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Setting Brexit Terms

Chris Kuehl, Ph.D.

It has taken months and has featured some extremely pointed conversations, but the U.K. finally has started the real process toward Brexit. A Jan. 17 speech by Prime Minister Theresa May was supposed to position the issue as squarely as possible, and by most accounts she accomplished that objective. The global reaction thus far has been what one could expect because it is clear that Britain is planning a complete break from the EU. As with any change of this magnitude, there will be winners and losers. As such, the markets are trying to figure out what countries and what industries will be in which category.

In the aftermath of the Brexit vote, there was shock and an almost immediate case of “buyer’s remorse.” It seems that even many of those citizens who voted for the break had regrets once it happened. They really did not expect the vote to go their way, and they suddenly had to face the fact it was no longer a gesture of protest. Those who voted for Brexit had many motivations for their decision. It took a while to sort out what the voters were really concerned about. After watching the reaction of the supporters and opponents for the last several months, it became obvious that most of them still wanted the economic connection and advantages that came with EU membership, but they deeply opposed the EU position on the free movement of people. This came down to deep resentment of the immigration policy adopted by the EU.

May outlined a complete break with the EU. Faint hope over the last few months held that the U.K. would cobble some deal together for partial membership, but this plan was met with overt hostility from the Europeans and was not too popular in the U.K. The issue of free movement was not remotely negotiable with the EU, but it was the key concern in the U.K. Any significant concession to the British would almost certainly encourage other states to contemplate a withdrawal from the organization as well.

Britain has now suggested that the U.K. and Europe work out a new free trade pact. However, this plan has received a cool reception in Brussels. The British are demanding a good deal, and May threatened to walk away from any talks if it appeared the deal would not meet these demands. There were not-so-veiled warnings that attempts to punish the U.K. would be rejected, but the reaction from EU members has been more angry than cooperative. The interpretation of May’s comment was as a threat. That has meant that talks are off to a less than promising start.

The Trump administration has indicated that it will immediately pursue a deal with the British. This is due in part to the antipathy that exists toward the EU, but that may make the British a little nervous. Trump has been attacking the EU for months. He has escalated these attacks to more personal assaults on Germany and Angela Merkel. The British are not interested in picking that same fight and have been a bit cool toward the U.S. plan. Beyond this, a trade deal with the U.S. would not be worked out quickly because most stakeholders will want to see what the Brexit split really looks like before committing to a plan.

Looking for Certainty in Uncertain Times

Populist movements worldwide have lit the fire fueling the uncertain future of globalization. As President Donald Trump settles into the White House and with more influential presidential elections on the horizon, 2017 could continue to hold many unknowns for businesses that trade globally.

In such an economic climate, getting reliable intel has gained even more importance. Pulling country reports more frequently has become the norm for at least one credit professional. “Our investment in reports is a bit higher than usual,” said Arnold Mills, ICCE, U.S. accounts receivable manager for Cincinnati-based Meridian Bioscience, Inc.

Mills also began subscribing to the PRS Group’s monthly Political Risk Newsletter (PRL) to garner even more information on the countries that could affect his firm’s business. He explained that he plans to incorporate the newsletter into his decision-making toolkit. Since July, it has already provided “nice updates” on the state of some of the economies where his firm sells. He also monitors “the forecast table at the end of the report on countries that concern me to see if there are any changes in their economic ratings.”

With more than 30-years experience in credit, Darrell Horton, director of credit and accounts receivable/finance for Las Vegas-based Aristocrat Technologies Incorporated, considers the PRL a “must have.” Horton shared that as soon as he saw an issue of the newsletter, he knew immediately he wanted to subscribe. “This is the kind of information I need,” he explained. “The articles are up to date and fresh with the information that I need to know in order to make an informed credit decision in the area. It could benefit any credit manager who deals in international markets.” Like Mills, Horton finds great value in the “Political and Economic Forecast Table” snapshot. The ratings are contained in a five-page table, which subscribers can quickly review each month and track rating changes from month to month. “This helps me put countries’ current trends into perspective and helps me predict what to expect in the future,” Horton said.

The PRL summarizes the latest forecasts for economic and political changes that affect international business. The “Political and Economic Forecasts Table” has 18-month and 5-year forecasts for turmoil, investment, transfer and export risk in 100 countries. It also provides forecasts of real GDP growth, inflation and current accounts. Each issue includes rating changes, allowing subscribers to track ratings and country risk over time. In addition to the historical data, the table provides A, B, C or D ratings for financial transfer risk as well as export market risk. Members receive a 10% discount when they subscribe. “The price of the subscription through FCIB is hard to beat,” Horton shared. For more information, click here, or to order, contact This email address is being protected from spambots. You need JavaScript enabled to view it..

Horton also uses another FCIB resource to round out and build further on country reports and other data. The World Trade Press A to Z Guide, available free to FCIB members via FCIB’s Knowledge and Resource Center, is a comprehensive country-by-country resource valued at more than $4,000 annually. It is comprised of 120 business guides for each of the 100 countries it covers and 77 trade tools, which provide information about documentation and compliance requirements; Incoterms; global business culture information; and much more. Using the business guides, credit professionals can gain access to on-the-ground media outlets for real-time coverage on countries of interest. Before Horton travels for international customer visits, he accesses the section on how to interact with people from that particular culture. “I’m reading that article for sure,” he said. “In the end, you just take all of the information you can possibly get and hope you can find the truth in it.”

Turkey: Trying Days Ahead

Dr. Hans Belcsák

It has long been my contention that the biggest chink in Turkey’s economic armor is the country’s chronic current-account balance-of-payments (BoP) deficit, which is being covered with inflows of (mostly) short-term money from abroad. This makes it essential that Ankara retain the confidence of foreign investors. The regime of President Recep Tayyip Erdoğan, however, has been doing a poor job of this, and now the Turkish economy, as well as the lira, is suffering from the repercussions. Indications are that Erdoğan and his ruling Islamist Justice and Development (AK) Party are not about to change their policy direction, so economic conditions are apt to get worse before any improvement can realistically be expected.

Erdoğan and his supporters seem determined to turn back the clock on the reforms of Mustafa Kemal Atatürk, which in 1923 transformed the Ottoman Sultanate into a secular republic. They have been pushing what is best described as “creeping Islamization” (not very well received in urban centers such as Istanbul and Izmir, but finding a strong echo in the Anatolian hinterland) and are seeking to concentrate all the levers of government power into the office of the president. The latter has become increasingly dictatorial and intolerant of dissent, making it clear that he meant it when he compared democracy with a streetcar useful for taking you to your destination (meaning power), “at which point you get off.”

At this time, Turkey is still under the state of emergency that Erdoğan imposed after he survived a coup attempt last July. Part of the problem is that the country has just gone through its bloodiest period in history, having suffered 269 separate terrorist incidents and has seen 685 people killed and more than 2,000 wounded in the past 12 months. The AKP-dominated parliament has given preliminary approval to a new constitution, which will grant Erdoğan the executive presidency he covets. But he apparently is not yet finished with the purge that has been his response to the putsch attempt. Rather than trying to heal his divided country, he has cracked down hard on all of his opponents, from Kurdish activists to leftists and secularists. Since the coup, more than 100 journalists have been locked up, and almost 14,000 policemen and soldiers have been jailed, including nearly one of every two military generals.

The purge, a targeted strike against people linked to Fethullah Gülen, an exiled cleric whom Erdoğan blames for the failed coup, has reached into nearly every sector of Turkish society. In all, more than 100,000 civil servants have been fired from their jobs, and at least 30,000 people have been arrested, including not only the army officers and journalists but also teachers, security personnel and opposition politicians. Hundreds of businessmen have been rounded up, and an estimated USD 10 billion in assets from more than 600 companies have been confiscated. At this stage, all business owners have to worry that their partners could be jailed tomorrow, that their supply lines could be shut down, or that their bankers are targeted by the regime and their executives may be thrown behind bars.

No wonder the mood in the business community is one of anxiety and fear. Transactions are being hampered, investors are being scared off, and normally risk-taking entrepreneurs are withdrawing into the safety of defensive positions. No wonder gross domestic product contracted already in last year’s third quarter, by 1.8% year-on-year, with worse numbers to come. No wonder the lira has been in a steep nosedive in the foreign exchange markets. The unit has tumbled by as much as 12% against the U.S. dollar since the start of this year, after losing one-fifth of its value in 2016; and there is every reason for believing that it will stay vulnerable on the downside. The fact that the mismatch between the foreign-currency-denominated loans on the books of Turkish corporates and their assets has widened to USD 231 billion has exacerbated the problem of Turkey’s current-account BoP deficits and reliance on inflows of “hot money.”

Standard & Poor’s and Moody’s both downgraded Turkey’s credit rating last year, and both now have it at junk level. The country’s remaining investment-grade rating, from Fitch, may be junked when the company issues a review on Jan. 27. Already last October, Turkey’s short-term external debt amounted to 74% of total reserves. About half of it is denominated in dollars at a time of rising U.S. interest rates. And as the arrests of alleged coup plotters reach ever deeper into the business community, capital flight is certain to get worse, helped along by the erosion of judicial independence and by attempts on the part of the ruling AKP to reward loyal supporters with confiscated assets. To date, foreign banks have been largely prepared to roll over their huge syndicated loan exposure to Turkey, but as the economy keeps slowing and the lira continues to drop, this backstop may start to erode.

The orthodox response to such a situation would be a drastic interest rate hike by the Central Bank (CB). Türkiye Cumhuriyet Merkez Bankasi raised rates moderately last November for the first time in nearly three years, and it next meets Jan. 24 to decide policy. But really aggressive moves are not expected because Erdoğan, eager to support economic growth, has convinced himself that high interest rates are the cause or nemesis of inflation and currency weakness. He prefers to compare those selling the lira and buying hard currency to terrorists. Their aim, according to him, “is to bring Turkey to its knees, to take over Turkey, and to distance Turkey from its goals.” He opines that “they are using the foreign exchange rate as a weapon.”

The CB has initiated a number of half-measures that are highly unlikely to provide solid and lasting support for the lira. Among other things, it has loosened foreign-currency reserve requirements by half a percentage point. It has also halved commercial banks’ borrowing limits in the interbank money market. This leaves the question wide open of whether it has any freedom to act against the wishes of the president, and it leaves investors and creditors wondering whether the worst for the currency and the economy is yet to come. I believe it is, given geopolitical upheavals in the region, the upcoming plebiscite on granting the president wide-ranging powers, investor nervousness and the impact of the recurring terrorist attacks on tourism.

Global Roundup

Davos 2017: What we learned at the WEF. Banks got a warm welcome, Britain got a cool reception and climate change fears abounded at the World Economic Forum. Here are some of the highlights from Davos 2017. (The Guardian)

Trump, trade deals and tariffs. Panjiva, a global trade intelligence platform, unveiled a new report, the Panjiva Global Trade Outlook—2017, designed to help stakeholders in global trade develop their 2017 strategies. The report provides analysis of top trade trends from 2016 and on policy, economic and logistics issues likely to shape the future of global trade as President Donald Trump assumes office. (Global Trade Magazine)

May sells ‘Global Britain’ to world leaders in Davos. In the wake of confirming that “Brexit means hard Brexit,” U.K. Prime Minister Theresa May opened her arms to the world at the World Economic Forum, saying Britain is a great, global trading nation and is ready to shape globalization. (EurActiv)

'Hard Brexit' would fuel business failures. More than two-thirds of insolvency professionals believe a “hard Brexit” would lead to more corporate insolvencies, according to insolvency trade body R3. Before Theresa May’s Brexit speech confirmed that the U.K. will leave the European single market, the trade body for insolvency professionals published its survey of nearly 400 professionals from its membership, which forecasted the effects of Britain leaving Europe. (Insolvency News)

China exports slump more than expected in December, imports growth cools. China's exports slumped more than expected in December as global trade remained sluggish, while the growth in imports also cooled, official data showed Friday. A Reuters poll of economists had expected exports to fall 3.5%, imports to rise 2.4% and the monthly trade surplus to hit $46.50 billion. (CNBC)

Fitch downgrades Costa Rica to 'BB'; outlook revised to stable. The downgrade reflects Costa Rica's deteriorating debt dynamics driven by large fiscal deficits and continued institutional gridlock preventing progress on reforms to correct fiscal imbalances. Costa Rica's central government fiscal deficits have grown over the last five years, while the government's tax reform proposals to rein in the fiscal deficits have made little progress in Congress. (Fitch)

Geopolitical risk a top concern for finance professionals. Geopolitical risk is having a bigger impact on earnings than ever before—and senior management and boards are taking notice. According to the 2017 AFP Risk Survey supported by Marsh & McLennan Companies, 49% of financial professionals believe their organizations are exposed to greater earnings uncertainty than they were three years ago. In addition, 52% of treasury and finance functions are considering the impact on their organization’s growth expectations due to a geopolitical event. (AFP)

Banks pull together for SME blockchain platform. Seven European banks have come together to develop a shared platform that aims to make domestic and cross-border commerce easier for European SME businesses through the use of distributed ledger technology (DLT). Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit signed a memorandum of understanding (MoU) to collaborate on the development and commercialization of the platform, to be called Digital Trade Chain (DTC). (Global Trade Review)


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