Rating Export Risk

By Short, Christopher | Business Credit, June 2005 | Go to article overview

Rating Export Risk


Short, Christopher, Business Credit


The ability for a company to be in touch with its potential and current markets, particularly in the export arena, means that a number of important factors must be considered to succeed within those markets. One vital area of concern is export risk. Not only do exporters need to make sure they are dealing with creditworthy companies, they also need to understand the overall business environment in the countries in which they trade.

This article focuses on identifying and evaluating such risk factors, including:

* Political and institutional instability, which is a reality for many businesses operating overseas--for example, the instability within Iraq is one of the factors influencing exports to the Middle Eastern market

* Growth vulnerability needs to be assessed, so that as companies identify opportunities within a market, they can effectively hedge against the vulnerability of sudden growth decline

* Foreign currency liquidity issues

* Sovereign financial vulnerability

* External over-indebtedness

* Payment behavior of client companies

* Fragility of banking sectors

2005 Assessment And Outlook

Applying the risk factors above to the current world economic situation, we have seen the economic recovery that materialized in 2004 remain vibrant and even improve in 2005. As a matter of fact, the risk index for some emerging countries is at a historic low, due to strong Chinese and American demand, high raw material prices and low risk premiums in financial markets. These exceptionally good conditions are expected to gradually wane by the end of 2005. The tightening of American monetary policy has spurred tension in some emerging-country financial markets, causing a notable increase in spreads and a decline in stock prices.

For industrialized countries, the results are mixed. Companies in the euro zone are still suffering from a strong euro and sluggish domestic demand, while in North America the economic environment has remained strong. In the United States, economic activity is still robust even though household consumption, which represents 70 percent of the GDP, and spending on housing are expected to lose momentum amid rising prices. Exports should benefit from the dollar's weakness, although to date, deficits remain at record highs. This situation will sustain active company investment and companies should continue to post good profitability. They have recovered some control over their costs, a welcome development in an atmosphere of increasing prices. Companies that have reduced their debt will be better able to withstand the higher interest rates to come.

In Asia, the Chinese economy has remained dynamic, while Japan, which verged on a recession at the end of 2004, has resumed weak growth. The whole region continues to be very dependent on China.

In the Near and Middle East, daily oil price increases have continued to boost the economic and financial situation of oil-exporting countries. In other regional countries, the uptick in tourism and intra-regional exports are behind the recovery. But since the assassination of the former Lebanese prime minister in February, the political crisis gripping Lebanon and Syria has further unsettled an already unstable area.

Focus On Latin America

Looking more closely at Latin America, the risk index for the region has been improving, due to healthy export trade combined with improved political stability, stringent budget and monetary policies, and renewed confidence on the part of lenders and investors. Some countries are still vulnerable to a sudden increase in U.S. interest rates or to the vagaries of their domestic politics. …

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