Three Risks to Monitor in 2016: Weak Growth, Political Tensions and Company Debt in Emerging Economies
A New Year of Political Uncertainties
A cautious approach to country risk will be necessary in 2016, since the risks that emerged in 2015 are expected to continue this year. Coface forecasts global growth to remain soft at 2.7%, compared to 2.5% in 2015. At the forefront are the political tensions gaining ground in both advanced and emerging countries.
The elections in the United States and the risk of a “Brexit” by the United Kingdom are likely to weigh on business confidence. Both of these countries outperformed the eurozone in 2015. In the emerging world, uncertainties remain high in the Middle East, and the risk of terrorism could lead to stronger nationalist movements. According to Coface’s political risk index1, Turkey and Brazil stand out due to the significant deterioration of their economic situations that brought about growing political instability between 2007 and 2015. The country risk assessment of Brazil, whose political crisis and recession are expected to continue in 2016, is now C, the second downgrade in less than a year.
Advanced Countries: Recovery under Pressure
Overall, advanced countries will see moderate 2% growth in 2016. The main concerns here are their dependency on commodity prices, the Chinese slowdown and financial market volatility.
The trend of low barrel prices should continue in 2016, due to the continued surplus of oil supply - in part attributable to Iran’s return to the market. Canada is heavily affected by the drop in oil sector investment and is now assessed A2. The continued decline in oil prices has, however, had a beneficial effect on households and businesses in some advanced countries. With the exception of Japan and Italy, the fall in energy costs has helped to revive corporate investment, especially in Spain and the United Kingdom.
Japan is also among the potential victims of the stronger than expected Chinese slowdown, given that 18% of its exports are destined for China. Weak growth, estimated at 0.9% for 2016, and the persistent risk of deflation have prompted Coface to place Japan’s A1 assessment under negative watch. Not surprisingly, the decrease in demand and in tourism from mainland China will continue to adversely affect activity in Hong Kong and Taiwan, also under negative watch.
In the eurozone, where growth of 1.7% is expected in 2016, the company situation is gradually improving. This is evidenced by the insolvency statistics for France, Germany, Italy (which decreased between -3.5% and -5% through the third quarter of 2015 compared with the previous year) and especially Spain (-26%.) Growth in Italy will be supported by domestic demand, spurred by the return of confidence and the progress in structural reforms. This has led Coface to place Italy’s B assessment under positive watch.
Excessive Company Indebtedness: A New Malaise in Emerging Countries
In emerging countries, growth has halved in five years with 3.9% is expected in 2016. Company indebtedness is growing, affected by both the drop in commodity prices and the highly expansionary monetary policies that followed the Lehman Brothers crisis. Only Central Europe remains unaffected. Hungary, upgraded to A4, and Latvia, B, placed on positive watch, stand out for solid growth driven by household consumption and for increased exports to European countries other rather than Russia.
Chinese companies are among the most indebted. Their debt represents more than 160% of GDP and 60 points more than in 2008. Following China are Turkey (+30 points), Brazil (+17 points), Russia (+14 points), and Malaysia (+11 points). Turkish companies, which have one-third of their debt denominated in US dollars, are proving to be among the most exposed to currency risk. The main glimmer of hope in the medium-term are the gains in competitiveness resulting from recent depreciations of emerging currencies.
In this context of increased risk, Coface has downgraded of the assessments of several emerging countries that were already under negative watch. These include:
- Algeria (B) and Gabon (C), due to the low price of hydrocarbons
- South Africa (B), negatively affected by sluggish growth and growing social tensions
- Tanzania (C) and Madagascar (D), where growth is constrained by political uncertainties
Country Risk Assessment Map