April 23, 2015
Freddy Van den Spiegel, former chief economist for BNP Paribas Fortis, set the tone early in FCIB's annual International Credit and Risk Management Summit and Expo this week by explaining that the global economic landscape is not in as dire of shape as many media experts purport and is especially far from the "great unraveling" that the Financial Times predicts. Still, he admitted that the global recovery likely wonâ€™t accelerate much until 2016.
In part because of that growth malaise lingering in some regions, working capital and supply chain finance management emerged as a buzz topic at this year's conference, held in Madrid. Jaap Jan Nienhuis, senior credit consultant for Innopay BV in Amsterdam, said supply chain finance is expanding in the business credit marketplace even though it is still employed with regularity by a small portion of companies. He defined supply chain finance as a collaboration between a buyer and seller on cash flow with the objective of optimizing working capital and reducing risk, usually facilitated by an external solutions platform.
In a related interview with FCIB, Nienhuis noted the surge of new initiatives or product and service offerings related to supply chain finance, something new hits the market "almost every week" to meet the growing demand. A number of European creditors are increasing the amount of discounts they offer for early payments, which help creditors' cash turns by sometimes avoiding expensive bank borrowing fees, Nienhuis added. Related speaker panel discussions on the topic included "e-Commerce Driven Strategies to Support Working Capital Management" and "An Alternate Financial Supply Chain."
Other discussions of particular note focused on opportunity in specific regions, including the Middle East, Asia and Africa. During the "Trade Financing in Emerging Markets" session, panelists targeted Africa as a market with boom potential. "There is a lot of prospective for growth in Africa," said Jean-Paul Steenbeke, deputy CEO, head of sales and account management for Credimundi in Brussels.
- Jennifer Lehman, NACM marketing and communications associate
For more coverage of FCIB's latest Summit in Madrid and other international business credit topics, visit NACM's Credit Real-Time blog next week and watch for the release of the June issue of Business Creditmagazine.
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The pace of U.S. economic growth, though favorable overall, remains fairly slow, according to new research from the Wells Fargo Economics Group. It notes the rebound remains "fairly muted" even as retail sales, producer prices, manufacturing production and housing starts all rebounded over the last week. In a break from NACM Economist Chris Kuehl's bearish analysis in the latest Credit Managers' Index, the group expects stronger indications next month that the economy is ready to rebound from earlier setbacks.
In March, industrial production fell 0.6%, keeping the headline number 2% higher than a year ago. The group attributes the decline to the onset of mild weather, which reduced demand for utilities. "The ongoing pullback in the oil industry likely pushed mining production lower in the month," it said. "The silver lining in the mining industry is that the rate of decline appears to be slowing some as the price of oil stabilizes."
Manufacturing production rose 0.1%. This was due mostly to motor vehicles and parts activity, "which zapped a three-month losing streak" and jumped 2.7%. Retail sales were up 0.4% as clothes retailers, department stores and eating and drinking establishments posted strong gains. Likewise, housing starts bounced back some, rising 2%.
"The transitory nature of the recent slowdown was also evident in prices," the group said. "The producer price index (PPI) grew 0.2% in March, with core prices rising at the same rate. These gains came on the heels of a sizable decline in February. In addition, core consumer prices accelerated slightly to a 1.8% year-over-year pace, which should help justify a Fed rate hike by September."
Existing home sales grew 1.2% in February to a 4.88 million unit pace. While the Northeast experienced a drop, Midwest sales were flat and the West and South saw increases. New homes sales jumped 7.8%. "More than half of February's hike in new home sales was among homes not yet started or under construction," Wells Fargo said. "The pickup in the rate of new home sales has helped reduce inventory levels to 4.7 months. The tighter supply of new homes may serve to support further building activity in the months ahead."
Durable goods orders fell 1.4%, following a 2% rise in January. Excluding transportation, new orders dropped 0.4%. Core capital goods shipments, which gauges current equipment spending, rose 0.2% for the month. "However, the more forward looking new orders for core capital goods declined at a 7.6% annualized pace, suggesting that some of the weakness in the manufacturing sector will continue in the months ahead," the group said. "Our expectation is that durables orders will bounce back slightly in March, rising 0.5%. Excluding transportation orders, durables should rise 0.4%. Even with a slight rebound in March, we expect the manufacturing sector will continue to face headwinds of a stronger dollar and slower global growth."
- Diana Mota, NACM associate editor
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After significant delaysâ€”formerly based in partisan gamesmanship and, more recently, wariness from the most progressive in President Barack Obama's own partyâ€”Congress appears close to approving trade promotion authority for the president. The move, coupled with an upcoming diplomatic visit by top Japanese officials, should clear the way for the United States to push a long-negotiated multilateral free trade agreement (FTA) to the finish line in the coming months.
Widespread reports have surfaced noting that key federal lawmakers have crafted legislation that will give Obama trade promotion authority, which is seen as critical for the administration to negotiate the final points of the Trans-Pacific Partnership (TPP), among other FTAs. Supporters, such as Business Roundtable, the National Retail Federation and more moderate/centrist lawmakers from each party, believe such authority would help fast track the enactment of business-friendly trade deals. Obama even made a passionate plea for the authority during Januaryâ€™s State of the Union address in an effort to enable exporters to better reach the 95% of consumers living outside of U.S. borders.
Within days of the newfound support for granting trade promotion authority to Obama, Japanese Prime Minister Shinzo Abe hinted that the deal was within striking distance of being completed. Abe is set to meet with Obama in the U.S. by month's end.
Trade promotion authority is a strategic working relationship between the president and Congress that sets the parameters for the U.S. in various international trade negotiations, establishes a framework for Congress and the executive branch to more quickly work out agreements and includes a set of legislative procedures that allows the president to submit to Congress bills implementing trade agreements for an up-or-down vote within a short period of time, without the threat of amendments, according to Robert Brown, a partner with Bingham Greenebaum Doll LLP. Congress has approved this authority for every president from the 1930s until 2007â€”perhaps not coincidentally, new trade deals have languished since that time. Brown, like many others, called the authority and FTAs "of vital importance to the U.S. economy."
The TPP is the deal closest to completion and the one most likely to benefit from potential passage of legislation granting Obama the trade promotion authority. The TPP involves a number of emerging Southeast Asian nations as well as the U. S., Canada, Japan, Chile and Peru, among others. It is intended to bring together the nations of the Pacific in some kind of trade partnership that will advance their respective economies. It was supposed to be the key to the U.S. "pivot to Asia" policy and, indirectly, a way to ease some of China's trade dominance in the region.
But it has been fraught with delays, diplomatic errors, allegations that the U.S. and Japan have been bullying their way through the trade talks and, perhaps most unsettling, a lack of transparency. Regarding the latter, nearly no one has seen the official documents and specific recommendations included in the proposed TPP other than (if they're to be believed) what has been released by WikiLeaks.
Though more positive signs of completion exist than ever before on the TPP, NACM Economist Chris Kuehl, Ph.D. warns of barriers still in play and questions whether Abe's confidence is more posturing than actual progress. "Unfortunately, every statement that could be construed as optimistic about TPP is immediately followed by a qualifying remark," he said. "The fact is that Abe and Obama are in very awkward positions as far as trade is concerned. The sticking points for both men are tightly connected to their internal political issues."
- Brian Shappell, CBA, CICP, NACM staff writer
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The World Bank is the latest to warn that the slowdown in Chinaâ€™s pace of growth could impact global markets. A significant Chinese slowdown, though unlikely, "would exert large spillovers, particularly on commodity exporters," it reported. Perhaps the most affected is Australia, which was listed by nearly one-third of NACM members that responded to a recent survey naming their top five countries for sales and credit-granting activity, with a rate higher than all but one other nation outside of the United States.
As iron ore prices fall, the slowdown would hit Australiaâ€”whose growth rate has deteriorated sharply since first quarter 2014 amid declining prices for export commodities, depressed mining investment and a weakened Australian dollar. Further slowdown in China would also extend to other neighboring countries, World Bank's East Asia and Pacific Economic Update states.
"A one-time, 1-percentage-point decrease in Chinaâ€™s GDP growth relative to the baseline [stemming from a 2-percentage-point decrease in investment growth] would reduce growth in the region by approximately 0.2 percentage points [from 2014]," World Bank said. "The impact would be relatively larger for commodity exporters and for economies more tightly integrated into regional supply chains [Ahuja and Nabar 2012]. In addition, the significant negative impact on Australia and New Zealand, among the worldâ€™s largest commodity suppliers, would lead to indirect spillovers on the Pacific Island countries, given their tight links through trade, investment and aid."
A recent International Monetary Fund report also highlights the effect of the iron ore slump on Australia. Its latest world outlook predicts the country's economy will grow by 2.8% this year, slightly down from its previous prediction in October.
The 2015 Coface Handbook of Country Risk estimates 2.2% growth for the country. Regarding exports, coal and iron ore as well as coal seam gas and natural gas continue to depend largely on demand from China (21% for goods and services, 60% for iron). "The country has to adapt to the Chinese slowdown," the publication states. In addition to its vulnerability to the commodities cycle and Chinese demand, other weaknesses include substantial household debt (148% of disposable income) and shortage of skilled labor.
- Diana Mota, NACM associate editor
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Efforts to enact P3 (Public Private Partnership) mandates in U.S. states that lack solid lien rights continue to spread throughout the country. The District of Columbia is among the most recent to begin operating with P3-focused laws, which relate to a construction project being completed on publicly owned property and funded by private investment. For subcontractors and material suppliers in states without such legislation, there is no way to file a mechanic's lien on a public property. Financial protection is also lacking because general contractors typically arenâ€™t required to post a payment bond in such states.
The state governments of Arkansas, Georgia and New Mexico are among those currently working on potential legislation, according to the National Association of Surety Bond Producers. It noted that New Mexico has no P3 statues in place, while the others lack protective language related either to bonding or surety requirements. The association notes Maryland and Pennsylvania are also working to correct or clarify existing language which leaves too much room for "discretionary" decisions on the part of GCâ€™s).
Meanwhile, with state legislatures either finishing their current term this spring or already having wrapped up, a number of new construction-related laws are on the books.
Mississippi was particularly busy, passing two of note. Mississippi SB2508 sees the state again taking steps to regulate and validate construction contractors in an attempt to ensure they are licensed. The state now has more ability to issue citations and reprimands on contractors deemed as poor performers, including the potential removal of contracts from the licensing board. "Material suppliers need to be mindful of this, as the board has broad oversight," said Chris Ring, of NACM's Secured Transaction Services. "A material supplier's lien rights can be called in to question when materials are being installed by contractors that do not meet licensing requirements or are issued citations, reprimands or are removed from the project by the board." Mississippi S2364 focuses on its notice of contest language, clarifying the date in which a party needs to file said notice when a lien is deemed invalid.
Arizona's legislative activity illustrates the changing nature of lien processes because of technological advancements. Within Arizona HB 2336, primarily introduced to include design professionals in state prompt pay statues, state agencies may now use electronic means (email, EDI, etc.) to alert parties that payments have not been approved.
- Brian Shappell, CBA, CICP, NACM managing editor
For more on legislative activities in these states and more, please visit NACMâ€™s Secured Transactions Services website.
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