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AS INFLATION FELL TO A RECORD LOW IN JANUARY 2015 and economic growth exceeded that of other G7 countries, the Government must hope that British companies – and British voters - will find plenty of reasons to be cheerful this year.

But while the economic outlook is undoubtedly better than five years ago and there are a number of promising overseas markets, the recovery could yet be derailed by events outside our control. That is why a major theme in January 2015 was the return of geopolitical risk and its effect on trade, from the uncertainty over European governments’ ability to carry out reforms and the growing popularity of parties hostile to European construction to the ongoing Russia-Ukraine crisis.

Meanwhile, the UK itself is facing political uncertainty in May because most commentators agree the looming general election may not produce a decisive result. The only thing that can be predicted with any certainty is that the UK’s membership of the European Union will be a major point of contention during the campaign following the emergence of UKIP. The Conservatives have pledged a referendum on Britain’s membership of the European Union in 2017 if they win a majority. However, the timing has been the subject of heated discussion amid concerns the continued debate could harm Britain’s economic position.

These uncertainties, which I will explore in more detail below, mean that UK exporters require a greater appetite for risk if they are to make the most of the available trading opportunities over the next 12 months. As ever, information will be the CFO’s greatest asset.

Country risk overviewThe following overview is based on the latest country risk evaluation1. Country risk assessments provide an insight into the average payment incident level presented by companies in a country in connection with their short-term trading transactions. There are seven grades from A1 to D and each can be positively or negatively watchlisted:

Advanced marketsThe United Kingdom (rated A2)

At 2.6%, UK growth was at a higher level than in other advanced economies in 2014, while inflation is now at a record low of 0.3%2, largely due to plummeting oil prices. At the same time, unemployment has continued to fall (the level of employment in the three months to December 2014 was 73.2%3, its joint highest rate), companies are reporting solid profits with a historically low level of non-payment being recorded.

In the minus column, levels of household and public debt remain high, while the strength of sterling, especially against the euro, has pushed up the price of UK exports. The ONS reports that the UK’s balance of payments deficit widened in Q3 2014 despite the strong performance of the financial and corporate services sector. The most competitive manufacturing sectors are pharmaceuticals, automotives and aeronautics.

United States (A1)

The UK’s largest non-EU export partner is experiencing strong growth (+2.9% in 2015) based on robust domestic demand and a real industrial renaissance, particularly in the automotive sector but also chemicals, textiles and transport. Companies have been able to take advantage of a reduction in energy costs, linked to the expansion of shale gas and the fall in oil prices, but also limited wage rises.

The Eurozone

There has been slow but perceptible improvement in the Eurozone following the sovereign crises and growth is expected to reach +1.2% in 2015 (after +0.8% in 2014 and -0.4% in 2013). This has led to an upgrade of assessments for Spain (A4), Germany (A1), Austria (A1) and Portugal (B, positive watchlisted) in the last year.

In France and in Italy too, there has been some improvement in companies’ financial health but deflationary pressures have affected their appetite for investment. A large proportion of household revenue is being used for debt repayment which is also dampening demand. In this context, the return of political risk – primarily the crisis in Ukraine-Russia, could knock morale and act as a brake on further growth. In this

respect the forthcoming elections in Spain, Poland, Denmark, Finland, Portugal and Estonia will be important tests.

China (A3, negative watchlisted since January 2015)

After years of unparalleled progress, Chinese companies now face several challenges: a confirmed slowdown (an expected growth of 7% in 2015); overcapacities in several different sectors, including metallurgy and construction; and above all, worrying levels of indebtedness (an estimated private debt to be over 200% of GDP). We therefore expect Chinese companies to have payment difficulties in 2015, in a context of domestic activity that is less buoyant but more sustainable in the medium term.

Middle East and North Africa After a period of political and social turmoil which is still ravaging Iraq, Syria and Libya, economic activity is gaining some momentum in other MENA countries, on the back of global recovery.

Countries in the Gulf Cooperation Council (eg Saudi Arabia, Kuwait, UAE) are expected to grow by 4.1 percent in 2015, leading the economic growth in the region on the back of large budget surpluses and diversification into non-hydrocarbon industries to reduce their vulnerability to energy price fluctuations. The hydrocarbon sector’s contribution to GDP declined from 41 percent in 2000 to 33 percent in 2014 but another sharp decline in oil prices would still weigh on growth performances and fiscal balances in 2015. In addition, all need to address structural challenges including excessive bureaucracy and levels of transparency.

Meanwhile, oil importers such as Egypt (rated C), Jordan (B), Morocco (A4) and Tunisia (B) are expected to grow 3.4 percent in 2015, having experienced recovery in tourism, investor confidence and exports. Several have announced stimulus packages to support the economic activity in the aftermath of social unrest and are making some progress to improve fiscal performance, labour market conditions and business environment.

Emerging markets Brazil, India, Indonesia and South Africa (all rated A4) are among the countries that have experienced capital outflows and recurring tensions in their exchange rates since 2009. The combination of an economic slowdown, rising private debt and repeated depreciations has been reflected in several country assessments, including the downgrade of Turkey to B (+3.5% in 2015) and of Russia to C (-3.0% in 2015). However, it is worth noting that no large emerging country has had to call on the IMF in an emergency although Venezuela (D) and Argentina (C) were tested in 2014 by major risks of external liquidity (both turned to China for help).

By contrast, the situation in other emerging economies has stabilised. For example, Vietnam (C, positive watchlisted) has steadied its exchange rate, moved upmarket (as shown by the dynamism of its exports of electronic products) and attracted foreign investment, particularly from Korea, despite a difficult business environment. The assessment of Sri Lanka has also been raised by a notch

to B, because since the end of the war in 2009 growth has been strong and stable and the budget deficit has fallen.

Timidity is counterproductive Slight improvements in advanced and emerging countries show that the global economy is in recovery but it is less vigorous than before the 2008 crisis and the prevailing climate is one of uncertainty which encourages risk averse behaviour and threatens to constrain business investment and growth as it did in Japan in the 1990s.

Of course, this represents a challenge for ambitious companies but it is not insurmountable. This is where the best CFOs can make the difference by calculating the risks and ensuring their companies take appropriate credit management precautions to protect their sales revenue and justify investment from banks and other finance companies. Such smart risk-taking is what really separates successful businesses from the herd.

References

1. Coface Country Risk Assessments http://www.cofaceuk.com/Economic-studies

2. Consumer Price Inflation, January 2015, ONS, 17 February 2015 http://www.

ons.gov.uk/ons/rel/cpi/consumer-price-indices/january-2015/index.html

3. UK Labour Market, February 2015, ONS, 18 February 2015

http://www.ons.gov.uk/ons/rel/lms/labour-market-

statistics/february-2015/statistical-bulletin.html

Profit from informed risk taking By Grant Williams,

Risk Underwriting Director,

Coface UK & Ireland

Author information

Grant Williams is Risk Underwriting Director at Coface

in the UK & Ireland, part of the Coface Group, a global

leader in credit management solutions. Coface’s credit

insurance, business information and collection services

enable companies to protect themselves against the risk

of financial default by their domestic and overseas clients:

clients have access to information about the financial

health of 65 million companies worldwide.

Coface publishes quarterly assessments of country risk

for 158 countries. Its regular Country Risk Conferences

bring together economists, policy experts, researchers and

business leaders to review major economic trends and an

outlook for the world economy.