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Cash Crisis in Venezuela Worsens

President Nicolás Maduro gave Venezuelans 72 hours, starting Dec. 11, to swap out the country’s 100-bolivar note for new currency before it would become worthless.

News reports have noted that the government has credited the need for higher value bills due to inflation. “Amid skyrocketing inflation, Venezuelans paid for goods by weighing stacks of cash instead of counting bills,” CNN Money reported.

The International Monetary Fund forecast the country’s inflation would rise 470% this year and 1,660% next year. In November, it was reported that the bolivar lost about 55% of its value. On the black market, the 100-bolivar note is worth about three U.S. cents and accounts for about 77% of the nation’s cash, an article by The Economist states.

“The 100-bolivar note was the most common currency denomination, and it is being eliminated because it doesn't buy anything anymore,” said NACM Economist Chris Kuehl, Ph.D. “This would be the equivalent of the $100 bill in the U.S. having no more value than a penny. Prices are now in the hundreds of bolivars for even a fast food meal (around 500 bolivars). The currency is rapidly being replaced by straight barter as there has been such a significant devaluation. Nothing suggests that things will get any better in the coming year.”

It has also been reported that the country removed the notes in an effort to stop Colombian smugglers from hoarding the money to purchase price-controlled food and gasoline in Venezuela and then resell it at higher prices. Shortages of goods, however, make that claim invalid, several news reports state. Several analysts see this as a diversion by Maduro to take the spotlight off of his administration’s failure to reverse the direction of the economy.

“The currency has crashed and inflation has skyrocketed,” CNN Money reported. “Venezuelans now need to carry stacks of cash just to buy food and medicine, which are already in short supply.”

The quick currency turnaround, however, finds Venezuela in a similar situation as that of India, after the country recently made the 500- and 1,000-rupee banknotes invalid. Chaos has erupted as people wait in long lines to exchange the money. However, while the Indian banks were short on replacement cash, in Venezuela the new bills never arrived at the banks.

“Central bank President Nelson Merentes said the bills will arrive in the country and be distributed in a ‘progressive manner’ to banks, [according to a spokesperson, who did not provide details on timing],” CNN Money reported.

Problems in Venezuela have been ongoing, however. “This is not an unexpected development, and I anticipate additional currency controls in the near future,” said Val Venable, CCE, director of credit for Ascend Performance Materials, which secures transactions when selling into Venezuela. “As with the India situation, this will first be felt domestically, particularly in small business where many of their transactions are cash based. Because of the long-term issues within Venezuela and its politics, I can’t image this caught many companies that export to Venezuela by surprise or with risk to their cash.”

Over the past year, it seems that fewer members are doing business there differently. One credit professional noted his company no longer sells directly into Venezuela. “We have a couple of ex-Venezuelan distributors that now work out of Miami and Puerto Rico, and we sell to them. They take all the Venezuelan risk.”

He added that Venezuela’s “inflation numbers make me think of the stories of hyper-inflation in Germany when people would take their daily pay by wheel barrow to the market to buy food before it devalued anymore.”

Similarly, another credit professional’s firm also indirectly conducts business in the country via two customers based elsewhere. “We do not have any resources, assets or legal presence there,” he said. “I don’t follow the currency exchange too closely because of the customer arrangement we have, but I imagine this is driving business out, along with there being no money to purchase things anyway.” He added that his firm’s indirect sales into the country were down 32% from last year. “It wasn’t a high number of sales last year, but still to be off nearly a third is probably a good indication of how much further the situation has declined.”

Yet another credit professional, who also no longer sells into the country, explained that “when we were selling into there, everything was strictly payment in advance. I don't see how they are able to continue with the situation currently as bad as it is.”

The Penalties from Protectionism

Chris Kuehl, Ph.D.

The reports just keep rolling in, and they all strike the same chord. The International Monetary Fund has weighed in many times along with the World Bank and the Organisation for Economic Co-operation and Development, and so on. Now it is the Bank for International Settlements (BIS)—often referred to as the central bank’s central bank.

Its annual report asserts that protectionism and anti-trade attitudes constitute the greatest threat to global growth in the coming year. The populist wave that has swept through the U.S. and Europe has its roots in many issues, but trade remains at the top of the list. It is not that trade itself is unwanted, but trading with other nations has been interpreted as the reason that jobs are leaving the U.S. and that companies are shutting down. The notion is that the U.S. and other countries could be producing the things that are imported and thus preserve domestic jobs.

The BIS report doesn’t create any new arguments—just reiterates the ones that others have made. The statements made by President-elect Donald Trump have heightened concerns, and there is renewed fear that Europe will pull ever more inward. Even Japan has been making noises that can be interpreted as more protectionist than usual. The U.S. remains an enigma as there are those in the new administration who seem to be favorably oriented toward trade despite the antagonism from Trump.

In Britain, a reaction from the general population has been assessed as regret over its Brexit vote. It seems that the majority of those who voted for it were not opposed to the trade aspects of Britain’s relationship with Europe—the main motivation was concern over immigration. In the rest of Europe, trade itself is not the issue—it is the lack of jobs and economic growth. The trade pacts also get dragged in as contributing to the problem. That would be an accurate assessment of the U.S. attitude as well. Polls consistently assert that the population is not really anti-trade. People are concerned about jobs and growth and oppose anything that seems to challenge the economy’s ability to provide either of these.

The BIS report makes the same points that have been made before. Protectionism slows global growth significantly and creates higher inflation at the same time. This slow growth ultimately costs jobs throughout the global system. The report goes on to note that the markets in the U.S. and to some degree in Europe have managed to remain healthy despite the threat, but the report also points out that much of the enthusiasm right now is based on assumptions. The most important of these is the expectation of a large infrastructure-led stimulus in the U.S. economy. It is true that a trillion dollar effort would dramatically boost growth in the U.S., but there is this small problem: Nobody yet knows where that trillion dollars is going to come from. It would be useful to note that plans have been underway for the better part of six years to boost spending on infrastructure and nothing significant has come from it. It has always come down to budget.

The idea this time is to get private investment engaged, but this is not easy either. The kinds of infrastructure investors would be interested in would be something that has a revenue stream. That limits their engagement to toll-based transportation. There are plans to engage money that is currently held overseas, but there is no guarantee that companies will be interested in repatriating at the level needed. If the money has to come from the federal budget, there is no way it will be close to the trillion needed. If the whole plan falls apart over financing, what will the investment reaction be? The bottom line is that there are many potential pitfalls and few guarantees.

Strong Policies Help Mexico Face External Risks

Despite external challenges, Mexico continues to grow at a moderate pace, according to the latest International Monetary Fund (IMF) assessment of the country.

The IMF report finds the country’s economic policies sound, fiscal deficit falling and inflation stable. Key external risks, however, include rising trade protectionism and financial market volatility.

“The country remains exposed to external shocks, including risks of growing protectionism, given its strong financial and trade linkages with the rest of the world,” executive directors noted.

Regardless of “slowing growth as a result of weaker investment and manufacturing exports, other parts of the economy are doing well,” the IMF said. “A steady increase in jobs has kept the unemployment rate close to post-crisis lows of 4%; wages are rising; inflation is low; and there has been an uptick in private consumption and credit growth.”

It recommends, however, improving the business environment and increasing the participation of women in the labor force as potential ways to help boost economic growth.

Mexico is one of several locations that the new FCIB International Credit & Collections Survey is asking credit professionals to evaluate. Other areas include Australia, Canada, Puerto Rico and the United States. Credit professionals’ responses remain anonymous and provide vital information to further the credit field.

“I like to participate because current payment trends can be valuable information when determining whether to extend more credit or if there are existing debts that need to be collected,” one credit professional shared. “Businesses can often get a pulse on the economic or political conditions of a country based on supplier trade experiences.”

Global Roundup

EU summit extends Russia sanctions for six months, reassures Dutch over Ukraine deal. EU heads of state and government agreed last Thursday to roll over sanctions against Russia over its actions in the Ukraine for a further six months, ticking off one element of an otherwise problematic and late-running summit. (EurActiv)

Italy: Pressure for popular vote to force electoral law reform. Following the resounding defeat Prime Minister Matteo Renzi suffered at referendum on Dec. 4, Italy has entered a period of political unpredictability. Renzi had pinned his government’s survival on Italians approving his plan to streamline the country’s notoriously cumbersome constitutional setup. Some 60% of voters thought otherwise. Renzi’s fall is destined to have repercussions in Europe for various reasons, including the stability of Italy's banking system. (The Interpreter)

Can Russia ride China’s trade lead in Southeast Asia? China immediately seized upon President-Elect Donald Trump’s victory to offer its proposed Regional Comprehensive Economic Partnership (RCEP) as an alternative to the TPP. Russia’s backing of the proposal signals a call for a broader Asia Pacific free trade zone as well. (Global Risk Insights)

China cedes top U.S. creditor crown to Japan as yuan struggles. Japan has dethroned China as the top holder of U.S. government debt as the Chinese central bank dipped into its foreign exchange reserves to support the yuan, while its Japanese counterpart has been content to allow the yen to weaken. Investors are paying close attention to declines in China’s holding of U.S. Treasuries as any sharp sell-off could add further upward pressure to U.S. interest rates, which in turn can undermine the Chinese currency. (Reuters)

Protests erupt in Brazil over controversial 20-year austerity plan. Fierce protests erupted in 15 Brazilian cities Dec. 13 as the country's Senate approved a controversial 20-year austerity plan. Known as PEC 55, the constitutional amendment imposes a cap on public spending that will limit federal investment in social programs for the next 20 years. Brazil's Senate approved the spending bill 53-to-16, and it went into effect on Thursday. (CNN)

U.S. developments put emerging markets on alert. Emerging markets are on high alert following the election of Donald Trump as president of the United States. This has inflated uncertainty about the 2017 global outlook, primarily through interest rate and trade channels. While the policy agenda of the Trump presidency remains unclear, two of his pledges could have significant impacts: fiscal stimulus and protectionism. Spillovers into EMEs would be most acute through the interest rate channel as U.S. rates could increase more quickly than previously anticipated and through the trade channel. (Atradius)

One month in, what's the impact of India's demonetization initiative? A month into India’s demonetization initiative, long lines of people looking to exchange notes still spew out of banks; some sectors of the economy continue struggling with the lack of readily available cash; grassroots businesses are still being revolutionized with electronic payment capabilities; and masses of people continue transitioning toward new ways of paying for basic goods and services. (Forbes)

The economic effects of the 2016 election. The economic effects of the election are likely to be positive, but somewhat muted in 2017. Like anyone seeking office, Donald Trump made extravagant promises to get elected. And like any politician, he will not be able to deliver on all of them. The 46 Democrats (plus two Independents) in the U.S. Senate could hold up any measure indefinitely by filibustering, a procedure that only takes 41 votes. The most likely scenario is that Trump will have to compromise, and his promises on the campaign trail will have to be pared down. (Global Trade Magazine)

Top 5 trade finance news stories of 2016. With the Brexit vote, Trump’s presidential victory and many exciting fintech developments, 2016 has been a year full of surprises in the trade finance space. As the year comes to a close, Global Trade Review looks back on the most popular stories of 2016. (Global Trade Review)


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