EU-China Challenge, Irish Tax Triumph, German Investment Gloom, Hottest Tickets in Town — Baker Ing Bulletin: 8th Dec 2023

Welcome to this week’s whirlwind tour of trade credit. We're peering through the diplomatic fog of the EU-China trade skirmish, and, in Ireland, it's raining euros as corporate taxes hit the jackpot. Meanwhile, Germany’s investment brakes have credit in a tizz, and The Situation Room has become the hottest ticket in town. So, grab your notepad (and perhaps a strong coffee) as we dissect this week's happenings...

1?? Navigating Sino-European Trade Surplus ????

In the wake of the EU-China summit, the sprawling €400bn trade surplus in China's favour has emerged as a significant point of contention indicating potential for shifting trade winds that could influence risk across industries.

The surplus itself is emblematic of deeper systemic issues—namely, China's restrictive market practices and aggressive state support for domestic industries, which have long been bones of contention in Sino-European relations. The EU's pointed criticism suggests a brewing storm of policy recalibrations that could see European credit managers grappling with the ripples across global supply chains.

For industries ranging from manufacturing to high-tech, European companies may see tighter credit terms and increased premiums as insurers and credit managers weigh the risks of policy-induced market disruptions. Conversely, Chinese companies facing potential EU retaliatory measures could experience credit squeezes as European financial institutions reassess their exposure to these markets. Moreover, with China's EV market burgeoning under hefty subsidies, European credit managers must now factor in the competitive disadvantages domestic manufacturers may face, which could, in turn, affect their credit ratings.

What now? Granular assessment of exposure to Chinese markets, a comprehensive review of counterparty risk, and an appraisal of how shifts in policy could affect payment terms and credit availability. The EU's stance could signal a more assertive trade policy era, with credit departments needing to forecast and model scenarios ranging from the imposition of tariffs to the introduction of quotas.

As the EU and China continue their dance of economic interdependence and rivalry, we must adopt an anticipatory and scenario-based approach to credit management. This will be vital in steering through an era where trade policy, politics, and credit risk are increasingly intertwined.

2?? EV Tariff Delay Fuels Credit Strategy Shift ???

The European Commission's decision to extend the transition period for new trade rules in the electric vehicle (EV) sector, coupled with a €3bn investment in the EU's battery manufacturing, is a significant development. Whilst the immediate focus is on the automotive industry, particularly in the EU and UK, the ripple effects of these changes are expected to be felt across the broader supply chain. The delay in implementing stringent rules provides a temporary reprieve for automotive manufacturers, but it also signals a period of adjustment and realignment for suppliers in related industries.

For credit professionals in automotive and sectors beyond, including electronics, energy, and manufacturing, this development necessitates a reevaluation of risk exposure. Suppliers and businesses within these interconnected industries might experience shifts in demand, production adjustments, and changes in their financial performance as a result of these evolving dynamics in the EV market. Companies supplying components, raw materials, and technology to the EV industry could see changes in order patterns and payment terms, impacting their credit risk profiles.

Furthermore, the EU's investment in battery manufacturing signals a strategic move towards localising production, potentially reducing reliance on non-EU sources. This could lead to shifts in global trade patterns, affecting suppliers and businesses in regions currently dominant in battery production, like China. Trade credit in these regions will need to monitor developments closely, as they could lead to changes in export volumes, payment terms, and overall market demand.

The extension of the transition period also reflects broader themes of supply chain resilience and diversification, which have become increasingly crucial in the post-pandemic world. For credit managers, this means considering not just the direct impacts on specific industries, but also the indirect effects on the global supply chain. This includes assessing the financial stability and creditworthiness of companies in sectors that may be indirectly impacted by these changes.

3?? Ireland's Tax Windfall Signals Credit Caution ??????

Ireland's record collection of €6.3bn in corporation tax during November, after a period of concerns about weakening performance, is significant. The government's decision to set up a sovereign wealth fund with this windfall, and the broader context of Ireland benefiting from tax reforms that attract major global companies, create a multi-layered impact for trade credit.

The surging corporate tax receipts are a result of major companies like Apple restructuring their affairs to declare more profits in Ireland, reflecting the country’s low-tax, high-activity status. This restructuring, driven by global pressures for tax transparency, has led to substantial real operations by these corporations in Ireland, contributing to this tax boom.

The significant increase in corporation tax revenue suggests a robust economic environment, potentially enhancing the creditworthiness of Irish businesses, particularly in the technology sector. This sector's strong performance implies a stable and potentially growing market for trade credit. However, Finance Minister Michael McGrath’s caution about the volatility of this revenue stream and the end of an era of persistent over-performances must be heeded. The reliance on these temporary receipts for permanent fiscal commitments could lead to future financial instability, a factor that credit managers must account for in their risk assessments.

Furthermore, the impending increase in the headline tax rate from 12.5% to 15% for the largest firms, in response to a global minimum tax rate, adds another layer of complexity. This change may not yet have led to behavioural changes among multinational groups, but its long-term implications on Ireland’s attractiveness as a tax-friendly jurisdiction, and consequently on the businesses operating there, could be significant.

While the current fiscal strength of Ireland presents a favourable environment for trade credit, the shifting tax landscape and potential long-term implications of global tax reforms require a cautious and forward-looking approach.

4?? German Investment Retreat Prompts Credit Reassessment ????

The stark downturn in German investment plans, as reported by the Ifo Institute, is a critical indicator for credit professionals. With the net investment index plummeting from 14.7 to just 2.2, reflecting a steep decline in business confidence and spending intentions, this trend poses significant challenges for credit management within and beyond Germany.

This shift in investment sentiment, primarily in the manufacturing sector and notably among energy-intensive industries, signals potential cash flow and creditworthiness issues. Trade credit must now closely monitor our German business partners, assessing any increased risk of delayed payments or financial instability. The changing landscape also means revisiting and possibly tightening credit terms and exposure limits for affected companies.

Furthermore, the broader economic implications of this downturn extend to the entire supply chain. Companies that rely heavily on German manufacturing might also face increased risks, necessitating a review of their credit strategies. Given this context, credit professionals should now delve deeper into sector-specific analyses. This required assessing how the curtailment in investment might ripple through the financial health of companies in these sectors. Understanding the intricacies of each sector’s reaction to the current economic climate is crucial.

Moreover, engaging in regular dialogue with German business partners becomes imperative. The objective must be to glean insights into their strategies for navigating these turbulent economic waters. How are they planning to mitigate risks? What measures are they taking to ensure financial stability? These conversations can offer invaluable perspectives that go beyond quantitative analysis, providing a clearer picture of the potential credit risks and opportunities.

5?? A Full House Underlines Industry Trends ?????

Baker Ing, in partnership with Callisto Grand, successfully hit a nerve in our industry’s zeitgeist with the "Situation Room: Mastering Cash Collection" workshop. The event, which swiftly reached full capacity, is a bellwether of the acute interest in sophisticated cash collection techniques and strategic client communication within credit management.

The event agenda was tailored to the pulse of modern receivables management, addressing advanced methodologies for optimising cash flow and reducing credit risk. Key focus areas included leveraging data-driven KPIs for AR teams, navigating the intricate web of stakeholder relationships, and a holistic approach to collections that marries the 'why' with the 'how.' This holistic view is particularly pertinent in a business environment where the efficacy of communications can pivotally affect a company's liquidity and financial health.

The overwhelming response and rapid booking of the seminar underscore the profession's recognition of the intricate interplay between robust receivables strategies and overarching business success. It reflects a broader industry trend towards not only embracing the quantitative but also the qualitative aspects of financial interactions in a world where soft skills have become as valuable as financial acumen.

Responding to the high demand, Baker Ing and Callisto Grand are set to replicate the success of the seminar with an additional session in ?ód?, Poland. This follow-up promises to distil further the essence of effective credit management for professionals seeking to enhance their tactical approach in an ever-evolving market landscape.

In a world where the landscape of trade credit is perpetually shifting, Baker Ing and Callisto Grand’s Situation Room series stands out in continuous professional development, ensuring that the credit community remains agile, informed, and ahead of the curve.

Contact Lisa Garofalo-Moss for more details.

As we close this chapter, remember: every number tells a story, and every policy shift is a plot twist. Stay sharp, stay savvy, and don't let the fast-paced drama of trade credit catch you off-guard. Whether you’re a numbers master or a strategy guru, Global Outlook is your go-to for in-depth insight and analysis for credit managers.