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World corporate risk reaches peak levels

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Australian exporters face challenging times ahead with greater levels of risk now confirmed in most key trading markets.

According to Coface’s latest country risk assessments, the average risk assessment for the 160 countries monitored has reached a peak level – unseen since the early years of the century.

Coface, a global leader in credit insurance and risk management, has reported a deterioration in corporate risk in the world’s largest economies.

And the insurance giant predicts global growth to remain below 3 percent this year for the sixth consecutive year.

The vulnerability of the world’s powerhouse economies – the United States, China and Japan – has sent shockwaves throughout the world.

The world's three largest economies have been affected by aggravated credit risk, says Coface.

Coface downgraded Japan to A2 last March – and now the United States and China, have been downgraded to A2 and B respectively.

Business insolvencies

In the United States, companies are facing cyclic problems, reports Coface.

The post-crisis recovery point has been reached and this has led to a rise in business insolvencies for the first time since 2010. Companies are facing falling profitability and reduced investment levels are causing a continuous drop in unemployment.

In China, despite stable growth, stimulus measures are proving to have a limited effect due to overcapacity and excessive corporate debt levels.

Unsurprisingly, this shock wave is spreading, to Canada on the one hand, downgraded to A3, and to several Asian countries on the other hand, Coface notes.

For this reason, the assessments of South Korea, Hong Kong, Singapore and Taiwan have been downgraded to A3, and Malaysia to A4.

Strong exposure to China slowdown

These countriessuffer from strong exposure to the Chinese structural slowdown for exports, tourism and investments.

Further, volatility on commodity markets, including oil, is penalising corporate business.

Political risks increasing in Europe

Political uncertainty in Europe is weighing on the confidence levels of businesses and households.

Following on from the Brexit vote, Coface has revised its growth forecast for British GDP by 0.6 points, to 1.2% for 2016.

Export segments taking advantage of the low sterling rates are not the worst off. On a long-term basis, a "Norway-style" free trade agreement appears unlikely after the resignation of David Cameron and, if WTO rules are applied, the economic cost could be high for the United Kingdom and the EU.

British export sectors, tied to the EU by supply chains, could be penalised by customs duties.

Within the EU, countries with a limited domestic market and priority commercial relations with the United Kingdom face the highest level of exposure: Ireland, and to a lesser extent, the Netherlands, Belgium, Denmark and Sweden.

Healthy dynamic growth

At present, no effect is expected on the healthy dynamic growth within the eurozone (forecast at 1.7% in 2016), fed by both household consumption and private investment.

Relaxed budgets, decreased oil prices and the low rates of the ECB have had positive effects on the margins of businesses. Small businesses are benefiting from a wider range of bank loan services for the first time.

Coface hasupgraded France to A2, in response to several encouraging signals: 

  • The highest level of investment by businesses in the last 4 years
  • A boost in the construction sector (which represents 5% of GDP)
  • A constant drop in the number of insolvencies estimated at -3.2% in 2016.

Italy has been upgraded to A3, due to falling insolvencies levels and unemployment and expected increased investment.

Central Europe lies in the positive wake of Western Europe, with upgraded assessments for four countries: Lithuania (A3), Slovenia (A3), Latvia (A4) and Romania (A4), taking advantage of solid growth and reduced export dependence on Russia.

Falling oil prices

The effects of the fall in oil prices is continuingto be felt within oil-exporting countries.

Saudi Arabia (new rating B), Kuwait (A3), Qatar (A3) and Algeria (C) have seen their public deficit expand and non-hydrocarbon business slow. This also applies for Angola and Zambia (D), subsequent to the depreciation of their local currency due to the Chinese slowdown and the collapse in commodity prices, and Mozambique (D), facing a highly probable payment default.

As a result, Coface has introduced an eighth assessment category – E for "extreme risk."

Some countries with a D assessment have now been allocated the new E category – a synonym for extremely high credit risk.

This includes: Afghanistan, Armenia, Central African Republic, Cuba, Eritrea, Iran, Iraq, Libya, Sudan, Syria, Timor-Leste, Venezuela, Yemen and Zimbabwe.

COUNTRY RISK ASSESSMENT CHANGES

UPGRADES                             

Country   Country risk 
          new
France   A2
Italy   A3
Lithuania   A3
Slovenia   A3
Latvia   A4
Roumania   A4
Ivory Coast   B

                                       

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