Coface Country Risk Update: Improvements in USA and UK While Major Emerging Economies Struggle
A new country risk outlook by global credit insurer Coface notes an upturn in growth for the advanced economies (1.9% forecast for 2014 versus 1.2% in 2013.) As a result, Coface has positively adjusted country risk assessment for the United States to A1 and the United Kingdom to A3 positive watch. The level of risk has increased in the major emerging economies, however. The assessments for Brazil, Ghana, Russia, Thailand, Turkey and Venezuela have been either downgraded or placed on negative watch.
Coface has also adjusted its Business Environment Assessments for a number of countries. Improved assessments were granted for Algeria, Indonesia, Rwanda and UAE. Madagascar, South Africa, Tunisia, Ukraine, and Venezuela have been downgraded.
United States and United Kingdom: Improvement Based on Solid Fundamentals
The United States joins Japan, Canada and Switzerland in the best risk category (A1). The country is experiencing dynamic and balanced growth (Coface 2014 forecast of 2.7%), benefiting both from sustained household consumption and corporate resiliency. The profitability level of companies is now back at its pre-crisis level with a relatively low debt burden. Another contributory factor in the reassessment of the United States was the settling of the public debt ceiling crisis at the beginning of 2014.
The United Kingdom, after a two year break, has seen a return to its A3-positive watch assessment. Growth (forecast at 2.1% in 2014), driven by household consumption that is based on easier credit access, will be further boosted this year by increased levels of investment. Confidence is improving among companies, even though some sectors, mainly manufacturing, are lagging behind others such as financial services and construction.
A Number of Major Emerging Economies under Pressure
The slowing of growth due to supply issues continues in the major emerging economies. Two BRIC countries, Brazil and Russia, have been particularly hard hit by the dip in investments.
In Brazil, downgraded to A4, growth potential has been impacted by slowing consumption and by structural problems that include inadequate infrastructure, a shortage of qualified labor and bureaucratic barriers.
In Russia, geopolitical tensions are aggravating an already weakened economy, leading Coface to place Russia’s B assessment on negative watch. The Ukrainian crisis as well as the increase in capital outflows will have negative consequences for an already slowing rate of growth (forecast at 1.0% in 2014, compared to 1.3% in 2013) with a decline in investment.
Since political fragility is one of the criteria used by Coface, the assessments of A4 for Turkey and C for Venezuela have been placed on negative watch, reflecting the complex political crises in those countries. In Turkey, the risks from political tension cannot be discounted ahead of the upcoming municipal and presidential elections (March and August 2014.) Coface is expecting growth to slow to 2% in 2014, impacted by tighter monetary policy and high inflation. On the corporate side, Coface has recorded a deteriorating payment experience in Turkey since December 2013.
In Venezuela, there is a recession and hyperinflation against a backdrop of social and political problems. The situation will remain fragile until the legislative elections in September 2015, in particular for companies running the risk of nationalization and subject to import rationing and controls on prices and margins. Suppliers to the State and to the oil and gas sectors, both foreign and local, are suffering from long payment delays.
An Extremely Varied Business Climate
Along with the country risk updates, Coface has completed its annual review of business environment assessments.
Among the improvements is Algeria,where the negative watch on its B business environment assessment has been removed. The country is benefitting the business regulations introduced in the 2014 Finance Law, including an easing in the approval process for foreign investment projects.
Among the downgrades, not surprisingly, is the business climate in Ukraine, downgraded to D. The situation in the country has significantly deteriorated in recent years in terms of control of corruption and regulatory quality. The high level of political instability is hindering the likelihood of any implementation of reforms.