August 25, 2011
Though a group of four, the bulk of the attention from U.S. businesses aimed at members of the BRIC nations (Brazil, Russia, India, China) has been focused mostly on China and Brazil. However, with potential problems growing within the economies of at least two of its counterparts, India appears to be emerging as a perhaps the key target for new exporting and joint venture opportunities over the next two years.
This month, Export-Import Bank Chairman/President Fred Hochberg has been telling business media outlets that India has potential to be Ex-Im's largest portfolio over the next 12 to 18 months. Hochberg has been to India multiple times this year as part of the Obama administration's traveling delegations. Perhaps it's with good cause since Ex-Im's portfolio in India already exceeds $5 billion.
The 2011 Coface Handbook of Country Risk noted India has seen economic growth ranging between 6.7% and about 8.8% over the last three years and has substantive strength in areas such as technology. The rise in wages for skilled workers also is expected to boost consumer culture, a plus for domestic exporters reeling from lowered expectations in Europe and China, though some international economists fret about the nation since much of its population "still lives off a dollar per day." However, India appears to be continuing to emerge and grow, which could be a problem for its BRIC partners in China and Brazil.
Chinese growth has been red hot in recent years (9.6%, 9.1%, 10.3%), with little cool-off expected in 2011. However, weaknesses are creeping in, most notably fast-rising inflation and what appears to be an erosion in the trade advantage it has over other nations. Other issues worth monitoring include increasing social tensions linked to growing inequity, overcapacity in industry and commerce, uncertainty and weakness in the banking system and escalating environmental problems. It's by no means a short list.
Meanwhile, Brazil faces asset bubble formations that are not too dissimilar from those of the United States in the last decade as well as inflation, and the nation has a reputation for shooting itself in the foot every time it appears ready to become a true economic player. As for Russia, to say the country is rife with corruption would be a massive understatement. Additionally, its economy has little diversity beyond its raw-materials stronghold and the middle class there is few and far between.
That's not to say India doesn't have its own problems, including corruption and somewhat weak banking. However, NACM Economist Chris Kuehl, PhD notes the nation seems to be working on that, and reformers are pressing hard to speed up efforts.
"The growth of the Indian economy has been spectacular and second only to that in China as far as economic miracles are concerned," said Kuehl. "The most consistent inhibitor to faster growth has been the corrupt environment in the nation. It has long been a problem created by the wealth of bureaucratic rules and regulations. The protests building in recent weeks will not change this system overnight, but there are some very powerful political forces getting behind the effort, as the populace is responding. Enterprising politicians can ride this outrage to power. The ruling party is having a hard time keeping ahead of this."
Brian Shappell, NACM staff writer
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Congress has regulated and re-regulated the financial services sector in the wake of the recession.
Banks and companies that provide credit and debit card services have also been the subject of new legislation, notably provisions in the Dodd-Frank financial reform bill that limit the amount banks can charge merchants for swiping debit cards and, earlier, provisions in the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act), that went into effect in 2010 and protected consumers from arbitrary interest rate increases while also limiting fees that credit card companies can charge.
To shore up the potential profit that they stand to lose from these relatively recent regulations, banks and card companies have made inroads into business credit, where card behavior is less strictly governed. Recently, two major card providers stepped out with new card offers aimed directly at the needs of small businesses, with Capital One Financial Corp. announcing the launch of the Business No Hassle Cash Premier card and American Express OPEN, the card giant's small business division, announcing a new Business Gold Reward Card.
Capital One's business card offers small business users 2% cash back on every purchase and lacks any expirations or spending minimums. American Express' card users can rack up double points for online marketing spending, positioning the card as both a source of credit and something of a business partner. "What small businesses need more than anything else is demand for their products and services," said Doug Tabish, vice president of charge cards at American Express OPEN. "They are pushing us to help them think more holistically about how to generate demand. We're responding by offering maximized benefits with Business Gold Rewards, allowing entrepreneurs to reinvest the points they earn to better their existing businesses."
While these add-ons and perks are likely to entice many small business customers, they're also built to encourage those businesses to rely on the cards for payment, meaning that vendors to these small businesses could see an increase in requests to pay via credit card.
A May 2010 NACM survey indicated that a large majority of companies already accept credit cards for payment, but many still consider it a necessary evil, fraught with occasionally debilitating costs. Credit card providers often rely on offers similar to the ones recently launched by Capital One and American Express to get small business buyers to use credit cards more frequently, while levying a hefty interchange fee on vendors who want to accept that particular type of card.
In other words, merchants accepting credit cards should keep an eye on their interchange fees as banks and card companies aim to make up for the profit they'll lose from the regulatory pendulum swinging back in their direction.
Jacob Barron, CICP, NACM staff writer
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Saying Japan's economy has had a tough year would be trite at the very least. But the Asian nation got more bad news as Moody's Investment Services cut its credit rating this week amid growing debt concerns. The move, however, failed to set off the panic that followed the Standard & Poor's downgrade of the United States, perhaps because some expected a post-disaster downgrade was inevitable and perhaps because the long-term view of Japan is not negative.
Moody's dropped Japan's rating to Aa3 from Aa2, while issuing a "stable" outlook for the nation. It is the first downgrade for Japan by Moody's in nearly a decade. Moody's explained the move by discussing the large budget deficit since the 2009 global recession, partially laying the blame at the feet at the inconsistency of Japanese policy-makers, and secondarily the natural disaster's impact on holding back the nation's recovery:
"Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies. The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi Nuclear Power Station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions. Prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets and implement its Comprehensive Tax and Social Security Reform plan."
It was, however, noted that Japan does enjoy positive factors such as "undiminished home bias of Japanese investors and their preference for government bonds" and "considerable institutional and structural strengths."
Japan reacted swiftly to the ratings downgrade by trying to reduce the value of the yen and with the announcement that it would release $100 billion in foreign exchange reserves to a state-run bank with the purpose of helping exporters by facilitating more overseas purchases. The program, to be run through the Japan Bank for International Corporation (formerly the Export-Import Bank of Japan, which functions similarly to the U.S. Ex-Im Bank), is set to last for one year and will target the exporting efforts of small and mid-sized companies rather than the mega-corporations. It also seeks to bring in greater levels of foreign currency into the mix.
Brian Shappell, NACM staff writer
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A recent report found that delinquent debt among the nation's largest and smallest businesses increased dramatically in the second quarter of 2011.
Experian's Business Benchmark Report for Q2 found that very large businesses, defined as those with more than 1,000 employees, had the greatest shift in percentage of dollars delinquent, going from 11.6% in June 2010 to 18.2% in June 2011. Very small businesses, defined as those with only one to four employees, had the greatest shift in percentage of dollars considered severely delinquent, going from 9.9% in June 2010 to 11.7% in June 2011.
Other findings from the report weren't nearly as dire. Businesses that fell in between the large size gap separating very small companies from very large ones have seen a significant reduction in delinquency over the past year. Specifically, companies with 100 to 249 employees had the greatest improvement in percentage of dollars delinquent and severely delinquent, reducing their debt by as much as 7.3% and 35.8%, respectively, year over year. The trend for the Q2 report echoed this shift, indicating that the same sector of businesses decreased their delinquent and severely delinquent dollars by 5.4% and 20.2%, respectively.
As far as other measures of payment behavior were concerned, U.S. businesses paid their bills an average of 6.8 days beyond contracted terms in June 2011, marking a 12.5% increase when compared with the numbers from June 2010. This increase in slow payment was spread across all sectors, with the largest increase coming from the construction industry (17%) and the insurance industry (15.7%). Regionally, Midwest businesses showed the greatest increase in slow payment (23.9%) compared with the previous year, but for the most part this was stable with recent quarterly numbers.
Midwest, Southeast and Mid-Atlantic businesses have shown the greatest increase in percentage of dollars delinquent over the last year, increasing by as much as 15.9%. Companies in the Northwest and, again, the Midwest have shown the greatest increase in percentage of dollars considered severely delinquent, increasing by 35.6% and 18.2% respectively.
Jacob Barron, CICP, NACM staff writer
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In discussions many debt-laden municipalities will be monitoring as a potential template for their own woes, officials from a community spiraling toward the largest U.S. municipal bankruptcy in U.S. history were set to negotiate in-person with creditors for the first time.
Officials from Jefferson County, AL scheduled a trip to New York City to meet with a group of creditors the municipality owes for a sewer renovation project that left it with crushing debt. It is estimated that more than $3 billion in the county's debt is tied to a sewer rehab project there several years ago. About two weeks ago, creditors seemed to throw at least a temporary lifeline to Jefferson County in the form of a renegotiation plan. However, county officials and the creditors were reportedly hundreds-of-millions of dollars apart on terms.
Jefferson County officials also have made it known they won't take any deal that prevents them from a near-future Chapter 9 filing. Perhaps it's a negotiation tactic or perhaps it's that they've received less resistance from state officials about a potential filing than state governments in Pennsylvania and Rhode Island of late. Alabama Gov. Robert Bentley noted earlier this summer that Chapter 9 was "a very strong possibility."
Local media in Harrisburg have reported that city council members in the Pennsylvania capital are closely watching the Jefferson County-creditor negotiations fallout. Council members, faced with the likelihood of a default stemming from a failed trash incinerator project, have rejected both a state debt plan and a subsequent plan from Harrisburg Mayor Linda Thompson plan, hoping for a better option before passing the point of no return. They've noted that city residents/taxpayers would have to feel too much of the brunt for others' past mistakes and have stood against solutions such as the outright selling the incinerator operation and city-owned parking structures, both designed as ways to avoid filing a bankruptcy that could raise the cost of borrowing for many similar-sized state communities.
The most recent Chapter 9 municipal bankruptcy filing in the United States, in Central Falls, RI, largely was caused by a growing financial problem for cities around the nation: the high cost of entitlements.
Brian Shappell, NACM staff writer
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While disbursements under the Small Business Lending Fund (SBLF) continue despite criticism, the U.S. Treasury announced another program meant to spur an additional $3.6 billion in small business lending.
The State Small Business Credit Initiative (SSBCI) was established by the same bill that created the SBLF, the 2010 Small Business Jobs Act, and offers states the opportunity to apply for federal funds for state-run programs that partner with private lenders and investors to increase the amount of credit available to small businesses. States must demonstrate a reasonable expectation that every $1 in federal funding will generate a minimum of $10 in new private lending.
Eleven states and Washington, D.C. applied for the funds and were approved, meaning they can access a collective total of $360 million in SSBCI funds which, with the $1-to-$10 private sector expectation, translates into a total of $3.6 billion in new private lending.
"These funds will provide critical support to state-level programs that help expand small business lending and spur private sector job growth," said Deputy Secretary of the Treasury Neal Wolin. "Unlocking credit for small businesses will provide a powerful boost for investment and job creation in local communities across the country."
The SSBCI has an overall federal funding commitment of $1.5 billion, meaning that while the program is currently only expected to generate $3.6 billion in new private lending, it is eventually expected to result in at least $15 billion in additional credit nationwide.
The approved applications for SSBCI funding approved were for Alabama, Florida, Idaho, Iowa, Louisiana, Mississippi, Ohio, Oregon, Tennessee, Texas, Virginia and Washington, D.C. Florida will receive the largest portion of the initial $360 million ($97.7 million).
Jacob Barron, CICP, NACM staff writer
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