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Coface South – Credit insurance specialists

Coface South – E.W. Droppa & Associates, LLC. is a general agency for Coface North America. Providing solutions in credit insurance, business reports and commercial collections.

Has the US Automotive Sector Shifted Safely Into Top Gear?

The bail-out for the US automotive industry, at a cost of $80 billion and large-scale layoffs, traumatized the United States. Automobile manufacturers have regained their competitiveness and are benefiting from the upturn in US economic growth, which is forecast at 2.9% in 2015. The industry has recovered and demand is being driven partly by easier access to credit, but at what price? In a Panoramareport focused on the sector. Coface predicts a 3.8% increase in auto sales in 2015 compared to last year, a sustained level of growth but well below the level recorded in recent years.

The sector needs to continue to look towards the future and to make the changes necessary to meet new challenges ahead.

A recovery sustained by domestic consumption, and recently, increased investment

After a 35% collapse when the crisis hit, car sales in the United States in 2014 were back at 2007 levels. The recent fall in oil prices (-48% in 2014) is undoubtedly a contributing factor. But the recovery is also being driven by two additional trends.

The first is that the US economic recovery has meant households have benefitted from very low interest rates. Easier access to credit has bolstered purchasing power and enabled vehicle replacement. This improvement in living standards is also being driven by wages rising faster than prices. With the fall in unemployment levels, companies are increasing the pay of skilled workers. All of this is helping to boost the economic confidence of American households.

The second factor is the positive economic environment that is encouraging auto companies to relocate production in the country. Investments in increasing automation in the production process reduce the correlation between labor costs and location. As a result, with a few exceptions, all the world’s leading automobile and automobile equipment manufacturers are now located in the United States. National and state authorities have provided strong support for the sector, by holding down interest rates and implementing supporting policies such as “scrappage programs” and the injection of almost 80 billion dollars into GM and Chrysler.

Disenchantment with the car?

The fall in unemployment, however, has tended to bypass the younger generation. “Millennials” are not fully integrated into this virtuous cycle and are prolonging their years in education in an attempt to maximize their chances of gaining employment. Their high levels of student loan debt are causing Millenials to either delay vehicle purchases or become high-risk borrowers. In addition, they seem to attach less importance to vehicle ownership, making increased use of alternative forms of transport. The number of 20-29 year olds with drivers licenses fell by 9% between 1995 and 2010, an indication of disenchantment with the car.

There is also a downside to easy access to low interest rate credit. Banks are granting more credit to those in the “subprime” categories with the aim of increasing the profitability of their outstanding loans. These include so-called “high risk” households, and the numbers of payment defaults have increased significantly and will continue to rise in 2015.

Another possible source of tension is that the Federal Reserve could very well raise interest rates this year. This would add to the pressures on households with high debt and variable rate loans, and possibly force them to dispose rapidly of their vehicles.

An industry focused on change

Manufacturers need to adapt their supplies and define a model for this changing demand. The strength of R&D investment will be critical in a supply-led sector, such as automotive, where new models play a direct role in driving sales, by stimulating consumer aspirations.

Coface Insolvency Monitor for Central and Eastern Europe: Improved Economics but Corporate Challenges Remain

  • CEE’s improved economic activity in 2014 resulted in a minor drop of -0.5% in company insolvencies
  • Insolvencies rose in Slovenia and Hungary and decreased significantly in  Serbia and Romania
  • Coface forecasts that insolvencies will fall by – 6% in 2015

Companies in Central and Eastern Europe have experienced turbulent times over the last few years. Economies were challenged by the contraction of private consumption due to rising unemployment and ongoing debt reduction. They were also affected by the double dip recession of their main trading partner, the Eurozone. However, 2014 was a year of improvement for most CEE economies, according to a Coface economic study. The average pace of GDP growth increased from 1.3% in 2013, to 2.5% in 2014. The engine of economic growth was internal demand, particularly household consumption, which benefitted from lower unemployment rates, rising wages and improved consumer confidence. Low inflation, or even deflation, has reached many economies in the region, caused mainly by external factors such as lower commodity prices. The improved economic perspectives led to a stabilization in the number of insolvencies, with a modest decrease of -0.5% in 2014 (compared to +7% in 2013).

“In spite of a minor improvement, there are still a sizeable number of insolvencies, with over 65,000 companies declared insolvent last year. Improving domestic consumption was not sufficient enough to return insolvencies to their pre-crisis levels. With forecast GDP growth of 2.7%, we are positive that the downward trend in insolvencies will continue in 2015. Nevertheless, it will take time until companies can fully benefit from the economic recovery,”explains Grzegorz Sielewicz, Coface Economist for Central Europe.

Multifaceted CEE: Positive and Negative Signs within the Region

The dynamics of insolvency vary within the CEE economies. Strong rises in insolvency rates were recorded in Slovenia and Hungary. Although Slovenia showed a solid GDP growth rate of 2.5% in 2014, companies there did not experience visible business improvements and insolvencies grew by +44.7%, the highest level in the region. Inadequate investment decisions, lack of adjustment to current economic conditions and the high indebtedness of companies were the most frequently quoted reasons for entities becoming insolvent. In Hungary, the changing legal environment contributed to the high increase in insolvencies, which jumped by +29.4% in 2014.

Serbia and Romania enjoyed a much lower number of insolvencies than in the previous year. Due to amendments to the Serbian Insolvency Act in August 2014, company insolvencies decreased by -43.8% last year. Romania’s solid economic activity, supported by stronger household consumption and increased utilization of EU funds, has also translated into improvements on the corporate side, and insolvencies decreased by – 28%.

Positive Outlook: Insolvency Rates Continue to Fall

Company insolvencies in the CEE region will continue to see an improving trend. Coface forecasts that the average number of insolvencies will decrease by -6% by the end of the year. Household consumption will remain the main driving force behind most CEE economies. As a consequence, prospects should be better for sectors dependent on consumer demand.

In terms of exports, the Russian embargo implemented last year was a strong negative factor, especially for the agro-food sector. However, it did encourage CEE companies to look for alternative markets and to address growing local demand. CEE economies are benefitting from higher volumes of foreign trade to the Eurozone, as many Western European countries enjoy clearer signs of recovery.


  • A Coface Panorama on Turkey forecasts a growth rate of 3.5% this year, still solid but below the potential growth rate estimated at 5% and lower than similar economies
  • The main challenges weighing on the economy include the high volatility of the Turkish lira, the recovering but still-fragile growth in Europe and geopolitical risks impacting on the top export markets
  • The textile and clothing sectors are among the most affected by recent developments in the global economy and by regional tensions
  • The pharmaceutical sector remains solid, despite heavy regulations and lower profit margins

Over the past 10 years, the Turkish economy posted an average growth rate of 4.9%, led by domestic consumption. During the period following the global financial crisis, Turkey benefitted from the globally cheap and massively available liquidity conditions for financing domestic consumption and investment expenditure. However, the recovery in the US economy and the Federal Reserve exit strategy have pushed the global economy into a new era.

These new economic conditions create challenges for the Turkish economy, particularly due to foreign exchange rates. The increased volatility, coupled with political uncertainty, are negatively impacting consumption and investment expenditure. Production costs are rising, due to the strengthening of dollar. Exports are suffering from the weakness of the euro and high regional tensions. The economy is therefore struggling to maintain its previous growth performance.


The ability to produce higher added value products in order to increase export revenues is another challenge for Turkish economy. The market diversification and sophistication of Turkish exports have become pronounced issues, in line with the rising risks on Turkey’s traditional export markets.

The last decade showed that the Turkish economy cannot grow without posting progressively larger current account deficits. The main source of external gap is the trade balance.The fact that most Turkish exports are of a relatively average level of technology contributes to this situation, as it reduces competitiveness. Turkish products which incorporate high level research and development content represent 3% of its total manufacturing exports. As Turkey’s export sophistication remains limited, this creates a barrier to increasing the volume and value of its exports. This seems to be one of the reasons that caused stagnation in Turkish exports in 2014 and early 2015, following growth recorded since 2002,”says Seltem İYİGÜN, Coface MENA economist.

Despite these challenges, Turkey enjoys some economic strengths such as a low budget deficit and public debt, as well as a narrowing external gap in line with lower growth. A possible deal between Iran and P5+1 countries could also present new investment and export opportunities for Turkish companies.

The textile and clothing sectors are among the most impacted by the developments in the global economy. Regional tensions are also weighing on the export performance of Turkish textile and clothing companies. Coface has increased the textile sector risk assessment to high risk level from medium risk, mainly due to the negative impact of a stronger euro on exports, increasing import and production costs, the fragile recovery in the core market of Europe, losses recorded in Ukraine and Russia, and finally, deterioration in company payment performance. The clothing sector currently stands at medium risk level, but is being closely monitored. Efforts to increase exports (mainly to neighboring countries and the USA) appear to be a promising strategy to overcome this bottleneck.

The pharmaceutical sector remains solid, despite heavy regulations and lower profit margins. Coface evaluates the risk level of this sector as low. The sector is benefitting from  the greater access of Turkish citizens to healthcare services, higher per capita income and higher pharmaceutical expenditure per capita. Although the reference pricing system puts pressure on prices, which in turn restrains investments in new technologies, the sector still has the strong foundations necessary for steady financial performance.

The main sector risks highlighted by the Coface report are as follows:

Metal sector (excluding iron and steel):Risk level: Very high. The import-dependence on raw material supplies, the decline in commodity prices and the negative impact of exchange rate volatility on borrowing costs, are the main risks faced by companies. Some companies are facing deteriorations in their cash flows, due to the strengthening of hard currencies.

Automotive sector: Risk level: Medium. Sales increased strongly at the beginning of 2015, following a contraction of 10% in 2014. Companies operating in the sector generally have solid financials, which reduces the risks relating to payment performance.

Food sector: Risk level: Medium. The greatest risk for food producers is the rise in production costs, due to heavy winter conditions since the beginning of 2015. Small and medium size producers, in particular have been negatively affected by the increases in costs.

Construction sector: Risk level: Very high. The Central Bank’s sharp interest rate hike at the beginning of 2014, slower economic activity and rising inflation have led to a decline in demand in the housing segment. Low borrowing costs and stability in the labor market, which were among the most important factors fueling the home sales in the past, may be less supportive of the housing segment in the upcoming period.


In its most recent Panorama economic publication, global credit insurer Coface reviews 14 key sectors in North America, Emerging Asia and Europe. The Panorama also takes a detailed look at the pharmaceuticals industry in Europe.The year-end shows a clear improvement in the North American sector risk. After a short-lived downturn due to the crippling winter conditions in the first quarter, the United States has resumed solid and balanced growth, which is forecast at 2.0% in 2014 and 2.5% in 2015. The favorable economic conditions, along with high company profits and the recent fall in oil prices, have especially benefitted three sectors:

  • Chemicals

The chemicals section in North American stands out favorably compared to Western Europe, where the recovery is sluggish, and to emerging Asia, where the outlook remains fragile. Industrial production in North America increased by 3.2% in the third quarter of 2014 compared to the previous year, supported by strong activity in the sector’s two major markets – automotive and construction. Automotive sales were up 1.4% in the first 10 months of the year, and activity and prices are up on the construction side, although still without reaching pre-crisis levels.

  • Transportation

Encouraged by rising global growth this year, the first since 2010, and the expected acceleration in international trade in 2015, the transportation sector has recorded solid performances. In Europe, air freight has suffered from the effects of the Russian embargo on trade exchanges and strong competition from low-cost airlines, while in North America the sector has benefitted from the positive effects of past restructuring. Even though growth in North America was only 2.8% at the end of September[1], companies there are more profitable than in Europe. In addition, booming growth in the United States has contributed to the resurgence of demand in business and in freight.

  • Textiles / Clothing

The growth in this sector seems to have stabilized in North America, at around 2% annually, with abundant supply and steady demand. Cotton harvests in this region, which is the third largest global producer, could reach 2012-2013 levels with an expected rise of 24% in volume to reach 3.5 million tons[2]. Due to the resilience of American employment and consumer spending, the demand momentum in this sector is relatively favorable compared to Europe.

Warning for the distribution sector in Western Europe

The weak recovery in Western Europe and the unresolved overcapacity issues in the sectors connected to infrastructure investment in emerging countries in Asia have led Coface to leave its sector risk assessments unchanged for these regions.

sector 1214

Sectorial Risk Assessment


However, one sector is now being watched carefully — the distribution sector in Western Europe, which is considered for the moment as a “medium risk.” In contrast to emerging countries in Asia and to North America, where the sector is classified under “low risk”, the prolonged sluggishness of consumer spending in Europe, combined with the export ban on certain foodstuffs to Russia, are adversely affecting distributors’ margins and are resulting in downward pressure on prices.

[1] Source: RPK, IATA

[2] Source: ICAC


Posted by Buck Droppa on November 26, 2014
Posted in Country risk and economic studies 

A slow recovery but a recovery nonetheless in the Eurozone, political and financial instability in large emerging countries.

Read the full Panorama


World growth recovering, slowly but surely

The world economy has entered into a confirmed, but slow and uneven, recovery phase. Several factors explain the laborious nature of the post-crisis upturn. These include high levels of public and private debt, a credit dynamic below pre-crisis rates, a new risk of deflation in the eurozone and weakened long-term confidence amongst the economic players.

Coface forecasts a global growth of 2.8% for 2014, a rise of +0.1 points compared to 2013. This is the first increase since 2010, although its level remains below the pre-crisis growth levels (between 4 and 4.5% in 2006 and 2007). The advanced economies have become the main driver of this acceleration (accounting for 1.6%, which is +0.3 points higher than in 2013), whereas emerging countries have registered a slowdown of an equivalent size (4.3%, down by -0.3 points). 2015 will see the overall acceleration gradually continue, with global growth of 3.2%.

The country risk map that Coface is currently updating is in line with this rebalancing of growth. The majority of the assessments reviewed upwards concern advanced countries. Emerging countries represent all the assessments downgraded by Coface this quarter.

In the eurozone, despite disappointments, the country risks continue to improve

While, after an external shock in the first quarter, the United States has revived with solid growth (forecast at 2% in 2014), the European landscape is distinguished by a sharp disparity with regards to recovery. Its growth is revised slightly downwards, to 0.9%, due to less favorable outlooks for Germany (1.6%), France (0.4%) and Italy (-0.2%). In the eurozone we observe a fall in business confidence during the second quarter, fuelled by geopolitical tension in the Ukraine and deflation risks.

In Spain, the virtuous dynamic of the recovery is confirmed, with growth forecast at 1.2% for 2014 and 1.7% for 2015. The resurgence of domestic demand, the improvement in the financial situation of companies, dynamic exports and the fall in insolvencies (down by 30% at the end of June over one year) fuel the drop in Spanish risks. These improvements have led Coface to raise its B assessment, under positive watch since last June, to A4.

The A3 assessment of the Netherlands (0.7% forecast in 2014) and in Belgium (1% forecast in 2014) is now accompanied by a positive watch. In both countries, growth has returned, buoyed by exports, and we observe an upturn in investment and a fall in company insolvencies.

Faced with the challenges of macro-financial and political shocks, Russia, Turkey and Venezuela are downgraded

In reaction to recent changes in the political and social context and taking into account their impact on corporate activity, Coface has announced three major downgrades.

The country assessment for Russia is downgraded to C. The Ukrainian crisis has certainly had a negative impact on growth (0% forecast in 2014), principally due to the fall in investments and deceleration in consumption. Moreover, investment difficulties were already perceptible in 2013 and illustrate the Russian economic players’ lack of confidence in the business climate. The large outflows of capital from Russia since 2008 are testament to this. We also take into account the fact that Russian companies are massively indebted in terms of currencies. With limited access to markets due to the current sanctions and some affected by the fall in the rouble, companies are facing major repayment deadlines in a year from now.

Turkey has had its assessment downgraded to B. While the economic activity in Turkey is showing a certain resilience (3.3% forecast in 2014), on the corporate side, foreign debt remains high, which increases exposure to foreign exchange risk. The lira has proved to be very volatile and sensitive to changes in the Fed’s monetary policy. Indeed, Coface’s payment experience concerning Turkish companies has sharply deteriorated. On a political level, growing tensions on the country’s borders are likely to affect internal stability.

Venezuela is now placed in D category. The country has sunk into recession (-2.5%) and hyperinflation (64% in 2014), fuelled by a shortage of goods and against the backdrop of political and social tensions. The risk of nationalisation and, above all, the rationing of imports and control of prices and margins, have cast a shadow over a very difficult business environment for companies.

The Coface Country risk assessment measures the average risk of non-payment by companies in a country in the context of their short term commercial transactions. Sovereign debt is not included in this. In fthis assessment process, Coface gathers the economic, political and financial outlooks for the country, Coface’s payment experience and the business environment of the country.

The country risk and business environment assessments are based on a scale with 7 levels: A1, A2, A3, A4, B, C, and D and can be combined with watch categories.

Assessments either upgraded or removed from negative watch list or placed on positive watch list


Assessments either downgraded or removed from positive watch list or placed on negative watch list


Global trade remains stricken by the adverse effects of the crisis

Since the economic crisis of 2008-2009, the rate of growth of international trade has been slowing down, affected first and foremost by a long-term fall in global growth. This structural and temporary slowdown in the major emerging countries is especially damaging for global trade, in that its scale is closely linked to the boom in their exports (multiplied by a factor of 6 in 20 years, against a factor of 2.2 for the advanced economies). Added to this, the second negative effect of the crisis is the fall in demand for raw materials. Among the main emerging countries, those whose annual export growth is the strongest as at mid-2014 (Poland, Romania, India, Philippines), mainly sell manufactured goods and not raw materials.

The disappointing export performance of a number of countries coincides with an increase in protectionism[1], which is hindering trade. In total, Argentina, Russia and India each introduced over 250 measures[2] between July 2008 and July 2014, almost twice as many as in the United States, Germany, France, the United Kingdom and Italy. Russia, with regard to the recent measures introduced by its government to ban the import of agri-food products from the European Union, the United States, Canada and Australia, becomes the most protectionist country.

A global trend to include emerging countries in the value chain

The effects of the crisis on trade have been highlighted by the increasing importance, since the 2000s, attached to internalizing production processes. It is precisely this channel which caused the 2008-2009 crisis to spread quickly to global trade. The trade in intermediate goods[3], which is at the very heart of global value chains (GVC), fell by 25% in 2009. Still limited (with the exception of Asia), intra-regional trade has not been able to offset the effects of the crisis despite the proliferation of agreements to liberalize trade. Intra-regional trade as a proportion of total exports is still low in most emerging regions – 11% for Africa, 20% for Latin America and 15% for the CIS.

Nonetheless, the apparent resilience of GVCs to the crisis would suggest favorable medium-term growth prospects. The scope for improvement seems considerable, thanks mainly to the integration of emerging countries into these global chains. As an example, this is the case for Africa. The rise of the Asian middle classes is likely to favor the establishment of companies in Africa where production costs (such as in the textiles and clothing sector) are heavily dependent on labour costs.

The forecast: limited but less volatile growth in trade

Coface is nonetheless anticipating an acceleration in the global growth of trade to around 5% in 2015 – a higher level than that seen in the last two years.

“The fall in potential growth in the main developed and emerging economies makes it unlikely that we will see growth in international trade return to its pre-crisis levels. However the tentative acceleration in global growth and the continuing internationalisation of value chains would suggest that the growth in global trade will increase in 2015”, explained Julien Marcilly, Head of Country Risk.

In addition to the rate of growth, the structure of trade will also experience some upheaval. The expansion of the service sector in the advanced and emerging economies is likely to lead to similar expansion in trade. The speed of this process will largely depend on the rate at which technology develops. This development has one major advantage: it is likely to make the fluctuations in global trade less marked, given that variations in the service sector are generally less pronounced than those in industry.

These forecasts lead Coface to assume that, over the next few years, the growth in global trade will be more modest, but also less volatile.

[1]Protectionism involves a state policy aimed at protecting that state’s companies against competition from foreign companies. Protectionist measures, as defined by the World Bank, can take various forms including: safeguard or antidumping measures, grants and compensatory measures.

[2]Source: GTA

[3]Intermediate goods: goods that are imported, processed and re-exported.

In its latest country assessment, Coface has ranked the United Arab Emirates (UAE) A3 , and expects the country’s economy to grow by around 5% in 2014. The business climate in the UAE has also been assessed at A3, taking into account a number of factors such as the availability of company reports, reliability and the effectiveness of the legal system. After contracting by around 5% in 2009, the UAE’s economy has recovered gradually to register solid growth rates, with 5.2% recorded in 2013.

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China: Carrot-and-Stick

Posted by Buck Droppa on October 7, 2014
Posted in Country risk and economic studies 

This Panorama presents the different challenges the Chinese economy is going to face.

As domestic demand remains subdued, the property market continues to be sluggish and over-capacity in some sectors remains, it is unlikely that China will achieve its 7.5% growth target. Coface expects the GDP growth of China to reach 7.4% in 2014, given more policy support in sight.

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In its most recent Panorama, Coface reviews 14 key sectors in North America, Emerging Asia and Europe. What are the main trends?

This Panorama also takes a detailed look at the European airlines industry. At a time when it appears vital to capture the growth potential in Asia, European airlines are stumbling due to aggressive competition from low cost operators and airlines from the Gulf. Currently, they are among the least profitable in the world. Faced with these new constraints, what changes are conceivable?

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The Russian Economy: How Weak?

Posted by Buck Droppa on October 7, 2014
Posted in Country risk and economic studiesRisky Business 

In its latest country report, Coface provides an in-depth analysis of the economic situation in Russia.

The Ukrainian crisis has occurred in a context of significant weakening of the Russian economy. In 2013, Russian growth fell to 1.3% after an average GDP progression of 4.8% between 2000 and 2011. The slowdown that Russia is experiencing is not excessively different from that observed in the other BRICS. A number of the major emerging countries have recently been characterized by marked deceleration in investment and, to a lesser extent, consumption.

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