China Adds to Global Trade Importance with European, AsiaPac Outreach

China has been on a major charm offensive of late within business and trade spheres that has only intensified as U.S. officials have made the country a target.

One of the more interesting developments in international business trends is the shift in emphasis for Europe in light of the last year. The focus for the bulk of the European Union members has long been the United States, United Kingdom and, to some degree, Russia. These are all relationships that are strained, to say the least.

“Brexit” will cut the U.K. off from the business of Europe to a degree yet unknown. The Trump administration’s stated stances on policy, including tough talk on imports, foreshadow lessened interest in the EU. And Russia, perceived for years as hostile, has grown more aggressive. China will seek to replace some of the influence the U.S. and U.K. hold within European trade.

China already appears to be emerging as a clear winner in the battle for allies around Asian and Pacific states. In some respects, the Trans-Pacific Partnership trade pact was a last-ditch attempt to keep Asian states from falling into the Chinese orbit completely. The deal failed to garner support in the U.S., which sends what Asian and Pacific states see as a pretty clear message. In the last few months, the U.S. has watched the Philippines, Malaysia and, more recently, Cambodia and Indonesia tilt strongly towards deepened ties with China. 

– Chris Kuehl, Ph.D., NACM economist

Banks Look to Stronger Controls for Anti-Money Laundering as Correspondent Banking Relationships Drop

A recent report by the Dubai Financial Services Authority (DFSA) highlights that while many banks operating in the Dubai International Financial Centre (DIFC) have strong internal controls regarding general credit risk, some companies have a lack of awareness regarding trade-based money laundering risks.

The observation could be apt for trade creditors experiencing the increased cost of doing business throughout the world associated with a recent fall in global correspondent banking relationships (CBRs). Data compiled by Henry Balani of technology provider Accuity show CBRs have declined globally to 223,247 in 2016 from 360,785 in 2013. North America and Western Europe experienced the largest drop, 46% and 39%, respectively, he said.

Banks worldwide are reducing their CBRs with a focus on perceived higher-risk countries, including the UAE, according to financial messaging service Swift. As a result, more banks have lost access to international financial networks and products.

“There is an increased focus globally on trade-based money laundering risks from international groups such as the Financial Action Task Force and financial service regulators,” said Ian Johnston, chief executive of the DFSA. “Given the importance of trade to this region, regulators need to effectively oversee and supervise trade finance without hindering actual trade. We urge firms to benefit from all international guidance issued in that regard.”

Regarding anti-money laundering risk assessment, banks tend to lack specific assessment methods for trade-based money laundering and tend to focus more on credit risk and monitoring potential sanction breaches, the report notes.

Also, “…controls around identifying and dealing with the risk of dual-use goods need improvement,” the report adds.

– Nicholas Stern, editorial associate

Latin American Sovereign Outlook Negative Due to Weak Growth, Rising Debt

A weak global economic environment, depressed commodity prices, rising debt levels, and the prospect of higher global interest rates all contribute to negative credit drivers for sovereign creditors in Latin America, Moody’s Investors Service said in a recent report.

Weakness in Brazil and Argentina, two of the region’s largest economies, will hamper economic growth in the region, likely to average only .9% from 2016 to 2018. A recent average of 3% was achieved during the period between 2010 and 2015. Brazil, Ecuador, Trinidad and Tobago, and Venezuela are expected to experience the weakest growth and struggle with credit challenges over the next two years.

“Given some improvement in commodity prices and the rating actions already taken, we expect negative credit trends to be contained in 2017, relative to last year,” said Moody’s Vice President and Senior Analyst Samar Maziad. “Nonetheless, we expect the creditworthiness of a number of sovereigns to deteriorate further.”

Eight of the 29 Latin American countries that Moody’s rates ended 2016 with a negative outlook, while three had a positive. In 2015, only six had a negative outlook.

Debt levels are expected to rise in Argentina and Brazil, and large fiscal deficits and high debt ratios will likely constrain policy choices for the region’s countries. Higher global interest rates and volatile capital flows will limit the ability of authorities to ease monetary policy in 2017, inhibiting growth and contributing to higher interest costs on domestic debt. In Mexico, recent tax reforms have helped to cushion the sovereign’s credit profile to shocks, though uncertainties remain regarding potential changes in United States trade policies, Moody’s said.

– Adam Fusco, editorial associate

German Sectors on Track for Solid Growth, Stable Credit Quality in 2017

German nonfinancial companies are set to enjoy a year of stable credit quality, with ongoing economic growth and high levels of geographic diversification backing up Moody’s Investors Service’s predictions for 2017.

"German companies' stable credit quality in 2017 is supported by steady GDP growth of around 1.5% on the back of continued strong household consumption and net exports, as well as their geographic diversity, with only one-quarter of revenues earned from domestic customers," said Scott Phillips, a Moody's vice president/senior analyst.

Significant refinance requirements and regular issuance from large, repeat issuers point to new highs in bond issuance volumes this year, Phillips said.

The German automotive sector is likely to see decreased sales growth and price pressure taking away from profitability in 2017, though Moody’s analysts said strong credit metrics for firms like VW and BMW will keep their credit ratings in good shape.

The nation’s chemical sector should see profitability grow in 2017 by about 2% to 3% in earnings before interest, tax, depreciation and amortization (EBITDA), while mergers and acquisition event risk is increasing for some of the largest issuers, Moody’s said.

Also, a supportive regulatory and political environment should produce stable credit conditions for German-domiciled regulated energy networks, analysts said.

– Nicholas Stern, editorial associate

Import, Export Prices Advance in December

Import prices continued an upward trend in December, rising .4% after a .2% decline in November, according to indices from the Bureau of Labor Statistics. Export prices rose .3% in December, matching a rise in September; these were the largest increases for the export index since a .8% rise in June.

Prices for overall imports advanced 1.8% between December 2015 and December 2016, representing the largest year-long increase since the index rose 3.5% in March 2012. The 2016 increase was the first calendar-year advance since import prices rose 8.5% in 2011.

Prices for import fuel rose 7.3% in December, which was the largest monthly increase since the 10.5% advance in June. Natural gas prices also rose, showing an increase of 2.2%. The price index for import fuel advanced 25% in 2016, following a 41% drop in 2015. The 2016 increase was the largest calendar-year advance since a 62% jump in 2009.

Lower prices for foods, feeds and beverages, as well as each of the finished goods areas, led a decline in the price index for nonfuel imports in December, the third consecutive month for decreases, falling .2%. Prices for nonfuel industrial supplies and materials rose, however. Nonfuel import prices were down .1% in 2016 after a 3.4% drop the previous year.

For all exports, higher nonagricultural prices offset declining agricultural prices. Prices for overall exports rose 1.1% for the year ended in December, marking the first 12-month increase since the index advanced .4% in August 2014.

Higher prices for nonagricultural industrial supplies and materials offset lower finished goods prices, driving the nonagricultural export price increase of .4% in December, after edging down .1% in November. Declines in vegetable and fruit prices led a decrease in agricultural export prices of .3% in December, the bureau said.

– Adam Fusco, editorial associate

Slow Trade Payments in Singapore in 2016 Slumped to Lowest Level in Five Years

Companies in Singapore paid more slowly in 2016 than they did in the prior five years, with prompt payments (at least 90% of invoices paid on time) accounting for less than half the total of payment transactions.

Slow payments occurred in more than two in five transactions in Singapore last year and across the construction, manufacturing, retail, services and wholesale sectors, according to the Singapore Commercial Credit Bureau (SCCB).

According to AsiaOne, prompt payments to companies in Singapore fell 7.23% to 45.87% in 2016 from the prior year. During the fourth quarter of 2016, slow payments rose 7.85% to 43.28% from the year prior.

Typically, payment performance in Singapore improves at year-end due to sales during the holiday season, but some analysts believe companies are more actively enforcing payment terms to improve cash flows.

The food and beverage sector had the highest percentage of slow payers, while the wholesale sector saw the biggest jump in slow payments—8.35%—compared to the prior year, due primarily to a prolonged weakness in trading for oil and petroleum products, the SCCB said.

Bad debts in the heavy construction subsector slowed payment performance in the overall construction sector, with some 47.97%, or 7.6% more, firms reporting they were slow in paying in the final quarter of 2016 than during the same period in 2015, AsiaOne said.

The retail sector came in second in payment delays, hampered by slow growth among retailers in recent months. In manufacturing, payment slowing increased by some 7.63% to 45.4% in the fourth quarter of 2016 compared to the same period in 2015 due to a slowdown in the transport engineering and biomedical engineering subsectors.

– Nicholas Stern, editorial associate

Optimism among Small Business Owners Highest in over a Decade

Expectations for better business conditions among small business owners are at their highest since 2004, according to the National Federation of Independent Businesses’ (NFIB) December Index of Small Business Optimism, which rose 7.4 points to 105.8. Seven of the 10 index components posted a gain. The number of owners who expect better business conditions experienced a “stratospheric” 38-point jump.

“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”

“Business owners who expect better business conditions accounted for 48% of the overall increase,” said NFIB Chief Economist Bill Dunkelberg. “The December results confirm the sharp increase that we reported immediately after the [U.S. presidential] election.”

The December survey reflected the optimism of the postelection November survey, which jumped seven points to 102.4 after the results of the U.S. presidential election were announced.

Expectations for real sales gains and the outlook for business conditions contributed 73% of the gain in the index. The percent of owners viewing the current period as a good time to expand is now triple the average level in the recovery, NFIB said. Capital spending showed gains, both in reported outlays and plans for spending. Job-creation plans are at their highest levels since 2007.

“Business owners are feeling better about taking risks and making investments,” Duggan said. “Optimism is the main ingredient for economic expansion. We’ll be watching this trend carefully over the next few months.”

– Adam Fusco, editorial associate

Mixed Results in Canada’s Attempts to Move into Manufactured Exports

After oil and other commodity prices reached a peak in mid-2014, Canada has attempted to transition some of its economic energy toward non-energy exports, such as manufactured goods. The positive results of that effort are just starting to trickle in and remain mixed overall, according to an analysis by Wells Fargo.

Recent data analyzed by the bank show these efforts have been somewhat stymied, as represented by a poor October GDP figure and the biggest one-month drop in manufacturing in that month in about three years.

December data point to some firming prices in the Canadian manufacturing sector, though not as much as economists had anticipated, said Tim Quinlan, senior economist with Wells Fargo. The industrial product price index grew 0.3% in November, despite a consensus expectation for a 0.7% increase, while raw material prices fell during the month by 2%—also a larger decline that expected.

Not everything is bad in the near term, however. In December 2016, Canada reported its first trade surplus since 2014 as export volumes increased 3.5% for the month and import volumes declined by 0.3%. “This is quite a turnaround from the record deficit of more than CA$4 billion just two months prior,” Quinlan said. Nonenergy exports jumped 4.7%.

Meanwhile, Canadian jobs grew by 53,700 in December 2016, mostly driven by full-time job growth that was the largest reported since 2012, Wells analysts said.

Wells’ prediction for Canadian GDP growth is 1.9% for both this year and the following. “These latest figures are a welcome improvement and highlight how exports could go from a headwind, as it has been for the past couple of years, to a tailwind in the years to come,” Quinlan said. “That said, we remain cautious on the macro outlook as high consumer debt levels and overheated housing prices, at least in some markets, weigh on the broader outlook.”

– Nicholas Stern, editorial associate

Look for More Mergers, Centralization of Collections Agencies in Tight 2017 Market

Several trends seen among collections professionals in 2016 are likely to carry on this year, including creditors centralizing into shared services centers, slow economic growth and smaller commercial collection agencies disappearing or merging, according to a recent report by International Association of Commercial Collection Agency (IACC) experts.

“We have seen some large creditor companies consolidate internal resources, obtaining growth through acquisition in order to increase market share and profitability,” said Bryan Rafferty, vice president of Commercial Collection Agency of NY.

As the number of collection agencies decrease, opportunities open up for third-party growth because of less competition, Rafferty said.

“For companies that can operate effectively under the current regulatory/compliance-driven environment, there will be a lot of opportunity to gain market share through acquisition, business development, and competitive scorecard wins,” said Richard Kramer, senior vice president of Enterprise Sales, Altus Global Trade Solutions. Kramer also contributed to the IACC report. “Clients are looking to reduce the number of agencies they use in order to make compliance oversight and vendor management easier, exemplified by the Department of Education award and the trend in financial services awards.”

Another ongoing trend revolves around creditors issuing RFPs to identify the best collection agencies to work with, Kramer said. Look for these agencies to develop stronger web and marketing presences so creditors can research them more easily.

– Nicholas Stern, editorial associate

Moody’s Liquidity-Stress Index Points to Benign 2017

Moody’s Liquidity-Stress Index (LSI) fell for a ninth straight month as it declined to 5.9% in December from 6% the month prior, according to the rating agency’s recent SGL Monitor Flash. This bodes well for a benign default environment in 2017, Moody’s said, though it represents a contrarian view on the insolvency outlook when compared with reports from other sources. A fall in the index occurs when corporate liquidity appears to improve and rises when it appears to weaken.

“The LSI enters 2017 on a much calmer tone than it began 2016, with the energy sector strains that drove liquidity weakness and pushed up defaults now moderating,” said Moody’s Senior Vice President John Puchalla. “Meanwhile, a steady stream of new speculative-grade issuance continues to provide lower-rated companies with liquidity support, while generally positive economic sentiment should help them maintain healthy cash flows.”

Moody’s cited company-specific and transaction-related issues as the reason that downgrades exceeded upgrades in its speculative-grade liquidity (SGL) ratings and predicted that SGL rating volatility will lessen this year as the energy sector stabilizes.

Combined speculative-grade loan and bond issuance increased about 20% in 2016 as investors continued to hunt for yield in an environment of low interest rates. The chance of higher interest rates in 2017 could create challenges for companies with weak operating performance and low ratings, but such challenges won’t be of the same magnitude as energy companies faced in 2016, Moody’s said.

– Adam Fusco, editorial associate