eNews January 23, 2014

January 23, 2014


News Briefs

  1. Cash Flow Stats Notch Minor Increase, but Revenue, Profitability Signal Lingering Weakness
  2. Twenty Years In, Mexico and Texas Biggest Winners in NAFTA
  3. Country Risk Improvement Most Notable in Northern Europe, Sub-Saharan Africa
  4. Ex-Im Gets Appropriations Bump
  5. More Bullish Predictions for US Growth in 2014
  6. Congress, Administration Push to Fast Track Trade Agreements


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Cash Flow Stats Notch Minor Increase, but Revenue, Profitability Signal Lingering Weakness

The free cash margin index, measured by the Georgia Tech Financial Analysis Lab led by NACM Graduate School of Credit and Financial Management (GSCFM) Instructor and Georgia Tech Accounting Professor Charles Mulford, notched a minor increase in its first report of 2014. However, ongoing declines in revenue and operating profitability suggest "a weak and sputtering recovery," according to the report.

Although it was an increase, the free cash margin index, measured as a company's free cash flow divided by its revenue, for the 12 months ending September 2013, remained within its narrow range between 4.5% and 5.0%, improving from 4.63% in the period ending June 2013 to 4.68% in the latest period. On a year-over-year basis, the index declined from 4.72% measured for the 12 months ending September 2012.

Other data from the January report indicate that the increase in the free cash margin index continued to be driven by decreases in revenues rather than a more positive increase in spending and available cash. Median revenues declined to $705.28 million for the 12 months ending September 2013, down from $736.85 million for the period ending June 2013 and even further from the $776.47 million for September 2012. Operating profitability, measured with an operating cushion, also declined in the latest figures as the metric fell to 13.76% for the most recent period, down from 14.07% and 14.39%, respectively, for the periods ending June 2013 and September 2012.

"With the decline in median revenues and operating profitability, corporate managers began to restrict their spending, much as they did during the recession," the report said, noting that companies in the latest readings reduced both inventory and capital spending, signaling some persistent weakness and uncertainty in the existing environment.

Ultimately, at this point, the best thing for the economy might be a decrease in the free cash margin index, which could happen given the higher rate of gross domestic product growth that the US is currently experiencing according to government indicators. "If such growth continues into 2014, we should begin to see improvements in our reported metrics. In particular, we would expect improving median revenues and operating cushion. In all likelihood, however, we would also see a decline in free cash margin, as inventories expand and capital spending increases. Such changes would bode well for a continuing recovery and would allow us to finally put the 2009 recession permanently into the rearview mirror."

A full copy of the most recent report, with industry breakdowns, is available here.

- Jacob Barron, CICP, NACM staff writer

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Twenty Years In, Mexico and Texas Biggest Winners in NAFTA

New analysis released by Standard & Poor’s on the North American Free Trade Agreement (NAFTA) echoes the positive sentiments NACM Economist Chris Kuehl, PhD made on the matter back in October. S&P also noted the still-lingering issues preventing NAFTA from being a bigger success.

S&P’s 20-year look back at NAFTA this month mostly glowed about the impact of the free trade agreement. The agency highlighted growth in all three nations and the creation of nearly 44 million new jobs, half of which occurred in the United States, during the period. "Over NAFTA’s life, some countries and industries have benefitted more than others," S&P said in its analysis. "Broadly speaking though, trade among the three partners has flourished, in part because of diminished trade barriers and, with that, the creation of mutually beneficial, cross-border production chains."

The research noted that Mexico gained the most out of the agreement, largely because it simply had the most to gain in areas like increased transparency, foreign investment and infrastructure development. Mexico now is known worldwide as "an efficient exporter of manufactured goods." S&P listed Texas as the second biggest winner, explaining that the state’s economy already rivals that of many nations worldwide and, as such, should be looked at separately from the rest of the US when reviewing the FTA. The agency believes it is no coincidence that Texas fared better than almost every other U.S. state in areas like budget reserves and creditworthiness during and after the Great Recession. “We believe that the drastic increase in cross-border trade that stemmed from NAFTA accelerated Texas’s diversification,” S&P said of changes in the state’s economic landscape.

In October, Kuehl wrote in a Strategic Global Intelligence Brief published on FCIB’s website, that NAFTA at 20 succeeded in many ways in the mission to create a trading bloc to rival anything in Europe or Asia. However, Kuehl also noted in detail that it fell short in many other ways and still "has a long way to go." Paramount appears to be regulatory burdens and things like customs clearance procedures that present too many obstacles to freer movement of goods. "The US and Mexico are still fighting over a part of the agreement that was to allow trucks to travel into the US…the fact is that goods from any Asian state have an easier time getting into the US than goods from Mexico," Kuehl noted. It's one of many examples that "there are too many barriers still in place."

Another problem working against NAFTA is politics-as-usual behavior in Washington, DC. Some politicians have used misinformation about the trade pact as a way to pander to would-be voters for many years, ironically in places like Texas. Meanwhile, the Trans-Pacific Partnership (TPP) FTA—seen as a backdoor way to improve NAFTA because all three North American powers are involved—may also be losing steam because of politics. Democratic lawmakers and potential 2014 candidates to the left of the Obama Administration seem growingly unwilling to support the trade measure, which  includes several smaller emerging Asian nations, and now some of the nations involved reportedly feel the US and Japan are getting a little too greedy in demands that will benefit their own corporations above all else. In short, those hoping to improve NAFTA indirectly, and quickly, through finalizing the TPP may be overly optimistic.

- Brian Shappell, CBA, CICP, NACM staff writer

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Country Risk Improvement Most Notable in Northern Europe, Sub-Saharan Africa

New analysis from global credit insurer Coface found particularly noteworthy business credit improvements in eight nations worldwide. All of them are located in either Europe or long-troubled Africa.

Perhaps least surprising were improvements in Germany and Austria, which both maintained an A2 risk rating, the second highest of seven possible Coface ratings, but moved to a positive outlook. Analysts noted Germany’s slight shift toward consumerism may help take pressure off of traditional exporting needs. Austria will likely improve because of low insolvency levels and unemployment. Also moving into the positive outlook area is Latvia, which boasts a B risk rating, fifth among Coface’s seven ratings levels.

Ireland improved on the back of a diversified recovery that included heightened exports and booming confidence levels. It was moved up from an A4 to an A3 risk rating, although it is no longer in the positive outlook territory, which indicated it shouldn't move above or below that level quickly.

Like Ireland, the Ivory Coast moved up one notch (to a C) from the lowest level (D). While Kenya, Nigeria and Rwanda did not move up in the January 2014 credit risk metrics, Coface did move all three into a positive outlook. The four African nations are "part of a new generation of countries characterized by resistance to external shock." Still, each has a long way to go, with none earning a risk rating above a C, for now.

Coface was less enthusiastic about growth prospects and credit stability within the still debt-troubled European nations (France, Italy) as well as formerly hot emerging economies facing a proverbial glass ceiling based on infrastructure issues and volatile exchange rates in the run-up to major elections (India, Turkey, South Africa and Brazil).

- Brian Shappell, CBA, CICP, NACM staff writer

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Ex-Im Gets Appropriations Bump

Congress included an increase in appropriations for the Export-Import Bank of the US (Ex-Im) in its recently-concluded budget negotiations. Under the terms of H.R. 3547, the Consolidated Appropriations Act, signed into law by President Barack Obama January 17, Ex-Im will be able to put more of the profit it turns to use in financing export transactions.

"By increasing our appropriation, Congress will allow us to serve more US exporters so these entrepreneurs can increase their foreign sales and support more American jobs," said Ex-Im Chairman and President Fred Hochberg. "Both Congress and President Obama recognize the importance of Ex-Im's support of U.S. exports and the vital role that we play in the continued growth of our economy."

The approval of higher appropriations for Ex-Im could come as a surprise to some observers, as the bank has become a perennial target for conservative free-market advocates who have criticized the agency's financing activities, describing them as "corporate welfare" and pushed efforts not to authorize the bank's charter. However, H.R. 3547 was enacted on a bipartisan basis and the increase to Ex-Im wasn't enough to arouse any conservative protests, meaning the bank will continue operating, along with the rest of the government, through the end of September 2014 and most likely beyond.

One of the major selling points for Ex-Im's supporters is the fact that the bank doesn't cost the U.S. taxpayer anything, and actually reduces the federal deficit through its operations. This means that Ex-Im's annual appropriation is a "net-zero" appropriation that allows the bank to pay for all its operations from the fees that it collects. The increase in this year's appropriations means that Ex-Im will be allowed to use more of the profit that it collects to expand its activities.

Last fiscal year, the bank earned more than $1 billion above the cost of operations, including the payment of claims, all of which was transmitted to the US Treasury. Also during fiscal year 2013, Ex-Im supported a record 3,413 small business transactions and authorized an all-time high number of export transactions to sub-Saharan Africa, making it a key portion of the president's trade agenda.

- Jacob Barron, CICP, NACM staff writer

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More Bullish Predictions for US Growth in 2014

Add the International Monetary Fund (IMF) and Coface to a growing list of those predicting big things economically for the United States this year.

IMF raised its 2014 growth forecast for the US to 2.8%, marking an improvement from its forecast during the fourth quarter last year. IMF hinted that federal lawmakers getting (slightly) more work done, and on a timetable with reduced brinksmanship regarding matters like the budget, provided reason to believe domestic demand will rise steadily throughout the year. The IMF's outlook for overall global growth also increased since October, but by a smaller margin, to 3.7% despite concerns about slowing activity and new found volatility within the bigger emerging economies.

Meanwhile, Coface's Country Risk Update noted that the US business climate and credit risk environments showed "considerable improvements" in recent months. Coface noted a number of strengths within corporate America from a credit standpoint: high levels of self-financing, record profitability, low debt and strong investment. Like the IMF and others late last year, Coface analysts were also encouraged by a break, however slight, in partisan rhetoric and legislative gridlock within the US capitol:

"Clearer budget and monetary policies and growth in household demand boost positive trends."

- Brian Shappell, CBA, CICP, NACM staff writer

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Congress, Administration Push to Fast Track Trade Agreements

Lawmakers pushed for a renewal of trade promotion authority (TPA) last week, which would give President Barack Obama's administration more leeway to quickly conclude certain pending trade agreements.

A bill introduced earlier this month by Senator Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), along with House Ways and Means Committee Chairman Dave Camp (R-MI), would reauthorize TPA while also establishing rules for any trade negotiations and essentially outlining Congress' trade priorities. Specifically, the legislation, titled the Bipartisan Congressional Trade Priorities Act of 2014, would implement strict requirements for Congressional consultations and access to information pertaining to any trade negotiations while providing the Obama Administration with special fast-track procedures that would apply to any negotiated deal that satisfies the criteria set forth by the Senate and the House of Representatives.

Beneficiaries of this fast-track trade procedure would be supporters of the Trans-Pacific Partnership (TPP) and a potential free trade agreement with the European Union. Officials in Congress see both deals as vital efforts to boost US exports, as the TPP countries accounted for 40% of total U.S. goods exports in 2012 and the EU purchased close to $460 billion in U.S. goods and services the same year.

Skeptics of the new legislation don't believe it offers Congress a big enough seat at the negotiating table, an opinion that Baucus tried to rebut in his comments at a recent Finance Committee hearing by framing the bill as Congress' opportunity to get involved. "The trade deals we’re negotiating will provide new opportunities for US exports in many countries, and that means more jobs in the US," Baucus said. "We must recognize the opportunities created by international trade—and we must act. Stronger labor rights, environmental protections, currency rules and disciplines for state-owned enterprises—all of these issues and more will be left out of trade deals if we don’t push for them. If we don’t stay in the game, we'll be left on the sidelines. This is our opportunity to ensure Congress is a full partner in trade negotiations."

The Obama Administration is supporting the efforts of Baucus and other lawmakers to renew TPA, meeting privately with key lawmakers in order to win their vote for the legislation. Support within his own party for the bill, at least in the House of Representatives, is particularly scarce, as noted by the fact that the bill has no Democratic co-sponsors in the lower chamber.

- Jacob Barron, CICP, NACM staff writer


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