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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Major Country Risk Developments

Major Country Risk Developments

Posted with permission from greatamericaninsurancegroup.com


The global economy has suffered four shocks since 2020: the pandemic; a huge fiscal and monetary expansion in response to it; post-pandemic supply side shortages, in which pent-up demand hit supply constraints in industrial inputs and commodities; and finally, Russia’s invasion of Ukraine, which hit energy supplies and prices in a way not experienced before. An economic slowdown appears unavoidable as we approach 2023, with stubbornly high inflation and the response to it [rising interest rates], combined with soaring energy costs – leaving consumers globally with far less discretionary spending.

The IMF is now forecasting global growth of 3.2% in 2022 and 2.7% in 2023. Those estimates have been ratcheted down from earlier estimates. Inflation, meanwhile, is projected to be 8.8 percent in 2022, up from 4.7% in 2021, before declining to 6.5 percent in 2023 and to 4.1 percent by 2024.

The global economy faces a thicket of problems from high inflation, tight monetary policy that seeks to reverse more than two decades of easy money, and geopolitical risks ranging from the rise of far-right autocracies to the ongoing and violent war in Ukraine. Risks to the outlook remain largely on the downside. Monetary policy could miscalculate the right stance to reduce inflation. Policy paths in the largest economies could continue to diverge, leading to further U.S. dollar appreciation and cross-border tensions.

The oil market faces almost unprecedented two-way risks at present. On one hand, the possibility of deep recession-induced, in large part, by soaring energy costs around the world in the wake of the war on Ukraine. Meanwhile Moscow has weaponized gas supplies against Europe. Pending EU sanctions on Russia, Russia may remove some of its oil from the market as soon as winter. In reaction to a price cap plan, Russia may decide unilaterally to withhold supply. Or it may disrupt 1.2 million barrels per day of exports through a pipeline carrying Kazakh oil that passes through Russia. Also, global crude demand will likely surge when China finally eases its Covid-19 restrictions.

By any measure this is a big moment for oil prices, the global economy, and the world’s energy order. Crude prices remain high by historical standards. Yet the Opec+ oil cartel, led by Russia and Saudi Arabia, agreed in early October to cut two million barrels of oil per day from existing production supplies – adding salt to the wound for numerous oil-importing nations. Prices at the pump, which dipped over the summer, will begin climbing again. After months of raising supply, Saudi Arabia decided it was time to change course. The newly announced production cuts are designed to reset the market’s sentiment.

A geopolitical breach is also underway, as the decades-old alliance between the U.S. and Saudi Arabia frays in favor of the Saudis tightening their six-year partnership with Russia. Tensions between Saudi Arabia, the world’s largest crude oil exporter, and the U.S., the world’s largest consumer, come as signs of a deepening energy crisis ensues alongside the Russian war in Ukraine. Both Saudi Arabia and Russia stepped up their pursuit of production cuts to halt a recent slide in oil prices which have fallen from $120 per barrel in June to around $90 last month – a drop that has hit Russian state revenues. Russia needed a substantial production cut to raise prices – since Russian oil has been trading at large discounts after European buyers turned away. The U.S. wants to restrict Russia’s oil revenues to starve its military of funding for the war, which makes Saudi Arabia’s continued cooperation with Moscow a growing source of tension between the Saudis and the U.S. In short, Opec+ oil producers have imposed significant cuts in oil supply amid one of the tightest crude markets in recorded history, and ahead of a potential decline in Russian exports over the coming months. The move is a very big gamble on a fragile global economy’s tolerance for more energy inflation.

Energy prices have shot up far above the cost of extraction, production and generation. The result is a massive redistribution of the economic value of energy from consumers to producers. Consider Saudi Arabia: in the previous five years, its exports typically hovered around $20 billion a month. Since the Russian invasion of Ukraine, the value of its monthly exports shot up to $40 billion. Other petrostates are obviously also beneficiaries. Meanwhile, other big emerging economies in addition to India, such as Brazil, Turkey, and South Africa, are facing import bill increases that far exceed any export growth those economies may have had during this period.

Then there is Russia which has racked up enormous surpluses. This is not just a function of high energy prices but also the collapse in its imports. But still, it has made enormous amounts selling oil and gas this year. Russia’s trade surplus has more than tripled since last year, according to the World Bank.

Meanwhile, the U.S. and other G7 countries have advanced a plan to impose a price cap on Russian oil sales – a move that could lead to lower supplies from Russia alongside a tightening of European sanctions against Moscow which takes effect in December. Opec+ producers worry that a price cap planned only for Russia now could later become a precedent for wider use against other producers. The U.S. Treasury has estimated that the G7 plan to cap the price of Russian oil exports would yield $160 billion in annual savings for the 50 largest emerging markets, as Washington insists that the scheme it has championed would put a lid on rising energy costs around the world. However, there are still doubts and uncertainty in the oil market about the extent to which this novel experiment, never before attempted, will work in practice, what its effects will be on the market and how Russia will react.

According to the U.S. Treasury, Europe and East Asia are the two regions most dependent on net oil and oil product imports, which account for 4.7% of GDP, or $55 billion annually. In 16 emerging markets ranging from Mali to Turkey, El Salvador and Thailand, net oil imports account for more than 5% of GDP.

To date, a decline in Russian oil exports to Europe has been largely offset by shipments rerouted to customers such as China, India, and Turkey. However, the International Energy Agency has forecast that Russian oil production will fall sharply once the EU embargo comes into full force – a risk that would drive up energy prices without a price cap in place, according to U.S. officials. A price cap would stabilize world energy prices. Many emerging markets would benefit (from the needed price break) compared to the hammering their economies are currently experiencing. Opec Gulf producers have grown alarmed at the possibility that such a mechanism could one day be applied to them.

Meanwhile, the divergent outcomes of emerging economies will be determined by how well their economies are managed, whether they export commodities, and their level of indebtedness. Before the pandemic, depressed private investment and demand kept inflation too low for central banks that targeted 2%. In that world, government deficits helped by putting upward pressure on inflation. This also tended to push up interest rates, not a bad thing when central banks worried more about rates being stuck at zero. The upshot was that, as far as markets were concerned, governments’ capacity to borrow was infinite.

That world is now over. Inflation in many countries is too high, and structural forces threaten to keep it there for some time. Having belatedly realized this, central banks are raising rates at the fastest pace in 40 years. While some countries acknowledge inflation is a problem they continue to borrow as though limits do not exist. After the stimulus-inflated levels of 2020 and 2021, budget deficits fell sharply across developed markets this year, to an average 4.3% of GDP, according to independent estimates. However, budget deficits in developed countries are projected to rise to 6.1% in 2023 and 6.9% in 2024.

Several European governments are borrowing to defray higher energy costs over the coming winter. Markets are forgiving of those borrowing/spending plans for several reasons. First, by lowering headline energy prices, subsidies make it less likely that high inflation becomes embedded in the public’s thinking and is thus sustained. Second, these outlays are seen as necessary and temporary.

The most vulnerable economies in the developing world are having to run very tight monetary policy at a time when they are dealing with a slowing global economy and energy security. There are debt defaults already underway from lower-income countries that have borrowed in dollars. Bailouts by the International Monetary Fund (IMF) have hit record highs as rate rises push up lower-income countries’ borrowing costs.


Sharp increases in U.S. interest rates and a soaring dollar are causing global alarm. The strength of the U.S. dollar continues to matter because it tends to impose contractionary pressure on the global economy. The roles of the U.S. capital market and the dollar are far bigger than the relative size of its economy suggests. The U.S. capital markets are mostly those of the world, while its currency is the world’s safe haven. Thus, whenever financial flows change direction from or to the U.S., markets around the world are affected. One reason is that most countries care about their currency exchange rates, particularly when inflation is a worry. The danger is greater for countries with heavy liabilities to foreigners, and worse if the debt is denominated in dollars. Many countries will now need help.

The recessionary forces emanating from the U.S. and the rising dollar come on top of those created by the big real shocks. In Europe, above all, its higher energy prices are simultaneously raising inflation which in turn is weakening real demand. Meanwhile, the determination by China to eliminate the coronavirus at all costs, is hitting its economy, as well as its ability to fill overseas orders in a timely fashion.

While the reserve status of the dollar and Treasury debt insulates the U.S. from some of the pressures buffeting the UK, U.S. fiscal policy is just as mis-calibrated. While the sitting U.S. Administration touts the Inflation Reduction Act, which lowers U.S. deficits by $240 billion over a decade, the Administration also passed a law which increased spending on veterans’ affairs, infrastructure, and semiconductors, while taking executive actions that vastly expands various food and health benefits for the needy, as well as cancelling student debt worth between $400 billion to $1 trillion.

Adding that to the 2021 stimulus and the associated interest expense, the Committee for a Responsible Federal Budget, estimates that the Administration will increase deficits by $4.8 trillion, or 1.6% of GDP over a decade. The relaxed attitude toward all this additional debt is shaped by the Administration economists’ assumption that real interest rates – the nominal rate minus inflation- will remain around zero for the coming decade. Federal debt is much more manageable when real rates are lower than the economic growth rate. They have some justification: real rates were well below the economy’s growth rate for a decade before the pandemic.

On the other hand, massive deficits, the Federal Reserve tightening in response to flare-ups of inflation and diminished private savings could all elevate real rates in coming years- as occurred after then- Federal Reserve Chairman Paul Volker crushed inflation in the early 1980’s.

There is some talk of globally coordinated currency intervention, as happened in the 1980’s – which first, weakened the dollar and then, stabilized it. Until the Federal Reserve is content with where inflation is going, that cannot be the case this time. Currency intervention aimed at weakening the dollar by just one or even several countries is unlikely to achieve sufficient stability.

A more important question is whether monetary tightening is going too far and in particular, whether the principal central banks are ignoring the cumulative impact of their simultaneous shift towards tightening. An obvious vulnerability is in the eurozone, where domestic inflationary pressure is high, and a significant recession is probable in 2023. However, the president of the European Central Bank has stated clearly: “We will not let this phase of high inflation feed into economic behavior and create a lasting inflation problem. Monetary policy will be set with one goal in mind: to deliver on our price stability mandate”. Even if this should turn out to be overkill, central banks have little option. They must do what it takes to curb inflation expectations.

We are unsure how much tightening might be needed. In such times the perceived sobriety of borrowers matters a lot. This is true of households, businesses, and not least, governments. The financial tide is going out: only now will we notice who has been swimming naked.


The government unveiled a 200 billion euros “protective shield” for businesses and consumers struggling with soaring energy costs, the largest aid package adopted by a European country since the start of the energy crisis.

The centerpiece of the plan, financed by new borrowing, is an emergency cap on gas and electricity prices that have soared since Russia first slashed its gas exports to Europe over the summer. Disruptions in the flow of gas from Russia have pushed up prices for the fuel to record levels and raised fears of a winter gas shortage in the eurozone’s largest economy. Companies have cut production and consumers faced with rising inflation have reined in spending. A flash estimate published by Germany’s statistical agency showed that inflation hit a 70-year high of 10.9% in September.

A joint forecast by Germany’s leading economic institutes predicts the country will slip into recession next year, with GDP contracting by 0.4%-0.6%. Leading German policymakers assert that the country is in an energy war for its prosperity and freedom. The recently announced 200 billion euros aid for consumers and businesses, will be financed through new government borrowing and channeled through the reactivated Economic Stabilization Fund (WSF), an off-budget facility that was set up in 2020 to help companies survive the lockdowns and other public health measures imposed during the pandemic.

Despite the setting up of this “protective shield” around the economy, Germany is sticking to a fiscal policy based on stability and sustainability. A group of experts are working on details of a gas price cap and will present recommendations in mid-October. It is expected that prices for a set, basic volume of gas and electricity will be capped, with usage higher than that priced at market rates. Energy suppliers would be compensated by the state for having to sell their gas and electricity to consumers for a lower price. The German economy minister scrapped a previous gas levy on all consumers. The levy had been designed to help energy companies (such as Uniper, which had been plunged into crisis after being forced to buy expensive alternatives to Russian gas on the spot market) but was rendered moot by the government’s decision to nationalize Uniper in September.

The German government has warned of the risk of electricity shortages this winter. The government insists that despite new aid measures, German energy use must be reduced. Consumption, particularly in the private sector, is not falling as much as the government wants. The idea of a gas price brake has long been discussed in the German government, but it is contentious. The fact that so much of German gas is imported means any reduction in its price would require massive subsidies which would then pump new purchasing power into the private sector. This would stoke inflation and would be destabilizing and problematic for lower income households.

Germany is relying on highly polluting coal for almost a third of its electricity, as the impact of government policies and the war in Ukraine leads producers to use less gas and nuclear energy. In the first six months of 2022 Germany generated 17% more electricity from coal (over the same period last year). The leap means almost one-third of German electricity generation now comes from coal-fired plants, up from 27% last year. Production from natural gas, which has tripled in price since the beginning of the Russian war on Ukraine, fell 18% to only 11.7% of total generation.

The shift from gas to coal was sharper in the second quarter. Coal-fired electricity increased by an annual rate of 23% in the three months to June, while electricity generation from natural gas fell 19%. At the beginning of 2022 more than 50% of German gas imports came from Russia, a figure that fell slightly over the opening half of the year. Opposition groups accused the government of “madness” over its decision to idle the country’s three remaining nuclear power stations from the end of this year. Electricity generation from nuclear energy has already halved after three of the six nuclear power plants that were still in operation at the end of 2021 were closed during the first half of this year. The government now says it will keep on standby two of the remaining three nuclear power stations, which were all due to close at the end of this year.

The figures highlight the challenge facing European governments in meeting clean energy goals going forward. Germany has been trying to reduce its reliance on coal, which releases almost twice as many emissions as gas and more than 60 times those of nuclear energy, according to estimates from the Intergovernmental Panel on Climate Change.

One bright spot from the data was an increase in use of renewable energy. The proportion of electricity generated from wind power rose by 18% to 26% of all electricity generation, while solar energy production increased 20%.

The success in moving away from gas towards other energy sources could mean that the risk of hard energy rationing over the winter are less severe now, even with little or no Russian gas flows. However, a recession in the eurozone’s largest economy is still expected – as a large part of the impact comes via higher prices and because industries and households still rely on gas for heating. German industrial production slid 0.4% between July and September. Production at Germany’s most energy intensive industries fell almost 7% in the five months after Russia’s invasion of Ukraine. The consensus is that the demand destruction caused by the surge in prices will send the German economy into recession over the winter.


Meanwhile, Germany’s manufacturing export model appears under threat. Voices in government are arguing that having already suffered from reckless reliance on Russian gas, Germany’s economic dependence on another belligerent autocracy in the form of China has left it dangerously exposed.

Media reports suggest that Germany’s economy ministry run by the Greens, is looking to reducing support such as state investment and export guarantees for German companies operating in China. The stated intention is to achieve diversification rather than reducing exports from or investment in China overall. However, reduction in operations in an economy the size of China’s is unlikely to be made up by foreign markets elsewhere, it may well form part of a long-term reorientation away from manufacturing mercantilism.

The dangers to the German and wider EU economies from Berlin’s export-orientated model have long been clear. Since the early 2000’s, by suppressing domestic wages and demand, and prioritizing current account surpluses, Germany ultimately shifted production home and unemployment to the rest of the eurozone.

This model is also more at odds with the EU’s stated approach to trade policy. Traditionally, the German export lobby (and its supply chain satellites in central and eastern Europe) has been important in pushing for free trade agreements – even in these days it is often more interested in investing in consumer markets like China than exporting there.

The Greens have emerged as Germany’s chief Russia and China foreign policy hawks – and have pointed out the difficulties and contradictions of this position. A draft EU deal with the South American Mercosur trading block signed in 2019, is widely known as “cars for beef”. It gives European automakers access to Brazil’s vast consumer market, overriding the protests of French and Irish cattle farmers against Brazilian imports. In the final days of its six-month EU presidency in 2020, Germany also drove through the bilateral Comprehensive Agreement on Investment (CAI) with China, largely designed to protect German operations in China.

Germany has passed a law, making companies responsible for human rights abuses in their supply chains, ahead of similar initiative by the EU. Brussels has also enacted a ban on products made with forced labor. But German industry leaned against such moves. Germany’s domestic legislation does not create a new civil liability for companies, and their obligations to find and eliminate abuses are considerably weaker in lower tiers of their supply chains.

For now, Germany is having enough trouble with its rushed attempt to do without Russian gas. Fundamental structural change in business and the country’s political economy will take a lot longer. Still, if the EU is serious about reorienting its trade policy and Germany about rebalancing its economy towards domestic demand, ending the export bias is an important step. In the meantime, reducing artificial incentives for companies to become dependent on China is a good development in itself.


Europe needs to replace Russian gas. That makes liquified natural gas (LNG) imports to Europe more important. Not every country on the continent has sufficient infrastructure to import the LNG sent from the U.S., Qatar and elsewhere. Floating storage and regasification units [FSRU’s] offer countries a cheaper, flexible solution to importing liquified gas.

Relatively quickly, these vessels-refitted from LNG tankers- can anchor up, connect to the local gas networks and turn imported super-cooled gas into piped methane. Moreover, building an offshore regasification plant can cost $10 billion compared with the roughly $500 million new-build cost for an FSRU.

Since the Ukraine war countries such as Germany, which has no onshore LNG terminals, have scrambled to lease available vessels. Germany plans to charter three for this winter. The Netherlands expects gas to flow soon through two FSRU’s recently arrived at the port of Eemshaven, where a new floating terminal sits close to the north-western border with Germany. Germany’s gas storage has filled up faster than planned. France announced that its reservoirs were 90% full.

These relatively small vessels have two redeeming features. They are quick to set up and can later be repurposed back into LNG tankers or for other types of commodities.

Meanwhile, pressure is building on the EU to launch emergency action to support the strategically important European smelting industry as another plant announced savage production cuts. Germany’s Speira is the latest aluminum producer to slash production because of soaring energy costs as the crisis deepens for one of the continents key industrial sectors. The  recent cuts add to calls for help to save a sector that is facing an existential threat from skyrocketing power prices and comes ahead of a meeting of EU energy ministers that aim to soften the pain for households and business through emergency interventions.

The nonferrous metals trade body said industry problems, which have led to unprecedented cuts to smelter production over the past year, will deepen unless the EU intervenes. The industry is concerned that the winter ahead could deliver a decisive blow to the operations of many companies. The cost of energy has become far higher in Europe than in Asia and the U.S. following Russia’s cutting gas supplies to the continent. This is threatening to wipe out corners of the regions industry. Speira explained that energy prices have become too high to maintain production in Germany and the company expects little price relief in the near-term. Europe is facing similar challenges at many other aluminum smelters. Companies are preparing to curtail 50% of all smelter production until it becomes possible to sustain value.

The move to reduce smelter production at the Rheinwerk plant near Dusseldorf to 70,000 tons a year beginning in October, follows Aluminum Dunkerque, Europe’s largest primary smelter for metal, announcement that it would reduce output by more than 20%. The latest wave of cutbacks follows indefinite shutdowns of Norsk Hydro aluminum smelter in Slovakia and a zinc smelter in the Netherlands run by Nyrstar, which is controlled by commodities trading giant Trafigura.

While Europe only accounts for 6% of global aluminum production, the metal is of strategic importance because of its use in aerospace, defense, and the auto sector, as well as in buildings and to produce drink cans. Known as “solid electricity,” aluminum is one of the most vulnerable sectors to the surge in energy prices that shot up after Russia cut gas supplies to Europe.

Before the crisis, electricity was about 40% of an aluminum smelter’s costs with one ton taking five megawatt hours of electricity to produce, enough to power the average home for about five years. Producers now say it is nearly impossible to sign long-term power supply deals when their current contracts expire with electricity prices up over 10-fold of their average over the previous decade. Gas, which is used to generate power, heavily influences electricity prices.

Italy, one of the world’s most heavily indebted governments, has seen its bond yields shoot higher this year, even though incoming right-wing Prime Minister Giorgia Meloni has promised fiscal rectitude. In part, that’s because the European Central Bank is no longer backstopping member governments by purchasing additional debt.


Recently proposed tax cuts outlined by the new UK government [now partially withdrawn] caused great alarm. They were intended to be permanent and to reduce deficits by boosting growth – without details on exactly how that would be accomplished. It was not so much that the package was large, but that the government did not seem to consider its ramifications before announcing it.

The 6% fall in the value of the British pound and a half-percentage point rise in government bond yields following the unveiling of the government’s plan, reflect the markets belief that the Bank of England would need to raise interest rates more in response to the package, while investors (including foreigners) would be buying a lot more British debt. Some estimates put the sum at $240 billion of new debt needed to finance the budget deficit in 2023 and $90 billion being sold by the Bank of England as it unwinds the bond buying of previous years. In total, that’s equivalent to a staggering 12.2% of British GDP. The Bank of England said it would buy  bonds to stabilize markets. As markets demand higher bond yields as compensation for greater supply and greater risk, so too UK deficits will widen as net financing needs rise further.

Surging wholesale gas prices are putting the UK on a path to exceed 18% inflation, the highest rate among larger western economies. This projection heaps more pressure on UK’s Conservative government to address a worsening cost of living crisis; and comes as gas prices for next-day delivery surged by 33%. Rapidly increasing prices for natural gas have left recent economic projections out of date. UK rate of inflation has exceeded expectations in most months of this year as price rises have spread through the economy. The energy regulator Ofgem indicated that the projected price increases to households of average usage of energy from October -January will be up 75%. Meanwhile, the strength of the pound [versus the euro and dollar] remains close to its lowest levels since 1985. Sterling is down 20% against the dollar in 2022, putting it in contention for the worst performer among G10 currencies this year, running neck and neck with the Japanese yen.

Markets are pricing in a 1.5 percentage point interest rate increase by the Bank of England- to 3.75% in November. British banks have also begun pulling mortgage loans in response to rising yields on government bonds (gilts), with mortgage rates expected to rise substantially.

The turmoil in the UK underlines the importance of fiscal restraint, especially with inflation at 40-year highs and central banks raising interest rates aggressively. In the UK it seems a major experiment is underway as the state simultaneously accelerated spending/borrowing while the central bank steps on the brakes by hiking interest rates.

The IMF has been closely monitoring developments in the UK and has stressed that given elevated inflation pressures, it does not recommend large and untargeted fiscal packages. The Fund said it understood the UK government’s desire to help families and businesses deal with the energy price shock while boosting growth with supply-side reforms. But it raised the concerns that tax cuts, which will disproportionately benefit high earners, will likely increase inequality in the economy.


The last time the left was in power in Brazil, the country’s most important company was caught up in a multibillion-dollar corruption scandal and was almost buried under a mountain of debt. After emerging from the scandal and financial turmoil of the previous decade, $76 billion oil and gas giant Petroleo Brasileiro [Petrobras] is now  leaner, more profitable and a cash machine for its owners.

As Latin America’s largest economy prepares to choose a new president, very different visions are on offer for the state-controlled group.

Incumbent rightwing leader, Jair Bolsonaro, has spoken of privatizing Petrobras [the region’s largest oil and gas producer and the most valuable listed business]. His main challenger and the frontrunner, leftist ex-president Luiz Inacio Lula da Silva, intends to reassert greater government influence over Petrobras – once considered the crown jewel of the Brazilian economy.

Lula’s manifesto calls for the oil giant to once again be an integrated energy company, present in fertilizers, renewables and biofuels- areas at one point it largely decided to exit in order to focus on its core activity of pumping deep-water crude. There would also be a bigger role for the company in Brazil’s eventual clean energy transition. Lula wants the company to work towards having national self-sufficiency in refined derivatives, such as petrol and diesel, and stop charging international prices for fuel sold domestically. Lula’s ambition is for Brazil to be an exporter of petroleum products and an exporter of crude oil.

Lula’s resource populism taps into public discontent in Brazil over high living costs, a sentiment inflamed by bumper profits at Petrobras. Like other oil majors, the company benefited from a rise in crude benchmarks triggered by Russia’s invasion of Ukraine. Brazilian consumers didn’t. In addition to beating predictions of 27% increase in net income to $10.1 billion during the second quarter of 2022, Petrobras was the world’s biggest corporate dividend payer in the period, according to research by a leading Wall Street investment firm.

Private shareholders, including western financial institutions, together hold almost two-thirds of Petrobras’ equity, but with more than half of the voting rights the Brazilian state wields control. Despite a recent tumble, the Sao-Paulo-listed preference shares are up 50% so far in 2022, outperforming the local stock index.

Mr. Lula’s campaign proposals have unnerved some investors. The fear is a return to the days of political interference in the running of Petrobras under Lula’s Workers Party, which ruled Brazil for 13 years until 2016. Shareholders accused the then PT government of using Petrobras as an arm of the government. Some shareholders fear a return to old habits should Lula be reelected. One worry is that renewed diversification plans requiring extra investments could hit the company’s profit margins and cash generation.

Still, others hope that Lula, who governed Brazil for two terms between 2003-2010, will prove pragmatic on economic matters and avoid radical interventions in the economy, the private sector, and Petrobras in particular. It’s recalled that during Lula’s time in office, Petrobras found vast offshore oil and gas deposits known as deep-salt reserves that ranked among the world’s largest discoveries in decades. Mismanagement and meddling in the company took a heavy toll. Under Lula’s chosen successor Dilma Rousseff, Petrobras was forced to keep prices artificially low in a bid to tame inflation. A former chief executive estimated this cost the group some $40 billion. Elsewhere, refinery projects went over budget and unfinished. Borrowing exceeded $130 billion by 2015, making Petrobras the most indebted company in the sector.

Since those crises, the group has tightened compliance and reduced its gross debt below $54 billion. It has looked to offload assets such as mature fields, petrol stations, and refineries, concentrating instead on exploration and production in the Atlantic Ocean. The company has embraced recovery, not only financially, but also in its governance and credibility.

Still, the Bolsonaro era has not been without tumult. The rightwing populist has regularly attacked Petrobras over petrol costs and fired three chief executives in little over a year. But as a measure of the robustness of its overhauled internal procedures, the company has maintained a policy of moving refinery gate prices in line with dollar-based rates on external markets. Brazil produces enough crude for its own needs but lacks adequate refining capacity to meet domestic demand – and must rely on shipments of derivative products from abroad.

Local businesses point out that oil is a global market – and that there is no room for artificial prices or price controls. With at least one-fifth of diesel consumed in Brazil coming from overseas, importers need to be able to buy at the international price and sell in Brazil. Lula’s advisers have sought to soothe concerns. They have advanced a theory of one way to implement his pledge to “Brazilianize fuel prices” via reference values formulated by a government agency, with vendors free to follow or ignore them. This theory is, so far, not taking hold.

Privatization of Petrobras is viewed as the best possible outcome by some. This would remove the threat of government intrusion, and hence would free the company’s share price, which is considered undervalued compared to many of its peers.

If the polls are correct and Lula triumphs, investors can find some comfort in current legal reforms and new corporate governance norms at Petrobras approved in the wake of the ‘car wash’ scandal. These are designed to prevent government’s using state-controlled enterprises for political gain and oblige ministers to reimburse any costs incurred as a result of enforced subsidies. But as the controlling shareholder, the state can still effectively shape company strategy by replacing the board and the top job.

South Korea


The Bank of Korea will not confirm that a currency swap arrangement with the U.S. Federal Reserve will go into effect soon – as the Korean won continues to slide against the dollar to the lowest levels since March 2009. The won has fallen 155 against the dollar since the beginning of 2022, more than any other major currency in Asia apart from the Japanese
Korea is struggling to defend its currency as the Federal Reserve sharply raises interest rates to curb inflation. Expectations of a currency swap deal have grown after it was revealed that both countries had expressed interest in reopening a currency swap line. The Bank of Korea and the U.S. Federal Reserve signed a $60 billion currency swap agreement in March 2020 as an emergency measure to stabilize foreign exchange markets, but the deal expired at the end of 2021.

Calls for an emergency swap deal have intensified amidst expectation that the dollar’s rally -near its highest level in more than two decades against major currencies- to continue at least until the end of the year. The consensus is that such a deal, which will allow South Korea to borrow U.S. dollars at a present rate of exchange for won, as a last resort to stabilize the volatile market.

Authorities in South Korea and other Asian markets are preparing for worst-case scenarios as the dollar is likely to continue to rise with the Federal Reserve’s rate hikes, but there is not much they can say to reverse the trend other than gradually raising their own interest rates to slow the pace.

Export-dependent countries such as South Korea are under increasing pressure, with the country’s growing trade deficit and higher oil prices dimming the won’s outlook. South Korea reported a record trade deficit of $9.5 billion in August.

The authorities have stepped up oversight of currency markets, with the Bank of Korea asking currency dealers to provide hourly reports on dollar demand after a series of verbal warnings failed to halt the won’s descent.

A South Korean panel that overseas the country’s massive National Pension Service, the world’s third-largest pension fund, is drawing up new rules to improve its foreign exchange management policy – as a top priority.
Meanwhile, the government is trying hard to defend the psychologically important Won 1,400:US$1 threshold. It has intervened in the market to slow the pace of the won’s decline.

The won is not the only victim of a surging dollar in Asia. The renminbi has breached the psychological level of Rm7 : US$1 despite Beijing’s verbal warnings and other attempts to shore up the currency.
Separately, South Korea’s science ministry has indicated that “sense of crisis” is gripping the country’s semiconductor industry, as Korea braces for greater challenges from U.S. and China in an intensifying global chip war.

There is growing fear among Korean officials and industry executives that the country will shed production facilities as domestic chipmakers, lured by subsidies and tax incentives, rush to build semiconductor plants in the U.S. China is catching up fast in the memory chip sector on the back of generous state funding.
New Korean legislation passed in August have laid the legal groundwork to support the semiconductor industry against severe competition from the U.S., China, Japan, Europe, and Taiwan. It reflects a sense of crisis about South Korea’s competitiveness on the global stage and the new legislation is designed to strengthen Korea’s competitiveness in supply chain and security.
The complaint is that Korean companies have received relatively smaller tax benefits from the government and suffered from a lack of talent compared to China, the U.S. and Taiwan. Industry officials want the South Korean government to provide more support for domestic chipmakers as the U.S., China, and Europe boost investment in the sector.
South Korea remains the world’s biggest memory chip producer, with Samsung and SK Hynix together controlling about 70% of the global Dram market and more than half of the Nand flash market. Dram chips enable short-term storage for graphic, mobile and server chips, while Nand chips allow for files and data to be stored without power.

But the Korean chipmakers technological edge over U.S. rivals in the Dram business appears to be narrowing, while Chinese chipmakers are expanding their market share in the Nand flash market. Apple indicated that it is evaluating sourcing Nand chips used in some iPhones used in China from a Chinese chipmaker. Analyst have also noted that much of the R&D being conducted by Korean companies on next generation semiconductor technologies are taking place in the U.S.
The Korean government has taken the lead in mounting a turnaround to this challenge, emphasizing that semiconductors will determine the fate of the economy, while promising greater backing for the industry. It has expanded tax breaks, reduced red tape and introduced two pending bills known as the K-Chips Acts that are aimed at bolstering new activity. The government also intends to provide funding for essential infrastructure for chip production facilities such as electricity and water supply. The aim is to develop large ‘chip clusters” that will gather production and research and development to attract foreign chipmakers to Korea. The government also intends to train 150,00 people over 10 years to boost the semiconductor workforce, thereby addressing concerns over a lack of adequate local talent in the sector.

By Byron Shoulton, FCIA’s International Economist
For questions / comments please contact Byron at

What is Trade Credit Insurance?

If you are a company selling products or services on credit terms, or a financial institution financing those sales, you are providing trade credit. When you provide trade credit, non-payment by your buyer or borrower is always a possibility. FCIA’s Trade Credit Insurance products protect you against loss resulting from that non-payment.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has worked with insurers to help clients worldwide 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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Securitas Global Risk Solutions, LLC. Launches Securitas India

Securitas Global Risk Solutions, LLC. Launches Securitas India

New Venture to Address Growing Demand in India for Specialized Real Property Title Solutions 

July 8, 2021 – Securitas Global Risk Solutions, LLC, (“Securitas”) a specialty credit and political risk insurance brokerage based in Wayne, Pennsylvania announces the launch of Securitas Global, LLC (“Securitas India”), a new corporate initiative to offer land title solutions, cross border investment protection, and land portfolio management specifically for the Indian market. Expanding on Securitas’ long-standing record of helping clients manage their credit and political risk needs locally and internationally, Securitas India furthers the mission by providing title and political risk solutions for a range of Indian and international clients including: 

    • International and local developers 
    • Mortgage lenders in India 
    • Insurers and international re-insurers 
    • Private equity funds and foreign direct investment 
    • Development Finance Institutions (DFI) and Export Credit Agencies (ECA)

Why Securitas India?  With nearly 10 million people in India migrating to cities each year, India’s current land titling system does not support the surging growth.  This is an impediment to new investment, and lacks consistency, transparency and security. India’s backlog of land disputes has put many major infrastructure projects on hold and stifled the country’s economic potential.  A recent article in Bloomberg notes that the Indian government is working to reform the land titling system through a model bill that will guarantee the accuracy of land titles, require states to computerize land records, and establish tribunals to resolve the backlog of land disputes within three years.  Land titling reform carries the potential for an investment boom and considerable job growth.   

“India’s real estate market is set to grow by nearly $800 billion this decade. There is a clear need for the quality risk and titling services Securitas India can provide to facilitate investment and business certainty in India.”

-Shekar Narasimhan, Co-Founder 

Securitas India

As land transactions increase in the coming years, Securitas India will provide solutions to support the dynamic real estate sector via tailored insurance products, project monitoring and transaction management. Our expertise and client specific solutions will increase investor confidence and de-risk all aspects of the real estate finance and development continuum. Our team of professionals in the United States and India, brings over 100 years of experience in title surety, risk cover and real estate transaction monitoring and management.

Securitas India will be assisted in its efforts by Trimble Inc., a leading technology solutions provider of global positioning, modeling, connectivity, data analytics and land solutions.   

Securitas India and Trimble Partner

 For more information or to set up a consultation, contact Securitas at 484.595.0100 or at https://www.securitasglobal.com/contact-us/ 

About Securitas 

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients worldwide 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. 

About Trimble 

Trimble is transforming the way the world works by delivering products and services that connect the physical and digital worlds. Core technologies in positioning, modeling, connectivity and data analytics enable customers to improve productivity, quality, safety and sustainability. From purpose-built products to enterprise lifecycle solutions, Trimble software, hardware and services are transforming industries such as agriculture, automotive, construction, geospatial and transportation. For more information about Trimble (NASDAQ: TRMB), visit:  www.trimble.com. 

About Trimble Land Administration 

Trimble’s Land Administration solutions automate and integrate land registries, cadastral mapping, and the permitting and licensing of land for surveyors, governments, and businesses worldwide. Through the integration of a broad portfolio of technologies with workflow management tools, and consulting services, Trimble provides a fully configurable, scalable solution to help drive the efficient administration of land and its associated transactions, rights, and agreements. 

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