Credit Curtain or Just a Cover-Up?
Any business activity outcome is predetermined by country risks. “But that’s not fair!”- you will say. Unfair, but it is reality. On the other hand, had there been no risks, there would be nothing to insure.
The credit rating of the country where the borrower operates is the first thing analyzed by foreign financial and insurance organizations when determining creditworthiness of potential customers. Indeed, should one confide in a company from a state characterized by political instability, corruption and growing external debt?!
For example, the experts of Coface, a French ECA, believe the above risks are “traditional” for Ukraine and other CIS countries. Coface representatives emphasized this in their presentation made during the Country Risk 2011 Conference recently held in Paris.
All these factors affect Ukraine’s credit ratings within the systems of different ECAs. For example, during the global crisis period, taking into account a number of factors and risks, virtually all credit agencies significantly downgraded Ukraine’s rating which was below satisfactory level even before the market collapse.
While Russia’s rating was upgraded as early as in January of 2010, and the rating of Kazakhstan was not reduced at all, Ukraine’s reputation suffered the most. Our national rating began to increase moderately only in the second half of 2010 resulting in higher volumes of insurance of trade transactions with Ukrainian companies.
The increase of Ukraine’s rating was driven by a number of factors, the first and foremost of them being the political stabilization in the country. However, there is a variety of aspects preventing upgrades of Ukraine’s rating to an estimable level that would allow Ukrainian traders to obtain more favorable contract terms and conditions and attract significant foreign trade finance at reasonable interest rates. The primary obstacle is non-transparency of Ukrainian companies’ financial activities which is believed to be another risk traditional for our region.
“Before the crisis, we insured a great deal of loans which resulted in significant growth of Ukrainian companies’ external debt and, as as consequence, in failure of the whole system”, – admitted Yves Zlotowsky, Cofas France Chief Economist. Mr. Zlotowsky emphasized that one of the main factors critical for Ukraine’s rating was the inefficient state governance system affecting the image of Ukraine in the eyes of foreign investors in the long-term perspective. Still, it should be pointed out that some improvements in the system have been introduced already in the second half of 2010 in comparison with the situation observed in 2009. Furthermore, the volumes of direct foreign investments in Ukraine have also been increasing gradually lately.
So, the question is how could a Ukrainian entity open this credit curtain and obtain required limit and payment deferral terms in the situation when country’s rating is rather low?…
Full version of the article featuring comments of such ECAs as EDC, EXIMBANKA SR, EKF, Finnvera, SACE, and ONDD is available in the second issue of IBOBSERVER