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Global Trade Growth Expected to Remain Slow

Global trade growth will likely remain subdued, according to a recent Euler Hermes report.

“It appears that trade will never grow the same again, staying below the +4% growth mark in volume per annum,” wrote Ludovic Subran, chief economist and director for economic research, in the October 2016 Economic Outlook special report, Trade Wars: The Force Weakens.

In September, the World Trade Organization (WTO) cut its global trade growth forecast for the year by more than a third, going from 2.8% to 1.7%. It also revised its expectations for 2017 from 3.6% to somewhere between 1.8% and 3.1%. “With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009,” WTO said.

Subran identifies three major transformations that he credits for the slowdown: consumers’ shift from goods to services and experiences; costly and complex trade financing; and an increase in political risk and protectionism.

"The dramatic slowing of trade growth is serious and should serve as a wake-up call,” said Roberto Azevêdo, WTO director-general, in a Sept. 27 press release. “It is particularly concerning in the context of growing anti-globalization sentiment. We need to make sure that this does not translate into misguided policies that could make the situation much worse, not only from the perspective of trade but also for job creation and economic growth and development, which are so closely linked to an open trading system.”

Subran, however, doesn’t think the shift means the end of globalization. “It looks like the recipe for globalization will have to evolve to be more inclusive, trust-based and handled differently by policymakers and CEOs alike. ... In fact, what look like impediments to global trade could actually become opportunities for smaller—and more agile—countries and companies in their quest to go global.”


Development Aid is Harder than It Looks

Chris Kuehl, Ph.D.

Roughly two years ago, the Chinese announced their plans to wrest control of the developing world’s economic growth from the insensitive West—institutions like the International Monetary Fund and the World Bank and the European Bank for Reconstruction and Development. The plan was to pour Chinese money into these developing nations and show them who their real friends were. The U.S. and Europe had been criticized for years for their stingy approach, and China was going to change all of that with its own version of a development bank. It is now learning the hard way why Western institutions have not been more eager to help. China is getting stiffed.

The countries that lined up to take this proffered Chinese aid have lousy track records to begin with. Their governments are not all that stable, and many have long been described as kleptocracies. The aid is rarely delivered to where it is needed. The latest collection of leaders takes the majority of it and vanishes into the night. Even those who have better intent are often very dependent on a single commodity for their national income. When something happens to that market, they are in deep trouble.

The Chinese made many loans to countries that rely on oil. This was a deliberate move because China also wanted access to that oil. The problem now is that oil prices have cratered and seem unlikely to rise again soon. These states can’t pay China back. In fact, they are demanding more loans and more aid. China is now the country to be drained as the Western states have walked away. It seems there was a reason for the end to Western largesse, and now the Chinese are the ones on the hook.

The truth is that countries do not provide aid to others out of the goodness of their hearts. There are many intricate geopolitical motivations for these moves. China elected to engage in these aid programs and develop these loan arrangements in order to ensure access. This is the primary reason the U.S. and Europe have engaged for years. The country that is getting the aid or the loan is expected to reciprocate to one degree or another. This may be diplomatic support for the initiatives that have been undertaken by the countries that are providing the assistance. The Chinese have been lining up support for their positions as well. It is not accidental that significant levels of support have gone to other Asian states near disputed territories that China claims.

There are also the economic motivations, and China has been transparent here as well. The states that have been getting support have oil and other industrial commodities that China requires. It is assumed China will have access to these commodities and perhaps at a preferred rate. Even as China has lost money on these deals, it is presumably still reaping some of these less tangible rewards.


Uptick in Payment Delays from Saudi Arabia

Dr. Hans Belcsák

Payment delays out of Saudi Arabia have increased substantially, doubling and tripling in some instances, especially in the IT, electronics, petrochemical and construction sectors, and conditions are likely to get worse before a material improvement can be reasonably hoped for. The principal cause is the sharp reduction in oil earnings the Kingdom has had to accept, and while, after a number of failures, a tentative deal has been reached in Algiers by OPEC members on a (still undefined) cap on production, it is not likely to produce any sharp and lasting rise in global prices for petroleum.

Essentially, Saudi Arabia has lost the war of attrition it sought to fight against U.S. shale oil by flooding the world markets with its own output. Many of the U.S. producers of the black gold have been able to cut costs to where their fields are viable at USD 55-60 per barrel, which is close to half what Saudi Arabia would need to finance its welfare state and its military activities in Yemen, Syria and Iraq. With Iran now coming out from under its sanctions and Iraq cranking up liftings, it remains to be seen how long the OPEC agreement will hold and what it will achieve in practice. Meanwhile, Aramco has had to cut prices for customers in the Asia-Pacific region to defend its market share, and Saudi Arabia has had to cede to Russia its position as the largest supplier to China.

The biggest casualties have been the Kingdom’s financial reserves and its economy. Its net foreign reserves plummeted by USD 175 billion or about one-fourth in less than a year-and-a-half even though Riyadh was borrowing abroad to slow the fall. Standard & Poor’s and Moody’s both felt compelled this year to lower Saudi Arabia’s debt rating. At home, the authorities have been running a fiscal deficit of close to 13% of GDP. This has forced the government to cut fuel, electricity and water subsidies and a number of other benefits, raising the cost of living in the Kingdom and hurting the middle class. Most public servants have had allowances and bonuses canceled or at least reduced. Public-sector salaries for Saudis as well as expats have been slashed by 20%, which has had a broad impact as nearly two in three Saudis work for the state.

Construction projects have stalled or have been drastically cut back, and thousands of construction workers have had to be laid off. Many are immigrants from poor countries who are now stranded because they cannot afford a ticket home. The government has just released about USD 1 billion owed to the Binladin Group (working on expanding the Holy Mosque in Mecca, among other things) so that it can honor unpaid wages. Other companies are on the verge of bankruptcy and unable to pay laid-off workers as well as those still on the payroll. In an effort to soften the blow, the Central Bank has ordered lenders to restructure loans that Saudis can no longer afford, and the government is working on a mechanism to provide cash to low- and middle-income people who rely on subsidies.

In the longer run, all this may help push the economic transformation known as “Vision 2030,” which aims to slash wasteful government spending, develop the non-oil economy and wean the population off its dependency on cradle-to-grave benefits. But for now, the changes are painful and will have to be managed very carefully, lest they add fuel to the Shi’ite unrest the House of Sa’ud already faces as a potentially dangerous challenge. It should not be forgotten that the Kingdom kept itself relatively untouched by the tremors that shook other countries in the region during the Arab Spring mainly by stepping up handouts from the public till. And since then, pro-Iranian Shi’ite militias such as Lebanon’s Hezbollah and Iraq’s Badr and Asaib Ahl al-Haq, with their well-trained and well-equipped forces, have been openly talking about ousting the Saudi regime and freeing Islam’s holy places from its control.

It is against this backdrop that the U.S. Senate voted overwhelmingly to overturn a presidential veto on a bill that would allow the families of 9/11 victims to sue Saudi Arabia. The bill, based on the knowledge that most of the hijackers were Saudi nationals and on the suspicion that Saudi government officials gave assistance to them, allows the courts to waive claims to foreign sovereign immunity in cases involving terrorist acts on U.S. soil. The Senate vote, predictably, was followed by White House warnings that it would expose the U.S. to the risk of similar legal action in other countries, suggestions that it would put American soldiers at risk, and even Saudi threats of economic retaliation.

A report in the New York Times quotes the Saudis as having said they might sell off “up to USD 750 billion in Treasury securities and other assets in the United States” if the bill passes. This, so one heard, would crater the bond market here and trigger all sorts of other upheavals. But the threat, if it was indeed made, does not carry much weight. For one thing, the last time I checked, Saudi holdings of U.S. debt stood at just USD 116.8 billion as of last spring. Sales on this scale could easily be absorbed by the market. And if they did temporarily depress prices, the main losers would be the Saudis in their own portfolio. Many of the other assets the Saudis have here are illiquid, such as real estate, and could not be sold off quickly.

Saudi investors have expressed concern that their U.S. assets could eventually become targets of legal action. At the very least, they could be frozen by a U.S. court for the long period of time it takes for lawsuits for damages to wend their way through the judicial system. But the investors had already repatriated billions of dollars in the immediate aftermath of the 9/11 attacks, amid similar fears. U.S. markets were not roiled for long then, and they will not be now, whatever defensive action the Saudis intend to take. Meanwhile, it looks as though the already quite limited scope of the bill will be narrowed further.


Global Roundup

IHS: Global economic risk on the rise for 108 countries. A new global economic study documenting continued weak growth and high unemployment rates since the worst of the Great Recession contains a stern message for the United States and other countries that are running up their long-term debt without adequate concerns about further adverse economic fallout. (The Fiscal Times)

U.S. further eases Cuba trade and travel restrictions. The United States on Friday announced new measures to further ease trade, travel and financial restrictions on Cuba. The changes, the latest in a series of new rules since the two former Cold War foes began normalizing relations in December 2014, will allow export to Cuba of some U.S. consumer goods sold online and let U.S. firms improve Cuban infrastructure for humanitarian purposes, the U.S. Treasury and Commerce Departments said in a statement. (Reuters)

Ethiopia: Investors rattled by unrest, considering options. Foreign investor confidence in Ethiopia has been shaken following nearly a year of unrest, with the country’s government now admitting that as many as 500 people have died as a result of police crackdowns and a deadly stampede at a recent rally in the country’s Oromia region. (African Business)

Singapore’s growth miss may be the canary in the coal mine. Singapore's growth in the third quarter badly missed expectations on Friday, potentially signaling weakness around the region. The city-state's GDP grew 0.6% on-year in the third quarter, well off forecasts for 1.7% growth from a Reuters poll and the weakest reading since 2009, during the global financial crisis. GDP also contracted 4.1% on-quarter, compared with a Reuters poll forecast for 0.3% growth. (CNBC)

A fractured France at the crossroads of multiple risks. Since the beginning of 2015, the socio-political situation in France has become strained following a string of terrorist attacks as well as a wave of anti-government protests. Political violence and unrest coupled with stagnating macroeconomic performances have weakened the ruling Parti Socialiste (PS) and ushered in a “new normal.” As France is set to ready itself for the May 2017 presidential elections, the country is at the crossroads of several political risks. (Global Risk Insights)

ICC: Compliance needs global body. Compliance and regulation have been the biggest barriers for access to trade finance, according to more than 90% of banks surveyed in the International Chamber of Commerce’s (ICC) latest annual review, leading to a call for an independent global body to tackle the issue. The cost and complexity of regulatory requirements such as anti-money laundering and know your customer were highlighted by the 357 global banks that took part in the survey. (Global Trade Review)

Mercosur to consider trade deal with United Kingdom. The EU and South America’s Mercosur bloc could strike a free trade deal within two years, according to Argentina’s Commerce Secretary Miguel Braun. After Brexit, Mercosur would be open to a separate trade deal with the U.K. (EurActiv)

Standard & Poor's warns on U.K. reserve currency status as Brexit hardens. Britain is in danger of misreading the political landscape in Europe and faces the possible loss of its reserve currency status if it fails to secure full access to the European single market, Standard & Poor’s warned. The U.S. rating agency said the British government is heading into hazardous waters in negotiations with the EU and it risks serious damage to the economy’s future growth trajectory, with long-term implications for the debt profile and the country’s creditworthiness. (Telegraph)

King of Thailand dies at 88. King Bhumibol Adulyadej, revered in Thailand as a demigod, a humble father figure and an anchor of stability through decades of upheaval at home and abroad, died Thursday. He was 88 and had been the world’s longest-reigning monarch. (National Post)

 

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