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Corporate default risk: short analysis

Country risk assessment map

It is crucial for any company to decide the commercial risk of selling to an entity. It has to be decided the payment terms and the credit limit and, moreover, if that credit will be ensured somehow. In many cases the Companies decide to hire a credit insurance to prevent from any default risk.

Although in Companies we focus on the profile and performance of the customer itself, Credit Insurance Companies analyze other sides such as country risk. They don’t provide credit limits based only on their opinion on a certain organization’s sales or profit, but also on their opinion on the country in which that business is located. The economic, financial and political data of each country are studied, and they help to decide whether a company deserves a credit (and how much), or not.

As a consequence, the assessment of a profitable Company with encouraging performance can be penalized if that company is located in a country with high political risk. This is what happens with banks, whose rating is determined by the sovereign debt condition.

Taking all this into account, and looking at the attached chart (released by Coface), it surprises that some Asian countries have better rating (less risk) than other European countries (mainly in the South). This shows how important is the stability of the Country’s economy. Not only can the citizens be affected, but also the Companies (problems to open new markets).

My piece of advice is to check the country’s risk besides client’s risk itself. This way it will be possible to manage the risk, or at least have the whole picture of a Company.

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