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Global Roundup

Russian officials bar Navalny from running for president. On Dec. 25, Russian election officials formally barred Russian opposition leader Alexei Navalny from running for president, prompting calls from him for a boycott of next year’s vote. (Associated Press)

George Weah wins Liberia election, unofficial results show. For decades, Liberia has waited through war and strongmen for a peaceful democratic transfer of power. On Dec. 28, as the last ballots in a presidential election were being tallied, that appeared to be on the verge of happening. (New York Times)

Volatility won’t stay low forever: Political risks set to rise in 2018. 2017 was a year defined by rising and falling tensions across the globe, leading to varying impacts on FX markets—sometimes to the extremes. But 2017 was not all bad, and markets had good reasons to be optimistic. Going into 2018, many of these themes—both the good and the bad—will continue to evolve and take on new forms. (Nasdaq)

Three things that will shape the economy in 2018. Whether you follow opinion polls, experts, the media or soothsayers, a few common themes have emerged regarding the economy in 2018 and beyond. These are Brexit, the rise of the robots and a continued obsession with bitcoin and cryptocurrencies. Here’s a primer on how to better understand these three stories that will dominate the news. (EconoTimes)

Amsterdam Trade Bank under new money-laundering investigation. Amsterdam Trade Bank (ATB), the Dutch subsidiary of Russia’s Alpha Bank, is under investigation by Dutch authorities for possible money laundering. The Fiscal Information and Investigation Service (FIOD), the Dutch anti-fraud agency, launched a criminal investigation against the bank and raided its offices earlier in December. (Global Trade Review)

The bitcoin bubble, Venezuela and political risk. Regardless of mainstream reservations, rampant speculation and a near-certain chance of bust, bitcoin is here to stay. Cryptocurrencies will transform the way we identify, manage and mitigate political risks across borders—and Venezuela offers a perfect case study. (Global Risk Insights)

Vietnam export boom in 2017 defies Trump’s trade threats. From mobile phones to furniture, Vietnam’s export boom shows no signs of losing steam, defying a gloomy outlook at the beginning of the year when U.S. President Donald J. Trump persisted with his trade threats. (Bloomberg)

Turkey’s 2018 political outlook. In the coming year, Turkey is likely to face many of the same risks that it experienced during 2017—specifically: civil unrest, foreign policy tensions, an unsettled economy and a continued threat from terrorist groups. (Global Risk Insights)

Cash is dead as small businesses opt for e-payment in China’s digitalization drive. Cash, alas, is no longer king as operators of mainland China’s small businesses will tell you. In major Chinese cities, paying by paper money is all but dead thanks to the convenience of mobile payment, which has now surged to US$5 trillion in the mainland. (HSN)

U.S. and Australia meet to review bilateral FTA. Officials from the United States and Australia held a meeting in early December of the U.S.-Australia Free Trade Agreement (FTA) Joint Committee with both sides agreeing that the FTA is a cornerstone of the trade and investment relationship between the two countries and noted that bilateral goods and services trade has increased substantially for both countries since the agreement’s entry into force. (Global Trade Magazine)

Europe’s main challenge in 2018 will come from within. European leaders will enter the New Year with a number of serious challenges on their agenda. (Global Risk Insights)

The U.S. inflation mystery made economists look bad in 2017. A year ago, Bloomberg asked economists to predict how 2017 would unfurl. With the year almost over, we compared those forecasts to actual performance and, well, the results weren’t pretty. (HSN)

Will 2018 Be the Year of Clashing World Views?

Chris Kuehl, Ph.D.

The last two years have been confrontational in the extreme, as country after country has seen what amounts to a clash of world views. The traditional liberal order has always been based on some form of international system of rules and order. It has been predicated on the assumption that economic openness and global cooperation would be to the benefit of all.

The world was not really to be separated into nations and groups, but rather approached as a whole. This translated into free and open trade; free and open movement of people; and a striving for universal rules of conduct when it comes to business and many other interactions. Its enemies are efforts designed to protect one group or another from global competition and a general sense of isolation.

This approach has been dominant for decades and owes much of its rationale to the events that led to the Second World War. It was determined at the end of that conflict that economics was at the root of the problem—isolating Germany, Russia and Japan led to the conflicts that eventually sent the world to war. Since that time, many people have suggested that economics was not the only factor. There has been more and more opposition to the core principles of that multi-nationalist agenda.

Many differences exist among the political movements that have given rise to Donald Trump, Marine Le Pen, Geert Wilders and Brexit, among others, but there are many common issues as well. The reaction against the traditional global approach is based on the fact that many groups and individuals lose out in such a world: factory workers in the U.S. who lose their jobs to a factory in China, the French resident whose neighborhood changes drastically in response to new arrivals with very different cultural norms or the British workers who can’t get a job because of the migrants that arrive from East Europe and elsewhere.

The fact is that consumers in the U.S. benefit from having that factory in China, the people seeking a new life benefit from moving to France and the former East Bloc states see major benefits from exporting part of their populations to the U.K. This does not change the attitude of those who feel abandoned and ignored.

The challenge is that this angry population, and those that ostensibly lead them, has no solutions to its problems—just anger. The protectionist impulse doesn’t change the facts. All that is accomplished is making the whole country poorer and less productive.

There are those who would eliminate trade between the U.S. and others so that U.S. business grows, but that is not what happens. This cutting of trade means far higher prices for the consumer, and that functions like a tax. Much has been made of the stimulative properties of the tax cut, and the assumption is that many middle-class consumers will see savings of between $3,000 and $5,000. All of that would be wiped out if trade was ceased—the consumer would be paying between $5,000 and $8,000 more a year for the goods they buy now.

The traditional liberal world order has to deal with two related issues. The first is how to explain the contributions that system has made to the lifestyles of most on the planet. The second is to address the people that have been left behind by that progress. Those who have been economically marginalized have discovered their political clout and will continue to exercise it. They do not know where they are going, but they know they do not like the situation they are in. They need to understand what the system brings them, but the system also has to understand that it has failed these people and made them desperate for change—any change.

Latin America: Economic Recovery Amid Political Risk

The outlook for Latin America this year is “decidedly mixed,” according to The Economist Intelligence Unit (EIU).

“A series of elections in key economies, taking place amid increasing anti-establishment sentiment linked in large part to corruption, is heightening political risk,” the EIU states in a Dec. 28 article, Latin America in 2018: Economic Recovery, Political Risk. “A contested election result in Honduras and a political crisis in Peru in recent weeks provide just the most recent examples of the upheaval taking place in many countries in the region amid an anti-corruption backlash.”

But on the other hand, “reflecting trends in key economies such as Brazil, Argentina, Chile and Colombia, economic growth in the region is set to strengthen further in 2018, against a background of supportive international conditions and improving fiscal and monetary dynamics,” it further finds. “Under our baseline forecasts, Latin America's economic recovery will, for the most part, reduce the risk of a return to populism. However, there is a substantial risk that Latin America will experience the reverse: a renewed rise in populism that threatens economic growth in 2018 and beyond.”

Political volatility is not limited to the countries headed to the polls, the EIU says. “Even in countries that are not holding elections in 2018, persistent failure on the part of governments to bolster institutions and combat endemic corruption will be a key source of frustration and unrest in the region. Institutions remain weak in most countries, leading to continued government inefficiency and lax public governance.” 

The EIU also reports that “a mild cyclical recovery is gathering steam in Latin America, after two years (2015‑16) dominated by macroeconomic policy adjustment to the end of the commodities boom of the prior decade. … Although improving, this is still a disappointing rate of growth, and points to structural shortcomings in most countries' business environments, which act as a drag on productivity and growth rates.”

Credit professionals have an opportunity to share their business experiences with customers in several countries in the area via the current FCIB Credit & Collections Survey, which covers Ecuador, Paraguay, Trinidad & Tobago, Uruguay and Venezuela. While only FCIB members have access to survey archives, all participants will automatically receive the results of the survey in which they participate. This is the only survey of its kind in the U.S. or Europe and allows survey takers to advance the collective knowledge of global credit professionals by sharing real-time credit and collection experiences.

Turkey: Continued Growth Surpasses Expectations

Turkey’s economy recorded substantial growth during the first three quarters of 2017, up by 7.4% compared to a year earlier. This was achieved despite the series of shocks that occurred in the country in 2016.

During the third quarter of 2017, the economy expanded by 11.1% from a year earlier—the fastest pace among all G20 economies. Growth has mainly been driven by government support, higher investments, export growth and the recovery in private consumption.

One of the biggest boosts to the economy was the increase in the size of the Credit Guarantee Fund (CGF, with which the government supports small- and medium-sized companies) to nearly $64Bln (250Bln Lira). The CGF effectively makes the state a “guarantor” for credit applications.

Investments also grew, increasing by 7.9% in the first nine months of 2017 (2.7% in the same period of 2016). Overall, investments were led by a 12% jump in construction investments during the third quarter and most importantly by an increase of 15.3% in machinery and equipment investments (a leading indicator of increasing production capacity). Private consumption recorded a solid increase, particularly where durable goods were concerned. This reflects the positive impact that overall tax cuts on products, such as white goods and furniture have had on the economy.

Exports of goods and services, which rose by 13% year-on-year during the first three quarters of 2017, also strongly supported the economy. The contribution of trade to GDP growth stood at 1.4% for the first three quarters. The recovery in Europe is continuing to boost Turkey’s export performance. Production performed well, with an acceleration in manufacturing and construction activities, as did the services sector.

Within this positive environment, growth in private consumption is expected to be sustained during the first half of 2018. Moreover, the forthcoming presidential and parliamentary elections in 2019 may encourage the Turkish government to introduce new measures toward the end of 2018, in order to support economic activity ahead of the polls.

Despite these positive forecasts, Turkeys’ structural lack of savings will continue to represent the largest menace to the national economy. The government’s CGF program has encouraged banks to lend and thus pushed the banking sector’s loan-to-deposit ratio up 125% during second half of 2017. Aside from affecting banking risks, this situation also accentuates the challenges related to exchange rates, making Turkey more vulnerable to currency volatility and dampening investor sentiment. These factors could limit foreign direct investments over the coming years.

Turkey’s exchange rates problem is linked to the funding of its current account deficit, as this is largely financed by short-term capital inflows. If foreign direct investments, which are relatively low, were to contract, Turkey would become more reliant on short-term capital for financing its external gap. This would increase the country’s dependence on global financial investors and intensify its vulnerability to exchange rate shocks.

Among other potential challenges, Turkey should beware of rising interest rates on banking loans, as this represents an important risk for the investment dynamics in the country. The high levels of interest rates the country has reached could hamper cash flow management in the corporate sector and negatively affect business enthusiasm for new investments.

Against this economic backdrop, inflation is likely to continue to increase, due to the weakness of the Turkish lira against the U.S. dollar and the euro. The depreciation of the lira against these two currencies since September is likely to put upward pressure on inflation, both in terms of consumer and producer prices. Higher prices and taxes hikes coupled with a weaker lira could also weigh on private consumption, by reducing purchasing power.

Source: Coface

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations