Euler Hermes Country Risk Methodology Summary
The evaluation of overall country risk is the combination of the Medium-Term Rating (Country Grade) and the Short-Term Rating (Country Risk Level).
The Medium-Term Rating (Country Grade) measures economic imbalances, the quality of the business climate, and the likelihood of political hazards. It is on a six-level scale running from AA to D, in which AA is the lowest risk level and D is the highest risk level. The Medium-Term Rating is the combination of three scores:
• The Macroeconomic Rating (ME) based on the analysis of the structure of the economy, budgetary and monetary policy, indebtedness, the external balance, the stability of the banking system and the capacity to respond effectively to (emerging) weaknesses;
• The Structural Business Environment Rating (SBE) measures the perceptions of the regulatory and legal framework, control of corruption and relative ease of doing business; and
• The Political Risk Rating (P), which is based on the analysis of mechanisms for transferring and concentration of power, the effectiveness of policy-making, the independence of institutions, social cohesion, and international relations.
The Short-Term Rating (Country Risk Level) identifies more immediate threats by focusing on the direction of economic output in the next 6-12 months and those macroeconomic indicators that can signal imminent financial crisis as a result of a disruption to financing flows. It is measured on a four-level scale running from 1 to 4, in which 1 is the lowest risk level and 4 is the highest risk level. Those four levels of risk are also labelled as low medium sensitive and high in our country risk map. The Short-Term Rating is the combination of two indicators:
• The Financial Flows Indicator (FFI), a measure of short-term financing risks for an economy that can impact payments of trade receivables between companies; and
• The Cyclical Risk Indicator (CRI) which measures the short-term disruptions in demand. It includes our macroeconomic and insolvency forecasts.
Together those five risk dimensions constitute Euler Hermes' top notch country risk methodology. It assesses the risk of non-payment by a company in a given country, a must support decision-making by our clients.
Euler Hermes monitors business insolvency in over 30 countries
The concept of business insolvency varies from one country to another, making it hard to give international comparisons.
The disparities between countries are many. First, official insolvency procedures are not of equal importance everywhere. In some countries, amicable arrangements predominate (for example, in Spain and Italy), and the ﬁgures for company insolvencies are quite low, thus understating the real picture for business insolvencies. Second, in some countries, individual entrepreneurs are included in the ﬁgures for business insolvencies. In other cases, they are included in the ﬁgures for personal bankruptcies (for example, in the US), with no distinguishing between purely personal bankruptcies and sole trader bankruptcies. In the latter cases, the number of business insolvencies is signiﬁcantly understated.
To overcome the heterogeneous nature of national statistics and circumstances, we constructed country indices and our unique Global Insolvency Index
Once insolvency numbers are deemed comparable and standardized, we calculate an insolvency index, using a basis of 2000=100. This measures the change in insolvencies over time rather than their absolute numbers, and constitute a crucial leading indicator for possible sharp increases in the risk of non-payment in a given country.
We also compute a Global Insolvency Index (GII). This is the weighted sum of the national indices. Each country is weighted according to its share of the total GDP (at current exchange rates) of the countries included in our study. This proprietary indicator is the best way to monitor the health of the global real economy.