Historic Downgrade Action Amid Intensifying Global Economic Stress

Credit insurer Euler Hermes said it has taken a historic move to downgrade 126 risk sectors across the world as COVID-19 continues to impact the global economy.

The firm said that already weakened by numerous factors of uncertainty (Brexit, trade tensions, electoral deadlines), the global economy now faces a new challenge: the Covid-19 pandemic.

“Not only do we witness a heavy human cost, it is also taking a toll on businesses around the world, disrupting supply chains and business operations, affecting household and market confidence, and severely limiting international trade,” said the insurer.

It warned global economic growth in 2020 will register a strong slowdown, reaching only +0.5% (+2.5% in 2019). In parallel, international trade will contract this year at -4.5%. As a result, the risk of non-payments will rise significantly.

Euler Hermes said it now expects insolvencies to increase by +14% in 2020. “In this weak international landscape, numerous countries and sectors will be hit hard,” it cautioned.

Every quarter, Euler Hermes publishes its country and sector risk ratings to measure the development of non-payment risk in trade receivables. It monitors 242 countries and 18 sectors every quarter through continuous tracking of 40 short-term and long-term economic and financial indicators.

In the first quarter of 2020, Euler Hermes lowered the grade of 18 countries: Ecuador, Thailand, Indonesia, lndia, United Arab Emirates, Kuwait, Morocco, Kenya, Ghana, Mauritius, Czech Republic, Poland, Romania, Ireland, Slovakia, and Lithuania.

“This list includes both developed and developing economies,” it added. “For instance, Brazil is paying dearly in this global economic and health crisis, despite initial hopes that dynamic reforms would accelerate growth. Similarly, Japan, which was already fragile at the start of 2020 following several shocks last autumn, now sees its weaknesses made worse with the Covid-19 pandemic. India is also on the list: The country was already facing numerous structural and cyclical challenges, and these are now being amplified by the current situation.”

“The visible and potential consequences of the Covid-19 pandemic are integrated into our country risk analysis,” explained Ludovic Subran, Chief Economist of Euler Hermes and Allianz. “We are still paying attention to the situation of other developed countries, notably France, Germany, Spain, and the United States. These countries have the necessary means to protect their businesses, but their situation could rapidly become more complicated should their measures of isolation and the freezing of their economies last longer.”

Euler Hermes described its move to downgrade 126 sector risk ratings across the world, as “a new historic level, never seen before”.

The previous record was in Q1 2016, which saw a total of 70 sectors risk ratings downgraded.

“It is important to highlight that in 60% of cases, these changes have led to the sector rating going from moderate risk to high risk,” It added. “These two signs prove that the global economy and businesses are going through an unprecedented, extremely complex and uncertain time.”