Can Economic Woes from China, Greece, and Puerto Rico Affect Your Contracts?

The current economic troubles from China, Greece, and Puerto Rico surely bring back unsavory memories from past financial crisis, such as the one from 2008. One big question in any contract manager’s mind is: “Can China”s, Greece’s, and Puerto Rico’s problems affect my current contracts?”

In this article, let’s analyze some of the potential effects of these current world events in your contracts.

1. Don’t Expect a Foreign Stock Selling Frenzy

While the Shanghai Stock Exchange saw 20% drop in its market value in mid-June 2015, the major securities brokers in China have vowed to stabilize the market. In early July 2015, the largest 21 major investment houses in China agreed on not selling stocks as long as the benchmark Shanghai Composite Index is below 4,500 points.

The Shanghai Stock Exchange Composite Index fund measure the overall strength of China’s largest stock exchange and is currently trading at about 3,985 points. This means that Chinese brokers have to comply with their promise on holding to stocks.

A similar situation is happening with the Greek stock market. Not only are foreign investors keeping their Greek stocks, but they are actually buying more of them. Foreign investors own 59% of the whole Greek stock market. While the Global X FTSE Greece 20 ETF index fund dropped from a high of $23 per share last year to a low of $9.33 per year this late July, the net assets in the index fund went up from $245 million to $304 million during the same period.

Whether it’s for stabilization or “bearish” investment, many investors are holding on to their investments in the ailing stock markets of China and Greece.

2. Expect Some Downs in U.S. Stocks

While professional investors may be betting on a bearish market for China and Greece, U.S. investors may see a temporary drop in their domestic holdings. U.S. stocks had a really bad day on the day that Puerto Rico Governor Alejandro Garcia Padilla announced that the island may not be able to back some of its debt. Puerto Rico’s Governor continues to negotiate with debt holders on how to settle the debt payments.

While Puerto Rico continues to negotiate and Greece implements more and more austere economical measures, U.S. stocks are experiencing drops in value. Some of these drops are the outcome of necessary measures that investment houses are taking to protect themselves from potential side effects from those markets. However, many individual investors may be getting nervous about the dropping values of their 401(k) balances and personal investments.

3. Watch Out for Stronger Dollar

The U.S. dollar has been having a great year so far. Almost four years ago, you needed $1.50 to buy a single euro. Now, you just need about $1.11 to buy one. The dollar has gained ground against virtually every major currency in the world and this trend appears to continue for the rest of 2015.

While this may sound great for people planning to take a vacation abroad, this means that contract managers need to keep an eye on currency fluctuations relevant to their contracts. A stronger dollars has three main consequences for contract managers:

• Review clauses that detail ranges for currency fluctuations. If a contract becomes too expensive for the other party, you may need to take proactive measures or make concessions to keep contract running smoothly.
• Take a second look at clauses that trigger penalties or extra payments. Predict potential scenarios and the probability of collecting those penalties or making those payments. Planning ahead will make your budget more predictable.
• Evaluate current hedging strategies. Those measures may be put to the test. Keep a close eye on alternative financial vehicles to hedge against rising or dropping currency values.

Take stock of your current library of clauses in your contract management system and update those clauses as necessary.

4. Revise Projections

There is no worse blind than the one who doesn’t want to see.

This is the time to review your projections in China, Greece, or Puerto Rico. While Chinese customers make about 8% of the revenues from companies in the S&P500, those same Chinese customers may have a much bigger impact in your enterprise revenues.

Several market analysts are lowering their target prices for companies that depend heavily on Chinese purchases. Make sure to check that your projections reflect the current reality of China. As some individual Chinese investors are switching their stock investments to less liquid assets, such as real state, they may have less cash on hand available.

Take action by scheduling an action item in all your current contract life cycles in your enterprise contract management system so that all contract managers plan to revise current projections and evaluate whether or not those projections need revision. Provide a sensible turnaround period and plan an automated reminder email for those that don’t complete the revision within your specified timeframe.

Takeaway

Despite the economic woes from China, Greece, and Puerto Rico, economic experts from Morgan Stanley and the International Monetary Fund seem to agree that the global economy seems to be on sure footing for the rest of 2015. Just make sure to do your diligence regarding these four potential effects and your contracts should continue to operate as planned.