Country risk ratings: Business environment risk replaces commercial risk

A new, more precise risk assessment: Credendo replaces systemic commercial risk with business environment risk

For export transactions, Credendo provides ratings for political risk and for systemic commercial risk specific to each country. The systemic commercial risk classification system has meant that country risk factors that solely affect the risk of default of the debtors can be differentiated, and thus excludes political risks. Until now, countries have been rated on a risk scale ranging from A to C. However, experience gained over time has shown that a granularity limited to three levels may be an obstacle in sufficiently differentiating countries, particularly those rated in the highest category, C. At year-end 2019, more than 40% of countries were listed in category C, primarily developing countries. This share then took on unprecedented proportions in 2020 when it soared to 95% due to the Covid-19 global economic shock. Such a situation shows that when the world or a region is hit by a major shock (e.g. the 2008-2009 global economic and financial crisis or the sharp oil price drop in 2014-2015), no distinction can be made between countries before and after the shock. A resilient country rated C is indeed likely to stay in category C, whereas a country rated C that is hit to a greater extent cannot be downgraded to a weaker rating. Hence it became necessary to upgrade the systemic commercial risk system by moving to a broader system and risk scale. However, during the transition period, Credendo will continue to publish the “systemic commercial risk classification” in the country summary table. The modifications shall be implemented gradually within the different Group entities.

Business environment risk with a broader seven-grade scale 

Credendo is officially replacing “systemic commercial risk” with the launch of a “business environment risk” classification, which targets cross-border transactions. The change goes beyond a mere tweaking of the name: the new risk scale contains seven categories (the same as for political risk) ranging from A to G, with A being the lowest risk and G the highest. This upgrade to a more granular system will allow for a more precise differentiation of risk between countries. 

Maintaining structure, recalibrating indicators

The structure will be similar, as the business environment risk will still be composed of three indicator types: economic and financial indicators (e.g. GDP growth, currency depreciation, credit conditions); indicators reflecting the country's payment experience due to debtor default; and indicators characterising the institutional context in which local companies operate (e.g. corruption and quality of the legal system). However, the new risk scale implies a recalibration of risk indicators in the final rating. As for rating changes, classifications will be updated regularly, potentially with very swift reviews if necessary, particularly when a global crisis, such as the Covid-19 pandemic, occurs.