沧海露珠

The need for the new "business climate" rating

In assessing country risk, most ratings consider a country's overall liquidity and solvency. Coface has always been distinguished for basing risk assessments on its own microeconomic experience. Besides the macro-financial and macro-political outlooks, payment experience on companies is thus included among the factors considered in determining Coface @ratings for countries and sectors. To improve the accuracy of corporate credit risk assessments, however, Coface has sought to give greater consideration to the business environment. In assessing credit risks it is indeed equally important to know whether a company's accounts faithfully reflect its actual financial situation and whether the legal system can provide fair and efficient recourse in case of payment default. By making a new business climate rating available to everyone from 2008, Coface wishes to share its experience in measuring the true business climate in all countries worldwide. The new rating is underpinned by the Coface worldwide network and expertise rooted in its experience with risk underwriting, business information, and receivables management.

How Coface developed the new rating

The new rating is intended to assess overall business environment quality in a country. More specifically, it reflects whether corporate financial information is available and reliable, whether the legal system provides fair and efficient creditor protection, and whether a country's institutional framework is good for companies.

Like Country @ratings, the new ratings fall on a scale with seven levels in increasing order of risk where A1 represents least risk:

A1, A2, A3, A4, B, C, D.

The business climate rating comprises two modules

1/ The core of the new rating rests on the Coface experience with the quality of information available on companies and the legal protection given to creditors. The module was developed based on the responses by Coface entities worldwide to a questionnaire covering:

- the quality and availability of financial information (legal framework for financial statement publication, availability, accessibility, and reliability of corporate accounts, and so on)

- creditor protection and debt collection efficiency (rating grids for summary legal procedures, ordinary legal procedure, court costs, bankruptcy procedures, for example)

The above ratings may be compared to other sources like the "institutional profiles" database maintained by the French Ministry of Finance and validated by an internal committee to ensure homogeneous and consistent responses.

2/ The above ratings based on the Coface experience is supplemented by a module on institutional framework quality. This module reflects the quality of institutions whose strengths and weaknesses can affect companies. The parameters considered include, for example, public service effectiveness (government, education, health, infrastructures), regulatory quality, respect for the law, and extent of corruption. The calculations are bases on data from external sources notably including:

- the government effectiveness indicator maintained by the World Bank Institute based on the quality of public services provided and on civil service efficiency

- the HDI, or human development index, a composite statistical index created by the United Nations to rank countries according to their qualitative development based on the average of three quantitative indices reflecting respectively health/life expectancy, knowledge or education level, and standard of living

- an infrastructure quality index (energy, transport, telecommunications) published by the World Economic Forum in its "Global competitiveness report"

- a regulatory quality indicator (World Bank Institute) that reflects the possible existence of policies contrary to the smooth running of a market economy (like prices controls or poor bank oversight), and the apparent influence of local regulations on foreign trade and the business climate.

- a rule of law indicator (World Bank Institute) reflecting the confidence of economic agents in their judicial system, legal system efficiency and transparency.

- an indicator of corruption (World Bank Institute) reflects the apparent extent of corruption, defined as misappropriation of public property for private purposes.

The above indicators and indices are generally based on information derived from company surveys.

The Coface Business Climate @ratings for 150 countries

A1	BUSINESS CLIMATE	Country @rating		A2	BUSINESS CLIMATE	Country @rating
Germany	A1	A1		Chile	A2	A2
Australia	A1	A1		Cyprus	A2	A2
Austria	A1	A1		Czech Republic	A2	A2
Belgium	A1	A1		Estonia	A2	A2
Canada	A1	A1		Greece	A2	A2
Denmark	A1	A1		Hong Kong	A2	A1
Finland	A1	A1		Hungary	A2	A3
France	A1	A1		Israel	A2	A4
Ireland	A1	A1		Italy	A2	A2
Japan	A1	A1		Luxembourg	A2	A1
Netherlands	A1	A1		Malta	A2	A2
New Zealand	A1	A1		Portugal	A2	A2
Norway	A1	A1		Slovakia	A2	A3
Singapore	A1	A1		Slovenia	A2	A1
Spain	A1	A1		South Korea	A2	A2
Sweden	A1	A1		Taiwan	A2	A1
Switzerland	A1	A1
United Kingdom	A1	A1
United States	A1	A1
A3	BUSINESS CLIMATE	Country @rating		A4	BUSINESS CLIMATE	Country @rating
South Africa	A3	A3		Brazil	A4	A4
Bahrain	A3	A3		Bulgaria	A4	A4
Botswana	A3	A2		India	A4	A3
Costa Rica	A3	A4		Jordan	A4	B
Croatia	A3	A4		Morocco	A4	A4
Kuwait	A3	A2		Mexico	A4	A3
Latvia	A3	A3		Namibia	A4	A3
Lithuania	A3	A3		Oman	A4	A3
Malaysia	A3	A2		Panama	A4	A4
Mauritius	A3	A3		Romania	A4	A4
Poland	A3	A3		Trinidad and Tobago	A4	A3
Qatar	A3	A2		Tunisia	A4	A4
Thailand	A3	A3		Turkey	A4	B
United Arab Emirates	A3	A2		Uruguay	A4	B

C	BUSINESS CLIMATE	Country @rating		D	BUSINESS CLIMATE	Country @rating
Albania	C	D		Angola	D	C
Azerbaijan	C	C		Bangladesh	D	C
Benin	C	B		Belarus	D	D
Bolivia	C	D		Burundi	D	D
Bosnia Herzegovina	C	D		Cambodia	D	D
Burkina Faso	C	B		Central African Republic	D	D
Cameroon	C	B		Chad	D	D
Ecuador	C	C		Congo	D	C
Gabon	C	B		Cuba	D	D
Georgia	C	C		Democratic Republic of Congo	D	D
Ghana	C	C		Djibouti	D	C
Guatemala	C	B		Ethiopia	D	C
Honduras	C	C		Guinea	D	D
Indonesia	C	B		Haiti	D	D
Iran	C	D		Iraq	D	D
Ivory Coast	C	D		Kyrgyzstan	D	D
Kenya	C	C		Laos	D	D
Lesotho	C	B		Libya	D	C
Macedonia	C	C		Malawi	D	D
Madagascar	C	C		Mozambique	D	B
Mali	C	B		Myanmar	D	D
Mauritania	C	C		Nepal	D	D
Moldova	C	D		Niger	D	C
Mongolia	C	C		Nigeria	D	D
Nicaragua	C	D		Papua New Guinea	D	B
Pakistan	C	C		Rwanda	D	D
Paraguay	C	C		Sao Tome	D	C
Serbia	C	C		Sierra Leone	D	D
Syria	C	C		Sudan	D	D
Uganda	C	C		Tanzania	D	B
Ukraine	C	C		Togo	D	C
Venezuela	C	C		Turkmenistan	D	D
Vietnam	C	B		Uzbekistan	D	D
Zambia	C	C		Yemen	D	C
				Zimbabwe	D	D

Business Climate @ratings (BC) compared with Country @ratings

In most cases — 93 countries, or 62 per cent of the 150 countries rated — the Business Climate and Country @ratings are identical

For 39 countries, or 26 per cent of the 150 countries, Coface rated the Business Climate (BC) lower than the Country. This often concerns African or Middle Eastern countries, which in most cases enjoy real financial solidity and dynamic economies linked to rising raw material prices. Their business environment may nonetheless be sub-par (uneven application of the law that lends uncertainty to debt collection, lack of transparency of corporate accounts, widespread corruption).The good performance of these economies underpinned by natural-resource export earnings may sometimes even have a lulling-effect on implementing reforms intended to strengthen institutions. Good economic performance thus does not always contribute to improving the business environment. The case of India, with a BC @rating a notch below the Country @rating, and especially that of China, with a BC @rating two notches below the Country @rating, are characterised by a persistent gap between their booming economies and their deficient legal and institutional environments for companies. In certain countries with an overall A1 Country @rating, like Luxembourg and Hong Kong, the business climate only warrants an A2 @rating due to difficulties in obtaining financial information on companies.

For 17 countries, 11 per cent of the 150 countries involved, Coface rated the Business Climate higher than the Country. This concerns countries with relatively satisfactory business environments but which present financial weaknesses often linked to large current account deficits (Hungary, Turkey, Croatia, Slovakia) or relatively high political risks — in the more classic sense of the term (Lebanon, Israel, Bosnia).

The "BRIC" country example: Brazil, Russia, India, China

Brazil's strengths (BC@rating: A4) include the ready availability of business information, a satisfactory legal environment for collection purposes, a very capable workforce, and acceptable regulatory quality for business. Deficient infrastructure remains, however, the country's main weakness.

In India (BC@rating: A4), financial information is available for large companies but not for the smallest companies. Consolidated accounts are also hard to obtain for groups. The legal environment is satisfactory although not always favourable to creditors. Procedures are drawn out. Infrastructure deficiencies remain the main weaknesses for companies.

In China (BC@rating: B) financial information is difficult too obtain and often opaque. The reliability of accounts is poor in some cases. The protection provided by the legal environment is particularly limited for foreign creditors. Infrastructure is relatively satisfactory and the workforce relatively well trained.

In Russia (BC@rating: B), the general skills level is also a strength. The civil service is relatively efficient but the rule of law and the legal environment offer little security to creditors. Poor law enforcement undermines the business climate. Transparency as regards financial information and ownership remains very inadequate.

Business climate rating definition

The new rating is intended to assess overall business environment quality in a country. More specifically, it reflects whether corporate financial information is available and reliable, whether the legal system provides fair and efficient creditor protection, and whether a country's institutional framework is favourable to intercompany transactions.