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, February

Major Country Risk Developments, February

Posted with permission from greatamericaninsurancegroup.com


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Factory workers


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


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



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

Nigerian Naira


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

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

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Major Country Risk Developments January 2023

Major Country Risk Developments January 2023

Posted with permission from greatamericaninsurancegroup.com


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

EuroZone Flags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

Brazilian Flag

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

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

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

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

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


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

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

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

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

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

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

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

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


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

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

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

Uruguay FLag

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

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

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

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

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

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

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

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

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

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

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



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Aircraft Lessors Sue Insurance Companies for Coverage in Russian Confiscation Debacle

Aircraft Lessors Sue Insurance Companies for Coverage in Russian Confiscation Debacle

Carlyle Aviation Partners’ lawsuit against insurers

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


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

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

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

The lawsuit

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

The seizure

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

Other aircraft lessors


The policy’s exclusions for war

Carlyle’s policy does not cover claims caused by

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


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


Political risk insurance

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

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

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


Importance of insurance brokers

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



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


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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

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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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Liquidity matters: Corporates may need half a trillion of additional working capital requirement financing in 2021

Liquidity matters: Corporates may need half a trillion of additional working capital requirement financing in 2021

Used with Permission from eulerhermes.com


      • In 2020, Working Capital Requirements in the West increased (+5 days in North America and +1 day across Western Europe) while it dropped in regions such as Latin America (-3 days), Eastern Europe (-2 days) and APAC (-1 day). Inventory management and government support explain most of this divide. In the US and EU, severe lockdowns pushed companies into a “forced” stockpiling mode, which was fortunately tempered by the “invisible bank”, i.e. the very accommodating management of payment terms between customers and suppliers, , partly financed by liquidity support measures. 2020 saw a surge in WCR across industrial sectors: +13 days for metals to 95 days, +9 days to 117 days for machinery, +4 days to 84 days for paper and +3 days to 87 days for automotive.
      • Looking ahead, we estimate that large companies will face a record increase of EUR453bn in WCR  in 2021, equivalent to +4 days of turnover, up to EUR8.4trn. This comes in a context of the strong demand rebound triggered by the grand reopening, alongside severe shortages in inputs, labor and final goods. The surge in WCR already observed in most developed economies will ramp up in 2021, while WCR would remain well under control in a few emerging countries, notably in China (-6 days). In both the US and the Eurozone, we expect WCR to rise by +4 days.
      • While all sectors will see a rise in WCR, consumer goods sectors could see the biggest jump. Last year was a year of divergence. We expect many global sector WCR levels to resynchronize on the upside in 2021, with retail (+9 days up to 52 days) and agrifood (+8 days up to 81 days) seeing the largest rises, followed by industrial sectors such as metals (+7 days up to 103 days), transport equipment (+5 days) and machinery (+4 days).
      • Stocks matter: Along with the “just in case” model of inventory management, and the end of “just in time” for most sectors, rebuilding stocks in an environment of supply shortages will be the key driver of the increase in global WCR, notably across Western European countries. In 2020, Days Inventory Outstanding surged by +5 days in North America and by +1 day in Western countries, while the drop in inventories across Emerging Markets made up for the stockpiling in developed economies. In 2021, we expect pent-up demand and the massive restocking policies of Western companies in the midst of global supply-chain disruptions to weigh notably on their WCR levels. However, in 2022, reduced supply bottlenecks should mitigate the soaring inventory fallout on developed countries’ WCR.
      • State support matters, too: The additional WCR needs represent less than 20% of non-financial corporates’ net cash positions in the Eurozone. However, total deposits of non-financial corporates cover at best 30% of total debt, with France the most vulnerable. Our estimations for the Eurozone show that NFCs’ net cash positions (deposits – new loans up to EUR1mn) increased by EUR547bn in 2020, almost three times more compared to 2019. This compares to EUR102bn of expected additional WCR needed to be financed in 2021, i.e. 17% of 2020 net cash positions. Since the end of 2020, net cash positions have continued to increase in the Eurozone (EUR38bn as of May 2021), with Germany (+EUR18bn) and Italy (+EUR7bn) on top of the list, while in France net cash positions fell by -EUR9bn. However, if the grace periods on state-guaranteed loans are not extended beyond 2021, cash buffers will decrease as total deposits on non-financial corporates cover 30% of total debts at best, with only 23% in France, one of the lowest ratios.

A glance at the change in Working Capital Requirements in 2020 for 36 countries reveals a divide between Advanced Economies and Emerging Markets for the very first time. The WCR level in the West increased (+5 days in North America and +1 day across Western Europe) while it dropped in regions such as Latin America (-3 days), Eastern Europe (-2 days) and APAC (-1 day). Inventory management explains most of this diverging trend (see Appendix).

In EMs, total inventory levels were minimally impacted as demand for goods picked up and has remained strong since the summer of 2020. In contrast, the more severe lockdowns in the US and EU pushed companies into a “forced” stockpiling mode. France, Denmark and Spain, for example, saw their inventory outstanding level surge by +5 days, +7 days and +10 days, respectively, last year. The very accommodating management of payment terms between customers and suppliers fortunately tempered these increases in inventories in some Eurozone countries. France, for example, succeeded in seeing its WCR drop by -2 days over the year, thanks to longer payment terms to suppliers (+6 days) in relation to shorter payments from customers (-1 day).

Massive stockpiling always weighs on WCR levels and cash balances accordingly. However, it is not always a bad thing: it can pay off if it arises from companies’ expectations about future demand growth, to be sure of being able to cater to clients’ orders on time after the crisis period. Conversely, if stockpiling results from an inability to deplete current inventories fast enough, it usually brings on cash shortages for the company, which could end up going bust in the worst case. The different levels of change in WCR from one sector to the other also depend on where they are located in the global supply chain scale in regards to the final consumer. The more a sector is capital-intensive, the more it undergoes a significant WCR rise as any supply disruptions are more expensive when a plant has to temporarily stop production due to a lack of inputs.

2020 saw a surge in WCR across industrial sectors (see Figure 1): +13 days for metals to 95 days, +9 days to 117 days for machinery, +4 days to 84 days for paper and +3 days to 87 days for automotive. These sectors were forced into stockpiling during lockdowns instead of shutting down their plants because of how high closure costs usually are for capital-intensive activities. Overall, metals and machinery were the two losers in regards to last year’s changes in WCR: The Covid-19 crisis has highlighted how inflexible their manufacturing tools are in case of a sudden change in the economic cycle, especially from the inventory point of view. Conversely, the sectors most exposed to the boom of remote work saw their WCR level massively benefit from resilient demand and destocking. This includes electronics ranging from semiconductors to computers (-13 days down to 94 days) as the sector saw skyrocketing demand in 2020. Household equipment saw a fall in WCR of -5 days (down to 92 days), thanks to better-than-expected sales during lockdowns while construction also registered a fall in WCR (-4 days down to 76 days) as the sector cashed in on the shutdowns of new building programs to sell off all inventories left.

The two special cases are pharmaceuticals and automotive, which both saw their respective WCR rise by +3 days, pushing them up to a ten-year record high: 106 days of turnover for the former and 87 days of turnover for the latter. In spite of selling its medicines through drug stores, the pharmaceuticals sector unfortunately bears a very high level of WCR because drug makers usually deal with public hospitals and social security programs with very long payment terms. Conversely, pharmaceuticals has always generated a high level of cash flow so that it can easily support longer payment terms. The high WCR in the automotive sector has more to do with car dealers closely linked to carmakers by the fact that they share the same brand and usually support the funding of the largest part of car inventories.

WCR, just like Days Sales Outstanding (DSOs), tend to increase both in recession and recovery times. In Figure 2, we try to graph the effect that unprecedented liquidity support measures by governments have had – and continue to have – on compressing WCR variations. Initially designed to avoid hysteresis effects (bankruptcies and unemployment), and unlike the 2008-09 crisis, the Covid-19 crisis response has been very much focused on avoiding liquidity gaps and preserving B2B flows and credit. Using IMF data on liquidity support measures (state-guaranteed loans, moratoria on debt, subsidies) and our own WCR calculations (2021 forecasts explained hereafter), we see the lifeline from governments to help suppliers (the invisible bank) continue to finance their clients. In Europe, for instance, the WCR change has been quite limited, alongside very generous liquidity bridges. Also note that initial conditions (WCR levels, structure of the economy), as well as varying intensities of the crisis or recovery, certainly explain specific country developments (Spain and China for e.g.) In large Emerging Markets, we see that liquidity gaps may have been only partially bridged and that corporates will be faced with binding financing constraints as they return to pre-crisis activity.

Figure 1: Global sector WCR in 2020, in number of days (worldwide average)
Figure 1: Global sector WCR in 2020, in number of days (worldwide average)
Sources: Bloomberg, Euler Hermes, Allianz Research


Figure 3 summarizes the results of our WCR forecasts in 2021 for a few Western countries. France clearly appears to be the weak link in our sample as the country whose cash needs are likely to be the highest in order to finance the additional WCR of EUR31bn. Germany and Spain follow, with EUR17bn of additional WCR each, albeit a difference in level (EUR383bn for Germany and EUR109bn for Spain). The Netherlands’ additional WCR of EUR15bn expected in 2021 has to be monitored because this country was previously known for keeping its WCR low. Positioned as a big European platform country for international trade, it is no doubt paying more attention to enough restocking to avoid any fallout of supply-chain disruptions on its WCR. With its additional WCR of EUR153bn expected for the ongoing year, the US accounts for a third of the global additional WCR of EUR453bn needed to be funded in 2021, for a total of more than EUR2600bn.

Figure 3: Breakdown and 2021 forecasts of WCR amounts (EUR bn)

In 2021, nearly every country will see an increase in WCR levels, but the rise will be more significant across the northern hemisphere, given the dynamism of demand in the Eurozone and its massive restocking policies against very low levels of inventories (see Figure 4). Hence, we expect an increase of +4 days on average in WCR across Europe in 2021, ranging from +6 days in France and +7 days in Switzerland to +10 days in Austria and a more worrisome +15 days in the Netherlands. For the US, we expect a rise of +4 days in 2021.

Similarly, when looking at sectors, the rise of WCR is likely to affect all 18 that we monitor, in line with the return to growth prompted by the grand reopening and massive vaccination campaigns, which will improve demand prospects. Hence, we expect WCR to resynchronize on the upside in 2021 at a global level, with the largest increases seen in sectors linked to final consumer goods or closely related to them. Yet, sectors considered as strongly industrial should also see their WCR rise in 2021, such as metals, pharmaceuticals, transport equipment and machinery due to surging commodity prices, which will raise their production costs.

Figure 4 Inventories by sector
2021 WCR forecasts by sector (number of days)
Global demand by sector (new orders + backlogs of work)

Which sectors are the ones to watch? Agrifood (+8 days up to 81 days), retail (+9 days up to 52 days), transport (+ 4 days up to 32 days) and household equipment (+5 days to 97 days). We also expect large rises in WCR for metals (+7 days up to 103 days), pharmaceuticals (+5 days), transport equipment (+5 days) and machinery (+4 days). Last year, the transport equipment (aeronautics) sector benefited from the large destocking of Boeing’s 737 Max planes since these were allowed to fly again from the last quarter of 2020.

The WCR levels for electronics (+1 day), energy O&G (+2 days) and telecom (+0 days) are expected to remain around their long-term historical levels. Their WCR are better suited to withstand any upward pressures despite the acceleration of the recovery around the world. Now more than ever they have become instrumental to the new industrial background taking shape through global digitalization, which puts them in a strong position to set payment terms for both customers and suppliers.

Our WCR forecasts highlight a ten-year high level in 2021 for some sectors, notably agrifood (at 81 days), retail (52 days), pharmaceuticals (111 days), automotive (92 days) and machinery (121 days). These record levels could put companies at risk if they are denied additional credit lines from banks when they need to finance their operating cycle on a rise.

Furthermore, agrifood and retail are two specific sectors strongly destabilized by the booming remote work and e-commerce models, respectively. Not only has e-commerce prevailed over brick-and-mortar retail throughout the world, but also it is faster than before the Covid-19 crisis. Yet, meeting customers’ demands online usually requires e-commerce players to bear a higher level of stocks than retail outlets. It is all the more required now that consumption patterns have shifted towards durable goods, and government income support strengthened demand, while transportation services were limited. The conjunction of booming demand for consumer durables from Asia and supply-side bottlenecks created by sanitary restrictions in ports and terminals have kept shipping costs elevated for several months and made it all the more important to keep high inventories in the West.

However, stockpiling can also result from an inability to deplete current inventories fast enough. As a result, it can usually bring on cash shortages that could even push a company to go bust in the worst case. If replenishing current inventories, particularly in the northern hemisphere, is fueling the rise in WCR globally, changes in payment terms granted to clients should add to this upswing over 2021. This is because a relaxation in payment terms is usually an easy way of getting back market shares that could have been definitively lost by the supply disruptions that occurred last year due to the pandemic.


In the Eurozone, companies’ available cash surpluses generated by massive state support policies (notably direct liquidity support and state-guaranteed loans) appear to be significantly higher than the looming additional amounts of WCR.

Our estimations for the Eurozone show that the net cash positions (deposits – new loans up to EUR1mn) of non-financial corporates increased by EUR547bn in 2020, almost three times more compared to 2019. This compares to EUR102bn of expected additional WCR needed to be financed in 2021, i.e. 17% of the 2020 net cash positions. Since the end of 2020, net cash positions have continued to increase in the Eurozone (EUR38bn as of May 2021), with Germany (+EUR18bn) and Italy (+EUR7bn), on top of the list, while in France net cash positions fell by –EUR9bn, which suggests non-financial corporates have started to use their deposits in addition to new loans for operating activities (see Figure 6). German companies benefit from half of the French amount of cash surpluses stemming from public support policies back in 2020 (EUR93bn against EUR197bn in France). The positive point is that the first five months of 2021 show a further rise in cash generation of EUR18bn, which will fully cover the additional WCR expected in 2021. This stems from either additional public support programs or German companies’ profitability generating positive cash flows again since the beginning of the year alongside recovering export flows.

Figure 7 Available cash positions in 2020

While reassuring, it is important to bear in mind that these excess net cash positions are also needed for the repayment of all other debts. Therefore, this cash cushion might evaporate much quicker than expected, notably if the grace periods on state-guaranteed loans are not prolonged beyond the end of 2021 and companies need to start reimbursing their debt. Looking at the share of total coverage of the stock of loans & debt securities by total non-financial corporates’ deposits, France and Belgium appear to be most vulnerable despite the high levels of available cash. Indeed, total deposits cover 23% of total stock of total debt against around 30% in Germany and Italy (see Figure 8).

Fig 8 Share of coverage of total stock of loans and debt securities

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.

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