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eNews October 15, 2015

FCIB Global 2015 Conference: Emerging Market Performances a Mixed Bag

Emerging markets were of major interest among attendees and speakers at FCIB's Global 2015 Conference this week in Miami.

GDP in Russia is expected to contract by 4% in 2015 as inflation rises and domestic demand weakens, according to a recent outlook from Euler Hermes. Private consumption and gross capital formation dropped 8.6% and 37.8% year-over-year, respectively.

Todd Lynady, vice president of Euler Hermes World Agency (Americas), said during the Global 2015 panel Trade and Geopolitical Risk that most sectors in Russia, with the exception of agriculture and public administration and defense, have experienced a decline. Euler Hermes is anticipating insolvencies to increase in Russia by 30% this year and another 5% next year, Lynady explained.

"What we see for Russia going forward is basically a deep recession. A lot of that has to do with devaluing the ruble," he said. "If oil continues to be low, it will definitely have a huge affect on the Russian economy. The banking sector and liquidities will be called into question if the recession still continues. There is a lot of risk going on right now, and it will be interesting to see how it all plays out."

During the same panel discussion, concerns over the Mexican economy were expressed. Douglas Collins, regional director of risk services-Americas for Atradius Trade Credit Insurance, Inc., said that while he has seen more past due accounts in Mexico, it was expected given the peso devaluation. "The economy is moving along," he said. "We're keeping an eye on it, but not seeing anything out of the ordinary given the circumstances."

Brazil, however, did not receive the same degree of confidence as it is the "poster child of the downside of the commodities price swings," Collins commented. While Brazil remains rich in resources, its economy continues to face many challenges including rising interest rates and a weakening demand, according to a September Atradius report.

Prior to the economic crisis, the country experienced a huge boom in its agricultural sector and in commodities, like oil. "Unfortunately, a lot of what they earned was spent on football stadiums for the World Cup and the Olympics," Collins said, explaining it should have been spent on education, healthcare, roads, ports and infrastructure. "So you have the side effect of the commodity price cycle declining that impacts the whole economy of a country if it isn't built on solid foundations."

 

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Where to Look for Business Growth Potential

A recent study finds that, based on factors including the financing environment and technology, the areas ripest for growth potential aren't in North America nor in the often-discussed BRICs (Brazil, Russia, India, China).

Business globalization is accelerating largely because "increased connectivity of the digital age is lowering barriers to entry, opening up more international growth opportunities for 'dynamic' business," notes the Grant Thornton study, "Going Beyond Borders: Where to Grow Your Business." Although North America overall boasts the highest Global Dynamism Index (GDI) rating for a region in 2015, none of its economic powerhouses placed in the top five most dynamic, defined by Grant Thornton as those "able to renew and develop their business growth environments to stay ahead of the curve." The metrics used gave those distinctions to Singapore, Israel, Australia (already a top-five destination for credit granting by NACM members and their firms), Finland and Sweden. Just outside of this grouping was Slovenia, which showed the biggest one-year improvement in its GDI, according to the study.

Singapore's six-position rise from 2014 and ousting of Australia from the top spot is a lesson in across-the-board consistency. Singapore only rated higher than 12th in one of the 22 tracked categories—it was best in financing environment. However, it ranked no lower than 25th in every other indicator. "Singapore has claimed the top spot in [financing environment] every year since the start of the GDI, cementing its position as a global financial center to rival London and New York," Grant Thornton analysts noted. Israel, however, showed the strongest performance in the technology category.

The study praised business "pioneers such as Airbnb and Uber," citing massive improvements in technology as the driver of improvements in those industries (travel and transportation) and third-world farming alike. No country outperformed Israel in this regard. "At the country level, Israel heads the ranking," the study notes. "Israel has become a global force in hi-tech engineering since the 1990s and now has the highest concentration of hi-tech companies in the world outside of Silicon Valley, as well as more scientists and technicians per capita than any other economy."

Australia, Finland and Sweden performed very well in their business operating environment, finishing slightly behind Canada in the category. The latter two were also among the best in technology. Notably, several of top performing countries in the index typically score near the top of Transparency's International's Global Corruption Index.

The United States, Germany and China each narrowly missed the top 10, losing out to nations like Taiwan. The top 18 GDI ratings went to what Thornton considers "advanced" economies. Chile earned the distinction of highest ranking developing economy. Oil-rich Nigeria stands out among the worst index ratings in the world, with abysmal performances in business operating environment, labor markets and financing environments.

- Brian Shappell, CBA, CICP, NACM managing editor

 

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Pro-Supplier Bill Supported in Congress, Faces Possible Veto

The Senate and House of Representatives, after months of discussion, voted on a bill to establish clearer standards for surety bonds to aid material suppliers and subcontractors. However, the surety language, which was added to unrelated legislation after being unable to gain traction on its own, is widely believed to be heading for a presidential veto.

Both houses of Congress have passed the National Defense Authorization Act for Fiscal Year 2016 (H.R. 1735). Unlike in past iterations on the Senate side, language included to improve individual surety protections survived debate and negotiations. The legislation was designed to establish clearer standards for assets pledged by an individual surety on federal construction projects, including statutory language that would require assets currently pledged directly to the government be placed in the care and custody of a federal entity. It also sought to increase the amount of surety bond guarantees by the Small Business Administration from 70% to 90%.

"The federal Miller Act has allowed general contractors to use 'individual' sureties rather than 'corporate' ones for posting of payment bonds for the payment protection for subcontractors and material suppliers," said Chris Ring, of NACM's Secured Transaction Services. Since individual sureties are not subject to the same underwriting scrutiny as corporate sureties, NACM continues to support legislative changes, like those promoted by the American Subcontractors Association (ASA), designed to ensure that certain collateral assets are posted by individual sureties so subcontractors and material suppliers valid claims are made whole. The ASA has long argued that subcontractors and suppliers need improved confidence in the assets backing up payment bonds. It noted last week that instances of individual sureties "overstating the value of assets, listing assets which they do not own and not fully disclosing other bond obligations" are quite common.

President Barack Obama's problems with H.R. 1735 have nothing to do with surety language, but those changes hang in the balance nonetheless. ASA Chief Advocacy Officer E. Colette Nelson remained optimistic about the surety legislation, predicting that "the individual surety bond provision will remain in the legislation" when the dispute over unrelated matters is resolved.

 

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Labor Shortages Hit Several Sectors

There is a worrisome gap between the jobs on offer and the workers qualified to take them in the United States. This is certainly not a new issue, but that doesn't make the solution any easier to develop.

The latest concern affects the housing market. There are several parts of the country that desperately need people who know how to build a house or work in commercial construction, but the talent is missing. This same issue has affected manufacturing and transportation, most recently on display in the form of cost overruns on various interstate construction projects in Texas. There are shortages in health-related fields and tech areas as well. Virtually every sector other than some of the lower-level service sectors is feeling this.

It has always been assumed that labor shortages will provoke wage hikes, and, in some cases, this has been the situation. The fact remains that many companies are not able to hike wages high enough to attract workers without experiencing severe financial issues. They may not be able to raise prices, and this squeezes them between rigid pricing constraints and rising costs. If they are hiring someone who is not ready to contribute immediately, they are even less likely to pay them what they might be seeking.

The solution would seem easy enough—train people. Unfortunately, this is not as simple as it sounds. Businesses were once responsible for the bulk of training, but today margins are tight and companies are reluctant to take on a task that might involve two or three years before the investment in the person pays off. That assumes they stay with the company training them.

There are numerous barriers to training, notably access. There are many people ready, willing and able to train, but they are unfortunately someplace where this training is not accessible. People are expected to keep pace with the speed of changes in their profession, and this essentially means that training and education are constant needs.

 

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FCIB Global 2015 Conference: Don’t Panic Over Slow GDP Growth

Slow GDP growth isn't necessarily a reason to worry about world economies, noted the keynote speaker at FCIB's Global 2015 Conference held Oct. 11-13 in Miami. "The world is growing at a pace that is extremely slow," stated Ludovic Subran, chief economist and director for economic research at Euler Hermes. "It doesn't mean we are in crisis mode; it just means we need to get used to it. All of the engines are not growing at the same time."

Several factors are contributing to the slowdown, Subran said in his keynote address. "There's a deflationary situation in the world." Companies also are postponing investment and innovation cycles due to the slower growth. However, this in turn restrains the world from growing at a faster pace, he explained.

The influx of information worldwide further complicates issues by creating a sense of "doom and gloom," Subran said. "We get all of this information, and we think it affects us. We are not really good these days at estimating if it will have an impact on us." What's important is how resilient companies and sectors are to the changes, he added.

 

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