In the last months the newspapers and the leaders have focused on the apparently encouraging recovery of the World main economies. It is true that since the beginning of 2013 the figures are improving in most advanced economies, but it is not less true that this improvement is slow and weak. Though, there are some large differences in the performance of the regions, being the Euro zone the worst.
On the one hand, no one can deny that the US performance is getting better and that they are showing a strong pace towards the recovery. This country has being struggling to maintain the financial stability of the system by pumping a lot of cash into the market. Although this period of cheap money is coming to an end, it has generated good results such as unemployment reduction and economy growth. However, according to the forecasts, the GDP growth for 2013 will be lower than in the previous year (table 1).
On the other hand, we have the Euro zone. The austerity policies have adversely impacted in the economy growth and employment. The countries of this region will still face negative rates in GDP for 2013 (table 1). In fact, only from 2014 better results (although not encouraging) will be perceptible. We have to take into account the poor performance of economies from the South of Europe. For instance, the projections of the World Economic Outlook (WEO) for Spain and Italy establish a contraction near to 2% in 2013. This trend won’t help to reduce the high unemployment rate in these countries. Is the sunlight as strong as the leaders try to point out? I don’t think so.
What about the future? You just have to look at the figure 1. According to the Economist Intelligence Unit (EIU) forecast, in the next four year only the Euro zone and Japan will grow under 2.0%. That is quite disappointing, especially when you see the evolution of the economy in other regions.
In May 2013 I wrote a post in which I wonder what the European leaders would do to change this trend. Apparently they have done nothing, yet they are anxious to say the situation has improved. The facts demonstrate that years will have to pass before we can speak about recovery in the Euro zone.
CLIs (Composite Leading Indicators) are a tool that I recently discovered. They are used to “provide early signals of turning points in business cycles”. It is a forecast which pretends to predict the moment in which the bubble will be in the highest point and the moment in which that bubble will go off.
They are identified by the OECD itself as a quantitative information rather than qualitative with components that measure early stages of production and that respond rapidly to changes in economic activity. Therefore, it can be useful to know if an economic cycle is finishing or if it just has started.
In the last release, the indicators show what the last big data had announced: the United States grow firmly and fulfilling the forecast, while in the Euro area the growth now starts to gain momentum.
This can be considered as another tool that the management has to make decisions. It can help to decide whether it is the moment to invest taking into account the forecast, which anticipates turning points 6-9 months before they happen, or if a certain country is facing a change in the cycle.
Would you like to deepen in this topic, you can visit OECD site and view the attached video.
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.