Warning: The Coface country rating does not concern sovereign debt, but rather indicates the average level of risk presented by the companies of a country in their commercial transactions. This average trend is not a guide to each company’s rating, which is determined by its own characteristics. It is therefore essential that partners of a company located in one of the mentioned countries check the company’s specific Coface rating.

Coface’s new growth forecasts published recently take into account a growth contraction of 6.6 points between 2007 and 2009. Coface projects the 2009 recession at -2.5% and sees growth recovering in 2010, settling at 1.7%.

After having downgraded 22 countries in January and then 47 in April, Coface is now downgrading 13 country ratings, primarily for small or medium-size economies highly dependent on international trade. Perceptible signs of the end of the recession, and the scenario of a weak and slow “inclined L-shaped” growth recovery remains the most likely.

5th credit crisis: a growth contraction of 6.6 points between 2007 and 2009

(To enlarge graph, click here)

Coface foresees a world recession of -2.5% in 2009 (industrialised countries: -3.9% and emerging countries: +0.7%) and positive but weak growth of 1.7% in 2010. The expected recovery in 2010 is weak for industrialised countries (0.5%), but better for emerging countries (4.1%).

This revised forecast incorporates a greater growth fall-off than forecast at the beginning of the year and it assumes that this fall will soon stop.

Therefore the difference in world growth between 2007 and 2009 reaches 6.6 points, an exceptionally large growth contraction. The CIS and emerging Europe are zones where the contraction in growth is the greatest.

Western Europe seems to have reached the lowest point of the recession. The ratings for most European countries are unchanged, except for Austria, the Netherlands and Finland (ratings downgraded from A1 on negative watch to A2) due to a decline in foreign demand. Coface also places Portugal’s A3 rating on negative watch due to the sharp contraction in household consumption and the drop in exports and investment.

Emerging Europe is the zone whose real economy is most affected by the crisis and whose currencies are still fragile. Slovakia (A3) has been placed on negative watch due to the substantial drop in economic activity – along with the Baltic countries – as a result of the magnitude of the recession which weighs on their heavily indebted companies.

Latin America shows a certain ability to resist the world crisis, but Central America is suffering from the North American recession. Therefore Coface has placed on negative watch the ratings of small economies that continue to suffer the consequences of the crisis in the United States (Costa Rica, El Salvador and Guatemala). In Venezuela, the access to liquidity in dollars is becoming harder, which results in a rise in late payments.

Asia Pacific is the zone that shows the most positive signs. Signs of recovery are already perceptible in the zone’s two largest economies. Nevertheless Coface maintains the negative watch placed on China’s A3 rating in January 2009 due to recurrent problems of private sector companies, where the payment default risk is the highest.

“Three types of positive signals argue for an “inclined L-shaped” growth recovery,” states François David, Chairman of Coface. “Some real economy indicators are improving (retail sales, property and job losses in the USA and industrial production in the United Kingdom), anticipation surveys of investors and consumers are pointing up and financial players are showing a renewed appetite for risk. Our “inclined L-shaped” scenario is nonetheless dependent on confidence, which is still weak.”

Xavier Denecker, Managing Director of Coface in the UK and Ireland, comments:

“For now, Coface continues to rate the UK A3, decided in April 2009. For a long time the UK had been classified A1, the best category, because the quality of payments between companies was among the best in the world. The country has been hit at an early stage by the recession triggered by the banking crisis. Since the second quarter of 2009 the number of defaults seems to be stabilising, but still at a high level. More than ever, companies must look at how to convert their invoices into cash, through credit insurance and receivables finance.”

Contributed by Trevor Byrne of Coface Marketing

email: trevor_byrne@cofaceuk.com

website: www.cofaceuk.com