The credit crisis no longer spares any zone and even reaches the BRICs: Coface announces that China and Russia have been placed on negative watch

Note: Coface country rating does not concern Sovereign Debt, but indicates the average level of risk presented by corporates on their short term commercial transactions.

At its 13th Country Risk Conference at the end of January, Coface announced the credit rating downgrading of 22 countries. For the first time, two of the largest emerging countries have been negatively watch-listed simultaneously, China and Russia.

The anticipated worldwide GDP growth differential from 2007 to 2009 is now 3,1points. It fell 2,5 points between 2000 and 2001 in the previous credit crisis following the collapse of the Internet bubble.

This slowdown explains the rise in the Coface payment default index of over 50% between 2007 and 2008. Coface forecasts that the global credit crisis will only end towards the end of 2009.

The credit crisis is now similar in extent to the crises of the 80s and 90s. The credit crisis which started at the beginning of 2008 took a new dimension in the fourth quarter of 2008 when businesses in countries that had managed to hold out so far, such as Germany, became affected.

Given the new global GDP growth forecast of 0,9% for 2009, the crisis resembles the crisis of the early 1980s and 1990s considering the drop in growth. The slowdown in growth from 2007 to 2009 is projected at GDP 3,1 points – similar to the periods 1979 to 1982 and 1989 to 1991.

Nonetheless, the drop of 3,1 GDP points is below that of the first oil shock. In 2008, Coface registered an increase of 47% in its payment default index with a acceleration in the fourth quarter.

Coface’s global country risk overview emphasises how the credit crisis has spread since it started in January 2008 in the United States, reaching the other so-called “bubble” countries such as United Kingdom, Spain and Ireland.

No country seems to be spared any longer. First, it was the industrialised countries close to the epicentre of the crisis. Then it affected those countries with no speculative bubbles but who had sustained flat growth such as Italy, France, Germany and Japan. This is in addition to the fragile emerging countries such as South Africa and Vietnam.

China and Russia: Vulnerable companies undergoing a slowdown
As all industrialised country ratings were downgraded in 2008, Coface has placed two BRIC countries under negative watch, which had resisted up until now.

“The credit crisis is now affecting two major emerging countries - Russia and China - despite the comfortable macro-economic and financial situation they had been enjoying in recent years,” said François David, Coface chairman.

“However, companies in these two countries were already showing signs of strong vulnerabilities – pinpointed by Coface - heightened by the current slowdown,” he said.

China
Coface forecasts 7% growth for China in 2009. The Coface survey on Chinese company payment behaviour, conducted over the last six years, has highlighted the effects of excessive competition on the private sector’s reducing profit margins.

In this context, showing evidence of micro-economic vulnerability, the turndown in growth will result in an increase of payment defaults on the part of Chinese companies. China’s A3 rating has therefore just been placed on negative watch.

Russia
Coface forecasts growth of 2,5% for Russia in 2009. Coface business-to-business payment experience in Russia deteriorated in 2008, mainly due to persistent deficiencies in corporate governance.

These problems have already been taken into account in Russia’s B rating. The country is now severely affected by the crisis, primarily by the drop in credit and the fall in oil prices. Russian companies’ foreign debt rose by 140% since 2005, which should generate further payment defaults, which is the key reason why Russia’s rating has been placed on negative watch.

*The credit crisis for Coface is a significant worsening in companies’ payment behaviour. A credit crisis may be limited to a country, a region, a sector, or may be global. Coface has recorded 4 global credit crises, since 1973 and the first oil crisis, and the 5th crisis began in January 2008.