PR - Coface Predicts World Growth Slowdown

During its annual country risk conference on January 22, 2008, Paris-based Coface forecasted slower world growth of 3% in 2008. However, a credit crunch as severe as in 2001 does not seem likely at this juncture. Among the major risks to watch, Coface points to contagion spreading from the American slowdown to the United Kingdom, Spain, and Ireland and warns that the good performance of emerging countries should not obscure speculative bubble risks or business environment weaknesses. 

Crisis in 2008 shall be less severe than in 2001

Drawing on its experience with corporate payments in countries where it operates, Coface highlighted the differences between the current situation and the crisis in 2001, where payment defaults jumped 30% just before the bubble burst, and world growth was below 2%.

In 2007 and 2008 households, rather than companies, are the victims of over indebtedness. Companies are not central to the crisis, but an economic shock and more difficult access to financing could still affect them.

Even with much slower world growth, emerging countries should fare well. They are much stronger today, with their growth increasingly driven by domestic demand and healthy financial positions.  Their contribution to world GDP is much larger today, increasing from 24% in 2001 to 34% in 2008.  The United States, in sharp contrast, saw its contribution decline from 32% of world GDP in 2001 to just 26% today.

The presentations from the country risk meeting can be found at the Coface web site.

A new business environment rating

Have the risks associated with emerging countries disappeared?  Their excellent financial health cannot be allowed to mask recurring deficiencies in the business framework that put credit risk on companies.  In assessing credit risks, it is equally important to know whether a company’s accounts faithfully reflect its actual financial situation and whether the legal system can provide fair and efficient recourse in case of payment default.

Drawing on its experience with risk underwriting, business information, and receivables management gained through its worldwide network of local operations, Coface developed a new Business Environment @rating system. Complementary to its Country @ratings, the new rating reflects business environment quality by country.  Like Country @ratings, the Business Environment @ratings fall on a scale with seven levels in increasing order of risk, A1, A2, A3, A4, B, C, and D, where A1 represents least risk.

In most cases – 93 countries, or 62% of the 150 countries rated, the Business Environment and Country @ratings are identical. For 39 countries (26% of total), the Business Environment @rating is lower than the Country @rating. This often concerns African or Middle Eastern countries that enjoy real financial solidity and dynamic economies linked to rising raw material prices, but that operate in sub-par business climates (unven application of law, lack of transparency in corporate accounts, uncertainty regarding debt collection, widespread corruption, etc.) In India, the Business Environment @rating (A4) is one level below its Country @rating (A4). In China the Business Environment @rating (B) is two levels below its Country @rating (A3).

In 17 countries (11% of total) the Business Environment is rated higher than the Country @rating. This concerns countries with relatively satisfactory business environments but with financial weaknesses often linked to large current account deficits (Hungary, Turkey, Croatia, Slovakia) or relatively high political risks (Lebanon, Israel, Bosnia.)

“The business environment is naturally included among the parameters that determine overall country ratings” explains Yves Zlotowski, Coface Chief Economist. “We can thus imagine that with a better business environment, China’s country risk rating could reach the level of certain developed countries.”

For a full list of Business Environment @ratings, please click here.

Coface facilitates global business-to-business trade by offering its 105,000 customers four product lines to fully or partly outsource trade relationship management and to finance and protect their receivables: credit insurance, company information and ratings, receivables management and factoring. Due to the worldwide local service delivered by 6,000 staff in 64 countries, over 45% of the world’s 500 largest corporate groups are already customers of Coface.