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 nacm.org.

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