Top 5 Geopolitical Events Impacting Global Trade Credit and Cross-border Investments

Top 5 Geopolitical Events Impacting Global Trade Credit and Cross-border Investments

Top Five Areas of Geopolitical Risk

Assessing country or regional risk is a crucial part of a trade risk strategy and is necessary for conducting international trade.  Understanding laws, customs, and regulations of any country are paramount but it’s also prudent to anticipate how external factors such as your buyer’s creditworthiness, conflict, violence, or other political/economic uncertainty can impact trade or cross-border investments.

Risk insurance provides US exporters with protection against buyer non-payment as well as cross-border investments against political risk such as confiscation, expropriation, nationalization, forced abandonment or political violence. Trade credit and political risk insurance is a specialty risk transfer solution that helps US companies on many levels when trading and operating in the global economy.

For companies seeking to begin or expand their overseas operations, exporting remains a great opportunity to generate growth, but there are always risks.  Right now, here are five major risk areas/issues that impact global trade:

1. China

Vehicle on Street in Between High-rise Buildings With Stores on the Bottom

The ongoing trade dispute between the U.S. and China has garnered the attention of world markets and taken a sort of on-again, off-again nature.  After over a year of negotiations, a trade deal between the two countries seemed to be closer to reality after a meeting between President Trump and Chinese Premier Xi Jinping in December 2018 (in which a 90-day deadline for an agreement was agreed upon). While that deadline has come and gone, the trade war has again ratcheted up along with raised concerns of overall global trade risk.  The Trump Administration announced an intention to place a new set of tariffs on August 2, 2019 which again roiled global markets but also led to China retaliating by devaluing its currency on August 5.  In the most recent salvo, the U.S. has labeled China a currency manipulator.  It remains unclear whether this new round of back-and-forth will delay the anticipated trade agreement, which is likely to include language as well as specific targets for increased U.S. exports to China.

While a recent economic report appears to show that China is weathering the impact of the trade war, second quarter numbers from China showed that overall growth slowed, the slowest rate of growth since 1992.  While the trade war has notably hurt a number of U.S. exporters, such as soybean producers, slowing domestic demand in China also presents a concern for potential U.S. exporters.

Added uncertainty in China relates to growing protests in Hong Kong.  Initial protests over a bill to allow suspects in Hong Kong to be tried in courts in mainland China have now spiraled into their fourth month with protests growing larger, more aggressive, and taking on a more broadly pro-democracy tone.  While worries of a heavy-handed crackdown are present, it remains unclear how or when the protests  will end in what is a vital trade and business hub for the Chinese economy. 

2. Brexit

Blue and Yellow Round Star Print Textile

While the UK’s referendum on leaving the European Union was over three years ago, the details of translating the narrow victory of “Leave” voters into a workable political and economic agreement has been agonizing.  While new Prime Minister Boris Johnson has pledged that the UK will leave the EU “do or die” on the new deadline of October 31, 2019, his narrow one-vote majority in the British Commons leaves him, like his predecessor Theresa May, little room to maneuver.

Significant concerns over the economic and social impact of Brexit, as well as its impact on the hard-won peace in Northern Ireland has UK politics split 3-ways with no consensus – between those who want to an immediate or “hard” Brexit regardless of consequences, those who want to remain in the EU, and those who want a negotiated, gradual exit from the EU that avoids a hard border between Ireland and Northern Ireland.  These divisions internally divide both UK’s two main parties, Labour and Conservative, with only the smaller Liberal Democrats being fully committed to remaining in the EU.

U.S. and UK trade negotiators have met to discuss a possible post Brexit free trade agreement that could hold a number of opportunities and risks for U.S. exporters.

3. The Middle East

While hardening battle fronts and shifting alliances have the Syrian civil war in a current stalemate, the rivalry between Iran and Saudi Arabia is center stage, with the two in proxy conflict both in Syria and in the ongoing civil war in Yemen.  U.S. – Iran tensions have again raised tensions in the Persian Gulf with Iran taking a more aggressive stance toward U.S. and British economic interests.  The United States’ NATO ally Turkey adds another element to the overall regional turmoil, with the two countries at odds over Turkey’s purchase of military hardware from Russia and its antipathy to U.S.-backed Kurds in both Syria and Iraq.

In North Africa, Egypt’s economic growth is notable (5.6% annual GDP growth in July 2019).  The country enacted several IMF-backed economic reforms in recently years and labelled itself a “global investment destination” as part of the effort in 2018.  However, there is uncertainty as to the long-term sustainability of the reforms, with a recent report noting that poverty actually increased since 2015.  The country’s ability to help extend economic growth more broadly is key to reducing uncertainly among investors.

Tunisia, the lone success story of the Arab Spring, recently lost its 92-year-old President Beji Caid Essebsi after a long illness.  Caid Essebsi, elected president in 2014 after fall of the Ben Ali dictatorship, was the country’s first directly elected head of state.  His willingness to broker compromise played a central role in guiding Tunisia’s democratic transition and the country’s ability to democratically replace the deceased leader will again test the strength of its political institutions.  The long-time president of neighboring Algeria, Abdelaziz Bouteflika resigned on April 2, 2019 after a wave of protests.  While the country’s military has taken over the role of stewarding the country’s government, the end of Bouteflika’s notably corrupt 20 year rule has raised expectations among Algerians for possible political and economic reform.

4. Latin America

Africa Map Illustration

The issue of migration and its impact on relations between the United States, Mexico, and the countries of Central America has come to dominate political dialogue and rhetoric.  For the U.S. and Mexico, the border issues have somewhat obscured progress toward a new continental free trade agreement called the United States Mexico Canada Agreement or USMCA.  Mexico, which has become the United States’ largest trading partner, ratified the new deal in June 2019.  A more difficult ratification fight is expected in the United States Congress.  (For more information about the USMCA, see here.)

South America’s large economies, Brazil and Argentina continue to be mired in decline.  Brazil’s downturn, which began in 2016, has not improved under a new government.  Economists anticipate positive economic growth not until 2020 at the earliest.  In Argentina, a mid-2018 currency slide, economic recession and high inflation continues and is likely to result in the country electing a new, more populist government.  At stake are a number of difficult economic policies seen as necessary to pull Argentina out of “perennial volatility.”

Venezuela’s economy continues to bump along the bottom in a what one analyst calls a “perverse equilibrium,” with no resolution in sight for the country’s political impasse.  In the meantime, a growing humanitarian crisis has led to a boom in outward migration, as many Venezuelans seek to flee what appears to be an unending cycle of hardship.

5. Russia

Multicolored Church

U.S. – Russia relations are at a low point, with the two countries in protracted disagreement over Ukraine and Turkey (see Middle East above) to say nothing of proven Russia’s efforts to disrupt U.S. elections or both countries recent exit from the 1987 Intermediate-Range Nuclear Forces (INF) Treaty.  Sabre rattling and regular efforts at deflection from the Russia government draw attention away from the fact that Russia’s economy is stalled with 0.4% economic growth between 2014 and 2018.  Rising political protests in the country have drawn notice and speculation about the rising impact of economic stagnation on the seemingly air-tight political regime of Vladimir Putin.

 

 

About Securitas

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop solutions to mitigate credit risk to achieve their financial goals.  As a specialty insurance broker focused on developing trade credit and political risk insurance programs, Securitas is focused on finding coverage for difficult credits to protect businesses from unexpected credit losses.  See our Website at https://www.securitasglobal.com/ for more information, or contact us at:

900 West Valley Road

Suite 701

Wayne, PA 19087

Telephone 484-595-0100

Fax 484-582-0111

 

 

WTC Harrisburg: 25th Anniversary Gala, December 1

Join World Trade Center Harrisburg as they celebrate 25 years of growing trade in southcentral Pennsylvania! This has been such an exciting year for the organization and they have so much to celebrate, including moving into the new World Trade Center Harrisburg building.

THURSDAY, DECEMBER 1

25TH ANNIVERSARY GALA

4:30-5:30PM: OPEN HOUSE

5:30-9:00PM: GALA

THE NEW WORLD TRADE CENTER HARRISBURG BUILDING

HARRISBURG, PA

 

Keynote Presentation: Terri Morrison, intercultural communications speaker and co-author of 9 books. Terri will be available to sign copies of her books after her presentation.

Cost: $80 WTC Members/$95 Non-Members/$750 Table for 8

CLICK HERE TO REGISTER

WTC Harrisburg: Export Finance Programs, November 14

 

World Trade Center Harrisburg

MONDAY, NOVEMBER 14

EXPORT FINANCE PROGRAMS

9:00AM-1:30PM

DOUBLETREE BY HILTON HOTEL

READING, PA

 

You Will Learn How To:

  • Increase your bottom line by selling into new markets and to larger buyers with confidence
  • Offer competitive financing rates to your customers to help close the sale
  • Utilize low-cost export credit insurance to protect against buyer non-payment, insure foreign receivables, minimize risk, and offer extended credit terms to your buyers
  • Obtain working capital loans with U.S. government backing to provide capital for inventory, hiring, and performance bonds to support export sales orders and free up needed capital

Who Should Attend?: CEOs, CFOs, international marketing managers

Why Should I Attend?:  

  • To connect with the attending speakers, finance lenders, and other financial experts.
  • To get the answers to your specific export finance questions!

Cost: $45 WTC Members/$60 Non-Members

includes light breakfast, full luncheon, and refreshments

CLICK HERE TO REGISTER

US Commercial Service Export University Event 10/25

Join Export University on the morning of October 25th for Export 101: Preparing for Business Overseas to learn about international logistics, trade regulations, and international financing from expert practitioners in our trade community:

· Scott Hoffman, Benchmark Exports (see bio)
· Michael Ford, BDP International (see bio)
· Joe Flaim, Fulton Bank (see bio)

The 100-level course is for new-to-export firms seeking to learn the fundamentals of developing export relationships and managing export transactions. The course is also appropriate for experienced exporters looking for a refresher or for new employees in exporting firms who need export training.

Each participant will receive a paperback copy of “A Basic Guide to Exporting” (retails at $22), a comprehensive guide to the basics all exporters should know.

Click here to register: export-university-2016-17 (more…)

Push For Tougher Regulation at U.S. Banks

By Peter Eavis

U.S. banks have been reporting steady growth in earnings since soon after the financial crisis. With the latest reports rolling in, analysts think the banks’ first-quarter profits will be their best ever.

But as welcome as such profits are to the banks, they may also become a source of discomfort. The ballooning bottom lines could embolden the lawmakers and regulators who want to introduce additional measures to overhaul the nation’s banking system.

After the financial crisis, many officials involved in the regulatory revamping feared that tougher rules, like caps on bank assets, could destabilize the U.S. financial system and harm economic growth. It is a view that prominent bankers and lobbyists have also voiced.

Despite industry opposition to new rules, the buoyant bank profits could add to the ammunition that influential figures in Washington are using to advocate for more radical ideas to overhaul the banks.

‘‘I hope the regulators move forward with tougher regulations,’’ said Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation, a primary bank regulator, and now a senior adviser at the Pew Charitable Trusts. ‘‘This wouldn’t endanger the economic recovery.’’

Much has been done to strengthen banks since the financial crisis. The Dodd-Frank legislation, which Congress passed in 2010, and international banking standards known as the Basel III rules are forcing banks to hold safer assets, curtail trading activities and set aside more capital to absorb potential losses.

Even so, there is bipartisan support in Washington to do more. Most recently, Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, said that they planned to introduce a bill that would require banks to hold considerably more capital. If passed, such a requirement is likely to prompt the largest banks to shrink in size. While a draft of the legislation does not stipulate a maximum size for banks, it requires financial firms with more than $400 billion in assets to hold additional capital. Big banks like Citigroup and Bank of America well exceed that amount, as do Wall Street firms like Morgan Stanley, but regional lenders would fall below that threshold.

The restlessness over the big banks extends beyond Congress.

Daniel K. Tarullo, the Federal Reserve governor who oversees regulation, floated an idea last year for limiting bank size. And Thomas M. Hoenig, vice chairman at the F.D.I.C., has been pushing for the overhaul of large, complex banks, as well as more rigorous capital standards.

The banking industry might be able to bear more regulations, given how it has fared under earlier measures. In some ways, the banks have thrived despite the added costs of all the new rules and demands since 2008.

Dick Bove, a bank analyst at Rafferty Capital Markets, estimates that F.D.I.C.-insured banks will earn $39 billion in the first quarter of this year, which would be a record quarterly showing. ‘‘No one can argue that banks were hurt from a profit standpoint by regulation,’’ he said.

The financial overhauls of the past four years do not appear to have held banks back from indulging in activities that facilitate economic growth. Helped by Wall Street financial firms, U.S. companies have raised huge amounts in capital markets since the crisis. Last year, corporations issued $940 billion worth of bonds, a record amount, according to Dealogic, a data provider. This has happened even as investment banks have scaled back their operations to get ready for regulations they vocally oppose, like the so-called Volcker Rule.

The overhaul does not appear to have hurt the U.S. housing market, either. Large lenders like Wells Fargo have profited well from the recent boom in mortgage refinancing. That activity has also helped homeowners, through sharply lower borrowing rates.

Banks are also making significantly more loans to companies, which bolsters the economy and job growth in many parts of the country. There is even evidence that the overhaul may have helped the banks become better run. Citigroup, which was subject to much regulatory pressure, is more streamlined and reported strong first-quarter earnings this week.

Little of this might have been expected after past warnings from bankers. In 2011, Jamie Dimon, chief executive of JPMorgan Chase, said that the proposed rules to overhaul derivatives, a commonly used financial instrument, ‘‘would damage America.’’ He also said that the Basel rules were ‘‘anti-American.’’ Comment letters filed by lobbyists with regulators used sophisticated-looking models to show how rules could hold back the economy.

‘‘As far as the banks are concerned, there is never a good time to raise capital or increase regulation,’’ Ms. Bair said. ‘‘When times are bad, they say it could hurt things, and when times are good, they say they don’t need it.’’

Some analysts, however, caution against reading too much into the banks’ strong profits. Though banks have been preparing for new rules for months, many of them have not been fully executed, which means the true costs of the measures is not yet known.

Mr. Bove says that, while bank profits have hardly suffered from new regulation, their customers have. Lenders have simply passed on many of the costs, mostly in the form of new fees, he said. ‘‘The government aimed a Stinger missile at the banking industry and missed and hit the consumer instead,’’ said Mr. Bove, who also notes that loans to small business are still weak.

In addition, bank profits may not be as strong as they look, some analysts say. Earnings appear less impressive when taking into account the new capital that banks have to hold. This can be seen when applying a metric called return on equity, which reflects the extra capital.

Financial companies in the Standard & Poor’s 500-stock index had a 7.9 percent return on equity last year, according to data from S.&P. That is below the 10 percent return last year for utilities, also a regulated industry. And the banks’ return is down from the 16 percent return that they achieved in 2006.

That is why some analysts argue that it would be a mistake to force U.S. banks to hold even more capital than they already will under Dodd-Frank and Basel III. They argue that it would depress returns on equity and therefore prompt banks to exit certain businesses, reducing credit in the economy. In a research note last week, a Goldman Sachs bank analyst estimated a Brown-Vitter bill could remove $3.8 trillion worth of credit from the U.S. banking system.

But considering that past dire forecasts have not materialized, advocates for tougher rules may be tempted to press on.

Phillip L. Swagel, a professor at the University of Maryland School of Public Policy, sees risks in adopting higher capital reserves, but he says he thinks the industry’s gloominess can be overdone.‘‘I do understand the frustration of the bank critics when they see pieces like the one from Goldman Sachs saying that the world will end under Brown-Vitter,’’ said Professor Swagel, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.Despite the sharp debate, he says he thinks there is growing agreement among policy makers, and even banks, that more capital might be needed. ‘‘I see consensus on the top-line issue of more capital,’’ he said.

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