“Margins are under pressure? and companies cannot pass their costs on,” said Coface chairman Francois David. He underlined that global business competition has made it difficult to incorporate production cost increases into sales prices, and that the cost of obtaining finance has been lifted by steadily rising interest rates.
In emerging markets, the threat of oil supply cuts in markets such as Iran and Nigeria, and the possibility that China’s growth story may stall, slowing the ongoing Asian economic boom, pose additional uncertainties.
Given a risk gamut that also includes a potential US dollar collapse, “any abrupt event could turn that risk into a new default on payment,” stressed David. He pointed out that Coface downgraded a cluster of sectors during 2005 – pharmacy, chemistry, automotive, textiles, clothing and air transport. As an example, a range of Italian export sectors, particularly clothing, fine leather goods, shoes and household domestic appliances, are suffering from competition from Asian exporters, and have been unable to offset production costs rises by the devaluation of the currency, “as has been the case in the past,” Coface said in a statement.
Companies within the overall Central and Eastern Europe region “remain vulnerable to a macroeconomic environment that could be negatively impacted by a currency crisis,” Coface predicted. It has Hungary negatively watchlisted, due to current account deficit concerns.
In China, companies are suffering as much as their western counterparts from stiff domestic competition and high raw material and energy prices. Coface noted “a high level of credit risk” on the microeconomic front, highlighting that companies are increasingly forced to finance capital expenditure out of cashflow as bank credit has become less available. “The slightest obstacle could trigger a serious rise in payment incidents,” said the statement.
“What was new in 2005 was a strong increase in defaults,” said David. “The default level is up 30% from 2004. Previously the state companies never defaulted, but the private companies are doing so now.”
Coface is nevertheless predicting 3.5% global growth and 7% trade growth in 2006, and sees a brighter picture in Germany, where defaults were rife in 2001-03. “In the last few months, we have seen the German economy improve,” said David, noting that a rise in industrial production in September, October and November 2005 — strongly linked to export sales – has pulled the German economy out of stagnation mode. Coface said that German “payment incidents are back down to a satisfactory level, well below the world average”.