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Trade Credit Risk in Turbulent Times RIMS Annual Meeting Boston, MA April 28, 2010 Download at: www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ [email protected] ♦ www.iii.org Presentation Outline Global Economic Upheaval Financial Crisis, Credit Market Woes Have Continue to Impact Trade Credit Exchange Rates, Inflation & Interest Rates Influence on Trade Credit Risk Political Risk Apart from Economics, Political Issues Remain Critical Trade Credit Risk: Summary & Outlook Top Business Risks Influencing Trade Credit A Look Ahead 2 Economic Volatility AHA Ha lting Gl ob al lR Recovery i s Underway; Volatility Remains 3 World Economic Outlook: 2010-2011P IMF says growth in emerging and developing economies will outpace advanced ones in 2010/11. 8% 6.3% 65%6.5% 6% 4.2% 4.3% 3.1% 4% 2.6% 2.3% 2.4% 2.4% 2.0% 1.5% 1.9% 2% 1.0% 0% -2% -0.6% -2.4% -4% -3.2% -4.1% -6% -5.2% World Output Advanced Emerging United States Euro Area Japan Economies Economies 2009 2010P 2011P Outlook uncertain: The world economy is recovering from the global crisis better than expected, but activity is reviving at different speeds i n diff erent part s of th e world , accordi ng t o th e IMF . Thi s means trade credit risk will vary regionally and by industry. Sources: IMF, World Economic Outlook; Insurance Information Institute. 4 GDP Growth: Advanced & Emerging Economies vs. World, 1970-2011F Emerging economies GDP Growth (%) (led by China) are expected to grow by 10. 0 World output is forecast to 6. 0% in 2010 grow by 3.9% in 2010, 8.0 following a -0.8% drop in 2009. 606.0 4.0 202.0 0.0 Advanced economies will (2. 0) grow slowly in 2010, dampening energy demand (4.0) 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Advanced economies Emerging and developing economies World Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Ins. Info. Institute. Global Industrial Production Rebounds From a Tailspin; Global Trade Recovering Annualized 3-Month Percent Change 20 15 10 5 0 -5 -10 Global industrial production was -15 down over 25% in early 2009, severelt -20 curtailing global trade, but growing at -25 a 9% clip in late 2009 -30 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Ins. Info. Institute. Merchandise Exports Are Growing at Pre-Crisis Levels Again Annualized % change of 3-month moving average over previous 3- month moving average 75% Advanced economies Emerging economies 50% 25% 0% Global trade crashed during -25% the financial crisis. Seizure of credit markets contributed significantly to the crash. -50% -75% 09 08 07 06 05 09 08 07 06 05 Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Note: data are through November 2009 Source: International Monetary Fund World Economic Outlook January 2010 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv 7 Global Industrial Production and Exports: 2006 to 2011P (Annual Percent Change of 3-Moving Average) Global trade crashed during the financial crisis. Seizure of credit markets contributed significantly to the crash. Source: International Monetary Fund, January 2010; Insurance Information Institute. 8 Exchange Rates, Inflation and Interest Rates PfRPace of Recovery an dGtd Government Monetary and Fiscal Policies IflInfluence E xch ange and dIflti Inflation Rates, Impacting Trade Credit Risk andCd Cost 9 Trade Index Weighted US Dollar Exchange Rate* January 2000 through March 2010 115 Depreciation of dollar after Post-crisis 110 Tech bubble depreciation of dollar and post 9-11 105 100 Dollar appreciates as role as global “reserve 95 currency” affirmed during global financial crisis 90 85 80 75 70 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 00 01 02 03 04 05 06 07 08 09 10 The Global Financial Crisis Produced Significant Exchange Rate Volatility in 2008 and 2009; Despite the Fact that the Crisis Originated in the US, it Was Other Currencies That Weakened *The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. Source: US Federal Reserve, Board of Governors; Insurance Information Institute. Inflation Rates for Largest European Economies & Euro Area, 2008-2011F % Change from Prior Year Inflation is below 1.5% across major European economies and interest rates remain low as a 4.0% % 2008 2009 66 result, obscuring tight conditions 3. in trade credit markets 3.5% 2010F 2010F 3.3% .8% 3.0% %% 22 %% 2.6 2.5 2.5% 2.4% 2.2% 2.0% .8% %% %% %% 1 1.6 1.6 1.6 1.4% 1.5% 1.4% 1.3% 1.1% 1.1% 10%1.0% 1.0% 0.5% 0.3% 0.3% 0.1% 00%0.0% Euro Area Germany UK France Netherlands Source: Blue Chip Economic Indicators, 3/10/10 edition. 3-Month Interest Rates for Major Global Economies, 2008-2011F Interest rates remain generally low in much of the world, depressing insurer 2008 2009 50%5.0% investment earnings. But rates are often 4.5% held low by government action and 4.4% 2010F 2011F lingering economic weakness, obscuring 4.0% tight conditions in trade credit markets 4.0% 3.5% 3.0% .5% 2.6% 22 25%2.5% %% 2.1 2.0% 2.0% 1.8% 1.7% 1.4% .3% .2% 1.5% .2% 11 11 1 1.0% 0.7% 0.7% 0.6% 0.5% 0.4% 0.4% 0.5% 0.3% 0.2% 0.0% Euro Area Japan UK China US Source: Blue Chip Economic Indicators, 3/10/10 edition. Internationally, Most Short-term Interest Rates Are Still Quite Low Central Bank Current Last Interest Rate Changed Bank of Canada 0.25% April 21, 2009 Bank of England 0.50% March 5, 2009 Bank of Japan 0. 10% Dec 19, 2008 European Central Bank 1.00% May 7, 2009 U.S. Federal Reserve 0.25% Dec 16, 2008 The Reserve Bank of Australia 4.25% April 6, 2010 China 5.31% Dec 22,2008 Hong Kong SAR 0. 50% Dec 17, 2008 Korea, Republic of 2.00% Feb 16, 2009 Hungary 5.50%* Mar 29, 2010 *reduced from 5.75% Source: http://www.fxstreet.com/fundamental/interest-rates-table/ Political Risk Many NtiNations SfffSuffer from PlitilPolitical Instability, Fundamentally IflInfluenci ng T rad e C redit ditRik Risk 14 Aon: 2010 Political Risk Map Political and financial instability remain a feature of the business landscape in 2010 due to the recession, according to Aon. Source: Aon 15 Aon 2010 Political Risk Map: Findings Elevated Political Risk Levels to Continue in 2010 Significant volume of credit and political risk claims in international insurance markets have driven many of the 18 country downgrades in this year’s map. Aon believes 2010 will see elevated political risk levels continue before an overall tendency for improving global business conditions becomes established. For many companies and across different sectors, including credit and political risk insurance, the business environment remains uncertain when trading with or investing in politically or economically unstable countries. Movements on the 2010 Map A total of 18 countries have seen conditions worsen leading to a downgrade: Algeria, Argentina, El Salvador, Equatorial Guinea, Ghana, Honduras, Kazakhstan, Latvia, Ma dagascar, Maurit ani a, Philipp ines, Puer to Rico, Seyc he lles, Su dan, Un ite d Ara b Emirates, Ukraine, Venezuela and Yemen. Sudan, Venezuela and Yemen have been added to the Very High category, joining Afghanistan, Congo DRC, Iran, Iraq, North Korea, Somalia and Zimbabwe. Eight countries/territories have been upgraded to a lower risk level - Albania, Myanmar/Burma, Colombia, South Africa, Sri Lanka, East Timor, Vanuatu, Vietnam and the Hong Kong Special Administrative Region of the People's Republic of China. Bottom Line: Political and financial instability remain a feature of the business landscape in 2010 as a result of the recession. Source: Aon 16 A.M. Best: Country Risk Evaluation* 20 10 of the 76 countries evaluated by 18 18 A.M. Best are in the most at-risk 18 category. Country risk is factored 16 into all A.M. Best ratings. 16 14 14 12 10 10 8 6 Coun tr ies tha t pose the mos t r is k an d there fore grea tes t c ha llenge t o an insurer’s financial stability, strength and performance (CRT-5) are: Belarus, 4 Bosnia and Herzegovina, Dominican Republic, Ghana, Jamaica, Kenya, 2 Lebanon, Nigeria, Ukraine and Vietnam, according to A.M. Best. 0 CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 *A.M. Best defines countryyy risk as the risk that country-sppyyecific factors could adversely affect an insurer’s ability to meet its financial obligations. Countries are placed into one of five tiers, ranging from Country Risk Tier 1 (CRT-1) denoting a stable environment with the least amount of risk, to Country Risk Tier 5 (CRT-5) for countries that pose the most risk and greatest challenge to an insurer’s financial stability, strength and performance Source: A.M.
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