India’s Bond Market Sees Changes

A change in the Indian bond market is here, according to Fitch Ratings. The regulation change from the Securities and Exchange Board of India will “reduce options for companies to diversify their funding sources,” said the credit rating agency.

It was announced earlier this month by the Securities and Exchange Board of India that rupee-denominated corporate bonds will only be allowed through auction when foreign holdings hit 95% of the cap. Foreign investors can invest up to $51 billion in corporate bonds issued by Indian entities, said Fitch, and foreign ownership is already over 95%. The offshore “masala bonds” will “cease entirely until foreign ownership falls to 92% of the cap.”

Interested parties can still use the Track III External Commercial Borrowing (ECB) route, but there is a higher withholding tax on interest. Foreign companies will also face a minimum maturity rate of five years on amounts greater than $50 million and additional administrative requirements.

Corporates “will need to have a minimum ownership interest in the onshore borrower or a common overseas parent” as well, Fitch said. This does not include entities such as banks and other financial institutions. Fitch believes the ECB Track III will not be the first place company’s turn, but it could become part of an option to meet their financial needs.

Masala bonds were first issued last year, “and the market still lacks the depth that would make them more attractive to foreign investors,” added Fitch. The Reserve Bank of India (RBI) also tightened masala bond issuance earlier this month, banning related entities from purchasing them, among other changes. “The RBI's regulations were more targeted, and aimed at ensuring that only relatively strong corporates tap the offshore market,” said Fitch.

– Michael Miller, editorial associate

CMI Continues to Signal an Up-and-Down Year

The roller-coaster ride among economic data may be reflected again in the Credit Managers’ Index (CMI) from the National Association of Credit Management, according to preliminary numbers. Contradiction is the word of the day as shifts in the economy continue from upbeat to downbeat.

“It looks like companies are catching up with their creditors one month and falling back the next,” said NACM Economist Chris Kuehl, Ph.D. “This is another month where they are losing ground.”

July data indicates a down month for the CMI. The numbers in the index’s unfavorable categories have been in the contraction zone for the better part of two years, showing the distress in the economy. Preliminary figures indicate, however, that new credit is in demand. Sales likely have slipped, consistent with the trend this year.

A majority of companies are apparently managing to stave off bankruptcy in the face of economic confusion. On the other hand, the score for rejections of credit applications experienced a significant decline, signaling worsening conditions.

Companies are still determined to expand their operations one way or another, as numbers in the manufacturing sector indicate an increase in new credit applications. Businesses in the service sector may have less stomach for expansion this holiday season. With credit applications likely down, retailers may be planning for a year of light inventory.

– Adam Fusco, associate editor

For a full breakdown of the manufacturing and service sector data and graphics, be sure to view the complete July 2017 report this coming Monday here. CMI archives may also be viewed on NACM’s website here.

U.K. GDP Improves Slightly in Q2

The United Kingdom’s gross domestic product (GDP) improved slightly in the second quarter of 2017, but it’s nothing to write home about. The preliminary GDP estimate rose 0.3% in the three months ending with June, which is ahead of the 0.2% uptick seen at the start of the year.

“GDP growth for the U.K. has been anemic,” said NACM Economist Chris Kuehl, Ph.D. “There is little chance this will change much this year. Now that most understand the damage that has been caused by Brexit, the sense is that Q3 will be slow as well.”

“The economy has experienced a notable slowdown in the first half of this year,” said Office for National Statistics (ONS) Head of National Accounts Darren Morgan in a release. Despite the lack of substantial growth, “[economic] activity remains 9% above its predownturn peak,” according to the ONS.

Construction and manufacturing were the weak links during the second quarter, but retail and film production and distribution showed improvement.

“These meager growth rates indicate that the economy has lost momentum in 2017 and will consequently fail to achieve the 1.8% expansion seen in 2016,” said IHS Markit Chief Business Economist Chris Williamson.

The Bank of England expected a growth of 0.4% in the second quarter. IMS Markit is forecasting a growth of 1.4% this year, while the International Monetary Fund recently downgraded its expectation to 1.7%. Last year, the Bank of England predicted a GDP growth of 0.8% in 2017. In order to reach that prediction, “GDP would need to contract by an average of 0.7% in each of the remaining two quarters in order to hit the annual GDP growth predicted by independent forecasts and the BoE,” said the ONS.

– Michael Miller, editorial associate

Chinese Retail Firms Face Pressure

The Chinese retail sector is facing weak but improving credit conditions, while most other non-financial corporates in a variety of sectors are experiencing stable conditions, according to a new Moody’s Investors Service report.

"A challenging operating environment and merger and acquisition activity have pressured the credit profiles of Chinese retail companies, but revenue and margins are stabilizing thanks to improved product and service offerings and upgraded shopping environments," said Lina Choi, a Moody's vice president and senior credit officer.

Chinese internet and technology companies are expected to see slow, stable revenue growth this year boosted by consumer demand and increased monetization, analysts said. Meanwhile, the automakers and auto services companies will also experience slow and steady growth, thanks to reduced vehicle purchase tax incentives.

Utilities companies are expected to stay stable this year thanks to the current regulatory framework.

Domestic and overseas infrastructure investment, in addition to a large order backlog for existing property projects, should increase the revenue growth of Chinese construction and engineering firms this year, Moody’s said. “The credit profiles of rated developers should improve in 2017, despite slowing sales growth from tighter government controls,” Moody’s analysts said. “The major developers will continue to increase their market share, supported by their strong branding and execution abilities, solid financial profiles and continued access to funding.”

– Nicholas Stern, senior editor

Growth Strengthens in European Emerging Market Overview

Strengthening growth, diverging fiscal policy trends and political risk are themes in a recent report from Fitch Ratings that provides an overview of sovereign credit trends in European emerging markets.

The European Commission is forecasting a deterioration in the structural balance for most countries in the region, Fitch said. Output gaps remain negative, though wage rates are being pressured by strengthening growth. Commodity prices have contributed to an increase in inflation in the first quarter of 2017. Growth in central and eastern Europe is supported by distribution of European Union funds and by increasing strength of trade from western European countries. Easy monetary conditions and lowering unemployment, along with an increase in tourism, have helped domestic demand.

Political risks appear to be contained, Fitch said, in the face of recent changes to ruling factions in Bulgaria and Croatia, a new Romanian government and elections in the Czech Republic. A recovery in Russia continues, with domestic demand responding to confidence in the economic policy.

Turkey has recovered from a coup attempt, with growth reaching 5% year-over-year in the first quarter of 2017, supported by a stimulus effort by the government. “Billions have been poured into the economy to stabilize the political and economic situation and it has worked—at least for now,” said NACM Economist Chris Kuehl, Ph.D. “The issue now is whether the country has the ability to keep this up. The majority of analysts assert that it will not be able to. The country has been financing this surge of spending with debt (and expensive debt at that) given that investors are still not convinced the government is that stable. The only hope is that consumers and the business community have enough impact to boost government revenues. Most assert that there is just too much debt to handle and that it only stands to get worse.”

Fitch has taken three ratings actions in the region this year. Bulgaria was changed from Stable to Positive and Croatia was moved from Negative to Stable. Turkey was downgraded due to political developments affecting economic performance and the slowing economy weighing on banks, among other reasons.

– Adam Fusco, associate editor

IMF: U.S., U.K. Economy Growth Downgraded

The global economy will remain unchanged the rest of this year and into 2018, according to the July World Economic Outlook Update from the International Monetary Fund (IMF). Despite the stability across the globe, the U.S. and U.K. will grow weaker than previously expected.

“The recovery in global growth that we projected in April is on a firmer footing; there is now no question mark over the world economy’s gain in momentum,” said IMF Chief Economist Maurice Obstfeld in an IMF blog. The July update further cemented the projected global growth at 3.5% this year and 3.6% next year. China, Japan and the eurozone saw revised upward growth.

The IMF revised the U.S. growth forecasts to 2.1% in 2017 and 2018. The reason for this is due to “the weak growth outturn in the first quarter of the year; the major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed,” said the update. Even with the downgrade, “U.S. growth should remain above its longer-run potential growth rate,” added Obstfeld. The impact of Brexit on the U.K. is still unknown.

In China, “higher growth is coming at the cost of continuing rapid credit expansion and the resulting financial stability risks,” Obstfeld said. Also among emerging and developing economies, India is forecasted to grow in 2017 and 2018. Canada saw the biggest growth prediction in 2017 compared to the April projection. Meanwhile, Sub-Saharan Africa is expected to have some of the largest growth in 2017 and 2018 compared to last year.

“Despite the current improved outlook, longer-term growth forecasts remain subdued compared with historical levels, and tepid longer-term growth also carries risks,” said Obstfeld.

– Michael Miller, editorial associate

Retail High-Yield Default Rate Rises While Overall Rate Declines

Despite a drop in the overall high-yield default rate since the end of June, the U.S. retail trailing 12-month (TTM) high-yield default rate rose, following apparel retailer J.Crew’s $566 million distressed debt exchange (DDE). Large retailers such as Claire’s Stores, Sears and Nine West Holdings have a high likelihood of default before the end of the year, according to a new report from Fitch Ratings.

The retail sector rate, which rose to 2.9% in mid-July from 1.8% at the end of June, may reach 9% if those three retailers file for bankruptcy, the ratings agency said. The forecast for the sector at year end, even if Sears and Claire’s do not file, is 5%. The overall high-yield default rate fell to 1.9% in mid-July from 2.2% at the end of June, as $4.7 billion rolled out of the TTM default universe.

“Even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign,” said Eric Rosenthal, senior director of leverage finance at Fitch.

DDEs are the leading cause of default on an issuer basis. A total of 146 DDEs have occurred since 2008, with about 40% of those experiencing a subsequent default within an average of 13 months.

The energy default rate reached its lowest point since August 2015. Fitch expects the 2017 sector rate to finish at 2.5% and believes the sector has passed the peak of the default cycle for high-yield energy bonds.

– Adam Fusco, associate editor

Stable and Positive Outlooks Predominate Global Industry Sectors

The global economy is gaining traction as stable and positive outlooks dominate Moody’s Investors Service’s distribution of industry sector outlooks and stable growth appears more likely. Moody’s 54 industry sector outlooks reflect the rating agency’s expectations for fundamental business conditions over the coming 12 to 18 months. Currently, 12 of those outlooks are positive, four are negative and the rest are stable.

"Business conditions currently indicate continuing, if hesitant, global economic growth," said Moody's Senior Vice President Bill Wolfe. "Even so, despite an uneven recovery and even with many commodities-based sectors only recently emerging from a prolonged supply-side adjustment, overall business conditions are strong enough to support reduced monetary stimulus—suggesting that conditions for nonfinancial companies may be near a difficult-to-improve-upon peak."

Consumer-based industries, including consumer durables, global consumer products, North American building materials and U.S. homebuilding, have bolstered growth since the Great Recession and particularly over the past three to five years, Moody’s reported. Still, flagging monetary stimulus puts strengths in this sector at risk.

In March, global integrated oil moved to a positive outlook from stable, while global oilfield services and drilling and North America and EMEA refining and marketing moved out of negative territory to stable. During the second quarter, the Latin American telecommunications’ outlook improved to stable from negative, as did the global shipping sector.

Risks increased in the global automotive sector, as the outlook switched to negative from stable in October 2016, while in the same month the European automotive parts suppliers sectors fell to stable from positive, Moody’s said.

In a separate report, Moody’s noted that, so far this year, only 14 global nonfinancial companies have fallen into speculative investment-grade territory; in 2016, 63 companies lost their investment-grade status, prompted in part by flagging commodity-linked industries and negative sovereign rating actions.

– Nicholas Stern, senior editor

Almost Half of GCC Businesses Not Ready for New Value-Added Tax

Nearly half of businesses polled in the Gulf Cooperation Council (GCC) nations—the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait—are unprepared for the implementation of value-added tax (VAT) on Jan. 1, 2018, according to a new survey by the Association of Chartered Certified Accountants (ACCA) and Thomson Reuters.

Of the more than 330 people from a variety of industries in the region who participated in the survey, 11% said they understand the impact VAT implementation will have on their businesses and have used this knowledge to draft a policy, consider compliance models and identify IT system gaps, the survey noted.

Further complicating the matter, aside from Saudi Arabia, each GCC member state has yet to issue its own VAT law and executive regulation that can potentially lead to different tax treatment between each country, said Pierre Arman, market development lead for tax and accounting at Thomson Reuters. “Every function will be impacted by VAT (it’s not just a finance issue) and therefore it is essential for organizations in the region to begin analyzing how VAT will impact their operations through careful planning with their chosen tax adviser,” he said. “Time is limited and a considerable amount of the VAT impact assessment analysis can be done without knowing the details of the final law, as most of the VAT treatment can be extrapolated from other jurisdictions around the world.”

The ACCA and Thomson Reuters included a few pointers for businesses to ensure they’re ready for the VAT:

-    Allocate a budget for VAT.
-    Seek out a tax advisor.
-    Identify potential IT system gaps for VAT implementation. Specifically, when reviewing your existing billing system, identify what VAT compliance data is available and what’s not available for VAT calculation and reporting.
-    Evaluate the VAT reporting model you’d like to apply and prepare for the appropriate operational decisions and their consequences.

– Nicholas Stern, senior editor

U.S. Transportation Sector on Healthy Path for Remainder of the Year

Despite uncertainly surrounding the U.S. administration’s policies concerning upcoming spending on infrastructure, the outlook for the U.S. transportation sector is expected to be healthy for the remainder of the year.

According to Fitch Ratings’ midyear outlook on the sector, large transportation companies will still need to borrow debt to serve ongoing infrastructure renewal needs and provide congestion relief. Low fuel prices, however, should keep travel costs affordable.

A cautious growth trajectory is seen for public-private partnerships (P3s), as state and local governments explore P3 financial models. However, “there remains a scarcity of funding and a lack of understanding around the P3 structure, meaning most infrastructure needs will continue to be financed via more traditional means,” said Senior Director Scott Zuchorski.

Growth in passenger traffic at U.S. airports is expected to level off in the near term. “Large-hub airports are still the strongest performers in the aggregate, though smaller regional airports are now showing stronger performance as well,” said Senior Director Seth Lehman. Volume growth for U.S. ports should reflect that of GDP for the rest of 2017. However, “shipping company mergers, changing alliance structures and fluctuating freight rates will shift volumes, which could alter contractual protections for select ports,” said Director Emma Griffith.

Moderate growth is expected for toll roads for the remainder of the year. Stronger revenue growth is expected from inflationary toll increases. “Toll roads still face political risk, including federal funding uncertainty and state tolling opposition,” said Director Tanya Langman.

– Adam Fusco, associate editor

Business Volume Increased in the Equipment Finance Sector in 2016

The equipment finance sector saw business volume increase 2.5% in 2016, according to the recently released 2017 Survey of Equipment Finance Activity (SEFA). That marks the seventh consecutive year businesses increased spending on capital equipment. For small-ticket equipment transactions, new business volume grew 10.7% in 2016, according to a companion survey.

“The equipment finance industry continues a slow-growth trajectory, mirroring a fundamentally sound—if unspectacular—U.S. economy during the past several years,” said
Equipment Leasing and Finance Association (ELFA) President and CEO Ralph Petta. “Despite a slowly rising interest rate environment, leasing and finance companies are profitable entities, with generally healthy portfolios and sustainable levels of returns.”

The growth rate reported in the 2016 SEFA was down from 2015’s rate of 12.4%. In 2016, independents saw a 12% jump in new business volume and banks reported a 5% increase, while captives noted a 5.9% decrease. The middle ticket segment saw the largest increase in 2016.

According to the survey, the top five most-financed equipment types were transportation, IT and related technology services, agriculture, construction and office machines. The top five end-user industries representing the greatest portion of new business volume were services, industrial and manufacturing, agriculture, transportation and wholesale/retail.

Delinquencies increased in 2016, with 1.8% of receivables over 31 days past due compared to the prior year’s rate of 1.5%. Net full-year losses or charge-offs increased and remained at 0.29% of average receivables. Credit approvals increased a bit also, while the percentage of those approved applications being booked and funded fell overall.

– Nicholas Stern, senior editor

Fitch: Latin America’s Outlook is Negative

Latin America does not have a positive outlook after the first half of 2017. There were more negative than positive sovereign rating actions made by Fitch Ratings for the region in the first six months of the year, the agency said earlier this week.

Brazil, Chile, Ecuador and Mexico have negative outlooks, while Costa Rica and Suriname were downgraded one notch and two notches, respectively. El Salvador defaulted on local debt. No Latin American sovereigns are on a positive outlook in Fitch’s 2017 Mid-Year Sovereign Review and Outlook. The only positive move was Colombia, going from negative to stable due to a tax reform and “sharp falls in the current account deficit and inflation.”

“Sovereign credit pressures in the region generally stem from the challenging macroeconomic backdrop, the difficulty of fiscal consolidation, and sometimes volatile or polarized politics,” said Fitch. “All of these factors will see important developments in the second half of 2017 and 2018 as countries present their 2018 budgets and several elections take place.”

Some countries are doing their best to improve public debt. “Chile and Mexico are seeing benefits from earlier tax reforms, and Colombia and Uruguay have enacted tax increases in the past year,” added Fitch.

For a sovereign rating to change, the reasons may have to come from the citizens of the country. Fitch cites nine elections in the next year and a half as a key factor to a country’s rating. “Political deadlock was a major factor in our negative rating actions on Costa Rica and El Salvador, which have elections scheduled in [the first quarter of 2018],” said Fitch.

– Michael Miller, editorial associate

Weak Demand Cause for C&I Lending Slowdown

Weak demand may be the cause of a slowdown in growth for commercial and industrial (C&I) lending, rather than tighter credit, according to a report from Wells Fargo Securities. The pace of commercial and industrial lending at domestically chartered banks has slowed over the past year and is consistent with previous periods of economic weakness in 1990, 2001 and 2008. But the net percentage of banks that are tightening standards for such lending is easing, so other factors are at play.

A drop in the need to increase spending on business equipment is one reason. Firms are able to produce at the current pace of economic output. “The expected pace of final sales in the economy has come to reflect the steadiness of 2% economic growth over the last five years,” Wells Fargo said. Business equipment spending fell by 0.5% in 2016 after gaining 2.1% the year before.

Also, profit margins have declined. There is less incentive to add to capacity as a result. Finally, firms are able to exercise tighter control over inventories. “There is little need to borrow funds since both the real quantity of inventories has been low and little incentive exists to borrow in anticipation of higher inflation prices for inventories goods,” Wells Fargo said. “Inventories were a drag of 0.4% on growth in 2016 and are expected to add just 0.1% this year.”

– Adam Fusco, associate editor

Global Trade has Helped Asia-Pacific Banks, But Watch for Ongoing Risks

Improved global trade and a strengthening Chinese economy have helped relax cyclical pressures on Asia-Pacific financial systems, but high private-sector debt is still a risk to the system’s stability and bank performance for much of the region.

Rising demand in China, recovering commodity prices and relatively stable currency and asset prices have helped support bank performance in the Asia-Pacific region, according to a new report from Fitch Ratings. The ratings agency’s outlook is negative for 10 of the region’s 17 rated banking systems, but that’s down from 13 at the beginning of the year. “Nevertheless, the build-up in private-sector debt and the rise in property prices over the last decade of ultra-loose global monetary policy have created financial risks that could still be tested by US rate hikes,” Fitch analysts said.

Corporate debt has risen sharply in Hong Kong and China, and a sharp downturn in the economy poses a key risk for the banking sector in China. Meanwhile, rating changes for banks in China and India could occur from asset-quality issues, Fitch said. Risks are highest in state banks in India, while in China, risks are concentrated at second- and third-tier banks, which have less capital and larger exposure to shadow banking and higher reliance on wholesale funding.

– Nicholas Stern, senior editor

Optimism Continues Among Small-Business Owners, but Sustainability is Questionable

A surge in optimism among small-business owners that started with the U.S. presidential election continues, but has been falling since a peak in January. Economic growth in the first half of the year has been the same as in the past three or four years, with little progress. For the remainder of the year, euphoria will be hard to find, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism.

The index fell in June by 0.9 points to 103.6. It peaked in January at 105.9. Four of the 10 index components registered a gain, five declined and one remained unchanged.

Four percent of small-business owners reported that all of their borrowing needs were not satisfied, an historically low number, the NFIB said. Twenty-seven percent reported all credit needs met and 54% said that they did not want a loan.

The net percent of owners who reported higher nominal sales in the past three months compared to the prior three months, seasonally adjusted, was -4%. The net percent of owners expecting higher real sales volumes lost five points, to 17%. This shows low prospects for growth in the second half of the year, the NFIB said, since owners are less likely to hire employees or order new inventory with weak sales prospects.

Among owners, 57% reported capital outlays. Of those, 40% spent on new equipment, 21% acquired new vehicles, and 13% improved or expanded facilities. Capital spending has declined from earlier in the year, but the percent of owners planning outlays in the next three to six months rose three points to 30%, the strongest reading since September 2007, the NFIB said.

“A continuation of the high levels of optimism in the small business sector will depend heavily on Congressional progress on the major issues for small-business owners: health care, tax reform and regulatory relief,” the report said. “More substantial progress is needed on these major issues if owner optimism is to be sustained and produce accelerated hiring and spending.”

– Adam Fusco, associate editor

Global Cash Hoarding Increases

The world’s cash pile has doubled since the financial crisis roughly 10 years ago, according to a new Euler Hermes report. It is now 10% of the global gross domestic product (GDP).

Nonfinancial corporations had $7 trillion in cash on their balance sheets at the end of last year, according to Euler Hermes' Summer 2017 Economic Outlook, High Stakes Game Payment Behavior, Cash Piles and Major Insolvencies.

 “Global economic growth supports cash generation,” said the report. “Yet it is coupled with various uncertainties and risks which prompt saving behavior. Thus, companies will continue to be pushed to hoard.” The global cash pile increased nearly 3% in 2016 compared to the previous year based on more than 30,000 companies.

Asia-Pacific companies hold the most cash, while technology companies have surpassed oil and gas and automotive companies. Companies in the U.S. hold 30% of the global cash pile, and the U.S. has 71% of the tech industry’s cash pile. This is largely due to firms such as Alphabet (Google), Apple and Microsoft.

“Cash accumulation proved to be more dynamic in regions with the strongest economic growth,” according to Euler Hermes. “This explains why the total world cash shares of the Asia Pacific and North America regions have kept growing.” Asia-Pacific countries hold roughly 44% of the global cash accumulation. China has seen one of the largest cash pile increases since 2010, which represents more than 9% of the world’s cash.

Technology represents 18% of the global cash pile, followed by oil and gas, which is about half as prominent as the tech industry. The transportation, telecom, household equipment and machinery, and equipment sectors saw decreasing cash piles in 2016.

– Michael Miller, editorial associate

Illinois Sets Budget, Still Facing Unpaid Bills

Illinois is back on track, but the state is still facing an uphill climb. The state legislature overrode the governor’s veto on the $36 billion budget, making this the first time since fiscal 2015 the state has a spending plan in place. Illinois is $15 billion behind on bills but took the step this week toward resolving that issue.

Illinois isn’t the only state dealing with this problem. Connecticut, Pennsylvania, Oregon, Rhode Island, Wisconsin and Massachusetts are without budgets, but the latter is getting set to remedy that soon. All the states except for Illinois face no immediate credit rating implications, according to a new release from Fitch Ratings.

In Illinois’ case, the new budget includes a permanent income tax increase and recurring expenditure reductions, as well as “a plan to issue bonds to pay down a portion of the state’s significant accounts-payable backlog,” added Fitch. The budget impasse also caused the state Department of Transportation to suspend construction projects, but they have since resumed following the lawmakers’ override. Roughly 900 projects valued at more than $3 billion were in jeopardy.

“His tax-and-spend plan is not balanced, does not cut enough spending or pay down enough debt, and does not help grow jobs or restore confidence in government,” said Illinois Gov. Bruce Rauner on Facebook referring to state House Speaker Mike Madigan. The new budget is estimated to generate about $5 billion in revenue. “It proves how desperately we need real property tax relief and term limits. Now more than ever, the people of Illinois must fight for change that will help us create a brighter future,” the governor added.

Even with the new budget, Moody’s Investors Service said earlier this week, Illinois could face a credit rating downgrade. Moody’s has Illinois one step above a junk rating.

-Michael Miller, editorial associate

Economic Partnership Agreement Reached between the EU and Japan

An agreement in principle on the main elements of an economic partnership agreement was reached today between the European Union and Japan. The agreement will remove the majority of duties paid by EU companies, which total 1 billion euros annually, and open the Japanese market to key EU agricultural exports, according to the European Commission in a press release.

“Through this agreement, the EU and Japan uphold their shared values and commit to the highest standards in areas such as labor, safety, environmental or consumer protection,” said President of the European Commission Jean-Claude Juncker. “Together, we are sending a strong message to the world that we stand for open and fair trade.”

“This agreement has an enormous economic importance, but it is also a way to bring us closer,” said Commissioner for Trade Cecilia Malmström. “We are demonstrating that the EU and Japan, democratic and open global partners, believe in free trade…. With Japan being the fourth-largest economy of the world with a big appetite for European products, this is a deal that has a vast potential for Europe. We expect a major boost of exports in many sectors of the EU economy.”

The value of exports from the EU could increase by as much as 20 billion euros, benefitting sectors such as agriculture and food products, leather, clothing and shoes, and pharmaceuticals.

“The EU-Japan Economic Partnership Agreement is the most significant and far-reaching agreement ever concluded in agriculture,” said Phil Hogan, commissioner in charge of agriculture and rural development for the European Commission. “Today, we are setting a new benchmark in trade in agriculture.”

In regards to agricultural exports, the agreement does away with duties on wine and many cheeses, and will allow the EU to increase its beef exports to Japan substantially, according to the release. The agreement also opens up markets in financial services, e-commerce, telecommunications and transport. It guarantees to EU companies access to the large procurement markets of Japan and protects sensitive economic sectors of the EU, such as the automotive sector, with transition periods before markets are opened.

“After some years of debate and some real acrimony, the Europeans and Japanese have reached a deal that will both delight and dismay business in both countries,” said NACM Economic Chris Kuehl, Ph.D. “There are lots of provisions and sections, but the most important elements include the fact that Japan will get greater access to the European market for its cars. In return, European farmers will gain access to the Japanese agricultural market. Both of these are politically sensitive areas. The leaders have taken some risk by changing the rules at this stage.”

Negotiators on both sides will continue work on remaining technical issues, with a final text expected by the end of the year. It will then be submitted for the approval of the EU member states and the European Parliament.

– Adam Fusco, associate editor

Qatar’s Outlook Shifted to Negative Following Diplomatic Dispute

Moody’s Investors Service has changed its outlook for Qatar to negative from stable based on the economic and financial risks associated with the ongoing dispute between the nation and its Gulf Cooperation Council neighbors like Bahrain, Saudi Arabia and the United Arab Emirates.

“In Moody's view, the likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months, which carries the risk that Qatar's sovereign credit fundamentals could be negatively affected,” the ratings agency said.

Moody’s also affirmed Qatar’s rating at Aa3, reflecting the agency’s positive view of Qatar’s credit strengths, including a sizeable net asset position of the government and remarkably high levels of wealth that will continue to support the sovereign’s credit profile. The government has approximately $35 billion in net international reserves at the Qatari Central Bank and more than $300 billion of assets managed by the Qatar Investment Authority.

Amidst the dispute, the coalition has severed diplomatic relations, closed borders and expelled Qatari nationals from their countries, Moody’s reported. The coalition has also issued 13 demands of Qatar that it must meet in order to see relief. A quick resolution to the crisis has yet to arise, and the state of affairs is likely to impact economic activity. So far, there have been reports of disruptions to some nonhydrocarbon exports and a forced shutdown of helium production. Tourism is also likely to be hit by the termination of direct flights to the nation.

“Moody's thinks that a prolonged period of uncertainty will negatively affect business and foreign investor sentiment and could also weigh on the government's long-term diversification plans to position the country as a hub for air traffic, tourism, medical services, education and sports through a higher-risk perception among foreign investors.”

– Nicholas Stern, senior editor

Growth Slows in U.S. Manufacturing

The U.S. manufacturing sector experienced a subdued month in May, with growth slowing in output, new orders and employment. Optimism, however, is at its strongest level since February.

According to IHS Markit, the U.S. Manufacturing Purchasing Managers’ Index (PMI) reached a score of 52 for June, down from 52.7 in May, indicating the least-marked improvement in business conditions since September 2016. The main factors weighing on the index were slower output rates and new business growth.

“Manufacturers reported a disappointing end to the second quarter, with few signs of growth picking up any time soon,” said Chris Williamson, chief business economist at IHS Markit. “The PMI has been sliding lower since the peak seen in January and the June reading points to a stagnation—at best—in the official manufacturing output data.”

Manufacturing production has increased since last June, but the rate of expansion was modest and reached a nine-month low in the past month, Markit said. Softer new business growth was a check on production schedules. New order books improved in June, but the increase was the weakest since September of last year. Cost pressures were the weakest in 15 months, resulting in the slowest pace of factory gate (the actual cost of manufacturing goods before any markup is added to give profit) price inflation since late 2016. The sector has seen four years of sustained employment growth, though the pace of job creation was at its lowest since March, according to Markit.

“Forward-looking indicators—notably a further slowdown in inflows of new business to a nine-month low and a sharp drop in the new orders-to-inventory ratio—suggest that the risks are weighted to the downside for coming months,” Williamson said.

– Adam Fusco, associate editor