Major Country Risk Developments May 2023

Major Country Risk Developments May 2023

Posted with permission from greatamericaninsurancegroup.com


There appears to be developments on the diplomatic front in the Russian war on Ukraine. The Chinese leader Xi Jinping spoke with Ukraine’s president and announced that China would appoint an envoy to work towards a peace settlement. While China’s peace plan release earlier this year, was vague and did not call for the withdrawal of Russian troops, the latest move is one more step. China clearly has unique leverage with the Russian President if it chooses to use it. In the face of western sanctions, Russia is reliant on China to help keep its economy afloat. It would be careless to dismiss the idea that China could play a role in ending this brutal conflict. For different reasons, Ukraine, Russia, the U.S., Europe, and China itself all have a potential interest in Beijing’s involvement.

There is no doubt that both the Russian and Chinese leaders are united in their hostility to U.S. power. A swift Russian victory in Ukraine might have suited China well. But a prolonged war is turning into a strategic liability for Beijing. Rather than weakening the U.S.-led alliance system, the war in Ukraine has pulled the U.S., Europe, and Asian democracies closer together.

China has spent decades trying to build its influence in Europe and around the world. But its self-proclaimed “no limits” partnership with Russia has convinced many Europeans that Beijing is now a threat, too. Both Americans and Europeans are using the same language about “de-risking” their relationship with China by reducing economic dependencies. This matters to Beijing because the EU is China’s largest export market. Military ties between Japan, Europe and the U.S. are also strengthening. The best way for Beijing to rebuild its reputation in Europe would be to play a visible and positive role in ending the war. Such a move would also have a global impact, supporting President Xi’s preferred narrative that American power is in retreat and that China is a force for peace.

China is basking in the positive publicity gained from its role in normalizing relations between Iran and Saudi Arabia. The Chinese also chaired a conference on peace in Afghanistan. Beijing have even hinted at mediating in the Israeli-Palestinian peace process.

Washington is also keen to find a way of ending the war in Ukraine. It knows that the longer the conflict continues, the harder it will be to maintain a western consensus on pouring billions in military and economic aid into Ukraine. The mainstream view in Washington, and in many European capitals, is that the Ukrainians should be given as much support as possible. The Ukrainian goal is to win such a decisive victory that the Putin era is ended. But everyone knows that’s a long shot. A more likely outcome is that Ukraine strengthens its hand on the battlefield, ahead of peace talks. The U.S. side seem to have warmed to the idea that China could play an important role in getting Russia and Ukraine to the negotiating table.

There have been many discussions of whether the western alliance would put pressure on Ukraine to negotiate. Less discussed, but probably more important, is who could force Russia to make meaningful concessions-including withdrawing from occupied territory and abandoning the effort to wreck Ukraine. The only plausible answer to that question is China. Only President Xi can offer a warm handshake to Putin in public- and a twisted arm in private. At some point, the Chinese leader could decide that it is in his country’s interests to do just that. The rest of the world appears ready for such a development.


U.S. flag on top of money


The U.S. labor market has been hot lately, but some employers are now slowing hiring. April’s strong job growth (253,000 positions filled) suggests the job market is resilient amid banking sector turmoil, rising interest rates and elevated inflation. Unemployment stands at a record low of 3.4%. However, the economy also grew more slowly at the beginning of 2023 than it did in Q4 2022. Businesses have eased back on investments, while the housing market remains weak. Layoffs in the tech sector climbed with indications of some cooling in new hiring. April’s monthly payroll increase was slightly below the average monthly gain of 290,000 over the prior six months.

Demand for certain metal parts has slowed over the past 18 months. These are parts used in tractors, electrical hardware, lawn mowers, etc. Weaker sales and productions volumes will mean less need for workers. The share of U.S. workers in their prime working years, ages 24 to 54, who are employed or seeking jobs has climbed over the past year. The influx of job seekers is allowing hotels, bars, and restaurants to snap up workers after struggling with acute labor shortages over the past three years. Healthcare providers, some manufacturers and other services are also staffing up, replacing workers who quit or retired early during the pandemic. Job gains at providers of in-person services, such as restaurants, have offset recent cuts at large companies such as Facebook parent Meta Platforms, Google parent Alphabet and Walt Disney.

Meanwhile, wage growth is still running above pre-pandemic levels but is cooling as more Americans seek work. Slowing wage growth is some comfort to the Federal reserve who worry that strong earnings gains would fuel continued inflation above the central bank’s 2% target. The Fed approved its 10th consecutive interest rate increase on May 1 and signaled it may be done with increases for this current cycle. This latest move brings the benchmark Federal funds rate to a range between 5% and 5.25%, a 16-year high.

Fed officials considered skipping a rate increase in March after the failures of two regional lenders, Silicon Valley Bank and Signature Bank, raised concerns about a bank funding crisis. Federal regulators recently seized another regional lender, First Republic Bank, orchestrating a sale to JPMorgan Chase. The banking stress could lead to tighter lending conditions for businesses and households that ultimately results in layoffs.

Crowd in Istanbul with flags


Tens of thousands of Turkish nationals living in Europe have cast ballots in early voting for upcoming May 14th elections, with President Recep Erdogan counting on diaspora support as he battles to cling to power. According to early indications there has been a record turnout among Turkey’s 3.4 million overseas voters, who have historically backed Erdogan, after polling stations opened just over two weeks ahead of the main election on May 14.

The Turkish government has embarked on a voter drive that it says is aimed at boosting democratic participation by increasing the number of polling stations across Europe and pumping out messages on the importance of taking part. They insist that these efforts are not meant to bolster support for President Erdogan, who is fighting the toughest re-election campaign of his 20-years in power as Turkey’s deep economic malaise has dented his support.

Erdogan’s ruling AKP party openly acknowledges that a higher turnout among the diaspora should benefit the incumbent, given that in the past a majority of diaspora voters have backed Mr. Erdogan. The opposition forces say this time it will be different, as the political winds in Turkey are believed to have shifted. Germany alone accounts for 3 million strong Turkish diaspora- of whom an estimated 1.5 million are eligible to vote.

Opposition parties complain that President Erdogan has mobilized huge resources in Germany, including about 300 mosques funded and run by the Turkish state. Erdogan has performed better in Germany in past elections than in Turkey, gaining 65% of the votes cast in Germany in 2018 compared to 58% at home. However, the picture is distorted by the fact that only about half of Germany’s Turkish population- which includes exiled Kurds, leftists, academics, and journalists as well as religious conservatives – are Turkish passport holders who are eligible to vote.

Kemal Kilicdaroglu is the leading opposition candidate facing- off Mr. Erdogan, with the message that if he is elected democracy will grow, money will flow, investments will pick up, the currency will strengthen, and prosperity will come. The Turkish opposition is hammering home to voters that runaway inflation (70%) under President Erdogan has hurt all households. He cites that the price for a kilo of onions, vital for Turkish cuisine, has increased fivefold over the past 18 months. The president by contrast, boasts of Turkey’s strength and influence under his leadership. The contrasting images epitomize the stark choice voters face in the May 14th elections: a charismatic strongman who has towered over the country’s politics for two decades, or a soft-spoken retired bureaucrat who is betting that years of creeping authoritarianism and soaring living costs will finally convince voters of the need for change.

An opposition victory, particularly by a narrow margin, would test Erdogan’s commitment to democracy, as well as the allegiances of a judiciary, police, and military that he has spent two decades striving to bring under his control. If Erdogan, who displays an increasing intolerance for dissent, secures another term, his critics fear he will steer Turkey deeper into authoritarianism. Most polls suggest Kilicdaroglu, leader of the Republican People’s Party (CHP), enjoys a slim lead over the incumbent, with his chances buoyed by the fact the traditionally fractious opposition is at its most unified in its years-long quest to unseat the president.

The outcome could also determine the direction the $900 billion economy takes. Turkey urgently needs to attract foreign investment to manage a current account deficit that is near its widest level since records began and to replenish diminishing foreign exchange reserves. It is a crisis that has dented Mr. Erdogan’s popularity as he has pursued an unorthodox monetary policy, opposing interest rate rises even as inflation has soared and dismissing three central bank governors in less than four years. Yet his supporters insist he is the only person capable of fixing the country’s problems.

Beijing Shi, China high rise buildings


China’s manufacturing purchasing managers’ index (PMI), which includes the services and construction sectors, scored 56.4 in April, down from 58.4 in March. This shows continued expansion since the country’s zero-Covid policy was lifted in December. A reading above 50 indicates expansion compared with the previous month, while a reading below 50 means a contraction. However, this is a mixed report and suggests that China’s post-Covid recovery has lost some steam and requires continued policy support.

In a sign of China’s economic recovery from last year, media reports forecast about 240 million passenger trips during the first week of May [the five-day May Day holiday], higher than in 2019 before the pandemic. While consumer activity is rebounding from a low base, the rest of the economy has deeper challenges, with the real estate sector still limping after a government crackdown and export markets fading as advanced economies weaken. China’s recent PMI shows a similar picture, with growth in manufacturing dipping despite recovery in exports, while other sectors showed a rapid rise in activity, indicating an uneven recovery.

Economic growth has exceeded expectations and the Chinese economy is off to a good start this year. However, the underlying drivers to growth remain weak and market demand appears insufficient to sustain momentum. Production expanded slightly, but sub-indices for new orders, raw material inventories and employment in the manufacturing sector all fell in April. China’s import volume in April posted its biggest contraction in a year (down 7.9%), while exports expanded at a slower pace than expected casting doubt over the pace of the economic recovery. Part of a recovery in construction activity was driven by infrastructure. Beijing has used infrastructure to stimulate growth following the real estate sector’s collapse over the past two years. The government has signaled more state-stimulus support for the recovery and has called for targeted “proactive fiscal policy” and “prudent monetary policy”. This will include raising incomes for urban and rural residents and boosting consumption of services in sectors such as culture and tourism.

The consensus is that China’s export industries will remain under pressure due to ongoing global tech slowdown, heightened global financial turmoil and deteriorating U.S.-China trade relations. The export slowdown will likely continue to hinder the recovery of employment and manufacturing investment. Factory activity showed signs of sluggishness and authorities have warned of an incomplete recovery as global demand for goods waned.

Meanwhile, the U.S. Chamber of Commerce in China has warned that mounting Chinese scrutiny of U.S. companies has dramatically raised risks of doing business in China, as signs emerge that Beijing may be cracking down on some foreign businesses. The business lobby group asserted that it was closely monitoring China’s scrutiny of U.S. professional services and due diligence firms.

The warning follows reports that Chinese police had raided the Shanghai offices on Bain, the U.S. management consultancy. It also follows China’s introduction of a new counter-espionage law that has made foreign companies even more nervous. The new law casts a wide net over the range of documents, data or materials considered relevant to national security, the additional scrutiny of firms providing essential business services dramatically increases the uncertainties and risks of doing business in the PRC.

U.S. officials and executives have become worried in recent weeks about a series of actions by Chinese authorities that have targeted U.S. companies, particularly those involved in due diligence and risk assessment, or working on projects involving advanced technology supply chains. In April, authorities raided the Beijing office of due diligence group Mintz Group and detained five employees. The U.S. Administration has also become increasingly concerned about the apparent rise in coercive activity in China.

The increased scrutiny, accompanied by widespread speculation about actions against other western groups operating in China, comes at a time when Beijing has been trying to send a message that it welcomed foreign investment as it ends a long period of zero-Covid restrictions. The U.S. Chamber of Commerce said it welcomed pledges of openness but asserted that foreign investment will not feel welcomed in an environment where risk can’t be properly assessed, and legal uncertainties are on the rise.

In April China opened a national security investigation into Micron, the Idaho-based manufacturer of memory chips. U.S. officials believe Beijing is retaliating
against U.S. measures to make it much harder for Chinese companies to obtain advanced semiconductors.

These concerns come weeks before the G7 summit in Japan when national leaders are expected to discuss economic coercion in the context of what measures they could take to push back against Chinese actions. Furthermore, cash-strapped local authorities in China are struggling to reduce headcount because of demands from Beijing for greater security and monitoring of its citizens. Local authorities have in recent years hired millions of people to collect information on residents, identify security risks and communicate state policy as President Xi Jinping tightens control on society. These same local authorities reported the biggest decline in fiscal revenue in decades last year – due to Beijing’s zero-Covid lockdowns stifled growth, even as it forced more spending on mass testing and quarantines.

Income for local authorities have been hit hard by a crash in the property market-land sales account for about 25% of all revenue for local governments, which are responsible for everything from roads to healthcare and education. As a result, the authorities are under pressure to reduce staff and cut costs. China’s State Council, the cabinet, unveiled plans last month to reduce its headcount by 5%, a signal for cities and provinces to follow suit. Elsewhere, Chinese local governments are wooing Middle Eastern and Asian sovereign wealth funds as they struggle to raise money at home to stimulate post- pandemic economic development. Local government officials have reportedly held high-level meetings with Qatar Investment Authority, subsidiaries of Saudi Arabia’s Public Investment Fund and the Abu Dhabi Investment Authority.

Asian state investors, including Singapore’s GIC, have also been approached about taking investment opportunities on the mainland.

These overtures underscore the deepening economic and diplomatic ties between China and the Middle East. A region that has traditionally been a U.S. sphere of influence. They also come as global investors attempt to secure Middle East cash, with Gulf nations flushed with petrodollars after last year’s oil boom.

Brazil flag burning photo by Brutally Honest


Political noise and high interest rates are worsening financial conditions in Brazil. President Lula’s aggressive rhetoric against the governor of the central bank and his continued criticisms of that institution’s autonomy, has triggered market jitters. Local capital markets are deepening and competition between lenders is rising. The large private banks are well managed and mostly well capitalized. They also hold a fair amount of government paper (investments). Equity and corporate bond markets have strengthened and will offer alternative financing opportunities. The government has dialed back subsidized credit, but it is expected that the role of public banks will be expanded under President Lula. The administration sees this as an engine to help foster growth.

There are few restrictions on foreign firms gaining access to the Brazilian market. Even so, should Mr. Lula fail to pass important reforms of his policy agenda (such as a new fiscal rule and a simplified tax system) during his first year in office, or a sluggish economy hits his popularity, he could pursue more erratic policies to spur growth. Investors continue to monitor policy moves that would suggest much more expansionary credit policies, as this would create distortions affecting Brazil’s market for long-term credit.

Although its institutions have withstood recent crises, Brazil could face political stability risks during President Lula’s term in office, as the country remains deeply polarized. A mobilized right-wing opposition and a polarized Congress will muddle Lula’s task of securing a solid legislative majority, dampening his agenda’s progress. Protests are possible, although a repeat of the storming of government buildings in January is unlikely, as far -right extremists realize that there was widespread condemnation of those acts of vandalism and because the security forces now have better information about their activities. The Lula government will be closely monitoring their activities. The Lula government will have to navigate this tricky political environment through continual pork-barreling, which could weaken political stability, as the risk of corruption scandals will rise.

Sluggish economic growth, high interest rates and elevated (albeit declining) inflation will cause growth to weaken in 2023. Deteriorating credit conditions will further aggravate this slowdown as loan costs increase, credit growth weakens, and delinquency rates rise. These factors will likely constrain private consumption and export volume growth, and worsening fiscal dynamics will limit space for public investments. Public external debt is moderate. However, the public debt/GDP ratio is expected to drift upwards (from 75% currently), given that President Lula has vowed to implement large social benefits and increase public expenditure.

There is a fairly liberal attitude towards foreign investment, but taxes were introduced to reduce portfolio inflows (to ease currency-appreciation pressures) during the 2004-12 commodity boom and purchasing of rural land by foreigners is frozen. The transformation of Brazil’s external accounts has reduced vulnerability to external shocks, minimizing the risk of controls on capital outflows.

Infrastructure spending has been traditionally low. Public projects have barely advanced amid fiscal constraints and operational issues. Lula is considered as having a more pragmatic approach to attracting private capital in infrastructure. The expectation is that Lula will maintain public-private partnerships for transport projects that expanded under his predecessor, Jair Bolsonaro. Roads between major urban centers are fair, but many small roads are unpaved. Privatization of several major and regional airports through auctions has boosted capacity. Telecommunications improved after privatization a decade ago, but capacity bottlenecks have emerged. Internet speed is improving, but still lags behind many countries. Meanwhile transmission failures cause sporadic power outages. With 70% of the national electricity supply from hydroelectric plants, the grid remains structurally exposed to drought (although rainfall has been plentiful recently).

President Lula on a recent visit to China called for emerging markets to trade using their own currencies. Still about half of all cross-border debt is dollar-denominated. And although the dollar’s share of central-bank reserves has fallen over time, it still accounts for about 60% of them. Chinese interests in Brazil continues to expand and Lula’s recent visit underscores the importance of this partnership to both countries.

Against the backdrop of a slowing economy, his popularity is below 40%–lower than at the same stage in his previous two administrations (2003-10), presaging a challenging four-year term. Political tensions remain elevated, although they have eased since right-wing extremist supporters of the former president, Jair Bolsonaro (2019-22), mounted a violent insurrection in Brasília (the capital) on January 8th.

What is increasingly clear is that individual countries can circumvent the existing dominant system if they really want to. China’s alternative to the SWIFT interbank-messaging system has been growing rapidly. It has also been switching more of its bilateral trade towards settlement in renminbi – an easier task than replacing the dollar in trade flows between other countries. Even many firms in the West now use renminbi for trade with China. New digital-payment technologies and central bank digital currencies could yet make it easier to move money around the world without involving the U.S.

Drone view of Mosque Madrasa of Sultan Hasan


Egypt’s Gulf allies have shifted from handing out traditional support to instead seeking commercial deals and demanding reforms from Egyptian authorities. Meanwhile, Egypt struggles to sell-off state assets in its effort to ease a foreign currency and funding crisis, as Cairo’s traditional Gulf allies toughen their approach to supporting the country. As part of a $3bn loan package agreed with the IMF in October — its fourth since 2016 — Cairo agreed to reduce the footprint of the state, including the military, in the economy. Funds from asset sales are also seen as crucial to ease a severe foreign currency shortage and fill a financing gap the IMF estimates will be $17 billion over the next four years.

Oil-rich Gulf states have traditionally bailed out their neighbor in the decade since President Abdel Fattah al-Sisi seized power and were expected to be key buyers of Egyptian assets. Cairo has identified 32 public-sector companies it plans to open to private-sector participation, but since signing the IMF deal it has not announced any significant sales. The lack of progress underlines the tougher stance being taken by regional donors, including Saudi Arabia, the United Arab Emirates and Qatar. Gulf capitals have become less willing to provide traditional financial support, instead seeking commercial investments and expecting recipient governments to implement reforms. Observers have warned of a mismatch between Cairo’s expectations and those of Gulf sovereign wealth funds. Egypt’s position is to sell state assets at a massive premium to market prices because the Egyptians argue the current markets are depressed and don’t represent the long-term value according to those briefed on the discussions. There remains a huge amount of daylight between the two sides.

Observers have also questioned the willingness of President Sisi’s military-led regime to start reforms, including curbing the army’s business interests, which have markedly expanded under Sisi and stretch from agriculture and fish farms to construction and food factories. The Saudis are reportedly annoyed and frustrated that the Egyptians take them for granted. The Saudis are seeking meaningful reforms and expect a structural reform plan to be in place.

Saudi Arabia’s Public Investment Fund, which committed to invest $10bn in Egypt, recently pulled out of talks to buy state-owned United Bank after a fall in the Egyptian pound wiped hundreds of millions off its dollar value, according to an international banker and another person familiar with the discussions. The PIF declined to comment. The currency has lost nearly 35 per cent of its value against the dollar since Cairo agreed in October to move towards a more flexible exchange rate regime as part of the IMF package. Shoppers in a Cairo market amid Egypt’s economic crisis.

The government has few other ways to raise capital beyond asset sales to Gulf allies, analysts say. The Qatar Investment Authority, meanwhile, has rejected the offer of a stake in a military-owned biscuit manufacturer. The Qataris are willing to put in the money, but it needs to be a smart investment, it needs to be making money, or in a few rare cases at least breaking even,” said a person briefed on the discussions. They won’t just throw money away.

They are trying to find the right opportunity. According to recent reports the Egyptian military would resist selling profitmaking assets. However, the real issue [for buyers] is that military companies depend entirely on state funding in the form of an assured flow of government procurement contracts, subsidies, and the ability to transfer losses to the treasury. There is little attraction for outside investors unless they are assured of the continuation of these privileges. Abu Dhabi’s sovereign fund ADQ, the prime UAE vehicle investing in Egypt, has paused its projects in the country. There is no appetite for anything substantive right now. This could change following the visit by UAE president Sheikh Mohammed bin Zayed al-Nahyan to Cairo in May. The UAE remained committed to helping Cairo, but Abu Dhabi was more likely to channel support via the IMF program.

Egypt was plunged into crisis last year after foreign bond investors pulled about $20 billion out of Egyptian debt around the time of Russia’s invasion of Ukraine, amid jitters over the impact of the war on emerging markets. The authorities had been relying on the foreign portfolio’s inflows to fund its current account deficit. Cairo was forced to turn to the IMF and its Gulf allies, with Saudi Arabia, the UAE and Qatar depositing a total of $13bn in the central bank.

In a sign of Gulf nations’ shifting approach to assistance, the IMF’s Middle East director announced that the Fund had increased co-operation with Gulf states, including in the design of programs. The IMF interacts with Gulf authorities more frequently to make sure the additional financing [they provide] is also helping implement the reforms the IMF programs aim to achieve. Recently, the IMF said Gulf states had pledged $41 billion to Egypt, Jordan, Pakistan and Yemen in official support and investments and had disbursed or rolled over more than $22 billion to date.

Girls at Peruvian festival


Peru is more divided and unstable than at any point since the 1980’s. The country needs fresh elections. Peru’s president, Dina Boluarte, has withstood a wave of anti-government protests that erupted after she took office on December 7th, following the ouster of President Pedro Castillo.

However, Ms. Boluarte relied heavily on the police and military forces to suppress the protests, which seem to have abated for now. Journalists and human rights groups have documented multiple cases of alleged excessive use of lethal force. This level of repression and a lack of accountability are exacerbating an erosion of democracy in Peru. This democratic backsliding, which also reflects voter demands for a return to order after an extended period of political volatility, raises the risk that a right-wing authoritarian could eventually gain power.

Although the number and intensity of the protests have calmed down recently, and despite an assertion by some that the country has been “pacified”, there has been no peaceful settlement between the government and protesters. On the contrary, the authorities deployed strong-arm tactics to quell demonstrations, including deadly force, arbitrary arrests, intimidation, and the stigmatization of demonstrators as terrorists or criminals in official discourse. As a result, many expect political instability to remain, and we highlight the risk that these developments have set the scene for a move towards an authoritarian government reminiscent of that led by Alberto Fujimori in the 1990s.

Nearly 50 civilians have been killed in the recent unrest—the highest death toll in a single protest movement since Peru restored its democracy in 2000. Since demonstrations turned violent in December, Ms. Boluarte has relied on emergency powers and the military and police forces to contain dissent. She has also sought to quash expressions of anti-government sentiment by proposing regulations to control media coverage of protests, and by increasing prison time for people convicted of terrorism while states of emergency are in place. Moreover, the consequences for officials accused of committing deadly violence have been minimal. Ongoing criminal investigations into the incidents are likely to be shelved; no member of the Peruvian security forces has been convicted this century for killing civilians or protesters in clashes.

The government’s heavy-handed approach and limited accountability reinforce a wider trend: the deterioration of political culture in support of democracy. As the political environment has become more unstable (there have been six presidents in as many years), politicians and voters alike have abandoned once-powerful taboos against openly supporting authoritarian practices. As a case in point, the loser of Peru’s last general election in 2021, Keiko Fujimori, sought to overturn the result by making unfounded allegations of electoral fraud, and the winner, Mr. Castillo, attempted a self-coup less than two years later. These events meant that Peru was downgraded to a “hybrid regime” by the Economist Intelligence Unit’s, December, 2022 Democracy Index.

This erosion of democracy, together with the current political crisis, the growing role of the military and a desire for a restoration of order, all heighten the risk that a right-wing authoritarian leader could return to power sooner or later. There is no indication that the interim president, Ms. Boluarte plans to stay in power (she proposed holding early elections in 2024, although she stopped mentioning this possibility more recently). The risk of a military coup is also very low, despite the outsized role that the armed forces currently play. Rather, the expectation is that a right wing populist candidate could easily capitalize on rising polarization within Peru and voters’ demand for a heavy handed approach to unrest -and win the next election, which is expected at some point in 2024. A recent survey by Ipsos, a local pollster, showed that 24% of Peruvians would vote for “a strong leader, willing to act with a heavy hand to impose order”.

Should a right-wing authoritarian win the next election (which we expect to be held at some point in 2024), we would expect them to broadly maintain macroeconomic orthodoxy, but also attempt to erode institutions, including the electoral authorities and judiciary. They may well have enough legislative support to pass laws that weaken checks and balances; right-wing parties currently in Congress have called for a harsher crackdown on protesters. Although a right-wing authoritarian regime may not harm the business environment in the short term, the ensuing weakening of institutions could erode the rule of law and increase policy instability over the medium to long term, raising operational risks for firms.

For now, the situation remains uncertain, and the ascent of a right-wing authoritarian figure is by no means inevitable; elections in Peru are extremely volatile, hotly contested affairs, and another left-wing populist like Mr. Castillo could still win. However, on balance the risk that Peru falls into authoritarianism has increased. The obvious way to calm the country would be to call a fresh general election.

The constitution does need reform, but its pro-market economic chapter, which leftists want overturned, has underpinned Peru’s rapid growth and poverty-reduction over the past three decades. To remove this incentive would turn away many perspective investors and undermine many of those already operating in the country.

Peruvian society is more polarized today than it has been since at least the 1980’s. Without a clear signal from leaders on both the right and the left, on a path toward restoring democratic government, the damage to business confidence will soon become a drag on consumer confidence and potentially darken the outlook for economic rebound which the country now desperately craves.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

By Byron Shoulton, FCIA’s International Economist For questions / comments please contact Byron at bshoulton@fcia.com

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Top 5 Benefits of Trade Credit Insurance

Top 5 Benefits of Trade Credit Insurance

How does trade credit insurance work?

Trade credit insurance is a type of insurance that protects businesses from the risk of non-payment by their customers. It works by providing coverage for losses that result from a customer’s failure to pay for goods or services delivered by the insured business. The insurance company assesses the creditworthiness of the business’s customers and sets credit limits for each customer. If a customer fails to pay, the insurance company will cover the insured business for a percentage of the loss, typically between 75% an 95% of the amount owed. The cost of trade credit insurance is typically based on the insured business’s sales volume, the creditworthiness of its customers, and the level of coverage desired. Five benefits of trade credit insurance include the following:

1. Facilitate Sales

Open account credit terms can facilitate sales by making it easier for customers to purchase goods or services from a business. With open account credit terms, the customer is allowed to purchase goods or services on credit and pay for them at a later date, typically within 30 to 90 days. This can be particularly attractive to customers who may not have the funds to pay for the purchase upfront, but who are confident they will be able to pay within the credit term period. By offering open account credit terms, businesses can attract more customers and increase sales volume. However, it is important for businesses to assess the creditworthiness of their customers and manage their credit risk appropriately to minimize the risk of non-payment.

2. Protect Against Credit Losses

Credit insurance protects the insured from credit loss by providing coverage for losses that result from a customer’s failure to pay for goods or services delivered by the insured business. The insurance company assesses the creditworthiness of the insured’s customers and sets credit limits for each customer. If a customer fails to pay, the insurance company will cover the insured for a percentage of the loss, typically between 75% and 95% of the amount owed.

In other words, if the insured experiences a credit loss due to non-payment from a customer, they can file a claim with the insurance company, and if the claim is approved, the insurance company will reimburse the insured for a portion of the loss. This helps to protect the insured’s cash flow and balance sheet, and can help them to continue operating their business even if they experience losses from non-payment by customers.

It is important to note that credit insurance policies typically have exclusions and limitations, and the insured must comply with certain terms and conditions in order to be eligible for coverage. Additionally, the insurance company will typically require the insured to maintain appropriate credit management procedures and documentation to help minimize the risk of credit losses.

3. Gain Access to Additional Working Capital

Trade credit insurance can help insured businesses gain additional working capital from lenders. This is because trade credit insurance provides protection against the risk of non-payment by the insured’s customers, which can improve the creditworthiness of the insured and make them a more attractive borrower to lenders.

When an insured business has trade credit insurance in place, lenders may be more willing to extend credit or offer better terms, as they have greater confidence that the insured will be able to repay the loan. This is because the insurance policy provides protection against the risk of non-payment, which reduces the lender’s credit risk.

In addition, some lenders may even require businesses to have trade credit insurance as a condition of obtaining certain types of financing. By providing additional protection against the risk of credit losses, trade credit insurance can help businesses obtain financing on more favorable terms, which can in turn help them to grow and expand their operations.

4. Buyer Credit Risk Evaluation

Credit insurers can help insured businesses evaluate the credit risk of their buyers. As part of the underwriting process, credit insurers typically assess the creditworthiness of the insured’s customers and set credit limits for each customer. This involves analyzing a variety of factors, such as the customer’s financial statements, credit history, payment behavior, and industry trends.

In addition to setting credit limits, credit insurers may also provide ongoing monitoring and reporting on the creditworthiness of the insured’s customers. This can help the insured to identify and mitigate credit risk more effectively, and can also help them to make more informed decisions about extending credit to new customers.

Some credit insurers may also offer other services to help insured businesses manage their credit risk, such as credit risk analysis tools, customer credit reports, and online credit monitoring services. By providing these services, credit insurers can help insured businesses to make more informed decisions about extending credit and manage their credit risk more effectively.

5. Leverage Insurers Global Underwriting Platform

Many credit insurers have global underwriting platforms that allow them to provide credit insurance coverage for businesses operating in multiple countries and regions around the world.

These global underwriting platforms typically involve a network of local offices and underwriters who are familiar with the local markets, regulations, and business practices in their respective regions. This allows credit insurers to provide more customized coverage and risk assessments for each individual market.

In addition to providing coverage for businesses in multiple countries, global underwriting platforms may also offer other services such as risk assessment tools, credit monitoring and reporting, and other resources to help businesses manage their credit risk across borders.

Having a global underwriting platform can be a significant advantage for businesses that operate internationally, as it can provide them with more comprehensive and effective protection against credit losses in a wide range of markets.



Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

This article was generated by artificial intelligence and reviewed by Kirk J. Elken for accuracy.

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Major Country Risk Developments, February

Major Country Risk Developments, February

Posted with permission from greatamericaninsurancegroup.com


Federal Reserve has dialed back on the pace of interest rate increases in its ongoing fight to tame inflation. The move comes amidst evidence that inflation has slowed in the U.S. and Europe from peaks reached last year. Economic activity has slowed as consumers pull back on spending [or become more selective in shopping decisions]. Of significance, is that while inflation may have peaked, raw material and input prices remain generally elevated – with no indication of an early reversal.

The U.S. posted its largest trade deficit on record in 2022. U.S. imports exceeded exports by $948.1 billion, an increase of 12.2% over 2021. During the final two quarters as global trade slowed, U.S. imports of goods and services fell. Weaker demand for U.S. goods such as industrial supplies and consumer products contributed to a 0.9% decline in exports. The lower U.S. imports late in the year reflected slowing consumer spending. Recent reports have painted a mixed picture. U.S. manufacturing output and home sales fell in December but hiring surged in January and GDP grew a surprising 2.9% in the fourth quarter.

U.S. import growth slowed last year compared to 2021 as consumers spent less overall on goods such as home fitness equipment and furniture which boosted spending on services such as travel and restaurant meals.

U.S. exports of petroleum products and liquefied natural gas boomed after Russia’s invasion of Ukraine led to sanctions on its energy products. Also, Americans flocked to Europe [and elsewhere] as international travel reopened, taking advantage of the strong dollar. The sharp slowdown in the U.S. housing market has reduced demand for shipments of furniture, kitchenware, and lighting.

Global shipping demand has slowed since November after retailers amassed excess inventory. Globally, many are reporting excess supplies on hand.

Sentiments in Europe have adjusted since December, with a consensus expecting the region to escape a recession this year. That is because energy prices have dipped from recent peaks due to adequate reserves and a much milder winter than anticipated.

Furthermore, generous government support provided to households and companies to cushion an expected price spike kept confidence afloat.

Both the Federal Reserve and the European Central Bank (ECB) have continued raising interest rates, but at smaller increments. The consensus is that the tightening cycle that begun in 2022 will likely be concluded by year-end 2023. We doubt that central banks will begin cutting interest before early 2024.

Eurozone consumer prices rose at an annual rate of 8.5% in January, down from 9.6% in December and well below the record high of 10.6%, hit in the year to October. However, core inflation, which excludes changes in food and energy -and is considered a better measure of underlying inflation- remains unchanged at an all-time high of 5.2%. Headline inflation is slowing in most advanced countries, reflecting the easing of global energy costs. Meanwhile, price pressures in the services sector are expected to remain elevated for months to come.

Trade also fell in Europe at the end of 2022, reflecting weakening domestic and overseas demand. German imports of goods fell by 6.1% in December while exports fell by 6.3%. In France, imports were 1.9% lower in the fourth quarter, while exports were down 0.3%

While the fall in headline inflation is welcome, the Federal Reserve, the ECB, the Bank of England, and Bank of Canada officials remain vigilant about bringing down elevated core inflation. The central banks will need to see solid evidence of consistent cooling of price pressures before ending the cycle of rate hikes. We project that such evidence may be unlikely before the end of 2023.

Separate data on labor markets show that Eurozone and U.S. employment levels remain resilient. Even with a number of recent layoff announcements in the technology sector, U.S. unemployment fell to 3.4% (a level not seen since 1969).

Eurozone unemployment remained unchanged at 6.6% across the bloc, (the lowest level since records began in 1995). German manufacturing held up much better than expected in the final quarter of 2022. Output at factories rose in November and December, boosting hopes of a milder economic slowdown in the eurozone. Unemployment also fell in Italy, France, and Spain.

The new data helped the euro gain almost 1% against the dollar, its strongest level in six months. Estimates for eurozone growth have been upgraded on the back of better than expected weather conditions which eased demand for gas causing declines in wholesale gas prices. More investors and businesses are increasingly expecting a mild recession, or the possibility that Europe could avoid a recession this year.

Meanwhile, fertilizer and crop prices have fallen sharply since their peaks after last year’s Russian invasion of Ukraine. Yet, agricultural specialists warn that the world’s food supplies are still under threat. Food prices were already elevated before Russia’s full-scale invasion a year ago, due to droughts and pandemic-related hoarding by governments and businesses.

Last year prices for crop nutrients soared as a result of Russia’s position as the world’s largest fertilizer exporter, while the jump in natural gas prices, a critical ingredient for nitrogen fertilizers, also piled pressure onto agricultural markets.

The Black Sea grain deal between Russia and Ukraine brokered by Turkey, played a crucial role in subduing prices, along with plentiful supplies from Russia; and lower natural gas prices have calmed fertilizer prices. However, it is important to note that this Black Sea grain deal could unravel, and volatile energy prices and climate change also could undermine crop production. The most immediate danger is the UN-backed grain deal, which is due to be renewed in March. Any failure to extend it would block exports of Ukrainian grain, sending prices through the roof again.

While many crops, along with fertilizers, are exempt from sanctions imposed on Russia by Ukraine’s allies, many banks, insurers, and logistics groups have been reluctant to handle Russian farm produce. Relatively low grain inventory levels have added to concerns about global food supplies. For wheat, the stock-to-use ratio shows projected stocks for the end of the crop year in June at 58 days, the lowest level since 2008, when international food prices soared after droughts and an increase in global energy prices. Because of the low global stock situation, prices will remain volatile and could even head higher if a drought or significant weather event emerges in the spring.

Currency movements are also important for food supplies in many developing countries. Despite recent declines in food prices on international markets, the strength of the dollar is likely to keep costs in local currencies high. That means food inflation for consumers will likely persist in 2023, due to the lag for internationally traded prices to work their way through to retail supply chains. A record wheat crop in Russia and bumper corn, and soybean harvests in Brazil have relieved tightness in international grain and vegetable oil markets, while recent fall in the price of natural gas, a feedstock, has increased production of nitrogen crop nutrients. Cheaper international prices, including for fertilizer, will likely remove some of the pressure on growers.

The shocks of the past three years have hit lower-middle income developing countries hard. The world’s poorest countries are threatened. According to the IMF, about 15% of low income countries are already in debt distress and an additional 45% are at high risk of debt distress. Sri Lanka, Ghana, and Zambia are already in default. Many more are expected to follow. The terms of borrowing (low interest rates) were attractive but risky. Then came Covid-19, with soaring energy and food prices, higher interest rates, a strong dollar and a global slowdown which have now rendered the costs prohibitive. That is where several of these vulnerable countries now find themselves.

When debt becomes unaffordable, it needs to be restructured. But restructuring has become even more difficult than it was in the 1980’s, following the Latin American debt crisis in 1982. Back then, the main creditors were a few western banks, western governments and western-dominated institutional financial institutions. It was then relatively easy to coordinate between these entities.

Between 2000 and 2021, the share of public and publicly guaranteed external debt of low and lower-middle income countries owed bondholders jumped to 50%, while the share owed to China rose from1% to 15%. Meanwhile, the share held by 22 predominantly western members of the Paris Club of official lenders fell from 55% to 18%. Therefore, coordinating creditors in a comprehensive debt restructuring operation has become much harder, because of their greater number and their diversity. No one wants to restructure debt owed to themselves if that would merely benefit other creditors, not the country itself.

Factory workers


China’s export boom that propelled the world’s second-largest economy through much of the pandemic has sputtered. China’s exports to the rest of the world fell 9.9% in December compared to a year earlier. This was a steeper decline than the 8.7% drop recorded in November and reverses a long spell of surging exports earlier in the pandemic as Western consumers snapped up electronics and other consumer goods while working remotely Chinese exports in 2022 were 7% higher than a year earlier, at $3.6 trillion. That marked a slowdown from double-digit percentage gain in 2021. That has reinforced concerns that China will no longer be able to count on robust trade to power growth in 2023. Chinese authorities expect to kick-start economic growth this year after lifting its stringent Covid-19 restrictions. They face a challenge: Chinese citizens borrowed less and saved more last year and it is not clear how long it will take to return to free-spending ways. Individuals in China took out the equivalent of $564 billion in new loans in 2022, down more than half from 2021, marking the lowest total since 2014 according to government data. The huge decline was largely due to fall in home sales, which translated into lower demand for new mortgages. Everyday consumer spending also took a hit during lockdowns that affected many Chinese cities, reducing the need for short-term borrowing. Consumers, instead, accumulated cash, pushing new household deposits in China to a record high of more than $2.6 trillion in 2022. With few attractive investment options – the country’s stock market had another lackluster year- some homeowners used their excess cash to repay their mortgages instead of making big purchases Any major shift in Chinese consumer behavior will have broad implications for the banking and consumer goods sectors. Although a rise in deposits means Chinese banks are getting a cheaper source of funding, the slowdown in borrowing will hurt their net interest margins, the difference between what banks charge for loans and pay for deposits. Companies, including online retailers and travel companies are expecting a pickup in consumption this year following a difficult few years. Since Chinese authorities allowed people to move around again late last year, retail spending and travel have started to rebound. During the recent Lunar New Year holiday, Chinese families spent more on travel, movies, and food from restaurants, according to private and public data. However, with economic uncertainties continuing, big ticket purchases such as real estate will take longer to recover. The higher savings and lower borrowing rates and a lack of consumer confidence could continue to hold back spending. Both consumer and business confidence fell in the past year. With uncertainty about the future the tendency is to save. When the Chinese government brought an end to its strict zero-Covid policy and unveiled a series of measures designed to help revitalize the real estate sector between November and December, stocks jumped in anticipation of a recovery. However, there is a growing consensus that it will take until the third quarter for consumption to recover to near pre-pandemic levels. Some fear that the generation of Chinese consumers who emerge from the pandemic may have similarities to Americans who experienced the Great Depression. They could develop a long-term shift in their desire to save more. If that were to occur, we could see weaker Chinese GDP growth going forward -than many anticipate. A survey from the People’s Bank of China conducted late last year, show that half of the respondents felt uncertain about their job prospects, while a quarter said their incomes had decreased. The same survey, which covered 20,000 depositors in 50 cities across China, asked whether people prefer to save, spend or invest. Around 62% of the respondents chose saving, 23% picked spending and only a sixth intended to invest more. Fading western demand and China’s zero-tolerance approach to Covid-19 outbreaks through last year took their toll on overseas sales by other leading Asian export countries last year. South Korea’s exports in December were 9.6% lower than a year earlier, while exports from Taiwan were down 3%. Meanwhile, Japan’s exports in December grew 11.5%. aided by a steep fall in the yen against the dollar and other major currencies. Still, that was slower than the near 20% annual growth recorded in November, and sharply below annual growth of close to 30% recorded in September.


President Gustavo Petro has completed his first year in office taking a pragmatic policy approach that helped him make some progress on his campaign agenda. This included significant political reforms aimed at fighting corruption. The success in pushing forward the reforms served to consolidate the position of the ruling Pacto Historico (PH) coalition as a political force to be reckoned with going forward. Local parliamentary elections, scheduled for October 29, 2023, will likely complicate governability. The ruling PH and the centrist parties that support the president in Congress, will each put forward their own candidates, which will likely weaken President Petro’s large working coalition. However, if the government’s proposals for political reform is approved, the PH should find itself in a stronger position ahead of the polls, having attracted credible legislators from other parties who may wish to stand in municipalities with large budgets. The orientation of Colombia’s international relations is shifting under the Petro government. The president has tried to remain on good terms with the U.S. (historically Colombia’s main ally in the region). However, some aspects of his agenda–such as the restoration of diplomatic relations with Venezuela in order to re-establish bilateral trade and improve security conditions along their shared border–may raise tensions with the U.S. That is uncertain since the U.S. itself appears to be shifting its attitude toward the Venezuelan regime of Nicolás Maduro (in order to access Venezuelan oil). On the other hand, unlike many countries in Latin America, Colombia is unlikely to seek any stronger ties with China, as it will not want to put its relationship with the U.S. at risk. The sitting Petro government is focused on expanding the state’s role in the economy via a more progressive tax regime, higher social spending, greater state intervention and increased protectionism. One priority is to compensate poor families whose incomes are being squeezed by current high inflation rates, by raising the value of monthly government cash transfers. Inconsistent statements by members of Mr. Petro’s ideologically heterogeneous cabinet will cause uncertainty regarding the direction of policymaking in the near term, but the president is likely to maintain a fairly moderate stance and policy changes will be less radical than his campaign promises suggested. With regard to prospects for economic growth in 2023, it appears that a combination of domestic monetary policy tightening, and persistently high inflation will push Colombia into a technical recession (GDP expected to contract in the last quarter of 2022 and the first quarter of 2023). While the Petro’s government continuing pragmatism should bolster political stability, the policy outlook is uncertain, and when coupled with tax increases, will tend to keep gross fixed investment subdued this year. The expectation is that unfavorable international economic conditions will contribute to domestic growth slowdown, from an estimated 7.9% GDP expansion in 2022 to growth of only 1.6% in 2023. However, upward revisions to global and Chinese growth for 2023 should see stronger than expected demand for Colombian exports. Moreover, a 16% increase in the minimum wage for 2023, which is higher than was expected, will help support private consumption. The more benign global outlook and the boost to household spending from the higher minimum wage have led to a less pessimistic view of Colombia’s GDP performance in 2023. The inflation rate reached 13.1% in December (the highest level for more than 20 years), driven mainly by higher food prices – surpassed most expectations. The 16% minimum-wage increase this year, will add to the trend of increasingly entrenched price pressures which will complicate the task of achieving disinflation any time soon. Should price pressures begin to subside as the effects of monetary tightening become apparent later this year, and as private consumption decelerates more sharply, we will likely see inflation begin to retreat towards year-end. The forecast is for 2023 year-end inflation of around 12%. The best case expectation is that it will take until end-2024 for inflation to approach the central bank’s 3% target [which is unlikely to be met before 2025]. Currency volatility, high oil prices and continuing global supply-chain bottlenecks pose risks to the inflation forecast. Interest rates easing may begin in the second half of 2023. Exchange rate volatility is likely over the near-term, and markets have already priced in higher interest rate risk under the Petro government. Based on this assumption and on the expectation that Colombia’s wide fiscal and current-account deficits will narrow (albeit gradually), the peso is expected to strengthen only modestly this year, from an estimated Ps4,700:US$1 at end-2022 to Ps4,662:US$1 at end-2023. Assuming that the country’s twin deficits continue to narrow, and that other macroeconomic forecasts materialize (including a gradually weaker U.S. dollar), the peso could strengthen to around Ps4,150:US$1 by end-2027. Colombia’s large current-account deficit remain a source of vulnerability and contributes to currency depreciation pressure. Despite windfall oil income, the deficit is expected to remain sizeable in the near term at least. Although the trade deficit will narrow in 2023, the combination of profit remittances by firms (mainly in the oil sector) and weaker inflows of workers’ remittances amid a U.S. slowdown could prevent a sharper narrowing of the overall current-account deficit, which will remain large, at 4.6% of GDP in 2023 (against an estimated 5.6% of GDP in 2022). Over the medium term, inflows of workers’ remittances will recover (as U.S. economic growth picks up in 2024-27) and profit remittances should ease, helping to narrow the current-account deficit gradually, to 3% of GDP over the next 4-years. Nonetheless, a strong (albeit diminishing) cushion of foreign exchange reserves, Colombia’s flexible credit line with the IMF, continued access to international markets and reasonable foreign direct investment inflows, will limit the country’s external risks. Furthermore, a pick-up in demand for Colombia’s exports is anticipated in 2023-24, assisted by China’s anticipated recovery.



Widespread anti-government protests are disrupting copper output in Peru, the world’s second largest producer. This has triggered predictions of a possible surge in copper prices which has already rocketed in recent months as China’s resource-dependent economy reopens. Demonstrations demanding early elections and the resignation of interim President Dina Boluarte have thrown up roadblocks across the country and attacked mines, causing production slowdowns and closures in Peru’s copper operations. The country accounts for 10% of global copper supplies. Copper [which has a wide variety of applications, including electricity cables and electric car production] prices have jumped to $9,000 per ton in three months. The abrupt end to draconian Covid restrictions in China, boosted demand for the metal. The recent supply snags in Peru could provide fresh upward impetus for prices to climb further. The situation appears to be getting worse, with production losses expected to escalate rapidly. This is considered the first flare up in Peru’s longstanding issues with the mining industry, and it seems likely that volatility could take copper prices as high as $12,000 per ton, according to industry strategists. A political crisis that has long been percolating – Peru has had six presidents since 2018- is now boiling over following leftist president Padro Castillo’s removal from office on December 7th – after he attempted to close congress and rule by decree. Boluarte, who served as his vice-president, was sworn in hours later. Much of the unrest has been focused in the copper-rich south, where Castillo – viewed as a champion for the rights of indigenous and rural communities remains popular for his opposition to large-scale natural resources companies. Peru is also a large producer of gold, zin, and tin. The miner Buenaventura suspended operations at its silver mine after protesters broke in. Another mining company reports that mines, especially those located in Peru’s south, are running out of supplies such as explosives and steel. They also report being unable to refresh their workforces because of the disruptions and acknowledge that copper exports are now below where they were just two or three months ago. Key mines have had to suspend operations. Glencore’s Antapaccay mine, which produced 170,000 tons of copper concentrates in 2021, temporarily suspended operations after it was attacked by protesters in late January. Chinese-owned Las Bambas mine – responsible for 2% of global production, halted output without a restart date because of transport disruptions which hit critical supplies. Freeport-McMoRan, which operates Cerro Verde, Peru’s largest copper mine, acknowledged that it had reduced ore extraction by 10-15% per day in a bid to conserve supplies critical to keeping operations running. Global copper supply suffered a disruption rate – the amount of supply lost versus forecasts of 6.3%, compared with the usual average of 4-5%. The rate for Peru was 12%. Moody’s switched its outlook for Peru’s sovereign debt from stable to negative, though it affirmed the country’s investment grade rating. The rating agency said the sustained unrest would affect investor confidence, undermine growth, and complicate fiscal management. Expectations are that the economy could slip into recession by the final quarter of 2023. Agricultural businesses have also been hurt by the protests, with the country’s leading industry association estimating that $300 million in exports have been lost since protests began in December. Peru is a major exporter of grapes and blueberries.

Nigerian Naira


The country’s highest court and the IMF have weighed into a botched plan to replace Nigeria’s largest currency notes. The rollout has caused chaos across the country just weeks ahead of a crucial general election. The Supreme Court slapped a temporary ban on the enforcement of the current deadline to replace the naira N200, N500 an N1,000 notes on February 10, pending the hearing of a lawsuit brought by three northern states challenging the new currency design. It adjourned that hearing until February 15. The central bank, which is overseeing the introduction of the new notes, has already had to extend the deadline to swap the old currency after shortages of the notes led to huge lines at banks across the country. The IMF is calling on Nigeria to allow more time to complete the process, noting the problems with the rollout. The three states took the federal government to court, arguing that the scarcity of new notes was causing severe hardship and stating that there had been insufficient time to complete the process. The states argued that economic activities were grinding to a halt as a result of the currency redesign. The court order is the latest twist in the chaotic rollout first announced late last year. The central bank announced at the time that the new notes would be more secure, prevent counterfeiting and allow Nigeria to move to a more card and electronic payment-based economy. The notes were unveiled in October but the central bank only started supplying them to commercial lenders in December, leading to shortages across the country where most transactions are in cash. The original January 31 deadline for old notes to cease being legal tender had already been extended by 10 days before the Supreme Court’s ruling. Long lines have formed outside cash machines and scuffles have broken out in banking halls as customers reportedly jostled to withdraw money ahead of the deadline. There have been protests in parts of the country amid frustration over the unavailability of the new notes. Bank executives report that they have not been supplied with enough naira to replace the old notes that have been collected. Nigerian anti-corruption agencies have alleged that some banks are hoarding the new currency. Meanwhile, Nigeria braces for its presidential elections to take place on February 25. A team of western educated analysts and economists based in Lagos, are now fine-tuning a data system aimed to bring evidence-based insights into the complex electoral races – where official data is deemed to be so unreliable that no one seems to know exactly the size of the population. Election polling has been done before in Nigeria, but usually in the form of surveys commissioned by political parties and other organizations for internal use. In this election cycle at least two data specialist firms are aiming to fill a gap in the market for high-quality, publicly available information. Surveys covering big issues, such as the proposed removal of fuel subsidies, would help Nigeria’s leaders in decision making. The intent is to be able to do polling on any difficult decisions the next government may have to take. There is a growing awareness that public policy and private industry need to know what the Nigerian public is thinking about national issues- before taking decisions that will affect them. By Byron Shoulton, FCIA’s International Economist For questions / comments please contact Byron at bshoulton@fcia.com    

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

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Major Country Risk Developments January 2023

Major Country Risk Developments January 2023

Posted with permission from greatamericaninsurancegroup.com


The global economy faces several uncertainties in 2023, the most prominent being: are we in a recession, and if so, how steep, or widespread will it be? According to the International Monetary Fund, one-third of all countries around the world will likely experience a recession beginning in 2023. The IMF also believes the global economy still has some ways to go before policymakers and central bankers can ease back on the current monetary tightening cycle – meaning further interest rate increases in 2023. Inflationary pressures remain elevated, however there are recent signs that some pressures have cooled – as energy and commodity prices pull back from recent highs. Many believe the current economic slowdown can remain just a slowdown. Others believe that a recession, will in all likelihood, be narrow and short-lived; while others are bracing for a steep contraction this year, given continued weak global demand, higher borrowing costs and rising debt service costs – which is contributing to the more gloomy outlook.

U.S. Federal Reserve (Fed) officials warned they will need to see substantially more evidence of inflation easing before they are convinced that price pressures are under control. Minutes of the Fed’s December 2022 meeting, when the central bank raised its benchmark rate by half a percentage point, showed that the Fed intends to continue squeezing the economy to try to tackle price pressures, which they believe could prove more persistent than anticipated. December’s half-point rise ended a months-long string of 0.75 percentage point increases and lifted the target range of the federal funds rate to between 4.25% and 4.5%. The decision in December followed fresh evidence that inflation appeared to have peaked as energy prices and those tied to the goods sector have retreated. U.S. GDP growth is set to slow as borrowing costs are kept high for an extended period, with most Fed officials projecting growth of just 0.5% this year before a 1.6% rebound in 2024.

U.S. unemployment currently at 3.6% is projected to increase by nearly a full percentage point during 2023. So far, the Fed’s tightening has been felt most in interest-sensitive sectors such as housing, where prices have declined dramatically from their pandemic peaks. However, labor demand remains high as consumers continue to spend, helping to further entrench inflationary pressures that have taken hold across the services sector.

Meanwhile, with unusually mild temperatures so far this winter in Europe and the United States, energy costs seem likely to be less of a strain on households and businesses -than previously feared.

Also, global grain prices have retreated in recent months after recording record highs in 2022 as the war in Ukraine stifled supply -as did dry weather in many crop-growing areas. Now, grain prices have fallen close to where they were at the start of 2022. The recent decline is consistent with an overall easing of commodity prices including natural gas, cotton, lumber, and crude oil. Weaker global demand, and China’s current downturn has contributed to price declines and will likely help prevent significant price spikes in the months ahead. More interest rate boosts by the Fed and other central banks aimed at cooling economy activity in the year ahead, when taken together with China’s slowdown, has the potential to birth a recession.

The outlook for global grain availability and pricing will remain uncertain, partly because so much hinges on the outcome of the war in Ukraine – which shows no sign of an early conclusion. Despite a fragile deal allowing some Ukrainian grain exports to go forward, the level of exports are far below pre-war highs. That arrangement remains shaky and will require ongoing monitoring. Future Ukraine grain planting, harvesting and access to global markets is not guaranteed. Whether western sanctions imposed on Russian exports have had a substantial impact on its foreign exchange earnings and it ability to wage the ongoing war – is unclear.

Going forward Russia believes it can survive sanctions and western economic war by using the global marketplace to its advantage. China, India, Turkey, and oil markets continue to buy and sell hugely discounted Russian crude and other exports since and during the war. Russian energy exports that previously flowed to Europe will now head to India, China, and Turkey. U.S. energy exports will flow to Europe and shipments from the Middle East may plug gaps in both directions. How this new system performs, whether the sanctions regime works and who will step in- to trade more Russian energy, will drive prices over the next twelve months and potentially for years to come. Last year’s energy crisis revived fears about energy security, presenting an opportunity for industry groups to argue in favor of continued investment in oil and gas during the period of transition from fossil fuels. The sources of energy – of all sorts- needs further diversification, new finds, and greater investment commitments for the coming decades.

On balance, it now appears that energy prices will remain volatile but mostly manageable this year, given the need for countries to refill national reserves drawn down to help combat OPEC production cut, will keep energy demand consistent this year, even without robust global economic activity. During this period of uncertainty, producers will need to keep sufficient reliable suppliers available, while consuming nations will need to ensure that sufficient reserves are kept on hand.

Western nations have placed a price cap of $60 per barrel on Russian crude exports, a move meant to crimp Russia’s ability to spend on the war. Russia has refused to sell its crude or petroleum products to countries endorsing the price cap imposed by the western alliance. The market for crude remains brisk, and during these periods of global tension, sanctions avoidance has become an art form for Russian exporters.

Movements in crude prices influence agricultural prices because demand for U.S. and Brazilian corn and soybeans stems in part from renewables fuels. Corn, for example, is the key ingredient for producing ethanol; while soybean oil is a vegetable used for the production of biofuels. Higher crude oil prices make producing such fuels more attractive, thus stimulating demand for the underlying grain. Many analysts are betting that prices for grain and other commodities could likely slip in 2023, at the height of a possible recession, with continued monetary tightening in major economies.

However, farmers and the agricultural sector are contending with higher operational costs, including for fertilizers and farm equipment. That could keep grain prices elevated in 2023. Grains tend to trade at or near their cost of production, but historically seldom trade below production cost. Prices for fertilizer components such as urea have pulled back from record highs in 2022 but remain well above the five-year average. Prices for natural gas, another raw material for fertilizer, have fallen sharply over the past month, but they are also up from a year ago.

A change in the financial climate has already hit the technology sector, letting the air out of the bubble in growth stocks. This could be compounded if an economic downturn follows in 2023, turning a sharp valuation adjustment into a broad-based rout in the tech industry. Many tech companies have already been struggling to deal with the aftermath of the recent boom, by cutting workers and paring back investments. An economic crunch that also hit demand for their products and services would force many companies to much deeper cuts and threaten the post-covid hangover into an outright tech depression.

The real estate and construction sectors are recalibrating as the long era of cheap money, which has drawn so many new investors into those sectors since the financial crisis, comes to a halt. Owners of offices, shops, warehouses around the world were still figuring out what impact the pandemic has had on their tenants when they were hit by rising interest rates in 2022. Higher borrowing costs, inflation and the threat of recession will push some landlords to the brink in 2023, and the expectation is that forced sales will begin in earnest within the first half of the year, as property owners have to refinance loans at far higher rates or sell assets to meet redemption requests from investors.

Global economic growth is forecast to slow from 6% in 2021 to 3.1% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 and during the acute phase of the Covid-19 pandemic.


A resilient Germany is weathering the energy crunch. German inflation slowed more than expected in December, sliding into single digits for the first time since last summer and providing some relief for the European Central Bank [ECB] in its battle to control price increases. Consumer price inflation fell to 9.6% in December, well down on the 11.3% registered in November.

EuroZone Flags

The eurozone’s largest economy is the latest country to experience a sharper than expected fall in price pressures. The German number, down from a seven-decade peak of 11.6% in October – follows a sharp fall in inflation in Spain and may ease pressure on the ECB, which will next meet to set rates on February 2, 2023.

Together, the German and Spanish figures suggest eurozone inflation could drop lower than the 9.7% forecast by economists. According to the Institute of International Finance, a trade body for global finance, the fall in inflation means that the peak of ECB hawkishness is behind us. Headline inflation in Germany seems to have reached its peak and unless there is another large surge in energy prices, double digit inflation numbers should be gone for some time. However, some caution is appropriate as the nature of the sharp decline is in part driven by the government’s gas price support subsidies. Nonetheless, the ECB is still on course to raise rates a few more times this year.

German headline inflation is still likely to continue to decline further in the months ahead. Separate data from the German Labor Office showed unemployment declined to 5.5%. The robustness of the country’s labor market is expected to bolster the ECB’s view that the eurozone recession is set to be shallow and that underlying price pressures remain too strong to stop the tightening cycle at this time.

European natural gas prices have fallen to levels last recorded before the Russian invasion of Ukraine last February, as warmer weather helps to preserve reserves.

The Dutch gas futures for January, the benchmark European contract, dropped to its lowest levels in ten months. Russia’s weaponizing of the commodities it sells to Europe, combined with record-breaking temperatures, helped push gas prices to more than $500 per metric unit over the summer. In an effort to stem prices, the EU has implemented a series of measures including mandatory gas storage and consumption reduction targets.

The latest price decline comes from warmer than usual temperatures across north-west Europe, which are expected to linger for a while. As the warm weather reduces heating demand, Europe has been able to build up its gas inventory again after drawdowns from mid-November, including during cold snaps in December.

Since Christmas Eve, Europe has been sending more gas into its storage facilities than it has taken out of them, with storage levels increasing. Capacity stood at 82.2% as of year-end, down from the mid-November high of 95.6% , according to the industry body, Gas Infrastructure Europe. The current level is 30% higher than the same period last year, when Europe had unusually low levels of storage, and about 10% higher than the average of the previous five years. Reduced demand for gas has also helped inventories, with the region cutting its requirements by about a quarter compared with the five-year average.

Analysts warn that Europe will be in a difficult position when trying to restock its gas inventory next winter, when the volume of gas supplied from Russian pipelines will be considerably lower and liquified natural gas market, which the region has depended on this year, remains tight.

Weakened demand in China, the world’s leading grain consumer, will likely affect the outlook for agricultural futures in 2023. With the Chinese authorities having now reversed previous Covid lockdown protocols, Chinese companies, factories, and traders are seeking to step up economic activity. However, that could take months. The consensus is for an economic turnaround in China to pick-up pace late in 2023, once the current outbreak of the Omicron variant has subsided.

In a change of course, China’s pandemic controls that included relentless lockdowns, mass testing, quarantine and electronic contact tracing have been rapidly dismantled. The toll those policies had on the economy are many. Meanwhile, the sudden abandonment of the zero-Covid playbook has led to an alarming spike in new Covid-19 infections and, according to some forecasts, could lead to millions of deaths over the winter. For the next several months the impact on Chinese growth will be negative, the impact on the region will be negative and the impact on global growth will also be negative, according to the IMF.

Before the recent sudden reopening of society, Chinese doctors and nurses warned that the country was unprepared for a new Covid wave, given thinly resourced hospitals and medical clinics, and nearly 90 million Chinese aged 60 and over – who had not received three vaccine doses. Now, China’s healthcare system is being overwhelmed with a deluge of sick patients, and funeral providers are unable to keep up with demand for their services.

Beyond the immediate health crisis, which could persist for months, the true extent of the damage wrought upon Chinese society by the Administration’s zero-covid policies is only just emerging. For large swaths of the 1.4 billion population, the pandemic shattered the fragile balance that once supported the back-and-forth movement of people from rural areas to cities. Zero-covid’s vast web of intersecting restrictions hammered low-income families, and in some cases, left people cut-off from their loved ones.

As the restrictions have been unwound, it is becoming clear that the pandemic’s scars are deepest among youngsters in rural areas, experts say. Rising inequality, which is heavily influenced by access to education, could in the coming years carry repercussions for the Chinese leadership and the ruling Chinese Communist Party. In addition, China’s youth unemployment rate has been near-record levels and the brunt of the impact is shouldered by those born to poorer households. At the height of the nationwide lockdowns in 2020, the UN estimated that 1.5 billion school children globally were affected by school closures, a third of which did not have access to remote learning facilities. However, the problem facing China’s 291 million students stand out because of just how long Beijing persisted in using lockdowns to try to contain the virus. Weak test results show how much learning has deteriorated among students in rural provinces. Teachers in China report a decline in the quality of students’ ability overall since the pandemic.

One negative effect that is little discussed but may have longer-term implications is education. as it has sharpened China’s already high levels of social inequality, especially between urban and rural residents. Many young people from rural areas or the urban lower classes have been forced to study online and have been separated from their parents for long periods over the past three years. The result is that their education -hitherto their only path to upward mobility- hangs in the balance.

Despite the dangers inherent in public displays of dissent, frustrations among younger Chinese and opposition to the policies of the current rulers, have become increasingly evident in recent months. The sudden reversal in China’s Covid lockdown policies, came on the heels of recent national street protests and demonstrations. An Australian think-tank has tracked more than 100 protests and acts of public resistance across 39 cities across China. Some Chinese experts believe that the legacy of the 2022 protests will go far beyond the zero-Covid policy reversal. The current period marks a turning point for a generation who have no memory or knowledge of the 1989 Tiananmen democracy movement. Prior to the protests, Chinese citizens had largely complied with the zero-Covid policy as citizens under any authoritarian system would. However, last year’s protests showed that not all Chinese people feel the authorities are infallible, and some are daring to dissent for the first time. Other experts point to the credibility of President Xi Jinping’s being badly wounded as Covid death toll mounts. There is also a sense of exhaustion among much of China’s middle class, dashing hopes of an economic recovery based on pent-up consumer demand. Despite official forecasts promoting an early economic turnaround, some economists refuse from ruling out a long phase of stagnation to hit the Chinese economy. This remains the biggest uncertainty for many observers.

The transition back to normal life is proving difficult. There is a sense of euphoria that restrictions are being lifted but fears remain. Central shopping districts in many big cities appear empty during the day. Over the three-day public holiday around January 1st, the number of domestic trips was barely higher than a year earlier, and less than 45% of the pre-pandemic figure. At cinemas, sales were down nearly 46%. However, reports of a pick-up in nightlife is encouraging with images of packed bars and crowds of new year revelers in cities across the country have circulated on Chinese social media. While the disease spreads, it will be hard to keep production lines running and haulage trucks on the road. Covid is also ripping through factory towns and causing serious disruption. Local governments and company managers are battling high infection rates on factory floors. In late December suppliers in major exporting provinces such as Guangdong, Zhejiang, Shandong, and Jiangsu faced severe delays. Many home appliance makers, for example, were operating at 20%-50% capacity.

Another worry is that workers could be forced to quit to take care of elderly family members living far from the factories. As China proceeds with its flash exit from zero-covid, manufacturing hubs could experience some short-term shocks to labor supply, as workers head home earlier than expected for their Chinese New Year break. They may also delay their return.

Local government intervention may also pose a risk to business. Some executives worry that as cases surge, officials could begin to seal off their towns. Even within towns, traffic from one district to another might be restricted. That would interrupt the connectivity that makes Chinese cities so efficient for manufacturers. Predicting how long such disruptions may last is difficult.


The Egyptian pound plunged to a record low early in the New Year, the latest sign of the country’s severe foreign currency crunch, two months after agreeing to a $3 billion rescue loan from the IMF. This is the fourth time in six years that Egypt has had to resort to the IMF.

The currency fell 6% to 26.4 to the U.S. dollar – the steepest slide since the Central Bank of Egypt (CBE) in late October devalued the pound in an effort to clinch the IMF deal. The recent slide comes as billions of dollars of imports are blocked in Egyptian ports because local banks are unable to secure enough dollars to pay for them due to the shortage of foreign currency. This has left importers stranded for badly needed parts, manufacturing inputs, raw materials, consumer goods, etc.

Russia’s invasion of Ukraine in February 2022 spurred outflows of $20 billion from Egypt- in a flight to safety by foreign debt investors. The war also caused prices of raw materials to soar, dealing a powerful blow to Egypt, the world’s biggest importer of wheat. In an effort to conserve foreign currency, the CBE placed restrictions on imports last March. The requirement to use letters of credit, or Documentary Credit, slowed the process and created a backlog of unfulfilled demand for dollars. It also prioritized access, placing basic commodities such as food staples and medicines at the top of the list.

The new IMF pact includes a requirement that Egypt implement a permanent shift to a flexible exchange rate regime instead of using foreign currency reserves to keep the exchange rate at a targeted level. This way, market forces would determine the currency’s value- something Egyptian governments have long resisted. The CBE devalued the pound in March 2022, and then again in October, with the currency losing 40% of its value against the dollar over the period. The two devaluations reduced the pound from around 16:U.S.$1, to 24.7:U.S.$1. The CBE increased interest rates by 300 basis points on December 22, taking the overnight deposit rate to 16.25%. The rise surprised expectations and reflects increasing concern about inflation, the falling pound, as well as the need for Egypt to attract foreign portfolio investors back (with these higher interest rates).

It is unclear if the recent fall in the currency exchange rate in early January, represented the expected move to a flexible exchange rate regime. To determine that, we will need to monitor the level at which the currency will eventually stabilize, the extent to which this will lead to improved foreign currency liquidity in banks and if we see more volatility in the pound going forward.

Last year, the CBE revoked the need for importers to use letters of credit, a measure that was initially introduced in March in order to conserve scarce foreign currency resources by slowing down the import process. Successive Egyptian governments have been reluctant to move to a flexible exchange rate to avoid big jumps in prices in a country reliant on imports for many of its basic needs. But the scarcity of foreign currency in recent months and the emergence of a parallel market in dollars had already stoked inflation to 18.7% in November, its highest level in five years.

In December, the CBE boosted interest by three percentage points in an attempt to cool down inflation. State-owned banks early in January began offering one-year deposit certificates at a 25% interest rate- a move aimed at enticing savers to hold on to their Egyptian pounds rather than convert them to dollars.

Businesses from poultry farmers to car manufacturers have been badly hit in a country that imports most of its food and many of the inputs for its industries. As policymakers ponder when and how to move to a flexible exchange rate regime where the value of the pound is not propped by the CBE, entrepreneurs complain they have no visibility on the future.

Importers will be watching to see if dollars will be available to clear the backlog of imports stuck in ports, which equated to about $9.5 billion, this according to the Prime Minister. These include goods ranging from corn and soya, used as animal feed, to cars, industrial inputs, and household appliances. Importers in a variety of sectors were all caught up in the predicament: how to secure foreign exchange to pay for necessary inputs needed to run their businesses. Car parts, corn, soya, among other essential goods, remain stuck at the ports. Some poultry farmers have had to kill chicks. The result a substantially lower supply of chickens being sold causing prices to increase more than 50% last year. That example is applicable across a variety of sectors in Egypt.

Despite $13 billion in deposits from the United Arab Emirates, Saudi Arabia, and Qatar and another $3.3 billion in asset sales to the UAE in 2022, foreign currency has remained in desperately short supply for this import-dependent country. In late December President Abdel Fattah al-Sisi commented that banks would secure foreign exchange necessary to clear the backlog of imports within four days. He didn’t say from what source.

Concerns have lingered about the Egyptian authorities commitment to a flexible exchange rate, but developments over the past week suggest that they may be moving in the right direction. However, Cairo based investment bankers stress that the shift to a flexible exchange rate system cannot happen overnight. Instead, the authorities need to first build up a buffer of foreign currency to help clear the backlog of demand, before moving on the exchange rate.

As policymakers weigh the options, the outlook for many Egyptian businesses is uncertain. One multinational auto components company suggested that his business had fared better in the environment than most it was also an exporter, giving it access to foreign currency. However, those reserves are being depleted and the company is now unsure whether to accept new orders. The company is unsure if it will be able to clear imported inputs for a new order and have to pay thousands in holding fees as it waits for dollars from the banking system.


Brazil’s fortunes have risen and fallen since Lula da Silva [Lula] was last president. As President once again (effective January 1, 2023) Lula has a daunting task ahead because of Brazil’s many economic challenges. Big pre-election spending helped boost GDP growth last year 2.9%. But growth is expected fall to 1% in 2023. Meanwhile, inflation is down from a peak of 12% in April to 6% in November. However, the share of Brazilians who do not get enough to eat has risen from 6% four years ago to 16% today.

The outgoing Bolsonaro administration succeeded in putting the state pensions system on a sounder footing; but failed to realize many of his promised liberal economic reforms. Inflation has helped to reduce the burden of government debt, by swelling the size of national income. But high inflation has also pushed up the government borrowing costs and eroded confidence in long-run macroeconomic stability. This leaves the new Lula government with less room to maneuver in dealing with the federal debt burden, which at 75% of GDP, remains uncomfortably high.

Brazilian Flag

The resulting fiscal crunch will complicate Lula’s ambitious policy plans and the speed with which he hopes to enact them. He wants to revamp various social policies started under his earlier administrations. These include a conditional cash-transfer scheme known as Family Fund, a subsidized-housing initiative, and a program to provide jobs and upgrade Brazil’s shoddy infrastructure.

Lula also plans to reduce illegal deforestation of the Amazon. The pace of tree clearing in the Amazon rose 60% under former President Bolsonaro as officials turned a blind eye to illegal logging, mining, and land grabbing. Among Lula’s first decrees upon taking office were ones to restructure environmental bodies gutted by his predecessor, reverse plans to legalizing wildcat mining in protected areas and reactivate the Amazon Fund, by which Norway and Germany help pay for environmental policing and sustainable-development projects.

Lula has had to scramble to fill a hole in the budget for 2023 of the order of 1.7% of GDP. By rallying support in Congress for a constitutional amendment to exclude roughly that amount from a federal spending cap. Lula’s amendment passed. This was not easy, despite his reputation as a skilled negotiator. Lula’s Workers Party (PT) has a minority position of just 12 seats in congress.

Faster growth than Brazil’s lackluster 0.5% annual average of the past decade is crucial to fund social programs on the new governments platform. Financial markets will not be tolerant with leftist-like overreach or state interventionism that undercuts private initiatives, stifles competition or the ability of markets to function relatively free. Brazil’s economic turn around will depend on such assurances.

The new Lula administration is off to a bumpy start with supporters of former President Bolsonaro having violently attacked the parliament and supreme court and rioted against police trying to protect these institutions. Opposition forces has sent a clear message that its tactics won’t be limited to debates in Congress.


The end of 2022 coincides with the twilight of President Muhammadu Buhari’s second term in Nigeria. After coming to power seven years ago promising to rein in corruption, create jobs, and alleviate poverty, its hard to find evidence that much has changed.

While GDP growth was officially reported at 3.1% in 2022, inflation at 16% at the beginning of 2022 rose to a peak of 21.5% in November. Meanwhile, food inflation consistently outpaced headline and core inflation during the year. For the basket of goods consumed by the average Nigerian, costs accelerated by between 50% to 100% in 2022. According to the World Bank [WB] approximately five million Nigerians were pushed into poverty in 2022 amid a slump of purchasing power by 35% driven mostly by inflation.

The impact of inflation squeeze on small and medium sized enterprises (SME’s) was also devastating. The foreign exchange challenge was a major restraint for investors and importers in Nigeria during 2022. Sharp currency depreciation, foreign exchange illiquidity, especially at the official window; volatility of the exchange rate, created considerable uncertainty and unpredictability for importers, investors and widened transparency issues in the FX allocation system. According to the WB, while the official exchange rate depreciated by 5.2% in 2022, the parallel market rate depreciated by 40%. The WB concluded that Nigeria’s exchange rate policy settings are stifling business activities, investment, and growth, thereby amplifying the country’s macroeconomic risks.

Foreign exchange reserves were down at $36.97 billion at yearend 2022 from $40.04 billion in December 2021. The decline was due to lower prices, sub-optimal oil production and the central bank’s futile efforts to support the currency. The FX reserves are unlikely to increase over the short-term due to the country’s inability to benefit from high oil prices due to oil theft as well as the central bank’s efforts to stabilize the Nigerian naira. Rationing and restrictions in the foreign exchange market by the central bank and further widen the gap between the official exchange rate and the parallel market rate as demand pressure rises.

While GDP growth is projected at 2.9% for 2023 the FX situation is unlikely to improve much this year. Shipping is crucial to the Nigerian economy and the need for reforms have become urgent. These include the pressing priority of reducing delays in clearing cargo from arriving vessels, removing bureaucracy and red tape, curbing extortions in the clearance of vessels. The aim is to reduce vessel turnaround time from the current 20+ days to less than one week.

Last year the central bank launched a scheme to attract $200 billion in foreign exchange repatriation from non-oil exports over the next three years. The scheme emerged out of the need to diversify Nigeria’s export earnings from oil while addressing declining FX earnings. The central bank admits that, so far, its efforts recorded 44.98 billion in FX inflows. Cocoa beans, sesamum seeds, cashew, and seven others top the list of agricultural commodities Nigeria exported in 2022, generating $1.7 billion in revenue in nine months, according to latest data from the National Bureau of Statistics. On a year-on-year basis, the value of the top agricultural exports increased 14.9% in 2022 over 2021.

To unlock growth and investment in 2023, the government will be forced to undertake some urgent reforms. The enactment of the Petroleum Industry Act (PIA) promises to transform the oil sector through the creation of a legal and regulatory framework meant to inspire higher levels of investors’ confidence. However, Nigeria needs to demonstrate a greater commitment to the implementation of the PIA. For example, the deregulation of the petroleum downstream sector is a major economic reform imperative that markets are expecting; and which would indicate a good faith commitment to changes in the business climate. This will be an important first step to unlock investment in the sector and put an end to the perennial fuel scarcity and the monopolistic structure of the sector over generations.

There is also a need to consolidate reform in the ailing power generation sector. Businesses and households alike continue to highlight the need to enable and create an environment that will sustain private sector investment in the sector; and attract new private capital to boost electric generating capacity. This has become a national rallying cry. Urgent reforms are needed with respect to electricity tariffs, metering and deepening the energy mix. Nigeria needs fiscal and monetary incentives to boost private investment in renewable energy. It must seek every opportunity to achieve this goal in the not too distant future.


This country’s president Luis Lacalle Pou has been hard at work negotiating new trade deals outside the regional trade block since taking office in March 2020. Mr. Lacalle Pou’s ambitions are running up against other Mercosur members who are closing ranks on Uruguay, as political alliances shift in the region. The Uruguayan president has decided to “open up to the world” under his pro-business platform.

The tensions of such a move were on display in December at the Mercosur summit held in the Uruguayan capital Montevideo. There were accusations of foul play and unsportsmanlike tactics on news that Uruguay has independently applied to join the Trans-Pacific Partnership [TPP], the 11-member trade alliance including Australia and Japan. This followed separate bilateral trade talks with China and Turkey earlier last year.

The Argentine Foreign Minister admonished Uruguay to choose if its with Mercosur. The Argentine’s claim that any member of Mercosur determines something without consensus, it is breaking the fundamental rules of Mercosur. Together with Argentina, Brazil, and Paraguay, Uruguay makes up the Mercosur partnership, a three-decades-old customs union in which no individual country is allowed to negotiate preferential agreements with third parties.

Uruguay FLag

Many trade observers have described the protectionist alliance of Mercosur as one of the least effective of its kind anywhere in the world, both in terms of trade among its members and with external partners. It has also struggled to finalize a free trade agreement with the EU, a process that is entering its 24th year.

Those delays and frustrations are among the factors driving Uruguay’s mission to explore opening up to foreign markets on its own. According to president Lacalle Pou Mercosur can no longer lead with an early 1990’s mindset or pull back on any member’s economic progress.

Chile, Colombia, Peru, and Mexico have all been looking towards the Pacific to expand trade with Asia. All have joined the TPP, with the exception of Colombia, while Mercosur has stalled.

The other three Mercosur member states have called for regional unity, threatening to penalize Uruguay with a series of undisclosed measures if it continues to pursue commercial arrangements alone. Critics regard the threats as bullying against a smaller country because it has triggered real discussions about restructuring the alliance, which could ultimately lead to a break-up. Argentina and Brazil account for nearly 90% of the trade block’s GDP, giving them more influence in negotiations. Some say the bigger countries simply use Mercosur as a trade shield, to protect their industries from global competition.

Uruguay maintains that the country wants to modernize, not cut away from the block, that represented roughly a third of overall Uruguayan trade in 2022.

The president has defended his nation’s actions., arguing that a decision to lower the common external tariff applied to goods from outside the block in September 2022, between Brazil and Argentina was made without consensus among partners. Recently the Uruguay-China chamber of Commerce reiterated its support for the steps taken by the Uruguayan government to deepen trade relations between the two countries, saying that advancing the Free Trade Agreement with China was central to their strategy.

Outgoing Brazilian leader Jair Bolsonaro pledged support for Uruguay’s attempts to make Mercosur more flexible. However, Bolsonaro successor Lula may have other ideas. Lula has already emphasized that greater Latin American integration and multilateralism will be critical to his administration’s foreign policy. Lula’s new term in office marks the first time in four years that the biggest members of Mercosur, Brazil, and Argentina, are politically aligned under the direction of leftist leaders.

Uruguay’s move to go ahead with its own international deals was a risky given the heightened political uncertainty. They don’t know what Brazil will do under Lula. And what Brasilia says matters more that Argentina. Because of Uruguay’s diplomatic power many do not believe the country will be thrown out of Mercosur or penalized.

Lula is himself strongly in favor of bolstering trade, in particular with China, which remains Brazil’s biggest buyer. In Lula’s previous two terms as president in the early 2000’s, Brazil became a member of the BRIC’s block with Russia, India, and China, which became an important tool for global cooperation. It is now up to Lacalle to convince Lula to lead the China negotiations for Mercosur.

By Byron Shoulton, FCIA’s International Economist For questions / comments please contact Byron at bshoulton@fcia.com

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.



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Aircraft Lessors Sue Insurance Companies for Coverage in Russian Confiscation Debacle

Aircraft Lessors Sue Insurance Companies for Coverage in Russian Confiscation Debacle

Carlyle Aviation Partners’ lawsuit against insurers

The lawsuit was filed on October 31 against over 30 insurers in the Miami-Dade County Circuit Court in Florida.


After Russia invaded Ukraine in February 2022, a flurry of sanctions was placed on Russia and vice-versa. Carlyle Aviation Partners, an American Company and one of the world’s largest aircraft leasing operators, has lost use of 23 jets as a result. Carlyle has an insurance policy on these planes, which permits it to claim $225 million for damages to any one plane, with a $700 million coverage limit. Carlyle filed an insurance claim for over $700 million with over 30 insurers to cover the loss of the jets. Now, it is suing for unspecified damages, to be determined in court. The lawsuit was filed on October 31 and alleges that their insurers have failed to meet their contractual obligations to cover Carlyle’s loss of the 23 aircraft. A special hearing on the case is scheduled for March 10, 2023.

When Russia invaded Ukraine, Carlyle asked the Russian airline lessees to return the 23 aircraft and terminate the leases. The Russian airlines said that they would not be able to return the aircraft due to restrictions from the Russian Government. The Russian Government had prohibited foreign-owned aircraft from a list of “unfriendly” countries from flying out of the country without a special permit. This list included the United States, the European Union, the United Kingdom and Commonwealth, and Switzerland. Carlyle says in its complaint that it took “all reasonable steps to protect, preserve, and recover these insured assets [the aircraft].” The aircraft remain in Russia, except for one that is in Egypt. However, Egyptian authorities said that they would return the aircraft only if Carlyle paid outstanding parking and storage fees. There were 515 aircraft from foreign lessors in Russia when sanctions were enacted against Russia.

Carlyle Aviation is not the only aircraft lessor filing insurance claims over Russia’s actions. Insurance companies now face multiple multi-million and billion-dollar claims stemming from Russia’s confiscation of aircraft. AerCap Holdings NV, the world’s largest aircraft-leasing firm, also filed claims for $3.5 billion related to Russia confiscating its jets. SMBC Aviation Capital, the world’s second largest aircraft lessor filed a claim in November against Lloyds of London on $1.6 billion of aircraft losses in Russia. Dubai Aerospace Enterprise, the largest plane-leasing firm in the Middle East,  filed a $1 billion insurance claim in May for aircraft held in Russia. This amount is expected to rise, though.

The lawsuit

  • Carlyle Aviation Partners filed a claim against 30 insurers for $700 million for the Russian government’s confiscation of 23 of its jets.
  • The named insurers include American International Group UK, Chubb European Group SE, and Berkshire Hathaway International Insurance Ltd.”
  • Now, Carlyle Aviation seeks unspecified damages, to be determined at trial.
  • Carlyle alleges nine separate breaches of contract and violation of “good faith duties.”
  • Russia has enacted other policies prohibiting the return of the aircraft. Carlyle Aviation notes Russia’s blanket prohibition on the return of aircraft in its complaint, saying that “on March 8 and March 9, the Russian government banned the export or relocation of aircraft, aircraft engines and other components until December 31, 2022.
  • Carlyle’s attorneys are basing much of their legal argument on the policy’s hull coverage. However, hull coverage is usually limited to coverage of damages to the plane, excluding losses from wear and tear, hijacking, and government action.

The seizure

  • Carlyle Aviation leased the 23 planes to 12 different Russian airlines, including Izhavia, NordStar, Smartavia, and UTair, the country’s sixth-largest airline in 2021.
  • Carlyle requested the return of the aircraft on February 27, three days after Russia’s invasion of Ukraine began on Feb. 24, the company said in its complaint.
  • The airlines  told Carlyle Aviation that they could not move the aircraft out of the country, due to airspace restrictions and closures. According to the complaint, these restrictions prohibited flights from  thirty-six countries that included all EU member states, the United States, the United Kingdom, part of the Commonwealth, Canada, and Switzerland. Any of these flights are required to get  special permits.
  • The Russian airlines that the planes were leased to have ignored Carlyle Aviation’s demand to return the aircraft.
  • Carlyle Aviation Partners said that it was bringing the lawsuit because it has “exhausted all avenues to recover the aircraft.” It says that it has followed all required procedures and has not been indemnified.
  • The aircraft remain in Russia, except for one Boeing 737-800 that is being held in Egypt. However, the Egyptian authorities said that they will only return the jet if Carlyle pays outstanding parking and storage fees.

Other aircraft lessors


The policy’s exclusions for war

Carlyle’s policy does not cover claims caused by

  • War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power.
  • Any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.
  • Strikes, riots, civil commotions or labour disturbances.
  • Any act of one or more persons, whether or not agents of a sovereign Power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional.
  • Any malicious act or act of sabotage.
  • Confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government (whether civil military or de facto) or public or local authority.
  • Hi-jacking or any unlawful seizure or wrongful exercise of control of the Aircraft or crew in Flight (including any attempt at such seizure or control) made by any person or persons on board the Aircraft acting without the consent of the Insured/Operator.


Furthermore, this Policy does not cover claims arising whilst the Aircraft is outside the control of the Insured/Operator by reason of any of the above perils.  The Aircraft shall be deemed to have been restored to the control of the Insured/Operator on the safe return of the Aircraft to the Insured/Operator at an airfield not excluded by the geographical limits of this Policy, and entirely suitable for the operation of the Aircraft (such safe return shall require that the Aircraft be parked with engines shut down and under no duress).


Political risk insurance

In political risk insurance, the insurer commits to indemnifying the insured for a percentage of losses from an expropriatory act.  This act includes expropriation, confiscation, nationalization, requisition, and sequestration.

The act must be taken by, or under the order of, the host government in which the foreign enterprise is located. The act must also:

  • Permanently deprive the Insured of all or part of its equity ownership interest in the foreign enterprise
  • Permanently deprive the foreign enterprise of all or part of the applicable physical property or
  • Selectively prohibit or materially impair the operation of the foreign enterprise so as to cause the permanent and total cessation of its activities


Importance of insurance brokers

Insurance policies need to be carefully tailored to the needs of the insured. A well-crafted, comprehensive policy can prevent the kind of claim disputes that Carlyle Aviation is having. Brokers walk you through getting the right coverage for your assets, advocate for you, and handle the details of your claims.



Since 2004, Securitas Global Risk Solutions has helped clients develop credit and political risk solutions. Securitas is focused on developing comprehensive solutions that meet the needs of our clients. Please feel free to call us with any questions, or if we can be of any assistance.


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