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Global Roundup

Global stocks sink after major U.S. index enters correction. Global stock markets sank Feb. 9 after the Dow Jones industrials on Wall Street plummeted more than 1,000 points, deepening a week-long sell-off. Markets followed U.S. stocks lower after the Dow, coming off a record high, entered a “correction”—that is, a 10% decline from its latest peak—for the first time in two years. (AP)

Egypt to loosen monetary policy soon, central banker says. Egypt’s central bank plans to start easing monetary policy “soon,” once it is convinced inflation has been reined in, Governor Tarek Amer said on Jan. 30. Yields on Egyptian pound treasury bills have been falling over the past two weeks, suggesting the market anticipates a rate cut. (Bloomberg)

Venezuela announces 99.6% devaluation of official forex rate. Venezuela’s central bank on Jan. 29 announced a devaluation of more than 99% of its official exchange rate with the launch of a new foreign exchange platform, a move critics quickly said would not create a functioning currency market. (Reuters)

South Africa's President Zuma: A chronology of scandal. President Zuma is facing increasing calls to resign as his political career has become overshadowed by corruption allegations and scandals. Here is a timeline of the major events that tarnished his reign. (DW)

U.K. set to leave European Union as slowest-growing economy. U.K. economic growth is set to lag all other European Union countries this year and next, even assuming Britain maintains the same trading relationship with the bloc after Brexit. (HSN)

Hyperledger boss Behlendorf expects China to lead on blockchain. Brian Behlendorf, the executive director of blockchain consortium Hyperledger, says China will be a leading force in developing blockchain for trade finance. (Global Trade Review)

Forcing another free trade deal could result in a more divided Europe. As trade officials desperately try to move the long-delayed EU-Mercosur agreement forward this week, we must stop and consider that this deal is likely to go far beyond the balance of trade, and increase economic, social and political divisions within both continents. (EurActiv)

EU forecasts stronger euro-area growth as Brexit risks remain. The euro-area economy will expand faster than previously anticipated this year and next, the European Commission said, though it offered little comfort to the region’s central bank, saying inflation is expected to remain subdued. (Business Mirror)

The importance of the FARC’s 2018 political campaign. On Jan. 27, Rodrigo Londoño began his campaign for president of Colombia. Will this move help the FARC achieve greater acceptance and further the peace process, despite the unlikelihood of a political victory? (Global Risk Insights)

A world without NAFTA? The Trump administration’s efforts to re-negotiate NAFTA continue amidst uncertainty and growing concern whether the parties will be able to conclude talks successfully. With such significant conceptual gaps between the parties, the future of the agreement is in question—but what is truly at stake? What would a post-NAFTA world look like? (Global Trade Magazine)

May to tell Japanese firms she wants EU deal as soon as possible. Theresa May will tell Japanese investors in Britain that she wants a Brexit transition deal as soon as possible, her spokesman told reporters. The prime minister and Chancellor Philip Hammond are due to meet Japanese companies, including the three big carmakers, later on Feb. 8. (HSN)

Exporting to India: What you need to know. Looking to break into the world’s fastest-growing economy? Then look toward India. That’s right—by 2020, India will outrank China as the most populous country in the world. So what does the growth of this nation mean for its economy, and for exporters who may want to enter it? (International Trade)

Could China overtake the the U.S. in AI development? U.S.-based companies have long been considered industry-leaders in the field of artificial intelligence (AI). As the Chinese government prioritizes state support for AI development, will the U.S. be left behind? (Global Risk Insights)

Populism and Latin America

Chris Kuehl, Ph.D.

It would not be accurate to assert that Latin America is experiencing a populist wave for the first time or even that the current political situation is all that similar to the developments in Europe and to an extent in the U.S. There has long been a streak of populism from both the right and left in Latin American politics. What seems to make this latest emergence a little different is that these new movements are essentially rejecting both the traditional right and left. They are pushing for a new orientation to governing that has elements of both the traditional political positions married to new concepts of power and governing.

Six nations in Latin America will be holding elections this year, an unprecedented concentration. The assessment of this year’s political battle is that it will be as much about the future of democracy itself as it is about leadership in these six nations. The states that will be picking new leaders one way or the other include Brazil, Mexico, Colombia, Venezuela, Costa Rica and Paraguay. All are seeing the rise of nontraditional leaders who are exploiting a general sense of anger and disillusionment. In several of these countries, the populists have a decent chance of winning significant power.

Brazil’s election was thrown wide open by a ruling from the country’s federal court. Three judges held that Inázio “Lula” da Silva would not be permitted to run due to his involvement in a widespread series of corruption scandals. He was expecting to make a political comeback, but this derails his effort. He has declared that he will campaign anyway. The Workers Party plans to leave him in that position, which sets up even more chaos. The people that are running are as polarizing as any Brazil has seen in years. The right-wing populist is Jair Bolsonaro, a former military officer who has asserted such controversial policies as beating homosexuality out of children and mandating gun ownership. His left-leaning populist opponent is longtime environmental activist Marina Silva. There is not one candidate from the middle despite the fact that most Brazilians identify themselves as part of that middle.

Mexico is looking at a deeply divisive election as well. The polls are currently favoring the longtime candidate of the left—Andrés Manuel López Obrador (AMLO). Hewas the firebrand mayor of Mexico City some years ago and has been standing for the top job as leader of the left for years. He has never finished all that strong, either losing to the traditional party in Mexico (PRI) or the newer pro-business party (PAN). This year, PAN is in shambles and has fielded a weak candidate, while the PRI is weighed down by the anger and disillusionment that has surrounded current President Enrique Peña Nieto. The most useful campaign strategy AMLO has is pointing north. Every time Trump launches into another tirade against Mexican immigration or he advocates for his wall, the support for AMLO jumps. Right now, his chances are as good as they have ever been. This is a leader in the mold of Hugo Chavez. By the end of the year, he could be the president of Mexico.

In Colombia, the race to replace the current president is wide open. Juan Manuel Santos has been opposed by both the left and right and can’t stand for election again in any case. He is attacked from the right for initiating the peace process with the FARC and from the left for not controlling corruption and not doing enough for the poor. He has had little success in anointing a successor. There are two former FARC commanders running as well as representatives of former President Álvaro Uribe. No candidate has more than 20% support and the positions taken have become more extreme as they all seek to appeal to their base.

Costa Rica has been a beacon of stability and order for decades. It doesn’t even have a military per se—putting national defense in the hands of the national police. The surprise in the recent first round of elections was the rise of an evangelical pastor who based his campaign on opposition to gay marriage. While the other contenders focused on economic issues and development, Fabricio Alvarado Muñoz focused on social issues in an intensely Catholic country. The attacks on the LGBT community were also a thinly disguised attack on the legions of foreign tourists that dominate the country. They are massively important to the economy, but they trample local culture and norms. Essentially, they treat the entire population of Costa Rica as their servants—or so the campaign of Muñoz asserts. That resonates with some in Costa Rica.

Even Cuba will get a new leader this year—the first non-Castro president since the revolution. It will not be a populist who will come from the very safe ranks of the party, but whoever it is, will be 20 to 30 years younger. It will be somebody who has come to power under Raul Castro and not through the more ideologically pure Fidel Castro.

Global Economy Came into 2018 with Momentum

Wells Fargo Economics Group

The following text is a reprint of a report published by Wells Fargo Securities on February 7, 2018.

As is apparent from data on global industrial production (IP), there appears to be a synchronous global upswing underway at present. We do not yet have full-year data for 2017, but it appears that global IP grew in excess of 3% last year, the strongest year of IP growth since 2011 when the global economy was rebounding from its deep recession.

Moreover, the GDP data for individual economies in the fourth quarter that are now trickling in suggest that the global economy came into the new year with a decent amount of momentum. For starters, real GDP in the United States, the world’s largest economy, grew at an annualized rate of 2.6% in the fourth quarter relative to Q3. Real GDP in the eurozone rose 2.3% (annualized rate) on a sequential basis in Q4, and the year-over-year rate of economic growth in China remained unchanged at 6.8% in the fourth quarter. There are not yet many “hard” data releases for Q1-2018, but the “soft” data for January that are available suggest that growth has remained resilient in most major economies thus far in 2018.

We estimate that the global economy grew near its long-run average of 3.5% last year, and we look for roughly similar growth rates in 2018 and 2019. We forecast that real GDP growth in the United States will strengthen from 2.3% last year to 2.9% in 2018. We look for the eurozone economy to decelerate marginally from the 2.5% growth rate it registered in 2017, its strongest growth rate in 10 years, to a still respectable 2.3% rate of growth this year. We also think that the steady slowdown that has been underway in China for the past seven years will continue in 2018. That said, the 6.4% growth rate for China that we forecast for 2018 continues to place it among the fastest growing major economies in the world.

With growth picking up and the threat of deflation receding in most economies, central banks are removing policy accommodation. The Fed has raised its target range for the fed funds rate by 125 bps over the past two years, and we look for the Federal Open Market Committee (FOMC) to hike rates by another 75 bps this year. The European Central Bank (ECB) started to dial back its quantitative easing (QE) program last year. We look for the Governing Council to end its QE program late this year, and we forecast that it will begin a slow process of hiking rates in 2019. The Bank of Canada has raised its main policy rate by 75 bps since last summer, and we expect it will hike rates at least once more in 2018. The Bank of England (BoE), which cut its main policy rate by 25 bps in the immediate aftermath of the Brexit referendum in June 2016, took back that “insurance” rate cut in November. We look for the BoE to hike rates again later this year. The Bank of Japan has dialed back its pace of bond buying in recent months, but it probably will keep its deposit rate in negative territory for the foreseeable future.

Despite 75 bps of Fed rate hikes last year, the trade-weighted value of the U.S. dollar fell more than 8% in 2017. Wells Fargo’s currency strategy team looks for the downward trend in the greenback to remain intact in 2018 as ongoing Fed tightening starts to become less supportive of the dollar and as foreign central banks start to catch up to the Fed with their own removal of policy accommodation. Our base-case forecast for global GDP growth near its long-run average in 2018 and 2019 is generally constructive.

So where are the risks to this forecast? There clearly are a number of geopolitical events that, if they were to come to pass, could raise risk aversion among investors and businesses, thereby weakening growth prospects. However, geopolitical events are very difficult to accurately forecast, so we assume that they will not happen. (If they do, then we will change our forecast.) Another risk to our forecast is the potential that central banks, especially the Fed, could tighten “too” fast. This risk would rise if inflation were to shoot higher than central bankers currently expect. But if these risks do not come to pass, then the global economy should continue to expand this year at a solid pace.

Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a U.S. broker dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Bank, N.A. and Wells Fargo Securities International Limited, authorized and regulated by the Financial Conduct Authority.

Election Calendar

Republic of Djibouti
National Assembly | Feb. 23

Senate / Chamber of Deputies | March 4

National Assembly of People’s Power | March 11

President | March 31 (Date not confirmed)

Chamber of Deputies / Chamber of Senators / President | April 30 (Date not confirmed)

As Risks Evolve, Export Payment Terms Must Evolve as Well

An exporter in Denver sold goods to a distributor in Brazil (and many other countries). After a long and satisfactory relationship with its Brazilian distributor, they agreed on payment terms of 150 days on an accepted draft basis.

After shipment, the exporter's bank sent the documents to a bank in Brazil with instructions to release the documents after the buyer accepted the 150-day draft, thereby obligating themselves to pay it at maturity. Some traders refer to this method of payment as a documentary collection with a time draft, sometimes as documents against acceptance, abbreviated DAA or D/A.

For years, this relationship worked well and the distributor always met its obligations.

In October of 1989, the exporter shipped goods valued at $76,000. The distributor in Brazil accepted the draft with the maturity date falling on a Monday in March of 1990. On the Friday preceding the maturity date, the government of Brazil announced that at the end of business that day, the old Cruzado would become invalid and a new currency, Cruzeiro, would be introduced on Monday.

On Monday, the due date, the distributor authorized its bank to pay $76,000. The bank informed the distributer it could not transfer the funds until the central bank set a new rate of exchange for the new currency and implemented new regulations relative to wire transfers.

Days and weeks elapsed before it implemented the new regulations. The distributor then discovered that, according to the new regulations, it could only wire $1,200 a year out of the country. It doesn't take a calculator to figure out collection of the $76,000 would take some time!

This illustrates sovereign risk—the government intervened to prevent payment from being made. The distributor had the capacity and willingness to pay, but due to government controls, could not pay.

The exporter in Colorado informed the distributor that it would suspend future shipments until they received the $76,000. The distributor in Brazil, however, depended on receiving these goods for its livelihood. In order to keep its reputation clean, it arranged for payment from an account that it happened to have at a bank in Miami. Subsequently, payment terms for all future shipments were letter of credit only.

This lesson reminds us all that situations change, and not just with international customers or distributors, but with their countries as well. Exporters would be well served to regularly review the risks of doing business in all their markets.

Reprinted with permission for Shipping Solutions export software, www.shippingsolutions.com. Copyright InterMart, Inc.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations

Global Roundup

Kenya defies court order to reopen TV stations, detains opposition figure. Kenya on Feb. 2 defied a court order to lift a ban on three private television stations and briefly detained an opposition politician, deepening a crisis sparked by a disputed presidential election. (Reuters)

China’s 2015 GDP was exaggerated by fake data, analysis shows. China’s growth rate in 2015 was probably overstated by “a couple of percentage points,” according to new data analysis by Bloomberg Economics. (HSN)

Trump blasts EU for trading with U.S. ‘very unfairly.’ The European Union (EU) trades with America “very unfairly,” President Donald Trump said in an interview aired Jan. 28, warning that his many problems with Brussels “may morph into something very big.” (EurActiv)

Egypt votes: The last man standing. Staying true to the political climate in post-Mubarak Egypt, the upcoming presidential election is as unpredictable, as it is predictable. Seven influential figures announced their intention to stand in the election, but really only one remains. (Global Risk Insights)

Argentina and Brazil push for a Mercosur agreement with the EU. 2017 promised to be a decisive year for the trade agreement between Mercosur and the European Union given Brazil and Argentina’s strong efforts to finalize the deal. However, due to disagreements in the agricultural sector, the deal is now expected to occur in 2018. (Global Risk Insights)

EU rejects Brexit plan for banks by Britain’s financial industry. European Commission officials have rejected the City of London’s proposal to strike a post-Brexit free trade deal on financial services, a major blow to Britain’s hopes of keeping full access to EU markets for one of the world’s top two financial centers. (HSN)

With solar tariffs, no finding that China conducted unfair trade practices. In week beginning Jan. 22, the Trump administration took a decision to raise tariffs on solar cells and modules imported into the United States. The decision was based on a complaint brought under Section 201 of the Trade Act of 1974. Make no mistake, this was not a finding that China had conducted unfair trade practices; rather, it was pure protectionism intended for a very narrow domestic constituency. (Global Trade Magazine)

China’s economic gloom merchants. Markedly slower growth and imminent financial crisis have been the common dual predictions for China over the past decade. China’s growth has indeed slowed from its unsustainable breakneck pace in the two decades before the 2007–2008 global crisis. Keeping growth going through and since the downturn has, however, required a big increase in domestic credit, raising the risk of a financial crisis. Can China continue to confound the pundits? (The Interpreter)

Swiss see no quick deal on new EU treaty. Switzerland will not meet the European Commission’s deadline for a deal in the early part of this year on a new treaty that would bind the neutral country more closely to its biggest trading partner, new Swiss Foreign Minister Ignazio Cassis said. (EurActiv)

The Gulf crisis echoes in Africa. In December, Qatari Emir Sheikh Tamim bin Hamad Al-Thani travelled to Senegal, Mali, Guinea, Burkina Faso, Côte d’Ivoire and Ghana. Since Sheikh Al-Thani became emir in 2013, Qatar’s African policy has been primarily focused on East Africa. However, the Saudi and United Arab Emirates-led diplomatic and economic embargo of Qatar could force the Emirate to rethink its policy toward the continent. (Global Risk Insights)

Tensions rise within Brazilian economic team as election nears. As Brazil’s election race heats up, so are tensions in the country’s economic "dream team." Finance Minister Henrique Meirelles, who is currently testing the waters for a possible presidential bid, is becoming increasingly irritated with Treasury Secretary Ana Paula Vescovi, according to four people with knowledge of the matter. (Bloomberg)

Bitcoin whipsaws investors as bubble shows signs of bursting. Bitcoin whipsawed investors on Feb. 2, falling below $8,000 for the first time since November before recovering most of its losses, as a miserable 2018 continued for cryptocurrencies, with investors confronting a mounting list of concerns about the future of the industry. (Bloomberg)

The real purpose of Russia’s presidential election. Vladimir Putin’s election to a fourth term as president of Russia on March 18 is a foregone conclusion. Nobody can remotely consider Russia’s presidential election to be democratic, whatever Putin and his defenders might say. As such, one might ask why bother to hold an election at all? (Interpreter)

‘Modification’ Has Not Gone Smoothly

Chris Kuehl, Ph.D.

The promise four years ago was simple enough: Narendra Modi and the Bharatiya Janata Party would set about the task of developing the Indian economy so that everyone in the nation would be able to see progress.

The assertion was that Modi was a business-friendly leader and would be able to clear a path to development, but it has been far harder to execute than it was to promise. There has been a shrinking of growth that was made worse by a badly managed tax reform and increase. The cash ban was supposed to dump billions into the banks and break the power of cash hoarders, but this transition has been anything but smooth.

This litany of problems has worsened the current situation. Modi now faces a budget crisis that leads to a political crisis.

Modi has one last budget to present before elections next year. This is usually the time governments try to curry favor with their constituents with tax breaks and various programs. The problem is that the budget is far too tight to do much, and the Modi campaign will not have the tools to win over supporters.

Not that the Congress Party as any better ideas, but Modi was elected on the basis of his reputation as business savvy. The public expected far more from his plans.

Pockets of Collection Complexity Found in Every Country

Sweden, Germany and Ireland have taken the lead as the easiest countries in which to collect debt, while Saudi Arabia, the United Arab Emirates and Malaysia were at the opposite end of the spectrum, according to a Euler Hermes report released Feb. 1.

“International debt collection is three times more complex in Saudi Arabia than in Sweden,” finds the 2018 Collection Complexity Score and Rating.

The United States and Australia were identified as the most complex developed economies in which to collect debt; and Western European countries, the easiest. Greece and Italy both rated as countries with high levels of collection complexity, however.

Sweden and Germany, both ranked at 30, set a positive example, compared with Saudi Arabia at 94, the firm said. Overall, the global average stands at 51 on a scale of zero to 100, which indicates a high level of collection complexity worldwide, Euler Hermes said.

Asia-Pacific had the most countries with severe ratings, with Malaysia, China and Indonesia being the worst in the region.

Three out of five countries in Latin America were ranked with very high collection complexity: Chile, Colombia and Argentina. Africa has three (Cameroon, Morocco and Togo), and Eastern Europe has four (Czech Republic, Hungary, Slovakia and Turkey).

The largest economies, the most dynamic markets and the less vulnerable countries do not necessarily entail a more conducive business environment, the trade credit insurer noted. “Pockets of collection complexity exist in all countries, even in Sweden. Indeed, complexity in international debt collection depends on many different factors. At a global level, it appears that the key factor of complexity is by far local insolvency proceedings, which are not always effective, i.e., taking into account priority rules and cancellation of prior transactions.”

The analysis measures the level of complexity relating to international debt collection procedures in 50 countries. The three main factors analyzed were local payment practices, local court proceedings and local insolvency proceedings.


Corporate Overheating Among Projected Risks for 2018

While the economic upturn continues, greater supply constraints in advanced economies, banking risk in China and political risk were identified as three major risks for 2018 by Coface.

The issue of overheating will be particularly relevant for companies in advanced countries, the trade credit insurer said. “Historically low levels of unemployment in Germany, the United States and Central Europe indicate that companies are close to their maximum production capacity. This supply issue is shared with French companies, paradoxically facing a labor shortage despite high levels of unemployment, which could limit their growth.”

Temporarily hidden in 2016 and 2017 as a result of public investment, the structural weaknesses in the Chinese economy are resurfacing: overcapacity in steel and soaring corporate debt in the form of bank credit and shadow banking, it noted. “In this context, banking risk increases significantly, especially for small- and medium-sized banks.”

And lastly, resurgence of political risk cannot be ruled out in 2018, Coface said. “Social frustrations are still high in emerging countries at the beginning of a busy election year and are accompanied by high Coface social turmoil risk index levels in Iran (71%), Lebanon (65%), Russia (64%), Algeria, Brazil and Mexico (61% each).” In the Middle East, the volatility of oil prices exacerbates this risk, it added. Saudi Arabia is also marked by a high level of risk in this respect (score of 65%), and Coface has lowered its assessment of the country to C.

Despite the fact that political risk remains high, Coface improved assessments for Ukraine (C), Moldova (C) and Georgia (B), which are enjoying good growth following the pickup in Russia and the clear recovery in Europe. Kazakhstan (B) is benefiting from increased oil production and public investment related to China's "New Silk Road" project.

In 2018, global growth could peak (Coface forecasts growth of 3.2%). In emerging countries, the recovery is expected to be stronger (4.6%) and above all more synchronized, the firm noted. In advanced countries, Coface expects that the downward trend in insolvencies will begin to lose momentum; its forecast decline is only 1.8% in 2018, after a 6% drop in 2017, as many countries have returned to their pre-crisis levels, the firm said. It expects insolvencies to increase in the United Kingdom (up 10%) in a context of persistent political uncertainties.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations

Global Roundup

No-deal Brexit would cost EU economy €112bn, report claims. A no-deal Brexit would cost the remaining 27 EU nations €112bn in lost economic output, according to research by a U.K.-based think tank. Although the U.K. would still be the biggest loser from crashing out of the EU without a new trade deal—with a cost to the economy of £125bn by 2020—the EU would also suffer a bigger economic hit than previously thought by the end of the decade. (HSN)

New president plans Zimbabwe revival by restoring economy, democracy. Zimbabwe’s new president, Emmerson Mnangagwa, has a plan to revive one of the world’s worst-performing economies and end its isolation: pay compensation to white farmers whose land was confiscated, sell bonds to rebuild infrastructure and hold internationally acceptable elections. (Bloomberg)

Asian countries open to, but baffled by U.K. TPP interest. After it emerged that the U.K. was seeking membership of the Trans-Pacific Partnership (TPP), trade figures in Asia have expressed openness to the idea, but confusion as to how realistic it is. (Global Trade Review)

Emerging technologies drive more risks than firms can protect against. Emerging technologies such as cloud services, artificial intelligence and the internet of things (IoT) may well become the next big headache for firms and organizations in 2018. (Global Trade Review)

Is NAFTA in trouble again? President Donald Trump once again threatened to withdraw the United States from the North American Free Trade Agreement (NAFTA), this time in an interview with the Wall Street Journal. The U.S. negotiating positions on issues like local content and government procurement are designed to reduce the U.S. trade deficit with its NAFTA partners. (Global Trade Magazine)

IBM and Maersk are creating a new blockchain company. IBM and Danish shipping giant Maersk are teaming up to form a new company whose aim is to commercialize blockchain technology—the nifty, shared-accounting ledgers first made famous by the cryptocurrency bitcoin. (Fortune)

Ukraine faces a heightened risk of instability in 2018. Current high levels of corruption and periodic rounds of unrest linked to poor governance and diminishing support for the local authorities highlight Ukraine’s persistent structural issues. The ongoing conflict in the east will also continue to generate political tensions that may hinder Kiev’s reform efforts. (Global Risk Insights)

Tillerson: Threat of North Korea war growing despite talks. U.S. Secretary of State Rex Tillerson offered a sobering assessment about the possibility of war with North Korea, saying advances in that country’s nuclear program meant the situation was “very tenuous.” (Business Mirror)

China GDP powers past debt purge, leaving trail of unfinished projects. In most of China, the economy is powering through Xi’s borrowing bottleneck, with economists surveyed by Bloomberg projecting the nation’s GDP grew 6.8% last year, the first annual acceleration in seven years. But for less-developed areas, the story is not so simple. (Bloomberg)

Turkey shells Syria's Afrin region, minister says operation has begun. Turkish artillery fired into Syria’s Afrin region on Jan. 19 in what Ankara said was the start of a military campaign against the Kurdish-controlled area. The cross-border bombardment took place after days of threats from Turkish President Tayyip Erdogan to crush the Syrian Kurdish YPG militia in Afrin in response to growing Kurdish strength across a wide stretch of northern Syria. (Reuters)

Why unregulated cryptocurrencies could trigger another financial crisis. Despite the laudable blockchain technology and the great opportunities it offers in enabling quicker transactions, numerous problems can be associated with its products—such as bitcoin and other cryptocurrencies—if regulation is delayed. Global measures for the use of digital currency should swiftly come into force. (EconoTimes)

Britain Faces Uncertain Future

Chris Kuehl, Ph.D.

Things could really not have turned out much worse for the U.K. over the last year or so. The Brexit vote created a crisis in the Conservative Party that cost David Cameron his job and set off an intraparty struggle for leadership.

The assumptions and claims of the pro-Brexit crowd have been proven woefully inaccurate. It was asserted that Europe would be so heartbroken to see the U.K. pull out that it would bend over backwards to accommodate a new era. This has not been the case as the European Union (EU) has essentially said, “Don’t let the door hit you on the way out.”

Germany has been adamant that the U.K. pay the full price for its decision to withdraw, and it is not alone. The EU has been thriving in the last year and seems not to have missed the U.K. one bit, while the British economy has suffered and is slowing.

The other assumption made by those countries that wanted a break from the EU was that they would be able to leverage their other relationships. There was a great deal of confident talk that the U.K. would always have its Commonwealth brothers, and there was always that “special relationship” with the U.S. It was stated repeatedly during the campaign that Britain would be able to easily replace business with Europe with more business with the U.S.

At the start of the Trump administration, it appeared that this was an accurate assumption as President Donald Trump said all the right things about doing more business with the U.K. He had been a big supporter of Brexit and seemed ready to bolster the U.K. economy, but that enthusiasm passed very quickly. Today, there is open hostility between the Theresa May government and Trump. The trip that Trump was supposed to take to London was canceled in part because the British population is not fond of the U.S. president and there would have been large and angry protests. The promised trade deals have not been forthcoming either. Even the low value of the pound has not triggered much in the way of exports from Britain to the U.S.

Meanwhile, the talks with the European Union have most definitely not gone the way the British would have liked. The debt the U.K. owes for breaking away has been acknowledged and will be paid despite all the pledges to refuse. The hoped-for trade agreement has been stalled, and there is deep opposition from Germany and others. The EU has most definitely moved on and seems to be seeking ways to bolster the organization without the U.K. Issues still abound as far as how to deal with the border between Ireland and Northern Ireland. There are also numerous other sticking points. All of this has been made far more complicated by the weakness of the May government and the efforts on the part of the Tories to unseat her. She lacks the authority to make real deals with Europe.

Then, there is the role of the Commonwealth. It was expected that somehow Canada, Australia, New Zealand, South Africa, India and a collection of former British colonies would step in and do far more business with the U.K. They haven’t and seem to have no intention of doing so. They have far more relevant relationships with neighbors and with the EU and the U.S. The levels of trade between them and the U.K. have not changed appreciably.

All of this has led to a significant diminution of British power and influence. It was once a key decision-maker in Europe and was considered the most steadfast ally the U.S. had. Today, it has no power in Europe at all, while under Trump, the British have all but lost any vestige of being special.

Carillion—What Happens Now?

Elaine O’Connor, of Anthony Gold

Carillion is, or was, the second-largest construction firm in the UK. Its collapse on January 15, 2017 was confirmed when the High Court ordered the compulsory liquidation of the various companies in the group. It employed 20,000 people and the projects of the business included the HS2 rail project, Battersea Power Station redevelopment, military contracts and the maintenance of schools, prisons and hospitals. So, what happens now?

Carillion outsourced projects to a significant number of smaller businesses and spent £952million with local suppliers in 2016. The construction giant stated that this demonstrated its commitment to generating economic growth and development. Many of these firms are now waiting in the wings to learn if they will be paid. It has been suggested that the small suppliers are already out of pocket due to being made to wait 120 days for payment. For small business owners, extending this sort of credit may put the entire business at risk.

The BBC reported on January 16, 2017 that Cabinet Office Minister David Lidington said there would be government support for public sector contracts. This means that employees will be paid. However, this will only extend to two days and does not extend to companies working on private projects.

It was well known that Carillion was experiencing financial difficulty. Last year, the company issued three profit warnings, had debts of approximately £1billion and a £600million pension deficit. Richard Howson was the company’s chief executive until he stepped down in July 2017, after the first profit warning was issued. He will continue to be paid until October this year fueling increasing criticism about executive pay. It will be interesting to see whether this leads to greater shareholder engagement regarding director’s pay, particularly in companies that are not performing well.

The government is also likely to come under scrutiny as it encouraged small businesses to get involved with Carillion and continued to award several billion-pound contracts to them, even after substantial financial issues were reported.

Accountancy firm PwC is overseeing the liquidation and made the following statement:

“Unless told otherwise, all employees, agents and subcontractors are being asked to continue to work as normal and they will be paid for the work they do during liquidations.”

Contrary to this, there have been reports where workers attended projects and were told to go home. Redundancies have also already begun. For example, Flora-tec is a landscaping services company, which Carillion owes £800,000. They were forced to make 10 people redundant when the collapse was announced.

It is PwC’s job to sell Carillion’s assets, and to try to satisfy the many creditors to which debts are owed. It is not clear whether this will prevent suppliers becoming insolvent, which may depend on whether the debts are secured and if insurance for such an event was in place. As with all liquidations, it is highly unlikely that there will be sufficient funds available to pay everyone what they are owed.

Printed with permission from Anthony Gold.


Australia’s Late Payments Fight Shows the Limits of Government Intervention

When it comes to late business-to-business (B2B) payments, eyes most often turn toward the U.K., where payments and fintech companies have worked to raise awareness of the issue, and where government policymakers have taken steps to combat the problem. According to the latest figures from Dun & Bradstreet, small businesses (SMBs) in the U.K. are owed an average of more than $88.6 million each from their corporate customers.

But the late B2B payments problem is a global one, and while the U.K. explores how to approach the topic, there is another jurisdiction in which the late payments fight is heating up: Australia.

Recent research from Australian small business accounting firm Xero and payments company American Express explored just how big of a stressor late invoice payments are on Australian companies. Analysts found that more than a third of outstanding invoices at businesses with between $1.5 million and $230 million in annual turnover cannot be reconciled at least every other month. Xero and Amex described the nation’s late payments problem as “endemic” across the mid-market. The matter has landed on the desks of policymakers too.

Australia’s Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell is one of the loudest opponents against late supplier payments. Last month, reports said she began the process of establishing a mechanism for large corporates to register their supplier payment practices and collect data on payment times. According to government data, up to half of Australia’s SMBs are owed more than $20,000 by larger companies who, according to Carnell, use their small suppliers as “cheap finance.”

In its final report on Payment Times and Practices, the ASBFEO recommended legislative action to promote fair payment terms, along with the adoption of digital payment technologies to accelerate supplier payments. Following a probe into Australia’s late payments culture, Carnell also provided recommendations to establish a National Payment Transparency Register, an online portal that can also support small suppliers’ submission of complaints of late payments by their customers.

The report caught the attention of the Australian Institute of Public Accountants (IPA) this month, calling on the government to take action in support of faster payments to small- and medium-sized suppliers. The IPA, which represents 35,000 accountants and business advisors, submitted recommendations on how to support SMBs in the country in its 2018 pre-budget submission, according to reports in Dynamic Business last week.

In that submission, IPA CEO Andrew Conway said he was “disappointed that the government did not go further” to act on recommendations by the ASBFEO on late supplier payments, reports said.

“The consequences of late payments on small businesses across the economy and across all industry sectors cannot be overstated,” said Conway. “The ASBFEO report cites, ‘Payment times matter’ or, more poignantly, ‘How I started using small businesses to finance my multinational conglomerate.’ Sadly, this is not frivolous hyperbole; it’s a statement of fact.”

“We urge the government to reconsider its response to the report and to adopt all of the recommendations, especially Recommendation 9 to legislate maximum payment times for business-to-business transactions,” he added.

Wayne Debernardi, general manager of Media and Strategic Communications at the IPA, recently spoke with PYMNTS and emphasized the Institute’s support of the Ombudsman’s recommendations.

“Small business is the most vital sector for a thriving economy, and anything that can be done to support their productivity and business success should be pursued,” he said.

One of the largest hurdles for today’s small businesses, especially those facing longer payment times from corporate customers, is availability of financing.

“Access to affordable finance is still a difficult issue facing small businesses, and cash flow is vital for their business community,” Debernardi stated. “Many small businesses fail without adequate cash flow to sustain their operations. Hence, having their invoices paid in a timely manner is critical.”

Ombudsman Carnell recently highlighted the issue of SMBs’ access to financing when she offered harsh criticism of the nation’s banking industry, describing the process of getting financial institutions (FIs) to comply with new bank rules is “like pulling teeth.” The regulations require banks to nix unfair loan contracts with small business borrowers and increase coverage of total loan facilities.

“The banks’ initial underdone response to the legislation serves as a reminder that [they] were once again trying to ‘game’ the rules, and this erodes trust,” Carnell said in a statement last August, noting that it took months for banks to comply with the new rules that came into effect in 2016. “It’s hard to understand why all these things are like pulling teeth. It came into effect last November, and it has taken my office and ASIC until now to take them to where they are pretty close to complying with a law that has been in effect for eight months.”

The delay of complying with new rules showcases the limitations of regulations on making a meaningful impact on late payments and SMB finance.

“Regulators can play a role in enforcing [timely invoice payments] to a certain extent,” noted Debernardi.

He cited recent efforts by the government to lead by example, describing the initiative as “a big step in the right direction” but warning that “enforcement without consequences, such as penalties, will still be difficult.”

In November, reports said new government rules came into effect that require government employees to pay contractor invoices within 20 days, a direct response to recommendations from Kate Carnell. The rules apply for contracts up to $1 million and, according to reports, will affect more than 6,800 small suppliers that have contracts with the government.

Previously, the Business Council of Australia also launched an initiative in early 2017 to deploy a code of supplier payment ethics. Companies can sign up for the code and vow to pay their own suppliers within 30 days, however the effort is voluntary and unenforceable, again highlighting the limits of government intervention.

“Legislation, such as the recent unfair contract terms legislation, will have a positive impact,” Debernardi stated. “However, we believe that it will not be enough to change ‘payment culture’ in Australia.”

Source: PYMNTS.com

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations

Global Roundup

Resurrected CPTPP to be signed in March. The latest round of talks between the remaining 11 members of the reformed Trans-Pacific Partnership (TPP) concluded in Japan last week, with a final agreement expected now to be signed in March. (Global Trade Review)

Russia says no obligation to comply with U.S. sanction on North Korea. Russia has no obligation to carry out sanctions set by the United States, including those on North Korea, RIA news agency quoted Deputy Foreign Minister Igor Morgulov as saying on Friday. (Reuters)

Brazil and Mercosur Negotiate Possible Trade Accord With UK. In addition to being close to closing an agreement with the European Union, the South American Trade Agreement Bloc (Mercosur) is also discussing a possible trade agreement with the United Kingdom, according to Brazilian Finance Minister, Henrique Meirelles. (Rio Times)

Britain will not reverse Brexit, Hammond tells CEOs in Davos. Britain will not be reversing Brexit, Chancellor of the Exchequer Philip Hammond told business chiefs in Davos. “Britain will be leaving the EU on the 29th of March 2019,” Hammond said. “This decision is not going to be reversed. That is a matter of political reality.” (HSN)

ECB takes swipe at U.S. for breaking agreement not to stir currencies. European Central Bank President Mario Draghi took a swipe at the U.S. administration, saying the euro’s recent rise was partly the result of comments that contradicted an agreement not to talk currencies up or down. He said several ECB policymakers at a meeting on Thursday had questioned a change in U.S. policy. (HSN)

Mexico, the upcoming elections and the implications on credit. Over the past days, investors were primarily focusing their attention on the NAFTA negotiations and their potential implications on Mexico. In all fairness, despite this might be another an important preposition to take into account, the upcoming elections in July might be of a further concern. (Times of Malta)

Trade Is A Key Geopolitical Risk In 2018. The U.S. economy is expanding, equities are at new highs and markets appear calm. What is there to worry about? Geopolitical risks are ticking up, according to Seeking Alpha’s BlackRock Geopolitical Risk Indicator (BGRI). But this isn't automatically bad news for markets. (Seeking Alpha)

Civil unrest awaits Chad as Idriss Déby likely to remain unchallenged. Chad will hold parliamentary elections in 2018, three years after the end of the initial parliamentary term. No major political change is expected, but continuing socio-economic problems are likely to result in civil unrest and armed factionalism.  (Global Risk Insights

Why $70 oil isn’t good news for Nigeria. If you’re an economy that’s just come out of a five-quarter long recession that was mainly triggered by a drop in global oil prices—your main revenue source—then there’s good reason to be excited about oil returning to three-year highs of $70—unless you’re Nigeria. (Quartz)

IFRS 9 Offers Treasurers New Hedging Opportunities. With the new year comes the new accounting standard for financial instruments, IFRS 9, which replaces the IAS 39 regulations. And with the new standards come substantial changes to the way that derivative instruments and hedging strategies are accounted for, along with potential benefits for a broad range of businesses—provided they are able to take advantage of the opportunity. (AFP)

Skuchain uses blockchain and IoT for new supply chain platform. U.S. blockchain company Skuchain has partnered with Japanese tech giant NTT Data to build a blockchain platform for supply chain and logistics management. The solution, which combines blockchain technology with internet of things (IoT) innovations such as radio-frequency identification (RFID), has already been trialed in Japan’s manufacturing sector, where it has been successfully used to improve supply chain efficiency. (Global Trade Review)

What a US–China trade war would look like. Sometime soon, U.S. President Donald Trump will announce his plan to respond to what the administration calls China’s “economic aggression.” When he does, it is not only China that needs to be prepared to respond. Together accounting for well over a third of global output, the collateral damage of a serious trade fight between the two countries would be enormous, let alone the damage caused to the two nations directly. (Interpreter)

Trump at Davos: ‘America First Does Not Mean America Alone’. President Donald J. Trump, speaking at the World Economic Forum in Davos, Switzerland, struck a tone similar to a governor, mayor, or president of a chamber of commerce, praising the accomplishments and attributes of the United States economy, and delivering a message to the gathered titans of industry that America is open for business. (Global Trade Magazine)

U.S. Tariffs, Aimed at China and South Korea, to Hit Targets Worldwide. When the Trump administration unveiled tariffs on imports of solar panels and washing machines — industries dominated by Chinese and South Korean businesses — they deliberately applied them to products from around the world. (NYTimes)

U.S. senators strike deal reopening government. President Donald J. Trump signed a bill reopening the government late last Monday, ending a 69-hour display of partisan dysfunction after Democrats reluctantly voted to temporarily pay for resumed operations. They relented in return for Republican assurances that the Senate will soon take up the plight of young immigrant “Dreamers” and other contentious issues. (Business Mirror)

Clash Exposed at the World Bank

Chris Kuehl, Ph.D.

The chief economist for the World Bank has either resigned or was kicked out after just 15 months on the job. Paul Romer was brought on board in part to offset the fact that the head of the World Bank appointed by President Barack Obama a few years ago was not an economist or a banker, but an expert in public health issues.

Under Jim Yong Kim, the focus of the World Bank shifted toward health development and education. Romer was seen initially as someone who would keep some of the World Bank focus on those traditional subjects, but it is also worth noting that he is an expert on education and urban development issues as well. He almost immediately clashed with many of the staff at the World Bank.

This is something of an arcane subject, but it really does matter in the grand scheme of things. Economists are actually not scientists in the proper sense of the term. They are more philosopher than scientist when it comes down to it. Economists take sides, as one of the key questions they try to answer is how the economy is doing.

To answer that, they need to ask the question: Who is it good for? To an economist that tends toward the left of the political spectrum, the subject may be for those that are poor or disenfranchised to some degree, while someone of a more conservative bent may be more concerned with the state of the business community or the investor. There are certainly those who favor their country or industry and will therefore interpret data according to that loyalty. A weak dollar is good for an exporter and bad for an importer. A tariff on steel or some other product will be good for one business and not another. You get the idea.

In past years, there have a wide variety of economic outlooks represented at the World Bank. This has influenced the mission of the institution. The World Bank is one of the so-called “Three Sisters” established by the Bretton Woods treaty at the end of World War II, along with the International Monetary Fund and the General Agreement on Tariffs and Trade (later to become the World Trade Organization). All three of these have morphed and changed as they seek to keep their mission relevant. The formal name of the World Bank is the International Bank for Reconstruction and Development, which says it all.

As to the removal of Paul Romer, he objected to what he described as shoddy methodology and poor research that seemed more interested in proving a pre-conceived notion than trying to answer real questions. In recent years, there have been other critics who echoed his remarks. This has offended more than a few. Romer is a more conservative economist, but far from an ideologue. It is hoped the World Bank addresses his concerns as these criticisms have not come from him alone.

NAFTA Risk Prolongs Trade Uncertainty for Canada

The risks have risen that North American Free Trade Agreement (NAFTA) negotiations may result in an unfavorable economic outcome for Canada, says Fitch Ratings, although this is not its base case. Failure to make progress at the latest (penultimate) round of NAFTA negotiations that began in Montreal last week could mean higher risks of a U.S. withdrawal. 

Previous talks exposed disagreements between the two countries over NAFTA's trade dispute resolution mechanism and other areas. The U.S. recently imposed tariffs on up to 10% of Canadian exports including steel, softwood lumber and other manufactures. Canada in turn has filed a formal complaint to the WTO about U.S. trade actions dating as far back as 1996. 

The timetable for potential NAFTA changes—resulting from either a successfully reworked agreement or breakup—is still unclear. Notably, Mexico and the U.S. will hold federal-level elections in July and November, respectively, that could make reaching a deal and ratifying it harder. U.S. President Trump has recognized that the upcoming Mexican general election may necessitate an extension of talks.

Any party can declare its intention to leave NAFTA with six months' notice, but such a decision would likely lead to protracted uncertainty over the bilateral economic relationship. It may also face legal challenges and legislative obstacles in the U.S. It is also not a given that the 1987 Canada-United States Free Trade Agreement (CUSFTA), which preceded NAFTA, would come back into force without modification.

Although some sectors are highly exposed, Fitch believes the overall impact of a NAFTA abrogation on Canada would prove a manageable economic shock. It would likely result in growth decelerating in the short term while longer-term effects would include lower productivity and efficiency gains. In the meantime, NAFTA risks are a key uncertainty for Canada's economic outlook and are tempering a positive trend in investment intentions. 

The IMF has estimated that an average rise in tariffs of 2.1 ppts (to the equivalent of a WTO most-favored nation [MFN]—relationship) would have a relatively limited 0.4 percent drag on Canadian GDP in the short term. A likely depreciation of the Canadian dollar would cushion the blow to exports, offsetting some of the negative trade effect from NAFTA abrogation. 

According to research by the Bank of Canada, around half of Canadian goods exports to the U.S. are not subject to NAFTA rules but some sectors, including light truck manufacturing, would potentially face high MFN tariffs in the U.S. market in the absence of a new agreement, putting integrated supply chains at risk. 

There are broader risks though beyond those parts of Canada's economy that would be directly affected by a rise in tariffs. Uncertainty over new tariffs and potentially new non-tariff barriers could weigh on business investment for a protracted period. Uncertainty could also affect firms in the services sector which have invested heavily in businesses on either side of the border. Increased restrictions of movement on labor, for example, could affect productivity, while tightened market access could restrict future growth. 

Canada's economy has performed robustly in recent quarters, underpinned by a strong labor market, household consumption and recovering global trade and energy prices. Fitch estimates full-year real GDP growth to come in at 3.2% in 2017, marking a full recovery from two years of subpar growth in 2015-2016. However, Fitch expects growth to moderate and key sources of risk in addition to NAFTA uncertainty to include very high household leverage, an inflated property market and rising rate environment.

Source: Fitch Ratings


IMF’s World Economic Outlook Better than Expected

The current state of the global economy is uplifting. The International Monetary Fund’s (IMF) recently updated World Economic Outlook (WEO) survey shows faster global output than its fall predictions and a favorable forecast for global growth over the next two years. However, a financial market correction could still steer the economic outlook elsewhere beyond 2019.

Since mid-2016, an upswing in growth graced some 120 economies, accounting for three quarters of the world’s GPD, the IMF reported in its WEO update on Jan. 22. Third-quarter growth in 2017 was higher than originally projected in Germany, Japan, Korea and the United States, while emerging markets and developing economies (EMDEs) greeted Brazil, China and South Africa. The WEO revision now forecasts nearly 4% global economic growth in 2018 and 2019—0.2 percentage points higher than both the October 2016 forecast and IMF’s current estimate of last year’s global growth.

Financial conditions are currently riding on “easy settings,” the report clarifies, and tightening these settings—possibly brought on by rising inflation and interest rates—could bring slower growth. For example, the U.S. economic outlook appears bright, notably thanks to the reduction in corporate tax rates and temporary allowance for full expensing of investment. But, policy is always developing.

“If the financial conditions remain easy into the medium term, with a protracted period of very low interest rates and low expected volatility in asset prices, vulnerabilities could accumulate as yield-seeking investors increase exposure to lower-rated corporate and sovereign borrowers,” the report notes.

Although such occurrences are plausible, W.W. Grainger Inc. Credit Administration Senior Manager Ed Bell, Ph.D., CBA, ICCE, said he isn’t committed to the idea of an economic slowdown in the U.S. beyond 2019. In fact, he predicts the opposite.

“I think [economic growth] is going to pick up,” Bell said. “We’ve been in a very long period of negative, no or slow growth, which is something we’re coming out of now. This year, there are some economists predicting higher than 3% GDP. If that’s true, it’s going to signal the fastest growth we’ve had in years.”

The recent tax incentive, for instance, will see companies “pour money into growth for the first time” in a long while, Bell said. The country’s economic outlook could turn depending upon changed agreements, i.e., the NAFTA discussions, or tariffs on U.S. products, as well as political shifts following the next presidential election.

Despite these possibilities, Bell said he doesn’t see the current trend dissipating.

“If it does, then credit managers will be under pressure again, like we were through the recession, to extend more trade credit,” he added. “If credit tightens, meaning it’s harder for companies to go out and borrow money from financial institutions, then they have to go back to relying on trade credit. … I do believe we will see inflation creeping back into the picture, [but] I think the Fed will be really quick to react and raise interest rates, which again, will tighten credit.”

—Andrew Michaels, NACM editorial associate

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations

Global Roundup

May’s Cabinet reboot descends into chaos. United Kingdom Prime Minister Theresa May’s attempt to give her government a 2018 reboot was marred by a chaotic Cabinet reshuffle as senior ministers refused to follow her orders. It’s a development that bodes ill for her ability to successfully navigate the next, even trickier stage of Brexit talks. (Business Mirror)

EU trade in 2018: A preview. The year 2018 will offer a very narrow window of opportunity to bring key EU trade policy files forward. (EurActiv)

World Bank: Permanently lower your hopes for the global economy. The World Bank’s assessment of the global economy starts off well. We’re in the midst of a “broad-based cyclical upturn,” which is expected to last several years. Annual global GDP growth is forecast to rise to 3.1% this year and stay at this level or just below until 2020. But this rosy picture of the present is tempered by a stark warning about the future. (Quartz)

Indonesia elections: Three factors that will shape the political trajectory of 2018. For Joko (Jokowi) Widodo, the first Indonesian president elected from outside Jakarta's elite, the combination of disruptive global forces and the intrinsic features of Indonesia's contemporary polity tested both his leadership and the nation's stability in 2017. Three aspects of Indonesia's contemporary polity are worthy of close attention in the year ahead and beyond. (Interpreter)

South Korea’s Moon open to meeting Kim ‘under right circumstances.’ South Korean President Moon Jae-in vowed to never accept North Korea’s nuclear program, while also saying he was prepared to meet Kim Jong Un under the right conditions. (Bloomberg)

China, South Korea reset bilateral ties. On Dec. 13, after a year-long feud, South Korean President Moon Jae-In traveled to Beijing for the first time since his inauguration in an attempt to rebuild the two countries’ relationship, which has been damaged by the presence of the United States’ Terminal High-Altitude Area Defense missile defense system in South Korea. (Global Risk Insights)

Canada: Step Up on NAFTA Talks, Says US Agriculture Secretary. U.S. Agriculture Secretary Sonny Perdue took a jab at Canadian negotiators, suggesting they were not aimed at concluding NAFTA talks successfully. (Global Trade Magazine)

Cheese is the beef as EU-Mexico trade talks resume. The EU and Mexico resumed talks last Monday aimed at sealing a new version of their 18-year-old trade deal, a project that has hit several snags – including the touchy issue of cheese. (EurActiv)

Fitch: Global Rating Outlooks Most Positive Since Crisis. The prospect of rating upgrades outnumbering downgrades this year and next is higher than at any time since the financial crisis, Fitch Ratings said in its latest global Credit Outlook report. (Fitch)

Global Output Gap Closing?

Chris Kuehl, Ph.D.

According to the latest World Bank assessment, the global economy is finally recovering fully. This would mark the first time that anybody could assert this since 2008 and the near global collapse of the financial system. When there is a gap between what an economy is capable of and what it is actually doing, there is a problem. This creates weak consumer demand, an excess of spare capacity, high levels of joblessness and very low inflationary pressure.

To some degree, the closing of the gap is indicated by the fact these issues have become less urgent. In the last few years, there have been several major economies that have seen their gap issues fade, while the global gap was persistent. It takes recovery throughout the world for the gap to fade globally. Today, there has been substantial recovery in the U.S., Europe, China and Japan as well as in many of the developing nations. Not every nation has seen this recovery, but more are than are not.

In general, this is a good thing, but it also means that there will be substantial changes as far as economic threats are concerned. For the better part of the last decade, there have been no inflation concerns, allowing a lot of policy moves and strategies in business. The central banks had the luxury of a low-inflation environment to work with, which allowed them to move very slowly as far as hiking rates. Today, there are still many in the central bank community advocating for a further extension of the low-rate environment. The business community had access to cheap money as well and, furthermore, had the luxury of time as they saw no immediate end to that largesse. The investment community also had access to cheap money. The access allowed a significant amount of risky buying. A surge in inflation—even a minor one—will change the equation dramatically.

The central banks will have to start worrying about overheating, which will prompt them to start raising interest rates higher than they have been in years. This triggers a whole set of reactions. The supply of cheap money dries up and leaves businesses with fewer options, while their inputs will become more expensive. They will likely react by trying to raise their own prices and create pressure for others in the supply chain. It all eventually lands with a thud in the laps of the consumer. The biggest impact may be felt in the investment community because there will no longer be cheap money available to propel those risky investment decisions. Some of the big bets that were attempted in the past will create big losses. The bottom line is that, for almost 10 years, the slack in the overall economy forced companies to keep their prices down to a significant degree. Now that pressure is being released, and companies will be tempted to make up for all those years of restricted pricing.

Although the levels of global growth have markedly improved over the last year or so, there remain threats to this pattern. The three threats that the World Bank has called out include the slump in productivity still affecting the developed economies in the U.S., Europe and Asia; the related threat of aging workforces; and the general slowdown in investment. Add in the likely reaction of the central banks to inflation threats and there are many reasons to assume the pace of global growth could slow once again.

Many of these threats are too difficult for any government to manage—at least in the short-term. There is not much that can be done about an aging workforce other than welcoming immigration or convincing people to start having lots of kids, but neither of these are rapid solutions. The productivity issue is also a long-term issue. The World Bank points out that some factors are well within the ability of governments to influence and the current policies are heading in the wrong direction.

This is not the time for a big fiscal stimulus, and that is precisely what the U.S. has embarked upon. When the looming threat is inflation and an overheated economy, the last thing needed is a big wave of tax cuts. The strategy makes perfect sense during a recession, but not when the recovery is finally in gear. There are, of course, ways to address inflation. These also come with a price and, if there is significant price and wage pressure, central banks are willing to push an economy back into recession as was the case in the 1980s.

Artificial Intelligence in Risk Management

Piyush Srivastava, RiskCounts LLC

In this increasing debate over artificial intelligence (AI), in how it is good for mankind and, on the other side, how it is going to take away our jobs, what is the right answer?

I would take the analogy of the advent of cars, trains or airplanes, in the times when people used horse carriages, horses or bullock carts. What was the advantage of a motor car or the train? Well, it reduced the time of travel, brought efficiency in terms of speed, reliability and saved valuable hours, and so did the creation of an airplane, which made traveling across the globe a viable and easier option for the masses. If we look at AI and machine learning today, it seems that it is no different from graduating from the horse driven carriage to a car.

Now, AI is affecting multiple areas of our lives, like AI-driven cars, back-office automations, machines learning to operate nonstop operations and doing tasks in minutes, what would take a person perhaps a week to do the same manually.

Risk Management is no exception to this. Fintechs and banks are introducing AI applications in risk management in a limited way, but these applications are also finding usage in the areas of investment decision making that is supported by huge amounts of data, hedge funds and asset managers using high-speed trading complex models. At the same time, phone-based market making is giving way to electronic execution. Market makers and asset managers are now looking to use technology and AI to assess the risk of the counterparties from the publicly and privately available data.

The increasing use of AI in risk management will have a profound impact in the way firms and financial services organizations manage their risk. A lot of emphasis is put on monitoring the risk in the operations with less focus on real analytics. With the increasing use of AI and machine learning, it is estimated that the focus of risk managers will shift toward analytics and stopping losses in a proactive manner, rather than spending time in managing the risks inherent in the operational processes.

Today, firms are developing operational risk platforms by scouring the internet for all-encompassing information about an organization with the help of machine learning and AI. The day is not far when traders, asset managers and risk managers will actively resort to AI-based platforms to monitor counterparty credit risk and operational risk of the entities that they are dealing with.

AI is here and it’s time for risk managers and financial services to embrace the benefits of this technology.

Source: RiskCounts


Venezuela’s Debt Restructuring Expected to be Long, Complex

Venezuela's debt restructuring process will likely be long and complicated by sanctions and the challenging political environment, said Fitch Ratings. Political changes and a comprehensive and credible economic plan will be needed to gain the market's trust in the durability of any reform agenda and debt restructuring terms.

Venezuela defaulted on its sovereign debt on Nov. 14, 2017, failing to make interest payments before the end of the 30-day grace period. Since the default, the government has accumulated missed interest payments totaling nearly $700 million.

At the same time, state-owned oil company Petroleos de Venezuela, S.A. (PDVSA) also failed to make payments on its debts with accumulated missed interest payments totaling over $800 million. However, PDVSA has made some late payments over the last two months, signaling a differentiation of the government's treatment of sovereign and PDVSA debt payments, at least in the near term.

In early November, President Maduro called for a debt restructuring and called a creditor's meeting in Caracas, which yielded no concrete results.

In Fitch’s view, the political and economic prerequisites for a debt restructuring are missing. Political changes would be required to address U.S. sanctions and re-engage the broad international creditor community, beyond Russia and China. A comprehensive and credible economic plan will also be needed to address the severe economic imbalances, the deep and prolonged recession, hyperinflation and reverse the sharp decline in oil production.

The government has sought to by-pass the opposition-controlled National Assembly by creating a new Constituent Assembly with powers over all other government bodies in July 2017. Additionally, the governing Partido Socialista Unido de Venezuela (PSUV) party further consolidated power in the Oct. 15, 2017, long-delayed regional election when it won 18 of the 23 governorships at play. The results have weakened and effectively split the opposition, resulting in greater political control for the Maduro government. Political talks between the government and parts of the opposition are ongoing in the Dominican Republic but have yielded no substantial results to date.

The government has failed to outline a credible economic strategy to arrest the deep economic contraction and hyperinflation. The economy contracted by an estimated cumulative 36% over the last four years, with a further contraction of 14% expected in 2018. Hyperinflation has taken hold, reaching an estimated year-end rate of 2,616% in 2017 and accelerating into 2018. Any credit positive economic plan would also reverse the sharp decline in oil production. Oil represents more than 95% of the country's exports and historically, nearly 50% of government revenues. OPEC data indicates that Venezuela's total crude production sharply declined to 1,837 thousand barrels per day (tb/d) in November 2017 from 2,270 tb/d in December 2016. Oil production will likely continue to decline in 2018.

Furthermore, U.S. sanctions greatly complicate a restructuring. The sanctions prohibit U.S. citizens or entities based in the U.S. from entering into financial transactions with the government and PDVSA, including any dealings in new debt and certain existing bonds owned by the Venezuelan public sector.

A successful debt restructuring can only happen after the political and economic prerequisites are in place. The legal challenges will also likely be complex. The default is therefore likely to be long and protracted given the enormous challenges Venezuela faces.

Source: Fitch Ratings

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations