Coface Country Risk Outlook 2015: Laborious Global Recovery, Subject to Multiple Risks
According to global credit insurer Coface, the global economy is on the path of gradual recovery. Global growth, while less vigorous than before the 2008 crisis, continues to follow a moderately accelerating trend, up +3.1% in 2015, after +2.8% in 2014 and +2.7 in 2013. Slight improvements are expected both in advanced countries (to +2.1% in 2015 compared to +1.7% in 2014) and in emerging countries (+4.3% versus 4.2%.)
Coface adjusted its country risk assessments. Sri Lanka was upgraded to B, while Czech Republic (A4), Portugal (B) and Vietnam (C) were placed on positive watch.China’s A3 assessment was placed on negative watch.
Advanced Countries: Fragile Recovery as a Result of Still-Constrained Investment in Europe
Coface is cautiously optimistic in its assessment of risks in advanced countries. In the United States, strong growth (+2.9% in 2015) is based on robust domestic demand and a real industrial renaissance, such as in the auto industry, where companies are running at 90% of their capacities. Companies are taking advantage of a multi-faceted reduction in costs, including lower energy costs linked to the expansion of shale gas and the fall in oil prices, but also limited wage increases. The steel industry remains the only sector where risk is considered high, while the chemicals, textile, transport and auto industries are classed in the moderate risks category.
Improvement is much slower in Europe, but it is perceptible. In the eurozone, growth should reach +1.2% in 2015 (after +0.8% in 2014 and -0.4% in 2013.) After the recent assessment upgrades of Spain, Germany and Austria, Coface today announced a new improvement: Portugal’s B assessment is now under positive watch. Emerging from its rescue plan, the country is expected to experience growth of +1.2% in 2015. The financial situation of companies is gradually improving, with recovering margins recovering and lower bankruptcy rates.
In France and Italy, the financial health of companies has also improved. Coface anticipates a rise in French company margins to 31.1% by the end of 2015, which is the same level as 2009, as a result of the implementation of the government’s ‘pact of responsibility’ and the fall in oil prices. However, companies will remain very cautious on investment decisions, due to the lowflation environment and growing political risks in the eurozone (uncertainty over the ability of governments to carry out reforms, and the growing popularity of parties hostile to the European Union.)
In Europe, cash retention behavior is at the heart of lowflation. The still heavy burden of public and private debt means a large proportion of revenue is used for debt repayment. And negative inflation, itself caused by this low demand, causes a rise in the debt’s real value. Consequently, the reduction in public and private debt maintains deflationary pressures and these same pressures complicate debt reduction. In this context, the proactive action of the ECB is crucial as a reassuring framework, both for companies and for households, to avoid the deflationary crisis. It will not, however, be sufficient to boost significantly the appetite for investment in the real economy.
"After the sovereign crises, Europe has now discovered an opposite risk -- that of conserving heavy debt that considerably affects the recovery and feeds deflationary pressures. Growth is also hindered by geopolitical events with still uncertain outcomes, primarily the Russia-Ukraine crisis. Lastly, the return of the political risk in Europe itself affects confidence. In this regard, the elections that punctuate 2015 will be important tests," commented Yves Zlotowski, Coface Chief Economist.
Emerging Countries: Return of "Traditional" Crises, with a Few Fortunate Exceptions
While their growth remains strong overall, emerging countries are suffering from the return of traditional crises, with capital outflows and recurring tensions in exchange rates. The volatility of six fragile currencies since 2009 (Brazil, India, Indonesia, Turkey, South Africa and Russia) serve as illustration. The combination of an economic slowdown, rising private debt and repeated depreciations has led Coface to move several country assessments downward, including the most recent downgrade of Turkey to B (+3.5% in 2015) and Russia to C (-3.0% in 2015). It is worth noting that while companies are at risk, crises of a systemic nature are no longer the rule in emerging countries. Banks are stronger and public finances are solid. In brief, no large emerging country has had to call on the IMF in an emergency. Two Latin American countries, Venezuela and Argentina, have been particularly tested in 2014 by major external liquidity risks. In both cases, China has played the role of "purveyor of liquidity" in the last resort.
Several countries have distinguished themselves by favorable trends. Vietnam, whose C assessment is now accompanied by a positive watch, has stabilized its exchange rate, moved upmarket (as shown by the dynamism of its exports of electronic products) and attracted foreign investment, particularly Korean, despite a difficult business environment. Coface has also raised the assessment of Sri Lanka by a notch to B, because since the end of the war in 2009 growth has been strong and stable and the budget deficit has fallen.
China Placed on Negative Watch
For Coface, Chinese companies have entered into a danger zone, hence the decision to place the A3 country risk assessment of China on negative watch.
Companies face several challenges, the confirmed slowdown of 7% growth expected in 2015 and overcapacities in sectors including metals and construction.
Above all, indebtedness has reached a worrying level. Private debt is estimated by Coface at over 200% of GDP. Bank credit continues to increase faster than GDP. To this must be added financing from shadow banking, which is not very transparent and sometimes practiced at usurious rates. This phase of increasing risks is inevitable and intrinsic to the "normalization" of Chinese growth. The willingness of authorities to favor consumption to the detriment of investment, in order to reduce overcapacities, means that the colossal debt of companies can no longer be refinanced systematically. Consequently, we expect Chinese companies to experience difficulties in 2015, in a context of domestic activity that is weaker but more sustainable in the medium term.
 Lowflation: weak growth and weak inflation