Recovery in Central and Eastern Europe Fueling Local Telecom Earnings Rise

A regional recovery underway in Central and Eastern Europe is boosting household spending and consumer confidence that will allow telecom providers to outpace their Western European counterparts in credit quality and revenue and earnings growth into 2018.

"Strong regional economic recovery is fueling household demand for telecoms services, such as smartphones and mobile data, driving revenue and earnings growth, improving credit quality and attracting M&A interest,” said Alejandro Núñez, vice president and senior analyst at Moody's Investors Service. “The pace of these improvements will eventually slow, but will continue for at least the next 18 months."

The ratings firm anticipates several telecoms in the region will see an average of 3.5% revenue growth this year and next, based on the sector’s being a less-mature market than in Western Europe as regards service penetration, pricing and usage. “CEE telecom markets have had more scope to expand their networks and increase the penetration of new services such as 4G mobile and Internet Protocol television (IPTV) services,” Moody’s analysts said. Prices in Central and Eastern Europe also lag behind those in Western Europe—from 44% in mobile voice revenue per minute to 14% in mobile data.

This growth potential is fueling M&A interest among foreign buyers, particularly in Poland, Moody’s said. “This trend will continue most likely in the form of in-market cable-to-mobile deals or foreign firms acquiring or merging with CEE operators.”

Earnings volatility for the sector is also likely to decrease as many telecom companies in the region have lowered foreign exchange risk over the past year by refinancing euro and U.S. dollar bonds with local-currency-denominated bank loans, analysts said.

– Nicholas Stern, senior editor

Clearing, Settlement Services Highly Vulnerable as Cyberattacks Threaten Financial Institutions

Cyberattacks against financial institutions have become an increasingly important risk factor, and institutions that provide trade execution, clearing and settlement services are more vulnerable to attacks aiming for system disruption because of their interconnectivity with the financial system.

“Cyber risk is a growing threat that can adversely affect credit ratings as attacks can compromise customer data and disrupt websites, with detrimental financial or operational consequences for individual issuers and financial systems,” said Fitch Ratings analysts in a recent report. “Related reputational damage may weaken business and access to funding and capital markets.”

In the U.S., the chair of the Securities and Exchange Commission has said cyber-security poses the biggest risk to the financial system. Under the European Union’s General Data Protection Regulation, which takes effect in May next year, banks can face fines of up to 4% of their global turnover for security breaches; any organization that uses data from EU citizens has to comply with the rule. Fitch sees that some organizations, like The International Organization of Securities Commission’s Committee on Payments and Market Infrastructures, are seeking more coordination at the international level to combat the issue. The European Central Bank reports that the average lag until a breach is detected was 146 days in 2016, a drop from 205 days in 2014.

“As information is shared across firms, cyber risk detection and response plans could improve, but coordination does not ensure that risks can be fully contained,” Fitch notes.

The use of cyberinsurance to mitigate some of the damage from cyberattacks is on the rise, reaching about $1 billion in premiums in 2015 and expected to continue growing, though protection against reputational damage is more difficult to protect against, Fitch says.

– Nicholas Stern, senior editor

SWIFT Addresses Allegations of Service Bureau Hacking

SWIFT, the financial messaging service, has said in a press release that there is no indication that its network or core services have been compromised amid allegations that two services bureaus may have been targeted to gain unauthorized access to bank customers’ data.

As reported by Reuters, a hacking group calling itself the Shadow Brokers recently released allegations that service bureaus in the Middle East and Latin America may have been compromised by third parties. The allegations date back several years. Service bureaus are third-party providers that operate a connection to SWIFT for firms that wish to outsource their day-to-day operation of the SWIFT connection. In its release, SWIFT said that it is in close contact with the service bureaus in question to ensure that they are implementing appropriate preventive measures.

SWIFT recommends that customers pay close attention to their own security and keep in mind security issues when choosing a service bureau or other third-party provider. The effects of any vulnerabilities can be mitigated by immediately installing security updates and patches. SWIFT is working through its Customer Security Programme to provide tools and guidance about security to its customers and will keep customers updated through its Security Notification Service.

SWIFT said that there has been no impact on its infrastructure or data and that there is no evidence to suggest that unauthorized access has occurred to its network or messaging services.

Service bureaus must register under SWIFT’s Shared Infrastructure Programme (SIP), which outlines the legal, financial and operational requirements with which services bureaus must comply. The SIP should not be considered a substitute for customers to perform their own security checks and due diligence, the messaging service noted.

– Adam Fusco, associate editor

Small Fabricators and Manufacturers Optimistic about Future in New Survey

Many small- to medium-size job shops surveyed for the latest Fabricators and Manufacturers Association’s Forming and Fabricating Job Shop Consumption Report have an optimistic outlook lately and believe some significant impediments to business progress may be removed and that some of the stimulating efforts will bear fruit.

A whopping 61.9% of those surveyed see improving conditions for the coming quarter and another 34.3% expect things to be about as they are now. Only 3.7% expect things to get worse. This is the most confident the sector has been in a while.

Still, the survey found capacity utilization is on the low side, just short of 70%, which indicates slack in the system, though when looking at the anticipated capacity, there is a general sense that companies will be adding to it. That may mean more slack in the short term, but should mean less in the way of shortages and bottlenecks later. But generally, the survey respondents are staying connected to their capital equipment strategies as 57.4% indicate that nothing has altered their plans and they intend to buy what they had intended to buy. About 18% have delayed their original plans by a quarter or two and 24.6% have set their plans on the back burner indefinitely. There is tremendous variability between sectors, however. Those feeding into the agricultural community are seeing very low demand while medical manufacturing thrives. Automotive and aerospace are not as vibrant as they have been.

In the manufacturing community, the level of real confidence is reflected in data such as new orders. The survey this month shows that 44.7% of the respondents are reporting more in the way of new orders and another 41% are reporting that this activity has been stable. Only a little over 14% of the responses indicated a decline in new orders. That suggests that there is more expansion in the manufacturing sector overall and that it is expected to expand further into the year.

Hiring has also seen progress and stability, but there are some factors to take into consideration that affect these numbers and have for some time. The survey reports that over 27% expect to do additional hiring while just over 68% are staying right where they are as far as hiring is concerned. That means that only 4.5% of the respondents plan to reduce their workforce. This is as low a level as has been seen in the last few years. The wrinkle in all this is that most of the manufacturers are struggling to find qualified people to hire. The pipeline as far as talent is empty. Companies really have no alternative but to poach one another’s employees, which generally means that labor costs will rise steadily as companies try to lure the people they want and need.

Beyond hiring, the next biggest expense is raw material costs. Here, the key factors are generally the price of steel and aluminum. The survey reports that the vast majority of respondents see prices for both metals coming up. In general, the commodities suppliers have been trying to adjust to reduced demand over the last few years—they have limited output as a means to hike prices. The tactic has worked pretty well and the hope is that more production can be spurred when and if there is a boost in overall demand.

The cost of transportation and logistics has also been a factor when it comes to overall expenses, but there hasn’t been all that much movement. The percentage of respondents that report more logistics costs is 29.3% and most have indicated that these costs have been stable—over 70%. Not one respondent reported that these costs are going down. Rail costs have been more stable than trucking costs and there has been some reduction in the costs of ocean cargo due to the overcapacity issue facing maritime shipping. There is also a great deal of regionalism in logistics, in part due to the fluctuating costs of fuel and overall operating expenses. Just as with manufacturing, there has been a shortage of manpower in transportation. It is estimated trucking companies are short some 80,000 drivers this year alone.

– Chris Kuehl, Ph.D., NACM economist

Leveraged U.S. Corporates May Face Challenges from Rising Rates

Rising interest rates may translate into downside risk for some U.S. corporate sectors. The credit profiles of U.S. corporates are generally insulated from rising rates, but lower-rated issuers are more vulnerable, according to a new report from Fitch Ratings.

The ratings agency does not see significant interest rate risk across speculative-grade credit profiles, even in a severe stress scenario, but a rising rate environment may limit the margin of error available to corporates that are undergoing material acquisition or in the midst of adjusting their business models. This is particularly true for those that are highly leveraged. Poor execution of cost-saving programs and key initiatives, for example, may hamper a cash flow profile that is already weak if coupled with rising rates. Negative rating actions may result.

The retail sector, with high floating-rate debt exposure, is vulnerable to interest rate risk if the benefits of a growing economy are offset by secular challenges, Fitch said. Diversified manufacturing, which likewise has high floating-rate exposure, could see improved demand, though external factors such as an increase in trade restrictions could weigh on costs and hamper growth. Sectors with low floating-rate exposure like telecom face their own challenges from a competitive environment.

The stable outlook for U.S. corporates for this year supports the view that rates rise in response to increasing inflation during an economic recovery, Fitch said. Since companies have been proactively managing maturity profiles, modest rate increases, without an increase in spreads, would not impact interest rate expense in the near term. Investment-grade corporates are less vulnerable to rising rates. Fitch estimates that its portfolio of speculative-grade corporates has an average of 52% of floating-rate debt compared to 15% for investment grade.

– Adam Fusco, associate editor

China’s GDP Climbs in First Quarter with Strong Housing, Construction Sectors

Chinese GDP for the first quarter beat economists’ consensus forecast, buoyed by the nation’s secondary industry comprised of mining, manufacturing, construction and utilities production.
GDP in China grew 6.9% in the first quarter of the year, continuing a slight upward trend over the last three quarters, according to an analysis by Wells Fargo’s Jay Bryson, global economist, and E. Harry Pershing, economic analyst.

The country’s secondary industry climbed 6.4% year-over-year, following 6.1% the prior quarter, and accounts for about 40% of the value added in the Chinese economy, the analysts said. The nation’s primary industry, including the agriculture, forestry and fishing sectors, slowed to 3.0% in the first quarter from 3.3% the prior quarter. Growth in China’s service sector also decreased slightly to 7.7% from 7.8% the prior quarter.

“Strength in the secondary sector can partially be attributed to a rebound in overall investment spending, which increased 9.2% in March—its highest year-over-year rate of growth since May of last year,” the analysts said. Meanwhile, investment in the Chinese housing sector has similarly grown—by 8.9% in February. “The turnaround in housing investment has seemed to provide a boost to the construction sector, which is contained in the secondary industry. Although we do not expect housing investment growth rates to return to the 30% rates we witnessed during 2010–2011, continued government support for lending should buoy investment in the sector and for the foreseeable future.”

Also, China’s foreign exchange reserve woes, which saw reserves decline from nearly $4 trillion in mid-2014 to about $3 trillion today, have eased somewhat after modest increases in February and March, Wells said.

– Nicholas Stern, senior editor

Asian High-Yield Bond Issuance More than Doubles in Q1 2017

Asian high-yield bond issuance is at its highest level in four years. This has paved the way for “stronger liquidity profiles and manageable levels of refinancing risk,” according to Moody’s Investors Service. The first quarter of 2017 was more than double the last quarter of 2016, said the ratings agency.

There were 26 deals totaling $10 billion during the first quarter of this year, which is the highest level of issuance since the first quarter of 2013, when it was at more than $12 billion, said Annalisa DiChiara, a Moody's vice president and senior credit officer, in a news release. This was “driven by investor tolerance for lower credit quality and active refinancing by issuers," she added.

Refinancing risk will stay at a manageable level, “and the market is well positioned to absorb upcoming maturities which total [$127 billion] in rated and unrated bonds from now through to 2021," DiChiara said. The fourth quarter 2016 issuance was at $4.5 billion, and “50% of the [$10 billion] issued in Q1 2017 was rated at B3—a record amount of issuance at this level,” said the release.

The Asian nonfinancial high-yield corporate default rate will also stay low, according to Moody’s, at around 3% this year, while “most Asian high-yield corporates currently show good or adequate liquidity.”As of the last day of March, Moody’s covered 123 Asian companies in its high-yield portfolio with nearly $67 billion of rated debt outstanding.

The March Asian Liquidity Stress Index was at its lowest since September 2015, but the long-term average of the index shows “the ongoing weakness in liquidity for many issuers in Asia,” said Moody’s.

– Michael Miller, editorial associate

U.S. AAA Rating Affirmed by Fitch

With its financing flexibility and its prominence as having the most liquid capital markets in the world, the United States has earned an affirmation of its AAA rating and stable outlook from Fitch Ratings.

According to Fitch, the U.S. economy is one of the most productive and dynamic and is supported by strong institutions and a favorable business climate. The U.S. is the issuer of the world’s preeminent reserve currency, which accounts for nearly two-thirds of global reserves.

Uncertainty remains, however, over the short-term fiscal and borrowing outlook, but Fitch expects tax cuts to lead to a loosening in fiscal policy. The U.S. government debt burden is a relative credit weakness in comparison to other AAA-rated sovereigns, Fitch said. A tax reform proposal may lead to an increase in deficits over a 10-year time span, though the plan would aim at boosting investment and growth. Tax cuts are not likely to lead to a lasting boost in growth, however, Fitch believes.

The ratings agency has revised its real GDP growth forecast for the U.S. to 2.3% for next year and 2.6% for 2018. Trade protectionism and checks on immigration would be negative for growth in the medium term. Fitch expects the Federal Reserve to continue to raise interest rates, with two more 25 basis point increases in 2017 and four in 2018, with no major effects on credit growth.

Fitch does not anticipate any developments that would lead to a downgrade in the stable outlook for the United States. Developments that may lead to negative rating action, however, include 1) a significant increase in government deficits and the debt-to-GDP ratio, and 2) a deterioration in the credibility of economy policy or a shock that affects the U.S. dollar’s role as the foremost global currency.

– Adam Fusco, associate editor

New Chinese Bond-Tightening Rules Should Ease System Risks

A recent announcement by Chinese regulators to tighten the rules surrounding the use of corporate bonds as collateral should help reduce systemic risks, but it is also a credit negative for onshore issuers and borrowers. The rule changes effectively reduce the pool of bonds eligible to serve as collateral for repurchase agreements or repos, which should curb the growth in system-wide leverage that the rapid development of the repo market has helped engender, according to a new Moody’s Investors Service report.

“The new rules are aimed at controlling leverage in China's financial markets and should therefore reduce systemic risks,” said Nino Siu, a Moody's vice president and senior analyst. “And, by restricting the use of collateral to high-quality bonds, the new rules reduce the likelihood that defaults on lower-rated bonds could bring about a rapid contraction in the supply of credit, in the event that they cause lenders to reassess the risks of collateralized lending.”

On April 7, the China Securities Depository and Clearing Corporation Limited (CSDC) announced that, starting April 8, only newly issued corporate bonds with onshore issuer ratings/bond ratings of AA/AAA, AA+/AAA and AAA/AAA can be used as collateral in a repurchase agreement. Bonds issued or announced with a prospectus on or before April 7 are not affected by the new rules.

This change should enhance the regulation of the credit risks in the repo market that has more than doubled since March 2015 to about $3.25 billion by the end of this March, analysts said. About 34% of all corporate bonds in the onshore exchange-traded market in China are AAA-rated by onshore rating agencies. That means borrowing on the remaining lower-tier bonds available in the onshore market will become more difficult. Also, more borrowers tend to look for non-AAA-rated bonds at the short end of the duration curve. “The loss of repo eligibility for non-AAA-rated bonds will therefore boost the liquidity premium of such corporate bonds and result in a wider yield differentiation between AAA and non-AAA-rated bonds, raising funding costs for lower-rated issuers,” Moody’s said.

– Nicholas Stern, senior editor

Small Business Owners Remain Optimistic

A surge in small business optimism that started last November was continued in March, according to the National Federation of Independent Business’ (NFIB) Small Business Optimism Index. Though the index slipped slightly, it still posted a strong reading, with gains in actual earnings, capital expenditure plans and job-creation plans. Sales expectations, however, dropped eight points, signaling that the index could be moderating.

“Small business owners remain optimistic about the future of the economy and the direction of consumer confidence,” said NFIB President and CEO Juanita Duggan. “We are encouraged by signs that optimism is translating into economic activity, such as capital investment and job creation.”

The Uncertainty Index, which is a subset of data on how small business owners foresee the near term, saw a significant increase, the NFIB said. It reached its second-highest reading in the survey’s history in March. Most of the March data was collected before Congress failed to pass a bill repealing and replacing the Affordable Care Act, NFIB noted, adding that the optimism of the past five months was in part due to small business owners’ expectations of a reversal in some government policies. Duggan said that the index’s April data, due in May, will better indicate how owners are processing events in Washington.

“By historical standards, this is an excellent performance, with most of the components of the index holding their gains,” said NFIB Chief Economist Bill Dunkelberg. “The increases in capital expenditure plans and actual earnings are signs of a healthier economy, and we expect job creation to pick up in future months.”

Small business owners are having a hard time satisfactorily filling open positions, however, which will be a headwind to job growth, the NFIB said. The reports correlate with hard data on a tightening labor market and a gradual pickup in wage growth, Wells Fargo noted.

– Adam Fusco, associate editor

Supreme Court Summarily Vacates Fifth Circuit Decision Upholding Texas Surcharge Prohibition

On March 29, 2017, the United States Supreme Court issued its long-awaited decision in Expressions Hair Design, et al. v. Schneiderman, holding that New York’s prohibition against surcharging credit card transactions is a regulation of commercial speech and remanding the case to the Second Circuit Court of Appeals for further consideration as such.

On Monday, April 3, 2017, the Supreme Court ruled on petitions for certiorari in the two other surcharge-related cases that were pending before it.

In Rowell, et al. v. Pettijohn, a group of merchants sought review of a decision by the Fifth Circuit Court of Appeals, which, like the Second Circuit in Expressions, held in early 2016 that the Texas surcharge ban is a constitutionally permissible regulation of pricing.  On Monday, the Supreme Court granted the merchants’ petition, summarily (i.e., immediately and with no further briefing or argument by the parties) vacated the Fifth Circuit’s decision and remanded the case back to the Fifth Circuit for further consideration in light of the Supreme Court’s holding in Expressions.

In Bondi v. Dana’s Railroad Supply, et al., the Florida attorney general sought review of a decision by the Eleventh Circuit Court of Appeals, which held in late 2015 that Florida’s surcharge ban is a facially unconstitutional regulation of merchants’ speech.  The Supreme Court denied the state’s petition for a writ of certiorari, leaving the Eleventh Circuit’s ruling intact.  As a result, the Florida surcharge ban has effectively been overturned in its entirety.

Denial of certiorari in Dana’s means the Supreme Court will not have an opportunity to provide further guidance on the application of the commercial speech doctrine to credit card surcharge bans unless and until another case—possibly even Expressions or Rowell, depending upon the outcome in those cases on remand—comes up from the courts of appeals.  However, the Dana’s decision at least suggests that the Supreme Court is receptive to the Eleventh Circuit’s reasoning, and is a knockout punch for Florida merchants, whose surcharging fight is now over unless and until the Florida legislature decides to craft a new surcharge ban.

– Bruce Nathan, Esq., and Andrew Behlmann, Esq., of Lowenstein Sandler LLP

U.S. Unemployment at Its Lowest in 10 Years

The U.S. unemployment rate is at its lowest figure in nearly 10 years. The rate dropped to 4.5% in March from 4.7% in February, according to the latest release from the Bureau of Labor Statistics (BLS). The unemployment rate is also the lowest it has been since May 2007, when it was at 4.4%. The rate has been under 5% for 11 months straight. On a year-over-year basis, the unemployment rate was down half a percentage point.

Total nonfarm employment increased by 98,000 jobs in March after increasing by 435,000 jobs in January and February. There were an additional 6,000 construction jobs in March compared to 59,000 new jobs in February. This was the lowest increase in construction jobs in seven months, according to the Associated Press. This is likely in part to the warmer-than-normal weather in February across the country.

“Employment in construction has been trending up since late last summer, largely among specialty trade contractors and in residential building,” BLS said. Meanwhile, manufacturing and wholesale trade were among the other major industries with little or no change in March. Construction unemployment was down to 8.4% last month compared to 8.7% a year ago, and the number of unemployed workers was down 4,000.

As much as better-than-usual weather in February is to be credited for job gains, less-than-favorable weather was a factor for the swing and miss on growth in March. It was expected the economy would add 180,000 jobs with an unchanged unemployment rate, according to economists polled by Reuters. Economists surveyed by Bloomberg also expected an increase of 180,000 jobs.

– Michael Miller, editorial associate

Fitch’s Retail Loan Default Rate Climbs

Fitch Ratings has increased its U.S. retail trailing 12-month (TTM) loan default rate on the back of Payless ShoeSource’s bankruptcy filing on April 4. The ratings agency expects the rate to go much higher from continued challenges in the retail sector.

The loan default rate fell to 0% in March after reaching a level of 0.5% in February. Fitch expects the rate to hit 9% over the next 12 months, equaling about $6 billion in defaults, due to increased discounter and online penetration as well as a shift in consumer spending toward services and experiences. The vicissitudes of brand popularity are also a factor in the competitive retail environment that has seen negative cash flow, tight liquidity and unsustainable capital structures, according to Fitch.

Payless was on Fitch’s Loans of Concern list. Eight other retailers on the list with a significant risk of default include Sears Holding Corp., Gymboree Corp., Nine West Holdings Inc. and rue21 Inc.

Payless’ Chapter 11 filing was intended to facilitate a balance sheet debt restructuring and operational overhaul. It intends to emerge as a smaller concern. Liquidation sales are planned for 400 out of 4,400 underperforming stores that are pegged for permanent closure. To reduce debt by 50%, the company has entered a plan support agreement with parties that hold about two-thirds of its first-lien and second-lien debt.

– Adam Fusco, associate editor

Credit Quality for Public Firms Grew in March, but Watch for Longer-Term Default Risks

Overall corporate credit quality improved in March as the Kamakura Corporation’s troubled company index decreased from the prior month. The troubled company index was at 8.15% in March and at the 81st percentile of historical credit quality (with 100 being the best of all time) from January 1990 to the present.

The index reflects the percentage of the Kamakura 38,000 public firm universe that has a default probability over 1.00%. A rising index indicates declining credit quality and vice versa. The percentage of the firms tracked by the index with default probabilities between 1% and 5% decreased in March, as did the percentage of firms with default probabilities between 5% and 10% and those with default probabilities over 20%. Those companies with default probabilities between 10% and 20% were mostly flat for the month. Overall volatility in the numbers was low as well.

Trade creditors should continue to watch for signs of distress coming from troubled retailers, as the two tracked American defaults in March were discount retailers Gordman’s and HHGregg, Kamakura said. During March, there were 18 overall defaults tracked in the index, with four from Brazil, three from Russia and two each from Australia, Great Britain and the U.S. Among the 10 riskiest rated firms, five were from the U.S., two from Great Britain and one each from France, Greece and Spain. Walter Investment Management Group was the riskiest rated firm with a one-year default probability of 15.02%, up 6.54% from the prior month.

Over the longer term, Kamakura analysis shows default rates dramatically expanding on the five- to seven-year time horizon, even for blue-chip firms. This expansion is particularly significant given new issuance of high-grade debt in the five- to seven-year window both in 2016 and 2017, said Martin Zorn, president and COO for Kamakura Corporation. Kamakura’s anticipated 10-year cumulative default rate among 2,577 rated firms is 13.44%, higher than the 13.33% rate expected in September 2008 when Lehman failed.

“One of the risk management lessons learned during my tenure at the Winston-Salem-based Wachovia was that excellent credit management was earned through portfolio management and the early identification of problems,” Zorn said. “The term structure of default is a critical tool in the early identification of potential future problems.”

– Nicholas Stern, senior editor

Kamakura Chairman and CEO Donald R. van Deventer, Ph. D., will speak about using big data and computer power to supplement careful credit analysis at NACM’s 121st annual Credit Congress & Expo in Dallas, TX, June 11-14.

Moody’s Database Reveals Insights into Corporate Debt Structure

Analysis of data from a database of debt instruments from Moody’s Investors Service may yield helpful insights ahead of the next economic downturn. The data reveals how default types change over time, how recoveries differ depending on the instrument’s position in a company’s debt structure and whether private-equity ownership influences recovery rates.

Moody’s Ultimate Recovery Database traces close to 5,500 debt instruments from more than 1,100 defaulted U.S. companies whose total liabilities recently exceeded $1 trillion, the ratings agency said in a new report. The database spans the years from 1987 to the end of 2016 and includes U.S. nonfinancial corporate borrowers, both rated and unrated by Moody’s, that had more than $50 million in debt at the time of default.

“Our database includes information gathered during the 2008–2009 recession and shows that it featured a higher percentage of distressed exchanges than did previous downturns,” said Moody’s Vice President David Keisman. “Distressed exchanges accounted for about 15% of defaults between 1987 and 2007, but that figure has since risen to almost 50%.”

The data reinforces the importance of a debt instrument’s position in a company’s capital structure and the amount of debt cushion beneath it, with a positive correlation between debt cushion and ultimate recovery rates, Moody’s said.

“Recoveries are also influenced by current default rates, but industry rarely matters,” said Moody’s Associate Analyst Julia Chursin. “Losses are exacerbated during default peaks and are less pronounced during more benign credit cycles. On the other hand, there is relatively little variation in firm-wide recovery rates among industries, and so no observable relationship between the recovery rates of asset-heavy and asset-light industries.”

Private-equity ownership affects the type of default and the recoveries on certain kinds of debt, but has little influence on firm-wide recovery rates. Higher losses for junior creditors result from the prevalence of distressed exchanges, prepacks and bank debt in the liability structures of private-equity defaulters, Moody’s said.

– Adam Fusco, editorial associate

Construction Spending at Nearly 11-Year High

Construction spending is on the rise according to the latest monthly release from the U.S. Census Bureau. February’s seasonally adjusted rate was at $1.19 trillion, up nearly 1% from the revised January estimate of $1.18 trillion. Construction spending is at its highest level since April 2006 after it had declined the previous two months. A spending rebound of 1.1% was expected, said economists polled by Reuters.

The data is collected through surveys in all 50 states and Washington, D.C. They gather information on four construction types: privately owned nonresidential construction, state and local construction, privately owned multifamily, and federal construction projects. It estimates the cost of labor and materials and contractor’s profits, among other items.

On a year-over-year basis for February and the first two months of 2017, total construction spending was up 3%. The latter works out to be a positive difference of nearly $5 billion. Meanwhile, private construction saw a spending increase of 0.8%, or about a $7 billion increase from January. Public construction spending saw a smaller rise of $1.6 billion in February. Educational and highway construction also increased from January to February.

Total private construction jumped nearly 7% from February 2016 to February 2017 while total public construction spending dropped 8% over the same time period. Residential construction spending moved upward more than 6%, but nonresidential spending only increased 1%. A main reason for the small increase was due to a nearly 30% drop in sewage and waste disposal spending and an almost 20% dip in conservation and development spending over the year time frame.

Within total public construction, power spending slipped more than 36% from February 2016 and over 11% from January 2017. Total nonresidential lodging, office and commercial spending each saw major breakthroughs from February 2016 despite little or no change from January 2017.

“The construction sector hasn't been on fire but continues to post passable numbers, and momentum may begin to build at least for the housing sector as permits for both single- and multifamily units are on the climb,” according to Econoday. “Construction spending is a good indicator for the economy’s momentum,” said the economic website.

Warmer weather in February helped construction start earlier this year, but late winter weather could cause a fallback in March, said Wells Fargo. Data for March will be released by the Census Bureau on May 1.

– Michael Miller, editorial associate

Sunnier Skies May Be in the Offing for Brazil

Though it has yet to emerge from a recession that is now two years in the running, Brazil’s economy might be set to enter positive territory this year, with both private consumption and investment driving growth.

It’s doubtful that the rebound in production will be vigorous, however. According to a report from Euler Hermes, investment has plunged by over 10% and has been the worst-performing component in 2016. Imports have contracted and private and public consumption have decreased. But the fall in GDP has moderated, and indicators for confidence and production that dropped heavily last year are now evening out.

A quick fall in consumer prices enabled Brazil’s Central Bank to cut its key policy interest rate for the first time in four years. More cuts are expected throughout this year to prompt growth in the economy.

Businesses and households have accumulated debt below that of other emerging economies. Public debt continued to rally and escalated to about 74% of GDP compared to an average of 47.5% of GDP for emerging economies. Brazil is allowed to hold this level of indebtedness because it is a one of the best in regards to reserve adequacy, the credit insurer said.

Some domestic banks and local governments in the country may see some negative effects from the “Carne Fraca” (Weak Meat) investigation into corrupt practices in Brazil’s protein industry, according to Fitch Ratings. Long-term risks from the investigation are expected to be limited as long the investigation does not spread from those plants already implicated. If the meat sector were to undergo a wider risk scenario, public sector banks would likely be more exposed, the ratings agency said.

– Adam Fusco, associate editor

Supreme Court Determines New York Credit Card Surcharge Ban Regulates Speech

On March 29, the United States Supreme Court issued its ruling in Expressions Hair Design et al. v. Schneiderman, in which a group of retailers challenged New York’s prohibition on credit card surcharges. The challenged New York statute, N.Y. General Business Law § 518, provides that “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means.”

Prior to 2013, Visa and MasterCard rules mostly prohibited U.S. merchants from imposing surcharges for credit card payments, rendering the New York statute essentially redundant. However, as a result of a massive 2013 antitrust settlement (which was recently overturned by the Second Circuit Court of Appeals and is in the process of being re-engineered), Visa and MasterCard amended their rules to permit merchants to surcharge credit card payments, bringing the New York statute and similar laws in a handful of other states back into the news—and in several instances, into court.

The Expressions plaintiffs sought to enjoin the New York Attorney General from enforcing § 518 against them, arguing that the statute violates the First Amendment by regulating how they can communicate prices to their customers. Rather than raising prices across the board and offering a discount for cash payments, the retailers wanted the ability to maintain and post their usual, single prices, but charge an additional fee for credit card payments to properly reflect the added costs imposed by the credit card networks.

The merchants prevailed in the United States District Court for the Southern District of New York, which held that § 518 is unconstitutional because, among other infirmities, the statute impermissibly regulates merchants’ speech by drawing an arbitrary distinction between the words “discount” (which was permissible) and “surcharge” (which was forbidden) even though the economic underpinnings of both are essentially the same.

The Second Circuit Court of Appeals reversed the District Court, holding that § 518 is not unconstitutional because it is simply a pricing regulation and because it is “far from clear” that § 518 prohibits dual pricing (i.e., separate prices for cash and credit, as opposed to a single price plus a surcharge for a particular mode of payment). The Supreme Court granted certiorari to review the Second Circuit’s decision.

In the Supreme Court, the merchants waived a facial challenge to the overall constitutionality of § 518, and instead challenged the statute only as it has been applied to them in one particular pricing scenario: posting a single cash price and an additional credit card surcharge (either as a percentage of the price or a fixed amount). For instance, a particular retailer might post the price of a particular item at $9.99 but also disclose that it imposes a 3% surcharge for credit card payments. The Supreme Court agreed with the Second Circuit’s determination that § 518 would bar this type of pricing arrangement. However, the Supreme Court disagreed with the Second Circuit’s holding that § 518 is simply a pricing regulation, holding instead that § 518 regulates speech because it regulates “the communication of prices rather than prices themselves” (emphasis added). Accordingly, the Supreme Court remanded the case to the Second Circuit to consider § 518 instead in the same context the District Court previously did—as a regulation of commercial speech and thereby determine the constitutionality of the surcharge ban as applied to this pricing arrangement.

It is likely, given the Supreme Court’s directive to consider § 518 as a speech regulation, that the Second Circuit will reverse its prior course on remand and will instead uphold the District Court’s determination that § 518 is unconstitutional, at least as applied to the “single price” pricing arrangement described above. The takeaway for merchants accepting credit cards from customers located in New York (debates regarding the applicability of § 518 to business-to-business transactions aside) is that, pending the Second Circuit’s ruling on remand, it is very likely § 518 will no longer prohibit the posting of a single price and the imposition of a surcharge atop that price for payment by credit card.

– Bruce Nathan, Esq., and Andrew Behlmann, Esq., Lowenstein Sandler LLP

Flagging Enthusiasm Could Show Up in Otherwise Strong March Credit Managers’ Index

Flagging Enthusiasm Could Show Up in Otherwise Strong March Credit Managers’ Index
The business outlook from credit managers appears to have stepped back a bit from February’s outstanding showing, according to preliminary data in NACM’s latest Credit Managers’ Index (CMI), which will be released Friday morning at

Expect a slight dip in March’s combined CMI score brought on by questions surrounding an anticipated boom economy. Preliminary CMI data shows trade creditors saw slumping sales and new credit applications, but one should look to weigh these drops against readings from a year ago to get a better sense of the ongoing strength in the favorable categories, NACM Economist Chris Kuehl, Ph.D., said. Also look for a turnabout in recent trends of improving favorable category readings and declining unfavorable numbers.

Rejections of credit applications is another category that looks to show signs of improvement in March and could be significant considering a lower level of applications, he said. Parallels between dollar amount beyond terms and dollar collections readings could foretell some areas for concern going forward. Still, “…it is encouraging to note…” that a couple of unfavorable categories, including accounts placed for collection, look close to reaching a 50 level reading, Kuehl said.

– Nicholas Stern, senior editor

For a complete breakdown of the manufacturing and service sector data and graphics, view the March 2017 report on Friday morning by clicking here. CMI archives may also be viewed on NACM’s website.

Eurozone Sees Best Economic Growth in Nearly Six Years

Economic growth in the 19-country bloc known as the eurozone is at a nearly six-year high, according to IHS Markit. The Markit Eurozone Purchasing Managers’ Index (PMI) increased from 56 in February to 56.7 in March, putting the rating at a 71-month high, dating back to April 2011. The first-quarter average was also the highest since the same quarter in 2011.

The PMI survey is based on information from approximately 5,000 companies. The data includes output and input prices, employment and new orders, all of which saw increases.

Manufacturing input costs and selling prices were at their steepest rates since 2011. Economic growth in Germany was second to only France among the European Union (EU) countries using the euro. Manufacturing jobs in Germany increased at its best rate since summer 2011.

IHS Markit Chief Business Economist Chris Williamson said the monetary union saw its best employment growth in nearly 10 years. The entire area saw its largest monthly employment growth since July 2007. Meanwhile, the Associated Press reported the area’s unemployment rate hovered around 10%. Williamson added the business mood in Europe is positive, even with the forthcoming elections. The PMI also signified a first-quarter GDP growth of 0.6%.

Despite positive growth, EU expansion is not likely, according to NACM Economist Chris Kuehl. He said this is due to immigration and financial concerns surrounding new applicants such as Turkey. Six countries, including Greece, Spain and Italy, have talked about withdrawing. The United Kingdom is in the process of leaving the EU after last summer’s referendum. Nearly half of the 28 European Union members have joined in the last 13 years.

– Michael Miller, editorial associate

China’s Steel Companies May Weaken This Year while Exports Should Shrink

Chinese steel companies are set to weaken this year after realizing gains in 2016, mostly due to weakening domestic demand thanks to excess capacity and inventory buildup last year.

"These factors will together depress steel prices, which have reached a four-year high, while elevated raw material prices and reduced exports will also weigh on the earnings of producers," Jiming Zou, a Moody's vice president and senior analyst, said in a recent report.

Moody’s believes China’s steel exports will decline this year by a high single-digit percentage amount on top of 2016’s decrease of 3.6%. “The decline will be driven by increased trade barriers outside China and a narrowing price gap between the domestic and international markets, which makes exports less attractive,” ratings agency analysts said.

Meanwhile, China’s government has set a goal of reducing steel production by 50 million tons this year, which should help relieve some of the pressure on steel prices and earnings. Fallout from this reduction, when combined with China’s efforts to improve state-owned companies’ efficiencies and productivity, could lead to larger firms buying up smaller ones in the sector.

– Nicholas Stern, senior editor

New Equipment Leasing and Finance Sector Business Volume Down in February, Following 2016 Pattern

New business volume in the equipment leasing and finance sector was down 5% to $5.9 billion in February from the prior month.

Business volume fell 3% year-over-year, according to the Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index, which reports economic activity from 25 companies representing a cross section of the sector. Cumulative new business volume in February was up 0.5%, year to date.

“New business volume during the first couple of months of 2017 continues the sluggish growth pattern that began 2016,” Ralph Petta, ELFA president and CEO, said in a statement. “This slow start belies the business-friendly environment that many business and economic commentators point to in characterizing the new administration in Washington. Credit quality is mixed as well.”

Those surveyed in the index reported receivables over 30 days were 1.50% in February, down from 1.7% the prior month and up 1.40% from a year prior, the ELFA said. Charge-offs were 0.38% in February, down from 0.43% the prior month and up from 0.37%, year-over-year. Total credit approvals were at 74.8% in February, down from 75.4% in January.

Meanwhile, the Equipment Leasing and Finance Monthly Confidence Index (MCI-EFI) for March is 71.1, down from 72.2 in February, but still among the highest readings in the past two years.

“There are indicators of a coming manufacturing renaissance and a plan to reduce federal taxes and regulation,” said Miles Herman, president and COO of LEAF Commercial Capital Inc. “But will all this translate into legislation to justify the postelection optimism? If promised legislative changes come to pass, it’s likely we’ll see that optimism become action.”

– Nicholas Stern, senior editor

Corporate Bond Issuance in China Expected to Make a Comeback

Refinancing needs and plans for infrastructure spending will contribute to the recovery of bond issuance by Chinese corporates through the rest of this year, though market conditions will remain tighter than last year and some companies will face restrictions, Fitch Ratings said in a recent report.

A tightening in the bond market in late 2016 made issuance less attractive, with renminbi bonds by Chinese nonfinancial corporates falling by about two-thirds in the period from December to February, compared with the previous year. Tighter rules on some companies, introduced by authorities to address overcapacity and contain risks from leverage, were also a check on issuance. Fitch does not expect a further tightening of conditions. Highly rated firms are likely to turn back to the bond market rather than going to banks for their borrowing.

Refinancing needs among corporates is high, with bonds worth CHY4.3 trillion maturing in 2017, which is about half of the total issued in 2016. Debt financing will be required for expected infrastructure fixed-asset investment, Fitch said.

– Adam Fusco, associate editor

Countries’ Participation in Global Value Chains Can Lead to Account Surpluses, ECB Study Says

A new study from the European Central Bank (ECB) finds that economies that participate in global value chains more than their trading partners also have larger current account surpluses or smaller current account deficits.

This finding has important policy implications, the ECB said, as it “…implies that persistent deviations from a balanced current account do not, as is often argued, reflect domestic distortions, but are in fact welfare-maximizing outcomes against the background of differences in economies’ competitiveness. As a consequence, policies aimed at narrowing global imbalances should focus on measures that facilitate participation in global value chains.”

However, an economy’s participation in global value chains only affects its current account balance if the former changes relative to that in the rest of the world, the bank concluded.

After the global financial crisis, trade surpluses and deficits declined sharply; G20 economies saw their average absolute current account balance relative to GDP fall to 3.9% in 2015 from 4.7% in 2007. Also, rebalancing in account balances after the crisis was seen in advanced and emerging economies, the ECB said.

In the past couple of years, current account balances in some countries, such as the U.S. and China, have begun to widen again, with the U.S.’s deficit growing and China’s surplus increasing, for instance, though global trade imbalances have remained fairly stable thanks to lower commodity prices, the bank said.

More recently, analysts have detected a slowdown in the prior rise of global value chains. Possible explanations include reductions in the length of companies’ supply chains aimed at improving risk management, the adoption of local content requirements and other regulations, and changes in demand, the ECB explained. Moreover, “the observed slowdown in the fragmentation of production across borders has been a global phenomenon and is unlikely to impact global current account configurations.”

Other findings from the ECB paper:

•    Evidence suggests that the impact of global value chain participation on current account balances is economically significant. For example, about a quarter of the large U.S. current account deficit during the run-up to the global financial crisis that cannot be explained by other fundamentals can be explained by its limited relative participation in global value chains.

•    Participation in global value chains appears to boost growth, amplify cross-country monetary policy spillovers and render an economy’s income distribution more uneven.

– Nicholas Stern, senior editor

Growth Expected for Global Oil Field Services and Drilling Sector

After two years of stress and declining earnings, the global oil field services (OFS) and drilling sector’s 2017 earnings before interest, tax, depreciation and amortization (EBITDA) is expected to grow between 6% and 8%. In a new report, Moody’s Investors Service has revised its outlook on the industry to stable from negative. Recovery is in the offing for oil prices and upstream spending. Signs of optimism are to be found in expected improvements in OFS operating margins and an expansion of upstream drilling budgets.

"While OFS companies will remain stressed in regions with high production costs and excess service capacity, the broader operating environment will become less dreadful as higher energy prices keep spurring U.S. rig activity and stabilizing international markets," said Moody's Vice President Sajjad Alam.

Certain businesses and markets are expected to undergo further declines in revenue and EBITDA, however; recovery will not be uniform. Onshore international markets are expected to stabilize with accelerated oil field activities by the U.S. and Canada, but offshore operations will decline. Analysts expect OFS to regain pricing power by the second half of this year in regards to onshore equipment utilization. Declining investments and project deferrals are likely to continue in the realms of deepwater and ultradeepwater operations.

Furthermore, smaller companies that are specialized or regionally focused continue to face tough business conditions in 2017. More than half of its rated OFS companies have very weak credit quality, Moody’s said. Survival prospects for will be challenged in a slow recovery environment because of the difficulty in repairing balance sheets quickly enough to avoid default.

– Adam Fusco, editorial associate

Smaller Firms in Emerging Markets Impacted by Macro Conditions, RBI Study Finds

Corporate leverage ratios in emerging market economies (EMEs) like India have been on the rise in recent years, and when considered against low global growth, reduced commodity prices and the risk of policy rates rising in advanced economies, they raise policy concerns in such nations.

Corporate leverage in EMEs climbed to about 55% of GDP during 2009 to 2014, from about 49% of GDP from 2003 to 2008, and was accompanied by lower earnings in a weak macroeconomic environment, according to a new study by the Reserve Bank of India (RBI) entitled “Corporate Leverage in EMEs: Has the Global Financial Crisis Changed the Determinants?”

The study essentially evaluated the drivers of corporate leverage in a broad swatch of sectors in Brazil, China, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, South Africa and Thailand before and after the Great Recession.

“Firm-specific factors such as profitability, tangibility, market-to-book value ratio and firm size emerge as important determinants of corporate leverage,” the report’s authors concluded. “Our results imply that firms with more tangible assets found tapping the equity market more lucrative and were thus less leveraged in the pre-financial crisis period. In the post-crisis period, however, tangibility ceases to be a significant determinant of corporate leverage, possibly suggesting that debt-issuing conditions were lucrative for all firms, irrespective of whether they had high or low levels of tangible assets.”

Further, firm size was a significant factor with respect to debt buildup in the post-financial crisis period, implying that larger firms are more leveraged after the crisis. For smaller firms, “…leverage buildup was higher for firms with lower tangible assets but higher growth potential in the post-crisis period, while these factors were not influential in the pre-crisis period. More importantly, in the case of small firms, the coefficients of world GDP growth and the Fed shadow rate are statistically significant only in the post-financial crisis period, which indicates the influence of global developments on small firms in the post-crisis period,” the RBI said. This conclusion is at odds with a more “mainstream” view that firm-level factors are the key factors in determining corporate leverage after the crisis.

“In the face of interest rate and unhedged currency risks, issues relating to the servicing of debt can quickly snowball into a systemic financial stability concern,” the RBI said. “Against the backdrop of recent history, which showed that the deleveraging process is almost always lengthy, costly and painful, the challenges for policymakers include ring fencing their financial sector from possible effects of the deleveraging process.”

– Nicholas Stern, senior editor

Optimism Among Small Businesses Remains High

Small business optimism is at one of its highest levels in 43 years. Anticipation mounts for policy changes from the U.S. government in regards to health care law, tax reform and regulatory relief, according to the National Federation of Independent Business (NFIB) Small Business Optimism Index.

“It is clear from our data that optimism skyrocketed after the election because small business owners anticipated a change in policy,” said NFIB president and CEO Juanita Duggan. “The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.”

Nearly half of small business owners expect conditions to improve in the near term. Though the index fell slightly in February, it follows an increase in January and the largest month-over-month increase in the survey’s history in December, NFIB said.

Recording the first positive reading since early 2015, business owners reporting high sales improved four percentage points. Those expecting higher real sales fell three points, but the category remains positive after a 20-point gain in December.

Capital spending was up, reaching the second-highest reading since 2007. New equipment, vehicles and improvement or expansion of facilities led the items for capital outlays. Small businesses are ready to invest, Duggan said.

“Small businesses will begin to turn optimism into action when their two biggest priorities, health care and small business taxes, are addressed,” she said. “To small business, these are both taxes that need reform. It is money out the door that strangles economic growth.”

– Adam Fusco, editorial associate

FOMC Raises Rates, Potentially Leading to Higher Dollar Exchange Value

The Federal Open Market Committee (FOMC) raised the federal funds rate target by 25 basis points, setting in place a firmer path to raise rates three times this year.

By raising rates in March, the FOMC steers clear of the complications to raising rates later that an unforeseen event, like a surprise French election, could bring, said Wells Fargo Chief Economist John Silvia.

The FOMC anticipates minimal changes to real GDP growth and inflation in the near term. “Meanwhile, in our view, the FOMC’s full employment target has been more or less met. One of the three FOMC policy pillars is that policy should look forward,” he said. “We expect the FOMC to work on this pillar as an improving economy pushes inflation toward the Fed’s two percent goal.”

On a global scale, the U.S. rates act as a benchmark for global investors “… as changes in U.S. rates alter yield spreads between sovereign debt returns as well as defining exchange rate risk between countries,” he said. “With out-of-sync economic cycles, the actual and expected interest rate/growth differentials for the U.S. support the case for the dollar’s increase in value over the last six months as well as a further increase over the next six months.”

Elsewhere around the world, central banks like the European Central Bank and the Bank of Japan aren’t in a position to raise rates, so actions by the Federal Reserve won’t be followed, leading to a higher exchange value for the dollar, Wells analysts said. This in turn will promote financial capital outflows. “China is in a more difficult situation since a stronger dollar would increase bilateral trade imbalances and incentivize further capital outflows—difficult results in today’s context,” Silvia said.

– Nicholas Stern, senior editor

SWIFT GPI Achieves Another Milestone

The Federal Reserve Banks in the United States and The Clearing House have developed local market practices for their participants that use the SWIFT global payments innovation (gpi) service. SWIFT gpi gives to banks the ability to offer faster, more transparent and traceable cross-border payments, with features that include same-day use of funds and end-to-end payment tracking. The service was launched last month.

Because gpi payments carry additional information to flag them as gpi, member banks need a local market practice for the payments to be exchanged through local clearing systems that do not use SWIFT. Now that these practices are in place for the major USD clearing systems, efficiency of tracking will be greatly increased, SWIFT said.

“By using a market practice to include a gpi tracking reference in the Fedwire Funds Service messages they send, our participants that are also SWIFT gpi members can be in a position to extend the benefits of SWFT gpi to funds transfers that are made through the Fedwire Funds Service,” said Nick Stanescu, senior vice president and head of payments product management for the Fedwire Funds Service and the National Settlement Service.

“The Clearing House is pleased to join the world’s payments market infrastructures in providing greater transparency in payments through SWIFT’s gpi initiative,” said Jim McDade, senior vice president of product management at The Clearing House. “Our commitment includes aligning CHIPS formats with the gpi U.S. market practice, which will ensure payments carry the required information needed for the tracking of domestic and cross-border wire payments, from origination through to the credit to the ultimate beneficiary’s account. This transparency will improve efficiency, security and customer service.”

SWIFT will continue to engage other infrastructure communities for future gpi tracking, including the Bank of Japan Financial Network System and SIX’s Swiss Interbank Clearing.

– Adam Fusco, editorial associate

U.K. Business Outlook at Its Highest Since Mid-2015

The United Kingdom is gaining business confidence after seeing a four-year low in October. Data collected in February shows a confidence level of 52% compared to 39% last fall, according to the most recent Markit UK Business Outlook. The less than favorable outlook was partially due to last summer’s referendum that ended with the U.K.’s decision to leave the European Union.

The outlook survey for manufacturing and services is based on responses from about 12,000 providers. Business sentiment is at its highest since June 2015. U.K. manufacturers were 55% confident, which is second to Brazil among the 12 countries rated by IHS Markit. The positive outlook can be traced to improving client demands among other factors.

Private sector firms are more positive about growth prospects for the next year, according to IHS Markit Senior Economist Tim Moore. U.K. private sector companies also saw an 8% increase in employment expectations, which is at its highest since fall 2015. U.K. companies are expected to raise prices at the fastest rate since late 2009, said Moore. Private sector firms expected to increase output prices is at 42%. Firms expected to increase input prices during the next 12 months is at 54%, which is its highest since early 2011.

-Michael Miller, editorial associate

Asia’s Infrastructure Needs $26 Trillion by 2030

Developing Asia’s infrastructure will cost $26 trillion over the next 14 years. The region needs $1.7 trillion per year from 2016 to 2030 to maintain growth momentum and combat poverty and climate change, according to Asian Development Bank (ADB).

The infrastructure projects include transport, power, telecommunications, water supply and sanitation. Nearly $15 trillion will be used for power, while transport will see $8.4 trillion. Telecommunications and water and sanitation will need investments of $2.3 trillion and $800 billion respectively, according to ADB.

In 2009, ADB estimated the annual investment at $750 billion. The reason for the increase can be attributed to using 13 more ADB member countries and updated prices in the current report. More than 60% of ADB’s estimated infrastructure work, or $16 trillion, is for East Asia. The Pacific, as a percentage of the gross domestic product (GDP), led all regions needing investments valued at 9.1% of the GDP.

Philippine President Rodrigo Duterte said he plans to spend $170 billion for 5,000 projects. China recently committed $3.4 billion for three infrastructure projects in the Philippines. Malaysia’s capital city, Kuala Lumpur, is already planning new rail lines. A 720-kilometer railway is also in the works in Indonesia. India’s government said last summer it needs to invest more than $1.5 trillion over the next 10 years for an infrastructure gap and to connect hundreds of thousands of villages with roads by 2019.

– Michael Miller, editorial associate

Long-Term Public Debt Challenge Remains in U.K.

The U.K.’s economy has looked resilient despite predictions of doom and gloom following Brexit, particularly as the Office of Budget Responsibility (OBR) recently updated its growth forecast for 2017 to 2% from 1.4% last fall.

But Fitch Ratings still sees long-term challenges ahead in terms of reducing public debt, and the ratings agency has taken this factor into account in giving the U.K. a negative outlook on its sovereign ‘AA’ rating. The firm also has a dimmer view of the growth it anticipates coming from the U.K. this year and next—1.5% and 1.3%, respectively—as it expects weaker foreign investment stemming from lingering Brexit jitters.

“Currently we assume that the government debt-to-GDP ratio will peak in 2018, but that would still leave the U.K. with one of the highest public debt ratios among highly rated ('AAA' and 'AA') sovereigns,” Fitch analysts said.

Also, the OBR anticipates that general government gross debt as a share of GDP will stay mostly at the same level for the next two years and start dropping in fiscal 2019/2020. “This underlines the scale of the challenge of putting the debt ratio on a downward path,” Fitch said.

– Nicholas Stern, senior editor

Exit Risk Low in Euro Area, but Could Rise This Year

The chance of a country other than Greece choosing to leave the European Union is low, but could increase as the year proceeds due to the rise of anti-EU parties in the area.

In a new report on how euro-area risk is reflected in its ratings, Moody’s Investors Service said that such parties, though unlikely to gain enough electoral support to seek exit from the euro area, might still influence political agendas. The report addresses how the ratings agency would determine that a departure from the union, if followed by a currency redenomination, was a default. Such a scenario would not automatically result in a default. Moody’s said it would focus on changes in the value of debt obligations relative to the original contractual promise. If investors were offered securities of diminished value relative to the original, then it would conclude that a default had occurred.

Exit risk is indicated in Moody’s euro area bond ratings and euro area country ceilings. The country ceilings mainly reflect the risk of a country exiting the union and redenominating all domestic debts into a new, weaker currency.

“Ultimately, the single currency is a political construct that relies on sustained popular support among member states,” said Colin Ellis, chief credit officer at Moody’s. “Any evidence that such popular support was waning in key member states could weigh on popular support elsewhere in the euro area, increasing credit risks.”

– Adam Fusco, editorial associate

Asian Corporate Liquidity Stress at Its Lowest Level Since October 2015

The Asian Liquidity Stress Index (LSI) is at its lowest level since October 2015. Moody’s Investors Service says its Asian LSI fell for the third straight month to 28% in February 2017, down from 29.4% in January.

The index measures high-yield companies with the weakest speculative-grade liquidity. A contributing factor for the low level is from improvements in North Asian subindices, says Moody’s Vice President and Senior Analyst Brian Grieser.

Another reason for the improvement is a strong bond issuance, which is nine times higher this year than last. In January and February, bond issuance was $5.1 billion compared to $560 million during the same timetable in 2016. Despite the improvement, the Asian LSI is still above the long-term average of nearly 23%. All North Asian subindices improved for February 2017, which includes the Chinese Property subindex. It fell from 17.5% in January to 17.1% in February.

The North Asian subindex also dropped 2.1% between the same two months. The South and Southeast Asian subindices stayed constant at 27.3% in February, as did the Indonesian subindex.

Minus Japan and Australia, Moody’s rated 125 speculative-grade nonfinancial corporates in Asia with a rated debt of more than $65 billion. The number of rated high-yield companies with the SGL-4 rating score dipped from 37 to 35 in February 2017, while the number of high-yield companies also decreased by one from 126 during the period.

– Michael Miller, editorial associate

Imports, Exports Both Rise in January

Somewhat unexpectedly, data released from the U.S. Census Bureau and the U.S. Bureau of Economic Analysis shows both imports and exports are up for the month of January.

The goods and services deficit was up $4.2 billion. Exports rose $1.1 billion while imports were $5.3 billion more than in December. The January increase in the goods and services deficit reflected an increase in the goods deficit of $4 billion and a decrease in the services surplus. Year-over-year, the goods and services deficit increased close to 12% from January of last year.

Industrial supplies and materials led the increase of goods exports, followed by capital goods and automotive vehicles, parts and engines. Consumer goods, crude oil, cell phones and other household goods, and industrial supplies and materials led the imports of goods.

The January figures show surpluses with Hong Kong, South and Central America, and Brazil. Deficits were recorded with China, the European Union, Germany, Mexico, Japan, Italy and OPEC. The balance with Saudi Arabia shifted from a surplus to a deficit, while the deficit with Mexico increased $1 billion to $5.5 billion for the month. For the fourth quarter, surpluses were led by South and Central America and Hong Kong while China and the European Union led deficits.

In the past, “China has seen its surplus fall a little, although the deficit remains very high,” said NACM Economist Chris Kuehl, Ph.D. “The surprise nation has been Germany, as they have been watching their surplus with the U.S. rise steadily over the last several years. This is significant as the Chinese surplus is built around the cheap consumer goods they sell to the U.S. while the Germans are selling high-value industrial goods and high-value consumer goods—basically the same goods the U.S. wants to sell on the global market.”

– Adam Fusco, editorial associate

Loan Growth as Share of GDP Picks Up in Last Two Years

U.S. bank loan growth to commercial firms is still lagging behind pre-Great Recession levels, but the loan level has been outpacing GDP growth in the country since 2011, according to a new Fitch Ratings benchmark tracker.

"Loan growth has followed the pattern of a historical lag after a recession, and while growth has not returned to pre-crisis peaks, it has posted above-average growth for the last two years, compared to overall loan growth since 1985," said Joo-Yung Lee, head of North American financial institutions, Fitch Ratings.

Some asset classes are performing better and receiving more loans than during historical periods, except for 2007, including commercial real estate and commercial and industrial lending, Fitch said. Lending to these sectors has outpaced GDP growth since 2010.

Meanwhile, residential and construction loan growth has fallen behind other sectors, Fitch analysts said. That’s not entirely surprising, though, considering these sectors’ poor credit performance during the crisis, and the fact that construction and development loans were among the hardest hit.

"U.S. GSIB [global systemically important banks] loan growth has likely lagged due to significant de-leveraging post-crisis, their focus on building capital and liquidity, and ensuring compliance with increased regulatory requirements, such as stress testing and Basel III," Lee said.

– Nicholas Stern, senior editor

Equity Borrowing Erodes Credit-Positive Effects of Rising Home Prices

Homeowners are increasingly borrowing against the equity in their properties and this is eroding the credit-positive effects of rising home prices on U.S. residential mortgage-backed securities (RMBS). The borrowing is through both cash-out first-lien refinancing and second-lien equity borrowing, according to a new report from Moody’s Investors Service. If home prices continue to rise, the negative effects may be offset with current underwriting practices, but risks remain if the loan products used for equity extraction gain popularity.

“Rising home prices generally help lower default risk and loss severities, and therefore are credit positive for RMBS transactions,” said Moody’s analyst Peter McNally. “Rising prices, however, can also entice borrowers to extract equity from their homes and increase their debt loan, adding risk to RMBS deals.”

More risk resides in cash-out refinancing in RMBS tied to newly originated loans, because they are more likely to default than rate-term refinancing and purchase loans. “However, whether cash-out refinancing will boost risks in individual RMBS deals depends on the loans’ other characteristics,” McNally said.

The performance of loans in outstanding RMBS can be weakened by the increasing use of second-lien home-equity products. “Borrowers’ addition of debt secured by their homes can reduce their incentive and ability to remain current by lowering their equity stake in a property and reducing their available income after mortgage payments, which would be particularly concerning if home prices were to fall,” said Moody’s analyst Jody Shenn.

The Moody’ analysts noted, however, that today’s underwriting standards and operational practices are stronger than those before the financial crises that began in 2008.

– Adam Fusco, editorial associate

Demonetization in India Barely Dents GDP Growth, while Imports Surge in Germany

Experts thought the demonetization shock that hit India in the third quarter of 2016 would certainly put a big dent in the nation’s GDP growth, but the nation has emerged largely unscathed.

Real GDP growth in the fourth quarter of 2016 dropped to 7% from 7.4% in the prior quarter, with the data suggesting demand in the economy was broad-based, according to the latest export risk outlook from credit insurer Euler Hermes. Even more surprising was the fact that private consumption in India, apparently so dependent on cash transactions that had been disrupted, accelerated to 10.1%, year-over-year, from the prior quarter’s reading. Euler Hermes analysts explained that a favorable base-rate effect due to downward revisions of prior quarters, an inability of official statistics to properly capture the negative growth effects in the informal sector and accounting effects resulting from more companies who operate in the informal sector moving to declare their revenues have contributed to the upside changes.

“Looking ahead, recent high frequency indicators (PMIs, exports) point to an upturn of activity in early 2017,” analysts said.

In Germany, GDP growth improved by 0.4% in the fourth quarter of 2016, compared to 0.1% growth in the prior quarter, mostly as a result of domestic demand in government spending and fixed investment, the credit insurer said. Research and development spending was also up, as were exports, which rose 1.8%. Imports, meanwhile, surged to 3.1%. “Euler Hermes expects domestic demand to continue to drive growth in 2017, with slightly moderating consumption but strengthening equipment investment,” analysts said. “External trade should further pick up, in line with stronger global trade activity.”

– Nicholas Stern, senior editor

Credit Managers’ Index Saw Continued Strength in February, though Unfavorable Factors Could Remain Stubbornly in Place

Business overall is good and growth reflected in a variety of economic news lately has reached levels not seen since before the recession that started in 2008, according to the latest NACM Credit Managers’ Index (CMI), released today.

“The sense is that there has to be an improvement in the coming year if there is investment in infrastructure, tax reform and changes in the regulatory system,” said NACM Economist Chris Kuehl, Ph.D. “The challenge for the year is that these changes will take time. Nobody is sure what the patience level for consumer or business will be.”

The combined score in February’s CMI track in tandem with positive growth trends seen in economic indicators like the Purchasing Managers Index (PMI), as manufacturers continue upward momentum seen in the past two months, collect more dollars and extend more credit. “When manufacturers start to get their accounts caught up, this is a good signal that they are planning to start asking for more credit in the near future,” Kuehl said. Not all is well in the manufacturing sector, though, and unfavorable factors in the CMI improved slightly, though at a much less favorable rate, as some firms struggled to catch up with the broader recovery.

Data also show a rebound in a service sector that is leading the way for the CMI in February, backed by stronger demand from consumers. “Retail has been having a surprisingly good quarter and construction has been up along with the medical economy,” Kuehl said.

– Nicholas Stern, senior editor

For a complete breakdown of the manufacturing and service sector data and graphics, view the February 2017 report by clicking here. CMI archives may also be viewed on NACM’s website.

More Distressed, Leveraged Retailers Pose Risks for Commercial Creditors

A large number of U.S. retailers have slipped to the lowest and distressed tier of credit ratings—the number has tripled over the past six years to the highest level since the Great Recession—while more companies across all industries are in similar circumstances.

"Moody's-rated U.S. retailers rated Caa or Ca today make up just over 13% of our total rated retail portfolio, which is the highest level since the Great Recession, when this group comprised 16% of the portfolio," said Moody's Vice President Charlie O'Shea. "And the increase comes at the same time as the broader universe of Caa-rated companies is likewise growing."

During a lengthy period of low interest rates and “cheap money,” a new pool of B2- or B3-rated firms is created that have little room to spare from falling into the lowest rating tier, O’Shea said. “Among companies, Claire's, J.Crew, Tops and rue21 have all been hamstrung with weak credit metrics after taking on high levels of debt to fund acquisitions.”

As the same time that retailers’ credit ratings are slipping, debt maturities are on the rise, Moody’s said. Nineteen retail firms rated Caa/Ca by Moody’s owe approximately $5 billion in debt through 2021, with about 40% of this due by the end of 2018. “While the credit markets remain open to companies up and down the rating spectrum, that could change abruptly if investor sentiment turns,” Moody’s analysts said. “Among other considerations, interest rates have begun to trend upward, while U.S. speculative-grade companies have a record $1 trillion of debt coming due in the next five years, which could make refinancing much more difficult for distressed names.”

This group of struggling retailers also poses risks for more stable firms as they take more desperate measures to survive, “including highly promotional pricing that can border on irrational,” O’Shea said. The stronger companies then have to decide whether to match lower prices or relinquish sales. “And as companies under stress continue their downward spiral, liquidation and going-out-of-business sales inevitably follow, putting even more pricing pressure on their healthier competitors.”

– Nicholas Stern, senior editor

U.S. and German Manufacturing, Greek Debt Burden Prominent in Export Risk Outlook

This year is starting out strong in the U.S., with retail sales rising higher than expected in January and December numbers revised upward, according to the Euler Hermes Export Risk Outlook. Manufacturing is also showing signs of improvement, with two Fed regional surveys quite strong. The Philly Fed Index leapt to its highest level in 33 years. Inflation rose in January, with much of the increase from a rise in energy prices, the fifth consecutive increase. Gasoline prices also saw their fifth consecutive increase, to a 20.3% year-over-year pace.

In the U.K., services continued to drive growth in the fourth quarter. Despite an uptick in inflation, consumer spending remained resilient. Exports grew strongly. Euler Hermes expects the U.K. economy’s resilience to persist until the direct Brexit negotiations begin with the European Commission, likely in the middle part of this year. Consumer spending is expected to take a hit with a rise in inflation and drive down growth in the second half of the year.

In Greece, recent short-term debt relief measures, approved in January and aimed at reducing the interest burden, are positive in the view of Euler Hermes. This is due to the fact that 80% of the debt is held by institutions and that principal repayment will not start for another 17 years. The credit insurer believes that acceptance of the International Monetary Fund as a technical advisor rather than a financial contributor would be the best for the parties involved as Greek financing needs are lower than planned.

In Germany, the Ifo Business Climate Index and the Manufacturing PMI showed an acceleration of new orders, with the PMI also revealing a strong increase in new export orders. Though global trade was weak last year, it is expected to accelerate in 2017. German export volumes are forecast to pick up markedly this year, Euler Hermes said.

– Adam Fusco, editorial associate

Global Growth on Track for Improvement This Year and Next, though Risks Remain

Forecasts for global economic activity point to growth this year and next, though several risks remain to cloud the picture. According to a new Moody’s Investors Service report, G-20 countries are on track for increased growth of 3% in 2017 and 2018, up from 2.6% last year.

"Specifically, we see four major systemic risks to our forecasts: 1) global economic risks associated with shifts in US trade; 2) risks to global financial markets and emerging market economies if U.S. interest rates were to rise faster than anticipated and/or the U.S. dollar were to appreciate sharply; 3) risks of a sudden and sharp deceleration in China; and 4) political and fragmentation risks in the EU and the euro area," said Madhavi Bokil, a Moody’s vice president and senior analyst.

Trade with countries that the U.S. has large trade deficits with, including China and Mexico, could be impacted by large tariffs, and “…could potentially be inflationary and harmful for near-term growth as they are likely to be met with retaliatory actions,” Bokil said.

In the U.S., an expected bump from stimulating fiscal policy should ramp up growth to 2.4% this year and 2.5% in 2018, up from a prior forecast of 2.2% and 2.1% growth, respectively.

In Asia, India is likely to see the fastest growth rate of any G-20 economy at 7.1% this year, though demonetization of 86% of the nation’s circulating currency in the fourth quarter of 2016 weighed on a previous forecast of 7.5%, Moody’s said.

Growth in China is set to slow to 6.3% this year and 6.0% in 2018 from 6.7% in 2016. “The Chinese economy's solid growth performance last year, in part through significant policy support, has further helped reinforce various positive dynamics, such as firming commodities prices,” Moody’s analysts said.

In European nations’ economies, ongoing growth and resilience could be tested if the European Central Bank tapers, analysts said. In Germany, Moody’s raised its growth forecast to 1.6% this year and next, up from 1.5% and 1.4%, respectively. The nation’s economy has been buoyed by a robust labor market, rising wages and low interest rates; these factors should continue to be in play in the near term. The U.K. is the only G-20 economy Moody’s expects to decelerate this year—to 1% from a 2% estimation in 2016—as the country carries on negotiations for its departure from the European Union.

Emerging markets for the most part should help lift the global economy in 2017 and 2018, though the outlook for specific countries like Mexico remains stormy. Moody’s has continued to revise downward its growth forecast for Mexico to 1.4% this year and 2% in 2018 from 1.9% and 2.3%, respectively, in a November forecast. Trade restrictions from the U.S. could increase risk aversion and lead to reduced investment in the country, Bokil said.

"In summary, global demand is rebounding after weak economic activity in 2016, and much of the adjustment to lower commodity prices is now behind us," said Elena Duggar, a Moody's associate managing director. "However, structural factors, such as aging populations and high debt levels, combined with a reduced pace of globalization, put a cap on long-term trend growth."

– Nicholas Stern, senior editor

Eurozone Growth Nears Six-Year High

The pace of economic growth in the eurozone improved to come close to a six-year high in February, according to the IHS Markit Flash Eurozone Purchasing Manager’s Index (PMI). Signs bode well for the recovery to maintain itself in the coming months, with job creation the best in over nine years, order book growth picking up and business optimism moving higher.

Europe started to see solid growth numbers last year. “The eurozone has been expanding in a variety of areas—employment is up, productivity is up and there has been a solid improvement in measures like the PMI as well as measures such as the durable goods and production numbers,” said NACM Economist Chris Kuehl, Ph.D. “There have even been some suggestions that inflation has started to emerge. This is in a region that has been worried about deflation for most of the last 10 years.”

The Markit Eurozone PMI reached 56 in February, up from 54.4 in January and the highest since April 2011. Both manufacturing and services saw growth accelerate to rates not seen since 2011. February also marked the largest overall increase in new business since April 2011 and the largest monthly rise in employment since August 2007. Service sector jobs were created at a pace not seen in nine years and factory employment displayed the second-largest rise in almost six years.

The PMI “indicates that companies are currently firmly focused on expanding in the face of rising sales and fuller order books,” said Chris Williamson, chief business economist at IHS Markit. “The big surprise was France, where the PMI inched above that of Germany for the first time since August 2012. Both countries look to be growing at rates equivalent to .6% to .7% in the first quarter.”

“Trouble spots remain throughout the global economy, however,” Kuehl said. “Some of this has been worsened by the confusion over U.S. trade policy, but the bottom line is that there is reason enough for business people, investors and consumers to build more confidence.”

– Adam Fusco, editorial associate

China Blacklists Commercial, Private Debtors with Public Shaming, Travel Ban

When it comes to incentivizing delinquent payers to fulfill their obligations, China has taken matters to another level with its blacklisting and public shaming of millions of citizen debtors of various stripes.

According to media reports, the Supreme People’s Court of China recently announced its blacklist of 6.73 million citizens who have been banned from taking flights, while 2.22 million people can no longer travel by high-speed trains in the nation. The debtors list is comprised of people who are accused of taking advantage of legal loopholes to avoid paying debts from commercial and civil cases. (China lacks a personal bankruptcy law.) The government blocks the personal ID card numbers of the debtors that are needed to buy and check in for flights and trains, as well as stay at hotels.

As part of its social credit system, the Chinese government has opened an online search to the public for any such debtor, and even publicizes the debtors on LED screens and billboards—all in an effort to reign in the growth of debt that’s been accrued over the past several years, according to the gbtimes. For instance, household debt in the country has grown from 17% of GDP to 40% in recent years. According to credit insurer Atradius, the current economic slowdown in China will continue to lead to increasing overdue invoices and longer payment terms this year, while insolvencies are expected to rise further as well.

Individuals with commercial or personal debts can get themselves removed from the blacklist by paying back their debts.

 – Nicholas Stern, senior editor

Various Data Sets Point to Positive Economic Growth Trends this Year

Confidence in the economy is on the rise in the U.S, in Europe and even in Japan, and various data sets undergird a solid foundation for the rosy projections that the positive outlook will be sustained through 2017.

The bulk of the positive trends in the marketplace are the result of positive activity seen in 2016. In the last month, retail sales climbed 0.4%, while retail activity improved 5.6% over the last year, even without the support of auto sales that had been sustaining the retail community. Now, consumers are busy buying all manner of things and seem geared to do so through the spring. Retailers are expecting a good year and maybe even the best they have seen since the recession.

Meanwhile, industrial production has been realizing decent gains—the Purchasing Managers’ Index (PMI) is at 56, the highest it’s been in over two years. Even more encouraging: the New Orders Index is now above 60. Factory orders are up 0.2% despite the fact that demand for autos and auto parts is somewhat lower than it has been. The mining sector of the industrial production trio was also up by 0.4% over last year. This is significant given that it has been a sector that has dragged on the economy for several years now. The per-barrel price of oil has not returned to the heights once occupied, but near $60 a barrel is almost double what it was just about a year ago.

The third data point supporting the notion of growth is that inflation is showing some real growth. There was growth of 2.5% in January, the fastest pace since 2012. The Fed has been seeking inflation near or slightly over 2%—thus far, the measures have fallen a little short. Their preferred measure is the Personal Consumption Expenditure, which stands at 1.6%. The Fed is looking at the core rate of inflation and does not consider items like food and fuel as these prices can be extremely volatile from one month to the next. Without some inflation, it is hard for producers to raise prices and wages while consumers adopt a “wait and see” attitude as they expect prices to keep falling or at least remain steady.

– Chris Kuehl, Ph.D., NACM economist

Transaction Banks Adopt New Global Payments Service

Major transaction banks around the world are using a new global payments innovation (gpi) service from financial messaging service provider SWIFT. The service, which went live for payments in January, is intended to offer faster, more transparent and traceable cross-border payments, according to the company.

“We are delighted that SWIFT gpi is now live and is already enhancing the cross-border payments experience for corporate treasurers,” said Christian Sarafidis, chief marketing officer at SWIFT. “A year ago the global financial community pledged to dramatically improve the cross-border payments experience, and today marks a major milestone in delivering on that promise. It further demonstrates the ability of SWIFT and the financial industry to collaborate, innovate and rapidly introduce new solutions.”

Banks currently exchanging gpi payments across 60 country corridors include ABN AMRO, Bank of China, BBVA, Citi, Danske Bank, DBS Bank and ING Bank. Numerous additional banks are expected to follow suit in the coming months.

Corporate treasurers are provided with real-time, end-to-end views on the status of their payments through the service’s Tracker feature and are notified when payments have been credited to beneficiary accounts. SWIFT said that it will introduce gpi Observer, a quality-assurance tool that monitors participants’ adherence to the gpi business rules. The next phase of gpi is expected to include additional digital services, such as one for rich payment data.

“Customers require more certainty, transparency and traceability in their cross-border payments; SWIFT gpi is delivering this today,” said Wim Raymaekers, head of SWIFT gpi. “And with nearly 100 leading transaction banks already signed up, SWIFT gpi is set to rapidly expand with more banks, new features and additional payment services.”

– Adam Fusco, editorial associate

Expected Easing Tax, Regulatory Pressures to Sustain U.S. Residential Housing Sector Recovery This Year and Next

Since the Great Recession, investment in the U.S. residential housing sector has followed a slow road to recovery from the peak of 6.7% of GDP that it reached in early 2006, according to a new Wells Fargo report. The apartment sector has led the overall industry’s recovery to the 3.8% of GDP level it enjoys now, while single-family homebuilding continues to lag. A variety of factors—from slower population growth to people’s reduced mobility to the Millennial generation’s decision to delay new household formation—are at play in the decline.

Still, Wells analysts believe there are signs the recovery will stay on track over the near term, starting with household formation. As the older edge of the Millennial cohort approaches 35, “Growth in household formations should ramp back up to 1 million net new households this year and 1.1 million new households in 2018,” said Mark Vitner, senior economist, and Misa Batcheller, economic analyst—both with Wells. Add in demand for replacement and second homes, the overall housing demand should reach close to 1.28 million this year and 1.38 million in 2018, though new home construction is expected to lag and home prices should continue to rise at a greater rate than inflation.

“We have slightly increased our forecast for new home sales and housing starts for 2017 and 2018 based on the expectations that the Trump administration will succeed in cutting income tax rates and also ease some regulatory burdens for builders, developers, lenders and home buyers,” the analysts said.

Still, this impact will be moderated by the expectation that such changes will take time to accomplish. Thus Wells sees new home sales rising by 10.1% this year and 9.7% in 2018, with single-family starts rising at a similar level, though home price appreciation is likely to decline as builders focus on lower-cost suburban areas and in states with lower housing costs, such as Texas, Florida, Georgia and the Carolinas.

Look for more coverage of the U.S. construction sector outlook in this week’s NACM eNews.

– Nicholas Stern, editorial associate

European Commission Releases Economic Forecast

For the first time since 2008, the economies of all European Union member states are expected to grow throughout an entire forecasting period, in this case from 2016 to 2018. Even those members who suffered the most during the recession were expected to have returned to growth last year, according to the European Commission’s Winter 2017 Economic Forecast. Higher-than-usual uncertainty dogs the outlook, however.

“The European economy has proven resilient to the numerous shocks it has experienced over the past year,” said Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs. “Growth is holding up and unemployment and deficits are heading lower. Yet with uncertainty at such high levels, it’s more important than ever that we use all policy tools to support growth. Above all, we must ensure that its benefits are felt in all parts of the euro area and all segments of society.”

The eurozone has experienced real GDP growth for 15 consecutive quarters. Employment is growing at a robust pace and unemployment continues a downward trend. The driver of recovery is still considered to be private consumption while investment growth remains subdued. The commission expects GDP growth in the eurozone of 1.6% in 2017 and 1.8% in 2018, an upward revision from the Autumn Forecast due to better-than-expected performance in the second half of 2016. Risks loom large, however, and mostly on the downside.

“In these uncertain times … it is important that European economies stay competitive and able to adapt to changing circumstances,” said Valdis Dombrovskis, vice president for the Euro and Social Dialogue. “This requires continued structural reform effort. We also need to focus on inclusive growth, ensuring that the recovery is felt by all. With inflation picking up from low levels, we cannot expect current monetary stimulus to last forever.”

With the recent increase in energy prices, inflation has picked up too and is expected to reach higher levels this year and next. Core inflation, however, is set to rise only gradually. Growth rates among member states may be affected by the U.S. dollar’s appreciation and higher long-term interest rates.
The high uncertainty in the forecast is attributable to the still-unknown policies of the new U.S. administration, as well as the upcoming elections in Europe and the “Article 50” negotiations with the U.K.

Fiscal stimulus in the United States could have a greater impact on growth than expected, in the short term; in the medium term, recent crises loom large as risks to the growth forecast, as do the U.K.’s vote to leave the European Union, potential trade disruptions and monetary tightening in the U.S.

– Adam Fusco, editorial associate

Insurance Companies Coming to Place Cybersecurity at High Priority

North American insurance companies are taking risks from cyberattacks very seriously these days and include them among the top board-level priorities, according to a recent survey conducted by Moody’s Investors Service.

Property and casualty, reinsurance, life and health insurance firms are significantly ramping up their governance, oversight and investments in cybersecurity, including “…more formalized reporting to executive management and their boards,” the ratings agency said. “Among survey respondents, essentially all maintain incident response plans for multiple cyberintrusion scenarios, and most insurers test their vulnerability to these annually," Moody's Senior Vice President Alan Murray said. “Cyberattacks can have serious tangible consequences for insurers, exposing them to legal actions, regulatory scrutiny, fines and other expenses," he said. "In addition, an insurer's reputation is at stake."

(See NACM’s eNews on a recent report from financial messaging provider SWIFT about how to mitigate the fraud risk associated with suspicious financial transactions.)

The insurers’ cybersecurity plans often list responses to attacks that will minimize damages while most firms also conduct security testing by having people attempt to breach their systems at potential weak points, Moody’s said. The insurance companies surveyed also said they use threat intelligence services and tools to both prevent and deter attacks.

The companies have increased their cybersecurity staffing by almost 30% during the past three years, as they’ve also increased their outsourcing efforts to rein in costs and keep up with the latest in cybersecurity tools and methods, the ratings agency said. About two-thirds of those polled said they increased outsourcing and employed a median of 10 cybersecurity vendors that provide a wide variety of services.

“However, vendor reliance also has potential risks,” Moody’s said. “For instance, a vendor may not provide flexibility and responsiveness in all scenarios, and/or products and services of vendors may not align with an insurer's particular business models.”

– Nicholas Stern, editorial associate