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Bringing Trade into the 21st Century

Artificial intelligence (AI) has the potential to revolutionize the trade sector, according to the Euler Hermes Digital Agency.

AI can help “make credit risk something of the past,” said co-founder Christophe Spoerry. Although fraud and insolvencies will still occur, he points out, being able to “monetize data means that no failure should be unexpected.”

The use of AI technology in trade would make “open terms transaction much more reliable,” Spoerry said. Credit professionals would likely use them more frequently because they cost less than other payment methods such as letters of credit, he estimated.

AI-based trade navigation assistants can be built and trained based on companies' accounting and banking data, the agency says. “By activating a ‘self-driving mode,’ these assistants can take over after commercial negotiations: issuing purchase orders and invoices, collecting payments and handling disputes and claims—all in a timely, reliable and optimized manner. Building on accounting and banking data, companies will also start using ‘finance assistants’ for cash-flow forecasting and credit management. 

The artificial intelligence revolution won’t happen overnight, however, the firm says. “Not every company in B2B [business-to-business] commerce will leverage trade navigation assistants in the short term, and payment behaviors take time to change.”

So what could it mean for credit professionals today? “Building a trade navigation assistant need not wait,” Euler Hermes says. “Data from just a few hundred participating SMEs in a given sector or geography is sufficient to gain fairly accurate predictions at the transactional level.”

Although B2B data from legacy providers such as Dun & Bradstreet and Experian is limited in many countries, it is sufficient to create trade navigation assistants in the Americas and Western Europe, the agency says. Connecting with customers on platforms such as Xero or Quickbooks already provides partial access to their data. Building a comprehensive map of B2B commerce requires an accurate listing of 50,000 to 100,000 companies worldwide.

A transaction is relatively easy to model with machine learning, Euler Hermes says. In B2B commerce, the variables to feed the model are relatively small in number and usually straightforward to interpret. The first generation of trade navigation assistants will ultimately progress from prediction to prescription. Solutions will progressively manage more tasks and reduce the inherent stress of B2B commerce including payment delays, liquidity risk and credit risk.

Fast forward 10 years
Data dumping is key to building today’s dominant business-to-consumer (B2C) platforms, with data concentrated in a few marketplaces such as Amazon, Facebook, Google and WeChat, Euler Hermes points out. “These platforms also own some of the best current talent and solutions to interpret this data and monetize the ecosystem. In 10 years, it is likely there will be a Facebook or Google equivalent for the trade sector.” The firm likens today’s B2B trade services environment to the early days of MySpace and Altavista. “There is real opportunity for disruptive new entrants in B2B trade data,” it says. “A few players, such as Alibaba.com and Amazon, are already well-positioned, but the race has only just begun.”

For trade and trade finance, the data of today’s corporate buyers and sellers can be leveraged to build a data-driven future that was not a viable option for B2C where data was scarce, it says. “In the future, players will likely come together to interpret the data they generate and build the AI-based trade navigation and finance assistants that data technologies now facilitate. This vision requires defining business models for federated data use, and interconnected infrastructure and artificial intelligence to support it.” Fundamentally, the Euler Hermes Digital Agency believes a successful journey requires a widely shared vision of the opportunity.

Euler Hermes Digital Agency presented its arguments on Sept. 7 in New York at a recent TXF 2017 conference for the trade and treasury sector, titled “Transformative Trade, Tech and Talent.”

Surge in Global Trade—How Real?

Chris Kuehl, Ph.D.

News from the World Trade Organization (WTO) took an upbeat turn. The rate of global growth this year is expected to reach 3.6% as compared with the anemic pace set last year when growth was just 1.3%.

The big economies that have struggled to get out of the recession have finally started to fire most of their cylinders. The U.S. grew at more than 3% in the second quarter (although the storms will likely slow this pace in Q3), and Europe is growing at 0.6%. While this would hardly be called robust, the pace is faster than it has been in the last few years. Japan is seeing the best growth numbers it has seen in more than a decade, and even China is back to around 7% growth.

None of these are the numbers seen even a decade ago, but they are better than they have been in several years. The 3.6% pace is welcome, but it falls short of the 6% average that had been common prior to the recession.

These are certainly welcome numbers, but there are plenty of skeptics that point out the caveats and assert that this pace is not likely to be sustained for long. They also assert that this growth is not all that it is cracked up to be.

The first point to make is that this 3.6% growth comes on top of the really anemic growth of last year. Frankly, it would not take much to achieve greater growth numbers than in 2016. If this year’s performance is compared with some of the more robust trade years prior to the recession, there would not have been much improvement, if any at all. It is true that the major trading nations are doing better than they have in the last few years, but that is faint praise as they are all far slower than was the norm just a few years ago.

One of the inhibitors has been the lack of significant trade deals in the last few years. The U.S. attempted some large ones under Obama, but they did not get much traction in Congress. Under Trump, they have been abandoned altogether. The Trans-Pacific Partnership was assumed to be an easy win for the U.S. given the majority of the advantage was with the U.S., but it fell to a generally anti-trade attitude developing in the U.S. The European agreement has also stalled, and there are threats to existing pacts such as NAFTA. The other nations have not been any more active as Europe has been preoccupied with the very survival of the EU and Japan has been uninterested in expanding its presence in Asia. Without these new trade pacts, there is nothing to stimulate new patterns.

The second caveat is related to the lack of new trade agreements—the rise of protectionism. The U.S. was once a champion of free trade, but under Trump that reputation has vanished. Today, the U.S. has become one of the most protectionist nations with efforts under way to block imports from all over the world. The other nations have not been much better as Europe grapples with the implications of Brexit and Japan seeks to protect key markets from other Asian imports. This drift toward protectionism is not uncommon during times of economic stress, but there have been additional factors making this path more dangerous as far as global business is concerned. The enmity between the U.S. and China has intensified with Trump in office. China has always been a perfect foil for the U.S. politician and much has been blamed on the Chinese as far the economic issues facing the U.S. Add in the geopolitical issues brought forward by North Korea and the trade wars have been more intense with threats of retaliation from both sides. Even close trading partners such as Canada and Mexico have been affected by the politics of trade. The WTO has noted that the Group of 20 nations has introduced over 1,000 measures to restrict trade between 2008 and 2015. This is twice the number introduced in the period between 2000 and 2008.

The third factor that will likely drag down the global trade numbers is simply the weak consumer numbers in countries like the U.S. and Europe (as well as Japan). The wage growth that might have been expected as these states came out of recession has not taken place at the expected levels. This has been a very slow and halting recovery and the wage growth has been likewise slow and halting. The consumer expresses more confidence in the U.S., Europe and Japan, but thus far, there has not been the level of spending expected. Until the consumer gets fully engaged, there will be a limit to the imports purchased in the big consumer-oriented states. That definitely slows global growth.

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Egypt: Economic Outlook Improved, but Still Significant Steps to Take

Jan-Pieter Laleman, Credendo risk analyst

A recently published International Monetary Fund (IMF) report shows that Egypt is performing well under the Extended Fund Facility program that was accepted in November 2016 in light of a looming balance of payment crisis.

The program consists of a USD 12 billion IMF loan. Under the program, Egypt let the Egyptian pound float and has implemented significant consolidation. Given that in the last six years, two other IMF programs have been prepared, but never executed, it is a positive sign that the current program remains on track and is well implemented.

Impact on country risk
By letting the Egyptian pound float, it has lost half its value against the USD, but at the same time, it has significantly reduced pressure on the country’s foreign exchange reserves. This resulted in foreign reserves doubling between the end of August 2016 and the end of April 2017.

It has enabled Egypt to clear its foreign exchange backlog this September. Central bank officials claim that new foreign currency requests are met without delay. This is a significant development for a country that has been plagued by difficult access to foreign exchange reserves since the toppling of President Mubarak in 2011.

The increased foreign exchange reserves had already led to an upgrade of the short-term political risk by Credendo in June 2017. Besides the devaluation, the economic reform program foresees a stabilization of the public debt levels through a subsidy reform, new taxes and significant consolidation. With the reduction in subsidies, diesel and gasoline prices were, for example, increased by 53%.

Nevertheless, significant challenges to the program remain. The currency floating and subsidy cuts have had a significant impact on inflation, which was above 30% at the end of June 2017. This is the highest rate in decades and is causing significant hardship for the population.

The central bank has responded to the hike in inflation by increasing the interest rate. Additionally, the currency devaluation has increased the nominal value of the (private and public) debt denominated in foreign currency. These elements continue to put pressure on Egypt’s commercial risk, which is currently in category C. Under the consolidation plan, it is projected that the public debt will be reduced from around 98% of GDP in FY 2017 to around 81% in FY 2020. This adjustment is necessary in order for the debt to remain sustainable. But this means that the current reform drive needs to be continued.

Reprinted with permission from Credendo.

Election Calendar

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

Spanish court suspends Catalan parliament session, throwing independence call in doubt. Spain’s Constitutional Court on Oct. 5 ordered the suspension of Oct. 2’s session of the regional Catalan parliament, throwing its plans to declare unilateral independence from Spain into doubt. There was no immediate reaction from Catalan leaders who held an independence referendum on Oct. 1 that was banned by Madrid. (Reuters)

Saudi Arabia’s escalating foreign policy: The Qatar crisis is just the beginning. Saudi Arabia is losing the shadow war against Iran in the Middle East. Despite the centrality of foreign policy success to mitigate Saudi’s domestic problems, it is losing in Syria, Lebanon and Yemen. The Qatar crisis was a reaction to these failures, but will likely drive Saudi Arabia to greater extremes. (Global Risk Insights)

North Korea-China trade ties. North Korea’s leaders have made allowances for limited market-based activity in light industry and agriculture, stimulated by economic relations with China and investments by Chinese firms. But North Korean dictators want China’s investment, equipment and technology without introducing individual economic freedom. (Global Trade Magazine)

EU braces for Brexit talks collapse as May falters. As infighting consumes the British government, Europeans have stepped up quiet preparations for a possible collapse of Brexit talks that could see Britain crash out of the EU without a deal 18 months from now. Prime Minister Theresa May’s EU counterparts still see the “no-deal scenario” she threatened them with as most unlikely because they think it would hurt Britain much more than the continent. (Reuters)

Hard Brexit could cost £17bn per year in lost export revenues. A “hard Brexit” could cost the U.K.’s automotive, technology, health care and consumer goods sectors almost £17bn per year in lost EU export revenues, concludes a new study by Oxford Economics and law firm Baker McKenzie, The realities of trade after Brexit, which looks at the four sectors that account for 42% of the U.K.’s manufacturing GDP and 45% of manufactured exports to the EU. (Global Trade Review)

Banks: Economic slowdown in Mexico “is just around the corner.” The two earthquakes that struck Mexico in 2017 will have a negative effect on its overall growth, according to Bank of America and Merrill Lynch. “The slowdown is just around the corner,” the banks said in a report, adding that the growth of the country’s gross domestic product will reach 1.9% when predictions had previously stood at 2.1%. (PanAm Post)

Europe could see another Brexit-like rupture—beyond Spain. Another rupture may be sneaking up on Europe, driven by a similar mixture of pent-up anger and short-term political maneuvering. This one is between the old West European democratic core of the EU, led by Angela Merkel and, increasingly by, Emmanuel Macron, who are keen to integrate the eurozone, and the populist authoritarians of Eastern Europe, who dislike Brussels. (Bloomberg)

Zimbabwe cash crisis: Three foreigners held for illegal currency deals. Police in Zimbabwe have arrested three Chinese men and at least 16 locals for illegal currency deals. The arrests come a week after President Robert Mugabe's government tightened rules to impose heavy jail sentences or fines on offenders and seize their cash. (AllAfrica)

Asia cracks down on cryptocurrency. Virtual currencies are gaining popularity worldwide. The price of bitcoin has tripled since the beginning of this year. Amid the ongoing boom, some Asian countries are starting to tighten regulations. (NHK)

More banks join UBS and IBM’s trade finance blockchain project. Commerzbank, Bank of Montreal, Erste Group and CaixaBank have joined an initiative by UBS and IBM to build a new global trade finance platform powered by blockchain technology. Under the name Batavia, the platform is an expansion of a proof of concept that IBM and UBS launched at Sibos in 2016 and have since concluded successfully. (Global Trade Review)

Trump expected to decertify Iran nuclear deal, official says. President Donald Trump is expected to announce soon that he will decertify the landmark international deal to curb Iran’s nuclear program, a senior administration official said on Oct. 5, in a step that potentially could cause the 2015 accord to unravel. Trump is also expected to roll out a broader U.S. strategy on Iran that would be more confrontational. The Trump administration has frequently criticized Iran’s conduct in the Middle East. (Reuters)

U.S. to ask Cuba to cut embassy staff by 60%. The Trump administration is preparing to ask Cuba to withdraw 60% of its diplomats from Washington, U.S. officials said on Oct. 2, in response to last week’s U.S. move to cut its own embassy staff in Havana by a similar amount. The U.S. request marks yet another major setback for relations between the U.S. and Cuba, two countries that only recently renewed diplomatic relations after a half-century of hostility. (Business Mirror)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations