Week in Review

August 20, 2018

Global Roundup

Mexico unsure if it will finish NAFTA talks with U.S. in August. Mexico’s economy minister said on Aug. 15^th that Mexico and the United States may not meet an August goal to finish bilateral talks to revamp the NAFTA trade deal, which is beset by disagreements over automobile trade rules and other issues. (Reuters)

U.S. says Turkey tariffs to stay as Qatar comes to Erdogan's aid. The U.S. and Turkey remained locked in a stalemate that has jolted global markets, as the White House said new tariffs on Turkish goods would remain and President Recep Tayyip Erdogan received a financial lifeline from Qatar that should buy him time in the standoff. (Bloomberg)

Italy needs to wake up and fix its banks. The renewed turmoil in financial markets should send Italy’s leaders an urgent message: They must speed up a costly and possibly disruptive repair of their fragile banks to prevent even greater costs and disruption later. (HSN)

U.K. could move towards U.S.-style sanctions regime after Brexit. The U.K. government will have the power to impose sanctions independently of the international community after Brexit. That’s as a result of a new law, the Sanctions and Anti-Money Laundering Act 2018, which received royal assent in May, and will come into force when the U.K. officially leaves the EU next year. (Global Trade Review)

EU companies “most likely to leave” Iran after U.S. sanctions, business organizations warn. German carmaker Daimler has shelved its expansion plans in Iran due to the reimposition of U.S. sanctions but it might not be the last EU company to pull the plug on future aspirations. (EurActiv)

Sanctions, oil and the emerging China-Russia-Iran axis. Although China has backpedaled on proposed tariffs on U.S. crude imports, the move is indicative of its need to diversify sources. Steps may now be taken to enable China to play the oil card in the future, including imports from Iran despite sanctions, and drawing closer to Russia. (Global Risk Insights)

Newest U.S. sanctions against Russia hit an economic nerve. Russia typically brushes off new U.S. sanctions. Not this time. (Business Mirror)

Tensions in Colombia rise after FARC leaders disappear. The political party of Colombia’s demobilized FARC guerrillas said on Aug. 16 that three former commanders have gone into hiding after military operations near their reintegration camps. (Colombia Reports)

Greece set to exit bailout, still faces daunting challenges. Greece exits the last of its three bailouts on Aug. 20 and hopes to be able to borrow again in international markets after a nearly nine-year debt crisis that shrank the economy by a quarter and forced it to implement painful austerity measures. (HSN)

Tariffs help U.S. steel prices but fabrication margins fall. Import tariffs have contributed to positive supply/demand and pricing dynamics for the U.S. steel industry due to less competition from cheaper imports, according to Fitch Ratings and CRU Group. (Fitch)

U.S. hits Taiwan with antidumping duties. The U.S. Department of Commerce has announced the affirmative final determination in the antidumping duty (AD) investigation of imports of forged steel fittings from Taiwan. (Global Trade Magazine)

The discord in the Korean peace process. From two declarations that were meant to supplement one another, the failure of the United States and South Korea to sort out their different interpretations of the texts complicates their own agendas. Discord between these two declarations poses a major threat to the successful accomplishment of both. (Interpreter)

The anatomy of a crisis: A strong dollar and disappearing liquidity. Since March – the dollar’s rallied over 7%. And it’s caused the Emerging Markets to implode. But the bigger problem is what lies ahead. (Palisade Research)

German economy accelerates against all odds. Unfazed by a mounting number of uncertainties, Europe's largest economy has logged better-than-expected growth in the second quarter. Experts said the expansion was mainly driven by domestic consumption. (Deutsche Welle)

The new physics of financial services: How artificial intelligence is transforming the financial ecosystem. Artificial intelligence is weakening the bonds that have held together the component parts of incumbent financial institutions and ushering in a new set of competitive dynamics that will reward institutions focused on the scale and sophistication of data much more than the scale or complexity of capital. (World Economic Forum)

Industry rejects Fitch’s call to reclassify supply chain finance as debt. A recent report by Fitch Ratings in the wake of U.K. construction firm Carillion’s collapse has sounded the alarm over supply chain finance (SCF) programs, calling for the extension of payment terms due to reverse factoring to be classified as debt. (Global Trade Review)

Europe’s Infrastructure Crisis

Chris Kuehl, Ph.D.

The latest tragedy is the collapse of a toll highway bridge in Genoa that has resulted in the deaths of more than 35 people thus far. As is usually the case, there is a sudden flurry of accusations and calls for inquiry into the company charged with maintaining the bridge and highway. The real issue, however, has been building for years and it is not just something that Europe has to contend with. The U.S. has been allowing its infrastructure to deteriorate for years and years, and has started to pay the price. The American Society of Civil Engineers has graded the system in the U.S. as D- and has threatened for years to move that to an F. Analysts in Europe assert that over 60% of the bridges in use in Europe need urgent repair and the issues of infrastructure go far beyond that of roadways. In just the last year, there have been collapsed schools, stadiums and even hospital facilities. These have not resulted in deaths, but there has been injury, and the costs of repair and replacement have been high.

The issue has been the same in both the U.S. and Europe. The last 10 years have been a decade of very slow growth and very slow recovery from the recession that started in 2008-2009. The majority of governments also chose this moment to address their budget crisis. For many years, the watchword was austerity. In country after country, budgets for infrastructure were slashed—to develop new systems and to repair old ones. The fixes that were undertaken were often little more than band-aid treatments designed to buy a little more time. The lack of investment was evident in some of the richest nations such as Germany, but the most egregious breakdowns have been in countries hardest hit by the financial crisis—Italy, Spain, Greece, Portugal and even France.

Now that this neglect has become acute and failures are turning deadly, the governments are facing even more drastic choices. There is no more money than there has ever been, but fixing these problems will be far more expensive than they would have been if routine maintenance had been taking place. The expectation is that more of these failures will occur—affecting the urban areas as well as rural ones. The reaction will be angry. Lots of pledges and promises will be made, but these howls of outrage are a smokescreen covering up the fact that politicians have been siphoning money from these projects for years.

The U.S. had relied on the gas tax to finance highway repair and construction, but that money source was shown to be inadequate many years ago. The fact is that cars get better mileage and people are spending relatively less on fuel than was the case previously. It is has been said that state highway departments have a picture of the Chevy Suburban in their offices with a sign that says, “Our hero.” The gas tax has not changed in years; there are now serious moves at both the state and national level to hike that tax so it can pay more for the needed work. Unfortunately, the need now is so great it would take an increase of between $1 and $1.50 a gallon just to make a dent in the needed repair work. The majority of the proposals are suggesting a hike of maybe 10 to 15 cents a gallon.

Cyber Security, More than an IT Problem

Cyber security is more than just protecting a company’s computer systems and data from a potential attack. Vince Warrington, founder of U.K.-based Protective Intelligence Ltd., advises companies to look beyond what security measures they need to take by also considering what their customers, potential customers or outsourcing partners are doing to protect themselves from an attack.

It is about assessing internal and external risks, Warrington cautions. Cyber attackers look for the weakest link in a supply chain. “No one tries to attack the big companies directly,” he explained. “Attackers spend months studying for the weak link. They look for the weak partner and then make their way all the way back to the main target.”

It’s not just an information technology problem. It’s an invasive issue that can seep into all parts of a company—even the credit department. “It can get to anyone in a business,” he said.

Credit professionals know how to assess risk, he added. "This is just another type of risk." They should treat and assess a customer’s or prospect’s cyber security efforts like any other business risk. Cyber incidents can have serious economic and political consequences that impact board rooms and destabilize governments.

When assessing businesses consider how they approach cyber security, Warrington said. “Nowadays if a company isn’t taking cyber security seriously, how seriously is it taking other parts of its business? If it hasn't got a defined process, how many holes are there?"

Oftentimes people are afraid to ask about cyber security because they think they won’t understand it. They think it will be too technical or it only concerns the IT department. “It’s not magic; it’s not difficult to crack," Warrington said.

Warrington will help cut through the jargon and buzzwords to help credit professionals understand how cyber security impacts them and their customers as part of FCIB's International Credit & Risk Management Summit, Sept. 16-18, in Dublin. He will explain current global cyber threat levels, the people behind them and their motivations and what indicators credit managers should look for when considering these risks.

Egypt: Sisi Consolidating Power

The PRS Group

President Abdel Fattah El-Sisi won a four-year extension of his mandate at elections held in March 2018, and was sworn in for a second time on June 2. The incumbent won 97% of the vote, an unsurprising result, given that any legitimate competition was sidelined by various forms of legal and political intimidation in the months leading up to the vote.

A post-election Cabinet reshuffle will facilitate the consolidation of Sisi’s power. A sweeping overhaul of the government conducted in June saw the installation of a new prime minister, with Mustafa Mabdouly, a former minister of housing, replacing Sherif Ismail, and the reassignment of 12 Cabinet portfolios, including Defense, Interior and Finance, to figures apparently chosen on the basis of the president’s confidence in their loyalty. Sisi has similarly sought to eliminate unreliable allies from the senior ranks of the armed forces. 

The U.S. has historically been Egypt’s largest aid donor, but political leaders in Washington have been sending mixed signals to Cairo over the past year. With support from the U.S. no longer as reliable as has historically been the case, Sisi has been seeking out alternative benefactors closer to home. 

Saudi Arabia, in particular, has stepped forward to fill that role. Sisi’s support for the muscular foreign policy adopted by Crown Prince Mohammed Bin Salman and his UAE counterpart, Mohammed Bin Zayed, has been rewarded with billions in aid and investment that will help to cushion the socioeconomic impact of austerity measures and structural reforms the government has committed to implementing under a lending agreement with the IMF. 

During its first term, Sisi’s government managed to reinvigorate economic growth, revive FDI and replenish badly depleted foreign exchange reserves. However, those successes were made possible by the conclusion of a three-year lending deal with the IMF, which was conditioned on the flotation of the highly overvalued pound and the implementation of unpopular austerity measures, including steep cuts in spending on subsidies and an increase in the VAT. 

The government is counting on an aggressive approach to slashing the subsidies bill to underpin a rapid reduction of the fiscal deficit that enables policy makers to shift their focus to stimulating growth and facilitating job creation. Although the announcement of metro fare hikes triggered several days of disruptive protests in Cairo, the risk that austerity measures might generate a destabilizing backlash will be kept in check by the widespread recognition that the fiscal reforms are necessary and the likelihood that any significant disturbances will be met with repressive force. 

The analysis above is taken from the July 2018 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations