eNews March 16, 2017

Global Business Confidence Highest in over Two Years

Worldwide business confidence is at its highest level since mid-2014. After a decline in business sentiment last fall, optimism has revived in almost all key markets.

"We've seen businesses take a more upbeat view of the coming year in all major developed economies, as well as in China and Russia," said Chris Williamson, chief business economist at IHS Markit. "Only in Brazil and India has optimism waned…. What's especially encouraging is that investment and employment intentions are at their highest since 2015, suggesting firms are very much in expansion mode which bodes well for the sustainability of the upturn."

According to the latest IHS Markit Global Business Outlook survey, which measured expectations for the year across 12,000 companies in February, the net balance of optimists less pessimists is up 11%, with goods producers generally more confident than their counterparts in the service sector.

Businesses plan to increase capital spending, and hiring intentions among private sector firms is the highest in nearly two years. Concerns remain, however, with inflationary pressures expected to intensify through the year. The net balance for input prices is up to its highest level in three years, though firms are confident that rising costs can be shared with customers and plan to raise selling prices.

The data from Markit indicates that firms have largely put aside concerns surrounding political uncertainty. Confidence has picked up to a large degree in the United States, where inflation expectations are the weakest of all countries surveyed.

Businesses in the U.K. are the most confident concerning output growth since nearly two years ago, with investment in employment and capital expected to rise. Expectation of input cost inflation in the U.K., however, is the highest globally.

Confidence improved in the four largest economies of the eurozone. Spanish companies are the most upbeat, while France saw the largest improvement in optimism. Employment and capital expenditure are expected to rise more quickly than previously projected. Job creation is expected to be strongest in Spain, Germany and Ireland.

Emerging markets registered an increase in optimism to reach a two-year high. Sentiment picked up across Russia and China, while confidence levels are down in Brazil and India. The downward trend among Brazilian firms centers around the ongoing economic crisis, a weaker currency and political instability. Indian companies see problems securing payments from clients and perceive unfavorable government policies as challenges to confidence.


Credit Congress

Unparalleled Networking for Credit Professionals

Maximize your conference experience through special networking events offered at this year's Credit Congress.

Scholarship Foundation Golf Outing
The Foundation's 12th Annual Golf Outing will be hosted on the rolling hills of Cowboys Golf Club in Grapevine, offering participants the chance to network with their peers and enjoy a round of golf, Sunday, June 11, 6:30am-2:00pm.

Expo Grand Opening and Reception
First opportunity for colleagues, friends and business associates to reconnect, network and get down to business. Vendors provide, through their products and services, information and resources essential for credit professionals to perform effectively and efficiently, Sunday, June 11, 4:00-6:00pm.

FCIB's Conversation Uncorked
A welcome respite in the bustle of the busiest conference day where attendees can relax and share knowledge and insights with like-minded international credit executives, Monday, June 12, 3:45-5:00pm.

Beer and Browse Reception and Silent Auction
Credit professionals can socialize while supporting the Scholarship Foundation to support its goal of providing financial assistance to credit professionals for educational programs, Monday, June 12, 5:00-6:30pm.

CFDD Luncheon
The passing of the torch to a new chairperson, installation of officers and the presentation of awards and scholarships are all part of the fun at this annual event, Tuesday, June 13, 11:45am-1:45pm.

Closing Night Party
The time has arrived to relax and have fun with friends and new acquaintances after a fruitful four days of educational sessions, meetings, and receptions, Wednesday, June 14, 6:00-10:00pm.

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Follow the Five C’s of Credit When Determining Lien Rights on Temporary Structures

Construction credit, according to Connie Baker, CBA, director of operations for NACM’s Secured Transactions Services (STS), is its own unique world in the broader universe of commercial credit. The mechanic’s lien and bonding process for private and public projects is one of the aspects of the profession that makes it distinct from other commercial credit areas.

Even after one understands the nuances of complying with these statutes, which vary by state, the real world can always interject an example that leaves professionals and experts searching for a clear-cut answer. In some cases, clear answers may not be available.

That’s why it’s sometimes best in these difficult circumstances to fall back on the core credit principles—character, capacity, capital, collateral and conditions—that serve to mitigate credit risks. Take a recent situation Baker came across. A supplier had sold materials to a job to be used in the construction of a temporary bridge structure which, through the course of the project, would be taken down before a final bridge was to be opened. The question from the trade creditor was whether the company could file a mechanic’s lien on this temporary structure.

The answer, according to Jim Fullerton, Esq., with Fullerton & Knowles, P.C., of Clifton, VA, is not clear cut. “Is there a structure? At the end of the day, that is the important question.” In general terms, lien rights attach to the structure and the land for the convenient use and enjoyment of the structure, he explained. Without a structure, there doesn’t appear to be any coinciding lien rights. Instead, trade creditors should spend more time qualifying the debtor for credit, asking for all or some significant portion of payment upfront or require another form of alternate security, such as a bond.

The legal question of whether lien rights attach to temporary structures is likely made more difficult as there is no extensive case law on the topic, according to B. Emory Potter, Esq., of HAYS POTTER & MARTIN, LLP in Peachtree Corners, GA. An argument could be made that a lien was filed in good faith, as the temporary structure was needed to build the bridge, he said.

Fullerton often sees supplier clients delivering materials to job sites that don’t end up being used on a project and therefore having no lien rights because the materials aren’t a permanent part of the structure. Similarly, contractors involved with demolition work on a project also probably don’t have lien rights unless there is some structure remaining after the work.

If a temporary bridge were built for a public project, however, a supplier of materials to that project would have the ability to maintain bond rights, Fullerton said.



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Capital Outflows May Challenge Fiscal Policies in China

If China's growth target is to be achieved, a more activist fiscal policy may need to be employed by authorities. Monetary policy may be constrained through the rest of this year due to persistent capital outflows.

"Moreover … domestic liquidity conditions are likely to tighten further, with small- and mid-size banks, which are most reliant on wholesale funding, feeling the greatest impact," said Michael Taylor, a managing director at Moody's. "However, we expect most rated banks and nonfinancial companies to remain resilient both to the intensified application of capital controls and to a hypothetical further modest depreciation of the RMB."

In a recent report, Moody's noted that currency reserves that cover broad money have deteriorated, dropping to 13% as of February 2017. Capital controls will therefore remain a check on risk in the financial system. China’s general government debt is higher than the Aa3 median and is expected to increase to around 39% of GDP by 2018. The debt burden could rise further if contingent liabilities related to state-owned enterprises come to fruition. Liquidity pressures do not threaten the nation’s banking sector at the moment, though banks that rely on wholesale funding are experiencing higher borrowing costs. Exposure to foreign currency is limited, indicating that most funds are domestic and liquidity is sufficient.

Moody's expects Chinese authorities to maintain currency stability through the rest of this year. “Nonetheless, capital outflow pressures will persist against the backdrop of a strengthening dollar, rising U.S. Treasury yields, expectations of slower Chinese GDP growth and lower returns in China relative to some assets offshore,” said Lillian Li, a Moody’s vice president and senior analyst.

The modest size of rated banks' foreign currency assets and liabilities does not expose those banks to risk if there is further modest devaluation of the RMB, and some may even see gains from foreign exchange movements. Nonfinancial rated companies would also be resilient to risk, based on manageable levels of foreign currency exposure and financial mitigants such as long-dated maturity profiles and good liquidity. Restrictions of capital account transactions and overseas investments would not impact most rated Chinese nonfinancial companies due to good access to offshore capital markets, Moody's said.

Prolonged use of restrictions by authorities, however, may delay reforms that support more market-based risk pricing.


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Avoid Export Punishments, Keep Abreast of Trade Violations

The United States Department of Commerce is “putting the world on notice.” Secretary of Commerce Wilbur L. Ross, Jr. said that those who avoid foreign trade rules and regulations will be punished. One recent example includes Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. of China, known together as ZTE, getting hit with a $1.19 billion penalty for violating the Export Administration Regulations (EAR) and the Iranian Transactions and Sanctions Regulations (ITSR).

ZTE’s settlement includes paying Commerce’s Bureau of Industry and Security (BIS) more than $660 million, with $300 million suspended for a seven-year probation period. Commerce said ZTE knowingly conspired to bypass U.S. sanctions for about six years to earn contracts worth hundreds of millions of dollars from sales to Iranian entities, including those connected to its government. Some of the telecommunication products were controlled under the EAR for national security and encryption reasons.

This recent case is one of many highlighting why creditors need to carefully vet their foreign trading partners. Credit professionals can also learn more about the topic, ask questions and seek advice from compliance expert Lizbeth Rodriguez-Johnson, Esq., of Holland & Hart, of Denver during three sessions she’ll lead at NACM’s 121st annual Credit Congress & Expo in June. (See below for more details.)

Chris Pilkington, vice president of the International Division of Columbus, Ohio’s Huntington National Bank, said there is an easy way to avoid such penalties with the U.S. Knowing your responsibilities and doing proper research are the first steps to steer clear of punishments. He added that knowing the specific details of shipments and products will also keep you out of harm’s way. Willful blindness will not be tolerated and will not go unpunished. If something seems to be awry, Pilkington said, self-reporting violations could ease punishments or remove them altogether.

Some red flags to watch out for from the BIS include:

  • Customers with little or no business background
  • Vague delivery information
  • Abnormal shipping routes
  • Customers paying cash when financing is usually called for with an expensive sale
  • Items ordered are not compatible with the technical level of the country
  • The product’s final destination is a freight forwarding firm

A full list of exporting red flags can be found here. Pilkington said failing to do any of these checks can also cause the bank aiding in your transaction or your firm to not get paid on time or at all.


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Positive Economic Trends Lead to High Expectations This Year

A series of recent economic indicators, from auto and new homes sales to metals and NACM’s Credit Managers’ Index, point to a coming year of raised expectations. Yet some troubling signs remain—particularly in the areas of capacity utilization, capital investment and durable goods orders—that could cloud the economic recovery forecast.

The rebound in the stock market, improvement in consumer confidence and the general sense of satisfaction in the overall business community is largely rooted in what people think might happen in the next few months as opposed to what has actually happened. There has been a great deal of anticipation regarding tax reform, deregulation, infrastructure spend, health care reform and other issues. The problem is that none of these will be quick fixes. That could well test the patience of the public and the business community.

Auto sales have largely recovered, but the sector appears to be quite close to a plateau. New home starts are also up, but this appears to be partly connected to the warm winter and the extended building season. There is also a division between the high-end buyer and those who would favor the starter home. Regional variations continue to be a major factor.

The metal markets are diverging to some degree with steel consumption up dramatically, but prices are also rising fast in copper, aluminum, nickel and steel. Unlike the oil sector, the metals producers have been able to reduce their output in response to limited demand. Now that there is growth and demand, there is room to hike prices at least in the short term.

The Purchasing Managers’ Index (PMI) composite total is over 57, as strong as it has been in close to two years. The data from the Credit Managers’ Index was solid again as well—matching the progress seen in the PMI. Transportation has been performing well—especially in the dominant rail and truck sectors.

The good news hasn’t spread to every area, however, with the most worrisome including capacity utilization, capital investment and durable goods orders. The capacity numbers are not awful—around 75% for most of the last year, but normal levels between 80% and 85% would lead to more purchasing of new equipment and more hiring. The decline in capital investment is related to the reduced activity as far as capacity is concerned. The business community is encouraged by what they are seeing, but they are not yet ready to start investing. At some point, that could slow down the recovery. The durable goods decline is not quite as drastic as it appears as this is largely related to a slowdown in the aerospace sector. The overall assessment this month remains very positive, but the caveats are important. At some point, the promise of progress on taxes, regulation, infrastructure and the like will have to become reality if there is to be solid business expansion.



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