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Blockchain: The Answer to De-risking?

Developments in the field of financial technology (fintech), namely blockchain technology, could address problems associated with de-risking and correspondent banking relationships, according to a new report. (De-risking is the term used when financial institutions refrain from doing business with accounts that they perceive as high risk, especially in terms of regulatory compliance—or noncompliance.)

The Economic Commission for Latin America and the Caribbean’s latest report outlines ways blockchain technology could address these challenges by offering an alternative way for financial service institutions to support cross-border transactions. The cryptographic technology “enables data to be shared across a network of computers controlled by multiple organizations and individuals,” it explains.

The report finds that an “appropriately designed blockchain-based settlement network” could improve the surveillance of transactions, enabling “the detection of illicit financial transfers and thereby decrease risk and associated compliance costs.” Such a network also “would offer Caribbean banks the opportunity to bypass correspondent banks altogether, thereby reducing transaction costs and increasing efficiency.” 

Several issues, however, must be addressed before blockchain technology could address the correspondent banking problem, the report concludes. “This includes the need to address concerns over consumer protection, privacy and compliance with financial guidelines.”

Attendees of this year’s Global @ Credit Congress will have an opportunity to learn more about blockchain during the Emerging Payment Systems and Disruptive Innovations in Financial Services session. Research and development on technologies such as blockchain and distributed ledgers continue to evolve as businesses and financial institutions continue to experiment with it.



Bankruptcy in Puerto Rico

Chris Kuehl, Ph.D.

Technically, the government of Puerto Rico is not allowed to declare bankruptcy, but the oversight board that has been created to run the territorial finances has instituted a process that looks a great deal like one.

Creditors are already unhappy and have started to challenge the process in court. The creditors are owed around $3.5 billion each year, but the oversight board has declared that no more than $787 million will be paid out per year. This is a substantial gap and means massive cuts to bond payments, pensions and various subsidies that have been part of the government plan in the past. The territory is broke and can barely afford even the $787 million.

Those planning to take this plan to court are not asserting that Puerto Rico has some huge stash of cash they are trying to hide from creditors, but they are demanding that the U.S. government take more responsibility for the crisis and throw more money at the problem.

It is not as simple as this, but the prime reason the government in Puerto Rico is in financial distress is that the U.S. government removed a tax break that had been the prime motivator for business development in the region. That break drew manufacturers to set up in Puerto Rico despite the increased costs of transportation and the lack of other infrastructure.

The tax break stimulated the development of the pharmaceutical business in Puerto Rico and the government assumed it would have plenty of money to work with for years. The break was removed so that pharmaceuticals would shift operations to places like North Carolina. Puerto Rico was suddenly in trouble. Those who are owed money are demanding that the U.S. step up and rescue the PR economy as the U.S. was the entity most responsible for putting Puerto Rico in this situation.



China’s Corporate Debt Continues to Mount

The latest OECD Economic Survey of China places the Chinese economy in the driver seat for global growth for the foreseeable future. China’s policy efforts should remain focused on rebalancing the economy through consumption and should address key risks, including high corporate debt, excess industrial capacity and inflated housing prices, the Organisation for Economic Co-operation and Development (OECD) survey recommends.

“After decades of breath-taking expansion, the focus should be on making growth more resilient, sustainable and inclusive, and addressing risks to stability,” said OECD Secretary-General Angel Gurría. “China’s economy should now be driven less by physical investment and more by innovation, it should deleverage and it should, above all, become greener.” 

Rising corporate debt and overcapacity in some sectors has led to mounting financial risks, the OECD said. Debt owed by nonfinancial firms reached 170% of GDP last year, the highest among leading economies. State-owned enterprises (SOEs) account for two-thirds of corporate debt, it added. “Steps to tackle financial risks should include gradually removing implicit guarantees to SOEs and restricting leveraged investment in asset markets.”

Commentary from a senior official with the People’s Bank of China’s research bureau—as quoted by Reuters—characterizes China’s “overall leverage level” as reasonable, but states that it is “rising at an alarming pace.”


Election Calendar

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

Recession in Brazil ending, exports driving rebound in economic activity. President Temer has managed to change much more in Brazil than was envisaged when he took office less than one year ago. Last week, a labor market reform to increase flexibility was passed in the lower house of Congress and a pension reform is expected to be put to a vote next week. Recession in Brazil is finally coming to an end. (EconoTimes)

Rebound in global market for U.S. oil and gas equipment exports. U.S. Acting Under Secretary of Commerce for International Trade Ken Hyatt issued a new report earlier this week that predicts increases in global oil and gas prices will drive a revival of U.S. oil and gas equipment exports during the next four years. The new study from the International Trade Administration finds that a five-year downward trend that followed slumping oil prices should reverse itself in 2017. (Global Trade Magazine)

Lenin’s Ecuador: What lies ahead in Latin America? Moreno’s success in Ecuador’s presidential elections casts doubt over the future of democracy and the country’s economy, with implications for the region as a whole and particularly its current ally, Venezuela. (Global Risk Insights)

Global trade growth is about to roll over. Signs are pointing to a looming slowdown in global trade growth, according to Morgan Stanley. Each component of the bank’s proprietary global trade leading indicator—save for the U.S. dollar—declined in April to mark back-to-back drops for the index, which is used to forecast real activity with a one-month lead. (Bloomberg)

Zimbabwe central bank says cash deposits rising. Zimbabwean banks have recorded a 50% increase in U.S. dollar deposits to $450 million in local and offshore accounts in over two weeks, the central bank governor said on Wednesday, citing improved economic performance. U.S. dollar notes have largely disappeared, with those holding them selling the cash at a premium of up to 20% percent, especially to businesses seeking to import goods. (Reuters)

Trump cuts spark fears of global corporate tax war. President Donald Trump’s plans to slash corporate taxes in the United States have sparked concerns of a new global fiscal race to the bottom, possibly involving a wave of negative social consequences, experts say. (EurActiv)

TPP nations discussing international trade pact without U.S. Trade officials from every signatory country of the Trans-Pacific Partnership (TPP)—other than the United States—met in Toronto last week to discuss the future of the international trade accord. The meeting was initiated by the Japanese, according to news reports. If the talks go forward, it could mean that the TPP will come into force even though President Trump withdrew the U.S. from the agreement in the early days of his administration. (Global Trade Magazine)

How Mozambique increased national debt by 20% in three easy steps. Mozambique’s debt scandal highlights the risks in letting security services run businesses, as they undermine transparency and economic independence. (Global Risk Insights)



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