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Emerging Countries Face Political, Banking Risks

Despite expectations that business in emerging countries will rebound enough to push up global economic growth slightly this year, overall, Coface projects 2017 will be a year of political and banking risks for emerging countries.

“Political risks in emerging countries are higher than ever, driven by social discontent and heightened security risks,” according to the trade credit insurer’s January Panorama report, “An Economic Upturn in the Face of Uncertainty.” The Commonwealth of Independent States, brought down by Russia, and North Africa-Middle East regions, due to Turkey and Saudi Arabia, “show the greatest risks among the major emerging economies,” the firm said. It also noted that a rise in “political and social frustrations,” in part, led to its downgrade of South Africa to a “C” rating. “Security risks, which include terrorist attacks, conflicts and homicides, are a new factor in the emerging political risk indicator.”

The resurgence of protectionist measures in the United States could further compound “the lackluster development in world trade,” the analysts said. In the short term, countries that export heavily to the United States will be hardest hit, notably Honduras, El Salvador, Mexico, Ecuador, Vietnam and Thailand.

Emerging countries also face excessive company indebtedness, Coface said. “Companies in China have the highest levels of debt (equivalent to more than 160% of GDP), and this debt rose by 12 GDP points between the second quarter of 2015 and the second quarter 2016.” Bad debt in the banking sector has risen sharply in Russia, India, Brazil and China, while credit conditions are becoming stricter.

Among advanced economies, Europe faces the greatest political uncertainties as it awaits outcomes from “decisive electoral battles” and the terms of Brexit. In 2016, Coface’s European political risk indicator increased by an average of 13 points for Germany, France, Italy, Spain and the United Kingdom. “If there is a further major political upset, on a similar scale to that of the British referendum, European growth could slow by an average of 0.5 points,” Coface said.

And although Coface expects fewer company insolvencies, loans to “highly indebted” companies are limiting resources for fast-growing newer companies.

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How Likely is a Chinese Version of TPP?

Chris Kuehl, Ph.D.

As one would expect, countries that do a lot of business with China support the Chinese version of a Trans-Pacific Partnership (TPP) agreement. This includes most of the Southeast Asian community. The Philippines under its new president has completely switched allegiances and is now a China ally.

Japan and South Korea remain wary of getting any closer to China, but both states do a lot of business with Beijing. The Japanese have territorial issues and a very tense history made all the more awkward by the rise of Japanese nationalism. The South Koreans do not trust the alliance between the Chinese and the North Koreans.

The surprise thus far is that Australia has declared that it is open to closer ties with China. This is purely an economic calculation given the dependence on China to buy the commodities that Australia sells. The U.S. will not lose all of its influence in the region as it can count on the enmity that exists between China and countries such as Japan and Vietnam, but the signal sent by the U.S. is not helpful and has fueled strategies that assume the U.S. will not come to the support of its Asian allies.

U.S.-Mexico Crisis Deepens

Economic ties between the United States and Mexico have come into serious question in the past few days amid White House talk of imposing a 20% tax on goods from Mexico as a way to pay for a wall at the U.S. southern border.

The U.S. is threatening “a ‘border adjustment’ process that essentially imposes a tax on imports from Mexico (and other states),” said NACM Economist Chris Kuehl, Ph.D. He expects Mexico to react aggressively and to seek damage to the U.S. economy even if these actions ultimately hurt the Mexican economy as well. “U.S. goods would be discriminated against and taxes would be imposed as a real trade war erupts,” Kuehl said. “There is no doubt this would hurt the already weak Mexican economy, but politically the government has no alternative. Failing to respond to what Mexicans consider an attack would doom the [Institutional Revolutionary Party] to defeat in the next election.”

The prospect of additional taxes has at least one credit professional who does business in Mexico concerned. “My concern is that if the 20% tax is imposed on all Mexican imports, my customers—[of which] I have many—will retaliate by holding up or slowing down payments. It is difficult enough to get Mexico to pay on time,” he shared. “On the other hand, I think the mainstream media is totally unreliable, and if it has a chance, it will blow up any story leading the public to believe that something has been done when in fact it has not. I guess we’ll have to wait and see.”

Presently, “There is a lot of speculation as no one knows for sure what is going to happen, especially regarding NAFTA,” said attorney Romelio Hernandez, of HMH Legal, who specializes in credit and collections.

With respect to cross-border sales only, however, “the legal framework and challenges for the enforcement of claims will continue to be the same,” he said. “The only thing I would probably do differently is in the due diligence process to better assess the financial condition of the prospect customers. And this is simply because of the high volatility of the peso right now; companies are having a hard time coming up with the required dollars to perform on foreign currency loans or sales.”

This June, Hernandez will present “Securing Credit Sales in Mexico” as part of FCIB’s Global @ Credit Congress lineup. He plans to discuss the most common security devices and contracts available in Mexico; how to identify challenges and opportunities using these devices; and how to prepare a cost-effective plan to implement them on future sales. The discussion also will include title retentions, pledges, mortgages, guarantee trusts, consignments and pagarés. To learn more about FCIB’s conference, visit Global @ Credit Congress. Kuehl will also touch on Mexico as part of his discussion during “Five Nations that Matter to the U.S.”

Election Calendar

February 5 – Liechtenstein, Parliament

February 12 – Turkmenistan, President

February 19 – Ecuador, President

April 9 – Serbia, President

April 23 – France, President

May 19 – Iran, President

Global Roundup

Global ratings outlook weaker than last year. Global rating outlooks are more negative than a year ago across most rating sectors. While the greatest challenges are faced by emerging market issuers, this is a global trend with the outlook bias also negative for developed market entities across the majority of sectors. (Fitch)

America, China and the risk of a trade war. Donald Trump’s quest to protect American workers from cheating foreigners has begun. But in his first flurry of policy tweets and executive orders, China, his favorite bogeyman, was conspicuously absent. On the campaign trail, he deplored China’s currency manipulation, accused it of flouting global trade rules and threatened a 45% tariff on its exports. Now, the world is waiting to see how much of this he meant. Trade tensions will mount, but a destructive trade war can still be averted. (The Economist)

German inflation anxiety could bring 2017 election shock. The ECB’s increasingly shrill mantra that it makes policy for the monetary union as a whole and not for its largest member (Germany) could well cause a black swan to appear—in the form of a German political shock this fall. The German economy is now emitting signals of serious euro-monetary disorder even though these become muffled in the various statistical averages across the euro-area as a whole which register on the dashboards of the Frankfurt monetary bureaucracies. (Eurasia Review)

TPP is dead. What now? The United States pulled out of the Trans-Pacific Partnership (TPP) this week. Once considered the most ambitious free-trade agreement in history, the TPP aimed to set the trajectory and tone of trade in Asia as a balance to a rising China. Now, there is an economic vacuum to fill, and—for countries looking for partners in growth—China is the obvious choice. The demise of the TPP will not affect near-term U.S. growth, but for the other countries in the TPP, including Vietnam, the economic gains and strategic alliance with the United States were significant, and the lack of TPP leaves them at a strategic disadvantage. (The National Interest)

Wait ... the TPP isn’t dead? President Donald Trump’s executive order withdrawing the United States from the Trans-Pacific Partnership at the very least hammered a nail into the coffin of the inchoate trade pact and in all likelihood will be seen as the ultimate coup de grace. So, is TPP alive or dead? On the one hand, the 11 other members of the pact have not indicated any intention to withdraw. Some Canadian actors are reportedly pursuing the possibility of continuing the TPP without the U.S. (Global Trade Magazine)

U.K. business failures begin to climb. New statistics show that the number of U.K. corporate insolvencies increased by nearly 13% from 2015 to 2016 to a total of 16,502. The Insolvency Service, which released the official statistics on insolvencies on Friday, said the rise was primarily caused by 1,796 connected personal service companies entering liquidation in the final quarter of 2016, following changes to claimable expenses rules. (Insolvency News)

Trump’s “aggressive” first days in office worry trade experts. In his first five days in office, some of President Donald Trump’s actions have prompted concerns in the trade world. The U.S. withdrawal from the TPP, implemented through an executive order on Trump’s first day as president, will have limited economic consequences, as the agreement hadn’t yet been ratified. On the other hand, the announced renegotiation of the North American Free Trade Agreement (NAFTA) could have much larger implications. (Global Trade Review)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations