Coface: Global economic risk ‘at a peak not seen since early 2000s’

An international insurer has warned that world corporate risk has reached peak levels as Asia Pacific looks to be particularly affected

Insurance News

By Jordan Lynn

International insurer Coface has warned that the global corporate risk landscape is reaching peak levels with forecast world growth taking a dip as the average level of global risk rises.

In the Coface World Country Risk Report, the credit insurer warned that the world economy faces a ‘Japanese-style’ growth trap as a lack of outlets and weak inflation reduce pricing power.

Jackit Wong, Coface’s Economist for the Asia Pacific Region, told Insurance Business that as global risk continues to rise, companies are negatively impacted.

“The global average of the country ratings, which measures the average company credit risk in 160 countries,  is at a peak not seen since the early 2000s,” Wong said.

“The global economy remains stuck in a ‘Japanese-style’ trap of sluggish growth, with few improvements even in 2017, as Coface reckons that 2017 is likely to be the sixth year for the global economy to grow below 3%.

“The continuously sluggish global growth has been and is expected to be dampening business investment and consumer spending sentiments, weighing on demand.  Against this backdrop, the global demand growth has been and will probably continue to be muted, with little improvements.

“Consumer prices are expected to increase only 2.9% worldwide on average this year, according to the International Monetary Fund (IMF), i.e., the lowest growth rate since 1980. This would probably reduce the pricing power of companies, squeezing profit margins.

“Thus, companies are negatively affected by this environment: because of the listless growth they lack outlets, while the low inflation rate limits their pricing power.  Adding to this, keener market competition amid globalisation and higher labour costs in emerging economies would probably cast a shadow over company profitability, adding financial pressures to companies.

“The bullets to turn this around appear to be running short, with diminishing marginal impact on boosting the global economy.”

Wong noted that the Chinese economy and its expected slower growth, set to be “the slowest expansion pace in 25 years” will have an impact on many Asia Pacific countries.

“Against this backdrop, the rest of Asia would be negatively impacted by this Chinese shock wave,” Wong continued.

“The most severely affected economies are very open and highly exposed to China, including Hong Kong, Singapore, South Korea, and Taiwan.

“As a slowdown in economic growth is likely to weigh on the already increasing companies’ credit risk in these economies, we have downgraded their country risk ratings accordingly.”

Wong stressed that the outlook for all of Asia Pacific is not  on a downward spiral as some emerging economies can still expect growth.

“Some Asia Pacific countries are less exposed to China, for example, Bangladesh, Cambodia, India, Indonesia, and the Philippines.  They are relatively less developed countries in the region, which growth is likely to remain robust, amid ongoing public infrastructure projects and solid domestic demand,” Wong said.

“That said, most Asian countries are export-oriented, with the total Asian exporters on the top 30 list, namely China, Japan, Korea, Hong Kong, Singapore, Taiwan, Thailand, Malaysia, Australia (according to WTO Secretariat) accounting for USD 5,488 billion or 32.2% of the world exports in 2015. So, if the growth of advanced economies, such as the US and the Eurozone, picks up, it is likely to boost the growth outlook for these Asian countries.”

As the global economic outlook continues to look challenging, Wong stressed that the Coface report highlights the need for credit insurance.

“The report gives us some alerts about a rise in company credit risk,” Wong continued.

“For corporates, they would have to reduce non-payment risks regarding their sales on credit terms, so as to avoid the lifeblood of their business – cashflow – from reducing significantly.  And credit insurance is one of the key credit management tools to protect corporates from non-payments.”

Wong noted that brokers can use the global report to help bolster their businesses and help clients understand the importance of insurance coverage.

Brokers can use this report in addition to our publicly available sector and country risk assessments on the webpage, to keep their clients better informed about industry and macroeconomic developments which have been changing rapidly these days, and to suggest using one of the key ways, i.e., the purchase of the credit insurance, to hedge against non-payment risks,” Wong said.

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