Coface Downgrades Malaysia and Japan on Corporate Default Probability

Trade credit insurance provider Coface believes that Malaysia and Japan now carry a higher risk probability of company defaults, though still at reasonable levels.

Coface’s country risk rating for Malaysia has been cut from A2 to A3, while that for Japan is now A2, from A1. Kazakhstan has been downgraded from B to C, meaning the average probability of company default is high, while Armenia is now rated D, meaning a very high average probability of default.

“Malaysia (new A3 assessment) is suffering from low prices for raw materials and the scandal over the 1MBD sovereign wealth fund,” says Coface. “Investor confidence has been affected, against a backdrop of high household debt and low external demand. The country’s growing political risks add to the problem.”

The downgrade of Japan came on the heels of the Bank of Japan’s adoption of negative interest rates, which Coface attributed in part to the “ineffectiveness of the Abenomics initiatives.”

Hong Kong and Taiwan are still at A1, the highest rung, but both have been placed on negative watch.

Global growth

Emerging economies recorded a slight recovery earlier this year, Coface concedes, but it warns that the slowdown in advanced countries is disturbing the balance of the global economy more than ever before.

It forecasts growth of 3.9% in emerging markets in 2016, higher than the 3.4% in 2015 but lower than the 7.2% recorded in 2010. However, industrialized countries as a group will expand by just 1.7%. As a result, global economic growth is “unlikely to exceed 2.7% this year,” says Coface.

Despite a generally healthy economy, there are “vulnerable points” in the US, says Coface. “While the services sector is doing well, buoyed up high levels of employment and household consumption, industry is suffering from the strong dollar.”

The United Kingdom is facing uncertainty over its future within the European Union, which is increasing the volatility of financial markets and weighing down confidence indexes.

The euro area is driven by internal demand, an improved employment market and favorable credit terms. But in Greece, Portugal, Spain and Ireland, corporate confidence is low, hampering growth (1.6% in 2016), particularly with the rise of political risks.

And while the Central Bank of China has reduced its mandatory reserves, supporting Coface’s growth forecast of 6.5% in 2016, the risk of a more significant slowdown remains.

Probability of company default

Coface still rates the US at A1, the highest level, on country risk assessment. The UK is at A2, the second highest rating, while China is at A4

In Asia, the country’s with the lowest ratings of C (high risk of company default) and D (very high risk) include:

  • Afghanistan (D)
  • Bangladesh (C)
  • Cambodia (C)
  • Laos (D)
  • Mongolia (C)
  • Myanmar (D)
  • Nepal (D)
  • Pakistan (D)

The A1 to A4 (reasonable risk) markets in Asia include:

  • Australia (A2)
  • China (A4)
  • Hong Kong (A1, negative watch)
  • India (A4)
  • Japan (A2)
  • Malaysia (A3)
  • New Zealand (A2)
  • Philippines (A4)
  • Singapore (A1)
  • South Korea (A2)
  • Taiwan (A1, negative watch)
  • Thailand (A4)
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