Legal & Finance
Coface
Coface
However, public debt remains worryingly high and accounted for 104.9% of GDP at the end of 2015.
Coface’s new trade guide predicts safer trade in testing times
The rate of growth is expected to slow slightly this year. Private consumption will continue to be the largest contributor as American’s real wages increase thanks to low levels of inflation, especially car sales and residential investment. Corporate insolvencies are falling and the sectors showing the best risks are automotive, textile and clothing, transport and chemicals. However, the energy sector has been affected by the fall in oil prices,
As global growth slows, Coface’s latest guide to the trading risks in the UK’s key markets shows a reversal of fortune for many emerging economies
Legal & Finance
into recession and political crisis, reflected in the departure of the Minister of Finance in December 2015. While GDP has shrunk, inflation and unemployment are rising and the country has now been hit by a public health crisis caused by the spread of the Zika virus. Coface predicts the economy in Russia (C) will shrink in 2016, hit by European sanctions, high interest rates and the depreciation of the Rouble which is correlated with oil prices. The success of a deal with OPEC to freeze oil production is not assured.
Positive China (A4) The slowdown will continue, as will concerns over structural imbalances in its economy: Overcapacity in many industrial sectors, loss of competitiveness, high corporate debt and falling business confidence. Chinese companies’ debt now represents more than 160% of GDP. Volatility in financial markets is another ongoing risk, reflected by the suspension of the Chinese stock exchange in early January.
Emerging economies Negative
D
owngrading its global growth projections last month [1], the Organisation for Economic Co-operation and Development (OECD) called on Governments to take action to “strengthen growth and reduce financial risks.” This was just the latest in a series of alarms raised about faltering global growth and volatile financial markets which reflects a deterioration in the trading environment, aggravated by ongoing geopolitical friction. This should not mean that businesses should focus on their domestic trade. After all, exporting is a proven way to increase sales and improve productivity, while the UK itself is not immune from the effects of
034 ITM
economic instability. However, it does reinforce the need for an informed approach. Coface’s regular country risk reports are intended to help companies reduce their exposure to risky business and focus on their strongest markets. The latest review focuses on the key economic and geopolitical challenges of 2016 [2].
Economic risks and opportunities As a global credit insurer, Coface’s country risk assessments [3] are based on a range of economic indicators and our own underwriting experience from around the world. Here is a round-up of our current assessments of the UK’s key overseas markets:
The Eurozone The outlook is more promising with predicted growth of 1.7%, compared with 1.5% in 2015. This improvement has been fuelled by investment and consumption, assisted by a gradual improvement in the job market, the weakness of the euro against the dollar and reduced energy costs. Business insolvencies have declined across the region, especially in Spain (A4) and the Netherlands (A2) although Portugal is a notable exception. In France (A3) the second consecutive annual fall in insolvencies is good news, as is the sharp increase in start-ups. However, insolvencies are still a risk in the service sector, textiles and construction. In Germany (A1), household consumption
www.intrademagazine.com
should be spurred by wage growth and low unemployment. It’s also likely that public spending will increase as Germany seeks to accommodate the rise in refugee numbers. Coface has revised its assessment of Italy (B) to positive and predicts growth of 1.3% in 2016, buoyed by household consumption and the expectation of structural reforms. However, there are ongoing concerns about the large number of non-performing bank loans and the high level of unemployment.
USA (A1) The United States enjoyed sustained growth in 2015, prompting the Fed to raise interest rates in December 2015 after seven years of expansionary monetary policy.
www.intrademagazine.com
Factors such as the slowing global growth, falling commodity prices and growing indebtedness have had a marked effect on many emerging economies, prompting Coface to downgrade its assessments or revise its outlook to negative. For example, South Africa, Algeria and Bahrain have been downgraded to B, while Zambia (C) and Namibia (A3) have been placed on the negative watchlist. The outlook remains poor in Brazil (downgraded to C, the second downgrade in a year) which seems to be sinking further
Among the BRIC countries, only India (A4) is enjoying sustained and stable growth. Coface believes this will continue during 2016/17 as the economy continues to benefit from the low level of commodity prices and the effects of the reforms initiated by Modi’s Government, aimed at promoting the Indian manufacturing sector, attracting FDI and reducing red tape. There are however, signs that some initiatives such as land reform, are running out of steam. Nevertheless, Coface predicts household consumption will remain buoyant and the services sector will continue to underpin activity, especially the high-technology sector. Elsewhere, Central Europe has not been significantly affected by the debilitating combination of falling growth and increased indebtedness. For example, Coface has upgraded its assessment of Hungary (B to A4) where it expects moderate growth of 2.5% this year.
The politics of risk Any analysis of trade risk in 2016 has to
“Coface’s regular country risk reports are intended to help companies reduce their exposure to risky business and focus on their strongest markets. The latest review focuses on the key economic and geopolitical challenges of 2016...”
Legal & Finance
Coface
take into account political developments which could dampen business confidence and destabilise trade. In the developed economies for example, there will be national elections in the United States and Ireland, as well as the UK’s referendum on EU membership in June. In Spain, a Government has not yet been formed following the inconclusive general election result in December and voters could be obliged to return to the polls later this year. In the Middle East, there are worrying tensions between Saudi Arabia and Iran which is emerging from political isolation.
Meanwhile, the conflict in Syria is another flashpoint between the West (including Turkey) and Russia, alongside the Ukraine conflict. The deteriorating situation in Syria and Libya are important factors in the growing terrorist threat that has led to attacks on France, Tunisia, Egypt and Lebanon in recent months. Finally, after record levels of migration in 2015, this issue is likely to remain an area of contention in Europe and could swell the ranks of nationalist and anti-immigration groups.
Stay ahead To help you keep abreast of the latest developments in country risk, Coface’s country risk reports are freely available at http://www.cofaceuk.com/Economicstudies. And you can hear expert analysis from Coface and other experienced commentators at the next Coface UK Country Risk Conference in London on the morning of Thursday 9 June 2016. The programme will focus on the UK economy, emerging markets, cyber-security and geopolitical risk.
References 1.
“In the Middle East, there are worrying tensions between Saudi Arabia and Iran which is emerging from political isolation. Meanwhile, the conflict in Syria is another flashpoint between the West and Russie, alongside the Ukraine conflict...”
2. 3.
Elusive global growth outlook requires urgent policy response, OECD, 18 February 2016 Country risk barometer: key challenges of 2016, Coface, January 2016 Coface’s Country risk assessments use a seven-level ranking. In ascending order of risk, these are: A1, A2, A3, A4, B, C and D. www.cofaceuk.com
www.intrademagazine.com