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Italy Hits a Bump

Political uncertainty could create a mild confidence crisis in 2017, according to Euler Hermes analysts.

Their report follows Italy’s vote against constitutional reform and the subsequent resignation of the country’s prime minister, Matteo Renzi. “If there are no spillovers to banks or the bond market as the baseline scenario suggests, the downturn may shave off 0.3 percentage points of Italian GDP,” the report states. However, stopgaps from Europe and its own structural strengths such as a fiscal surplus and debt ring fencing should keep the country from “2011-2012-style financial stress,” it notes.

Euler expects the Italian banking sector to “feel the pinch” and that “Italian companies will bear the brunt of a confidence shock, albeit mild.”

The initial reaction in the European markets was dramatic, said NACM Economist Chris Kuehl, Ph.D. “That response was tempered later, and some of the lost ground was regained. There is a sense that Italy is always facing issues like this and that it will find a way to survive.” Kuehl noted, “The bigger concern is that Italy retains the crown of ‘sick man of Europe’ and that the Italian population had been expecting more from Renzi.”

So what could this mean for companies doing business there?

Gary Gaudette, CCE, ICCE, senior treasury analyst for Hanover, NH-based Hypertherm, Inc., which does business in Italy, expects some trepidation in the short term until businesses sort out what the changes will mean to them and what adjustments, if any, they will need to make.

However, “Businesses will find a way to carry on as that is what they need to do,” he continued. “A change like this forces them to stop and assess the impacts to them, and then move forward. That collective stop and reassessment slows everything down for a period of time. From my perspective, the danger is that companies stay in a holding pattern too long, sort of waiting for the other guy to start pushing forward again.”

He shares Euler’s opinion that the banks may feel the most pain. Italian companies tend to be highly leveraged—often with lots of short-term bank debt, Gaudette added. “If business slows too much, I could see some trouble in paying their debt. ... So if there is an increase in non-performing loans it could be a real problem.”

Trade Deficit Widens

Chris Kuehl, Ph.D.

Given all of the attention that has been lavished on trade issues over the last year, there will be considerably more attention paid to the state of the trade deficit going forward. It doesn’t mean, however, it will be any better understood.

Having a trade deficit is not necessarily a bad thing—all it means is that the country is importing more than it exports. There are a number of factors that go into this balance, but most notably is the issue of price. In past years, the U.S. has run a major trade deficit due to the need to import expensive oil. However, in recent years, the U.S. has been producing more of its own and the price per barrel has fallen. Therefore, the U.S. has had to spend far less. This month, the deficit has risen in part due to the falling prices for farm commodities. The price for soybeans has been particularly low. The U.S. continues to be a major exporter of that commodity as well as many others.

With trade there will always be winners and losers—this is the nature of trade. Traditionally, there are two motivations for most trade—exploitation of absolute advantage or management of comparative advantage. With absolute advantage, a country has a product or commodity that other nations don’t have. If these other states want that product or commodity, they will have to pay the price set by the state that has it to sell. This could be something like diamonds or rare earth materials or some manufactured product or service. In truth, there are not many situations where absolute advantage exists these days.

The more common rationale for trade is comparative advantage. This is far more intricate. It holds that it is possible for a country to take care of all of its own needs and not have to trade with anybody, but to do so would be woefully inefficient. There are things the country can do very well and should concentrate on, while importing the things that it can’t make as cheaply or easily. The U.S. has an advantage when it comes to high tech goods and complex manufactures such as airplanes. It makes sense to make these things in the U.S. Does it make sense, though, to make plastic flip flops in the U.S. where workers are going to make a minimum of around $50 a day as compared to $2.80 a day in Burma? The U.S. maker will have many expenses that a Burmese competitor will not have. The end result is a price for the U.S. consumer, which would be many times higher. The U.S. is better served by channeling people into the sectors where there is a comparative advantage.

This month’s trade gap was 17.8% higher than it was the month before—$42.6 billion. It was the steepest rise since March of 2015 and the highest deficit level seen since June, considerably higher than had been expected by analysts. The specific reasons for this change are varied and complex. The U.S. saw a 1.8% reduction in exports as there was less demand for many of the farm exports the U.S. generally relies on. The export of consumer goods also declined, but some of that appears to be related to increased domestic demand for these goods and a decision by producers to satisfy the domestic needs over the export needs. The U.S. imported more from China and Mexico, but that trade was widely divergent with most of the Mexican activity consisting of inter-company trade. U.S. companies with operations on both sides of the border will trade back and forth between branches and subsidiaries. The imports from China reflect the interest of consumers willing to spend more and seeking cheap prices at the same time.

The Survey Says: Be Compliant and Know Your Customer

Thinking about doing business in the Czech Republic? Carefully research your prospective customer and ask for payment in advance, advised several credit professionals who shared their experiences in the latest FCIB International Credit & Collections Survey, which also covers Hungary, Lithuania, Serbia and Slovenia.

Use prepayment as a way to test how long it takes the customer to pay and compare that with the urgency of the order, one credit manager said. “This is a good indicator [of whether] the customer has cash problems.”

In some Eastern European countries, credit reports and financial data are hard to obtain or are published with delay, noted another survey participant. Therefore, the relationship with the customer is very important, he added.

If extending credit in these countries, yet another survey taker recommends using credit insurance.

At least 18% of the credit professionals who were doing business in Slovenia recorded an increase in payment delays compared with a 14% rise in Lithuania, 11% in Serbia, 10% in the Czech Republic and 6% in Hungary. The majority of participants (ranging from 88% to 64%) detected no change in the payment habits of their customers, however.

Knowing who the customer is and having all the necessary compliance documents were also key themes throughout the survey. A respondent suggested, “Ask yourself, who are the owners? Are they local or abroad?”

Participants of the survey are sent the results directly. The next International Credit & Collections Survey opens Wednesday and will cover doing business in Australia, Canada, Mexico, Puerto Rico and the United States.

By participating in the survey, credit and risk management professionals share real-time credit and collection experiences, which strengthens their field. And although the survey is open to both members and nonmembers of FCIB, only members have the additional benefit of reviewing historical benchmarks in the survey archives via the Knowledge and Resource Center webpage.

Global Roundup

South Korean parliament votes overwhelmingly to impeach President Park. South Korean lawmakers voted overwhelmingly on Dec. 9 to impeach President Park Geun-hye over an influence-peddling scandal, setting the stage for her to become the country's first elected leader to be expelled from office in disgrace. Park, 64, is accused of colluding with a friend and a former aide, both of whom have been indicted by prosecutors, to pressure big businesses to donate to two foundations set up to back her policy initiatives. (Reuters)

European Parliament committee gives CETA thumbs down. The Parliament’s Employment and Social Affairs Committee recommended on Dec. 8 to reject the EU-Canada trade agreement, suggesting that final adoption of the deal in the assembly’s plenary won’t be plain sailing. (EurActiv)

China curbs currency outflows to steady Renminbi. Renminbi (Rmb) liberalization has been put on the backburner, with China placing further restrictions on capital outflows. The Rmb is facing its worst year since it was unpegged from the U.S. dollar in 2005. It reached an eight-year low in November against the U.S. dollar and has lost almost 6% of its value this year. Currency reserves are down to their lowest levels in more than five years. The Chinese government is turning to currency controls as a means of arresting the decline. (Global Trade Review)

South African economic growth likely to remain weak for some time. The South African rand has been right at the front of the wave of rebounding emerging market currencies and has strengthened markedly against the U.S. dollar, regardless of subdued economic growth data for the third quarter. Weak production data released yesterday accelerated the reversal. The production in the manufacturing sector, which contributes around 13% to the GDP, dropped 1.9% month-on-month in October, resulting in a decline of 2.7% year-on-year. (EconoTimes)

Cargo monitoring to decrease food waste. Arviem AG‘s real-time cargo monitoring service will be supporting Nestlé Ecuador’s cargo shipments. The service will enable Nestlé Ecuador to verify the quality of its products while in-transit. Thanks to the smart data and insights provided by Arviem’s internet-of-things technology-based sensing devices, Nestlé Ecuador will be able to gain visibility to the journey of its products and identify inefficiencies in the supply chain resulting in reduced inventory and food waste as well as increased food safety. (Global Trade Magazine)

As Egypt prices soar, El-Sisi says currency is undervalued. Egyptian President Abdel-Fattah El-Sisi sought to shore up confidence in the pound on Dec. 8 as inflation accelerated to the highest level in eight years following the central bank’s decision to abandon all currency controls. The president said in a televised speech that the current exchange rate doesn’t reflect the true value of the pound. It would take a “few months” for balance to be restored in the markets, he said. (Bloomberg)

Canada lags behind Mexico in exports to the U.S. The U.S. Commerce Department released new trade statistics this month that show the US imported $245 billion in goods from Mexico in the first 10 months of 2016. The U.S. imported $230 billion worth of goods from Canada over that same period. In 2015, Canada and Mexico were tied in exports to the U.S. (BBC)


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