RISKROUND-UP 31st December 2015

INTRODUCTIONMost of the credit insurers who offer export and global trade credit insurance have their own teams of Economists carrying out research and publishing articles, helping Brokers and Clients understand the risk outlook of the economies around the world. As Brokers for the whole trade credit insurance market, UK Credit are in a unique position to have access to all this information and so this Risk Round-Up is designed to bring together the key ideas and information in one document. If you are interested in the greater depth of the original articles from which this information is taken, please contact your UK Credit Broker (or call 0845 073 8630) and they will be able to provide this.

SAUDI ARABIA: PERSISTENT LOW OIL PRICES ARE PUTTING PRESSURE ON THE GOVERNMENT

87% of government revenue in Saudi Arabia is generated by the oil sector. The high oil prices in the past have supported increases in government expenditure, however the recent drop in oil prices has created a high fiscal deficit in 2015 which is not expected to lessen in the medium term. One of the ways the Saudi Government have eased protests since the Arab revolts is through increased government spending, therefore they are reluctant to

cut spending by reducing fuel subsidies and public sector employment – an idea that has already been floated. So what does all this mean? With the oil prices looking to remain low, an expected current account deficit and decreases revenues from government spending causing a general slow down of the economy, it’s definitely one to watch whilst the government face some difficult decisions. One Global Trade Credit Insurance Underwriter that specialise in Emerging Markets, Credendo Group, have already downgraded Saudi Arabia for Political Risk.

Source: Credendo Group Risk Monthly “Saudi Arabia: Tough decisions ahead as low oil prices put pressure on the government and the economy”. 1st December 2015.

ROMANIA: NEW CABINET PLANS TO TACKLE CORRUPTION AND IMPROVE THE BUSINESS ENVIRONMENTLast month a fatal fire in a nightclub in Bucharest triggered large scale anti-government protests, ending with the resignation of PM Victor Ponta. Ponta had already been under pressure to resign for the last year over multiple corruption and fraud allegations, but despite many protests and party defections had managed to remain in office. Since the resignation, a new technocratic cabinet has been named by newly appointed prime minister Dacian Ciolos, and they are expected to govern until the next general election in December 2016. The focus of this new cabinet is the tackling of corruption and improving the business environment. Plans include the privatisation of public companies and increasing the absorption of EU funds which should lead to increased investments. Whilst the short one year mandate is expected to receive broad parliamentary support, the government’s limited period in office raises doubts about it’s capacity to properly implement the structural changes required to achieve the goals set out.

Sources:Euler Hermes Weekly Export Risk Outlook “Romania: Political uncertainty to continue?” 12th November 2015.

Credendo Group Risk Monthly “Romania: A new technocratic cabinet keen to improve the business environment” 1st December 2015.

UNITED KINGDOM: EXPECTED INTEREST RATE RISE HAMPERING THE MANUFACTURING SECTORThe Manufacturing Sector in the UK has suffered from downward pressure on selling prices, and output remains 7% below it’s peak in 2008. One of the factors that has contributed to this downward pressure is an anticipated rise in interest rates in Q2-Q3 2016. This has exerted upside pressure on GBP which is affecting competitiveness – especially when compared to EUR. With turnover and profitability under pressure in this sector, it is advisable that those both in the Manufacturing Sector and those selling to, consider Trade Credit Insurance to protect themselves from customer insolvency and help provide valuable financial information.

Source:Euler Hermes Weekly Export Risk Outlook “UK: No happy days for the manufacturing sector” 9th December 2015.

UNITED STATES: SLUGGISH RECOVERYIn December the US Fed raised short term interest rates by 0.25%, the first increase in over 9 years. All participants of The Federal Open Market Committee forecast further increases in short term interest rates throughout 2016 to an average rate of 1.4%. The statement released last month describes these increases as gradual and affects caused by changes in monetary policy can take a year or more to show in the economy. In terms of trade sectors, existing home sales fell -10.2% m/m in November which is the largest decline since July 2010, and the Manufacturing sector has struggled with a growth of only 0.9% y/y. Looking forward, global Trade Credit Insurer Euler Hermes estimates GDP Growth of 2.5% for the years 2015 and 2016 and there is a possibility of congressional leaders eliminating the ban on exporting oil that has been in place since the 1970s. Should the ban be overturned, estimates show that exports would rise immediately by several billion dollars a year giving a boost to the economy.

SourcesEuler Hermes Weekly Export Risk Outlook “US: First interest rate hike in almost a decade” 17th December 2015.Euler Hermes Weekly Export Risk Outlook “US: Q3 GDP sluggish, +2.5% forecast for 2016” 23rd December 2015.Council on Foreign Relations “The Case for Allowing US Crude Oil Exports, Policy Innovation Memorandum No.34”

SECTOR FOCUS: THE METALS SECTOR IN WESTERN EUROPE AND EMERGING ASIAA slow but sure growth in the Eurozone, caused in part by the looser monetary policy by the ECB with it’s quantitative easing program, has seen demand for both new vehicles rise and good recovery in the property market. These two sectors are supporting the demand in the metals sector, however production in Europe has been declining since June 2015. Despite an anti-dumping tax put in place by the European Commission on imports coming from China and Taiwan, Europe has imported twice as much in the first 7 months of 2015 as it did in 2013. Unlike Europe, China’s consumption of metals has been declining, with an estimated drop of 3.5% in 2015. Unsurprisingly, due to large stock levels, exports from China increased by 33% by the end of October 2015. However India have also imposed an anti-dumping tax on steel imported from China which could negatively effect the high export demand this sector in China has been relying on. Global Trade Credit Insurer Coface, has rated the risks in the metals sector in both Europe and Asia as ‘very high’.

SourcesCoface Panorama “Barometer sector risks in the world” December 2015.

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