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Climate Change and its Impact on Country Risk

Climate Change and its Impact on Country Risk

Used with Permission from Atradius.us

Climate change raises country risk, but offers business opportunities as well.

Summary

      • Climate change has a negative impact on economies worldwide, their public finances and international trade. The consequences of climate change thus raise the country risk related to export transactions and international contracting.
      • Changing rainfall patterns, sea level rise and natural disasters mainly affect countries in Africa, the Caribbean and the Asia-Pacific region. These countries often combine a high vulnerability to climate change with a poor readiness to respond to the consequences of it.
      • Internationally operating companies develop technologies and build infrastructure that are used for the climate adaptation initiatives of the countries affected. In this way they make a positive contribution in the battle against climate change.

In a period when the Covid-19 pandemic swept the planet like a shockwave, scientists and policymakers kept that other big problem, climate change, on their radar. Fortunately they did, because – just like the pandemic – global warming is a major threat to humanity and action is urgently needed. But there is a second parallel. Like Covid-19, climate change not only causes personal suffering, it also involves great financial and economic damage. Increasing drought, sea level rise and natural disasters affect the incomes of individual citizens and businesses and represent high costs for governments. Or, as the IMF points out in a recent background paper, “climate change redistributes income and affects asset valuations, with repercussions for public and private sector balance sheets, financial flows and financial stability, trade, and exchange rates”. As a result, climate change affects the country risk related to foreign trade and projects in countries around the world in several ways.

Meanwhile, climate change also offers opportunities. Development of new technologies and investments in, for example, irrigation, desalination plants and the energy transition have a positive impact on economic growth and create new jobs.

In this Research Note, we first pay attention to the most prominent consequences of climate change for individual countries: changing precipitation patterns, sea level rise and the climate change-related increase of natural disasters in coastal areas. The focus will be on the countries which feel the impact the most: emerging economies in Africa, Latin America and the Asia-Pacific region. Using the ND-GAIN index for climate change, we identify which countries are doing poor regarding their vulnerability and readiness for these various kinds of impact.

Fortunately, there is a bright side of climate change as well. In the last section of this note we mention a series of projects that show how internationally operating companies are involved in the fight against and adaptation to climate change.

The ND-GAIN index: mapping the vulnerability and readiness of countries for climate change

A useful methodology for mapping the consequences of climate change for country risk is provided by the Notre Dame Global Adaptation Initiative (ND-GAIN). This group of scientists from various disciplines, affiliated with the University of Notre Dame (Indiana, USA), publishes the ND-GAIN Index for 181 countries annually, with sub-indices for both countries’ vulnerability and the degree to which they are ready to effectively use investments to respond to the consequences of climate change (their ‘readiness’). The underlying data and country rankings are used by private companies as well as non-governmental organizations and governments in making decisions related to production, investments, policy choices and communication.

The ND-GAIN index measures the first component, vulnerability to climate change, by including the consequences for food supply, access to water, health, the ecosystem, the living environment and infrastructure, whereby for each of these six components six indicators are included. Examples of these 36 indicators are the expected impact on agricultural crops, dependence on natural resources, the expected increase in floods and the impact of sea level rise. The second component, readiness, is measured against a total of nine economic, political/administrative and social indicators. Examples are the business climate, political stability and the quality of the ICT infrastructure in the country concerned.

Changing rainfall patterns: major threat to agriculture-intensive Africa

Higher temperatures and the changing rainfall patterns make it such that relatively dry countries become even drier and wet countries wetter. Prolonged drought can occur anywhere in the world, but some regions and countries are more severely affected than others. Vulnerability to drought is exacerbated, among other things, by poverty and incorrect use of land. It is therefore no surprise that African countries are the most vulnerable. Most of these countries are located in Southern and Central Africa, some others in Asia (India and Nepal).

In 2019, the impact of climate change was clearly visible when southern Africa was hit by extreme drought. But too much rain can be a problem as well. In the Horn of Africa, weather conditions changed from an extreme drought in 2018 to heavy rainfall in 2019, resulting in floods and landslides. In East Africa, heavy rainfall contributed to strong crop growth, but also brought a severe locust plague.

Higher temperatures and heavy rainfall threaten public health

Due to the temperature rise in the coming years and the more frequent change in precipitation patterns, extreme weather events will occur more often. These consequences of climate change will have a negative impact on public health, agriculture and energy supply. With regard to public health, African countries in particular are vulnerable. A rise in temperature and heavy rainfall make the living environment suitable for insects that transmit diseases such as malaria and dengue fever.

Agriculture is the sector most vulnerable to a rise in temperature and changed precipitation patterns. Risks include a decrease in production, an increase in pests and diseases and floods that affect infrastructure. The figure below shows all countries in the world where the agricultural sector as a percentage of GDP represents 20% or more. It clearly shows that mainly African countries are exposed to outsized agricultural sectors. In many of them, it concerns mainly subsistence agriculture.

African Countries Reliant on Agriculture

In many countries, the agricultural sector creates the most jobs. The figure below shows the countries where the agricultural sector has a share of 50% or more in total employment.

African Countries Affected by Failed Crops

Failed crops increase food insecurity and deteriorate living standards in many countries. The ND-GAIN index also includes a so-called food score. It measures the vulnerability of a country to climate change in terms of, among other things, food production and demand for food. Indicators that are considered include the expected change in grain yields, expected population growth, dependence on food imports, population in rural areas and agricultural capacity. Figure 3 shows the countries that emerge as most vulnerable from this food index.

Most Vulnerable Countries to

Figure 4 presents a matrix of the countries’ ND-GAIN scores for both their vulnerability and their readiness. Almost all of the most vulnerable countries listed in figure 3 are in the top left quadrant. This means that these countries are vulnerable and have taken few measures to adapt to climate change. Somalia (SOM) and Niger (NER) are in the weakest position. Antigua & Barbuda (ATG, in blue) has a poor score for the food sub-index and is also relatively vulnerable to climate change, but the country has already taken steps to address the consequences, bringing it in the top right quadrant.

Climate Change Vulnerability Versus Readiness of Problems in the Food Sector

Faulty energy supply

Drought can also have a negative impact on energy supply if hydropower is an important source in a country’s energy mix. In 2019, drought seriously disrupted the energy supply in Zambia and South Africa, with a significant impact on the economy as well. Countries where hydropower has a large share in the energy supply are mainly located in Latin America. BP data shows that in Latin America around a quarter of the energy supply is generated by hydropower in Ecuador, Brazil, Venezuela and Peru. There are also some countries in Asia where hydropower takes up a large part of the energy supply, such as Vietnam and Sri Lanka where hydropower accounts for 14% and 12% respectively of total energy consumption. For Africa, the International Energy Agency states that hydropower accounts for about 17% of the continent’s electricity supply on average. Countries where hydropower provides more than 80% of electricity are Congo-Kinshasa, Ethiopia, Malawi, Mozambique, Uganda and Zambia.

Since Africa is very vulnerable to climate change, the energy supply is most exposed. Forecasts indicate that southern Africa will be facing more droughts, while East Africa will have more rainfall. As a result, hydropower capacity is expected to decline in Congo-Kinshasa, Mozambique, Zimbabwe, Zambia and Morocco. An increase is foreseen in Egypt, Sudan and Kenya.

Support for adaptation measures

Low-income countries are most vulnerable to climate change. These countries lack the financial resources and technology to increase their resilience and adapt to changing weather conditions. That is why these countries are receiving support from various organisations. For example, the World Bank helps countries to adapt to climate change with investments and technological assistance. To this end, it has set up the Adaptation and Resilience Action Plan. With regard to agriculture, its aim is to increase the resilience of farmers and support them with climate-smart solutions. For example, the development of climate-smart agriculture involves improved seeds and diversification of food production. Improved agricultural technology also includes manure, tractors and irrigation systems.

Sea level rise: huge problem in Asia-Pacific and the Caribbean

One of the most obvious consequences of climate change is sea level rise. As global average temperatures increase, polar ice caps in Greenland and Antarctica, sea ice in the polar regions and glaciers and snow in high-altitude parts of the world are melting, causing sea levels to rise. Another factor is that warmer water has a greater volume than cold water. Estimates of sea level rise to the end of the century range from 60 to 220 centimetres, depending on the extent to which humanity will succeed in reducing CO2 emissions. At first sight, this increase may still seem limited, but it has major consequences. According to calculations by American research group Climate Central, by 2050 the habitat of no less than 300 million people is at risk of being flooded once a year on average. At the end of the century, the habitat of 200 million people would be permanently below sea level, depending on coastal defences being built or population relocations. For many of the approximately 110 million people who already live in areas below sea level, the authorities will have to take measures to keep them safe as well.

The threat posed by sea level rise is especially relevant in Asia, the Pacific and the Caribbean. This is of course largely related to the elevation of the coastal areas, but also the height and quality of the coastal reinforcement present. Research using a so-called Digital Elevation Model supplemented with machine learning techniques shows that the coastal areas of China, Bangladesh, India, Vietnam, Indonesia and Thailand together account for about 75% of the aforementioned 300 million people whose habitat is endangered within 30 years.

Whereas for large countries in Asia it often concerns limited parts of the country, in the island states in the Pacific and the Indian Ocean most of the area is often threatened by the rising sea levels. For example, three-quarters of the population of the Marshall Islands lives in threatened areas, in the Maldives about one-third. In this sense, a large size of a country or economy is a mitigating factor for sea level rise, as only part of the country is affected.

Small Islands Most Vulnerable to Sea Level

The small island states in the Pacific and the Caribbean generally have limited administrative and technical capacities and limited financial resources. However, there are differences. For example, the Maldives, a country with a relatively high GDP per capita, can be found in the quadrant with vulnerable countries that are more than average ready for the consequences of climate change. In order to guarantee the high income from tourism, the government has invested heavily in coastal reinforcement and land reclamation.

Small island states dependent on foreign funding

Fiji is also on the right side of the vertical median, while still being financially vulnerable. For example, the World Bank has calculated that the country will still have to invest approximately 100% of its GDP in the coming ten years to prepare the country for the expected sea level rise and the increase in natural disasters. Fiji, like other island states in the Pacific and the Comoros (off the east coast of Africa), is mainly dependent on foreign funding. Support is coming from the IMF and World Bank, neighbouring countries such as Australia and New Zealand, or from countries that provide aid or provide loans for political-strategic reasons. For example, the IMF supported the Comoros after a cyclone disaster with ample emergency aid, Micronesia receives aid from the US to build a buffer for the future (with limited success) and Samoa receives loans from China. The Solomon Islands have exchanged a long-term relationship with Taiwan for a financially more favourable relationship with China.

Increasing natural disasters in coastal areas

The countries vulnerable to sea level rise are often also affected by increasing natural disasters, such as severe storms and hurricanes. As of now, there is no scientific consensus on a direct link between climate change and hurricanes, but in recent decades natural disasters in coastal areas have been increasing. A causal relationship can be explained by the fact that a warmer atmosphere heats the surface water at sea, which in turn increases the severity of hurricanes. Since the early 1970s, the number of hurricanes in the heaviest categories has nearly doubled worldwide, while the durations of the hurricanes and also the highest wind speeds have increased by almost 50%.

Natural disasters have a major impact. For example, in 2019 alone, natural disasters caused 11,755 deaths worldwide, while 95 million people were affected. Some of this is not related to climate change (such as earthquakes, while even without climate change there would be hurricanes), but the fact that floods were responsible for 43.5% of the number of deaths, extremely high temperatures for 25% and storms for 21.5%, makes it plausible that climate change did play a major role. Storms and floods were responsible for 68% of the deaths. The World Bank reports that 75% of the damage caused by natural disasters since 1980 has been attributable to extreme weather events and that climate change threatens to push some 100 million people into extreme poverty over the next ten years.

The differences per region and per country are large, but here too the poorer countries are generally hit harder than the high-income countries. According to the World Bank, low- and middle-income countries experienced 32% of storms in the period 1998-2018, but 91% of the storm-related fatalities. On the list of countries most affected by natural disasters published by the United Nations University Institute for Environment and Human Security (UNU-EHS), countries in Asia and the Pacific again dominate, alongside countries in Central America and the Caribbean in particular.

Top 15 Countries Hit by Natural Disasters

The impact of severe natural disasters is often relatively large for small island states, just as with the threat of sea level rise, and is therefore an important factor in determining the level of country risk. For several of the island states, ND-GAIN does not give a vulnerability score and therefore no ND-GAIN overall score. However, looking at only the readiness score of ND-GAIN for countries that have to deal with natural disasters (and which therefore also takes into account the extent to which these countries deal with other consequences of climate change), we can conclude that the picture is diverse. Mauritius, Brunei and Costa Rica score relatively well in this respect, while Guinea-Bissau, Bangladesh, Papua New Guinea, Nicaragua, Cambodia and Guatemala score poorly in terms of ‘readiness’. Large countries that combine a relatively high risk of natural disasters with a poor readiness score are (again) Bangladesh and, to a lesser extent, the Philippines and several Latin American countries.

The bright side of climate change: business opportunities 

Many emerging economies are vulnerable to one or more elements of climate change. Heat, drought and changing rainfall patterns are a major threat to agriculture-intensive Africa. Sea level rise and increasing natural disasters in coastal areas create problems in Asia, the Pacific and the Caribbean. Though some countries are lagging, many of them, often helped by multilateral or bilateral partners, take measures for both the short and long term, thereby creating business opportunities.

In fact, this applies to all channels through which climate change affects country risk. Businesses active in the development of new technologies for and construction of irrigation and desalination plants have a large playing field in Africa. Meanwhile, the great untapped potential of renewable energy in Africa offers opportunities. The French company Mascara Renewable Water for example has partnered with a local company to build a solar-powered desalination plant in South Africa which will convert sea water into fresh water. Netherlands-based Independent Energy B.V. exports to countries across Africa, the Middle East and South America, where there is interest in solar energy systems, but a serious lack of knowledge about how to build them properly.

On a much bigger scale are the opportunities created for construction and maritime companies active in the construction of offshore wind farms. Taiwan, for example, has contracted Siemens Gamesa, a leading supplier of wind power solutions, the Denmark-based multinational renewable energy company, Ørsted, and Dutch companies like Heerema Marine Contractors, Van Oord Offshore and Boskalis Westminster Dredging to be part in large offshore wind projects.

Countries affected by sea level rise and natural disasters in Asia and the Caribbean are in need of expertise when it comes to coastal defense and water management. Kiribati, the extensive island state in the Pacific, will seek support from China and other allies to elevate islands from the sea, partly through dredging. The Maldives, in the Indian Ocean, combine coastal defense and land reclamation with the development of a port and other improvements of the infrastructure, creating various opportunities for Indian and other foreign companies.

Climate change in the first place is a threat for most countries in the world, and especially the less wealthy ones in Africa, Latin America and the Asia-Pacific region. Internationally operating companies can benefit from the opportunities climate change creates and, meanwhile, make a positive contribution to the climate adaptation initiatives of these countries.

 

Used with Permission from Atradius.us

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.

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Lithium Market Set to Boom – A Risk Focus on the Lithium Triangle

Lithium Market Set to Boom – A Risk Focus on the Lithium Triangle

As the global economy continues to put the Covid-19 slump behind it, the market for electronic devices and an anticipated surge in electric vehicle demand has re-sparked interest in lithium, a highly reactive and conductive metal vital to the global economy. Found in only a handful of countries, with a small number of companies dominating its production, demand and prices have the potential to boom. In such a scenario, the potentially conflicting demands of consumers, mining companies, and lithium-rich countries warrants a look at political risk, particularly in South America’s Lithium Triangle, the home of 58% of the world’s lithium reserves.

Why Lithium is in Demand

The critical component of lithium-ion batteries, lithium’s demand corresponds to global demand for manufacturing electronics such as smartphones and electric cars, which are expected to have a 70% increase in demand in 2021 and throughout the decade, driven by consumer interest and by growing efforts in many countries to phase out internal combustion engine vehicles. In Europe, lithium-ion battery production is projected to increase from 28 GWh (gigawatt hours) in 2020 to 368 GWh in 2025. United States’ production capacity of the batteries is projected to more than double from 42 GWh in 2020 to 91 GWh in 2025 according to S&P global market intelligence, though it also projects the U.S. share of the market to decrease from 9% in 2020 to 6% in 2025. According to Seeking Alpha, lithium demand will increase by 600% by 2040.

Low Prices and a Potential Boom

An oversupplied market in early 2020 saw a decline in lithium demand, mainly due to Covid-19. According to data from Trading Economics, (shown below), lithium prices declined 45% between July 2019 and July 2020.

Trading economics lithium Prices graph

Yet the chart above shows a recent spike in prices. Lithium prices jumped up 41% in the Chinese market in January 2021, causing a significant rebound in global price. Simon Moores, Managing Director of Benchmark Minerals (@sdmoores) noted the jump in early February.

Who is Buying Lithium?

China is by far the world’s biggest owner and buyer of lithium. China has gained a dominant position (called a “stranglehold” by one mining trade source) of the main precious metals in the electric vehicle supply chain: lithium, cobalt, and nickel. Additionally, China manufactures most electric vehicles made in the world. As countries move to transition away from internal combustion vehicles, a range of countries appear poised to increase domestic production of lithium-ion batteries and electric vehicles, with accompanying demand for lithium resources.

Simon Moores' tweet on global lithium prices

Where is Lithium Being Produced?

Lithium deposits and production are highly concentrated in a few countries, most notably Australia—the world’s largest producer of lithium—and the Lithium Triangle—Argentina, Bolivia, and Chile.  The Lithium Triangle has 58% of the world’s identified lithium resources, according to the January 2021 U.S. Geological Survey. S&P Global also projects a 199% in South American lithium supply as new lithium brines (saline groundwater enriched in dissolved lithium) begin production and existing salars (a lithium brine reservoir) increase production. Between 2008 and 2018, Australian lithium production jumped from 24.7% of the global lithium supply to 60%.[12] This is largely due to its ability to export lithium to China. According to a 2018 survey by Bacanora lithium, four companies produce 73% of the world’s lithium:

(Tianqi Lithium owns an additional 24% of SQM.)

Political Risk in the Lithium Triangle

The anticipated surge in lithium demand and prices has renewed focus on South America’s Lithium Triangle.

Bolivia

Bolivia, owing to its large reserves and a recent political history, garners the most attention regarding political risk.  The left-wing populism of former President Evo Morales has promoted state regulation of key resources for well over a decade. The Morales government nationalized the oil and gas sector in 2006 and power companies beginning in 2010.

Argentina

A painful economic recession in 2019 led to the electoral victory of current President Alberto Fernandez and Vice-President Christina Kirchner, a former president whose previous administration was noted for taking on heavy debt and state intervention into key sectors.  Under her administration in 2012, Argentina nationalized YPF, an oil company.  Just last year, the Fernandez administration expropriated its leading grain exporter, Vicentin, after it declared bankruptcy.  While Fernandez is enjoying a bump in popularity, with 56% of Argentinians expressing confidence in the overall direction of the government in 2020, (up from 24% 2019), the country’s economic struggles remain.  As with Bolivia, Argentina’s recent history of using expropriation and nationalization in economic policymaking makes it a political risk concern regarding how it plans to utilize its lithium reserves as demand grows. 

The Lithium Triangle

 

Argentina

  • Lithium resources: 19.3 million tons
  • 2020 mine production: 6200 metric tons
  • Largest deposit: Sal de Vida, 1.1 million metric tons
  • Estimated percentage of GDP from mining: 5.3%

 

Bolivia

  • Lithium resources: 21 million tons
  • Annual mine production: about 400 metric tons
  • Largest deposit: Salar de Uyuni, 5.5million metric tons
  • Estimated percentage of GDP from mining:
  • 13.5% (2015)

 

Chile

  • Lithium resources: 9.6 million tons
  • 2020 Mine production: 18,000 metric tons
  • Largest deposit: Salar de Atacama 7.5 million tons
  • Estimated percentage of GDP from mining: 10%, mostly from copper.

 

Sources: US Geological Survey, Mineral Commodity Summaries 2020;  Statista.com, Major countries in worldwide lithium mine production from 2010 to 2020; TradingEconomics.com

Chile

Chile has been a major source of lithium in recent years, but has disappointed investors as other countries have outpaced its mining growth.

While Chile has generally rejected expropriation of lithium investment and has historically allowed private investment in the mining sector, the role of the state in taxing and regulating mining is tied up in current debates in Chile about constitutional change, environmental protection, and community rights.  Chile’s legislature has re-opened a charged debate over mining royalities, while Chile’s President Sebastian Piñera vowed to facilitate private and state partnership to double the country’s output of Lithium carbonate to 230,000 metric tons.

Analysis

Despite the recent slump, lithium’s long-term profit potential remains strong owing its importance to the global economy.  In many resource-rich countries, such as those in the Lithium Triangle, lithium mining’s economic potential will draw foreign investors who will face powerful political demands to see tangible community benefits from mining. This political mix raises risk concerns not just of increased taxation or regulation, but of expropriation and nationalization in countries with a history of state-intervention in key sectors such as mining.

For international investors, political risk insurance helps safeguard investments in the event of nationalization, expropriation, confiscation, currency inconvertibility, civil unrest and property damage.

Pie chart of world lithium resources

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.

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Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of International Trade (CCPIT), a state-run organization, reported that it had issued over 1,600 “force majeure” certificates, in an effort to protect Chinese companies from legal issues related to non-compliance with their contractual obligations.  These certificates at the time covered a value of about $15.7 billion. By the first week of March, the number of Chinese force majeure declarations had risen to over 4,800 companies covering contracts worth $53.8 billon.

What is a “Force Majeure” Declaration?

When a company declares “force majeure,” it is invoking a clause, typically noted in its contract with its clients, that states that due to circumstances beyond its control, it is unable to fulfill the terms of the contract.

Invoking the clause is an effort to typically delay or possibly be released from contractual obligations without legal or financial liability.  According to one legal definition: “Generally, force majeure refers to the occurrence of an extraordinary event beyond the reasonable control of a party and prevents that party from performing its obligations under a contract.”

Force majeure clauses are common, but vary from industry to industry.  On a personal level, property owners may be familiar with mortgage contract language stating various natural disasters or “Acts of God” that can relieve the owner of contractual obligations.

The oil and gas sector and other industries that utilize long-term supply contracts often have extensive force majeure clauses that also include human interventions such as government action, terrorism, war, and strikes that can cause a break in operations beyond the control of one of the parties to a contract.

From industry to industry, and company to company, the details and specificity of force majeure clauses vary widely, and are being tested by the economic disruption wrought by the Coronavirus pandemic.  According to one source, “if you’ve seen one force majeure clause, you’ve seen one force majeure clause.”

According to the World Bank, there is no template or standard wording for force majeure clauses or for the events that may or may not cause a force majeure declaration.

While no template exists, global organizations are attempting to introduce some basic standards. For example, the International Chamber of Commerce (ICC) updated its model force majeure contract language only recently (it includes terms like “plague” and “epidemic”).

While these efforts are useful in moving international business toward common terms and language, declarations of force majeure still remain subject to often dueling legal opinions and the decisions of specific courts and arbitrators.

A Legal Burden

According to one analysis, China’s above-noted attempt to offer companies blanket force majeure certificates are likely to be contested legally.  One reason noted is that the standard for a force majeure declaration may be different domestically in China than it is internationally – where many trade contracts are based on English common law, in which force majeure events are extensively enumerated and specific.

Some contracts may not contain reference to public health events such as epidemics or pandemics.  Additionally, if challenged legally, the burden is on the company making the declaration to prove that the events were unforeseen, unavoidable, and left the company in an impossible situation with no alternatives to meet its contractual obligations.  Already, some companies have taken their Chinese counterparts to task, rejecting their force majeure claims and setting up legal battles.

Seek Legal Advice

To avoid costly legal conflict, companies will often seek out a workable solution to avoid a force majeure declaration. The need to work out the details of myriad contractual obligations is said to be one of the main reasons that the International Olympic Committee and organizers of the 2020 Tokyo Summer Olympics took a longer time than most other sports leagues and planners of sporting events to declare a postponement due to Coronavirus.

The input of a trained legal advisor is invaluable when seeking to understand force majeure clauses and tailor contract language that is either specific or broad enough to account for a range of potential events – including public health crisis.

Legal counsel can also help draft language that conforms with both the details of doing business in a specific industry and existing legal precedents concerning force majeure declarations.

Get Proper Coverage

In the current environment, there is considerable likelihood that companies will face a force majeure declaration from either a supplier or buyer, or may even have to contemplate making a such a declaration due to unforeseen and unavoidable circumstances of Covid-19.

In addition to sound legal advice, companies need to have insurance coverage that meets a range of contingencies including force majeure.  The team at Securitas Global Risk Solutions has the necessary experience to discuss and advise clients on force majeure and trade credit insurance.  If you would like to discuss further, please contact Peter Seneca at 484-595-0100 or email him at pseneca@securitasglobal.com.

Disclaimer: The text above is for informational purposes only, and does not constitute legal advice.  Seek the input of a legal practitioner for more detailed information and advice on contract language and force majeure declarations.

 

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Reshaping Global Trade

Reshaping Global Trade

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well as a profound hit to the global economy.  At the time of the World Health Organization’s (WHO) declaration of a global pandemic on March 11, 2020, the human toll of the disease stood at over 121,000 reported cases and 4,373 deaths spanning 110 countries.

These numbers are increasing, and the social and economic fallout continues.  Stock market declines in major economies reflect growing difficulty doing business and investor uncertainty about the near future.  Stock markets in the US fell nearly 10% on average on March 12 alone, with European stock markets falling well over 10% on the same day.

It is now obvious that no industry or economic sector will be spared by the impact of the virus.  Notable declines in tourism and airline industries are reverberating across supply chains.  Airline losses are estimated to be near $113 billion with governments mulling an economic stimulus for that industry.

Accordingly, trade flows are down, initially owing to the heavy toll of the virus on Chinese and other Asian manufacturing hubs, but also due to slowing consumer confidence and store closures worldwide.  Initial layoffs in the Port of Los Angeles, the first in the US directly owing to the crisis, have begun while both manufacturing and construction industries are trying to postpone difficult measures.

As businesses close, events are cancelled, and employees are told to stay at home in impacted countries, not only has the now pandemic cause a global downturn, but it’s unclear how long it will last and if it will lead to a recession.  Only recently, Goldman Sachs predicted that the US economy would grow only 0.9% in the first quarter and would not grow at all in the second quarter of 2020.

While the length and severity of the pandemic remains unknown, a fair follow-on consideration is how the global economy will prepare itself for the next crisis, and what the long-term impact will be on global trade flows.

The pandemic has shed a light on rising pre-crisis corporate debt.  Concerns for vulnerably indebted companies and sectors and helped to spur central banks around the world to drop interest rates recently.  Additionally, companies with too much supply chain exposure in China are likely to pursue efforts to diversify their supply chains, likely to other Asian locations or to North America.

As of March 3, 2020, Chinese companies had issued over 4,800 force majeure certificates, stating their inability to meet their contractual obligations with clients.

The need for companies to diversify their supply chain exposure and conduct systematic risk analysis is becoming more and more apparent.  Will there be a shift, and will it help US manufacturers and exporters? As always, the interconnectedness of the global economy makes it difficult to gauge.

While US importers may look to diversify away from China, US exporters to China will no doubt suffer.  Already, some analysts think that China will not be able to meet its obligations to increase purchases of US exports.  It’s possible that North American manufacturers, with a new free trade agreement in place, could present a viable competitor to overseas supply chains that look increasingly risky, post-coronavirus.

Risk is the operative word and what this unfolding pandemic has shown is that preparation and risk assessment are crucial for companies in today’s economy.  A major part of this effort should include proper insurance coverage for a wide range of contingencies.

Securitas Global Risk Solutions (“Securitas”) is an expert in helping companies develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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Is Global Trade in Quarantine?

Is Global Trade in Quarantine?

The outbreak and spread of the Coronavirus disease (COVID-19) has stoked global fear of a pandemic.  Disruptions to business in China and other affected countries are rising as are worldwide disruptions to travel and trade as countries scramble to put safeguards in place to stem the spread of the virus.

For companies with overseas operations and business, this latest public health crisis underscores the importance of planning for the unexpected, including an annual comprehensive assessment to properly mitigate the risk of doing business overseas where situations can change quite rapidly.

Like earlier epidemics such as SARS in 2002-2003 and the Ebola outbreak of 2014-2016, efforts to contain transmissions involve a range of decisions to quarantine the sick and minimize human-to-human contact.  This proves particularly difficult in a global economy in which the flow of goods and people are both commonplace and vital, even in areas of the world seen as remote or rural.  Outbreaks raise public concerns and even outright fear in both nearby countries and worldwide, and can lead to political decisions in non-crisis countries to suspend travel or block the transport of some or all goods.  These actions are often sudden and unforeseen, with reaching consequences for complex supply chains.

Stories of the economic impact of Coronavirus are developing.  At present, the disease remains mostly centered in China and that country is expected to see the most drastic economic impact.  Already analysts are predicting both a significant first-quarter economic slowdown and an overall GDP decline for 2020 as many businesses remain closed or people remain at home, especially in the auto-manufacturing hub of Wuhan at the center of the crisis.  With China’s economy already cooling, (GDP fell to 6.1% in 2019 from 6.6% in 2018) it remains to be seen what the impact will be on China’s export-driven growth, particularly electronics exports or its $280 billion per year textile exports.

Companies doing business in China are in a scramble to adjust their operations and specific industries are noting shocks.  American exporters of agricultural products and machinery are already feeling the effects of the slowdown, as China struggles to keep food supply chains open in the face of quarantines and declining consumption.  West Coast port traffic is already reporting a significant decline in traffic. Other notable examples include the cruise ship industry and tourism in general, beset by virus outbreaks on ships and growing travel restrictions. In addition, the luxury goods industry, which enjoys popularity among wealthier Chinese consumers and tourists, is projecting a $40 billion decline in sales in 2020.

The Coronavirus outbreak highlights the need for international companies to engage in a range of contingency planning to anticipate how to adapt business operations in the face of risks such as public health crises, natural disasters, energy shortages, slow or broken lines of communication and political risk.  An entire field of business continuity planning encourages companies to regularly assess operational and financial risk by actively planning and developing working contingency plans.  Proper insurance coverage, just one aspect of this, is crucial so that cash flows and financial obligations can be protected, even in the case of unforeseen breaks in trade.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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Officially Launched: U.S. International Development Finance Corporation (DFC)

Officially Launched: U.S. International Development Finance Corporation (DFC)

U.S. International Development Finance Corporation Launches

The end-of-the-year appropriations deal struck by Congress and the Trump Administration brought a number of policy changes offering significant opportunities for U.S. export and investment growth overseas.

A new agency, the U.S. International Development Finance Corporation (called the DFC) began operations on January 2, 2020.  Created by the BUILD Act of 2018, the DFC begins its first year in operation having secured a working $299 million budget for 2020.

Along with the recent seven-year reauthorization of the EXIM Bank, the DFC represents a significant step by the United States in asserting a larger and more capable role in international trade and investment.

What Is the DFC?

The International Development Finance Corporation is a merger of the former Overseas Private Investment Corporation (OPIC) and the Development Credit Authority, formerly housed in the U.S. Agency for International Development, the DFC represents an effort to streamline and bolster American support for private-sector projects in low and lower-to-middle-income countries.

In emerging markets, the role of state-run and multilateral Development Financial Institutions (DFIs) are growing, raising calls for the U.S. to adapt and expand its efforts, while also countering the increasing economic role of China.  While China puts billions into emerging market projects, mainly in infrastructure development, its private-sector development finance role is emerging.  

EXIM Shipping Containers Miami Port

The DFC Brings New Changes

The DFC significantly expands the capacity of the U.S. government to support private-sector-led development projects.  The DFC now has a $60 billion investment cap, up from OPIC’s $29 billion cap.  But unlike OPIC, the DFC has a more explicit mandate to focus on low- and middle-income countries (though waivers can be obtained for high and middle-income country projects that meet U.S. national interest, or that specifically focus on poor and vulnerable populations.)

In addition to adopting OPIC’s debt financing and political risk insurance portfolios, the DFC is now able to fund project feasibility studies and technical assistance grants and can lend in local currency to hedge against currency risk.  The most notable change, however, is the DFC’s new capacity to take an equity stake in investments (Congress approved $150 million for 2020) allowing it to play a stronger role in projects chosen for financing.

The DFC will be allowed to take up to 30% position in any project.  The DFC will also adhere to OPIC’s lending standards for social and environmental risk and impact.  While OPIC was formerly tasked to work with companies that were either U.S. based or included a U.S. partner, the DFC has only a mandate to prioritize U.S. companies. 

Concerns raised since the passage of the BUILD Act in 2018 about the amount allocated for DFC equity investments (considered low), accounting rules about the budgetary treatment of equity investments, and a prohibition on the DFC’s use fees to offset its operating expenses were not addressed in the time between the passage of the BUILD Act and launch of the DFC, but are expected to be raised in the future by congressional supporters of the new agency.

For more information about the DFC, see https://www.dfc.gov/

About Securitas Global Risk Solutions

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop solutions to mitigate credit and investment risk across the world.  As a specialty insurance broker focused on developing trade credit and political risk insurance programs, Securitas is focused on developing solutions that meet the needs their clients.  See our Website at http://www.securitasglobal.com/ for more information, or contact us at:

Telephone: 484-595-0100

Fax: 484-582-0111

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