The need for the new "business climate" assessment

In assessing country risk, most assessments 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 business climate rating available to everyone, Coface wishes to share its experience in measuring the true business climate in all countries worldwide. The assessment 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 assessment

The new assessment 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.

Like Country @ratings, the new assessments 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 assessment comprises two modules

1/ The core of the new assessment 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 assessments 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 assessments 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, rule of 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 assessment will henceforth be a component of Country @ratings beside macro-economic and political data and the Coface payment experience.

Definitions

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.
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 an otherwise secure environment.
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 environment.
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 environment.
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 a difficult environment.
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 environment.