A year of financial crisis

The economies of the emerging countries are recovering relatively quickly. Problems persist in Eastern Europe. Economic trends in many countries are now pointing upwards, but there remains a great deal of uncertainty. The demand for EKN’s guarantees continues to be high.

Many companies and countries in the emerging markets were relatively unaffected by the problems in the Western countries’ financial systems. Countries outside North America and Europe were in a strong starting position in the wake of the financial crisis.

The dramatic events on the financial markets in the autumn of 2008 and most of 2009 have had both lasting and transient consequences for the world economy. The banks’ squeeze on granting credit to companies had a rapid effect on the real economy.

Several industries were hit hard by the economic downturn, and in Sweden, the automotive industry was particularly exposed. In order to apply brakes to the decline, many countries, including Sweden, undertook measures of an exceptional nature. With the aim of supporting companies and exporting businesses, the Government raised EKN’s guarantee framework.

Background to the financial crisis

During most of the first decade of this century, both credit rating agencies and lenders rated the levels of credit risk ever lower. The lower credit risks were reflected in lower risk margins. Put simply, borrowing money became cheaper. The lower yields on lending were partially compensated for by credits for high risk investments.

Rising interest rates during 2007 and 2008 led to growing payment difficulties for the borrowers. One consequence was growing credit losses for lenders and investors. The crisis of confidence that followed the decision by the American authorities not to rescue the Lehman Brothers investment bank had well-known repercussions throughout the global financial system.

Early in the crisis, during the autumn of 2008, the demand for EKN’s services increased rapidly. There was widespread concern. It was difficult for both small and large companies to finance export transactions, to have access to working capital credits, or to insure against risks in many more transactions and on all markets, even within the OECD. During 2009, EKN offered guarantees for transactions in OECD countries to a value of SEK 60 billion, compared to SEK 11 billion in 2008.

Risk Classification

Emerging markets have fared relatively well

Another key aspect of the crisis was how, and to what extent, it would affect the risks in the transactions that EKN was guaranteeing. It seemed to be a reasonable assumption that the problems in the Western financial system would have an effect on the creditworthiness of banks, companies and countries in the emerging markets.

When summarising 2009 and its impact on 2010, we can see that hitherto, the regions and countries where the demand for EKN guarantees from Swedish exporters was at its strongest were not hit as hard as we feared, apart from Ukraine and to a lesser extent Russia. Banks in the emerging
countries had only limited exposure to the problem-burdened western banks. Of course, exports and services to the West have been negatively affected, but this as
caused only slightly lower economic growth.

At EKN we review annually our country risk classifications for 176 countries. From 2000 right up until autumn 2008, EKN’s classifications of many countries were getting better and better. This trend was broken in autumn 2008. Of the 176 countries, in 2009 only three countries were upgraded, while 15 were downgraded. The countries to which EKN gave a downgraded country risk classification were mainly in Eastern and Central Europe, the Balkans and the CIS. From a country risk perspective, the crisis was a regional rather than a global one.

Each year, EKN analyses 176 countries and produces a country risk classification. Of the 15 countries which were downgraded during the year, 9 are in Eastern Europe or the Balkans. Asia, Latin America, the Middle East and Africa were less affected.

Eastern Europe and the Balkans

No fewer than 9 of the downgraded countries are in Eastern Europe and the Balkans. In several of these countries, the previous good economic growth was partly based on the banks taking out loans on the international capital markets. These banks, in their turn, made loans to local industrial enterprises and property companies, often in hard currencies.

During the crisis, the local currencies rapidly lost value. This made repaying the loans more expensive. Many borrowers stood no chance of coping with this debt, resulting in payment suspensions. This had drastic effects on the economies as a whole, and any economic progress in previous years was wiped out. Problems in the banking sector have led to difficulties in the public finances. Tax revenues have fallen, expenditures have increased, leading to increased national debt.

Other downgraded countries are spread all over the world: For countries in Asia, Latin America, the Middle East and Africa, the direct connection to the high risk loans to American and European banks was limited. This largely explains why the risk situation in these regions has not changed to any great extent. An expansive financial policy has contributed, as in the West, to maintaining a relatively stable economic situation.

Uncertain path to growth

Now that the most dramatic effects of the financial crisis have abated, many countries in Asia, Latin America, the Middle East and Africa seem likely to resume fast economic growth. Over the years, it is precisely on these markets that EKN has been an important partner to Sweden’s exporting companies.

But even if economic trends are now pointing in the right direction, the path will be beset by uncertainty. In these circumstances, we believe that demand for EKN’s services will remain high. EKN’s role is to provide support for Swedish exporting companies that meets their need to retain or to expand on well-established markets or even to expand into new markets.

The future lies in the emerging countries

An increasing number of economically significant countries lie outside North America and Europe. These countries have a good starting point for the later part of the financial crisis, and this has great significance for the future. Countries such as India, China, Russia, Brazil and South Africa may gain greater economic and political influence. Greater exporting efforts to these countries and other growth countries will be a vital force in Sweden’s future development.

Currently, Swedish exports are highly concentrated to the developed countries. The proportion of exports to the emerging countries is only a little over 20%. The combination of relatively good economic prospects for the emerging markets, retained creditworthiness despite the financial crisis, and the potential to increase exports to these countries provides favourable conditions and prospects for Swedish companies. It therefore remains very important for Swedish companies to have continuing access to risk cover when needed in order to achieve success on the export markets.