January 30, 2023

    

Week in Review

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What We're Reading:

What We're Reading:

US economy expands at 2.9% annual rate in fourth quarter. Economists are bracing for a significant slowdown in economic activity as the Federal Reserve's interest rates hikes take hold, but that certainly wasn't the case in the final months of last year. (Axios)

After Jenin, is a third Palestinian uprising inevitable? Israel’s military raid in Jenin was the deadliest in years, and makes an uprising more likely. (Aljazeera)

Pakistan faces ongoing commodity shortages as dollar crisis and lack of LCs take effect. Pakistan is confronting a continued shortage of key imports like food and fuel as its reserves of U.S. dollars fall and banks remain wary of providing letters of credit. (Global Trade Review)

Baltic dry index slides as iron ore shipments kick off 2023 with 13.1% drop. Despite hopes that a quick economic recovery in China would boost iron ore demand, 2023 has so far been a disappointment for the dry bulk shipping sector. (HSN)

House GOP seeks new restrictions on use of US oil stockpile. For the second time this month, House Republicans are seeking to restrict presidential use of the nation’s emergency oil stockpile—a proposal that has already drawn a White House veto threat. (AP)

Banks eye victory over EU’s Basel reforms on trade finance. The EU looks set to abandon plans to more than double capital requirements for some trade finance instruments, delighting banks and corporates who have spent almost a year campaigning against the reforms. (Global Trade Review)

5 takeaways from the massive layoffs hitting Big Tech right now. The industry is confronting one of its worst contractions in history with Meta, Google, Microsoft and Amazon all announcing mass layoffs over the span of a few months. (NPR)

Migration could prevent a looming population crisis. But there are catches. To developmental economist Lant Pritchett, "population decline" is a mild way to describe what could be a global demographic crisis. (NPR)

The US and Germany pledge tanks to Ukraine, signaling heavy fighting ahead. President Biden said the U.S. will send 31 M1 Abrams tanks to Ukraine, reflecting the rapidly expanding effort to provide heavy weaponry to Ukraine in its war with Russia. (NPR)

The world looks on as Erdogan jockeys for a third decade of power in Turkey. Turkey is less than four months away from a presidential election that could extend the 20-year rule of President Recep Tayyip Erdogan into a third decade. Analysts say that the result may be a close call for the long-term leader. (CNN)

Jeremy Hunt says significant tax cuts in Budget unlikely. The chancellor has been under pressure recently from some in his party to cut taxes to stimulate the UK economy. (BBC)

How will we know if the US economy is in a recession? The second consecutive quarter of economic growth that the government reported Thursday underscored that the nation isn’t in a recession despite high inflation and the Federal Reserve’s fastest pace of interest rate hikes in four decades. (AP)

Argentina Inflation Rate at Highest in 32 Years

Kendall Payton, editorial associate

Argentina’s inflation reached its highest rate in over 30 years at 95% last month, with prices doubled from last year, according to Reuters. This year’s budget proposal from the Fernandez administration expects price hikes to reach 60%.

Consumer prices have jumped significantly while wages still remain low. “The money isn't enough, the salaries aren't enough, inflation keeps rising and we already started the year with increases in bus fares, clothing, food,” Griselda Melle, a self-employed worker, told the news outlet.

In just two years, Argentina has seen hyperinflation at more than 2,000%, which is the highest rate compared to its last occurrence in 1991. Former President Menem at the time tried to combat the issue by launching a convertibility plan to knock the peso down to the U.S. dollar, but was eventually abandoned after 10 years, per Buenos Aires Times.

However, with inflation in its worst condition in over 30 years, the concept of Menem’s convertibility plan has seemed to resurface. Argentina and Brazil are working to create a common currency in order to reduce reliance on the U.S. dollar—but some analysts are critical of the idea, saying the proposal is not logical because of discrepancies in both country’s economies. “Developing and implementing a common South American currency is pie in the sky,” Jimena Blanco, head of Americas at risk consultancy Verisk Maplecroft told CNBC. “We expect the ‘Sur’ to share the same destiny as the Peso Andino, which never got off the ground, or the Sucre, the digital payment currency used by Venezuela and ideologically aligned countries that has no more than symbolic value and has failed to dent the importance of the U.S. dollar in regional trade,” Blanco said.

Customers in Argentina have averaged 59 days beyond terms, with 64% of credit professionals saying payment delays have increased, per the FCIB Credit and Collections Survey. The most common causes of payment delays include government approval (64%), regulatory and supply chain shipping issues (both 45%), as well as cash flow (36%) and central bank issues (27%).

What Credit and Collections Survey respondents are saying:

  • “Know your customer, start early building a relationship with them and include your salesperson. You'll make a team and teams work together.”
  • “Currently payments will not be released until 180 days from the time product hits Argentinian docks on open credit accounts. Prepays, for whatever reason, they tell me payments will be released faster.”
  • “Do not extend open terms to Argentina! Per our customer, govt requirement is to not release funds for 180 days from the date product hits their docks, not from your ship/invoice date. Prepayment is supposed to be faster on new orders, but old orders are not grandfathered in.”
  • “Obtain financial statements on your customers and backstop sales with credit insurance.”
  • “Do due diligence for all prospect customers especially to those small and medium privately held companies with no financials, credit report, etc.”
  • “Check the profile and validate like business address, company domain e-mail address, etc. and start with small, reasonable credit line and reasonable payment terms.”

The next Credit and Collections survey is now open and covers Algeria, Canada, Peru and the United Arab Emirates (UAE). Click here to complete the survey and share the link with your credit and collections network. 

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Insolvencies Close to Pre-Pandemic Levels

Annacaroline Caruso, editor in chief

Commercial bankruptcies are growing rapidly in the EU and U.K. after hitting record lows during the pandemic. Business failures in the U.K. are up 21% year-over-year and in the EU, they are up 16.3% quarter-over-quarter, Markus Kuger, chief economic advisor at Baker Ing, said during FCIB’s European Credit Executive Network meeting. “The accommodation and food services sectors saw the biggest increase in insolvencies at roughly 24%,” he said. “And we can fully expect to see more business failures as we head further into 2023.”

The direct impact of business failures this year will be in the range of €3bn to €4bn and possibly higher, according to a report from PwC. “With economic headwinds remaining driven by high inflation, energy costs, and interest rates, in our view, there will continue to be significant pressure on the profitability and cash flow of many businesses through the early part of 2023 at least,” said PwC Ireland business recovery partner Ken Tyrrell. The majority of all 2022 insolvencies were SMEs, leaving debts of approximately €2m per SME on average.

Bankruptcy levels have returned close to pre-pandemic levels and the situation is “deteriorating rapidly,” Kuger said. PwC’s Insolvency Barometer report warns that this could rise above 1,000 if there is a global recession. The report predicted there will be elevated rates of business failures in the hospitality, arts, entertainment, and recreation sectors. Similar to trends in the U.K. last year, an increase in business failure rates within the construction and real estate sectors is also expected.

The retail industry also is at risk of more insolvencies, at Bed Bath and Beyond and Party City are the latest examples of large retailers filing for bankruptcy. “At this time, the company does not have sufficient resources to repay the amounts under the credit facilities and this will lead the company to consider all strategic alternatives, including restructuring its debt under the U.S. Bankruptcy Code,” Bed Bath & Beyond said in a delayed quarterly filing with the Securities and Exchange Commission.

Insolvencies will only become more common, especially if the economy slips into a recession, Kuger said. “We can expect most economies to fall into a technical recession in early or mid-2023. Lower growth, higher interest rates and tougher lending conditions will lead to higher credit risks.”

Election Guide

Global Economic Uncertainty Remains Elevated, Weighing on Growth

Hites Ahir, Nicholas Bloom, Davide Furceri, IMF Blog

The shocks that have shaken the global economy in recent years have introduced a new normal for turbulence, driven in some cases by political fragmentation between countries. These episodes have also lifted uncertainty to exceptionally high levels, which in turn hurts economic growth as our research shows.

To better track the evolution of these conditions, we updated our World Uncertainty Index to show more frequent readings that are monthly, instead of quarterly, and incorporate data for 71 economies dating back to 2008.

The index fell in December, the most recent reading, but has continued to hit elevated levels in recent times on the back of successive shocks, including most recently Russia’s invasion of Ukraine and the associated cost-of-living crisis.

Our approach uses a text analysis of reports by the Economist Intelligence Unit that allows us to classify the sources of uncertainty by analyzing which words have been published in close proximity to mentions of uncertainty. We believe it’s the first effort to construct a text-based monthly measure of uncertainty covering many developing countries and being comparable across countries.

This shows how the drivers have evolved. Uncertainty jumped following the United Kingdom’s unexpected vote to leave the European Union—and soared even further after the surprise outcome of the 2016 presidential election in the United States. This was followed by US trade tensions with China, which caused major uncertainty for the world.

Another big spike followed in early 2020 with the onset of the coronavirus pandemic, followed less than two years later by another shock from Russia’s invasion of Ukraine and renewed trade uncertainty associated with the risk of geoeconomic fragmentation.

Reprinted with permission from IMF Blog.

 

ICRM fall22 email

 

Week in Review Editorial Team:

David C. Anderson, Director, FCIB Member Relations

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate