Beware of Risk in These Global Hotspots

The war in Ukraine and a global pandemic has impacted even the strongest economies, leading to inflation, recession and in extreme cases, default. And now, some countries are facing severe economic and geopolitical tensions, further impacting international trade.

When assessing risk for international customers, you must differentiate the types of risk. You can pinpoint nine factors and separate them into three parts, said David Kinzel , vice president of structured credit and political risk at Marsh, LLC (Denver, CO) during a Credit Congress 2023 session,?A Look at Current Global Hotspots: Where Are They and What’s Next??Determining the type of risk can determine how you assess your customers in their ability to pay you. “Security risk which is war, civil commotion and terrorism attacks. Trading risk, which is currency convertibility, transfer risk and sovereign debt risk,” Kinzel said. “And expropriation risk where the government confiscates foreign assets, applies unfair taxation and cancels key licenses for companies to operate overseas.”

Trade credit professionals should beware of risk in the following global hotspots:

Turkey?is a country with high currency convertibility and transfer risk. On April 19, 2022, Turkey’s Ministry of the Treasury and Finance published amendments to the country’s foreign exchange regulations. According to their?press statement, in Law No. 6362 on Capital Markets, the ministry must continue to take measures prioritizing the use of the Turkish lira in the context of the free market and combating dollarization in the economy. “The amendments to the foreign exchange rules were made following the high increase in inflation in the Turkish economy and the rapid depreciation of the Turkish lira, which has been characterized as a currency crisis by some observers,” reads an article by the?Library of Congress.

Reelected President Recep Tayyip Erdogan has reversed his approach on interest rates to reduce inflation in Turkey. “Turkey steadily lowered its policy rate from 19% in late 2021 to 8.5% in March as inflation concurrently ballooned, breaching 80% in late 2022,” reads an article from?CNBC.?“Turkey's central bank jacked up the country's key interest rate Thursday, almost doubling it from 8.5% to 15% as the new economic administration of recently reelected President Recep Tayyip Erdogan embarked on a dramatic monetary policy U-turn.”

“There is hope as he has appointed new advisors that will help him turn that around but Turkey is a high-risk area for trade and is only going to get worse,” Kinzel said. “The political risk insurers, part of the market that we work in, have stopped insuring Turkey for quite a while for that specific type of coverage for that convertibility risk.”

Argentina?has a high currency and convertibility risk as their government makes measures to tame inflation and support their currency. In May, the country made rate adjustments, more interventions in the exchange market and expedited deals with creditors, per?Reuters.?According to the ministry, the central bank will also increase its intervention in the foreign-exchange market and double down on its currency devaluation plan.

China?is a global hotspot for expropriation risk after their collaboration with Russia for de-dollarization. Now, many U.S. customers are unwilling to work with China and imports from China have decreased as more U.S. companies turn to nearshoring.

“We’ve seen some issues, such as Micron being restricted from doing business with China and Sound Point Capital not being comfortable being a U.S. company operating in China, so they divided their company into three different segments to be a stand-alone entity,” Kinzel said. “We encourage you to look downstream at your customers and their supply chain. If you have a customer where they’re outsourcing their supply chain to a Chinese-owned manufacturer, the risk isn’t as high. Depending on the industry that they’re in, like tech or electric vehicles, that's a higher risk for the expropriation element than a standard automotive industry.”

Fred Dons , director and head of CTF flow Netherlands at Deutsche Bank (Amsterdam, NL) cautions that in China, there is severe price distortion. “The LCs in China are 50 basis points, which should be at 2% but the market isn’t there,” Dons said. “It’s 2.5% when it should be 5%. Knowing that there is a risk and the interdependence of these countries, you should be able to price it but reign in your sales. It’s easy to sell but managing risk and compliance is more important.”

South America?is a high security risk with a dramatic increase in strikes, riots and civil commotion. Trade creditors must keep in mind the security risks in countries in South America that can cause payment delays or defaults.

In?Peru, the imprisonment of President Alejandro Castillo for alleged rebellion after trying to dissolve Congress in December caused an uproar of protests and riots in April and May. After the riots, Peru experienced economic fallout. “More instability will hinder mineral investment and deter tourism—economic engines which account for 10% and 3.9% of the nation’s gross domestic product (GDP), respectively,” reads an article by?Al Jazeera.

It is important for trade creditors with high-risk customers to be aware how high the stakes are, especially in our economic climate. Many businesses are still recovering from the failure of Silicon Valley Bank (SVB). “We are essentially borrowing on very expensive rates for the short term and low rates for the long term,” said NACM Economist Amy Crews Cutts , Ph.D., CBE. “The bond market believes that inflation will come down if the Fed cuts interest rates. But the underlying message is that we’re headed for recession.”