A global economic downturn and increasing political risks will pose major challenges for exporters this year, experts predict.
At the Coface Country Risk Conference in Paris earlier this month it was revealed that global economic and political uncertainty andhigh volatility of commodity prices has “cast a shadow over the growth outlook for 2019.”
The annual Conference brings together the knowledge and insight of French and international experts from the worlds of business, finance, politics and economic research.
Increased credit risks for European companies
World economic growth began slowing late last year, the conference learned.
The growth outlook for 2019 is 3% compared with 3.2% in 2018 and 2017.
Western Europe has weakened before the United States, contrary to previous reversals in economic trends.
Coface, a global leader in trade credit insurance and risk management, expects the number of business insolvencies to increase in twenty European countries (out of 26 analysed).
This increased credit risk for businesses stems from a cyclical slowdown and persistent political uncertainties.
The automotive sector is particularly affected, says Coface. After a growth cycle of about eight years, it is now showing signs of slowing.
The need for investment, increased competition, changing lifestyles of consumers, and the necessary adaptation to new anti-pollution environmental standards must be achieved in the context of a Chinese market reaching maturity, and growing protectionism, Coface says.
These developments have pushed Coface to downgrade the automotive sector to medium risk in almost all Western European countries as well as Central and Eastern Europe, and to high risk in Latin America and North America.
Political risk will remain an issue in Europe in 2019. Coface's social risk indicator is at its highest since 2010.
These risks often become manifest during elections, and elections in Greece as well as possible early votes in Italy, Spain, and Germany should be kept under watch. Spreading social discontent and the increasing popularity of anti-European parties are becoming sufficiently significant that they are set to lead to a very fragmented European Parliament following European elections in May 2019.
“For the first time since the sovereign debt crisis in 2011-2012, businesses need to navigate through two pitfalls at the same time this year: the cyclical slowdown and political risks,” said Julien Marcilly, Coface Chief Economist.
Emerging countries still vulnerable
This global environment has contrasting effects on emerging economies. The slowdown in growth in the eurozone (+1.6 % forecast for 2019) and the United States (+2.3 %) exposes emerging markets to contagion effects, primarily through trade flows.
As such, growth in world trade is expected to continue to slow this year (Coface expects only +2.3 % this year).
However, the dampening of growth in the United States also has a positive effect – by making interest rate hikes by the US Federal Reserve less likely, the risk of capital outflows from emerging markets is limited.
Numerous political risks will have to be monitored this year in the emerging world, notes Coface. This includes Africa, where people now have more means to express their frustrations (internet access rate has tripled since 2010) in the context of a heavy electoral calendar (including Nigeria, South Africa, and Algeria).
However, despite the fragile political and security situation, Coface notes a more favourable outlook for Mozambique (now D), the foreign exchange reserves of which are at their highest since 2014 and growth exceeds 3%.
Also, Rwanda (A4) has an improved outlook due to a constantly improving business climate and momentum for reform is being maintained.
Oil dependent economies
Coface is upgrading the country assessments of oil-dependent economies with oil prices remaining at a moderate level despite high volatility.
Angola has been given a C rating, Azerbaijan (B), Canada (A2), the United Arab Emirates (A3), and Trinidad & Tobago (B).
Lebanon is the only country to have been downgraded (now D) so far this year, penalised by persistent economic difficulties.
Coface provides risk assessments for 161 countries, which are ranked on an eight-level scale.
They are ranked in an ascending order of risk: A1 (very low risk), A2 (low risk), A3 (quite acceptable risk), A4 (acceptable risk), B (significant risk), C (high risk), D (very high risk) and E (extreme risk).
Coface sector assessments (13 sectors in 6 geographical regions, 27 countries representing almost 87% of the world's GDP) are ranked on a four-level scale: low risk, medium risk, high risk and very high risk.