Rising Oil Prices, Protectionism Worsen Company Credit Risks

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The high number of risk signals in the second quarter of 2018 “is reminiscent of the situation in the years 2012 to 2013, says Coface. The trade credit insurer concludes that these signals “confirm that the peak in world growth has passed.”

CFOs and credit managers should take note of Coface’s downgrades for China’s information and communications technology (ICT) sector to ‘high risk,’ and Canada’s metals sector to ‘very high risk.” Both are directly affected by punishing tariffs imposed by the US.

In its country risk assessment, Coface downgraded India from A4 to B (fairly high business default risk) and Sri Lanka to C (high business default risk). Argentina and Turkey were also downgraded to C.

“The credit risk of companies is increasing in the advanced economies where, after the start of the year being marked by a loss of confidence linked to rising protectionism, a slowdown in growth is to be observed”

Coface forecasts oil prices to average US$70-75 in 2018, up 30% to the average price in 2017. This has led to the upgrading of the energy sector in the US to “low risk,” and to “medium risk” in Canada, France, Saudi Arabia and UAE.

The rise in petrol prices persuaded Coface to upgrade the country assessment of Malaysia to A3 (satisfactory business default risk) and Oman to B. But more expensive oil is negative for importing countries, which explain in part the downgrades for India and Sri Lanka. Currency risk and political tensions are additional negative factors in Argentina and Turkey.

Coface also downgraded Italy from A3 to A4 on expectations that particularly indebted companies in that country will be vulnerable to a hardening of bank lending conditions.

“The credit risk of companies is increasing in the advanced economies where, after the start of the year being marked by a loss of confidence linked to rising protectionism, a slowdown in growth is to be observed,” says the credit insurer. It forecasts growth of 2.2% in 2018 and 2% in 2019 for the advanced economies, and 2.1% for 2018 and 1.8% in 2019 for the Eurozone.

The exception, at this stage, is the US. The forecast for the American economy is 2.7% GDP growth in 2018, an acceleration from 2.3% in 2017.

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