Country risk assessments update: UK improves whilst major emerging economies struggle
The upturn in the advanced economies (1.9% forecast for 2014, after 1.2% in 2013) is reflected in the upwards revision of the country risk assessments for the United Kingdom and the United States, which join the lowest risk category.The level of risk has increased, however, in the major emerging economies; the assessments for Brazil, Russia, Turkey and Venezuela have been downgraded or placed on negative watch.
The business environment remains variable in the emerging economies. A number of countries, including Ukraine and, again, Venezuela, have been downgraded. Others, such as Algeria, are progressing in terms of company regulations.
United Kingdom and United States: improvement in assessment based on solid fundamentals
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 so far by household consumption fed by easier credit access, will be further boosted this year by increased levels of investment. Confidence is improving among companies, even though some sectors, including manufacturing, are lagging behind others, such as financial services and construction.
The United States joins the lowest risk category. Now with an A1 assessment, like Japan, Canada and Switzerland, the country is experiencing dynamic and balanced growth (forecast at 2.7% for 2014 by Coface), benefiting from both 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.
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 have been particularly hard hit by the dip in investments.
In Brazil, downgraded to an A4 assessment, growth potential has also been impacted by slowing consumption and by structural problems: inadequate infrastructure, a shortage of qualified labour and bureaucratic barriers.
In Russia, geopolitical tensions are aggravating an already weakened economy, leading Coface to place its 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, after 1.3% in 2013) with a decline in investment.
As political fragility is one of the criteria applied by Coface, the assessments of A4 for Turkey and C for Venezuela are placed on negative watch, reflecting the complex political crises.
In Turkey, the risks of 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. As for companies, the payment experience registered there by Coface has been deteriorating 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 nationalisation and subject to import rationing and controls on prices and margins. Suppliers, both foreign and local, to the State and the oil and gas sectors are suffering long payment delays.
An extremely varied business climate
Alongside the revisions of its overall country risks, Coface has carried out its annual review of its business environment assessments.
Among the improvements is Algeria where the negative watch on the B business environment assessment has been removed. The country is feeling the benefits of the changes to the business regulations introduced in the 2014 Finance Law, including an easing in the procedures for approval for foreign investment projects.
Among the downgrades, we find, not surprisingly, 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.