Coface: Recovery Continues in Europe, Uncertain in US, Elusive in China
Global trade credit insurer Coface released its quarterly economic outlook and map for country and sector risk. The ongoing recovery seems to be a lasting one, given the economic rally in a considerable number of industrial sectors and in Europe, even if a few rain clouds on the horizon, in the United States and in China, darken the picture.
Countries upgraded were Spain (A2), Portugal (A3), Jamaica (B), Russia (B), and Uzbekistan (C). Downgrades were given to Qatar (A4), Mauritius (A4), Namibia (B), Bahrain (C), El Salvador (C), and Burundi (E). On the sector side, the risk level has improved for the automobile and agrofood industries in several countries.
Signals Mixed in the US
Conflicting signals from the US economy (A2), along with the lack of clarity surrounding the fiscal stimulus package are signals for caution. Despite an improvement in GDP for the first quarter of 2017 (up from 0.7 percent to 1.2 percent) and unemployment being at its lowest level in nearly sixteen years, household consumption is continuing to falter. Credit growth is likely to slow as a result of the expected rise in interest rates.
The recovering US energy sector has been upgraded to “high risk” from “very high risk”. Crude oil production and the on-shore oil services industry are growing and will continue to expand as a result of regulatory relaxation.
Wave of Upgrades in Europe
Europe is seeing mostly positive momentum, due to very favorable financing conditions, investments supporting growth, and a revival in corporate confidence. Insolvencies are down in almost all countries, except the UK and Belgium. In these two countries, 2017 insolvencies are expected to increase by +9 percent and +5 percent, respectively, according to Coface forecasts.
Coface has upgraded the assessments of Spain, where growth and foreign trade are particularly dynamic, to A2, and Portugal, which has withdrawn from the European Commission’s excessive deficit procedure, to A3.
Several sectors are following this positive trend. Agrofood in Western Europe is now assessed as “medium risk.” This is the result of rising raw material prices and the end of disastrous crop conditions. Metals in Germany are now classed as “medium risk” due to the price stabilization and positive dynamics of its core markets. The automobile sector in Italy is now rated as “low risk.”
Central Europe is seeing improvements as well. This quarter, pharmaceuticals are classified as “low risk” due to increases in internal and external demand. Energy has improved its classification to “medium risk” at both the regional level and in Poland, boosted by the profitability of oil refining companies and the anticipated increase in demand. Metals are rated at “medium risk” at regional level and in Poland, thanks to new investments in infrastructure and the recovery of the automotive sector.
Varying Performances in Emerging Countries
A slight recovery is being experienced in Russia, where the country assessment has improved to B. Investments and industrial production are increasing and retail sales are no longer falling, due to the controlled level of inflation (close to four percent). Automobile sales are up (+11 percent in 2017), allowing the industry to be upgraded from “very high risk” to “high risk.” Uzbekistan (now C) in particular is benefiting from the economic recovery in Russia, the easing of political uncertainty, and from World Bank and European Bank for Reconstruction and Development (EBRD) financing.
The situation is mixed in Asia. In China, which was downgraded to B in June 2016, the indicators have returned to red. The country’s economy is slowing and insolvency risks are rising due to stricter credit conditions. The automobile sector in particular has been downgraded to “high risk” due to drastic control measures on internal combustion cars. Despite a decline in automotive sales, the retail sector has seen from robust demand, hence its upgrade to “low risk.” In India, the the agrofood sector has improved to “medium risk.”
Increased Risk in the Middle East and Africa
Since 2014, country risk has increased the most in the Middle East and Africa. This is due to increased political tensions and falling oil and gas prices. Coface has again downgraded several countries this quarter. Qatar’s (now A4) economic growth and financial situation could worsen, following recent measures taken by other Gulf countries. Bahrain (now C) is facing a high budget deficit and excessive debt. Namibia’s (now B) outlook for this year is weak, despite a recovery in the mining sector. Mauritius (now A4) received lower rankings in the international benchmarks that measure business environment.
Risks are also escalating on the sector side, as evidenced by the pharmaceutical industry’s downgrade to “medium risk” in the United Arab Emirates and Saudi Arabia, due to lower public spending.
Latin America: The Winners and Losers of Trumponomics