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GLOBAL ECONOMIC OUTLOOK - NACM · Outlook •Global slowdown likely; mild recession possible by...
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November 2018 Byron M. Shoulton A 1
Byron M. Shoulton International Economist
GLOBAL ECONOMIC OUTLOOK
November 2018
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World of Risks
– Trade tensions stiffen. Tariffs new weapon. – Modest slowdown in trade flows forecast.– Anti-trade sentiment grows – Globalization in
Reverse?– 2019 Global GDP growth 3%. Down from 5% this time in
2017. Trade growth slows.– Higher U.S. budget deficits. Pressure to fund U.S.
debt will increase in 2020-22.– Demand ‘crowd out’ private sector competing for
liquidity. – Interest rates begin rise.– Global economy – Enters New Phase. Slower pace of
growth.
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Outlook
• Global slowdown likely; mild recession possible by 2020. Global growth currently 3% Vs. 5% a year ago.
WHY?• Chinese growth slows. Trade growth declines.• Emerging economies – weakened currencies;
debt servicing difficulties foreseen.• High levels of Foreign currency debt.• Affects both public and private sector debtors.• Equity markets correction reflects: Revaluation
of assets. Doubts on future earnings growth.
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Era of Change
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• Era of Great, Rapid Change. Reverses 70-years lower tariffs; promote globalization.
• U.S. changes approach to global trade relationships.
• Trump pledge to review & rewrite global trade policy. America First!
• Brexit vote – Shift against the EU status quo.
• Tariffs useful to get concessions. Will they be lifted once deal reached?
• LATAM, Africa, Mideast – Seek fresh start!!
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Fundamental Backdrop
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• Tariffs, Protectionism rises- U.S. Leads charge.
• Price spikes: Result of rising trade barriers.
• U.S. farmers, exporters seek protection from tariff retaliation by China, elsewhere.
• Threat: Global demand undermined by trade tensions. U.S. goods COULD face boycott?
• Threat to global stability?
• Stock market sell-off: Reflects loss of confidence; Weaker future earnings growth.
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Challenges
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• U.S. pushes for fairer trade agreements. Squares off with China. Elephant in the room.
• To succeed U.S. needs support from other countries hurt by China.
• U.S. Resists multilateral agreements. • U.S. Interest rates rising gradually.• U.S. growth stands out against slowdown
elsewhere. Note: U.S cannot be the only engine of global growth!
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Trump Era
• America First! Push nationalist agenda.
• Distrustful of multilateral Trade Agreements.
• Promotes “Fair trade” versus free-trade.
• USMCA: Canada & Mexico cements trade with U.S.- Great achievement!!
• Tariff war with China, others – Retaliation ongoing.
• U.S. Prefers bilateral agreements. Exits TPP.
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Overview
Global factory activity begin easing. Inflation strengthens.
Consumer & Business confidence uncertain. U.S.- China differences looms large.
Cross-Border trade: Hit by tariffs and retaliation. Effects could hurt.
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Growth Drivers
• Demand for new technologies – leads investment.
• Application & adaptation of new technologies: Across all geographic regions.
• Impacts service sectors: High-speed rail, agro-industry, broadband, AI; transport; Port facilities, roads, mining technology; manufacturing.
• Technological advances: boosts factory output, Agricultural output; improves construction processes.
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Trends
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Labor, skills shortage.
Demand grows for seasonal migrant
workers.
Interest rates rise-Gradually? Wage growth picks-up.
Emerging markets: Currencies weaken.
Uncertainty over Trade War.
GDP growth –Likely to begin slipping.
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Global Trade Pattern
Trade at center of debate. Trade momemtumwanes due to uncertainty.
2009-14: Pace of trade slows – barely kept pace with GDP growth.
1985-2005: Trade growth double pace of global GDP
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USA
Households - resilient. Consumer confidence: strong.
GDP growth steady. Robust jobs market.
Business investment up. Mining & manufacturing activity steady.
Housing, construction sectors – Peak..
U.S. attracts capital inflows. Strong $ - U.S. goods uncompetitive.
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USA
• 2018- GDP expands 2.9%.
• 2019: 2.2%-2.5%.
• Inflation subdued: 2%-2.3%. Unemployment: 3.7%. 2019: 3% .
• Fed raised short-term interest rates 3rd
time in 2018. Trump says ‘not so fast’.
• Further modest hikes forecast for 2019.
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USA
• Investments by S&P 500 companies increased to $341 billion – first six months of 2018 [19% increase over 2017].
• If sustained, would be fastest capex in 25 years.
• True during 1st half 2018- Slowed since.
• Consumer & corporate confidence at highest level since 2000. Cools.
• ~Market sell-off indicative of weakening!
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USA
Deregulation – Boost to businesses confidence.
Tax cuts – Further boost! Now tailing off.
Some “Uncertainty”: Tariffs & retaliation Reasons to holdback on capital expenditure?
U.S. deficits to grow massively over next decade!
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What are Tariffs?
• Tariffs are taxes imposed by governments on imports or exports.
• Barrier to trade. Inflates import prices
• Economic Nationalism rises.
• Governments attempt to protect domestic producers.
• Foreign goods artificially more expensive.
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Effects of Tariffs
• Revenue windfall for U.S. Treasury.
• Hurts U.S. diplomatically. Encourages retaliation & boycotting of U.S. goods.
• Hits some exporters pocketbooks.
• Influences price Increases.
• U.S. goods appear cheaper; more attractive. Inflates import prices.
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Crossroads
Manufacturing at 10-year high. Demand for goods, raw materials slacken. Tariffs to weaken growth.
Real economy stable - Central banks raise interest rates. Global economy at crossroads. China slows. U.S. Relations tense. Global trade flows ebbs.
Investment in infrastructure: Help sustain growth in developed & emerging economies. Private/public partnerships likely?
Confidence weakens? What will help renew confidence?
Positive results to trade talks. Doubts persists over U.S.-EU, US-China deals.
U.S. Demands not unreasonable. What’s the motivation to cut a deal?
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Crossroads
• Shifting Loyalties – Companies seek suppliers in lower or non-tariff locations!
• EU-U.S. trade deal hinges on EU concessions! U.S. threatens imposition of tariffs on European autos!!!
• U.S. China deal – Most difficult of all.
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China
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Economy faces crisis.
Slowest growth - in 2 decades. Huge debt
pile-up!
Brace for U.S. Trade War; Tense U.S. relations.
Will China agree/make concessions to U.S.?
Change tact: Boost government spending; Pump up bank lending to corporate sector.
Seek to stimulate growth.
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China-U.S.
• Accused of stealing intellectual property.
• Forced technology transfers- Trading unfairly.
• Aggressive expansion abroad.
• U.S. concerned how far China has come –In relatively short time. Seek thaw in ambitions for global dominance.
• Viewed as an adversary. Changed attitude from Washington.
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China
Need to re-kindle Domestic
demand. No longer low cost
producer.
Currency weakens. Fears of
capital flight.
Government eases control on
credit access.
Debt overhang -Major concern.
China’s wealth Fund: buys non-Chinese assets: Confirms
unease - Hard landing for domestic
economy?
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China
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World’s #2 economy – large role in application of advanced technology in manufacturing, industry, services.
Strong player in cross-border FDI. Belt-Road Initiative to boost China’s influence; trade in Eurasia. U.S aims to check China’s advance.China’s Trade & infrastructure financing to developing countries: Puts some countries in debt trap!
Competes with U.S. for access/influence globally. Influence grows. Purchasing western assets. Foothold on technology transfers
. Pushback ongoing
Confrontation with U.S. Intellectual property theft. Negotiated settlement sought on tariffs. Will be a long battle.
Loosen capital controls? Payment delays.
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China
CONFRONTATIONAL relationship with U.S. U.S. Administration confronts unfair Chinese trade practices; intellectual property theft.
• 5%-25% tariffs imposed on $230 billion Chinese exports to U.S. Without a deal, remaining $200 billion will be taxed.
• Resistance grows to Chinese companies buying U.S./Western assets. Demands technology transfer. Pushback grows!
• China being watched – Aggressive buying binge ofU.S., Western assets. Technology investments.
• Faces stringent reviews.China vulnerable – If U.S. forms United Front with nations feeling aggrieved by Chinese policies.
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Rewrite Global Order
• U.S. shakes up global trading system.Trade continues.
• Despite discomfort among trading partners – U.S. appears to gain concessions.
• Expect major adjustments to system. Now inevitable.
• Some uncertainty over future impact.
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Global Tensions Rise
• Pressure on U.S.-China relationship. • NATO adjusts to U.S. demands – Raise
spending levels.• Combating cyber warfare, espionage.• Trust levels among nations – Decline!• Sanctions remain on Russia. U.S. Threatens
to withdraw from missile treaty.• Relationship WORSENS.• Middle East rivalry sharpens.
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Latin America
• Changing political landscape. Leftists out in Brazil, Argentina. New leadership to address corruption.
• Venezuela – severe crisis. Study in mismanagement.
• Spending on regional infrastructure; other investments. Key in order to return to growth
• Search on for regional political stability.
• Region heavily dependent on raw material exports for growth.
• Exports: Chile, Peru, Colombia – best economic performers.
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Brazil
2019- New right-wing government takes control.
Change afoot!!
Industrial production to increase -follows 3-years of decline. Private
sector to regain central role.
Manufacturers invest again: capital goods imports up - 1st rise since
2014.
High consumer, corporate debt. Interest rates ease.
Corruption hurts
confidence.
High government fiscal deficit. Big policy changes
expected.
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Brazil
• LATAM largest economy – population: 207.6 million; GDP $1.07 trillion. Beset by graft, crime.
• Attempt recovery from steepest recession in 60 years. Reduce government’s role in economy.
• Unemployment: 12% [unofficially higher]-highest in 30 years.
• 2014-17: Economy lost 10% of output. To limp out of recession in 2019. Private sector regains heft slowly.
• Public debt 80% of GDP; well above countries with similar credit rating.
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Brazil
• Expect sell-off of state-sector.
• Banking sector well supervised–mostly well capitalized.
• Investors may return – Once confidence in new regime grows.
• Uncertainty dominates outlook.
• Well diversified economy; major trading nation. Needs investment boost!!
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Brazil
Industrial exports competitive; benefits from weak exchange
rate.
GDP projection – 2019 private sector grows 2%.
New policies on crime fighting. Corruption will be
under attack.
Renewed private sector – Attracts
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Brazil
• Important raw material supplier; manufacturer. Trade central to growth.
• New Government to attack the root causes of corruption – Needed to regain credibility with creditors.
• Bolsonaro’s platform – law & order. Military officers to be placed in control of major corporations.
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Argentina
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Receives IMF lifeline : $57.1
billion
On brink of 2nd
recession since 2015.
MACRI government-
approval rating down!
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Argentina
Country to regain access to international capital
markets?
Pledges elimination of fiscal deficit in 2019.
Argentines distrustful of IMF policies.
Tax on exports; cuts to subsidies.
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Argentina
• Recession to continue in 2019.• IMF credit facility to help stabilize currency
& break economy’s fall.• Government pledges to eliminate fiscal
deficit in 2019. Creditors want to support Macri agenda. Agenda unpopular at home.
• Tax on exports. Cuts to transport & electricity subsidies.
• CB to refrain from intervening in currency market.
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Mexico
• Economy set for take-off. Depends on AMLO gov’t.• Free market currency; market friendly policies to
remain. New USMCA removes uncertainty!• Exchange rate: supports exports; attracts
investments. • Energy reforms – paying dividends: Huge oil find in
Gulf of Mexico.• 80% of exports to U.S.
• 2019 – AMLO takes office as President. Some degree of ‘Wait-and-see’ expected.
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Mexico
Trade agreement with US, Canada & EU expands reach of Mexican producers.
Lower production costs attract factory relocation from China, elsewhere.
Mexico pursues pragmatic policies to avoid risk of recession, anti-trade backlash.
Will AMLO government endorse USMCA ?
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USMCA
• Replaces 25 year-old Nafta. Business Roundtable- biggest U.S. companies encouraged. New pact welcomed!
• Kept prices low; free movement of goods & capital tariff-free; expanded production in all 3 member countries.
• U.S. pushed renegotiation. Agreement includes IP rights.
• Local content rules for autos – revised.• Canadian dairy sector pried open.
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USMCA
• Early resolution – Unexpected. Benefits U.S. businesses. All 3 countries remain!
• Incoming Mexican government – To implement new deal.
• Without disruption of supply chain; companies breathe easier.
• Regional Trade security achieved.
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UK Brexit- EU
• Huge risks to UK economy: Bureaucracy. Gridlock. Disrupted supply chains.
• Tough negotiations. U.K. businesses need years adjusting to new rules. Bureaucracy.
• EU growth: Factories pullback. Uncertainty over Brexit - Hits domestic demand. Exports grow!
• EU Investments UNCERTAIN. German companies pessimistic. Regional growth: weakens.
• Financial sector relocates from London.November 2018 A 40Byron M. Shoulton
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Brexit
• Brexit : A years-long process.
• Both the UK and EU economy suffers.
• Level of dislocation and complexity –should deter others planning to exit EU!!
• Costly for companies; disruptive for society. Was it worth it?
• On display: EU dysfunction; weaknesses.
November 2018 Byron M. Shoulton A 41
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Beyond Brexit
UK-seek special trade/
financial relationships. Seek access to single market.
UK economic outlook-Unclear.
GDP growth of 1.8%.
London looses role as financial gateway to E.U. Ireland border free
or not?
UK pushes for trade
deals-with rest of the world. EU
“No deal” a possibility!!
UK gov’t contingency
plans.
Byron M. Shoulton A 42November 2018
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Eurozone
November 2018 Byron M. Shoulton A 43
Outlook mixed. Manufacturing to weaken.
Unemployment 6.2% average; down from 12.6%.
Consumer/business – confidence uncertain.
Inflation close to target!
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Eurozone
Businesses say “Future unclear”.
2019 GDP growth 1.7 %
Manufacturing exports – competitive. Demand remains strong.
Economic momentum weakens – Amidst drift
toward nationalism.
November 2018 Byron M. Shoulton A 44
U.S. tariffs feared–Especially on autos! Decline of moderate
political parties..- Major concern
as rightist gain support.
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Eurozone
Business investments –MODEST.
ECB to slowly remove stimulus.
Inflation on target. Long-run growth - supply chains:
Uncertain!
November 2018 Byron M. Shoulton A 45
Labor shortage-Region needs migrant
workers.
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Eurozone
German business confidence weakens. GDP growth 2%.
Germany’s trade surplus under fire. Need to spend more; pay more!
Anti-immigrant parties gain strength across region!
Tough EU stance against unfair trade – i.e. cheap Chinese imports.
Stiffens rules on Chinese investments.
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Eurozone
Unemployment 6-9%. From highs of
12.6%.
- Industrial production
stable.
2019 Domestic demand, exports=
2.3% GDP growth.
Banking sector –outlook mixed.
November 2018 Byron M. Shoulton A 47
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Eurozone recovers
Spain: employment
gains. Retail sales rise - Housing sector
recovers.
Reforms worked–Symbol of regional turn around. Large government debt load holds back
recovery.
EU economy M/T confidence revolves around ‘deal’ with
U.K. No deal?
Italy’s shift to nationalism – Sign of EU drift toward
extremism.
Challenge: Prevent more departures
from E.U.
KEY GOAL –Preserve Union !
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Central Europe
November 2018 Byron M. Shoulton A 49
Poland, Hungary, Czech Republic growth steady.
Boost to private sector. GDP growth 4%.
Lower unemployment than West-Europe. Importing labor to fill positions.
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Turkey
U.S. tariffs on Steel, Aluminum. Hits confidence. Economy suffers. Growth falls by half.
Weakened lira - Falls 30% against US$ in 2018.
Strains develop with West. Reduces import of U.S. cotton.
November 2018 Byron M. Shoulton A 50
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Turkey
Growth slows by half in 2018.
No recovery expected in 2019.
Foreign investment
inflows – slow.
Will Turkey attract enough foreign capital
to finance deficits in 2019?
Central bank under intense pressure-to not raise rates!
November 2018 Byron M. Shoulton A 51
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Turkey
Economy relies on foreign
capital inflows to finance fiscal
& current-account deficits.
Country downgraded.
Higher costs to access credit.
Relationship with West
strained. Tilt to Russia? U.S
Reviews relationship.
Turkey’s geopolitical importance -
Access to foreign credit
crucial.
Sovereign rating; banking sector outlook revised. Banks
mostly well capitalized.
November 2018 Byron M. Shoulton A 52
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Asia
ASIAN economies readjusts as Chinese demand slows.
Boosts trade with rest of the world. Sensitive to U.S. tariffs. S- Korean exports to U.S. weaken.
Hong Kong, Taiwan, Singapore, South Korea, Australia, Mongolia: Experience decline in trade flows with China.
Expand trade with Latin America, India, U.S., Canada.
Southeast Asia – experience growth uptick – supported by domestic demand and boost in exports.
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Southeast Asia
November 2018 Byron M. Shoulton A 54
Ind
on
esi
a Largest regional economy: GDP growth 5.2%
Ph
ilip
pin
es GDP
growth 7%; fastest pace in 3 years
Vie
tnam
Vietnam, Malaysia, Thailand, Bangladesh, Cambodia –Attract investments in manufacturing for export.
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India
Modi government –Reform agenda. Experience mild setbacks.
Looking toward 2019 election.
Currency stable but weak. Interest rates rise. Inflation moderate – Capital
inflows grow.
Subsidies cut -support to farmers reduced.
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India
Banks face $65B capital shortage by
2019
Weak capital
positions –influence
Indian banks weak
viability Ratings
State banks account for
90% of shortage –
with limited options to
raise capital
November 2018 Byron M. Shoulton A 56
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Credit Focus
High Need to ‘KNOW’ customers –
crucial.
Reassess financial health of EM’s
companies.
EM companies face difficulties meeting
foreign debt obligations.
Expect claims/slow payments in 2019.
FOCUS
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Russia
Recession. Sanctions delay
recovery.
Lack of access to Western capital
takes toll.
Commodity dependent economy–
benefits from price recovery.
Hit by U.S. & EU SANCTIONS
Relief unlikely!
Higher oil & gas prices -supports
2019 growth.
Less reasons to cooperate with
U.S./West.
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Middle East
• Oil, gas producers: withhold production- oil prices climb.
$80- $90 per barrel over 2019
Saudi: new leadership – Under scrutiny. Massive build-up of debt over 3 years.
• Liquidity strains grow in Oman, Bahrain.
• GCC countries resort to strict fiscal consolidation to contain budget deficits.
• U.S. shale as counter-balance Saudi production.
November2018 A 59Byron M. Shoulton
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Middle East
November 2018 Byron M. Shoulton A 60
Governments keen to maintain social spending – to prevent political unrest.
Regional governments boost bond issues. Funds used to offset revenue declines.
Heightened state of political risks. Saudi-Iran rivalry heightened.
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Saudi Arabia
• New leadership – Credibility suffers!!
• Anti- corruption drive. Internal dissent. Iran.
• GDP shrunk 3 consecutive years. Seeks diversification away from crude.
• Companies struggle to cope in troubled economic environment.
• Leads opposition to Qatar. Charges Qatar with aiding terrorism.
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Egypt
• Downgraded to ‘very high risk’.
• Economy kept afloat by aid from Gulf countries & $3bn World Bank structural adjustment program.
• President Sisi – firm control over opposition; Muslim Brotherhood. Re-election ASSURED in 2019. All credible opposition candidates removed.
• Seek to attract FDI: manufacturing & tourists.
• Tourism sector hard hit - major setback to recovery.– FX rationing causes payment delays. To ease in 2018.– Public sector dominates: power, transport, heavy
industry, insurance. Need for Privatization: urgent.
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Africa
• Nigeria, South Africa – Economies benefit from oil/commodity price hike. Recession to ease.
• Leadership; corruption – WEAK confidence: Overshadows opportunities for investment.
• Kenya, Ghana, Gabon, Botswana, Angola, Ethiopia. Attracting foreign investments: minerals, mining, agriculture.
• L/C’s, secured payment terms; government guarantees preferred.
• Reports of payment delays by Ethiopian, Angolan, Nigerian state-owned entities.
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South Africa
• Economy weakened by low investment inflows. Strong desire to attract investment.
• Need for new government to rebuild confidence in fiscal, economic management.
• New leader attempts to set new growth path. Escom – leading corporate: downgraded.
• Elections due in 2019 – investors watch for new direction.
November 2018 Byron M. Shoulton A 64
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Africa
Potential for
population to double by 2050.
Vital market.
Ripe investment destination.
Tech application.
China leads charge to develop
infrastructure; exploit raw materials/ minerals.
South Africa & Zimbabwe: Will Political
changes usher in new
beginning?
November 2018 Byron M. Shoulton A 65
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Global Forecast
November 2018 Byron M. Shoulton A 66
Despite elevated POLITICAL RISKS: cross-border trade continues. Demand high. Will
China’s downturn hit confidence?
U.S. Asia, Europe, LATAM – Attempt to stimulate global activity in 2019.
Abundance of capital – seek higher returns. Global trade, service opportunities plentiful .
EMERGING MARKETS – Weakened currencies pose threat to debt servicing ability.
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Caution justified
Can pace of trade hold up – Despite tensions? Caution in order!
Need for informed decision- making.
Take pains to identify risks. Understand changes & likely impact on customers.
Acceptable risks still found in difficult markets. Unacceptable risks found even in highly rated countries.
November 2018 Byron M. Shoulton A 67
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Trade Negotiations
• U.S. attempt to set new trade rules – EU, China will need convincing. Expect pushback.
• USMCA achieves goal in short timeframe. A plus for 3 countries.
• U.S demands on China, EU may not be unreasonable. Contentious!
• Brexit-EU impasse hurts M/T confidence.
November 2018 Byron M. Shoulton A 68
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CONCLUSION
Global growth to weaken by 2020?• Upward pressure on prices: crude, some
commodities. EM’s grow slowly. • U.S. pushes strong case against China on
intellectual property; technology transfers. • United Front with other countries needed.• U.S. seek rebalancing of global trade
system!• Rules of WTO to be rewritten with a view
toward fairer trade.
November 2018 Byron M. Shoulton A 69
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SUMMARY
Global Economy face challenges.
• Pace of growth uncertain. Debt build-up source of caution. Global asset sell-off: Hits confidence.
• Emerging markets deserves close monitoring – expanded debt levels.
• EM entities cope with weak currencies, high debt service obligations & possible slowdown! Understand impact.
November 2018 Byron M. Shoulton A 70
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SUMMARY
• Trade remains lifeblood of the global economy. New rules add layers of bureaucracy.
• Exports/Imports takes place under any & all conditions. Even with uncertainties!
• Building relationships with customers REMAINS key. Caution warranted.
• Keep abreast of changes impacting flow of goods; payments. Essential to survive!
November 2018 Byron M. Shoulton A 71