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Brexit Impact Subdued so Far

The global economic outlook remains the same prior to the U.K.’s decision to leave the EU, according to the latest composite leading indicators (CLI) by the Organisation for Economic Co-operation and Development (OECD).

Despite uncertainty about how the agreement between the U.K. and the EU will take shape, data volatility immediately following the referendum appears to have subsided, leading the OECD to publish its latest CLI. The organization suspended publication of the CLI in July, citing the referendum’s outcome as a “significant unexpected event ... affecting the underlying expectation and outturn indicators used to construct the CLIs,” which are designed to anticipate turning points in economic activity relative to trend six to nine months ahead. The CLI uses “a range of indicators that have leading properties in relation to future movements in the economic cycle,” the OECD states.

If the current situation holds for the next six months, the OECD projects continued slow growth for the U.K., before it stabilizes at a lower rate by year’s end. Currently, it also anticipates ongoing stable growth for OECD region overall, the United States, Japan and the euro area. Growth, however, “is expected to ease in France, while the CLI for Italy points to a more severe weakness in growth momentum,” the group said.

Of the credit professionals who weighed in on FCIB’s recent International Credit and Collections Survey on Western Europe regarding the U.K., 11% noted that payment delays were increasing, 13% decreasing, 65% no change and 11% no delays. One respondent advised checking customers’ payment schedules. “If they differ from the agreed payment term with you, the customers will most likely follow their internal payment schedule rather than your due dates,” she said. She also suggested being aware of the U.K’s pre-pack administration laws. “There is a great risk for suppliers to be left with absolutely nothing if pre-pack administration takes place,” the credit professional noted.

Regarding France, about 14% of respondents saw payment delays increasing, 2% decreasing, 74% unchanged and 10% none. One survey taker finds overall modest risk attached to doing business in the country. “They tend not to care about meeting your terms and conditions,” he commented. They, however, are” more cooperative if you communicate with them in French,” he offered. Another credit professional noted that collection by phone was more efficient than sending dunning letters via post.

Of those creditors who responded to questions on Italy, 17% found payment delays increasing, 8% decreasing, 61% no change and 14% none. A survey respondent who does business with the government recommends developing a relationship with the procurement team as well as understanding cultural differences, how they do business and the best way to communicate with them.

The complete results for the survey, which also includes Greece and Turkey, are available online to FCIB members.


Protectionism and Global Growth

Chris Kuehl, Ph.D.

The International Monetary Fund (IMF) has issued yet another warning to global leaders in the wake of the latest G-20 meeting. Trade is under attack all over the world as economies are slumping and domestic concerns regarding growth and employment come to dominate the agenda. The comments that emerged during the G-20 sessions worry the IMF although most of these statements are taken as basic pandering to the protests that have been developing in many of these states. Globalization—however loosely defined—has become a target. A whole host of ills has been assigned to this rather amorphous concept. It is interesting to note that there is not even consensus on what the term means, but there remain many who attribute everything from global climate change to unemployment to its impact.

The political instinct to protect is obvious. The constituent looks to the political leaders to protect their way of life and by extension their jobs. It is more than apparent that jobs are lost every day to trade. There are places in the world that make things more cheaply than in the U.S. It is therefore tempting to buy from these countries and even to produce in those states that offer cheaper labor and easier production opportunities. When foreign competition results in a plant shutdown in the U.S., the impact is immediate and obvious. The problem is that benefits from trade are far more diffuse.

The argument is always the same—trade benefits the consumer. It is indisputable. The fact the U.S. trades with other states means that products on offer in the U.S. are often less expensive. This is true if the product ends up on the shelves at WalMart or in the part of a piece of construction equipment used to build a shopping mall. For every business or worker that would benefit from a protectionist policy, there is another one that would be placed at a disadvantage. The consumer pays the ultimate price with the higher costs they will have to pay.

One example is provided by steel. The U.S. has watched its steel industry decline for decades as domestic producers have been unable to compete with the steel that comes from elsewhere—China, India, Russia and so on. The sector has been shrinking, operations have been closed and people have lost their jobs. The U.S. now relies on imported steel to a larger degree than ever. This prompted Congress to come to the belated rescue of the sector with very high tariffs on that imported steel as a means by which to bolster the floundering domestic sector. This was good news for U.S. steel producers, but not so good for the users of that steel. Suddenly, they were facing far higher prices for the steel they once imported and the prospect of higher prices for the domestically produced steel as well. The U.S. producers are not in a position to replace all the steel that once came from elsewhere in the world and that creates supply issues and bottlenecks. The ultimate cost will be passed on to consumers in the price of cars, construction and anything else that involves steel. Is it worth it to protect the U.S. steel producer? It all depends on who you ask.


At Look at Colombia

Hans Belcsák

The 297-page peace deal that has been signed between the Colombian government and the FARC guerrillas is probably not as inevitably destined for the dung heap as even some of the best observers of the Latin American scene would have it. There are undeniable risks, though, and anticipated economic benefits look quite exaggerated. While Colombia’s economy can cope with the crash of international oil prices and will continue to make progress, its growth has slowed and will decelerate further. I do not anticipate a recession, however.

With some luck, Aug. 24, 2016, will go into the annals of this country as a day to remember. It was the day on which negotiators representing the government of President Juan Manuel Santos and those bargaining for the left-wing guerrillas of the FARC (Fuerzas Armadas Revolucionarias de Colombia) announced that they had reached final agreement on a peace deal after close to four years of on-again off-again talks. Following the news, though, it did not take long for doubters who insist that the agreement will not hold to emerge. This includes, understandably, former Colombian President Alvaro Uribe, whose government waged an all-out war against the FARC and weakened it substantially. It also includes some highly respected newspaper columnists specializing in Latin American affairs, such as the Wall Street Journal’s Mary Anastasia O’Grady, who rightly warns that “it takes more than political gimmicks to quiet the ghosts of wartime atrocities.”

Comparisons are often made with El Salvador, where a settlement was reached in 1992 between the government and Marxist insurgents known as the FMLN. That deal is in trouble since the country’s constitutional court ruled on July 13 that the wartime amnesty granted to both sides denies victims their rights. Under the Colombian deal, local and foreign judges vetted by the Supreme Court, the UN and even Pope Francis will be able to award limited “restrictions on liberty” (not jail) and community service to guerrillas who confess. This does not sit well with the many Colombians who are painfully aware of the mass murders, kidnappings and recruitment of child soldiers FARC committed. And the path to a final conclusion of the pact is still long.

Next, the estimated 6,800 combatants of FARC are to gather in 23 designated “normalization zones” and start surrendering their weapons to UN observers. Many will be extremely hesitant to do so. Then FARC is to begin a transformation into a political party which will have 10 congressional seats guaranteed for eight years. The FARC is to wean itself off the lucrative drug trade, which is its main source of funding, and eradicate coca fields and clear up landmines. The government, in return, is committed to spending billions of dollars on development in areas that the FARC once controlled. Finally, Congress is to convoke a national plebiscite on Oct. 2 in which the people will determine whether they are prepared to accept the agreement. Current opinion polls suggest that the vote could be close.

This is what the pessimists have in mind when they say the arrangement will never work. One of the biggest stumbling blocks is, indeed, the notion that those who committed atrocities should not be allowed to avoid long jail sentences. Besides, the FARC negotiated with the authorities on three previous occasions, only for the latter to find out that the guerrillas used the talks to rest, regroup and rearm. This time, though, it appears that FARC leaders such as Rodrigo Londono-Echeverry, better known locally by his nom de guerre Timochenko, recognize that their dream of taking power by force is over. Besides, horrific crimes against humanity were committed also by the Colombian army and by right-wing paramilitary groups and there is more resistance to the agreement in the big cities than in the countryside, where the full impact of these brutalities was felt.

While many do not approve of full impunity or political eligibility for those responsible, a majority of Colombians want peace. A survey run by the polling firm Cifras y Conceptos in June showed 74% of those queried to be in favor of an accord such as the one now announced. Under the terms of the plebiscite, a simple majority of the votes cast for the agreement would be enough to pass it, so long as those voting “yes” constitute 13% of all registered voters. What the government has to accomplish is not only to try and keep the abstention rate low, but also to make sure that the vote does not turn into a referendum on President Santos, who, as an anglophile member of Bogota’s elite, is personally polling barely 20%.

If the pact is approved, the tough part begins with multiple challenges. Many of the rebels have spent their entire lives fighting in the jungle and have never studied anything beyond combat tactics and Leninist doctrine. They have no other skills and are as mistrustful of the Colombian society as this society struggles to accept them. Those who have a tough time finding jobs and a new life may bolt and join criminal gangs (already Colombia’s biggest security threat) and the drug trade (as many demobilized right-wing paramilitaries have done). The ELN, a (smaller) group of left-wing insurgents who have not been fully reintegrated into civilian life, is already taking over areas that the FARC is preparing to abandon, along with the coca and marijuana crops growing there.

There is also the risk that the government may not be able to hold up its end of the bargain and come up with the money needed to invest in infrastructure, health and education. It will need at least 3 million pesos, monthly, per person, for at least three years—on education and work training programs—helping rehabilitate combatants. In all, a congressional committee estimates, Colombia will have to spend USD 31 billion, and this has been made harder as the collapse of oil prices has slashed government revenues. Mr. Santos plans to raise taxes, but not until after the plebiscite.

Fortunately, Colombia, while an oil-producing nation, is not an oil nation. The economy is much more diversified than that of, say, Venezuela. With a production of only around a million barrels a day, Colombia ranks 19th among oil countries globally and the depreciation of the peso has gone some way in boosting traditional exports such as coffee, textiles, car parts and flowers. What Colombia has experienced so far has been a slowdown in growth, not a slide into recession. Consumption and investment have slackened, while the industrial sector, construction and financial services have held up relatively well. In all, the advance of real GDP slackened to 0.2% in this year’s first quarter from 0.8% in the final three months of 2015 and the expansion measured 2.5% year-on-year, compared to 3.4% in October-December 2015 and 3.1% in all of last year.

I suspect that forecasts of up to 2.5% growth in 2016 will turn out to have erred on the side of optimism. But it remains near impossible to predict precisely what effect the peace deal with FARC will have on the economy, assuming that it is accepted in the referendum. On the one hand, there is no shortage of economists predicting that the “peace dividend” could add as much as 2 percentage points to economic growth. After all, in 2014 alone rebel attacks on pipelines cost Ecopetrol, the state oil company, USD 430 million in lost output. On the other hand, the prospects for an early and sustained rise in oil prices are bleak and there is also a question as to whether the government will have the financial means to fulfill its development pledges under the peace pact. Oil accounts for one-fifth of all government revenues and every one-dollar drop in the price slashes an estimated USD 200 million from state revenues. Bogota has already had to implement spending cuts and tax hikes.

A consumer price inflation rate that ticked up to 8.97% in July from an average of 6.77% in 2015, driven by a surge in food prices to 14.28% in June, leaves the Central Bank (CB) little choice but to keep interest rates high—even showing a tightening tendency. The CB also needs to keep a watchful eye on the external accounts, where it projects for 2016 a current-account BoP deficit of 5.3% of GDP. Carry trades have helped a great deal in bridging the red-ink spill. There will be a risk of their reversal when the U.S. Fed starts hiking rates. Still, extra money will have to be spent to comply with the demands of the peace accord. Also, after years of planning, a USD 50-billion infrastructure program got underway last year. On balance, it all leads me to believe that Colombia will be able to avoid a recession this year.


Global Roundup

China promises cooperation on steel at global summit. China agreed to cooperate more closely with its trading partners on its politically volatile steel exports as leaders of major economies ended a summit on Aug. 5 with a forceful endorsement of free trade and a crowded agenda that included the Koreas, Syria and refugees. In a joint statement, Chinese President Xi Jinping, U.S. President Barack Obama and the leaders of Britain, Japan, Russia and other G20 nations pledged to boost sluggish global growth by promoting innovation. (AP)

Hanjin shipping—$14 billion in cargo drifting at sea. The financial collapse of Hanjin Shipping has left an estimated $14 billion worth of cargo stranded at sea, the Wall Street Journal reported. South Korea’s Hanjin Shipping Co. filed for bankruptcy protection there last week and, as a result, “dozens of ships carrying more than half a million cargo containers” have been locked out of world ports. (Global Trade)

Nigeria presidency approves borrowing from World Bank, China. Nigeria’s presidency has approved plans for external borrowing from the World Bank, China and Japan. Nigeria will take on debt from institutions, including the World Bank, African Development Bank, Japan International Cooperation Agency and Export-Import Bank of China. The government is waiting for the go-ahead from lawmakers to raise debt based on plans that include 20-year loans with 1.25% interest. (Bloomberg)

Global trade growth to grind to a halt in 2017. With global trade growth forecast to grind to a halt in 2017, Asia’s trade sector is facing up to a depressed immediate future. At Asia’s largest trade and treasury gathering in Singapore this week, HSBC’s global head of trade and receivables finance, Natalie Blyth, predicted that global trade would slow to 0% growth next year, with just 1% real growth in 2016. (Global Trade Review)

Italy’s banking problem: a bigger dilemma than Brexit. Italian banks have approximately €360 billion ($400 billion) in bad loans along with the real possibility that one of the world’s oldest banks may collapse due to this crisis. Italy’s banking problems not only have economic consequences for the European Union (EU), but also political because an upstart Italian party is using this crisis to call for a euro exit and possibly costing Prime Minister Matteo Renzi his job. The situation is bad and may actually get worse. (Global Risk Insights)

Trade protectionism risks deeper global-growth funk, IMF warns. Top officials at the International Monetary Fund and the group of 20 largest economies are worried rising protectionism could help push the global economy into a downward spiral. New IMF research shows an uptick in trade barriers in the last several years may already be causing damage. Global growth is already in a deep funk. The IMF last week signaled another downgrade ahead in a long series of disappointing outlooks, heading into the sixth year below its long-term average. (Wall Street Journal)

Saudi Oger faces huge debt restructuring as rescue talks collapse. The Saudi Arabian government has ended talks aimed at saving construction giant Saudi Oger, which is now facing the prospect of a multi-billion-dollar debt restructuring to stave off collapse, according to sources aware of the matter. The fall in oil prices since mid-2014, and the consequent sharp state spending cuts, has weighed heavily on the kingdom's construction industry, but in particular Oger, given its size and reliance on government contracts. (Reuters)

 

Week in Review Editorial Team:
Nicholas Stern, Editorial Associate and Diana Mota, Associate Editor