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What Accounts for Global Growth of Late?

Chris Kuehl, Ph.D.

If you have been paying attention to all of those reports from the likes of the International Monetary Fund, the Organization for Economic Cooperation and Development, the World Bank and so forth, you would note they have been considerably more upbeat than they have been in the last several years. Not that they are predicting another period of “irrational exuberance” such as what existed in the years prior to the recession, but there has been positive reaction to the reports that keep coming from industrialized nations.

The U.S. has now seen 3% growth for two quarters in a row. There have also been sturdy gains in key nations such as Germany, Japan and France. The U.K. has not been seeing roiling growth, but it is far better than many had expected to see in the aftermath of Brexit. It has been enough to convince the Bank of England to push rates up for the first time in a decade.

As is usually the case, the political leaders in these nations have been all too eager to take credit for this—just as they are always eager to blame down years on their predecessors or some other fluke event that has nothing to do with them. If growth this year is not attributable to the leadership of Donald Trump, Angela Merkel, Shinzō Abe and others—what has been motivating this expansion?

In a very real sense, the central banks and the collective approach to monetary policy can take the credit. Every major central bank has been engaged in stimulation of one kind or another. They all lowered interest rates to the lowest levels any of them had seen in decades. Most plunged ahead with policies designed to flood the markets with money—quantitative easing and other techniques designed to push money into the hands of banks.

Central bank stimulus has always been a challenge. The function of central banks has traditionally been to control inflation—the tools at their disposal are clearly aimed at this. They also have mandates to promote growth and employment, but the tools are far clumsier and dependent. Central banks can shove money into the hands of the commercial bankers, but they can hardly force them to take the money and lend it. One of the concerns has been that banks have not been active enough. In return, banks say that borrowers have not been active enough either.

This year, it appears that much of that money is finally working its way into the overall economy. Banks are seeing more requests for money from companies that they are comfortable lending to. The situation prior to this year was pretty miserable, and the issues have not entirely disappeared. The inhibitions have ranged from a rapidly aging population and labor shortages in many of the industrial states to the lingering impact of the financial crises that swept through the U.S., Europe and Japan. The money that central banks poured into the system through lower interest rates and various bond-buying schemes did not do much circulating because the banks used the bulk of it to get rid of nonperforming loans. This was not especially stimulative, but at least it allowed the banks to heal from their pre-recession decisions.

In addition to the impact of the crisis itself, there was the political reaction to the financial debacle. The banks suddenly faced a great deal of new regulatory activity. The focus for many of these lenders became compliance rather than growth and expansion. The joke among bankers has been that the good news is they are hiring, but the bad news is they are not hiring development people—just compliance officers.

In early 2015, it looked like the banks were on the edge of a decent rebound and the global economy was starting to perk up. That was when the next blow came with the collapse of oil prices. The U.S. was just starting to revel in the fact it had become the No. 1 oil producer. Suddenly, this was not the lucrative sector it had been. To make matters worse, the Chinese economy faltered as Xi Jinping started his push to focus on building a consumer-led economy less dependent on exports.

So now we stand in the midst of a growth surge as these issues are of less concern than they were. China is growing again. That has been good for the U.S. and Europe as we sell to the countries that sell to China (Australia, Taiwan, South Korea, etc.). The headwinds have not vanished, and there is still some sense of fragility, but the central bank policies seem to have paid off—even though these gains took a long time to manifest.

Losing a Banker's Acceptance: A $400,000 Piece of Paper

Roy Becker, President of Roy Becker Seminars, Centennial, CO

Would you misplace an original painting valued at $400,000? You probably would keep an alert and watchful eye on anything of such value. Would you also keep equal vigilance over a piece of paper called a Banker’s Acceptance? Losing it could cost you just as much!

Banker's acceptances (B/As) were created by the Federal Reserve Bank to help U.S. banks compete with London banks when providing international trade finance. A B/A must meet certain criteria including the following:

  • The tenor cannot exceed 180 days;
  • It must finance a trade-related transaction (a few exceptions exist to this rule); and
  • It must meet limitations as to amount by the customer and the bank.

Most often, the B/A arises out of a time draft related to a letter of credit.

Each B/A must be tied to a specific self-liquidating transaction. This type of financing (authorized by the Federal Reserve Bank) carries the commitment of the accepting bank and makes it an attractive investment vehicle by allowing a bank to sell it to an eager investor. Because B/As have gained a solid reputation and acceptance in the secondary market, the Federal Reserve Bank no longer finds it necessary to add its guarantee.

Once a bank has created a B/A, it can be discounted and sold into the secondary market. As a negotiable instrument, the purchaser can sell it to another investor until the maturity date. On the maturity date, the bank owes the face amount of the B/A to the holder of the document. Since the bank does not know who holds the B/A at maturity, it will expect the holder to present the B/A to the bank at that time.

A Misplaced Banker's Acceptance

In this particular scenario, a bank created a B/A valued at $400,000 and sold it into the market. At maturity, the bank collected the $400,000 owed by the customer, but no one presented the matured B/A to the bank. Sixty days later, the B/A finally arrived. Apparently someone found the overlooked B/A and presented it for redemption. The bank had no obligation, however, to pay any interest to the holder for the 60-day period after maturity.

This story has an interesting side note. Early during the 60-day period, the bank’s internal auditing staff audited the international department’s policies and records. When they came across this past-due item in the records, they wrote the department up as an audit exception and reported it to the bank’s board of directors. It took some educating to convince the auditors and the board of directors that the department had done nothing improper.

Although the bank had no obligation to try to find the holder of the B/A, it did make a few preliminary phone calls after which the trail turned cold. Although prepared to pay the holder, the bank did not know whom to pay. Therefore, the bank had use of the $400,000 interest free during the period. The bank's auditors would have better served their purpose by writing up the party who lost the use of the money during the 60-day period because he or she did a poor job of guarding their investment.

Reprinted with permission from Shipping Solutions export software, www.shippingsolutions.com. Copyright InterMart Inc.

EM Corporate Ratings to Lag Behind Improving Growth

Emerging market corporate ratings will take time to turn around, despite a likely 10% jump in revenues this year and global economic growth on track to be its strongest since 2010, according to Fitch Ratings.

The firm credits the effect of the commodities downturn and the Brazilian recession on balance sheets. EM corporate downgrades have outnumbered upgrades by 60 to 45 so far this year. In addition, the balance of rating outlooks and watches is still tilted toward negative. “We still expect the positive economic backdrop to shift the momentum in our rating actions, but this will not happen until 2018 at the earliest,” Fitch said.

Overall, the ratings agency expects global GDP to grow by 3.1% in 2017 and then accelerate to 3.2% in 2018, due to strong growth in the U.S. and an increasingly robust performance in the eurozone. Although Fitch anticipates this growth will support demand for EM exports, Brazil remains an outlier and a key drag on international ratings following two years of economic contraction. The firm, however, expects “a return to growth this year and an acceleration in that growth in 2018.”

Other factors it notes that point to a turning point in EM corporate rating trends include commodity prices (excluding oil) outperforming its expectations this year and a weakening of the U.S. dollar since the spring. This currency move has alleviated pressure from the significant rise in U.S. dollar-denominated EM private-sector external debt, further bolstered dollar-denominated commodity prices and helped calm fears of bilateral renminbi depreciation, which had fuelled capital outflows from China, it said.

Fitch forecasts aggregate revenues to rise by 10% in 2017 and a further 7% in 2018. This follows an increase of less than 1% in 2016. “The largest contributors to this growth will be energy companies, Chinese domestic homebuilders, utilities, and building materials and construction firms,” it said. Year-end leverage will decline in all regions except China, where a reduction is not expected until 2018.

Election Calendar

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

Saudi assets seen heading for rocky times. Saudi Arabia has thrown investors a curve ball. King Salman’s move to arrest a string of high-profile nationals, from ministers to princes, has left some encouraged by the authorities’ willingness to take on corruption. Yet, they are also worried about who might be next. (Business Mirror)

TPP leaders' meeting fails to materialize amid disputes. A meeting of leaders of the 11 countries in the Trans-Pacific Partnership (TPP) did not take place as scheduled on Nov. 10, amid disagreements over how to take it forward without the United States. (Reuters)

Nigeria central bank injects $195 million into currency market. Nigeria’s central bank said on Nov. 7 it had injected $195 million into the interbank foreign exchange market, extending efforts to boost liquidity and alleviate dollar shortages. (Reuters)

‘No miracle’ for Brazil as closed economy saps export potential. Brazil is largely missing out on improving global growth prospects, as Latin America’s largest economy remains one of the most insular in the world. Brazil’s exports account for about 12.5% of gross domestic product, a ratio that has barely budged in recent years. It is about half that of countries such as Russia and Chile, and one-third of Mexico’s. (Bloomberg)

Brexit dilemma hurtles toward Ireland: To veto or not to veto. A dilemma is hurtling toward Irish Prime Minister Leo Varadkar: Should he risk derailing the entire Brexit negotiation process over the border question? The border issue has given the Irish government an effective veto over the first phase of Brexit talks—a power it will lose once negotiations move on to the future trade deal. (Bloomberg)

U.K. delivers ‘disappointingly brief’ trade bill. The U.K. government has published a trade bill that details its post-Brexit trade policy. The bill, which the government says aims to avoid overnight changes to trade for businesses and a cliff edge for exporters, has been met with disappointment, both in its detail and its delivery. (Global Trade Review)

Catalonia’s biggest threat is internal. On Oct. 29, hundreds of thousands of Catalans took to the streets of Barcelona to protest in support of Spanish unity. This was the second time that the “silent majority” demonstrated the strength of Catalan unionism since the unconstitutional Oct. 1 referendum. As the political crisis in Catalonia deepens, it appears that the “silent majority” is becoming more conspicuous. (Global Risk Insights)

Waking the sleeping giant? The potential for trade finance transformation.Trade finance remains a key area where developments have been modest in comparison, despite its importance in facilitating international trade. Recently, the sleeping giant seems to have stirred, however, albeit slightly, with a notable number of press releases about proof of concept projects to digitize trade finance. Could we now be starting to see the start of a transformation in trade finance? (TMI)

Trade agreements take backseat in the great international tax race. The U.S. Congress is set to consider the first major reform of the U.S. tax code in decades. The proposed Tax Cuts and Jobs Act released on Nov. 2 features significant changes to the way U.S. corporations are taxed and carries implications for how they compete around the world. (Global Trade Magazine)

NAFTA uncertainty weighs on auto industry investment decisions. The Trump administration's proposals for new auto rules in the North American Free Trade Agreement (NAFTA) appear to be influencing investment decisions even before a decision has been made on whether the agreement lives or dies. (Globe and Mail)

Trump brings tough trade message in vision for Asia. U.S. President Donald Trump set out a strong message on trade at a meeting of Asia-Pacific countries in Vietnam on Nov. 10, saying the United States could no longer tolerate chronic trade abuses and would insist on fair and equal policies. (Reuters)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations