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Turkish Referendum Narrowly Passes

Increased political instability and polarization and continued diplomatic stress with Europe and the United States have created a less than optimistic view of Turkey as the main opposition party continues its efforts to have the referendum annulled due to alleged irregularities in the voting process.

About 51% of Turks voted in favor of a referendum that will keep the country’s economy weak in the medium term, according to The Economist Intelligence Unit. “The narrowness of the victory will entrench divisions in Turkish society, particularly given that Istanbul and Ankara, the country's two largest cities, both voted against.”

The referendum further expands the power of the president. “Once the amendments take effect in 2019, they will enable current President Recep Tayyip Erdoğan to enjoy dramatically enhanced executive powers with very limited checks and balances,” according to The Brookings Institution. “Many observers believe that this will exacerbate Turkey’s recent slide into authoritarianism, further eroding the democratic gains from an earlier era.”

Erdoğan will no longer be subject to the rulings of the country’s parliament or the country’s high court, noted NACM Economist Chris Kuehl, Ph.D. He will be able to rule by edict alone and will not be subject to formal control, Kuehl pointed out. “These expanded powers will make dealing with Turkey much harder for Europe and the U.S. It is now a dictatorship—anathema to the democracies in Europe. The tensions are high and getting far higher. … The one institution that has enough power to thwart him is the military, but even it has been constrained of late—especially after the abortive coup attempt. … Enough of the officers were implicated to compromise their authority and give Erdoğan more of an excuse to grab power.”

Erdoğan has been promising economic growth for years, Kuehl added. “All that has happened is that his cronies have gotten wealthy—usually at the expense of those in the poorer parts of the country.”

A credit manager who does business in Turkey and who has family there doesn’t believe that the country’s authoritarian direction will affect investors. “The geopolitical position of the country will keep them blinded on that sense.” In addition, he believes “that corporations will continue the same path or even increase [what they are doing].”

Foreign exchange (FX) rates could rise, he said. “But if companies control the FX effects, this should not be an issue [because] they are used to dealing with it. … Inside the country, [Erdoğan] is building a real estate bubble that the population perceives as infrastructure investments in hospitals, roads, metros, train lines or TOKI houses affordable for the poor people. And this is how he has won (apart from manipulating a bit) the latest referendum.”

Advice from other credit professionals who do business in Turkey via the September 2016 FCIB International Credit and Collections Survey includes using secured payment terms and understanding cultural differences. “If you ask for payment or hold an order as leverage, this is considered an insult,” one survey taker said. Keeping abreast of the political climate is paramount, several credit managers said. FCIB members can view the complete results by logging in through the FCIB Knowledge & Resource Center.


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India: Good Prospects with Some Caveats

Dr. Hans Belcsák

If one were to take official statistics at face value, without any qualifications, one would have to come to the conclusion that the government’s demonetization last November of India’s two largest existing banknotes—500 and 1,000 rupee bills—had virtually no lasting effect on the economy.

This does not mean that it did not create temporary problems, some of which are still making themselves felt. Reports from Mumbai, Bangalore, Chennai and other cities state that ATMs are running dry, on and off, because the Central Bank has been slow in printing and distributing the new banknotes. To date, it has replaced only about two-thirds of the total supply before demonetization. There are still problems in the informal economy, which is largely cash-based and accounts for some 70% of the employment in the nation.

While international credit managers report no difficulties with collections from Indian customers that are big companies, many small firms apparently are still slow payers, frequently blaming the “liquidity crunch” caused by Prime Minister Narendra Modi’s overnight move.

Small service companies reportedly cut one-third of their workforce and lost half of their revenues in the month after demonetization. Real GDP, however, still gained at an annual 7% in the final three months of last year, and this was down only modestly from 7.4% in the preceding quarter. In other words, it appears that, on the whole, the economy was able to shrug off quite handily the impact of the dramatic ban on 86% of the country’s cash.

The hope now is that Mr. Modi will keep the economy expanding as the year progresses, but there are still two potential pitfalls to be considered. One is the pending implementation of the Goods and Services Tax (GST), which has finally been passed by the Upper House of parliament. It is now to be introduced on July 1, or 11 years after it was first proposed in the legislature. No serious-minded analyst will deny that there is much to be said for replacing the hodgepodge of local and state taxes that have been responsible for holding up goods at state boundaries, frustrating marketers and hurting the economy. The GST will turn India into a true single market for the first time and could be the most significant development for business since deregulation and privatization began in the early 1990s.

Following a series of political compromises, however, between New Delhi and states reluctant to lose control of their revenues, the GST—once intended to have a single, nationwide rate—now has four different rates ranging from 5% to 28%, and which items will fall into each band has yet to be defined in detail. A council of state and national politicians is to meet next month to make final decisions on classifications, but this would leave businesses with just six weeks to prepare. So, now the government is being urged to delay the implementation by a chorus of voices from the very same business community that has been advocating such a reform for decades.

The second problem is the parlous condition of state-owned banks, which have long been in denial about the ability of many of their near-bankrupt borrowers to repay them. This has led to financial institutions’ balance sheets, and much of the corporate sector’s, to being in terrible shape. Authorities are now beginning to worry that the “twin balance-sheet problem” could imperil the wider economy.

Writing off loans might be a fair way out if banks could foreclose on companies and take equity in them instead. But this does not work well without a proper bankruptcy code, and such a law is only now coming into force and could take years to become fully effective.

So, banks have been taking the easy way out, which has meant rolling loans over and extending new ones to keep their clients afloat in the hope that economic growth will eventually bail everyone out, meanwhile pretending that there is no real problem. The result is that USD 191 billion, or 16.6% of the entire banking system, is said to be nonperforming, and more than 40% of the loans extended to corporate India have gone to firms currently unable to pay even the interest on them (according to Credit Suisse).

In many other places this state of affairs would be tantamount to an acute crisis. In India, state-owned banks make up as much as 70% of the entire system, and the government is not about to let them go belly-up. But the “twin balance-sheet” problem still hurts the economy as state lenders collectively show negative returns (13 of them were recently described by the finance ministry as “severely stressed”).

They have become choosier in their lending, but even if this were not the case there might not be much demand for extra credit. Corporate profits have been shrinking at large borrowers; capacity utilization is low by historical standards; investment has been contracting; and economic growth is being driven almost exclusively by consumption. From a longer-term perspective, this is not a good situation.


What Next in Venezuela?

Chris Kuehl, Ph.D

An estimated tens of thousands of people have taken to the streets in major Venezuelan cities, demanding early elections. It is being referred to as the “mother of all marches.” The opposition to Nicolás Maduro and his utterly inept regime has gotten stronger every day.

Various opposition groups that have tried to unseat him are coalescing enough to push hard for these elections. The country has been a financial disaster for years; and by every measure, life has deteriorated into a simple fight for survival.

The inflation rate has risen so high that currency is next to useless. More than 60% of the population is living under the poverty line; unemployment rates are higher than 40%; and even those who ostensibly have jobs rarely get paid. Crime is utterly out of control with violent attacks taking place every day. The police make no attempt to address crime and devote themselves to attacking the protesters and defending the regime. How much worse can things get before the country implodes? What would happen if Maduro were forced out?

The grim reality is that nobody has a good alternative for Venezuela. This is a country that is 95% dependent on oil exports for its budget. With per barrel prices in the 50s, there is not enough money coming in. Several years ago, the country was being warned that its exploitation of its oil reserves was going to create a crisis sooner than later. Oil in Venezuela was always divided between the easily developed and that which required a lot more refining.

The system employed in the past tried to balance that easy oil with the more difficult development, but under Hugo Chávez(and Maduro), the easy oil was pulled out as fast as possible. Those reserves are essentially gone now. All that is left is the harder to exploit oil. That means that Venezuela needs global prices to be above $60 if they are to make any money. This has not been the case for more than three years.

The only hope for the country is to get access to international aid and investment—both from private sources and from the international institutions like the International Monetary Fund. That is not going to happen until Maduro and his government are gone. Even if there is an opposition leader in power, there will be deep suspicion that the government would remain stable. The situation in the country has become too dire. Venezuela is essentially a failed state with little to offer the global economic community.

The protests have been met by violence from Maduro and his supporters. The most likely outcomes are either a coup that brings some kind of military junta to power, a severe crackdown by Maduro plunging the country into what amounts to a civil war or a takeover by the opposition that could lead to that same civil war if the Maduro supporters elect to fight.

Election Calendar

May 4 – Algeria, Algerian National People’s Assembly
May 6 – Niue, Niuean Assembly
May 7 – France, President
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

Iran election: Ahmadinejad barred from running. Former Iranian President Mahmoud Ahmadinejad has been barred from standing in next month's election by a top body of jurists and clerics that vets candidates, state media report. (BBC)

U.K. May’s wager: Early election buys more time to hash out Brexit. Nine months after becoming prime minister, Theresa May is learning how to gamble. Long branded a risk-averse micromanager, May is betting that a crushing election victory will win her the freedom to negotiate the kind of Brexit she wants and will avoid the European curse that has destroyed many former conservative leaders. If all goes to her plan, the snap election in seven weeks will tighten her grip on power with a broader majority. (Business Mirror)

IMF warns against protectionism as Trump, Brexit loom. As the International Monetary Fund (IMF) and World Bank kicked off what are normally staid meetings on Thursday, with central bankers and finance ministers from 189 member countries gathering in Washington, anti-free trade rhetoric in the United States and Europe created a tense atmosphere. The IMF renewed its warnings against protectionism as nationalist political trends threaten trade integration on both sides of the Atlantic. (EurActiv)

U.S. companies optimistic despite free trade concerns. Companies in the U.S. are positive about their international business prospects, despite concerns over the elimination and renegotiation of free trade agreements (FTAs) by the Trump administration. The fourth Wells Fargo International Business Indicator, published today, shows that 81% of companies expect their international business activity to increase in the next year, up from 64% in 2016, based on the positive effect of a strong U.S. dollar and the recovery of the domestic economy; 68% of respondents also expect their international revenue to increase, up from 58% last year. (Global Trade Review)

TPP minus U.S. starting to gain ground. The Japanese government is picking up the pace on reviving the Trans-Pacific Partnership (TPP) trade and investment deal, with talks scheduled next month among the 11 countries left in the pact after the withdrawal by the U.S. following the election of President Donald Trump. The move has sparked alarm among anti-TPP activists, who believed the agreement between 12 Asia-Pacific economies would be abandoned once the U.S. had left it. (nzherald)

GM halts Venezuela operations following plant seizure. General Motors has ended its operations in Venezuela after authorities in the strife-torn country seized the company’s plant there on Wednesday. In a statement Thursday, General Motors said that assets, including vehicles, were also seized from the plant as it was taken over by Venezuelan officials while demonstrations surged throughout the country. The company said in a statement that the facility was taken without due process and that it intends to defend its interests. (Risk Management Monitor)

Greece blows EU-IMF bailout targets away with strong budget performance. Greece far exceeded its international lenders' budget demands last year, official data showed on Friday, posting its first overall budget surplus in 21 years even when debt repayments are included. The primary surplus—the leftover before debt repayments that is the focus of International Monetary Fund-European Union creditors—was more than eight times what they had targeted. (Reuters)

What’s next for Morocco’s new government? The formation of a new government in Morocco has put an end to months of political stalemate. The political crisis has nonetheless exposed the power struggles at play in Moroccan politics and the challenges ahead for the newly-formed coalition. (Global Risk Insights)

Stung by debt, China’s economic growth to slow to 6.5% in 2017. China’s economic growth is expected to slow to 6.5% in 2017, as the government seeks to cool the property sector and temper credit growth to contain risks from a dangerous build-up of debt, a Reuters poll shows. Growth is then expected to weaken further to 6.2% in 2018, extending a slowing trajectory for the world’s second-biggest economy, which grew 6.7% in 2016, its worst performance in 26 years. (Hellenic Shipping News)

BRF executives among 60 charged in Brazil bribery scandal. Two executives at Brazilian poultry firm BRF SA were among 60 people charged on Thursday with taking part in a scheme to bribe health officials, in a scandal that briefly closed global markets to Brazilian meat, according to a statement from prosecutors. Federal prosecutors in the state of Parana said they accused the BRF director and government relations executive of taking part in a scheme to bribe officials in return for less rigorous plant inspections. (Reuters)

Fortune 500 companies are still hesitant about settling in Africa. Investor interest in Africa may have been piqued since the start of the 21st century, but many of the world’s Fortune 500 still seem reluctant to actually move to the continent. And if they do, they rarely stray from the beaten path. (Quartz)

Jakarta election result spells trouble for Indonesia. The heavy loss of incumbent Jakarta Governor Basuki ‘Ahok’ Tjahaja Purnama to former education minister Anies Baswedan signals rising intolerance and demonstrates the influence of hard-line Muslim groups in Indonesia, spelling trouble for President Joko ‘Jokowi’ Widodo and moderate Indonesians of all persuasions. That Ahok failed to run a savvy and cohesive campaign has only amplified the shortcomings of Jakarta’s moderate class. (The Interpreter)

Compliance with export controls start at the top. Senior managers focus on increasing productivity, reducing costs, developing products and winning customers. Export control compliance is often considered a burden. Why is it important? Who’s responsible? What are the consequences of noncompliance? AEB, a provider of global trade and supply chain management software, has developed an online guide to help executives understand the relevance of export controls for their business. (Global Trade Magazine)


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