October 3, 2022

Week in Review

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What We're Reading:

UK’s Truss defends economic plan that sent pound tumbling. British Prime Minister Liz Truss defended her divisive economic plan and shrugged off the turmoil it has stirred in financial markets, saying she’s willing to make “controversial and difficult decisions” to get the U.K. economy growing. (AP)

Nord Stream: Sweden finds new leak in Russian gas pipeline. Sweden has found a new leak in a major undersea pipeline carrying Russian natural gas to the EU—making it the fourth discovered last week. (BBC)

Italy: The daunting economic challenges facing Giorgia Meloni. Italy's election winner takes charge of an economy still shining from a summer boom, but dark clouds loom. High debt, inflation, weak growth and an aging population will weigh on Meloni's promised “national reawakening.” (DW)

Germany to spend billions to tackle high energy prices. Germany plans to spend up to 200 billion euros ($195 billion) helping consumers and businesses as surging energy prices due to the war in Ukraine are pushing Europe’s largest economy into a looming recession. (AP)

China’s population is about to shrink for the first time in 60 years. China accounts for more than one-sixth of the world’s population. Yet after four extraordinary decades in which China’s population has swelled from 660 million to 1.4 billion, its population is on track to turn down this year, for the first time since the great famine of 1959-1961. (Brink News)

Russia to formally annex four more areas of Ukraine. Russia's Vladimir Putin will hold a signing ceremony on Friday to annex four more areas of Ukraine after self-styled referendums condemned by Ukraine and the West as a sham. (BBC)

Forced labor widely persists: Is your supply chain susceptible? Even when a U.S. firm does not directly use forced labor, it may still be legally liable for such practices by downstream suppliers. In addition to bringing legal penalties, such practices can not only damage a brand but hurt business directly with consumer boycotts. (Industry Week)

Financial markets are a mess around the world. Fingers are pointing at the Fed. Around the world, markets are reeling with unpredictability. The values of currencies are plunging. Oil and other commodities are getting hammered. There is fear and panic in bond markets, and on stock exchanges in Frankfurt, Tokyo and Shanghai. (NPR)

Changing crude flows are creating opportunities in the US Gulf Coast. This increased flow of Russian crude to Asia appears to be the primary cause of discounts to Asian sour-grade benchmarks such as Dubai and Oman, with prices subsequently declining relative to the global Dated Brent benchmark. (HSN)

Iran president says ‘chaos’ will not be accepted as protests continue. Iran's president has warned that he will not accept “chaos,” as authorities continue to crack down on protests that have swept across the country since the death in custody of a young woman. (BBC)

People trapped, 2.5M without power as Ian drenches Florida. Hurricane Ian left a path of destruction in southwest Florida, trapping people in flooded homes, damaging the roof of a hospital intensive care unit and knocking out power to 2.5 million people before aiming for the Atlantic Coast. (Business Mirror)

Credit insurers warn of dwindling risk appetite. Rising geopolitical risk is driving up demand for export credit insurance, says a new Berne Union study, which warns that the market is bracing for a wave of Ukraine-related claims. (Global Trade Review)

Chinese, Japanese leaders stress importance of relations. On the fiftieth anniversary of normalized diplomatic ties between China and Japan, their respective leaders said it was important to take relations in a positive direction. (DW)

Philippine Economy to Grow Slower Than Expected

Kendall Payton, editorial associate

The International Monetary Fund (IMF) revised downward its forecast for economic growth in the Philippines. It now says the economy will expand 6.5% this year, weaker than its previous forecast of 6.7%. Cheng Hoon Lim, IMF mission head, said the economy remains sound and has been able to recover smoothly, but the remnants of previous economic disruptions persist today. “The pandemic is behind but we are now confronted with a gloomier and more uncertain global economy,” Lim said in a news conference, per Shore News Network

In an FCIB Credit and Collections Survey, 29% of respondents said payment delays from the Philippines have increased, and 47% said supply chain and shipping issues are the main source of those payment delays. 33% of respondents said cash flow and inability to pay also are causes of payment delays. On average customers are 28.1 days beyond terms. 

What respondents said: 

  • “Know your customer and have good contact information. Follow your shipments and get proof of delivery.”
  • “Usually, clients in the Philippines require an apostille of your bank details so get that sorted out early.”
  • “Secure credit line, if possible, with letters of credit.”

The Philippine central bank revised higher its 2022 and 2023 projections for the country’s account deficits, citing risks of a global economic growth slowdown. The World Bank also noted the widespread economic slowdown has begun to dampen demands for exports of commodities and manufactured goods. “These risks of further downward revision in global growth prospects ... are expected to broadly weaken global demand conditions, and hence, the country's external sector,” the Bangko Sentral ng Pilipinas (BSP) said in a statement.

Inflation in the Philippines averaged 4.9% between January and August, which surpassed the 2% to 4% range preferred by the central bank. “The continued near-term tightening was appropriate to keep inflation expectations anchored and reduce headline inflation,” Lim said. 

BSP raised interest rates by a total of 225 basis points, which brings the total rate to 4.25%— a move some experts say will help the Philippine economy. Aaditya Mattoo, World Bank EAP chief economist, said there has been a recovery in public and private investments, such as higher domestic demand and a revival of tourism. “Even though some aspects of the Philippines’ monetary policy have tightened, its fiscal policy seems to us to be a little bit more accommodative, and therefore we upgraded [our growth forecast],” per the Philippine Daily Inquirer.

Tourism and private investment recovery, along with large infrastructure projects can bolster an economic recovery, said Kelly Bird, Asian Development Bank (ADB) Philippines country director. “The normalization of socioeconomic activity will usher the Philippine economy to a steady, pre-pandemic pace of expansion,” according to an article from ADB.

The September Credit and Collections Survey is now open. Countries being surveyed are: Ecuador, Egypt, Honduras and Turkey.

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Argentina: Fresh Debt Concerns

PRS Group

Barely more than two years after Argentina’s most recent sovereign default, the third of the 21st century, another financing crisis is brewing. The departure of Economy Minister Martín Guzmán in early July further undermined the already battered confidence of the sovereign’s creditors. In his lengthy letter of resignation, Guzmán cited political interference from Vice President Cristina Fernández de Kirchner (CFK), a two-term former president and the leader of the leftist Perónist faction of the governing Everybody’s Front, as a key factor in his decision to step down.

Sergio Massa has been named as the head of a reconfigured Economy Ministry that now includes the previously separate ministries of Agriculture and Productive Development, and he wasted no time making his mark. Just days after assuming his new duties, he reshuffled the top leadership of the Department of Energy, removing close allies of CFK who posed an obstacle to slashing spending on electricity subsidies, one of the key conditions for the disbursement of loans from the IMF.

The display of political strength lifted confidence. However, Massa has not delivered a comprehensive and coherent plan of action, and it is likely that he will encounter strong pushback from CFK and her allies once he does so.

The lifting of health restrictions has provided some oxygen for domestic demand. However, the combination of sky-high inflation, suffocating interstate hikes, and policy uncertainty will hold the full-year growth rate to no more than 3% in 2022, and the ever-present danger of political instability that derails efforts to stabilize the economy represents a significant downside risk to the forecast.

The government is counting on the rollback of pandemic-related stimulus spending and reduced outlays for energy subsidies to facilitate achievement of the near-term fiscal target. However, there will be less fat to trim going forward, and the political room for maneuver will narrow as parties gear up for next year’s general election. In any case, meeting the fiscal targets should pose less of a problem in the near term than the policy challenges awaiting monetary authorities, who are responsible for taming inflation, replenishing depleted reserves, and otherwise creating the conditions for the easing of currency controls.

Goods imports increased by more than 77% (year on year) in the first quarter of 2022, reflecting a combination of stronger demand and higher prices for externally sourced essentials. Although higher prices for agricultural exports will partially offset the impact on the external balances, both the trade and current account surpluses are forecast to narrow in 2022.

The analysis above is taken from the August 2022 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

OECD Interim Economic Outlook Warns of Pervasive Global Economic Slowdown

OECD

The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine, which is dragging down growth and putting additional upward pressure on inflation worldwide, according to the OECD’s latest Interim Economic Outlook.

The Outlook projects global growth at a modest 3% this year before slowing further to just 2.2% in 2023. This is well below the pace of economic growth projected prior to the war and represents around $2.8 trillion in foregone global output in 2023.

The war has further pushed up energy prices, especially in Europe, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world due to lingering impacts of the Covid-19 pandemic. With businesses across many economies passing through higher energy, transportation and labor costs, inflation is reaching levels not seen since the 1980s, forcing central banks to rapidly tighten monetary policy settings faster than anticipated.

The inflation and energy supply shock stemming from the war has led the OECD to revise its previous growth projections downward worldwide. Annual GDP growth is projected to slow to around 0.50% in the United States in 2023, and 0.25% in the euro area, with risks of deeper declines in several European economies during the winter months. Growth in China has also been hit and is expected to drop to a projected 3.2% in 2022. Except the 2020 pandemic, this will be the lowest growth rate in China since the 1970s.

Inflation is projected to recede gradually through 2023 in most G20 countries as tighter monetary policy takes effect and global growth slows. Headline inflation is projected to ease from 8.2% this year to 6.6% in 2023 in the G20 economies, and fall from 6.2% this year to 4% in 2023 in the G20 advanced economies.

“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” OECD Secretary-General Mathias Cormann said during a presentation of the Outlook. “Inflationary pressures that were already present as the global economy emerged from the pandemic have been severely aggravated by the war. This has further driven rising energy and food prices that now threaten living standards for people across the globe.”

The OECD points to substantial uncertainty about the economic outlook, with significant downside risks. These include the possibility of further food and energy price spikes, which could push many people into poverty, as well as the possibility of gas shortages as winter progresses in the Northern hemisphere. Reducing energy consumption and diversifying supply sources will be critical to avoid shortages, which would push global energy prices up, damage confidence, and likely worsen financial conditions and require a temporary period of enforced reduction of gas use by businesses.

Taken together, these shocks could reduce growth in the European economies by over 1.25 percentage points in 2023, relative to the Outlook’s central projection, and raise inflation by over 1.25 percentage points. This would push many countries into a full year recession in 2023, while GDP growth would also be weakened in 2024.

Other key risks are that the ongoing adjustments in Chinese property markets—combined with the high level of corporate debt in China and continuation of the country’s “zero-Covid” policy—could generate a more severe slowdown in the world’s second largest economy than projected. This risk comes on top of continued costs from global supply chain pressures, and possible debt crises and financial contagion in many emerging-market and low-income economies. 

Further monetary policy tightening will be needed in most major economies to ensure that inflation pressures are reduced durably. This will need to be calibrated carefully given uncertainty about the speed at which higher interest rates will take effect and spillovers from tightening in the rest of the world.

Fiscal support can help cushion the impact of high energy costs on households and companies, but should be concentrated on aiding the most vulnerable and preserve incentives to reduce energy consumption. Fiscal actions to cushion living standards must avoid persistent stimulus at a time of high inflation. Means-tested transfers to households broadly meet these criteria.

Managing the energy crisis requires renewed efforts to secure alternative supplies while ensuring all sectors of the economy are incentivized to reduce demand. There is also an urgent need for governments to accelerate investment in energy security and invest in the green transition.

For the full report and more information, visit the Economic Outlook online.

      

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Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate