Creditors Must Assess Risk of State Projects

Construction trade creditors working on public projects, particularly those involving state projects, should bring a higher level of scrutiny to determine the quality of payment bonds obtained by smaller businesses taking on large projects.

Unlike federal construction projects, which require payment bonds with an “A” rating or higher, most state projects just require that the surety be permitted to write payment bonds in that state, not that the bonds receive a rating, said Chris Ring of NACM’s Secured Transaction Services (STS). The need to investigate the creditworthiness of such bonds and the firms that hold them was brought home by a recent law—Senate Bill 123—passed in New Jersey.

In part, the law establishes a Small Business Readiness Assistance Program that provides instruction for small companies through a series of educational workshops about qualifying for surety bonds. While finer details about how this program will work aren’t yet entirely clear, Ring says credit managers in New Jersey and a number of other states where these types of programs are in place should take heed that it’s more important than ever to verify the validity of the bonding company.

“What this law tells me is that New Jersey is seeing a lot of small businesses that aren’t able to qualify for large government contracts because they can’t qualify for bonds or go through the process of obtaining them,” he said. “Now, since New Jersey is trying to help small businesses post bonds on larger contracts, it means these contractors may be going on to secondary markets to put these bonds in place. By definition, that’s risk. I’m concerned for our customers when the government is trying to put smaller businesses in the larger market. Some will do well, but most won’t.”

Ring said one way to verify the rating of a bonding company is to check the Treasury Department website, which lists acceptable sureties with an “A” rating or higher. STS also offers a service for checking the rating of a bonding firm for state projects as well.

Credit managers should also delve more deeply into knowing their customers, particularly smaller contractors on large projects, to determine if they have proper licenses, the experience paying taxes for such projects and the know-how to hire other subcontractors, he said. “Know the project itself, the general contractor, who’s financing it. Information is the most valuable commodity a trade creditor can have, especially when you get into these big-dollar projects.”


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Economic Conditions Lend Emerging Markets Attractive Growth Possibilities

Despite some of the risks associated with a strong U.S. dollar and higher interest rates in advanced markets, several emerging markets pose strong prospects for growth in 2017.

Exchange rates have recently recovered to former levels as rising commodity prices and improving global activity point to favorable conditions for emerging markets, notes credit insurer Euler Hermes in a recent analysis. “This is true even for some countries stuck in recession (Brazil) or in very-low-growth mode (South Africa), where financial vulnerability has declined after a strong rebalancing (external deficits are narrowing),” analysts said.

Anticipated GDP growth this year stemming from private consumption and fixed investment, rather than just exports of commodities, is another reason why economies in countries like India, Indonesia, Kenya, Cote d’Ivoire (Ivory Coast), Peru, Chile and Bulgaria are high on credit insurer Atradius’ radar for improvement this year.

These countries also have demographics that consist of young and growing populations, including an expanding middle class that triggers more consumption, investment demand and imports, Atradius said. Choice emerging markets have supportive governments and institutions—especially in Indonesia, Peru, India and Cote d’Ivoire—that are keen on realizing business-friendly reforms.

Opportunities by Sector
For agriculture and food, long-term chances for growth based on rising demand and a fragmented food market are promising for Bulgaria, while rising consumer confidence and incomes in Kenya and Peru are improving demand for imported food and beverages, according to Atradius.

The chemicals growth outlook is likely to stay positive in India this year, as imports of chemicals jumped to $19 billion in 2015 from $10 billion in 2013, analysts with the credit insurer said. In Bulgaria, more industry and household demand, combined with a need for raw materials in a country that imports 80% of its chemicals, should keep growth on track.

In construction, Indonesia is set to see real fixed investment increase by about 6% this year to pay for expedited government infrastructure projects, while the Indian government is also expected to boost infrastructure spending. Peru, Cote d’Ivoire and Kenya are also preparing major infrastructure upgrades that offer “significant opportunities for building materials and capital goods providers in the coming year,” Atradius noted.

Potential downsides to projected growth include fast-rising interest rates in the U.S. that could expose emerging markets to currency depreciation and capital outflows, though effective monetary policy and a low dependence on volatile capital outflows in countries like India, Peru and Bulgaria keep them well-insulated from this prospect, analysts said.


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Global Economic Landscape Shifts toward Growth

Economic activity is expected to pick up pace in 2017 and 2018, especially in emerging market and developing economies (EMDEs), according to the International Monetary Fund’s latest World Economic Outlook. Uncertainties remain, however, about future policy stances of the incoming U.S. administration and their effect on world economies.

“Among emerging economies, China remains a major driver of world economic developments,” said Maurice Obstfeld, economic counselor and director of research at the IMF. “Our China growth upgrade for 2017 is a key factor underpinning the coming year’s expected faster global recovery.”

The main factor buttressing the strengthening global outlook from 2017 to 2018, indeed, is the projected increase in growth for EMDEs, the IMF said. Economic activity is expected to accelerate over the next two years, with global growth projected to be 3.4% for 2017 and 3.6% for 2018. EMDE growth is estimated to reach 4.5% in 2017 and 4.8% in 2018. Debt is a problem for emerging markets, however, as is the potential for developed nations to enact protectionist policies.

Upside risks to near-term growth include global activity accelerating more strongly if policy stimulus is stronger than expected in the United States or China, possible shifts toward protectionism, sharper-than-expected tightening in global financial conditions, increased geopolitical tensions, and a harder landing for China, the IMF said.

“We see a wider dispersion of risks to this short-term forecast, with those risks still tilted to the downside,” Obstfeld said. “Uncertainty has risen.” Obstfeld added that on the global level, vulnerabilities include higher popular antipathy toward trade and immigration, high levels of public and private debt, and continuing slow growth and deflationary pressures in advanced countries.


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Where Will You Work in the Future?

The biggest perceived threat to jobs 20 or 30 years ago in the developed nations came from the less-developed nations, or rather their large population of workers willing to work for far less than domestic workers. Today, the most likely competitor for the Western employee is the robot or the computer. The level of the challenge is debated in two recently released studies.

One recent study by an engineering professor at Oxford University has been causing a real stir with the assessment that 47% of the current jobs held will be eliminated by technology and robotics within the next 25 to 50 years. This assertion has been made many times before, including when automation and robotics has swept through the manufacturing sector. Warnings in this report are different, as sectors not thought to be vulnerable to such changes have been identified. In many respects, this study is a think piece that looks at what technology is capable of now and leaps it could make in the future. Can artificial intelligence replace human analysis? Can robots take over most of the service jobs now being performed? In most cases, the answer is a qualified “yes,” in the eyes of the Oxford analysis—at least conceptually.

The real issue is whether this will actually take place, as there will be barriers to technological advance. People will still prefer that humans take care of many services, but only if they are performed well. They will, however, accept more and more technological augmentation as time goes on.

If the assertion is even partially true, the developed world faces a major issue as far as employment is concerned. As technology replaces more tasks, an increasing amount of people may no longer have the skills needed to compete. What becomes of people who fall behind? Is it realistic to try to re-train a bulk of the employment base for jobs in a tech-dominated world?

The main point made in the study is that these technological advances are coming and are inevitably going to change how people work. There will be burdens connected to adjusting.

A more encouraging study from McKinsey, however, asserts that only about 5% of occupations are really vulnerable to the automation revolution, and far fewer American workers will be endangered than the Chinese, for example. McKinsey researchers conclude that augmenting the human contribution with technology would drastically improve productivity but that human/machine interaction has not yet been well thought out.

This report asserts that strategy is the key. Unless and until there is serious thought applied to the issue of technological interaction, there will be more problems created than solutions found. The McKinsey report also asserts that people and machines can be compatible, but only if that is the intent from the start. For example, factory workers have seen machines enter their workplaces for years and have adapted in most cases. The fact is that approximately 20 million workers in these factories lost their jobs over the last 20 years—those who remain have accommodated the machine. As the service sector encounters the machine, there will be a similar process of adaptation that generally means becoming facile with the technology and understanding how it can help the workers and the customer alike.


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