Coface Upgrades the Business environment of 7 Emerging Countries and Downgrades 2 European Countries

Coface expects the steady pace of growth of emerging countries to continue, forecasting their economies to grow at 5,7% in 2011 despite a slowdown compared to 2010.

This contrasts with Coface’s growth forecast of 1,8% for developed economies for the same period. The buoyancy of emerging economies goes hand in hand with improvements in the business environment.

Four years after launching its business environment risk assessment, Coface has announced several upgrades in central Europe, Africa and Latin America. The business environment risk assessments reference Coface's own payment records based on its international underwriting and debt collection experience.

"Since the launch of its business environment assessment in 2007, Coface has revised the assessments of some ten countries, reflecting an improvement in the payment records of companies in emerging countries,” said Yves Zlotowski, Coface chief economist.

“Upgrades of seven emerging countries support our finding of a gradual improvement in the risk of emerging economies, an improvement that is not solely due to a resilient economic environment. It is also due to more structural developments, that is, the improved governance of these countries."

Central Europe: Marked Improvement in the Business Environment

The business environment assessments of three central European countries have been upgraded: Poland (from A3 to A2), Lithuania (from A3 to A2) and Macedonia (from C to B). These three countries have in common an improvement in the access to companies’ financial information, says Coface.

Poland and Lithuania have benefited from the process of their integrating to the European Union. Lithuania has developed its infrastructure and in Poland there have been notable improvements in the quality of regulation due to the streamlining of its administrative procedures, system and improved supervision of its banking system. Macedonia, which plans to join the European Union, has made great strides in terms of governance, reducing corruption and increasing the respect for the law, says Coface.

Greece and Cyprus Among the Worst Rated Countries in Europe

In contrast, the business environment assessments of Greece and Cyprus have been downgraded to A3. This places them amongst the worst rated countries in the European Union. Only Romania and Bulgaria (A4) have worse assessments.

Coface says finding access to financial information is difficult and has noted a worsening of companies' payment behaviour. This indicates greater difficulties concerning debt collection. Cyprus also stands out for its opaque banking system.

Coface’s other risk rating, the country credit risk rating, has seen two downgrades: Greece (B) and Cyprus (A4). These downgrades reflect the impact of the Greek sovereign debt crisis on Greece’s businesses, which is conveyed through various channels. Bank credit is difficult to obtain by companies and, if obtained, is expensive. The macroeconomic climate is seen to be deteriorating as the recession deepens.

Greek businesses are bearing the brunt of the austerity budget plan, which, in some cases, could lead to them experiencing overdue payments owed to them by the country's administration. Furthermore, Coface has noted a deterioration in the payment behaviour of Greek companies in 2011. The country risk for Cyprus has increased because of its banks' exposure to the Greek risk.

Latin America and Africa: Progress Has Been Made in the Reliability of Financial Data

Coface has raised the business environment risk assessment of Colombia by one notch to A4, placing it above the average of emerging countries and ranking it first in Latin America in terms of accessibility and reliability of financial data. Despite the country's persistent corruption, Coface notes greater reliability of financial information due to stringent tax audits.

In Sub-Saharan Africa, three countries have seen their business environment risk assessments raised: Ghana (from C to B), Mozambique and Tanzania (both from D to C). These upgrades are in part due to the progress made in fighting corruption.

However, Coface says that the less-than-stringent legal obligations of Mozambique and Tanzania mean financial information is difficult to access in both countries. Ghana has made noteworthy progress, confirmed by the fact that it is placed above the average of the 212 countries ranked by the World Bank.

Middle East: The Institutional Environment Impacted by the Arab Spring

Bahrain's downgrade from A3 to A4 comes in the context of the Arab spring, in which the government’s efficiency is hampered by the population's strong resentment towards those in power. Though the country remains above the average of emerging countries, Coface points out a worsening access to financial information.

The Coface country risk assessment does not pertain to the sovereign debt since it indicates the average level of risk displayed by the companies in a country within the framework of their commercial transaction. This average change does not prejudge that of the score for each company, which remains determined by its own characteristics. It is therefore necessary for the partners of a company in one of the countries mentioned to have its specific evaluation by Coface.

The Coface business environment assessment is a component of Coface overall country assessment and is the subject of a parallel publication. The business environment assessment estimates the accessibility and reliability of information on companies and the legal protection afforded to creditors and takes into account the quality level of the institutional environment in 156 countries. The assessments fall on a scale with seven levels in increasing order of risk, A1, A2, A3, A4, B, C, and D where A1 represents least risk.