Overall, advanced economies are doing better after two years of recession, according to a new country risk outlook by global credit insurer Coface. The eurozone will record modest but positive growth in 2014 (+1%). Within the Economic and Monetary Union, Germany is expected to show a remarkable recovery of 1.8%. France will experience slow growth (0.6%) and the end of the recession is in sight for Spain and Italy. But despite these improvements, the confidence of business leaders has yet to return in Europe.
In the United States, growth and business confidence is returning. Concern is now coming from the emerging countries, which are facing a structural decline in growth (estimated at 4.8% overall in 2014), even though the BRICS countries will benefit indirectly from the recovery in advanced economies. Due to these factors, Coface has revised its country risk assessments for the United States, Brazil, and Thailand.
A2 for the United States placed on positive watch, despite the budget paralysis
The prospect for sustained and balanced growth (estimated at 1.5% in 2013 and 2.2% in 2014) leads Coface to place the A21 assessment of the United States on positive watch, despite the current budgetary pressures.
Business investment is robust. Private consumption, the main driver of growth, is making better progress than before the crisis, as households reach the end of their debt reduction measures. Improvements are also noticeable on the business side. Margins and profitability are increasing while debt levels are low (55% compared to 85% in the eurozone), although growth in some sectors (construction materials, copper, and paper) remains anemic. Businesses are the strong segment of the economy, with low debt and high profitability.
Though the government shutdown was a surprise, it should not have a significant effect on business provided that it does not persist in the long term. However, uncertainties related to the US government debt ceiling remain high and the risk of non-recovery cannot be ruled out. In this risk scenario, private demand could be significantly affected. However, at this stage our main scenario is that this impasse should be avoided at all costs so that private consumption and investment remain robust despite further possible budget cuts.
A3 for Brazil placed on negative watch, due to structural problems
Growth is disappointing (estimated at 2.3% this year and 2.9% in 2014) due to sluggish private consumption and particularly weak business investment. The origins of the economic difficulties are structural; the lack of infrastructure is constraining business. Rising interest rates in the wake of the Selic may reach nearly 10% in late 2013, which averts any prospect of a significant recovery.
The slowdown in consumption weakens industries and businesses that depend on it, including household appliances, automotive, and electronics. Rising interest rates and inflated prices for imported components and machinery, due to the depreciation of the real and made worse by taxes and production costs that remain high, do not encourage companies to accelerate their investments. In this context, payment incidents of Brazilian companies recorded by Coface remain at a high level, close to the peak of 2009. Both macroeconomic and microeconomic factors justify a negative watch of Brazil’s A32 assessment.
A3 for Thailand placed on negative watch, due to rising household debt
Risks are increasing in Thailand, whose A3 assessment is now on negative watch. Growth there has fallen sharply in 2013 and will remain constrained by household debt (80% of GDP) in 2014. The effects of previous stimulus measures are wearing off. In addition, the country will continue to suffer from sluggish exports, particularly related to its dependence on the Chinese slowdown.
A Coface country risk assessment measures the average level of payment defaults by companies in a given country within the framework of their commercial transactions in the short term. It does not pertain to sovereign debt. To determine country risk, Coface evaluates the economic, financial and political outlook of the country in conjunction with Coface’s payment experience and business climate assessment. Assessments, which can be watch-listed, have a seven-level scale: A1, A2, A3, A4, B, C, and D.