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Embargo on Qatar: Manageable for Time Being, But Not Long-Term

Four countries imposed embargo on Qatar of shipments of export cargo and import cargo in international trade.

Embargo on Qatar: Manageable for Time Being, But Not Long-Term

On June 5, 2017, Saudi Arabia, the United Arab Emirates, Egypt, and Bahrain (known as the quartet) announced they were breaking diplomatic ties with Qatar due to the country’s relations with Iran and accusations that it supports extremism. Although the embargo has had some impact on Qatar, the country has so far been able to soften the effects of the crisis. The biggest threat to the Qatari economy would be if this crisis is prolonged, according to a Coface economic study.

Qatar, the world’s largest exporter of liquefied natural gas, has been able to soften the effects of the embargo so far, mainly due to to its reserves of cash and gold. The government has taken immediate and effective measures, which – along with rising energy exports – have been able to mitigate the challenges arising from the crisis. Coface expects the Qatari economy to grow by 3.4 percent in 2017 and by 3 percent in 2018.

Support from the government, mainly in the form of billions of dollars of deposits into the local banking systems to sustain liquidity, has so far helped the Qatari economy to deal with the negative impacts of the crisis, even though Gulf residents have started to withdraw their deposits. Another measure has been to reorganize supply chains in cooperation with other regional and international partners such as Turkey. Meanwhile, Qatar’s hydrocarbon exports are continuing to soar. During the first half of 2017, Qatar’s natural gas exports rose by 19.3 percent from a year earlier, while its oil exports jumped by 31.6 percent during the same period.

Public deposits remain a key source of funding for Qatari banks. The share of public deposits rose from 32 percent to 38 percent from June to August as the government pumped money into the banking system to offset the decline in external funding. Funding from the Qatar Central Bank (QCB) to commercial banks is also playing an important role in sustaining liquidity in the banking system. Over the upcoming months, despite persistent outflows due to the unsolved diplomatic crisis, the asset quality of the Qatari banking system will remain high as banks are backed by the government’s immense capital buffers.

Challenges could arise in the medium-term if no rapid solution to the crisis is found. If it takes longer than a few months for the parties involved to reach a resolution, Qatar’s import costs will escalate further. This would impede growth in key sectors including construction, where prices would be pushed up due to the higher costs of building materials. This would dampen the country’s growth performance despite intervention from the government to reduce financial and fiscal risks. Continued political uncertainty would also drag down investments, particularly in non-hydrocarbon sectors.

Weaker economic conditions would lower investor sentiment and deposit outflows, making it important to monitor the liquidity of the Qatari banking system.

Any further deterioration in the current situation would result in greater costs to the Qatari economy. These negative impacts could be mitigated if energy prices continue to recover. Expansion in the construction sector and further infrastructure projects would also sustain momentum in other manufacturing activities. These developments would support growth in non-hydrocarbon sectors.

China and Africa are exchanging more shipments of export cargo and import cargo in international trade.

China – Sub-Saharan Africa Trade Relations: Still Unbalanced

Almost twenty years after the launch of the first Forum on China-Africa Cooperation, China-Africa relations remain unbalanced, according to Ruben Nizard, Coface economist and author of the study, “China-Africa: Will the Marriage of Convenience Last?”

Bilateral trade, which totaled $123 billion in 2016, has leaped over the past ten years driven by sub-Saharan African exports until 2014. The region now has a trade deficit with China. While 90 percent of exports to China are concentrated on natural resources, imports are more diversified and include manufactured goods, transport equipment, and machinery.

The slowdown in the Chinese economy and its reorientation towards private consumption are reflected in a weakening of demand for commodities from Africa. This will have inevitable consequences for exporters. According to Coface calculations, sub-Saharan Africa had a significantly higher export dependency ratio, on a 0-to-1 scale, than other emerging countries in 2016, at 0.24 compared to 0.16 for Southeast Asia and 0.19 for Russia, Brazil, and India. The differential is even greater with the European Union (0.07) and the United States (0.12).

Unsurprisingly, the countries that have benefited the most from China’s expansion and those with a less diversified economy are likely to feel the effects of lower demand more acutely. The strongest trade dependency is concentrated around crude oil exports and, according to the index established by Coface, South Sudan has been at the top of the ranking since its independence was declared in 2011, followed by Angola and Congo. Gambia, which produces wood, is not far behind. Eritrea, Guinea, and Mauritania are also among the most dependent countries because of their exports of metal ores including iron, copper, and aluminium.

Diversification, the Watchword for a Sustainable Win-Win Relationship

Despite this strong dependence on exports to China, the China-Africa relationship could turn into a win-win cooperation. Africa’s export basket is gradually diversifying, incorporating higher value-added processed raw materials, raw wood, and, to a lesser extent, agricultural products such as tobacco, citrus, seeds, and oleaginous fruit. This could increase local incomes and foster employment and technology transfers even if it makes commodity-rich countries vulnerable to international price fluctuations.

Diversification also includes FDI flows and loans from China. Chinese investments in Africa are no longer extractive in nature and now extend to services, processing industries, transportation, and utilities. Existing initiatives such as the One Belt, One Road should ultimately boost regional connectivity and reduce export costs.

Since FDI and financing levels are much lower than those of trade, African countries that are heavily dependent on China remain highly vulnerable to weakening demand or a further decline in the prices of raw materials. These countries would also be vulnerable to changes in China’s foreign policy because Chinese interests in the region are, first and foremost, based on a complex network of political and economic objectives.

“The latest developments seem to be moving in the right direction but efforts are still needed to move from a marriage of unbalanced convenience to a partnership based on win-win cooperation,” said Ruben Nizard.

Coface analyzes country risk for shipments of export cargo and import cargo in international trade.

Coface: Growth in World Trade Stronger Than Anticipated

Global trade credit insurer Coface released its quarterly economic outlook and map for country and sector risk. World economic growth remains healthy, forecast at 2.9 percent in 2017 and 2018. This quarter, once again, nearly all of the adjustments in Coface country and sector risk assessments are improvements rather than downgrades.

The growth in world trade is stronger than anticipated at the start of the year. Europe’s performance is strong and political risks are fading. Brazil and Russia are both showing positive signs, while capital is once again flowing in some emerging countries. These positive trends have led Coface to improve several country ratings:

Hungary (now A3) is demonstrating lively economic activity, supported by household consumption and renewed investments due to flexible credit conditions and EU aid. Finland (now A2) has seen a drop in corporate insolvencies, down 6 percent in 2016 and a further 19 percent in the first half of 2017. Growth is forecast at 1.3 percent in 2017, with 1.7 percent expected for 2018.

Cyprus (now A4) is experiencing dynamic growth and has improved controls in its banking and public finance segments. Belarus (now C) is benefiting from the upturn in Russia and Europe, affecting both exports and household consumption.

Even so, the outlook is not improving for the major English-speaking countries, as illustrated by lackluster savings rates and wage dynamics in the USA and the UK. This is compounded by the lack of visibility around Donald Trump’s policies and the outcome of Brexit negotiations.

Within this more positive global economic environment, several sectors are rebounding. The pharmaceuticals industry is proving to be the lowest-risk sector in the world. In Western Europe, particularly in Italy, France and Germany, risk is now rated “low” due to well-established production and demand. Corporate insolvencies are low.

North America’s transport sector is now “low risk” category as a result of public investment.

The information and computer technology (ICT) sector is back on track in emerging Asian countries, China, and in Latin America, largely due to healthier household consumption. The risk is now rated “medium” in these regions and countries.

Retail in Latin America is now ranked “medium risk,” also due to household consumption that has been aided by falls in the unemployment rate and inflation.

Agrofood in Russia and South America is now “low risk.” Companies in Russia have benefited from the food embargo on Western products while South Africa’s excellent harvests have provided relief there.

Low oil prices are impacting shipments of export cargo and import cargo in international trade.

The Hidden Impact of Lower Oil Prices

The economic stagnation from low oil prices is affecting liquidity conditions across Gulf Cooperation Council (GCC) countries, according to a study released by global credit insurer Coface. Government revenues have slowed, liquidity in the banking sector is tight, funding costs are higher and economic growth has dragged to a 2.1 percent forecast for 2017.

Interbank rates have increased and money supply has slowed across the region. This situation has been particularly concerning for Oman and Bahrain, which have the lowest fiscal and external buffers in the region. This means that tightening liquidity conditions have had a deeper impact for corporate financing in these two countries compared to stronger economies such as the UAE and Saudi Arabia.

Overall, GCC region loan growth is expected to register a solid growth of 4.9 percent in 2017. But this is far lower than the average annual growth of 9.2 percent recorded between 2012 and 2016.

“Restricted resources will make banks more selective in granting loans in 2017 and 2018,” said Seltem Iyigun, Coface economist. “This would also limit access to funding for corporates, especially for small and medium-sized companies, as they represent higher risks.”

Oil prices declined over 75 percent between mid-2014 and January 2016 and since then, have risen back by about 85 percent. The lower prices have resulted in deteriorated financial and business conditions in many countries, leading some governments to adopt austerity measures that include canceling low priority projects, raising administrative fees, and curbing subsidies.

“US interest rate hikes have invariably affected the UAE dirham as it is pegged to the dollar,” said Massimo Falcioni, CEO for Middle East Countries at Coface. “Capital adjustments are necessary due to the recently implementation of Basel III requirements that require banks to hold a significant amount of high quality liquid assets in 2018-2019.”

The heavy dependence on oil has dragged down government fiscal revenues in many countries across the region. Reduced public spending in 2017 will lead to the postponement of projects, make cash flow management more difficult for companies, and reduce the opportunities for banks to finance mega-projects, which are among their main sources of profitability.

Low oil prices have led some of the GCC countries to use their own resources to finance budget deficits. Capital markets could play a larger role in fundraising in the present business environment. Tapping into international bond markets would help GCC governments ease liquidity pressures and find additional sources that could be used for the private sector.

In 2016, GCC governments raised $38.9 billion through international bond issues and despite the recovery in oil prices, they are expected to continue tapping into the bond markets in 2017. According to the report, over $38.9 billion was raised by GCC governments in 2016 through international bond markets and the trend is expected to continue in 2017.

Tightened liquidity conditions are also leading companies to implement financing solutions such as Initial Public Offerings and turning to private equity funds to meet their capital needs.

Risks for payments on shipments of export cargo and import cargo in international trade in Asia-Pacific.

Coface: Payment Risks on the Rise in APAC

Coface’s annual survey traces the evolution of corporate payments in eight countries and 11 sectors in the Asia Pacific (APAC) region. The survey was conducted in Australia, China, Hong Kong, India, Japan, Singapore, Taiwan, and Thailand, with 2,795 respondents.

Sixty-four percent of the companies surveyed experienced overdue payments in 2016. Overdue payment risks appear to be continuing to increase across the region. The average number of overdue payment days lengthened in 2016. There was a significant increase in the proportion of respondents experiencing overdues exceeding 120 days, up from 8.2 percent in 2015, to 12.5 percent in 2016.

In 2016, a greater number of respondents (25.8 percent, vs. 24.2 percent in 2015) suffered from ultra-long overdue amounts that exceeded two percent of their overall sales. On a more granular level, the data reveals that the situation has been steadily worsening, in terms of companies with ultra-long overdue amounts equivalent to, or exceeding 10 percent of their total annual sales. This percentage has risen from 3.4 percent in 2014 and 5.1 percent in 2015, to 5.4 percent in 2016, resulting in significantly reduced cash flows for companies.

“2017 is set to be another challenging year, riddled with increasing global uncertainties linked to China’s deceleration,” said Carlos Casanova, Economist for Asia Pacific at Coface. “This will be compounded by the fiscal challenges experienced by commodity exporting countries and monetary policy tightening in the U.S. Taking all of these factors into consideration, overall company payment experience in the eight selected regional economies is likely to remain weak.”

While the situation deteriorated across the region, some geographical differences were apparent. The most noticeable increase in non-payment risks was noted in China, followed by Thailand and India. More companies in Australia (14 percent) and Japan (9 percent) reported ultra-long overdue amounts exceeding two percent of their annual sales, but these still represent a relatively low level. Improvements were observed in Singapore and Hong Kong, while Taiwan remained stable.

Overdue Issues Increasing in Half of the Industries Assessed

Construction remained the riskiest APAC sector in 2016. The percentage of respondents registering ultra-long overdues exceeding two percent of annual sales, at 33 percent, was the highest among all sectors in Coface’s survey. The economic slowdown in China, combined with uncertainties surrounding monetary and fiscal policies in the U.S., are likely to weigh on the region’s economic outlook. This is dampening confidence for both private investment and consumer home purchases. In addition, household debt remains high in some APAC economies (Australia, Thailand, Singapore, Malaysia, and South Korea). This could reduce the capacity for home purchases, especially if interest rates increase on par with the US Fed. Public infrastructure investments in some regions will help to cushion the construction sector against a steeper decline in 2017.

Closely following construction, industrial machinery & electronics was the next most vulnerable sector in 2016. However, the percentage of respondents registering ultra-long overdues exceeding 2 percent of annual sales remained high in 2016 (32 percent). This indicates fat-tail risks for industrial machinery & electronics, with 2017 likely to be another difficult year for the sector. Pro-cyclical factors point towards dormant demand for the remainder of the year due to a deceleration of activity in China and weaker capital spending in APAC. Signs of saturation in China and significant market fragmentation will increase competition. The return of deflationary pressures in APAC’s main markets including China, where producer price inflation has been slowing since February, could further squeeze margins.

In the IT-Telecom sector, a higher percentage of respondents (68 percent in 2016, vs. 63 percent in 2015) experienced an increase in overdues. Public infrastructure investments in some APAC economies, as well as strategic megaprojects such as China’s Belt and Road initiative, will generate additional demand in the years to come. This will provide welcome relief particularly for telecoms. But acute market competition in the IT sector, coupled with deteriorating liquidity conditions, will most likely foster an environment conducive to M&A activities in 2017.

While metals remains one of the riskiest sectors, its performance in 2016 was boosted by a recovery in commodity prices. The metals sector will probably continue to face challenges in 2017. China’s economy has started to show signs of deceleration and the authorities are implementing measures to cool housing speculation and demand. This could translate into a relapse of lower metal prices, which will almost certainly impact margins. Restructuring in this sector is likely to continue, following on from the merger between Baosteel and Wuhan Iron and Steel in 2016. Closures of China’s zombie enterprises in the steel sector and a rise in M&A activities are expected for 2017.

Trump's trade policies will impact shipments of export cargo and import cargo in international trade with Latin America.

Latin America: The Winners and Losers of Trumponomics

Global credit insurer Coface released a report outlining possible outcomes of US trade policies for the region, focusing on exchange rate, trade and investment. Uncertainty regarding the Trump administration is exposing the region’s vulnerability to tighter financial conditions.

Costa Rica, El Salvador, Honduras and Mexico are most vulnerable to any eventual import measures imposed by the United States. This is due to their high level of trade exposure to the US, particularly for manufactured goods. In addition to the overexposure to the US, their GDPs are more dependent on exports than other countries in the region.

Based on the assumption that the Trump’s administration is expected to initially focus on countries with a strong trade deficit, Mexico’s position is particularly sensitive. In 2016, Mexico’s trade surplus with the US was only exceeded by that of China, Japan, and Germany.

Ecuador and Colombia also reported trade surpluses with the US in 2016 but it is unlikely that they would be targeted by the US administration given their irregular and weak contribution to the US total trade deficit.

Uncertainties surrounding the NAFTA agreement could delay or reduce investments. According to the Peterson Institute for International Economics, if NAFTA was to come to an end, the peso would probably devalue by more than 25 percent. Mexican-produced cars would be likely to become more competitive in the United States, which would further add to the trade deficit in contrast to what the US administration is trying to achieve.

Even if Trump is able to carry out his campaign promises, they would be unlikely to cause a climb in Latin American policy rates, with the exception of Mexico. Inflation generally hiked in Latin America throughout 2016 on the back of challenging weather conditions that put pressure on food prices. This trend has since dissipated in 2017. In response, the Central Banks of Colombia, Chile, Peru, and especially Brazil have eased their benchmark interest rates.

Regarding the nominal exchange rate, no Latin American countries reported major depreciations when Trump won the presidential elections. Once again, the strongest volatility was seen with the Mexican peso. In 2016, the currency depreciated by 19 percent against the US dollar, but in mid-January this year it began to rebound.

Growing economies see more shipments of export cargo and import cargo in international trade.

Coface: Recovery Continues in Europe, Uncertain in US, Elusive in China

Global trade credit insurer Coface released its quarterly economic outlook and map for country and sector risk. The ongoing recovery seems to be a lasting one, given the economic rally in a considerable number of industrial sectors and in Europe, even if a few rain clouds on the horizon, in the United States and in China, darken the picture.

Countries upgraded were Spain (A2), Portugal (A3), Jamaica (B), Russia (B), and Uzbekistan (C). Downgrades were given to Qatar (A4), Mauritius (A4), Namibia (B), Bahrain (C), El Salvador (C), and Burundi (E). On the sector side, the risk level has improved for the automobile and agrofood industries in several countries.

Signals Mixed in the US

Conflicting signals from the US economy (A2), along with the lack of clarity surrounding the fiscal stimulus package are signals for caution. Despite an improvement in GDP for the first quarter of 2017 (up from 0.7 percent to 1.2 percent) and unemployment being at its lowest level in nearly sixteen years, household consumption is continuing to falter. Credit growth is likely to slow as a result of the expected rise in interest rates.

The recovering US energy sector has been upgraded to “high risk” from “very high risk”. Crude oil production and the on-shore oil services industry are growing and will continue to expand as a result of regulatory relaxation.

Wave of Upgrades in Europe

Europe is seeing mostly positive momentum, due to very favorable financing conditions, investments supporting growth, and a revival in corporate confidence. Insolvencies are down in almost all countries, except the UK and Belgium. In these two countries, 2017 insolvencies are expected to increase by +9 percent and +5 percent, respectively, according to Coface forecasts.

Coface has upgraded the assessments of Spain, where growth and foreign trade are particularly dynamic, to A2, and Portugal, which has withdrawn from the European Commission’s excessive deficit procedure, to A3.

Several sectors are following this positive trend. Agrofood in Western Europe is now assessed as “medium risk.” This is the result of rising raw material prices and the end of disastrous crop conditions. Metals in Germany are now classed as “medium risk” due to the price stabilization and positive dynamics of its core markets. The automobile sector in Italy is now rated as “low risk.”

Central Europe is seeing improvements as well. This quarter, pharmaceuticals are classified as “low risk” due to increases in internal and external demand. Energy has improved its classification to “medium risk” at both the regional level and in Poland, boosted by the profitability of oil refining companies and the anticipated increase in demand. Metals are rated at “medium risk” at regional level and in Poland, thanks to new investments in infrastructure and the recovery of the automotive sector.

Varying Performances in Emerging Countries

A slight recovery is being experienced in Russia, where the country assessment has improved to B. Investments and industrial production are increasing and retail sales are no longer falling, due to the controlled level of inflation (close to four percent). Automobile sales are up (+11 percent in 2017), allowing the industry to be upgraded from “very high risk” to “high risk.” Uzbekistan (now C) in particular is benefiting from the economic recovery in Russia, the easing of political uncertainty, and from World Bank and European Bank for Reconstruction and Development (EBRD) financing.

The situation is mixed in Asia. In China, which was downgraded to B in June 2016, the indicators have returned to red. The country’s economy is slowing and insolvency risks are rising due to stricter credit conditions. The automobile sector in particular has been downgraded to “high risk” due to drastic control measures on internal combustion cars. Despite a decline in automotive sales, the retail sector has seen from robust demand, hence its upgrade to “low risk.” In India, the the agrofood sector has improved to “medium risk.”

Increased Risk in the Middle East and Africa

Since 2014, country risk has increased the most in the Middle East and Africa. This is due to increased political tensions and falling oil and gas prices. Coface has again downgraded several countries this quarter. Qatar’s (now A4) economic growth and financial situation could worsen, following recent measures taken by other Gulf countries. Bahrain (now C) is facing a high budget deficit and excessive debt. Namibia’s (now B) outlook for this year is weak, despite a recovery in the mining sector. Mauritius (now A4) received lower rankings in the international benchmarks that measure business environment.

Risks are also escalating on the sector side, as evidenced by the pharmaceutical industry’s downgrade to “medium risk” in the United Arab Emirates and Saudi Arabia, due to lower public spending.