Credit Managers’ Index Looking to Open 2016 with Positive Trend

NACM’s Credit Managers’ Index for January, to be released Thursday morning at, is expected to show significant improvement overall, though some trouble spots still exist. Even with projected improvement, the CMI’s combined reading is more likely to rival October’s showing (53.9) than 2015’s July peak (56).

Pushing any potential positive trends for the combine index would be the performance of favorable factors categories. Although a surge in the sales category would be most appreciated, increases in new credit applications, dollar collections and amount of credit extended are more likely to carry that side of the CMI equation. Don’t expect much from combined unfavorable factors readings, which appears mired near the contraction zone (anything below 50).

NACM Economist Chris Kuehl, PhD. suggested that some of the positives in the January data may have  counterbalances in other categories. “It appears there is interest in new credit and that means that companies are considering expansion,” Kuenl noted. “The cautionary note here would be an increase in rejection of credit applications in the unfavorable indices.”

However, Kuehl noted that the ongoing willingness of creditors to extend terms is a good sign.

“This suggests that there are some good customers with good credit out there," Kuehl said.


Four Countries Receive Higher Risk Ratings

In the last quarter of 2015, Euler Hermes upgraded risk ratings for four countries, which began showing economic growth and improvements.

Côte d’Ivoire showed improvement last quarter as it went from an orange D3 rating to an orange C3. The West African nation’s gross domestic product (GDP) growth is forecast to reach 7%, or higher, in 2016 and 2017. Cyprus also remains a risky country, but improved its red B4 rating to an orange B3. The country lifted capital controls, successfully returning to bond markets with low interest rates, and its GDP is growing.

Economic growth in Honduras is set to remain strong in the coming years, and its country risk rating increased from an orange C3 to a yellow C2. The International Monetary Fund and Honduran government enhanced fiscal and external positions; inflation is contained and the fiscal deficit significantly narrowed. The business environment, however, remains problematic. “Although it performs particularly well with regard to getting credit and trading across borders, important shortcomings remain in enforcing contracts, protecting investors and resolving insolvency,” Euler Hermes says.

Real GDP growth in Ireland is strong, and its risk rating improved significantly from a yellow BB2 to a green A1. Ireland’s fiscal deficit has fallen, and debt sustainability has improved. “The expansion in both manufacturing and service sectors should remain strong, the consumer is likely to continue to benefit from a better economic outlook and external demand for Irish products should remain dynamic thanks to the improved price competitiveness,” Euler Hermes states.

- Jennifer Lehman, marketing and communications associate

New Sanctions Target Iranian Trading Network

One day after the United States lifted decade-old sanctions against Iran, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) designated 11 entities and individuals involved in procurement on behalf of Iran’s ballistic missile program.

The new sanctions target a trading network, which "obfuscated the end user of sensitive goods for missile proliferation by using front companies in third countries to deceive foreign suppliers,” OFAC said. Specifically, the agency sanctioned United-Arab-Emirates-based Mabrooka Trading Co. LLC and its China- and UAE-based network as well as five Iranian individuals.

Tensions between Iran and the United States are far from over, said NACM Economist Chris Kuehl. “At the same time that sanctions are being lifted as part of the nuclear deal, the U.S. has imposed new ones on companies and entities that have been contributing to the Iranian missile program.” Iran has asserted it will “aggressively pursue its legal rights on this program,” Kuehl noted. “The tit-for-tat may be a diplomatic ploy so both leaders of the U.S. and Iran can look tough at the same time that they are making progress toward some real cooperation on the issues that matter the most to them. The U.S. stalls its nuclear program, and the Iranians get to sell more oil.”

In a U.S. Department of Treasury press release, Adam Szubin, acting under secretary for Terrorism and Financial Intelligence, states: “Iran’s ballistic missile program poses a significant threat to regional and global security, and it will continue to be subject to international sanctions. We have consistently made clear that the United States will vigorously press sanctions against Iranian activities outside of the Joint Comprehensive Plan of Action – including those related to Iran’s support for terrorism, regional destabilization, human rights abuses, and ballistic missile program.”

Iran has denounced the new sanctions as having “no legal or moral legitimacy.”

- Diana Mota, NACM associate editor

‘Brutal’ Year Anticipated in the Oil Sector

By now it would seem that everybody on the planet is aware that there has been a collapse of epic proportion in the oil world. A number of factors, however, make this story compelling, and the most important of these is the fact this was so unexpected and unpredictable. Although there is nothing new about oil gluts or the volatility of this market, the past year or so is unprecedented in its extent and severity. It seems that none of the usual rules are being followed and that creates consternation as far as what happens from here. It doesn’t seem logical at first blush, but those who take the long view are really concerned that oil prices could hit all-time highs in the not-all-that-distant future—maybe as high as $200 a barrel if the whole scenario plays out as feared.

The first issue to consider is why reaction to the current glut has been so different. In the previous situations, producers took familiar steps to get prices back up. They cut production. In the last 30 to 40 years, the reduction in output was essentially managed by the OPEC cartel—this was the main reason the cartel was formed in the first place. Major oil states agreed to act in a unified manner to manage the supply and price of oil. As OPEC lost control over the oil world, there was considerably less interest in cooperation and it became every country or producer for themselves. Even without a cartel calling the shots, it would seem logical for producers to reduce output when demand slumps, but there has been a significant change in the way that oil is developed.

The big changes in the oil world have been driven by technology over the last few years and that has changed the strategies of the producer. There is a great deal of investment in oil now, and that makes producers reluctant to halt production even as prices fall—they need the cash flow even if it is significantly reduced. The other change of note is that oil extraction is harder than it once was. Twenty or 30 years ago, an oil producer could essentially turn the spigot on and off. If one wanted to reduce output, it was a pretty simple task, and when the demand went back up, the ramp up was swift. That is no longer the case, as shutting down operations can be costly and getting things back can be even more expensive. Many producers are electing to keep on developing as it is cheaper to sell at a low price now than to try to get back to normal production levels later.

This is the essence of the long-term concern. Producers are going to face a wall sooner than later. They have already elected to halt almost all new drilling and even exploration. There is far too little profit to be made to justify any additional capacity. The next step will be to shutter current production in an attempt to dry up supply. Unfortunately, these closures will not be strategic or organized—this will be businesses and operations failing and leaving the market altogether. If this happens enough, there will soon be too few producers to handle future demand. The situation will reverse and in a hurry. The demand will not be met, and suppliers will not be able to rush back into business and the glut suddenly reverses and becomes a major shortage—hence the fear of $200 a barrel oil.

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

Global Service PMI Falls for 11th Month

Growth in the global service sector fell to an 11-month low, mainly due to weaker economies in the United States and China, according to a recent news release from JPMorgan and Markit. The JPMorgan Global Services Business Activity Index dropped to 53.1 in December, down from 53.9 in November

“Sector data launched [Jan. 6] provides useful insight into the key drivers of the slowdown, which was largely the result of a reversal of fortunes for the consumer services sector,” explained David Hensley, director of global economic coordination at JPMorgan. “In contrast, the performances of the business services and financial services sectors remained solid in comparison.”

In the U.S., the PMI survey showed its service sector losing momentum, pushing the overall rate of economic expansion down to its weakest for the year, noted Markit Economist Chris Williamson. While the economy grew by 1.9% in the fourth quarter, the weakness seen last month has raised concerns that growth is not strong. “The survey also signals robust employment growth, but likewise suggests the pace of hiring has slowed since earlier in the year as businesses have become more cautious in the face of worries such as the forthcoming elections, the strong dollar, global growth jitters, and the outlook for interest rates,” Williamson said.

In the U.S., output expanded at its slowest pace; in China, growth was only marginal. Brazil, Russia, and Hong Kong, however, saw a significant decline in output, and France fell back into contraction. The United Kingdom, eurozone and Japan saw similar rates of output expansion from the previous month.

The U.S., eurozone, U.K. and China all saw a rise in staffing levels, while Hong Kong and India were unchanged. Brazil and Russia, however, cut back sharply on staffing levels.

According to the Jan. 8 Markit Global Sector PMI, metals and mining posted the steepest drop in production in three years. On a whole, global growth in 2015 was driven by finance, food and drink, pharmaceuticals and hi-tech services.

- Jennifer Lehman, NACM marketing and communications associate

Singapore's Fragile Growth Signifies Weakened Global Trade

Despite strong real gross domestic product (GDP) growth during the fourth quarter, Singapore’s economy remains fragile with 2015 representing the weakest year for growth since 2009, according to Wells Fargo Economics Group. While GDP increased by 5.7% in the final quarter of 2015, Singapore’s real GDP only grew by 2% on a year-over-year basis.

The country’s manufacturing sector impacted overall economic growth, with output contracting for the third straight quarter. “Weakness in industrial output primarily reflects Singapore’s exposure to the slowdown in global growth and trade activity, as much of the country’s manufactured output is ultimately exported,” the Jan. 4 report states.

Construction output recovered after contracting in the third quarter, but only increased 2.2% from last year. The service sector, however, is stable and increased 3.2% from a year earlier. “The relative resilience in service sector output despite contraction in manufacturing activity is an encouraging development, and one that has been echoed in several other large economies, particularly in China and the United States,” according to Wells Fargo.

Overall consumer price index (CPI) is negative and slow growth over the past year has given way to an absence of inflationary pressures in Singapore’s economy. This gives the Monetary Authority of Singapore the ability to reduce its target pace of appreciation for the country’s currency. “Relative to the U.S. dollar, the Singapore dollar has actually depreciated roughly 7% over the same time period,” reads the report. “With the Federal Reserve expected to continue increasing the federal funds rate in the coming quarters, [we] expect the Singapore dollar to see gradual declines vis-à-vis the greenback in the year ahead.”

- Jennifer Lehman, NACM marketing and communications associate

2016 Starts with Cold Reminder of Chinese Slowdown’s Grip

The year has started with another Chinese market meltdown that has many thinking of the collapse last September. The data released this week came in weaker than expected, especially in the industrial sectors.

That has triggered the worst stock slide in nine years. The motivation for the collapse was the fact the manufacturing sector shrank for the fifth consecutive month despite expectations of better news given all the stimulating that had been attempted by China's government. The global markets have all been reacting.

The sense is that markets will be back to more normal levels in the days to come but that is not a certainty. Countries that export to China are getting very nervous, and those that buy are fully expecting the country to start getting far more aggressive as far as their exports are concerned.

All of this is making for a lot of uneasiness as the year starts. The cascade of reactions will affect the United States and Europe somewhat indirectly. If the Chinese buy less from states like Australia, the Aussies will buy less from the U.S. and Europe in turn. It’s a pattern that could be repeated with any nation that has depended on Chinese demand for its own growth. The main reason for the sudden fear is that China has been trying to punch up its growth in the last few months—these attempts have not been that successful

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