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Good News in Eastern Europe

Chris Kuehl, Ph.D.

Not all of the problems in Europe have been solved—not by a long shot—but the most recent data show solid growth in important states such as Germany and France, as well as progress in countries such as Italy and Spain, which have had the most serious issues.

Growth in the Eastern regions, however, has been overlooked. Progress being made by the likes of Poland, the Czech Republic and Hungary has faded. Most of these countries have been more preoccupied with political issues and the rise of populist nationalism.

The more interesting story is the rise of the export sector in most of these countries, especially for nations that have been trying to shed the last vestiges of their former economic system. Romania, at 5.7% in Q2, has been the fastest-growing state in Europe this year, followed by the Czech Republic at 4.5%, Poland at 4.4%, Hungary at 3.6% and Slovakia at 3.1%. To put this in context, the growth rate for the entire EU was 2.3%. Fast growth in the Eastern states has not offset the very slow growth in the southern reaches of Europe.

There are three drivers behind this economic growth. Years of Western expansion and development in this region has paid off for countries such as Germany. The Germans and many other northern states sunk a lot of money into expanded capacity in the Eastern region, taking advantage of low wages as well as financial incentives tied to this kind of investment. Now that these countries are well connected to the Germans and the Scandinavian states they benefit from growth in these countries. German recovery has fueled the Eastern recovery and, to some degree, the Eastern recovery has been good for the Western economies. Trade between the two regions has accelerated.

This has led to the other development: The expansion of trade has meant there are more job opportunities in these countries, and the rate of unemployment has been tumbling. The addition of these good jobs has meant that consumers have more money than they once did and that has allowed local economies to develop. One factor, the role of expatriate, has not gained as much attention. The exodus of young workers seeking opportunities in the Western states has been a concern for years and from a variety of positions. The Eastern states are worried that they are experiencing brain drain. The Western states have been concerned that too many people have been arriving seeking work and that this has undercut wages. One positive factor that is often missed is that these workers have sent a great deal of money back to their home countries and that has boosted consumer spending, as well.

One motivation for the expansion that worries analysts is that all of these countries have been pouring money into their own economies with various stimulus plans. On the one hand, this is what one expects the government to do as a means by which to boost growth; but if the effort pushes debt and deficit levels too high, there is the possibility that more damage will be done than good. To make this strategy work, these states have to maintain that fast growth and reap the revenue rewards that come with it.

Doing Business in MENA Countries Remains Challenging

Despite the ongoing Arab dispute, Qatar had fewer increases in payment delays compared with three of the other four countries in FCIB’s latest International Credit & Collections Survey, which covers the Middle Eastern and North African region.

Of those doing business in Saudi Arabia, 34% noted an increase in payment delays, 30% in Egypt, 16% in Algeria, 13% in Qatar and 9% in Algeria.

Overall, respondents advised others who are considering doing business in these countries to “really know your customer.” Get all of the “legal information, credit application, tax documents and financial disclosure, if you can,” said one respondent. Another survey taker stressed understanding country risk, central bank issues and regulatory requirements.

Across the board, wire transfer, letter of credit and cash against documents superseded other forms of payment surveyed—with the exception of Qatar, where credit card payments outpaced cash against documents. The majority of credit professionals doing business in Qatar, Saudi Arabia and the UAE extended terms ranging from zero to 60 days, while the majority of those doing business in Algeria and Egypt offered between 31 to 90 days.

Another respondent viewed Algeria as “a very difficult” country to sell into. With respect to Egypt, a credit manager shared that the country “is having a difficult time getting [U.S. dollars]. We do not believe that a letter of credit will protect you because no U.S. bank will offer confirmation.” His recommendation—at this time—is to collect cash in advance.

Some credit professionals who do business in Qatar pointed out that the current regional dispute has resulted in customers not being able to receive products or to pay for goods. “The Arab embargo is making the movement of goods and funds challenging,” one said.

While one credit manager views Qatar as stable with little risk, absent the embargo, another suggests “somewhat aggressively” managing accounts in the Middle East overall. “You can influence timelier payments, but it takes effort.”

FCIB members can access the complete survey results via the Knowledge Center. The next International Credit & Collections Survey opens Friday and will cover France, Germany, the Netherlands, Russia and Turkey.

EIU: Outlook Reasonable for Emerging Markets

Emerging markets have a “reasonable” outlook for 2017–18, according to the Economist Intelligence Unit’s global forecast article “The Global Economy Is in a Sweet Spot,” from Aug. 16.

Both Brazil and Russia are expected to emerge from their lengthy recessions, it states. It also anticipates double-digit growth in industrial commodity prices and “financing conditions to remain relatively benign.”

China’s growth also should accelerate for the first time since 2010. “However, this growth is continuing to be generated partly through an increase in indebtedness, accompanied by rapidly rising property prices in some cities,” the analysis finds. “We believe that this accumulation of debt, particularly in the corporate sector, is unsustainable, and we think that once the president, Xi Jinping, has consolidated his power at a party conference late in the year, he will sanction policies to rein in credit.”

As a result, the EIU expects India to be Asia’s fastest-growing large economy in 2017–21, but it points out that its economy “is also going through a painful period” due to an uptake in bad loans held by state-owned banks, following an earlier lending spree.

Despite Brazil’s emergence from recession, growth in the country is expected to be weak year-on-year due to ongoing corruption scandals. Mexican GDP moved up to 2.3%. “The economy has been resilient in the face of deep uncertainty surrounding U.S.-Mexican relations under the Trump presidency,” the EIU said. Its forecast assumes Trump’s actions “will largely fail.”

Social unrest, war and terrorism continue to subdue the EIU’s outlook for growth in the Middle East and North Africa. It expects, however, for Iran to lead the region's improved economic outlook for 2018–21. “However, our assumption is that oil prices will not be sufficient to enable exporters to restore the expansionary fiscal policies that were in place in 2011–14.” Sub-Saharan Africa economies are expected to improve in 2017–18 as prices for exported commodities rise.

Election Calendar

Aug. 23 - Angola, General
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

NAFTA negotiation starts with harsh words from U.S. The renegotiation of the North American Free Trade Agreement (NAFTA) is off to a rocky start. The Trump administration lectured Canada and Mexico on the failures of the current agreement at an opening news conference on Aug. 16, while behind closed doors negotiators began to seek significant concessions from the United States’ neighbors. (Business Mirror)

Italy enjoys best annual economic growth since 2011. Italy posted its best annual economic growth figures since 2011 on  Aug. 16, with its gross domestic product outdoing official forecasts to grow 1.5% on an annual basis. (EurActiv)

Cheap sterling brings U.K. tourism boost, but food imports suffer. A fall in the value of the pound has seen a spike in the number of tourists visiting the shores of Britain. Meanwhile, separate data published Aug. 18 showed that the U.K.'s food-and-drink trade deficit—the difference between how much the U.K. imports and exports—widened 16% to £12.4bn over the first half of 2016. (CNBC)

The U.K.'s plan for post-Brexit customs is more hopeful than realistic. The U.K. government has just issued its official position paper on the issue of the customs union and Brexit. It emphasizes a desire for the “most frictionless trade possible in goods between the U.K. and the EU” and proposes two ways of achieving this in the long term, while making it clear that the U.K. will leave the EU’s customs union when it leaves the EU. (EconoTimes)

Coface: Payment Risks on the Rise in APAC. Coface’s annual survey traces the evolution of corporate payments in eight countries and 11 sectors in the Asia Pacific (APAC) region. The survey was conducted in Australia, China, Hong Kong, India, Japan, Singapore, Taiwan and Thailand, with 2,795 respondents. Sixty-four percent of the companies surveyed experienced overdue payments in 2016. Overdue payment risks appear to be continuing to increase across the region. (Global Trade Magazine)

China's Economic Outlook in Six Charts. China continues to enjoy strong growth—projected at 6.7 percent for 2017. And the country has potential to sustain strong growth over the medium term. But to do so safely requires speeding up reforms to make growth less reliant on debt and investment, the IMF said in its latest annual assessment of the economy. (IMF)

Cuban trade with Venezuela plunges over two years. Cuban trade with socialist ally Venezuela has fallen 70% since 2014 due to the South American oil producer's inability to meet delivery contracts and purchase goods, as it struggles with low oil prices and a resulting economic meltdown. (Reuters)

As Malaysia turns 60, its economy is stuck in third gear. Saudi Aramco, Riyadh's state-owned oil behemoth, has been investing heavily in Malaysia's economy. But with Kuala Lumpur still reeling from the 1MDB scandal and the country trailing its counterparts on key indicators, the economy remains vulnerable. (Interpreter)

Three problems facing Spain’s government today. The medium-term outlook in Spain is under pressure from three issues. Its politicians will have to act judiciously to avoid a constitutional crisis. (Global Risk Insights)

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