Geographic Credit Risk

Assessing and monitoring geographic credit risk is an important part of managing credit risk across a portfolio.

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Introduction

Banks contributing their internal ratings to Credit Benchmark review the geographic credit risk of each entity and assign it a country of risk.

The country of risk is the most important country the entity is exposed to and is the most representative of its credit risk profile.

Credit Benchmark’s data processing algorithms use the country of risk information from each bank combined with external data to assign a consensus country of risk to each entity.

A broad range of international and large national banks contribute their internal risk ratings to Credit Benchmark. The resulting dataset comprises consensus credit ratings across 150 countries.

The map highlights countries where credit consensus ratings are available for the Credit Risk IQ universe.

What Factors Do Banks Consider when Assigning the Country of Risk of an Entity?

Credit risk officers within banks, as part of their process for assigning internal ratings, assess various economic, industry, environmental, and political factors that can impact businesses differently across regions.

Economy

Credit risk teams look at a range of economic conditions across regions and countries.
They consider factors such as GDP growth, inflation rates, and employment levels which all have a direct impact on the financial health of companies.
Companies may face currency risk, especially if they have significant revenue or debt denominated in foreign currencies. This will be factored into the country of risk and the bank’s internal credit ratings. Exchange rate fluctuations can impact the financial performance and debt-servicing capabilities of these companies.
The stability of supply chains and quality of infrastructure vary across regions and countries. As a result, companies heavily reliant on specific geographies for production or distribution may face operational challenges.

Environment

Different geographies expose companies to natural and environmental risks such as earthquakes, hurricanes, floods, or other climate-related events. Businesses operating in geographies prone to such risks may face disruptions, leading to potential financial strain and impacting their creditworthiness.
Environmental factors (part of broader ESG initiatives) are an increasing component of banks’ risk assessments and lending practices. A company’s level of exposure to one country will be factored into the choice of country of risk.
Environmental policies can vary significantly across countries. Some countries focus more on reducing the impact of climate change than others. For example, the European Central Bank has defined physical and transitional risks in its guidelines on how it expects banks to consider environmental risks in their credit assessments.

Industry

Banks’ credit risk professionals focus on specific industries and geographies. The rating and country they assign incorporate their knowledge of local conditions.
For instance, demand for certain products or services may be higher in specific geographies due to cultural preferences or local demographic trends.
Understanding market dynamics in different geographies is an important part of assigning internal credit ratings in banks and managing risk across a portfolio.
Companies that fail to understand or adapt to cultural nuances in different geographies may face challenges in maintaining customer relationships and market share, impacting their credit risk.

Political

Differences in bankruptcy processes and definitions also change the default risk between different countries and jurisdictions.
Understanding the local regulations that apply to each entity is an important part of assigning the country of risk. The bankruptcy processes in the countries an entity operates in have a significant impact on the likelihood of this company being able to restructure if it gets into trouble.
Political stability and the regulatory frameworks must also be considered. Entities operating in lightly regulated geographies could be more likely to default.
Any volatile or changing political environments need to be monitored because changes in government policies, legal systems, or geopolitical tensions can affect the creditworthiness of companies.

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Assessing and Monitoring Credit Risk Across Geographies

Assessing and monitoring geographic credit risk allows risk managers to quickly see systematic differences in trends and behaviours.

Reports can highlight diverging geographies and help a portfolio manager identify where to focus their attention.

The following examples show the types of insights that the Credit Benchmark data can offer.

All of the analyses shown can be tailored to your portfolio. If you are interested, please ask for a free coverage check.

Regional Comparison

The region analysis reports compare credit risk trends across different regions.
The example graph shows how average credit risk has changed within the Food & Beverage sector across Africa, Asia, Europe, Latin America, North America and Pacific from March 2023 to March 2024.
All regions experienced an overall increase in credit risk with Africa, Pacific, and North America leading the way.

Country Comparison

The example here shows the distribution through time of credit consensus ratings in France, Germany, Ireland, Italy, Luxembourg, Netherlands, Spain, Switzerland, and the United Kingdom for Industrial Goods and Services as of March 2024.
This type of analysis shows where the credit risk of your portfolio has shifted.
Significant changes in credit risk highlight areas of your portfolio to focus on.