92 Highs and Lows of Sector Risk Q1 2016

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Trading safely also means making sure your clients pay you on time. It so happens that various risks lurk behind something as simple as getting paid. Some are linked to the country where your client is located. Others stem from the sector in which a company operates. Then you have the business’s own performance. To provide concrete knowledge of a complex world, the Economic Research team at Euler Hermes updates its sector risk ratings  every three months. .
We analyze risks in 16 business sectors across the globe. What are the changes we have seen in non-payment risk around the world over the past quarter?
92 industries worldwide have improved or worsened in the first quarter of the year. The division between better or worse is, however, far from even. [more]
We counted 70 downgrades and 22 upgrades. You can find all of them on a revamped global sector risk map.
The recent downgrades are linked to 5 pain points – while many upgrades emanate from Europe.
A note on methodology: Euler Hermes’s assessment measures the risk of non-payment in a sector in a country (“industry”) and takes into account four key components: demand, profitability, financing, and business environment in the country/sector at stake.

One Smile: More retail sales in Europe, anyone?
Out-of-steam and maligned as the old world may be, it generated some positive surprises at the beginning of this year. There was a marked improvement in the Construction, Auto, Transport, Retail and Pharma sectors in peripheral Europe. Countries like the Czech Republic, Croatia, Ireland, and the Baltic States led the positive trend. Italy, Spain, and even Russia’s Food sector showed some upward mobility. Favorable monetary policy and rising confidence, it seems, start to bear fruit and consumer related sectors are back into positive territory.

Five frowns: Metal, Energy, Middle- East, Latin America and Asia
As for the 70 downgrades the team of sector advisors found, these – again - have a lot to do with the low-for-longer commodity prices and their impact on emerging markets.
Take a look at the global Sector Risk Map and you can tell the 5 main victims (or suspects) right away.
Metal producers are burdened by over production and flat global demand (2016 forecast). Energy companies deal with a price per barrel that refuses to break the threshold of 40USD per barrel.
Where is this happening? Everywhere. The metal sector, for example, is now rated Sensitive or High Risk in 65 out of 72 countries. But still, the impact is mostly felt across Africa and the Middle East, and in Latin America. Low oil prices weigh on revenues for the entire Energy sector leading to 13 downgrades worldwide. 6 of these were recorded in Latin American countries, and 5 in the Middle East.
The Persian Gulf States, for example, are no longer spared. 5 downgrades were registered in the energy sector in GCC countries. Now the negative impact of low oil prices spreads across industries and creates a liquidity problem for the Machinery & equipment sector, downgraded to sensitive risk in 4 countries.
Perhaps the planned Saudi mega sovereign wealth fund, which could be worth up to USD 2trn and the possible sale of 5% of the colossal Saudi Aramco, make sense more than the record-breaking skyscrapers still being proposed and delivered across the region.
But things are not much rosier for oil and gas businesses in the world’s richest country. U.S. crude stockpiles have risen to record levels in 2016: 520 million barrels (+30% in one year). Plummet in operating margins (cumulative loss up to -USD10bn in FY 2015) compounds the debt to equity ratio across the U.S. oil sector.
As for Latin America, again the Energy sector struggles. State-owned enterprises, until not long ago the proud engines of growth, are now sputtering: 5 downgrades were recorded across the region. The same number applies to the Metal sector: Brazil exemplifies how overcapacity also stems from outlet sectors difficulties.
There are fresh problems brewing across the Asia Pacific region in some high-end industries such as computer components and IT services. Paper, textile, and construction are also impacted. The result is that service hubs such as Taiwan, Malaysia, Hong Kong and Singapore, weighed down by China’s readjustment, were one of the epicenters of downgrades for this quarter.
So where does this leave emerging and commodity markets? Hanging midair, waiting for the gods of metals and oil (or OPEC) to act.
Ludovic Subran
Chief Economist
Euler Hermes
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