Gambling on country risk

Exporters look to export credit agencies (ECA) to underwrite the risk of default of payment from their counterparties. Which countries in Asia are most at risk? Jenny Plei, head of country risk for French ECA Coface, explains.

Q: How is country risk measured?

We assess the financial situation, political situation and the general environment that may impact on the payment ability of the corporate in the country. At Coface, we have developed our own rating where we estimate the average probability of default of the corporate situated in the country. This is important because at Coface we guarantee the payment of trade between two enterprises. It is a financial analysis.

On top of this we have to take into account other factors that may impact on the ability of the company to make payment. We assess the factors in a country that will impact on the ability of the company to pay, such as political factors, risk of civil war, social tensions, and risk of crisis of balance of payments -- which will result in a shortage of currencies causing a weakening of external debt.

The third type of risk is sovereign risk, which is the capacity of the state to face its obligations abroad. Private companies will be affected if the state is in trouble. We also estimate the risk of a systemic failure of the banking sector.

Lastly, we look at the cyclical risk, that is, a risk of an activity downturn. Given this, we then look at payment experience in the country. We cover many aspects of trade in many countries, therefore we have the statistics which give us an idea of the average failure of the enterprise in the country.

Q: How is this information useful for companies?

The rating that we give is on seven levels. A1 to A4 is considered a good risk by investment banks and rating agencies. Ratings B, C and D are the more risky and speculative rates, meaning that there is a larger probability of default.

Q: What are the main sources of risk in Asia?

It would depend on the country, but at present, the main source of default of payment is a cyclical risk. The Asian countries recovered from the crisis largely due to exports in the electronics sector, especially to the US. Now we expect a slowdown in the US and companies in this sector will be affected.

Q: Which countries in Asia are most at risk at present and why?

Laos, Cambodia and Myanmar are very high-risk countries, but they are not very much involved in trade. A country that is highly involved in trade and is important to the region is Indonesia. There are many factors of risk there, namely in the political sphere, the external finance situation of the country, slow growth, and a banking sector which is still largely collapsed.

Q: Can a good corporate pierce a sovereign rating?

Sure, the ratings give an idea of the average situation in a country. There can be enterprises that are able to meet their obligations. Some multinationals for example, still have revenues that enable them to meet their payments. So the better way is to have a rating of the company located in the country.

Q: There is much attention on China these days, what is the outlook there?

We see many positive factors for China, such as high growth levels, especially when compared to other Asian countries. It also has an external financial situation, which is very comfortable with current account surpluses, a high level of foreign reserves, and an external debt that is not high compared to export revenues. Nevertheless, there are some factors of risk, which is due to the fact that the banking sector needs to be restructured -- which is closely linked to the public finance.

Then there is the problem of tax collection because the government has to find a way to finance the restructuring of the banking sector, which in turn is linked to the reform of state-owned enterprises (SOEs). The other major source of concern is the social tensions that may result from all this change in the state-owned sector, which may hamper the reform process.

Q: Going forward, what are the future risks for Asia and which countries will be most affected?

We see two problems. One is the US economy, which has entered into a slowdown that is sharper than expected and the question is how long will it last. This will depend on the electronics sector and exports to the US. The source of risk is Japan. The situation does not seem to be improving, and we do not expect it to improve very quickly. This will result in the weakening of the currency, which will add difficulties to the Asian countries. So it depends how much the Asian country is dependent on these two countries.

Generally, we say that China is more sheltered because it has a less open economy than the other countries and therefore will suffer less. Some countries like Taiwan and Malaysia, which are very dependent on exports of electronics, may suffer more.

Q: How often are these ratings updated?

The ratings are available on our website so they should be updated everyday. But the situations of countries do not usually change everyday. We update the ratings as and when changes occur, as well as do a monthly review of the countries.

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