Quarterly update of Coface country risk assessments
High tension at the start of the year
- The global economy is "Japanising": world growth remains low, despite ultra-expansionist monetary policies
- Surplus cash on financial markets is intensifying volatility
- Three increased risks: Chinese slowdown, low oil prices and mounting political uncertainties
- Based on these developments, Coface has downgraded seven country risk assessments this quarter
An international scenario with uncertain outcomes
Although emerging economies recorded a slight recovery earlier this year (Coface forecasts a growth of 3.9% in 2016, after 3.4% in 2015 and 7.2% in 2010), the slowdown in advanced countries (1.7% in 2016) is disturbing the balance of the global economy more than ever before. Growth is unlikely to exceed 2.7% this year.
In the United States, despite a generally healthy economy, there are vulnerable points. While the services sector is doing well, buoyed up by high levels of employment and household consumption, industry is suffering from the strong dollar. The United Kingdom is facing uncertainty over its future within the European Union, which is increasing the volatility of financial markets and weighing down confidence indexes. The euro area is driven by internal demand, an improved employment market and favourable credit terms. In Greece, Portugal, Spain and Ireland, corporate confidence is low, hampering growth (1.6% in 2016), particularly with the rise of political risks.
A number of threats have influenced the arguments behind Coface forecasts: today, the world economy shares the economic characteristics of Japan, with low growth despite ultra-expansionist monetary policies, volatile financial markets and zero inflationary pressure..
The Japanese economy is also hindered by low consumption levels. The evaluation of the yen earlier this year and the ineffectiveness of the Abenomics initiatives deployed have led the Bank of Japan to adopt negative interest rates. After placing the country under negative watch in January 2016, Coface has downgraded Japan's assessment to A2.
Tensions and uncertainties lead to increased risks
Chinese slowdown and low oil prices
While the Central Bank of China has reduced its mandatory reserves, supporting Coface’s growth forecast of 6.5% in 2016, the risk of a more significant slowdown remains. In parallel, the fall in oil prices has brought budgetary difficulties to exporting countries - their deficits are increasing more rapidly and operations in the hydrocarbon segment are challenged by negative external effects. These factors have led to several downgrades and negative watches.
- Malaysia (new A3 assessment) is suffering from low prices for raw materials and the scandal over the 1MBD sovereign wealth fund. Investor confidence has been affected, against a backdrop of high household debt and low external demand. The country’s growing political risks add to the problem.
- The Sultanate of Oman (new A4 assessment) remains one of the most vulnerable economies in the region when faced with low oil prices. Its short-term production capacity remains limited, while oil income (almost 85% of public income) dropped by 36.3% in 2015.
- Kazakhstan exports (new C assessement) to China have slowed, while the country has also been affected by Russia’s recession and low oil prices.
- Saudi Arabia (A4, now under negative watch) has seen its public deficit expand. Prices remain low and company confidence indexes are starting to deteriorate.
- To date, Kuwait (A2, now under negative watch) has been less affected. It may see its public and external accounts downgraded in 2016.
Increased political risks
The rise in political instability could have a serious impact on economies already affected by the global slowdown. Moreover, the logical follow-on from a deterioration in economic conditions, is a rise in discontent within populations and weakening national unity.
- Armenia has joined the D category, which includes countries where companies are facing a very high probability of default. The country is impacted by the Russian recession (the number of Armenian workers in Russia dropped by 5% in 2015). It is also facing growing frustration from the population over corruption and weak economic performance, which is contributing to the deterioration of its social and political situation.
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