Changes at the end of Q4 2017 Economic Research Department Paris, - PowerPoint PPT Presentation

Sector Risk Ratings Changes at the end of Q4 2017 Economic Research Department Paris, December 13 th , 2017 Photo by rawpixel.com on Unsplash

Content 1 Overview of Q4-2017 sector risk changes 4 key topics: Automotive sector strongly back on track, 2 Construction slowly recovering, Machinery poised to recover, Europe extending its lead 3 Methodology of the Sector Risk Ratings 2

Sectors continue to cash in on the return of global growth: +30 upgrades in Q4 2017 Net changes of sector ratings now strongly in Demand and liquidity show more positive a bullish cycle with nearly three times more net upgrade balance than profitability upgrades than downgrades in Q4 2017 indicators Sector risk changes by quarter Sector risk subcomponents changes in Q4 2017 (*) The NACE code reallocation scheme triggered 10 upgrades and 1 downgrade in Q3 2017 3 Source: Euler Hermes Source: Euler Hermes

(Western) Europe lies ahead of all other regions in terms of upgraded sectors Recovering liquidity has found its way into The Europe region accounts for 22 net the improvement of profitability almost all upgrades risk ratings in Q4 2017 over the world Net changes in sector risk ratings by region Evolution of sector risk subcomponents by region in Q4 2017 (vs. Q3 2017) in Q4 2017 (vs. Q3 2017) Sensitive risk l Medium risk l Low risk l Increasing risk (compare to Q3 2017); Falling risk (compared to Q3 2017) 4 Source: Euler Hermes Source: Euler Hermes

Changes overview in Q4 2017: 4 takeaways Changes* in sector risk proposed in Q4 2017 by sector and by region Computers Software & Household Transport Construction Metals Textile Paper Machinery Energy Electronics Transport Retail Automotive Agrifood Equipment Chemicals Pharma & Telecom IT Services equipment #2 #1 #3 North America p Japan r India APAC r Portugal p Greece p Sw eden r Sw itzerland q Italy p Sw eden r Greece r Greece r Austria p Portugal Western p Sw eden r Portugal *** p Germany Europe r Sw eden #4 p Bulgaria p Czech Rep. p Hungary p Slovak Rep. r Bulgaria Eastern p Latvia p Czech Rep. Europe p Slovak Rep. p Romania r Saudi Arabia s Qatar q Bahrain q Bahrain Africa & r Israel Middle East s Colombia s Colombia q Peru r Brazil *** r Brazil Latin s Colombia America (***) Two sectors: Manufacturers + Suppliers Change* of Regional risk Source: Euler Hermes sector risk in a level given country: Low s Deterioration #1 Automotive : Boosted by demand momentum in Europe and recovery in Brazil Medium r Improvement #2 Construction : Positive net balance for a slow recovery, thanks to Eastern Europe * The color of the Sensitive arrow gives the High #3 Machinery : Net upgrade on the back of global growth final risk level #4 Europe : On the road of economic success 5

Q4 2017 overview of changes: Sector risk map Quarterly revision of sector risk ratings Source: Euler Hermes 6

In 2017, Automotive is the strongest industry with positive net grade changes ahead of all others Automotive has joined the inner circle of 2017 has seen confirmation of a rise in the global sectors enjoying a structural low risk number of net upgrades across the globe profile (shifting of countries to the right in the chart) Sector risk 4Q changes (number of changes for a given Sector risk 4Q net changes (x-axis) and sector), by declining order of average risk global risk grade* (y-axis) in Q4 2017, by country * Risk grades are weighted in terms of countries’ GDP * Risk grades are weighted in terms of countries’ GDP Source: Euler Hermes Source: Euler Hermes 7

Content 1 Overview of Q4-2017 sector risk changes 4 key topics: Automotive sector strongly back on track, Construction slowly recovering, Machinery poised to 2 recover, Europe extending its lead 3 Methodology of the Sector Risk Ratings 8

Automotive is back on a more profitable road The global rise in demand remains uneven In Q4 upgrades mainly concern European but the improvement in subcomponents is countries in recovery (Greece and Portugal) or accelerating (Sweden), and Brazil – exiting strong enough to qualify several auto suppliers and manufacturers for an upgrade from recession. Watch out for Bahrain. Changes in sector risk subcomponents Changes in ratings proposed for Q4 2017 SRC in Q4 2017 (number of industries*) (new ratings by country) Automotive Automotive Manufacturers Suppliers Sensitive risk l Bahrain (D,P) Medium risk Brazil (D) Brazil (D, P, L) l Israel (L) Portugal (D,P) Portugal (D,P) Low risk Sweden (P) Greece l Romania (P, L, Le) Czech Rep. (D, L) Bulgaria (D, P, L, Le) Upgraded industry versus Downgraded industry Triggers for changes in grade: Demand (D), Profitability (P), Liquidity (L), Legal (Le) (*) industries = manufacturers or suppliers Source: Euler Hermes Source: Euler Hermes 9

T he sun rose in Eastern Europe’s Construction sector The momentum in the Construction sector has Risk level ratings have been improving come mainly from Eastern Europe fueled by throughout the Construction sector since more confidence, demand and liquidity the end of 2015 Confidence indicator in the construction sector in Sector risk distribution in the construction in Bulgaria, Latvia and Slovakia in October 2017 Europe (evolution over the last nine quarters) Upgrade from 4 to 3: Bulgaria and Slovakia (and The decline in Construction is over : high risk from 9 to 2 Greece ) Weaknesses still prevail : medium risk for a majority of Upgrade from 3 to 2: Latvia (and Japan ) countries Demand (2) and Liquidity (2) or both (1) of these sub- components have improved 10 Source: Euler Hermes Source: Euler Hermes

Machinery: Underpinned by global growth Positive net change continues previous Industrial output data suggest continuation quarters trends of growth for the Machinery sector, confirmed by business confidence Distribution of changes in grades (Q4 2017) Global industrial output indices 230 110 100% High risk: imminent or 210 recognised crisis. 90% 105 190 80% 170 100 70% Sensitive risk: structural 150 weaknesses; unfavorable 95 60% or fairly bad outlook. 130 50% 110 90 Medium risk: signs of 40% 90 weaknesses; possible slowdown. 85 30% 70 20% 50 80 Low risk: sound 10% fundamentals; very favorable or fairly good outlook. 0% Japan China US France Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 Germany Italy (rhs) Spain (rhs) UK (rhs) Upgrade from 3 to 2: India Business sentiment: slowdown in China (-60bps ytd), Upgrade from 3 to 2: Switzerland growth US (+40bps ytd), Japan flat, Eurozone very Upgrade from 2 to 1: Sweden positive (+310bps) 11 Source: Euler Hermes Sources: IHS, Bloomberg

Europe: Sectors have been slowly but constantly improving for two years (except for the UK) The UK exception: Automotive and (Paper) Hardly any European sector has been rated sectors have been downgraded to Medium as either Sensitive or High risk for one year: (High) risk since the Brexit referendum 22 new upgrades in Europe in Q4 Q4 2017 changes in sector risk ratings Sector risk distribution in the UK (number of countries) Source: Euler Hermes Source: Euler Hermes 12

Content 1 Overview of Q4-2017 sector risk changes 4 key topics: Automotive sector strongly back on track, Construction slowly recovering, Machinery poised to 2 recover, Europe extending its lead 3 Methodology of the Sector Risk Ratings 13

Methodology of the Sector Risk Ratings  The objective: to gauge the risk of non-payment by a company in a given industry (an industry is a given sector in a given country) …And dedicated to completing both the Country An assessment based on the evaluation of 4 key components, updated quarterly… Risk (CR) and the Individual Buyer Risk (IBR) Demand risk LOW RISK : sound fundamentals; very #1: (focus on turnover evolution and favorable or fairly good outlook. expected revenues) MEDIUM RISK : signs of weaknesses; possible slowdown. Profitability risk (focus on expected profitability, SENSITIVE RISK : structural weaknesses; #2: fluctuations in supply/capacity and unfavorable or fairly bad outlook. price of raw materials) HIGH RISK : imminent or recognised crisis. Financing risk #3: ( focus on liquidity, access to financing, and payment performance) Indivual Buyer Risk Business environment SECTOR RISK #4: (focus on technological innovations, government subsidies system and legal framework) Country Risk 14

Thank you for your attention Next Update: End of March 2018