Top Ten Game Changers for country risk in 2014 Getting back in the game. Ludovic Subran - March 5, 2014 Country Risk Practice

Transcription

1 Top Ten Game Changers for country risk in 2014 Getting back in the game Ludovic Subran - March 5, 2014 Country Risk Practice

2 Country Risk at EH: One objective, one methodology, several outcomes Why country risk? What do we measure? How do we measure it? Objective: To measure the risk of non-payment by a company in a given country MEDIUM-TERM RATING Macroeconomic risk (ME) Macroeconomic imbalances (level of development, structure of output and trade, long-term growth). Political risk (P) Structural Business Environment (SBE) Political risk indicators (mechanisms for orderly transfers of power and succession process, concentration of power, effective policymaking, independence of institutions, social cohesion, international relations). Business climate indicators (regulatory and legal framework, control of corruption and the relative ease of doing business). SHORT-TERM RATING Commercial risk (CRI) Financing risk (FFI) Business cycle (GDP + insolvencies + payments experience) Sensitivity to swings in capital flows and political capacity to respond effectively COUNTRY RATING Copyright Euler Hermes AA1 D4 2

3 Opening the box MEDIUM-TERM RATING Macroeconomic risk: from transfer and convertibility risk to structural imbalances Political risk: from confiscation and expropriation to societal risk Structural business environment risk: from corruption to insolvency resolution Recent historical examples Financing imbalances High export dependency on commodities (Russia 2008; Argentina 2008; most African countries). High export concentration on markets (Mexico on US; Emerging Europe on EU). Political instability (Russia 1998, Turkey , Ukraine 2004, Kenya 2008). Sanctions (Iran continuing, Syria continuing). Political unrest and societal risk (Ukraine 2004, Thailand ). Expropriation (Argentina 2011 onwards). Weak property rights and corruption (Russia, many African countries). SHORT-TERM RATING Commercial risk: from recession to prolonged risks to the private sector Financing risk: from capital outflows to risk of change Copyright Euler Hermes Recessionary periods and increase of insolvencies/claims (Asian Crisis 1997; Russia 1998; Turkey and Argentina 2001, Great Recession , Eurozone crisis 2010 onwards). Capital outflows and/or devaluation of local currency (Asian Crisis 1997; Russia 1998; Brazil 1999; Turkey and Argentina 2001; Iceland and Emerging Europe ; Limited access to FX reserves and/or capital controls (Russia 1998; Venezuela 2002 onwards; Ukraine 2004; Pakistan 2008; Iceland 2008; Cyprus 2013). Debt default (Russia 1998, Argentina 2001; Greece 2011; Cyprus 2013). Banking crisis (Russia 1998; Turkey and Argentina 2001, Hungary and Baltics ; Iceland 2008; Ireland/Greece/Spain/Cyprus). 3

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5 Game changer #1: China s transformation will be under control Credit aiming atquality. Public and monetary authorities to fight against non-standard financing Trust and entrusted loans* (Billion RMB) Growth moderation in China (+7.3% in 2015), South East Asia must find new growth engines Exports dependency to China (exports to China in % total exports) * Main components of the shadow banking system, 5

6 Game changer #2: The US will re-industrialize with or without easy money As QE tapers, long-term rates are likely to rise, making lending more profitable US long-term bond interest rates Cheap energy will boost manufacturing production and growing energy production will lower energy dependency Energy imports and industrial and mining production (12m/12m) Source: Bloomberg, Euler Hermes 6

7 Game changer #3: The Eurozone must keep its eye on the ball, but the ball is rolling A common strategy is needed to restore credit channels and therefore investment A new VLTRO in H at a fixed (low) rate with targeted liquidity similar to the BoE Funding for Lending Scheme. Credit to non-financial corporations (Year-on-year change,%)) Collateral VLTRO loan Banks maintaining or expanding loans: very low rates Banks contracting credit: penalty fees Source: Bloomberg, Euler Hermes Lending to the real economy Source: Euler Hermes 7

8 Game changer #4: The monetary musketeers and Japan s d Artagnan Progressive tapering and improved forward guidance in the US, targeted liquidity in UK and eurozone Total Central Bank balance sheets (% of GDP) Abenomics: accommodative monetary ( ) policy, expansionary fiscal policy ( ) and structural reforms (?) GDP growth and contributions to growth in Japan since Abenomics introduction (%) 8

9 Game changer #5: It s the price, stupid! when disinflation matters in the advanced economies Several drags on inflation: high unemployment, decelerating wages, weak credit growth and overcapacity Headline inflation (Year-on-year, %) Downside pressures on prices could endanger corporate profitability, which is already weak in France and Italy Profit share of non-financial corporations in the EMU (Gross operating surplus/ gross value added, %) 9

10 Game changer #6: Periphery countries Dodging the liquidity crunch, piggy backing the recovery In Latin America, reactive Central Banks should limit Fed tapering impact on national currencies Exchange rates (LCU/USD, base 100 = 01/01/2013) Most countries were able to rebalance their economies but external liquidity risk remains a concern in Emerging Europe Current account balance (% of GDP) 10

11 Game changer #7: Emerging markets, fragility is a policy thing With Fed tapering, most vulnerable countries are likely to face tough headwinds in the short term Liquidity and cyclical risks in emerging countries Fragile 10 need close monitoring: Turbulences but no crash! Import cover (months) Argentina Indonesia Turkey Brazil South Africa India Chile Colombia Philippines Mexico Source: Euler Hermes 11

12 Game changer #8: Old and new political risks in 2014 A busy political calendar in the next 18 months Despite an improved outlook, economic risks remain weighted towards the downside in MENA 12

13 Game changer #9: Building blocks a new form of protectionism World 3.0: removing frontiers, bridging continents. Regional and transcontinental trade area to foster economic and social development. What if regional block were one economy? Pacific Alliance would be the 6 th largest economy ASEAN would be the 8 th largest economy GCC would be the 14 th economy GDP (Trade unions and Benchmark countries, USD bn, 2012) Trade (exports + imports) (Trade unions and benchmark countries, USD bn, 2012) 13

14 Game changer #10: Global rebalancing don t put the cart before the horse Growing in sync: recoupling and rebalancing between advanced and emerging economies Contribution to world growth Fragility to external shocks: no longer specific to emerging economies Current account and external debt (2014), % of GDP Source: Euler Hermes Source: Euler Hermes 14

15 Thank you for your attention! Ludovic Subran - March 5, 2014 Country Risk Practice