Country rating methodology

1/ Country Risk @rating Methodology

Coface Country @ratings for 165 countries are available and updated regularly via www.cofacerating.com under the country-rating heading. They can be accessed freely for consultation purposes.

The Country @rating assigned by Coface reflects the average level of short-term non-payment risk associated with companies in a particular country. It reflects the extent to which a country's economic, financial, and political outlook influences financial commitments of local companies. However, international trade actors know that sound companies can operate in risky countries and unsound companies in less-risky countries and that overall risk will depend not only on a company's qualities but also on those of the country in which it operates. In assessing overall risk associated with a particular operation, Country @ratings are thus complementary to @rating Credit Opinions on companies.

How ratings are assigned

Ratings are based on threefold expertise developed by Coface :

- macroeconomic expertise in assessing country risk based on a battery of macroeconomic financial and political indicators
- expertise on business environment. The score is based on internal and external sources.
- microeconomic expertise that draws on Coface databases covering 44 million companies worldwide and 50 years experience with payment in trade flows it guarantees.

A1
The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behaviour. Corporate default probability is very low on average.

A2
The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.

A3
Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behaviour. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behaviour. Corporate default probability is still acceptable on average.

B
Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behaviour. Corporate default probability is appreciable.

C
A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behaviour. Corporate default probability is high.

D
A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behaviour. Corporate default probability is very high.

2/ Business climate rating methodology

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 new business climate rating will henceforth be a component of Country @ratings beside macro-economic and political data and the Coface payment experience.

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.

A1 The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

A2 The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.

A3 The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.

A4 The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.

B The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.

C The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.

D The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.

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DISCLAIMER : The present document reflects the opinion of COFACE Country Risk and Economic Studies Department, as of the date hereof and according to the information available at this date; it may be modified at any moment without notice. Information, analysis, and opinions contained herein have been elaborated from numerous sources believed to be reliable and serious; however, COFACE does not guarantee in any manner whatsoever that the data contained herein are true, accurate and complete. Information, analysis, and opinions are provided for information purpose only and as a complement to material or information which shall be collected otherwise by the user. COFACE does not have any procurement obligation but only obligation of means and shall incur no liability whatsoever for losses arising from the use of or reliance on the information, analysis and opinion herein provided. This document together with analysis and opinions furnished are the valuable intellectual property of COFACE; you may download some of the data for internal use only, provided that you mention COFACE as author and you do not modify or alter such data. You may not use, extract or reproduce the data in whole or in part, for making any public statement or for any other commercial purpose without our prior written consent. You are invited to refer to the legal notice provided on COFACE web site.

A1	The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behaviour. Corporate default probability is very low on average.
A2	The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.
A3	Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behaviour. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.
A4	A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behaviour. Corporate default probability is still acceptable on average.
B	Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behaviour. Corporate default probability is appreciable.
C	A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behaviour. Corporate default probability is high.
D	A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behaviour. Corporate default probability is very high.

A1	The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.
A2	The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.
A3	The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.
A4	The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.
B	The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.
C	The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.
D	The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.