FCIB's Tenth Annual Credit Management in the Global Economy Global Conference.

Credit managers from Europe and Canada joined with U.S. credit managers from more than 20 states at the FCIB-NACM Tenth Annual Global Conference, which featured world-class speakers on the international economy and global credit management. At the November 1-3 New York meeting, credit managers

from some of the largest companies in the world had an opportunity to network with each other and to tap the minds of leading experts. With sessions ranging from the economic outlook in Latin America to dealing with ethical issues abroad, conference attendees left with the latest information and analyses on the new credit management landscape.

Expert Forecast

Dr. Sidney Jones, a visiting professor at Georgetown University and one of the country's top economists, opened the conference with the words everyone wanted to hear: The U.S. economy will most likely continue on its remarkable path of solid economic growth and low inflation. The country "has undergone an amazing sequence of economic developments," said Jones, which has positioned it as the unmistakable leader in virtually every growth industry. The "virtuous cycle" of high employment and productivity but low inflation will hold, he predicted, as long as the government pursues a stable monetary policy and avoids the pitfalls that might shift the economy into a "vicious cycle" of high inflation and declining investment.

Jones outlined the basic reasons for the United States' stunning economic success. Most importantly, the nation's population is dominated by productive adults at the peak of their earning abilities and tax-generating income levels. The United States has been the prime beneficiary of the rapid globalization and the leader in key technological developments. The nation is at least three to four years ahead of the rest of the world in digital technology and e-commerce, Jones said, supported in part by the immigration of talented workers into key sectors of the U.S. economy. Stable monetary policy, established by outstanding leadership at the Federal Reserve, has provided the context for ongoing growth. Also, with a new commitment to lower government spending and the peace dividend in hand, the federal deficit is under control.

Jones put the probability of recession at only 5 percent, with a 30 percent chance of overheating and a 65 percent chance of continued solid economic growth. Inflation, which has been extraordinarily low for the past three years, is edging back into a 2.5 percent to 3 percent range, Jones noted, because of wage pressures, labor shortages and rising oil and other commodity prices. Jones cautioned that if inflation increases beyond this range, consumption and investment may decline. He also warned that the U.S. trade deficit is huge and a possible danger to continued prosperity; but he believes that it will slow as the rest of the world economy picks up. Jones also expressed some concern over the extent to which the U.S. economy is dependent on the stock market.

In response to questions from the audience about the international economy, Jones said that NAFTA has helped the U.S. economy and boosted Mexican economic growth through increased trade with the United States. A question about Japan's recovery prompted Jones to suggest that Japan's huge financial problems are politically based, far reaching and far from over. An audience member from the United Kingdom asked about the advantages of the euro. Jones responded that its prime benefit is pricing transparency and the savings on transaction costs. Most importantly, Jones said "the euro will coerce the badly needed restructuring of labor markets." He also noted that it is essential for Britain to join the euro zone.

Although Jones' positive short-term forecast for continued economic growth in the United States and recovery abroad was a welcomed note, he warned that "the system will work for another decade and then all hell will break loose" as 80 million baby boomers reach retirement age and Social Security funds dry up. He also reiterated the importance of stable monetary policy and the need to maintain top-quality leadership at the Federal Reserve. With America's high levels of immigration and its global economic reach, Jones said, "the United States is the first universal country," and because of this, "its creativity is beyond what any other country can approach." Still, he warned, "no society has ever survived affluence," and therein lies the challenge for U.S. business in the next century.

Latin American Analysis Dr. Hans P. Belcsak, President of S.J. Rundt & Associates, Inc., publisher of Rundt's World Business Intelligence and a leading authority on risk assessment, led a breakout session with in-depth discussions of three critical Latin American economies: Argentina, Brazil and Mexico. Belcsak advised the audience to position their companies for more rapid growth in all three countries but to be aware of credit and banking problems throughout Latin America. Particularly in Argentina, Belcsak warned, "credit is extremely tight and expensive and credit managers should closely monitor the liquidity of their customers." They should be prepared, he said, for requests for longer terms.

Belcsak focused his remarks on Argentina, where serious economic problems and the recent presidential elections have generated a number of questions about the prospects for doing business there.

Although the October 1999 elections underscored Argentina's commitment to economic and monetary stability, Belcsak said, the country remains gripped by recession, trade is sluggish and deflation has spread to all sectors of the economy. But, he expects an incipient recovery to take hold in Argentina in 2000 and noted that exports to Asia and Europe are already showing improvement.

"The greatest economic achievement of the Menem administration," Belcsak noted, "was the convertibility law, which created greater stability and will be maintained by the new administration. However, the price has been paid in recessions in 1994 and now." Credit is so tight that production is down and investors are hesitant. "The new government must come up with a sustained recovery program to reduce business costs," Belcsak said. He expects the government to honor its pledge to maintain financial stability and reduce corruption. Belcsak told the audience that there is no need to fear a devaluation in Argentina. Import restrictions may be tightened, he cautioned, but little of this would be directed toward U.S. companies.

According to Belcsak, companies doing business in Brazil can expect solid economic growth with favorable interest rate trends and controllable levels of inflation. He predicted shorter credit terms but added that credit remains a key sales Belcsak the overall country risk in Brazil has declined, Belcsak warned credit managers to watch their customers closely. "Brazil is a vast market with built-in problems," Belcsak said, "but the economy is faring better than almost anyone expected, and the prospects for business there are generally good."

Belcsak predicted brisk growth for Mexico during the next year and a positive outlook for U.S. companies doing business there. In this "nation of contradictions," he said, "there is an opportunity for new beginnings, but with lingering weaknesses." Rising oil prices, combined with the positive effects of NAFTA, have helped Mexico improve its external balances and increase reserves. Credit managers should evaluate their customers on a case-by-case rather than country risk basis and exercise caution in dealing with the Mexican banks.

Dealing with Ethical Issues

The tough challenge of managing ethical issues abroad and the pressing need for benchmarks were evident in the level of audience interaction at the conference session on international ethics. Dr. Tom Donaldson, Director of the Wharton Ethics Program at the Wharton School, University of Pennsylvania, led the session with a discussion of two case studies based on real-world ethical issues. "Global business means facing up to clashing cultural values," said Donaldson. "For a manager, handling such 'values in tension' well or poorly can be the difference between financial success and failure. Companies are tested every day by 'situational ethics'," Donaldson explained, "and the context often involves ethics that are different from the ethics we subscribe to, but not necessarily good or bad."

Donaldson described the dangers of working in a "risk tolerant environment" where employees are consumed by goals and leadership fails to communicate that unethical acts are not an acceptable part of achieving those goals. Time pressures, which Donaldson described as the "last day of the month syndrome," can lead to physical stress and sleep deprivation, which may cloud judgment. Donaldson noted that, "Every company likes to think that it can solve ethical problems by simply getting rid of the people who caused the problem, but in most cases, they are ordinary people." The key to avoiding the "dangerous currents" that characterize a risk tolerant environment is to eliminate what Donaldson called the "goal mesmerization" and high stress levels that occur when employees pursue overly aggressive goals and objectives.

Donaldson cited a number of common ethical problems that business people encounter abroad. In some countries, for example, business people pay customs agents for expedient handing, a practice that is illegal and unethical in the United States. In other cases, business people pay a "consultant" for "help" in dealing with the local government, and the "consultant" makes payments to government officials. The number of questions and comments Donaldson received from the conference audience quickly revealed that these types of situations are common. Donaldson pointed out that the real problem with bribery and facilitative payments can be found in the economists' complaint about such practices: They are non-value added and do not support a level competitive playing field. "A company may succeed with an inferior product simply because it makes payments," Donaldson explained.

Donaldson contrasted two strategies for dealing with ethical issues: a "rules only" strategy and a "rules plus values" strategy. Americans tend to take a negative approach in dealing with ethical issues and rely on rules rather than a combination of rules and deeper underlying values. "The American tendency is to write rules and hire lawyers," Donaldson said, "but the answer really lies in providing stronger leadership and ongoing efforts to avoid dangerous currents." A "rules only" strategy is inadequate because "smart people can get around rules," Donaldson warned. "Companies known for high ethical behavior have strong leaders who follow a 'values and rules' strategy that incorporates rules, compliance programs and strong company values." Donaldson advised managers to "structure an ethical culture for your people in their own sphere and avoid dangerous currents."

Effective Cross-Cultural Interactions

"Today, the goal of many companies is to build a global organization with global citizens who can work with anyone, anywhere," said Ted Dale, managing Director of Meridian Resources, who led an interactive session called "Interacting Effectively with Colleagues and Customers Around the Globe." Dale, who conducts training programs on cultural differences for a number of Fortune 50 firms, discussed the impact of cultural differences on business interactions between people from different countries and gave an overview of typical expectations for Americans in business situations in different cultures. Dale presented the "iceberg theory" of cultures to demonstrate that only the overt behaviors of a culture are immediately revealed to an outside observer. Most of what constitutes a culture, he said, lies below the surface in the unseen customs, beliefs, values and assumptions that create distinctive cultures.

Dale contrasted two types of cultures "individualistic and group-oriented" and explained how these two types affect business interactions. In individualistic cultures, which characterize countries such as Israel and the United States, interactions are more direct, verbal, informal, egalitarian and task-oriented. In group-oriented cultures, which characterize many Asian countries, interactions are mote indirect, nonverbal, formal, hierarchical, relationship-oriented and dependent on consensus within the group. For U.S. business people who interact with people from group-oriented cultures, intercultural considerations include the need to establish credibility, build relationships, follow expected protocol and understand assumptions about communication.

"There is a global business culture evolving, and English is its language," Dale said, "but certain cultural factors take longer to change and may not change in favor of the West. Important differences will remain." To interact successfully with business people from radically different cultures, executives must structure communications differently, design new ways to conduct meetings and accept a longer time frame for completing transactions." "The core intercultural values for organizations that are globalizing," Dale said, "are humility, listening, flexibility, observation, empathy, informed judgment and persistence. Companies that have adopted these values have enjoyed global success."

Breaking the Sovereign Ceiling

The Asian and Russian crises stimulated new interest in building structures to enable the credit ratings of non-sovereign issuers in emerging market economies to rise above the ratings of their sovereigns. Techniques for breaking the sovereign ceiling were described in detail at a conference session led by Dr. Daniel Bond, Group Vice President for the sovereign group and Chief Economist at Duff & Phelps Credit Rating Company, and Lacey Gallagher, Director of Latin American Ratings for Standard and Poor's. The panel discussed country rating systems and the use of various techniques to break the sovereign ceiling and mitigate sovereign risk. From their own years of experience with ratings, Bond and Gallagher also described how ratings are assigned and how credit managers can interpret ratings in a chaotic world economy.

Sovereign ratings provide an evaluation of debt servicing probabilities--an estimate of the likelihood that a government will repay its debts in full and on time. These ratings are not, Bond cautioned, a good measure of general risk or political risk involving, for example, the expropriation of private assets. And they are not, he stressed, a report card on good government. Sovereign ratings affect corporate ratings because sovereigns may elect to intervene in cross-border private flows and force corporate borrowers to default. The sovereign may directly or indirectly affect the ability of an obligor to meet its obligations, Gallagher explained. Direct intervention includes the imposition of foreign exchange controls or enforcing a moratorium on foreign debt. Indirect intervention involves government actions that may adversely affect the economic environment and reduce the obligor's capacity to meet its obligations in a timely fashion.

"In recent years," Gallagher said, "there have been 90 cases where governments have not paid their debts. In most of these cases, the governments have imposed restrictions on corporations to pay their debt in foreign currency." Gallagher also described a new trend of selective defaults, citing Russia as an example. She noted that some private companies in Russia continued to meet their obligations despite the government's moratorium on servicing foreign debt. "Russia was simply unable to enforce the moratorium," she reported. In the past 18 months, Gallagher said that there have been five major sovereign defaults: Russia, Indonesia, Ecuador, Pakistan and the Ukraine.

Because sovereign ratings traditionally hold down the best rating that can be assigned to corporate borrowers, rating agencies are beginning to recognize that some sovereign ceilings may be permeable. Where the sovereign ceiling is just below investment grade, Bond noted, corporations must be able to get above it, and some can, usually because they have assets abroad, foreign exchange earnings or export earnings that can be captured in offshore accounts. It may also be possible to link preferred corporations to multilateral institutions to extend their protection and access to foreign exchange. Bond called on the ratings agencies and credit managers to reach a better understanding of what causes private sector defaults and to determine which companies may be able to service their debt in times of crisis.

Fay Hansen is a business and finance writer based in New Jersey.