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Portugal’s Financial Stability Concerns Remain

Weak economic growth and less than desirable investment conditions have raised concerns about Portugal’s financial stability.

“While Portugal is recovering after the crisis, its economy continues to suffer from meager growth, weak investment and competitiveness challenges,” the International Monetary Fund (IMF) said in September. “Its banking sector holds too many nonperforming loans and public debt remains high.”

Toronto-based DBRS, the only major ratings agency that has not cut Portuguese bonds from investment grade to junk status following the country’s bailout about five years ago, confirmed Portugal’s long-term foreign and local currency issuer ratings at BBB (low) and its short-term foreign and local currency issuer ratings at R-2 (middle). The trend on all ratings remains stable. The news is especially good because the country needs at least one investment rating to participate in a key stimulus program offered by the European Central Bank.

Although the country “does not pose systemic risk ... there may be contagion to Spanish banks that have exposure and Italian assets that often appear correlated to risk assets,” according to a Seeking Alpha commentary.

Portugal’s officials currently are working on “systemic” measures to address the banking sector’s bad loans without the use of public funds to improve the financing of businesses, among others, according to a recent Reuters article.

The IMF cut economic growth projections for the country and expects growth of about 1% of gross domestic product this year, compared to the 1.4% forecast in April.

FCIB is currently asking credit professionals what they are experiencing when doing business in Portugal as part of its Credit and Collections Survey on Western Europe, which also includes Finland, Germany, Iceland and Spain. The survey closes Oct. 31.

Chinese Economy Proceeding as Expected

Chris Kuehl, Ph.D.

The fact that the Chinese economy is proceeding as expected comes as both good news and bad. The latest assessment of the Chinese GDP is in line with what the government had predicted. That is encouraging except for the fact these expectations were already muted. The growth is now at 6.7%, a far cry from the double-digit levels that were sported just a few years ago. The government has been taking steps to solidify the economy, but with mixed results. Major concerns still exist. The biggest worries include an increase in debt levels by the corporate community and a property market that is overheating and seems ready for a bubble burst.

Analysts assert that excessive credit use has artificially boosted this growth. There are deep fears that when this bubble bursts, the Chinese will not be the only ones hurt. Credit growth has been greater than the growth of GDP. Much of it has concentrated in real estate and state-sponsored infrastructure activity. Property development has been staggering and most analysts assert that current prices can’t be supported much longer. Many developments already stand idle; but up to this point, these have been in more remote regions of the country and not in the major coastal cities. That has been changing, and there are “white elephant” projects all over the country now.

More than 20 cities and regions have taken steps to limit the price of housing as there has been a 25% increase in these prices this year alone. The wealthy have options, but these prices are forcing many people out of the areas where they once lived. The expectation had been that growth would slow this year due to the loss of faith in the ability of the leaders to manage the economy. There was currency turmoil, and the stock market was under stress as well. It was thought this would be sufficient to drag the economy down to perhaps 6% growth or even less. The fact that growth has held steady at 6.7% suggests that artificial stimulus has been playing an outsized role.

Retail sales and investment have been the most important growth sectors for the country. The retail sector has been growing at a 10.7% pace. That has been good news for the economy and for leadership as this was the intent. The transition from an export-centered economy to one that is more consumer-centered has been a goal since Xi Jinping took control. That strategy appears to be paying dividends. The investment growth has been 8.2%. While that has boosted the GDP numbers, fears of overaggressive investment exist. The major concern is that industrial production is slowing faster than anticipated. There was an understanding that as support ebbed for export-oriented companies, these industrial numbers would fade. However, it was not expected they would fade this fast.

A Look at Colombia, Venezuela and Egypt

Dr. Hans Belcsák

In the near future, the thumbs down that Colombians have given the government’s peace agreement with the Marxist FARC rebels is not likely to impact the economy severely. While voters surprised most observers, including the best of the poll takers, when they rejected the deal in the referendum on Oct. 2, the FARC’s top commander, Rodrigo Londono (aka Timochenko) has indicated that (as yet) his guerrillas have no plans to end the cease fire and they do want to participate in fresh peace talks. The exchange market performance of the peso reflects hope that they can renegotiate the pact. The peso initially took a hit, but lately it was quoted at around 2,918: USD 1.00, which is still well above the nadir of 3,436 pesos per dollar it touched earlier this year.

Although the margin was narrow, a replacement for the accord that took four years to negotiate will be difficult to forge. Those who voted “no” are adamant that they will not accept a bargain in which FARC war criminals avoid jail and have a guaranteed place in the political arena. President Juan Manuel Santos has staked his legacy on the peace agreement and is now in a markedly weaker position, undermined by former President Alvaro Uribe, who with his Democratic Center Party spearheaded the campaign for the “no” vote.

Infrastructure development and agriculture investment that could have carried the country forward will now have to wait. Post-conflict financial assistance, promised from abroad, will hang fire. An important tax reform proposal that officials were going to introduce late this month also will get delayed, raising questions about the government’s fiscal position, which has been strained because of low oil prices and the softness of the economy. Data for the third quarter suggest that growth will stay weak. Of course, the longer the standoff lasts, the greater will be the risk that the country slips back into its drug-fueled conflict.

The recently agreed OPEC move to cut oil production will not push up prices substantially or in a sustained fashion. This is bad news for the state oil company Petroleos de Venezuela (PdVSA), which is now openly threatening to default on its debt unless enough bondholders agree to the proposed swap of paper maturing next year. The deadline for this swap has been extended three times, and still only about half the bondholders have shown serious interest. PdVSA will likely muddle through until next year, but eventually a restructuring of its and Venezuela’s debt will become unavoidable.

In a last-ditch effort to keep a lid on domestic unrest, the regime has extended to a number of border states, the experiment begun in Zulia earlier this year, under which state governments and private traders with access to dollars can import food and other essentials from neighboring Brazil, Colombia and Trinidad & Tobago. The move has visibly improved supplies in the affected areas. There are, however, two problems with it. For one, President Nicolás Maduro and his people are using the new system (which they do not discuss publicly) to benefit the military brass and other cronies whose support they hope to retain. For another, the imported products are being resold in Venezuela at many times the state-controlled prices, and this means that the International Monetary Fund’s (IMF) prediction of 500% inflation this year is already looking significantly understated.

Payments out of Egypt will remain sluggish and delays are more likely to increase than abate in the near term. While the government of President Abdel Fatta al-Sisi is more willing than its predecessor to accept the tough economic reforms that the IMF demands as condition for its extension of a USD 12-billion loan, money from this source will still take quite a while to start flowing. Meanwhile, the current-account balance of payments deficit continues to run at around 7% of GDP; official hard-currency reserves have been run down to dangerously low levels; and none of the traditional sources of foreign exchange inflows are doing well.

Tourism receipts have dropped by 46% between 2014-15 and 2015-16, according to the Central Bank. Socio-political uncertainties and an uninviting business climate have deterred investment from abroad, and earnings from Suez Canal traffic are way down, as are those from oil exports. Household remittances have declined, too, and a spat with Saudi Arabia and other Gulf monarchies this month over a UN resolution concerning Syria threatens to disrupt even their financial assistance.

Egypt is too important to be allowed to fail and will eventually get the IMF money. But as a quid pro quo, it will have to devalue the pound, which on the black market has fallen to around 15 per dollar (meaning the street charges a 70% premium for dollars over the official rate of 8.8:1), and this will add to an inflation rate that is already more than 14%.

Global Roundup

Brazilian politician who led Rousseff impeachment arrested on corruption charges. Eduardo Cunha, the Brazilian politician who orchestrated the impeachment of the country’s first female president, Dilma Rousseff, has been arrested on corruption charges. Federal police detained the former speaker of the lower house in Brasilia on Wednesday and executed a search warrant at his home in Rio de Janeiro. Cunha has also been accused of taking up to 116.5m reais ($37m) in bribes as part of the Operation Car Wash investigation into mammoth corruption at state oil giant Petrobras. (The Guardian)

EU fails to break impasse over trade pact with Canada. Canada's international trade minister says the European Union is not ready to sign a free trade deal with Canada at the moment, and she is leaving the negotiations. Chrystia Freeland said as she left the talks with the Wallonia region, which has been holding up the deal, "It seems for me, and for Canada, that the EU is not capable now of having an international deal, even with a nation with such European values like Canada. Canada is disappointed, but I think it is impossible." (The Daily Mail)

Saudi bank stress builds as kingdom’s cash injection falls short. The interest rate banks charge one another for loans rose on Sunday the most since August, extending a trend that’s slowing earnings and corporate borrowing in the world’s biggest oil exporter. The increase is defying the central bank, which has sought to ease the cash crunch by relaxing lending limits, offering new borrowing facilities and injecting funds into the financial system, including 20 billion riyals ($5.3 billion) pledged Sept. 25. (Bloomberg)

Nigeria overtakes South Africa as Africa’s biggest economy. A new report from the International Monetary Fund puts Nigeria back as Africa’s biggest economy, ahead of South Africa and Egypt. In August, South Africa was reported to have regained the top spot on the continent, following the recalculation of Nigeria’s GDP. The IMF’s World Economic Outlook for October, however, has Nigeria’s GDP for 2016 some distance ahead of South Africa at an estimated $415.08 billion, down from $493.83 billion in 2015. (Business Tech)

New Zimbabwe notes stir memory of 500,000,000,000% inflation. Zimbabwe’s tentative return to its own currency is getting a hostile reception from citizens, who fear a recurrence of the 500 billion percent inflation that plagued the southern African nation seven years ago. The country will soon introduce so-called bond notes, pegged to parity with the U.S. dollar and beginning with denominations worth from $2 to $5 in an attempt to complement the range of foreign currencies used in the beleaguered economy since 2009, which have been in short supply following a collapse in exports. (Bloomberg)

The domino effect of China’s economic slowdown. Beijing recently announced a 6.7% economic expansion in the third quarter, matching predictions and consistent with its last two quarters. One is tempted to be encouraged by such remarkable stability. However, economists are looking beyond the numbers to observe that this year’s pace of growth will still be slower than last year’s, which was the slowest in 25 years. If that trend continues, what are the repercussions for both China and the rest of the world? (Global Trade Magazine)

Egypt inches toward IMF bailout as shortages, prices enrage public. Economic pressures are bearing down on Egypt, with several key steps to be taken in the days ahead to secure a bailout by the International Monetary Fund (IMF). With the central bank holding back its reserves for the big push, a shortage of the currency has reached epic proportions. The collapse has made an array of common imported products more expensive, and some—including spare parts, medicines, industrial goods and foodstuffs—are not entering the country at all. (Philadelphia Tribune)

Saudi payments to contractors will increase soon, says minister. Payments to contractors working on mega projects in Saudi Arabia have been regularized and will rise in the coming period, said a report citing the kingdom's finance minister. Saudi daily Okaz reported last month that the government had started to pay dues owed to Saudi Binladin Group, the kingdom’s biggest construction company. Bloomberg too reported that the kingdom had started repaying debts to contractors after long delays that squeezed company finances and hurt investor sentiment. (Trade Arabia)


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