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Russia’s Economic Outlook Brightens

The International Monetary Fund (MF) has bumped up its projections for the Russian economy despite challenging macroeconomic conditions, according to its 2016 World Economic Outlook (WEO).
“Higher oil export revenues are providing some relief to the region’s oil exporters and to the
Russian economy in particular, where the decline in GDP this year (0.8%) is now projected to be milder than envisaged in the April 2016 WEO,” it says.

And although the economy is expected exit recession this year, the IMF noted that a lack of reforms as well as productivity and investment sanctions are expected to keep growth subdued for 2017 and beyond. “The combined effects of lower oil prices, sanctions and diminished access of firms to international capital markets have forced the economy into recession since the end of 2014,” it points out.

About 25% of the credit professionals who responded about doing business in Russia as part of FCIB’s October Credit & Collections Survey on Eastern Europe noted an increase in payment delays, while 9%, 44% and 22% said they were experiencing a decrease, no change or no delays, respectively. Reasons for late payments included shipping and customs delays as well as foreign exchange issues.

“Keep a conservative credit limit and shorter payment terms,” advised one respondent. Another survey taker suggested getting paid in advance, and if that’s not possible, “we provide a very small line with 15 days net as the payment term.”

The October survey also includes doing business in Bulgaria, Croatia, Romania and Ukraine. Members can access results here.

An upcoming session at FCIB’s annual International Credit and Risk Management Summit includes a panel of experts who will discuss ways to conduct business in Russia more safely. Panelists will discuss the “real” difficulties regarding trade and when collecting accounts receivables. For more information about the summit, held Nov. 13-15 in Amsterdam, click here.

How Realistic is the Next Big Thing?

Chris Kuehl, Ph.D.

There is always the next big thing—the next place in the world where business will expand, the next boom economy. In the last few decades, this has been China, India, Brazil and parts of Asia and Latin America. Some of these areas have been all that was expected, and the development has been sustainable. Others have seen their fortunes expand and then abruptly crash.

Right now, attention is starting to focus on Africa again. It seems that Africa always comes up as a place destined to take its place in the world, but never quite does. The problems, however, have always overwhelmed the plans—too much conflict, too much poverty and too much disease. Will it be different this time?

The first caveat is the most important, but it is often ignored. Africa is not a country—it is a continent with 54 countries. If the Europeans are struggling to keep 28 nations on the same page and the U.S. is still contending with the diversity of 50 states, one can only imagine the divisions in the world’s second-largest continent with a population second only to that of Asia. The practical importance of this diversity is that there will be a very wide gap between those countries that develop and those that do not. The Africa of today is widely diverse in terms of economic development. This gap will certainly widen as some states grow and others fail.

Three factors lead to the inclusion of Africa as the next center for global development—at least over the next three to four decades. The first is that the population is large and very young. The birth rate is high, and the rate of infant mortality has been down for years. The bulk of the African population is under 30; they now live mostly in cities. That can be a problem, but it also means a ready workforce. Africa today has the population density of China 20 years ago, and that is important for purposes of development.

The second factor is that many of the countries that once competed on the basis of their low costs of production have seen those costs rise. They are losing their competitive edge. The companies that shifted to China in the last 20 years left their old locations in search of cost savings. They will leave China and other states for the same reason. Africa is already seeing some manufacturers move from China and elsewhere. This is just the start of what could be a major migration.

Third, there are pockets of development already—countries where there are high levels of education and political peace. These become the anchor cities and states for the rest of the country. As they prosper, there will be other nations that attempt to emulate them. The real key to the growth of these enclaves and the rest of Africa will be the extent to which the developed states take an interest. The U.S. has a slim advantage at this point as there is still underlying resentment of the Europeans due to the colonial past and the Chinese have been exceedingly ham-handed when it comes to their dealings.

Venezuela’s Critical Calendar

Dr. Hans Belcsák

Even though Venezuela’s oil company PdVSA has just sweetened the terms of a proposed swap of more than USD 7 billion of bonds maturing next year with longer-dated paper due in 2020, there seem to be no lawyers or investment bankers eager to put their names to it. The proposal has been part of an attempt to improve the company’s cash flow situation, but Standard & Poor’s has just lowered its grade on the affected bonds to triple-C. It has made clear that in its view the swap would be a “distressed exchange” and, thus, a kind of default. Fitch is reportedly also planning to assign a triple-C rating to the proposed new Petroven notes. Besides, offering part of PdVSA’s U.S. subsidiary Citgo Petroleum as collateral would create a host of new problems as it would deprive other bond holders of their main security, could trigger a change-of-control clause in Citgo’s own debt (making some USD 5 billion payable immediately), and stump a number of foreign creditors that are already suing the company for nonpayment on contracts.

Even if the bond swap falls through, as I expect, PdVSA and Venezuela will probably be able to muddle through into next year. They will do their utmost to do so since the alternative would be grim. In case of a default, all of the government’s or PdVSA’s assets outside the country would become “attachable,” and this means that oil exports would be disastrously impeded. But 2017 will be another matter. The country and Petroven will have to scrape up USD 15 billion due for repayment in the next 14 months. China, which lent the government USD 65 billion, is still owed some USD 25 billion. It agreed last May to a deal under which Venezuela is making interest payments only, postponing settlement of principal to a later date, but Beijing does now appear to be at the end of its rope and is unlikely to offer any fresh loans. Even if OPEC’s agreement to cap output holds, it will most likely just stabilize oil prices, not push them substantially higher in a sustainable way. And this means that oil service companies (which have already slashed their operations in Venezuela), airlines and many other creditors abroad will continue to have to sit on unpaid bills.

This is what I expect regardless of what happens in the political arena. There, the national electoral council (CNE) has just taken steps to complicate the conditions for a presidential recall referendum so drastically that a successful attempt of this sort becomes almost inconceivable. While the constitution mandates that 20% of the electorate must register nationally to support a recall initiative, the CNE now says that this applies to every single one of Venezuela’s two-dozen states. Polling stations will be open for the purpose only on three days (Oct. 26, 27 and 28) and for just a few hours each day. And the opposition to President Maduro will get only one-third of the voting machines it has asked for. The CNE further says that if a referendum is held, this will have to be no earlier than in the middle of next year’s first quarter, which means, in effect, that if one succeeded in ousting Maduro after Jan.10, Vice President Isturiz would take over and the ruling party would retain control. That is, if there is no blowout of the now intense social tensions. The opposition Democratic Unity alliance has marked the 12th of this month as a day of “national mobilization.”

Global Roundup

Post Brexit: Managing FX risks in three steps. The result of the U.K.’s recent Brexit referendum was a surprise, but the market events which unfolded once the “leave” vote was announced revealed that some of the most experienced risk management professionals were unhedged against a weaker GBP or out of the money on long GBP exposures. This stark example of event risk has emphasized the importance of a strategic hedging program and should prompt many companies to re-assess their existing treasury policies and risk management approach. (Treasury Management)

Colombia-FARC peace agreement rejected by voters. Markets were shocked and stunned early in the week when the media started reporting that Colombians, by the slimmest of margins (50.2% versus 49.8%), had rejected the 52-year-war-ending agreement between the Colombian government and Revolutionary Armed Forces of Colombia (FARC), the country’s largest left-wing guerrilla group. However, although the disappointment was immense, the expectation for peace does not seem to have abated, as both sides seem, at least as of today, committed to try even harder to achieve the peace. (Wells Fargo)

Latest IMF forecast paints a bleak picture for global growth.The International Monetary Fund (IMF) has published its latest report on the future prospects for the world’s economies. The forecast paints a subdued picture, predicting global GDP to rise by 3.1% this year and 3.4% next. These figures compare with an annual average growth rate of some 3.8% in the six years to 2015. (EconoTimes)

Global finance leaders contending with anti-trade backlash. World finance officials, still searching for ways to rejuvenate a sluggish global economy, now face the added problem of dealing with a growing anti-trade backlash that threatens to make the economic situation worse. Finance ministers and central bank governors from the world’s 20 major economies are scheduled to wrap up their talks Friday. The G-20 talks were being held in advance of the annual meetings of the 189-nation International Monetary Fund and its sister lending organization, the World Bank. (Washington Post)

U.S. government stays open, Export-Import Bank remains hobbled. Right now, there are more than 30 proposals, totaling more than $20 billion, awaiting approval at the Export-Import Bank of the United States (Ex-Im). As of Oct. 1, they will now have to wait a little longer. Proponents of the bank had hoped legislation to keep the government open past Oct. 1 would also address the administrative roadblocks that have kept Ex-Im partially closed since July of 2015. Instead, the bank remains another victim of election-year posturing, and the ongoing standoff between President Obama and a Republican-controlled Congress. (Global Trade Magazine)

Pakistan’s growing burden of mounting debt. Pakistan’s economy is at the crossroads with the completion of the International Monetary Fund loan program worth $6.64 billion. The country has received the IMF amount over three years. However, it has yet to start paying off its external debt, which has swelled to $73 billion. This colossal debt couldn’t have come at a worse time as the country is already struggling with shrinking exports and slowdown in remittances. These challenges may not allow the government to keep the current all-time high foreign exchange reserves maintained for long. (Express Tribune)

Nigeria FX liquidity to remain tight, bad loans increasing. Currency market liquidity in Nigeria is set to remain challenging in the second half of 2016 due to low oil prices, which could push up credit risks for lenders as naira weakness makes loans harder to service, a central bank report said. The move to a flexible exchange rate regime has led to a sharp fall in the naira and contributed to the decline in asset quality for the banking sector. (Reuters)

GBP plummets as French president calls for a hard Brexit. President Francois Hollande said the U.K. will have to “pay the price” of opting for a hard Brexit and that the European Union has to prepare to defend its interests in negotiations. The pound plunged to a 31-year low, with traders saying the slump was exacerbated by computer-initiated sell orders. The currency was already in free fall amid concern about a so-called hard Brexit and Friday’s slide took it to the weakest level since March 1985. (Bloomberg)


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