initiatives for 2020 and beyond, payments transformation appears inevitable. Collaboration as part of this transformation can help with pandemic-driven uncertainty as regulators focus on addressing risks, especially with noncash payments. Banks are actively pursuing two different ways to achieve a leaner and more agile backend that can keep pace with a digital frontend, by either developing in-house capabilities or by working with digitally agile new players. In addition to developing in-house capabilities, 60% of bank executives believe that working with third parties throughout the value chain will help them augment ecosystem-based propositions.

Asia-Pacific surpassed Europe and North America to become the 2019 noncash transactions volume leader at 243.6 billion. The increase was driven by increasing smartphone usage, booming e-commerce, digital wallet adoption and mobile/QR-code payments innovations, led by China, India and other SE Asian markets (31.1% growth).

As the market continues to be disrupted and more payment options become available, payments firms must grapple with increased risk across business, regulation and operations. Payments executives say businesses are exposed to risks such as cybersecurity (42%), regulatory (37%), operational (35%), and business (30%).

Nearly 90% of executives feel they face a high likelihood of cyber vulnerabilities, as criminals are exploiting exposures opened by the COVID-19 lockdown, which increase the risk of cyberattacks, money laundering and terrorist financing. Payments firms are actively turning to technology to help alleviate the exposure to new risks.

This year’s World Payments Report offers insights on 44 payments markets across various geographical regions, including Europe, North America, Mature Asia-Pacific, Emerging Asia, Latin America, and MEA. An additional online survey of banks, fintechs, payment services providers, and corporates provided data from 235 respondents and 45 executive interviews.


Currency Volatility Costs Companies Nearly $12B in FX Losses

The cost of currency volatility to companies has jumped 37% from the previous quarter, according to the latest Kyriba Currency Impact Report.

The nearly $12 billion in foreign exchange (FX) loss is largely due to the consequences of the COVID-19 outbreak on the economy. The spike in currency volatility marks the sixth time in seven quarters that the quantified negative currency impacts have been more than $10 billion.

Payments fraud risk is also a significant challenge to corporate governance and balance sheets and will only increase under the current economic climate, the report finds.

North American companies indicated the Brazilian real as the most impactful currency, with 34% of companies referencing the currency in their Q1 earnings calls. The euro was identified as the second most impactful currency for North American companies, snapping its 12-quarter streak as the most impactful. The average earnings per share (EPS) impact reported by North American companies in Q1 2020 was $0.04—four times greater than the industry standard MBO of less than $0.01 EPS impact.

In Europe, currency impacts are up 58%. Publicly traded European companies which qualified to be monitored in the Q1 2020 report indicated a collective currency loss of $1.44 billion, following two consecutive quarters of sub-$1 billion impacts. The euro traded places with the dollar as the currency most mentioned as impactful by European companies during Q1 2020 earnings calls, followed by the Brazilian real, the Chinese yuan and the Mexican peso, as shown in the report.

Healthcare equipment and supplies and the professional services industries experienced the greatest impact from currencies, as those industries started to be affected by the global pandemic.

The report details the impact of FX exposures among 1,200 publicly traded multinational companies in North America and Europe. In addition, all companies in the report do business in more than one currency, with at least 15% of their revenue coming from other nations.





 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations