Week in Review

January 14, 2019

Global Roundup

U.K. says won't delay exit as speculation grows. The U.K. Parliament continues to debate PM Theresa May’s apparently doomed Brexit deal, with speculation mounting that exit day will be delayed. The pound rose on growing expectations that Brexit will be postponed. (Bloomberg)

Venezuela President Maduro sworn in for second term. Nicolás Maduro has been sworn in for a second term as Venezuela's president, despite international criticism that his re-election was illegitimate. (BBC)

World Bank president abruptly resigns. The World Bank said on Jan. 7 that its president, Jim Yong Kim, would step down from his post in February to join a private infrastructure investment firm, an unexpected departure that comes nearly three years before the end of his term. (New York Times)

A look at Venezuela's economy as Maduro begins his second term. When Maduro first took office in 2013, the country was troubled by weak growth, debt and falling oil prices. Today, the economy in the South American country is shattered. Forecasts for this year are predicting an expected contraction of 18%. (Marketplace)

U.S. recession risk hits six-year high amid trade war, shutdown. Economists put the risk of a U.S. recession at the highest in more than six years amid mounting dangers from financial markets, a trade war with China and the federal government shutdown. (Bloomberg)

Key global events to watch in January. At the start of every month, the Global Observatory posts a list of key upcoming meetings and events that have implications for global affairs. (IPI)

India will overtake the U.S. economy by 2030. A new world economic order is in the making, with today’s emerging markets, including India, at the heart of it. (HSN)

U.S.-China trade negotiations start amid cooling economic growth. Facing a March deadline, talks aimed at ending a trade war between China and the United States are under way, with the world’s two biggest economies expressing optimism over the potential for progress, but neither indicating its stance has changed. (Business Mirror)

Syria: Economic impact of the war’s next stage. The Syrian civil war is nearing its end game. This article examines the current economic obstacles and opportunities for Syria and President Assad. It also considers the implications of President Trump’s decision to withdraw American troops from the ground. (Global Risk Insights)

How is Qatar coping with its economic embargo? When four of Qatar’s neighbors hit it with an economic and diplomatic embargo back in June 2017, one expert says it faced two big problems. (HSN)

Not just Indian firms—Trump’s H-1B war is crippling Silicon Valley, too. When President Donald Trump started going after the H-1B visa, headlines suggested trying times for Indian firms had begun. The reality, though, is that American firms are suffering. (Quartz)

EU seeks information as Chinese espionage scandal hits Poland. The European Commission will seek information from Poland after national authorities arrested this week a Chinese Huawei employee and a Polish national over espionage allegations. (EurActiv)

North Korea’s “selective détente.” Almost two weeks have passed since Kim Jong-un delivered his 2019 New Year Address. He informed the world of his intention to capitalize on his diplomatic victories to enhance North Korea’s international status. He also expressed his willingness to continue the détente with South Korea and the United States. (Interpreter)


Meanwhile, Back in Asia

Chris Kuehl, Ph.D.

The domestic clash over the border wall and the government shutdown has essentially dominated the news cycle for weeks now. It would be easy to assume that nothing else was happening of importance with all of this going on, but, of course, that is not the case.

There has been quite a lot of activity in terms of the U.S.-China trade conflict—at least there appears to be. The U.S. and Chinese negotiators have agreed to keep meeting. It could signal that some kind of deal or agreement may be close to fruition. At this juncture, there has been no official word. Observers have been straining to get some inkling of what is to come and have only supposition with which to work. It appears that talks will now move to the U.S. in about a week; both sides are sounding optimistic.

The core issues have not changed much. The U.S. wants China to buy more from the U.S. so that the trade deficit can be reduced substantially. The U.S. is also seeking assurances that China will not pressure U.S. companies to give up their technological advantages and secrets. There is also a desire to get the Chinese to curtail their espionage activities aimed at U.S. companies. The issue of intellectual property protection is the more important of the issues and has been tied to some other domestic behaviors in China such as heavily subsidizing export-centered industries and engaging in currency manipulation. The Chinese have started to buy more in the way of farm output and other U.S.-made goods, but this is unlikely to lower the deficit appreciably.

The U.S. has threatened to impose more tariffs in March if the agreement stalls. China has pledged to respond with tariffs and barriers of its own should that take place. The on-again, off-again conversation between the U.S. and China has been roiling the markets for months. Nobody is quite sure what to expect as the direction of the talks lurch from positive to negative almost daily. The markets have been a little reassured by the latest activity because it seems the real issues have come into focus.

China’s economy has been stuttering of late. This has prompted the government to engage in a whole series of stimulus efforts, but these carry their own risks. The fear a year ago was that certain sectors of the economy were on the verge of overheating. The focus was on cooling things down with restrictions on lending and expansion. These have now been abandoned in favor of jump starting the economy back to solid growth, but the threat of inflation remains a big worry. The Trump team has tried to assert that the slowdown in China has been due to the U.S. tariff policy, but the decline started long before any of these tariffs and trade restrictions were implemented.

China has been in a transition for several years now and it has not been all that smooth. The stated intent of the Xi Jinping regime was to build a different kind of China—one that was not dependent on the export sector, but one that grew with its own domestic demand. To do this required China to develop a consumer class. That has meant fairly hefty pay hikes for some in China. This has affected productivity as there has been no real change in output. This is a very familiar challenge in the U.S. and in Europe as well as Japan, but the Chinese are somewhat new to it. They have largely lost their global position as a low-labor-cost nation although they are still far cheaper than the developed western nations.


Zimbabwe: Political Climate Inhospitable to Reform

PRS Group

Having achieved the presidency by means of a military coup carried out in November 2017, Emmerson Mnangagwa fulfilled his goal of obtaining a popular mandate at an election held in in late July, although the result was tainted by credible allegations of various widespread irregularities. At his inauguration, which was delayed as a result of post-election violence, Mnangagwa pledged to promote national unity, eradicate corruption and revive an economy hobbled by the statist policies of his predecessor, Robert Mugabe.

It was evident in the run-up to the elections that Mnangagwa was counting on the perception of free and fair elections to convince western countries to free Zimbabwe from the burden of sanctions. However, the post-election protests organized by the opposition and the rather heavy-handed response of the security services pretty much undermined the entire strategy.

Facing cash shortages, Finance and Economic Development Minister Mthuli Ncube implemented a questionable currency policy that in combination with a controversial transaction tax has contributed to a spike in inflation, stirring fears of a repeat of the hyperinflation of a decade ago, even as the government’s lack of funds to pay for fuel imports creates the risk of an economic collapse. Lacking a clear popular mandate, Mnangagwa will remain beholden to the military leaders who put him in power, and who may question their choice if economic problems contribute to a breakdown of domestic order.

Mnangagwa’s economic policy proposals in many cases amount to a sharp break with the economic nationalism and unorthodox fiscal strategy favored by Mugabe, but he has yet to follow through to any meaningful degree. The president has signaled that he is prepared to make a push on the reform front after receiving a strong vote of confidence from the governing party’s recent congress, but there are clear signs of the continued potential for destabilizing factional tensions within ZANU-PF. Thus, even if the regime possesses the will to tackle the numerous impediments to realizing the country’s full economic potential, a lack of administrative capacity and the political risks associated with a serious attempt to dismantle the complex system of patronage constructed under Mugabe will be obstacles to reducing deterrents to investment.

The analysis above is taken from the December 2018 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.


Election Guide

El Salvador, President, Feb. 03

Nigeria, President, Feb. 16

Nigeria, House of Representatives, Feb. 16

Nigeria, Senate, Feb. 16

Thailand, Senate, Feb. 24

Payment Delays in India on the Rise

A third of credit professionals who participated in FCIB’s December International Credit & Collections Survey reported an increase in payment delays—13% more than the previous survey on India taken May 2018.

None of the participants noted that they were not experiencing delays, compared with 27% in May 2018. And 67% said that there was no change in payment delays.

Cash flow issues, cultural norms and customs, both at 22%, were cited as the No. 1 reasons for delays in payment, followed by an unwillingness to pay (17%). Billing disputes, government approval and regulatory issues (11% each) tied for third place.

Sales were primarily to existing customers (92%). Three-quarters of the participants extend credit to customers and just more than half of them grant terms of 31-60 days; 28%, 0-30 days; and 17%, 61-90 days.

One participant warned that transportation and government control issues frequently delay shipments. Another shared that country rules and regulations on withholding tax and tax deducted at source “takes a lot of time to clear.”

Still another survey taker cautioned that Indian markets typically expect lengthy terms. “Deep negotiation is needed to shorten the term,” he said. “Indirectly, they expect some benefit like early payment discounts for shortening the terms.”

Monitor closely lengthier terms especially for SME, moderate risk customers, he further advised. “Those [that] have government orders generally get paid even after a year. Negotiating milestone payments with the government sector orders is wise; clauses for payment need to be firm for every milestone with consequences of default. Setting the right contract is as important as having good relationships.”

Half of the participants use letters of credit when selling to their Indian customers, although several suggested using cash in advance for initial sales. “Only expand to open account if a customer can demonstrate its ability and willingness to pay in advance. Then start small.”

The December 2018 International Credit & Collection Survey also covers China, Japan and South Korea. FCIB members can access the full results of the survey as well as the survey archives via the FCIB Knowledge Center. Nonmembers who participated in the survey will receive the results via an email. Participation in the survey guarantees you will receive the results whether you are a member or not and furthers the collective knowledge of global credit professionals by sharing real-time credit and collection experiences. The monthly survey is open to all credit and risk management professionals.

This next survey opens Jan. 25 and will cover Argentina, Brazil, Ecuador and Peru.




Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations