Four Global Credit Threats You Can't Ignore
There’s a saying in popular culture that all politics is local. However in business, global developments often overpower local trends, with major financial consequences.
From the uncertainty surrounding Brexit to the downturn in China, globalization now means that we are all interconnected, and neither your supply chain nor your customers can avoid the fallout of a worldwide financial issue.
You may not be able to avoid the impact of macroeconomic threats, but you can arm yourself with knowledge. By understanding the economic issues that are driving global credit risk, you can spot financial distress among portfolio companies sooner, and plot the right course of action.
With that in mind, here are four global risks to be aware of today.
Brexit beats the pound down to a new low
The UK’s decision to leave the EU sent shockwaves beyond the continent, and continues to create financial headaches. In the wake of Brexit, one of the biggest new threats to global creditors of British businesses is the pound’s weakness.
At the time of writing, the pound to dollar exchange rate is $1.22, down from a year-to-date high of $1.54. Less buying power erodes the profitability of global companies, and highly leveraged UK customers and partners could struggle to meet their obligations.
Beyond the pound’s weakness, Brexit has eroded confidence in the rest of Europe, threatening many of the major projects that non-EU firms have invested in. For instance, Germany’s METRIC mobility solutions AG recently filed for bankruptcy protection, shortly after citing unexpected budget deviations and delays to large-scale projects and contract awards, which caused liquidity to slow.
Learn which red flags and credit-monitoring tools help to warn creditors that action was needed. Read the bankruptcy analysis of METRIC mobility solutions AG.
All eyes on China as the slowdown continues
On the other side of the world, China has been grappling with lower growth. The trend continued during the third quarter of 2016 as the nation’s economic slowdown tightened its grip on businesses, and record indebtedness has pushed up debt and defaults.
Slower forecasted growth for the Chinese economy has far-reaching impacts. Hanjin Shipping Co's recent bankruptcy was just one fallout from the plunge in commodities, in the wake of China's deceleration.
And when it comes to China, things are made much harder for creditors by the mixed messages and opaque financial information coming out of the country. Conflicting data has clouded China’s economic outlook. Official data released on October 14th showed that the nation’s factory output prices finally rose in September for the first time in five years. However, just a day earlier, stocks fell after a negative trade report for the same month.
With uncertainty surrounding the Chinese economy, use every tool at your disposal to monitor global counterparties more closely.
Learn which red flags and credit-monitoring tools help to warn creditors that action was needed. Read the bankruptcy analysis of Hanjin Shipping co., Ltd.
Commodity squeeze sees Latin American defaults soar
Closer to home, Latin America is a prime example of how anemic global growth can cause devastating consequences. Corporate default rates have risen to a six-year high in the region, according to Moody’s, and they’ll only climb higher.
While the low price of oil has had an impact, a global economic slowdown has caused demand for key commodities to drop dramatically, and prices plunge. The resulting commodities-led recession in emerging markets like Brazil has been far-reaching, and corporate credit defaults have skyrocketed.
The $19 billion bankruptcy of Brazilian wireless company OI in June of this year, the largest bankruptcy in the country’s history, is emblematic. After rising 55 percent last year, bankruptcy filings in Brazil have accelerated. The situation doesn’t seem likely to reverse soon. Food for thought if you do business in the region.
Record debt-to-GDP ratio increases global risk
The IMF issued a report earlier in October that highlights 3 major risks to the global financial system. All stem from a single source: worldwide debt as a % of GDP has reached historic levels, and isn’t likely to abate anytime soon.
In particular, the IMF report highlighted non-performing loans on the books of European banks, overleveraged emerging markets, and other “cross-country” structural risks resulting from record indebtedness around the world. Each has the potential to derail the global economy, and contributes to a precarious outlook of rising international credit risk, defaults and business bankruptcy.
Targeting Global Credit Risk
Whether you’re thousands of miles away from these challenges or live next door, global financial risks have the power to unsettle you and your customers. Thankfully, CreditRiskMonitor can help.
Take a closer look at your credit risk outside of North America. Contact us to for a personalized risk assessment, or to upgrade your subscription.
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