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  • Political Risk Letter

Major Latin American Economies Headed to the Polls

Political risks in Latin America continue to develop ahead of a busy election season, which will limit the implementation of reforms in the near-term. Elections in the major countries in the region will delay policy action, as populist ideas gain ground, as seen recently in Chile.

General elections in Colombia, Mexico and Brazil are likely to follow contentious campaigns and could see incumbent parties ejected from power, potentially hitting investment, economic recoveries and growth potential, especially in Mexico and Brazil.

For the next 12 months, but especially in the next half-year, local politics will be a major drag on growth, with investment still lagging and fiscal constraints weighing on economic activity.

In Venezuela, the already very high political risks keep rising, with domestic political stability deteriorating and economic risks increasing. The country has started its debt restructuring process, although the process is rendered more complex by the impact of the U.S. sanctions on the country. Given this, and Venezuela’s lack of ties with regional and global financial institutions, the probability of an orderly restructuring appears low. We expect a deep recession in 2018, further FX adjustment and continued hyperinflation.

Growth has struggled across Chile, Colombia and Peru for a variety of reasons, although the dominant theme in the Andean region is the lack of investment as a result of a combination of political uncertainty and persistently low commodity demand throughout 2017. In Chile, we can expect a slowdown in investment growth on concerns about reforms following the closer-than-expected election, although we do not expect significant changes to macro policy.

Thanks to its slower-than-expected economic recovery, Colombia’s overall risk rating is medium, with the risk of violence from rebel groups also a factor over the past several months. We expect only a modest recovery in 2018, with growth remaining below potential. The government has, however, been making efforts to improve the country’s poor infrastructure, drafting a number of important reforms to encourage investment in the road and rail networks.

Following the congressional elections in which it did better than expected, Argentina’s government has embarked on serious efforts to drive reforms through Congress, which could start to pay off by the time of the next elections. The economy has started to rebound strongly, especially on the construction side, driven by government spending and compared with a very low base.

Political risk in Brazil has receded slightly, but not enough to increase the chances of the highly important pension reform getting through Congress intact. This will keep Brazil’s fiscal position weak. The decline in food prices is also reinforcing the disinflation cycle. Consumption, rather than investment, is driving the growth recovery, and corruption scandals continue to threaten Brazil’s investment recovery at a time when major parties are beginning to position themselves for the 2018 elections.

Reprinted with permission from Aon.

 

Where Is European Populism Today?

Chris Kuehl, Ph.D.

It was only about a year ago that Europe was in a dead panic as it looked ahead at the elections scheduled for the year. The National Front under the leadership of Marine Le Pen was heading toward a stunning victory in France; the prospects for Angela Merkel looked bad as she fought the advances of the Alternative for Germany (AfD); the far-right populists in the Netherlands, Austria, Norway and Belgium looked better by the day; and there were populists from the left making continued strides in Greece, Spain and Italy.

The angst was palpable and pundits were predicting the end of politics as anyone knew it. By summer, the threat seemed to have passed as Emmanuel Macron came out of nowhere and crushed Le Pen with a political organization that was only weeks old. Merkel fended off the AfD and the Dutch stopped short of elevating Geert Wilders. The Austrians succumbed to the pleas of the far right, but most of the other states stopped short and the traditional political parties declared they were still in control. That may well be a premature assumption as the issues that dominated at the start of last year are still in evidence.

There are many things that motivate different voters. It is always a risk to try to reduce that complexity down to some simple assertion. The people who have supported the far right have done so for deep ideological reasons and because they want to send a message. Some, however, simply reacted to the personality of those running for office. The deeper motivations seem to be rooted in fears of multiculturalism, globalization and European integration. These are abstract notions to most people, but they are expressed in very tangible ways by those who feel threatened.

Multiculturalism means an assault on one’s traditional way of life. It means that people with strange and even offensive customs and behaviors are to be welcomed into society without considering how this affects the others in the community. The assumption has long been that people arriving in Europe from elsewhere were coming voluntarily and wanted to start new lives. This would mean they would be eager to assimilate through learning the language of their new home and adopting the culture of that place. Many now are arriving in Europe out of desperation. They do not want to abandon their old traditions and culture. These can clash with the culture of their new home. That breeds suspicion and resentment on both sides.

The globalization threat is more economic in orientation. The rise of the global economy has meant that companies shift jobs overseas and replace domestic operations with sourcing from all over the world—anyplace that has less expensive production costs. The people who are left behind by this expansion resent the assault on their ability to make a living and oppose those who would not seem to have their interests at heart.

The European integration seems to shove the focus of Europe to the needs of the Germans and the French and away from the smaller states. The concern is that everything is geared to the biggest nations, which reduces the influence of all the others. This is the prime motivation for the populist rejection of the EU as a whole.

 

Credit Professionals Share South American Experiences

Credit professionals doing business in several South American countries shared their experiences via the latest International Credit & Collections Survey.

Only 3% of the respondents who do business in Argentina noted that payment delays were increasing compared with 20% of the credit professionals who responded in April 2017. About 14% saw a decrease in delays; 66%, no change; and 17% did not experience any.

Despite the drop in payment delays, one credit professional characterized Argentina as “a difficult country for trade. … Any issues can cause delays.”

Overall, advice from credit professionals ranged from making sure the customer arranges the import license before goods are shipped to monitoring ever-changing government restrictions and monetary policies to purchasing credit insurance, if available.

“Both the importation process and payment through the central bank can be difficult,” a credit manager noted. “Having partners that know these processes can help ensure things go smoothly.” Another advised processing several orders before establishing credit terms.

In Brazil, respondents also noted a decrease in payment delay increases compared with the April survey—31% to 20%. About 3% said payment delays were decreasing; 63%, no change; and 14%, no delays.

In addition to visiting new customers, one credit manager warned of tax implications for moving funds and special taxation. Another suggested getting a personal guarantee from the owners of the company, going slow and keeping a tight rein on the amount of credit extended. “Don't ship more than you are willing and able to lose,” he cautioned.

Yet another advised understanding the country’s Boleto collection process, which does result in on-time payments, providing a customer does not have cash flow issues. “If so, the process is poor and time consuming. Nonpayment and slow payments are recorded in the public/central bank records, so most will try to pay on time.”

In Colombia, 12% of respondents were experiencing increases in payment delays and an equal percentage said payment delays were falling. About 57% find the situation unchanged and 19 had not experienced any delays.

A credit manager noted that while his customers in Columbia pay for what they purchase, “they are high maintenance in the meantime.” Another credit professional advised understanding banking policies and accounting rules. In addition, “make sure your sale is as secured as possible,” another credit professional noted. “If you have a strong legal leg to stand on, you are more likely to get paid, maybe not on time, but you will get paid.”

Other countries in the survey include Chile and Peru. Members can login through the Knowledge Center to review the entire results.

 

 

 

Global Roundup

Europe’s central banks remain cautious on economic recovery. Central banks in Europe were expected to show continued caution about the region’s economic recovery on Dec. 14, signaling that they are in no rush to follow the Federal Reserve in steadily raising interest rates despite a rare synchronized expansion across the world economy. (HSN)

EU stalls on new Mercosur trade offers, delaying deal. Trade talks between the European Union and South America’s Mercosur bloc will likely extend into next year after European negotiators said they needed more time to respond to improved offers, a source close to Mercosur negotiators said on Dec. 12. (EurActiv)

Theresa May heads to Brussels after humiliating Brexit defeat. United Kingdom Prime Minister Theresa May heads to a European summit that was set to be a celebration of the breakthrough victory in Brexit talks she clinched last week. Instead, she arrived hours after a serious defeat at the hands of her own party. (Bloomberg)

U.S. tax reform could have ‘major’ negative impact on global trade, Europeans warn. Germany, France, Italy, Spain and the U.K. have expressed their concerns to the U.S. authorities about a draft tax reform that is in the process of being finalized by Congress. (Euractiv)

Tax Reform, Part 2: Implications for U.S. manufacturers with foreign subsidiaries. The Senate’s version of the Tax Cuts and Jobs Act (TCJA) was passed on Dec. 2 by a vote of 51-49 and makes fairly consistent fundamental changes to the tax treatment of U.S. manufacturing companies with operations abroad, as compared to the House version. The Senate version, however, appears to add additional complexity and sophistication on the international tax provisions. (Global Trade Magazine)

Fitch: MENA sovereign outlook negative on political risk, slow reform. Heightened geopolitical risks in the once-stable Gulf Cooperation Council (GCC), combined with the inability of some oil exporters to adjust their budgets to a new oil price reality, result in a negative 2018 outlook for sovereign ratings in Middle East North Africa (MENA), Fitch Ratings says in a new report. (Fitch Ratings)

Saudi Arabia to begin cash transfers for poorer citizens. Saudi Arabia will begin cash transfers to low- and middle-income citizens as it plans to raise domestic energy prices, part of a program to overhaul the kingdom’s oil-dependent economy. Monthly cash payments will start on Dec. 21 to compensate Saudis affected by measures, including subsidy cuts and new taxes, officials said on Dec. 12. (Business Mirror)

The Week in Cryptocurrency

Bitcoin hits new record high as warnings grow louder. Bitcoin blasted to another all-time high of almost $18,000 on the Bitstamp exchange on Dec. 15, up 9% on the day, as warnings grew over the risks of investing in the highly volatile and speculative instrument. (Reuters)

Asian regulators get tough on cryptocurrency. As regulators in Asia grapple with ways of regulating the booming cryptocurrency market, experts claim the sector is beginning to self-regulate due to concerns over fraud. (Global Trade Review)

U.S. watchdog outlines virtual currency trade exemptions. The U.S. derivatives watchdog on Dec. 15 published draft legal guidance outlining the basis on which retail virtual currency trading would be exempted from complying with its rules. (Reuters)

EU agrees on stricter bitcoin rules against money laundering, terrorist financing. The European Union agreed on stricter rules to prevent money laundering and terrorist financing on bitcoin platforms on Dec. 15. (Reuters)

 

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations