Euler Hermes, the worldwide leader in trade credit insurance, announces the upgrade of 11 countries risk ratings. These are Côte d’Ivoire, Greece, Hungary, India, Ireland, Italy, Nicaragua, Nigeria, Portugal, Serbia, and Spain.
“Global GDP growth is expected to pick up slightly in 2014 (+2.8%), though the pace of the recovery should remain below 3% for the third year in a row,” said Ludovic Subran, Euler Hermes’ chief economist. “Against a gradually improving global economic outlook, Euler Hermes has upgraded 11 countries ratings. However, while global insolvencies are projected to decrease by -8% in 2014, they remain 13% above the pre-crisis level, meaning the 2009 crisis has not been absorbed yet.”
Advanced economies are back in the game with an expected growth of almost +2% in 2014, the fastest since 2010. The eurozone should improve (+1.0%) after two years of contraction, with all major countries registering positive growth. In the southern eurozone, exports should help countries exit recession. Most central European economies will benefit from the eurozone recovery.
Emerging markets remain crucial contributors to global growth (+4.3% in 2014), despite slowing growth outlooks for several large economies such as Brazil, China, Russia, South Africa and Turkey. India should be the exception, with growth forecast to accelerate to +5.6% in 2014.
OVERVIEW ON UPGRADED COUNTRY RATINGS
Country New EH rating Previous EH rating
Côte d’Ivoire D3 D4
Greece B3 B4
Hungary B2 C3
India B1 B2
Ireland BB2 BB3
Italy A2 A3
Nicaragua D3 D4
Nigeria D3 D4
Portugal B2 B3
Serbia D3 D4
Spain A2 A3
COMMENTS ON UPGRADED COUNTRY RATINGS
Ireland: upgraded to BB2 from BB3. Better economic prospects, and insolvencies falling since 2013, but levels remain high. Financial independence has been achieved, and the restructuring of the banking sector has been completed, but vulnerabilities remain. The excessive stock of debt is the main medium-term challenge.
Côte d’Ivoire: upgraded to D3 from D4. Recovery has gained momentum, reflecting improved political stability. Foreign exchange reserves and import cover are nominally comfortable and external debt ratios and servicing are low, following debt forgiveness and rescheduling initiatives.
Greece: upgraded to B3 from B4. Better economic prospects, stabilization of the insolvency trend. Financial pressure eased significantly and a long-term bond issuance was conducted in April, the first since 2010. Falling consumer prices and the state of the banking sector remain high downside risks short-term.
Hungary: upgraded to B2 from C3. External imbalances and growth prospects have steadily improved. New credit growth is under control and inflationary pressures have declined, allowing two years of continued monetary easing to support the recovery. Nonetheless, the economy remains somewhat vulnerable to external shocks.
India: upgraded to B1 from B2. Improved growth forecast, strong monetary policy response. The recent rebound in capital inflows should be maintained, sustaining the domestic investment recovery.
Italy: upgraded to A2 from A3. Better economic prospects and insolvencies expected to decline from the second half of 2014 onward. Companies should benefit from a pick-up in credit and consumer spending in 2015. The country enters a period of political stability but medium term challenges remain.
Nicaragua: upgraded to D3 from D4. Fiscal policy has improved. A wide-ranging tax reform implemented in 2012 improved tax collection and administration, set spending restrictions, and increased fiscal revenues. External vulnerability remains significant, however.
Nigeria: upgraded to D3 from D4. External liquidity and debt indicators in Africa’s largest economy have improved to comfortable levels and GDP growth is robust, resulting in improved short-term risk. However, a number of vulnerabilities continue to weigh on medium term prospects, including personal and corporate security risk and a weak business environment.
Portugal: upgraded to B2 from B3. Better economic prospects driven by a recovery in domestic demand and exports, mainly due to improving competitiveness. Insolvencies are falling since 2013. Exit from the joint EU/IMF program in May remains challenging in view of the large public debt and fiscal deficit. The inflation rate is set to remain at very low levels, which could hamper the deleveraging of public and private sectors.
Serbia: upgraded to D3 from D4. The economy has emerged from recession. The exchange rate has stabilized and inflation is forecast to remain low until 2015. Foreign exchange reserves are adequate. The country is still characterized by a number of structural weaknesses (e.g. export structure), ongoing weak domestic demand against the backdrop of credit contraction and high unemployment, deteriorating public finances and a high external debt burden.
Spain: upgraded to A2 from A3. Better economic prospects with insolvencies falling since 2013, after six consecutive years of strong increase. Domestic demand is expected to strengthen and drive growth. Public finances will remain at critical levels, though, with public debt standing above 100% of GDP and fiscal deficit above -6% of GDP in 2014. The inflation rate is set to remain at very low levels, which could hamper the deleveraging of public and private sectors.
“Euler Hermes monitors 242 countries and territories using about 40 short-term and medium-term indicators to measure the risk of payment disruptions in a given country that are outside the control of companies, ,” explained Manfred Stamer, senior economist at Euler Hermes. “The assessment results in a medium-term rating (on a scale of AA, A, BB, B, C, D) and a Short-Term Rating (on a scale of 1, 2, 3, 4) which are combined in an overall Country Rating (from AA1 = best to D4 = worst).”
Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation
By Keith Phillips, CEO of TISATech
If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.
Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.
If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.
But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.
For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.
Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.
The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.
However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.
The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.
With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.
The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.
With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.
Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.
Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.
The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.
What to Know Before You Expand Across Borders
By Sean King, Director of International Tax at McGuire Sponsel
The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?
Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.
Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?
Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.
Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.
Foreign entity incorporation
To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.
As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.
U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.
Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.
Toll charges, transfer pricing and treaties
When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.
Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.
Are you GILTI?
Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.
Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.
The end goal
Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.
If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.
Pandemic risks eclipse treasury priorities as businesses diversify investments to mitigate impact
The Covid-19 pandemic has shunted aside existing challenges to sit atop treasurers’ priority lists, according to “The resilient treasury: Optimising strategy in the face of covid-19”, a survey run by the Economist Intelligence Unit (EIU) and sponsored by Deutsche Bank.
The results show that treasurers are looking to diversify their investments in a bid to mitigate the pandemic impacts, including heightened liquidity, foreign-exchange and interest-rate risk. As many as 55% plan to increase investments in long-term instruments, with 48% increasing investments in bank deposits, another 48% in local investment products, and 47% in money-market funds.
“The Covid-19 pandemic has drastically altered business plans in 2020. It has placed a certain level of strain on treasury processes, but the challenge it presents has been managed by traditional treasury skills. It is clear that pandemic risk will be on the treasury checklist for years to come, but it is one of many risks the department faces and will continue to manage,” says Melanie Noronha, the EIU editor of the report.
Despite Covid-19 looming large, other challenges wait in the wings. Notably, the replacement of the London Interbank Offered Rate was identified by 38% of respondents as the main challenge of their function.
Technology, meanwhile, continues to be a pressing issue, with treasury teams becoming increasingly reliant on IT solutions. Here, data quality is rising up the list of concerns. Already highlighted as very or somewhat concerning in 2019 by 69% of respondents, the figure rose to 78% in 2020. Acquiring the necessary skill sets to realise the full benefits of this data and technology is also a continuing priority – with some progress registered from last year. In 2020, 30% of respondents say they have all the skills they need to manage technological change, up from 22% in 2018.
“Treasury’s focus on technology is not only helping teams operate more efficiently in a remote-working environment, it has long played – and continues to play – a key role in realising their long-term priorities,” notes Ole Matthiessen, Head of Cash Management, Corporate Bank, Deutsche Bank. The survey shows that
Release 1 | 2 managing relationships with banks and suppliers (highlighted by 32% of respondents) and collaborating with other functions of the business (also 32%) remain top of the agenda – and seamless digital systems will help give treasurers the bandwidth and insight to be more effective partners for both internal and external stakeholders.
Based on a global survey of 300 treasury executives, conducted between April and May, the survey explores stakeholders’ attitudes among corporate treasurers towards the drivers of strategic change in the treasury function – from the pandemic through to regulation and technology – and their priorities for the next five years.
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