Will Africa Suffer the Most?

Perhaps no region of the world gets less attention year after year than Africa, but it is not for the lack of trying. Every day, some report or statement asserts that Africa will be the “next big thing.” Some have noted that this continent is young, increasingly urbanized and better educated than in the past. It has also been pointed out that Africa has more than its share of political turmoil and violence as well as corruption and incompetent leadership. These are indeed problems, but they are hardly unique in the world.

The faith in Africa’s future lays rooted in the abundance of its natural resources and the demand for this bounty in the developed world. This has often been a curse as opposed to a blessing as the majority of who seek to get hold of these resources do nothing to build the local economy, a situation that goes back to colonial development.

About 20 years ago, the Chinese began developing a keen interest in Africa. Over those two decades, the continent’s future seemed to lay with the Chinese and their insatiable demand for its abundant resources. The recent collapse of Chinese demand is taking a toll on the African states that depended on China. When the dust of the Chinese decline settles, every part of the world will suffer some damage, but the majority of it will be minor. The U.S. has already felt its worst, and things have already started to return to some semblance of normal. The Europeans may actually come out of this in better shape than they were as the consumer in Europe can certainly use those lower prices. It will be those nations that supply China that will bear the brunt.

In general, three types of relationships exist between China and African states. The most common is one in which China is only interested in the commodity or raw material it needs. There is no commitment of any kind to the region, and the country behaves exactly as the European colonialists once did. The relationship between China and the Sudan/South Sudan is one example. The only reason China is engaged with either country is oil. China extracts the oil with its own people and pays as little as it can for it. The Chinese are isolated and disengaged other than in efforts to preserve access.

The second type of engagement is when there is some mutual interaction. China still wants the raw materials and commodities, but it views the country as a market for Chinese consumer goods. Nigeria is a classic example of this relationship as the population of that country is large and wants the goods that China produces. A number of Nigerian business people are in China at any given time as they work to bolster these contacts. The Chinese are still not putting a great deal of effort into developing these states, and they do not want to see the Nigerias of the world become rivals.

The third type of interaction is perhaps the rarest, and it is one where China wants a long-term relationship with political and economic legs. Only South Africa seems to fall into that category. The Chinese want to use South Africa as a platform for Chinese expansion—both in a business sense and in a political one. The problem is that everybody else wants to get engaged with South Africa for the same reason and that makes the competition intense.

-- Chris Kuehl, NACM economist

To read more of Chris Kuehl’s commentaries, visit FCIB’s Knowledge and Resource Center.

CMI Sneak Peak: NACM’s Credit Managers’ Index Drops Nearly Two Points in August

The beacon of light that illuminated the recovery in July was extinguished this month as the August report of the Credit Managers’ Index (CMI) from the National Association of Credit Management (NACM) showed a nearly two-point drop in the combined score—slipping from 56.0 to 54.2.

The CMI has been on a roller coaster this summer with a wide range of performances, explained NACM Economist Chris Kuehl, Ph.D. “That sick feeling that one gets on a roller coaster seems to be affecting those that have been following the gyrations of the CMI this year,” he said. “A good month seems to occur after a bad one and then there is a return to the negative side of the next one.”

Going from 63.5 to 59.2, favorable factors were the main drag. The biggest shift occurred in the sales category and smaller declines were recorded in new credit applications, dollar collections and amount of credit extended. While unfavorable factors increased slightly from 50.8 to 51.0, the categories of rejection of credit applications, disputes, and filings for bankruptcies declined. Small increases, however, were noted in the categories of accounts placed for collection, dollar amount beyond terms and dollar amount of customer deductions.

- NACM Staff

Preliminary Data Shows Health of Eurozone Slowly Increasing

Flash estimates for this month’s eurozone Purchasing Mangers’ Index show slight improvements in both manufacturing and services sectors, which reported acceleration in the rate of expansion and an increase in new work, including stronger growth of new export orders at manufacturers.

Germany demonstrated solid growth with job creation hitting a 44-month peak, while France’s economic output increased for the seventh-consecutive month, according to the Markit Flash Eurozone PMI. The French manufacturing sector, however, did report job losses.

A turnaround in manufacturing appears to be “the key to getting France fully back on track,” said Rob Dobson, Markit’s senior economist. The sector still offsets “much of the recent gains seen [by] French service providers,” Dobson explained.

“On the price front, average selling prices are still holding broadly steady across the eurozone in August, while cost inflation was registered for the seventh successive month,” he said. “While this suggests that deflationary pressures remain contained at present, falls in the indices for both price measures during the latest survey ensure a watchful eye will be kept on the trend in coming data releases.”

- Jennifer Lehman, NACM marketing and communications associate

For updates on Greece, Mexico and Kazakhstan, visit this week's eNews.

Chapter 9 Strikes Again

Before last week, not many people may have heard of Hillview, KY. However, the city, with a population of 8,000, made headlines by filing for bankruptcy protection under Chapter 9—the first U.S. city to do so since Detroit, which filed in July 2013. It’s also the third Chapter 9 filing this year, following an Oklahoma hospital and a California district.

Hillview, about 16 miles south of Louisville, has joined a select destitute group. “Only 54 cities, towns and countries have sought court protection from their creditors since 1980,” according to an Aug. 20 Bloomberg article.

The city's filing with the U.S. Bankruptcy Court in Louisville estimates Hillview has liabilities of up to $100 million and assets up to $10 million. Primarily, city officials declared bankruptcy to halt interest gains on a legal judgment of $11.4 million for its largest unsecured debtor, Truck America Training, in a land dispute. In 2002, the city council approved a lease-purchase offer for 40 acres of city land. The trucking company sued Hillview for allegedly failing to transfer title of the land, and a jury awarded damages during a 2006 trial, which an appeals court upheld. City officials appealed to the Kentucky Supreme Court, which denied review so the prior judgment stands.

The city filed to stop interest gains and to structure a payment plan it can manage, the city’s attorney, Tammy Baker, said in news reports. Presently, Hillview does not plan to cut services and will operate as usual, Baker further said.

Federal law permits local governments to file for Chapter 9, but only if its state government allows it. Although cities and counties rarely turn to Chapter 9, an Aug. 5 Moody’s Investors Service report finds that it’s not as taboo as it once was. According to an August 2005 report by The Pew Charitable Trusts, some analysts predict the difficulties that arise from bankruptcy will keep a rash of other struggling cities from filing.

The Pew report identifies the following lessons learned from Detroit’s filing as well as other municipality filings:

· Early state intervention in local governments’ financial emergencies can help avert a crisis or possible insolvency.

· When local governments have no options other than filing for Chapter 9 protection, a broad outreach plan that includes all stakeholders throughout the process can help resolve conflicts.

· Once a local government exit Chapter 9, a long-term recovery plan that outlines immediate financial fixes and long-term strategies, such as investing in economic growth, is critical to addressing underlying fiscal problems and preventing future crises.

· By taking active steps to budget over the long term—matching expenses and revenue over several years—local officials can promote fiscal health and increase their city’s capacity to weather the ups and downs of the business cycle.

· Regular monitoring of local government finances can help state office detect early signs of distress.

· State policymakers can prevent Chapter 9 filings by developing alternatives, such as naming a monitor or temporary manager to restore a city’s’ finances.

- Diana Mota, NACM associate editor

Energy Driller, Popular Clothing Store on Brink of Chapter 11 Filings

Two formerly strong companies appear destined for bankruptcy and, barring some unexpected changes soon, those could come within the month.

Samson Resources Corp. is widely expected to file and is one current case study in how drastically lower oil prices caused in part by the United States’ emergence in energy markets are affecting connected businesses, according to analysts including Fitch Ratings. “The recent oil price drop has compounded the effects of the offshore rig oversupply cycle, resulting in limited tenders, weak day rates and legacy fleet rationalization,” Fitch said. “Backlog protections for offshore drillers are falling away at a fast clip—a significant portion roll-off within the next year—which will likely begin to pressure cash flows.”

Meanwhile, American Apparel this week unveiled disappointing second-quarter financial results, which included a net sales drop of more than 17.2% and additional problems stemming from foreign exchange losses. Company officials admitted they have “substantial doubt” that the business can rebound given its current liquidity. Amid whispers of dropping sales and liquidity problems, it entered Kamakura Corp’s list of 10 riskiest companies globally earlier this month based on its default probability, which surged from 5% to 41.54% in just three months, according the Kamakura assessments. The risk profile represents the worst of any U.S.-based company not operating in the energy sector.

- Brian Shappell, CBA, CICP, NACM managing editor

Judge Denies Settlement Between American Express and Merchants

An antitrust class action settlement against American Express was denied final approval by a U.S. District Court judge this month after a lawyer in the case shared confidential information with another attorney, who represented MasterCard in a similar proceeding.

As a result, Attorney Gary Friedman and his co-counsel in the Amex case will no longer be able to collect the proposed $79 million, “which they were slated to receive for a settlement that permits merchants to impose a surcharge on customers who use Amex credit cards, as long as those retailers impose the same surcharge on customers who use other credit cards,” according to an Aug. 4 article from Reuters. The judge’s decision also jeopardizes a comparable agreement with Visa and MasterCard.

A statement issued from American Express on its website says:

“We are disappointed in the court's decision to deny final approval to the settlement. We continue to believe the agreement is fair to merchants, providing them with additional flexibility while ensuring our card members are treated fairly at the point of sale. We believe we have strong defenses against the merchants' claims, and will continue to fight our case in court.”

Interchange fees—also referred to as swipe fees—are charged to a merchant when a credit card is used as payment. These fees typically range between 1-3% of the total transaction and are set by companies like Visa and MasterCard.

- Jennifer Lehman, NACM marketing and communications associate
For a more analysis on this story, be sure to check out next week’s edition of eNews, available late afternoon every Thursday at www.nacm.org.

U.S. Judge Imposes New Sanctions on Argentina

U.S. District Court Judge Thomas Griesa sanctioned Argentina this week for ignoring a 2013 court order requesting information about it assets, according to an article from The Wall Street Journal on Wednesday (Aug. 12).

For more than a decade, a group of hedge funds, led by NML Capital Ltd. and Aurelius Capital Management Ltd., has tried to collect $1.8 billion on defaulted bonds from the country. The bonds fall under U.S. law, which is why a U.S. judge has imposed this decision, explained Ron Shepherd, director of business, development and membership for FCIB (The Association of Finance, Credit & International Business). Griesa’s ruling states that any Argentinean possessions in the U.S., with the exception of military or diplomatic holdings, are considered commercial property and can be seized. 

“It’s not a typical kind of sanction, like in Russia or Iran,” Shepherd said. “In essence, this judge is saying, ‘any assets that Argentina has in the U.S. can be seized to repay the holdout bondholders.”

The ruling is a continuation of what has been occurring for the last 14 years, noted Shepherd, who added the judge’s decision really won’t impact the risks of doing business with Argentina. While “the saga continues,” Shepherd is curious about Argentina’s next step. “The country is already in default and already blocked from raising capital in the foreign debt markets,” he said. “The damage has already been done in terms of its ability to right its ship and fund its government. It has shut itself out of being able to do that.”

- Jennifer Lehman, NACM marketing and communications associate
For more on Argentina, check out this week’s eNews, which provides a link to the newly released Country Report on Argentina from Euler Hermes.

Excess Steel Supply, Alleged Foreign Subsidies Impairing U.S. Market

It appears the oil market isn’t the only industry facing deep repercussions from overcapacity. The  U.S. steel industry will likely face two other major headwinds in the second half of 2015: falling prices and foreign steel dumping, according to trade credit insurer forecast.

Euler Hermes expects 2015 steel prices to decline by 18% and annual production to decrease by 3-4%, primarily due to oversupply. Though construction, machinery and equipment, and automotive companies will benefit from lower prices for material over the next six to 12 months, Euler Hermes suggests extending credit to buyers in steel producing and services sectors with caution. Volatile prices and annual production levels have increased market uncertainty, and the firm predicts corporate consolidations and bankruptcies are in the near future.

Meanwhile, as part of an effort to address some domestic industry headwinds, six U.S.-based producers recently filed antidumping and countervailing duty petitions related to hot-rolled steel from more than a half-dozen nations allegedly receiving unfair subsides.

- Diana Mota, NACM associate editor
Read this week's edition of NACM eNews, available late Thursday afternoon each week via email or at www.nacm.org, for extended analysis on this topic.

Home Prices Rising Again: Good for Some and Not for Others

In 163 of the 175 metro areas surveyed by the National Association of Realtors, the price of homes has been rising in both the new and existing homes categories. The data certainly foreshadows a hotter market for the construction industry. However, higher prices can pose a few problems.
The housing sector has been down for a long time, and most home builders have gone into survival mode to some degree. They do not have the inventory similar to that of the past, and this shortage is part of what has been driving prices up. Coupled with higher demand, the homebuyer is now facing a higher cost for the home of their choice.

This is a critical point as far as the sector is concerned. If the demand appears sustainable, the builders will choose to start trying to catch up; but if this demand is only temporary, there will be less enthusiasm for building up inventories. Much of the direction seems to come down to what one thinks the Millennial buyer will do.

The evidence is that those at the older end of the Millennial generation spectrum—people in their early 30s—are getting interested in buying homes at a more consistent pace. However, those in their 20s don’t appear to be budging. If the builders assume that demand is returning and that cohort still sticks to the multi-family option, they will be left with stock they can’t sell. That could trigger another debacle like the one in 2008-2009. Opting for caution and a wait-to-see what these people do approach, there will be shortages and higher prices that will discourage the very people the home builders are so eager to see in the market.

- Chris Kuehl, Ph.D., NACM economists and Armada Corporate Intelligence co-founder

Drop in Yuan Raises Concerns for Global Economy

China reduced the value of its currency in an attempt to boost its struggling economy, several news outlets reported this morning (Aug. 11). The move is the largest one-day fall in more than a decade and is causing worldwide speculation about how it will affect the global economy.

“It was expected and it wasn’t,” said NACM Economist Chris Kuehl, Ph.D. “There had been more than a few comments regarding the tactics that China might employ to get its economy moving again and devaluing the currency was always something that was mentioned but never given that much credence.”

The Peoples Bank of China (PBoC) has chosen to reduce the value of the yuan, Kuelh explained, “as a ‘one-time’ effort to boost the competitiveness of Chinese exports—even as they acknowledge that this will make imports more costly.”

Be sure to check out NACM’s eNews this Thursday for a more in-depth story on China and its economy.

- Jennifer Lehman, NACM marketing and communications associate