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Asian Development Expected to Drive Global Growth

Chris Kuehl, Ph.D.

There is no doubt that China is not the economic engine it was a few years ago. The strategy of boosting the domestic economy in China has meant less dependence on export-driven growth. That has meant slower growth overall—not much more than 6.5% this year. On the other hand, the other nations in the region are starting to shake out of their slump as they have seen commodity prices rise. They have also been able to diversify their demand away from exclusive dependence on China.

The report from the Asia Development Bank holds that these states will contribute around 60% of global growth in the coming year. This is excluding Japan but does include China. The growth rate of the area will be around 5.7% on the strength of the economic activity in India and Southeast Asia. The growth from the U.S., eurozone and Japan will be about 1.9% and likely slowing. The key engine to all of this will be India. This is partly due to the extreme measures it has taken to get control of the money supply by banning currency. The process has been wrenching, but it has improved revenue collection immensely.

The growth in this region has been mostly due to increased demand for the commodities produced here—everything from food to industrial metals. The other major contributor has been a far more robust level of consumer demand in nations like India, Vietnam and Malaysia. The shift to supplying the U.S. and fellow emerging market states has offset the decline in Chinese demand to some degree.


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Making Sense of Sanctions and Sales in Iran

Boeing recently signed a tentative $3 billion deal to sell at least 30 planes to Iran Aseman Airlines. This is the first prospective sale since President Donald Trump took office and the second since the nuclear agreement reached last year. In December, Boeing signed a $16.6 billion deal for 80 aircraft to Iran Air with delivery expected to start next year.

“This is an example of a license under the new favorable Statement of Licensing policy, but there have been long-standing exemptions regarding trade with Iran,” said Jeremy Paner, of counsel for Holland & Hart in Washington, DC, and a former Office of Foreign Assets Control (OFAC) official. “The embargo is still there so Boeing needs to get what OFAC refers to as a specific license.”

This license typically allows banks to process these types of sales. “As soon as you involve the dollar, you’re involving the U.S. banking system,” which is also prohibited from doing business with Iran unless the transaction has a special exemption, Paner said. In the end, “it’s going to be a business decision on the bank’s end.” Given Boeing’s position in the U.S. market, a bank will likely participate in the sale. “For smaller players, it could be a problem [getting a bank’s approval],” he added.

When it comes to selling into Iran, people tend to think in extremes, Paner said. “They either think they can’t sell at all or they think they can open a falafel shop in Tehran. The answer is somewhere in between those two extremes.”

The sale of Boeing aircraft took place under the “favorable licensing policy under which U.S. and non-U.S. persons may request specific authorization from OFAC to engage in transactions for the sale of commercial passenger aircraft and related parts and services to Iran, provided such transactions do not involve any person on OFAC’s Specially Designated Nationals and Blocked Persons list (SDN List),” according to the Department of Treasury.

OFAC also made another exemption that allowed Boeing to negotiate a contingent agreement prior to the actual sales contract. “Pre-contract agreements are usually prohibited even if it’s not a legal obligation,” Paner said.

Sales such as these require long-term interaction due to ongoing service and support. “It’s not just jets,” Paner said. “It’s spare parts, warranties and leasing—all the servicing that goes with the sale.” So what happens if sanctions are put into effect again that would prohibit such sales? If that were to happen, “there’s an important distinction between the U.S. and the EU sanctions,” he noted. Interaction between the U.S. and Iran would generally have to stop immediately, while EU companies could “wind down” contracts. “This causes lots of confusion with my European clients.”

On April 13, at 10 a.m. ET, Paner and Tehran-based collections attorney Ehsan Hosseinzadeh, of Educated Lawyers, will present the webinar “Doing Business in Iran.” Paner will help clarify what the Iran deal in January 2016 actually changed, what hasn’t changed and what to expect next. Regardless of the changes, “there are still things the Treasury Department can do that would cause lots of issues [for businesses],” Paner said. Hosseinzadeh will present ways to enforce debts and contracts as well as the legal process and remedies for collections.


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Whither Merkel’s Germany?

Dr. Hans Belcsák

As Angela Merkel looks out of the windows of the white and shining Federal Chancellery on the banks of the River Spree these days, she has plenty of reason to worry about the future of the European Union and Germany’s role in it.

To her East, she is confronted by the nationalistic, xenophobic and increasingly authoritarian governments of Poland and Hungary. Also to the East, she has to deal with an aggressively expansionist Russia with which relations have sharply deteriorated. To the North, she encounters the challenge posed by the United Kingdom, which has just formally initiated its departure from the EU. To the West, she must find ways to cooperate with the new U.S. administration of President Donald Trump, who to most Europeans is still an enigma they find difficult to decipher. And to her South, she can hardly avoid the sight of Italy and Greece, two countries in deep economic difficulties and in need of financial help if they are to remain members of the EU and its common currency.

 Rattled by a bruising setback late last year in local elections in her home region where she has her parliamentary seat, Mrs. Merkel has been backpedaling on the immigration policies that have cost her so much political support. No longer is there talk of “wir schaffen das,” meaning “we can do this,” in reference to the acceptance of hundreds of thousands of refugees from the war-torn regions in the Middle East without much, if any, screening. Berlin now is circumscribing access to asylum much more tightly and is speeding up the deportation of migrants who are being denied refugee protection. The government has become noticeably more resolute in expelling those who represent “a threat to public safety,” such as criminals and potential terrorists. Video surveillance of public places has been increased; the powers of the police have been expanded; more money is being allocated for equipment; and there have even been discussions about possibly banning the burka.

It is, no doubt, clear to Mrs. Merkel and her confidants that her bid for a fourth term at the helm is likely to turn the Bundestag elections next Sept. 24 into a referendum on her policies, and that in Germany, as elsewhere, the trend is away from establishment parties toward upstarts that are much more eurosceptic and in favor of tight curbs on immigration.

In the recently concluded Dutch elections, the incumbent Prime Minister Mark Rutte and the Volkspartij voor Vrijheid en Democratie (People's Party for Freedom and Democracy, VVD) were able to fend off a potentially painful challenge from the populist far-right Freedom party of Geert Wilders, but it does not necessarily follow that the forces of Marine Le Pen in France will be defeated just as easily. In Italy, the pro-EU center has been clearly shrinking, and there continues to be a distinct possibility of the populist, anti-EU Five Star Movement coming to power in the next 12 months. In Germany, the Alternative fuer Deutschland (Alternative for Germany or AfD) is still performing strongly, notwithstanding recent poll results that hint at a loss of its momentum. It will almost certainly become a vocal force in the Bundestag.

If there is a real threat to Mrs. Merkel’s political position, it comes from the center-left Social Democrats (SPD) under its recently anointed leader Martin Schulz. The SPD has been surging in the polls and has been taking advantage of the vulnerabilities of the chancellor’s Christian Democratic Union (CDU)/Christian Social Union (CSU) parties. True, the economy is going strong on the back of record exports, but Germany’s massive foreign-trade and current-account payments surpluses have put the country into the cross-hairs of critics in deficit nations, of which the U.S. is only one. Weaker members of the eurozone are adamant in their demands that the European Central Bank stick to its expansionary monetary policies, although these are increasingly too loose for Germany (where inflation ticked up to 2.2% in February). Recognizing that the Federal Republic’s high savings rate (about 10% of GDP, versus 3% for the U.S.) is responsible for the enormous external surpluses, they want Berlin to crank up public and private consumption.

Even the CSU, the CDU’s Bavarian sister party, has been calling for “the greatest tax reduction in German history,” given that the federal government last year ran up a budget surplus of EUR 23.7 billion. In the CSU’s view the tax cuts should come at the expense of public-sector spending, whereas the SPD wants to boost outlays from the public till.

At this point, Mrs. Merkel still has a reasonable chance of winning re-election next fall, but even if her CDU/CSU were trounced by the SPD and Mr. Schulz became chancellor, economic policy would not change a great deal. The SPD would need a coalition partner, and on present indications a resurrection of the Grand Coalition (except this time with the CDU/CSU in the junior position) is still much more likely than any new left-wing alliance including the formerly Communist left party and the Greens. And in the end, I do not believe that the German public will be easily diverted from its predilection for saving or from the notion that debt is bad, or will be persuaded that inflation is a good thing and that righting trade imbalances should be the job of the country with the surplus, not of those with the deficits.

What may change, though, is the critical role Germany plays as the keystone member of the European Union. With a strong political majority, Mrs. Merkel would not have to be overly concerned about the precise form Brexit will take. She could, and probably would, accept compromises involving immigration control and single-market access, especially as Germany exports roughly twice as much to the U.K. as it imports from there, meaning that the Federal Republic has much to lose in a disagreeable separation. With a strong political majority, Mrs. Merkel was able to give her nod to eurozone rescue operations and to bailout programs for Greece, Ireland, Portugal and Spain. If her position were to be seriously weakened, so would be her ability to press for a soft Brexit and to make sure that the persisting Greek and Italian financial problems are addressed.

The question is still wide open as to the direction the EU should take post-Brexit: Should it loosen up and return to member states some of the powers currently concentrated in Brussels, or should it march on toward ever greater integration, political as well as economic. If there is one thing that the British vote for Brexit has made clear, it is that in a worst-case scenario the European Union can still break up.

Germany under Merkel has been instrumental in holding the bloc together. Were she to lose the chancellorship, this would mean that the legislature, now relatively weak, would strengthen materially, while the executive, now strong, would weaken. For the EU, this would not be a good development and the possibility underscores the significance of the upcoming elections in France. If the pro-EU, pro-German Emmanuel Macron wins the presidency, the bloc’s main axis would remain intact and its future would look reasonably bright. If Ms. Le Pen wins, the Franco-German partnership will suffer gravely, and so will the EU.

Election Calendar

April 16 – Turkey, Referendum to dramatically increase power of president
April 20 – Timor-Leste, President
April 23 – France, President
May 4 – Algeria, Algerian National People’s Assembly
May 6 – Niue, Niuean Assembly
May 7 – France, President (second round, if needed)
May 9 – South Korea, President
May 19 – Iran, President
May 24 – Cayman Islands, Cayman Legislative Assembly
June 11 – France, National Assembly of France
June 18 – France, National Assembly of France (second round, if needed)
June 24 – Papua New Guinea, National Parliament of Papua New Guinea
June 26 – Mongolia, President
July 2 – Senegal, Senegalese National Assembly

Aug. 4 – Rwanda, President
Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
Nov. 19 – Chile, Chilean Chamber of Deputies
Nov. 19 – Kyrgyzstan, President
Nov. 19 – Chile, Chilean Senate
Nov. 19 – Chile, President
Nov. 26 – Honduras, Honduran National Congress
Nov. 26 – Honduras, President

Global Roundup

Venezuela reverses its congressional ‘coup’ but tensions remain. Venezuela’s Supreme Court has reversed a controversial decision that had stripped congress of its powers, sparked fears of a coup and brought an anvil of international pressure down on the beleaguered socialist administration. President Nicolás Maduro praised the court’s decision and said the “controversy had been overcome,” but the whiplash changes left many in the region uneasy—particularly because the theoretically independent court seemed to be following the president’s orders.  (Miami Herald)

German foreign minister visits London to talk Brexit. German Foreign Minister Sigmar Gabriel met Wednesday with Boris Johnson in London ahead of the upcoming Brexit negotiations. He has already made clear where his priorities lie. (EurActiv)

Lack of blockchain knowledge among payment providers is major barrier to implementation. The latest study conducted by Capital One and NAPCP has revealed that while payment professionals are well aware of the benefits of payment technologies now entering the marketplace, they believe that cost and compatibility concerns may hamper their implementation. (EconoTimes)

Fitch and S&P downgrade South Africa to junk status amid political crisis. South African debt got dealt a second blow this week as Fitch Ratings Ltd. joined S&P Global Ratings in cutting the nation’s credit assessment to junk, following President Jacob Zuma’s move to fire a well-respected finance minister. Zuma fired Finance Minister Pravin Gordhan on March 31 in a cabinet reshuffle, igniting South Africa’s worst political crisis in almost a decade and sparking calls from top officials for him to resign. (Bloomberg)

What future for U.S. EXIM under Trump? The 2017 annual conference of the U.S. Export-Import Bank (U.S. EXIM) departed from the tone of previous years: for the first time, the national anthem was sung live to open the event, and acting chairman Charles J Hall’s opening remarks began with a damning comparison of U.S. and China GDP growth and export strategies. (Global Trade Review)

Trade is front and center as Trump and Xi meet. As Presidents Trump and Xi meet at Mar-a-Lago, trade is one of the two biggest issues on the agenda, along with North Korea. The smart strategy for the United States is to recognize the progress that has been made on currency, press China on measures that would reduce national savings and hence the trade surplus, and negotiate greater openness of China’s markets for agriculture, manufacturing and services. (Global Trade Magazine)

Greece: Lenders achieved results, but no full deal on Friday. Greece and its lenders have achieved results in talks on reforms necessary to unlock new loans, but there will be no final deal on Friday, the chairman of eurozone finance ministers Jeroen Dijsselbloem said. "We have achieved results," Dijsselbloem told reporters upon entering a meeting of the ministers devoted to Greece, adding however that "there will be no total political deal today.” (Reuters)

Fitch: Shallow economic recovery for Latin America in 2017. In its "Latin American Sovereign Overview 2Q17," Fitch Ratings forecasts regional GDP growth in 2017 to recover moderately to 1.3%, following two years of economic contraction. Better external demand, a moderate rise in commodity prices and improved performance in two large regional economies (Argentina and Brazil) should facilitate the region's economic recovery. (Fitch Ratings)

Survey: Record number of businesses hit with payments fraud. Nearly three quarters of corporate treasury and finance professionals said their companies were victims of payments fraud last year, according to the “2017 AFP Payments Fraud Survey,” underwritten by J.P. Morgan. This is the highest percentage since the survey debuted in 2005 and comes after a dramatic increase in 2015. Check fraud and business email compromise are both on the uptick. (AFP)

India unexpectedly tightens, flags cash tools to curb prices. India unexpectedly raised the reverse repo rate while keeping the benchmark unchanged, effectively tightening policy to step up the fight against accelerating inflation. The reverse repo rate was raised to 6% from 5.75%, while the benchmark repurchase rate was kept steady at 6.25%, the Reserve Bank of India said Thursday in a statement in Mumbai, citing excess funds in the banking system after the government’s clampdown on cash. (HSN)

Iranian elections highlight future challenges. Less than two months before Iran elects its next president, the country faces a set of political and economic challenges. The outcome of the elections will have a significant impact at home and will set the tone for Iran’s international policy in the next four years. While President Rouhani’s re-election is a likely prospect, a victory for the country’s hard-liners cannot be ruled out. (Global Risk Insights)


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