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Global risikorapport

Country Risk and the Global Outlook
– January 2023

A Winter of Economic Surprise

Commentary:

“The year started on a positive note with the reduction in headline inflation across developed markets proving that monetary policies are working. But the worst is not over as core pricing pressures are yet to abate. Central banks in some countries will still have to rely on hiking interest rates, meaning that businesses should prepare themselves for a likely recessionary climate. Mainland China’s push toward economic revival in 2023 will likely stimulate demand, and the positive impact of increased tourism from China will also be pertinent,” said Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet.

Introduction

December brought some much-needed holiday cheer. The year kicked off on a positive note with headline inflation coming down across developed markets, including in the US and Germany, which indicates that monetary policies are working.

However, given where inflation levels are currently hovering (and the fact that core pricing pressures have not yet abated), more will have to be done to weather the storm. We expect central banks to continue hiking rates in the coming weeks, albeit at a slower pace, meaning that the risk of a synchronized global economic slowdown remains intact, and businesses should prepare for a possible recession, especially in developed parts of the world.

The logic that a central-bank-engineered recession (if at all) should be mild, might hold true for the US, but in Europe, the course that the ongoing war between Russia and Ukraine takes may impact outcomes. 

Mainland China also brought positive news, where economic policymakers reiterated that economic revival is the top policy priority for 2023. Apart from deploying credit support for the property sector, borders have been reopened and consumption vouchers are being issued across several provinces to stimulate domestic demand.

There was also the first sign of a thaw in relations between Mainland China and Australia, as shipments of coal from the latter arrived in China for the first time in almost two years. European luxury retailers will be relieved to note that Chinese consumers could soon be back buying their products; the other sector to benefit would be tourism.

Throughout 2022, despite reopening borders, tourism in Asian economies did not see the kind of robust recovery witnessed elsewhere, due to the lack of Chinese tourists. That should change with Mainland China’s changing stance on containment measures. However, for the time being, the high number of covid cases remains the headline. Several countries have imposed (and attracted retaliatory) measures on inbound travelers from Mainland China, confirming our previous assessment that benefits from China’s reopening will materialize rather slowly. 

WESTERN EUROPE’S OUTLOOK MOVED TO DETERIORATING FROM DETERIORATING RAPIDLY DUE TO BETTER-THAN-EXPECTED WINTER MONTHS

We have still not crossed the critical February mark, but all signs indicate that Europe has managed through this winter better than many had expected it to. The weather has been kind to many; in Southern Europe, it’s hardly winter anymore. European firms held up better than expected to gas prices, industrial production didn’t take a significant hit and the initial prints on GDP data indicate that both the UK and Germany may have escaped a recession in 2022. This is remarkable, given where we were just a few months ago. The conflict between Russia and Ukraine is still ongoing and the risks related to an escalation there remain intact, but we view these signs on the European economy positively and hence have ‘upgraded’ the outlook to deteriorating from deteriorating rapidly.

Last month, Europe introduced price caps on Russian oil, which requires traders using Western services such as maritime routes, insurance, and financing to pay no more than $60 per barrel for Russian oil. And businesses in the region are now preparing to abide by a complete embargo on crude and refined fuel imports from Russia by February 5. This could alter energy trade flows to the region permanently and has the potential to change the energy mix of industrial inputs, creating opportunities for new businesses. 

Dun & Bradstreet Country Risk Analysis
Country December 2022 January 2023 Change
Country Risk Rating Upgrades (risk level has improved)

Bahrain

DB4c

DB4b

1 Quartile

Thailand

 DB4c

 DB4b

 1 Quartile

Country Risk Rating Downgrades (risk level has deteriorated)
Honduras DB5d DB6d 2 Quartile
Panama DB3b DB3c 1 Quartile
Outlook Trend Upgrades (from/to)
 Iceland  Deteriorating  Stable  
Cyprus  Deteriorating  Stable  
Outlook Downgrades (from/to)
 Lebanon  Improving Deteriorating rapidly  
 Sudan  Improving Stable  

 

REGIONAL SUMMARIES

North America

North America’s regional outlook is maintained as ‘deteriorating’. Inflation in both the US and Canada trended downward in December, fueling expectations of smaller rate hikes (and in Canada’s case, even a potential pause) in upcoming central bank meetings. Labor market statistics showed marginal tightening in terms of payroll additions, but wage growth continued to show signs of cooling. The current job numbers may push central banks to continue hiking for a bit longer, but we expect the labor market will soon start to reflect the effects of the massive rate hikes made in 2022.

US House Republicans' struggle to elect the Speaker points to more legislative gridlock ahead; business investment decisions contingent on bipartisan support for domestic fiscal policies may face difficulty. At the North American Leaders’ Summit held in Mexico City for the leaders of Canada, Mexico, and the US in early January, immigration, drugs, and regional trade integration dominated the discussions. In terms of closer economic ties, these countries may find common ground around nearshoring, especially for the manufacturing of semiconductors.


Western & Central Europe

Western Europe’s regional outlook is upgraded to ‘Deteriorating’, from ‘Deteriorating rapidly’. Unusually mild weather is easing pressure on energy prices at a time when headline inflation was already slowing down both in the Eurozone and the UK. However, core inflation remains stubbornly above the targets, leaving both the ECB and the BoE on a policy hiking trajectory; at the December meeting, President Lagarde assertively signaled multiple hikes in the Euro Area in the coming months. 

Businesses should prepare for different scenarios; while global pressure on commodity prices and supply chains has visibly declined, an abrupt and unexpected turn in temperatures could worsen the European outlook significantly, and the re-opening of China, while positive for European and global growth, may re-invigorate inflation in Europe, for example, via higher demand for energy. In the short run, pressure on business costs is likely to remain elevated and demand will contract as consumers continue to see their purchasing power eroded.


The Nordics

In the Nordic region, energy inflation is relatively lower than the Eurozone. Non-energy inflation is still elevated with second-round effects from higher costs pushing up prices of nearly all goods and services. Most central banks are in a state of policy uncertainty and are finding ways to strike a balance between inflation management and the risk of harming domestic economies from raising short-term interest rates.

Inflation remains the single biggest economic challenge for policymakers, followed by growth slowdown concerns and eroding real incomes due to higher prices and higher interest rates, similar to the wider Euro area. However, the Nordic economies are relatively better placed than their EU peers, with relatively robust government finances and a more disciplined approach in financial maneuvering. They are also less dependent on the vagaries of natural gas prices. However, higher interest rates are impacting Nordic households and businesses, both directly through higher costs on existing loans, especially in Sweden and Norway, and indirectly through the effect on asset prices.

Asia Pacific

The outlook for Asia Pacific region is maintained at deteriorating. Our weak expectation is primarily based on the slowing global economy, as well as China, which has just started turning a corner on its economy. Trade in the region has been hit and will likely remain sluggish in Q1 2023. But with rising expectations that rate hikes around the world are nearing the end of their cycle, we expect regional currencies to begin stabilizing in the coming weeks.

China’s reopening is a major boost to regional and global economic prospects. However, with the current high covid case numbers dominating news headlines, the benefits of China’s reopening will be slow to materialize. Finally, the Bank of Japan (BOJ) grabbed attention with a minor tweak to its monetary policy stance in December. The markets may have overreacted initially, but the timing is fueling debates about an eventual end to Japan’s long-running monetary policy experiment. We expect Japanese financial assets to react to speculations about the potential successors of BOJ Governor Haruhiko Kuroda, who is due to retire in April 2023. 

Latin America & Caribbean

Barring Argentina and Colombia, inflation in the LA6 countries – including Argentina, Brazil, Chile, Colombia, Mexico, and Peru – is showing signs of cooling down. However, headline figures will continue to remain much higher than the target rate. Inflation in Colombia continues to climb despite recording double-digit figures in the last six months, adding to the concerns of twin fiscal and current account deficit. Copper prices have reached the highest rate in six months, cushioning the impact of global financial tightening on Chile’s finances. The slowdown in the US will continue to weigh down on the overall region’s exports.

Risks to businesses in Peru have increased further as President Pedro Castillo was ousted, triggering violent protests and the subsequent declaration of a state of emergency. The invasion of Brazil’s congress by protestors is a concerning risk, providing markets with yet another reason to demand higher risk premiums. The possible increase in social spending has already prompted skepticism in the markets. Growing corruption concerns may attract additional sanctions across several Central American countries.

 

Eastern Europe & Central Asia

Eastern European nations dependent on Russia and Ukraine for energy and food supplies are reeling under supply challenges due to the war. Commodity- and energy-importing EECA countries are facing difficult economic choices due to strong dollar and high energy and food prices. These countries continue to face further slowdown in growth coupled with higher inflation and rising interest rates.

The risk of stagflation has increased in parts of the EECA region, particularly within energy-intensive and open economies such as the Czech Republic, Hungary, Slovakia, and Poland, along with Russia and Ukraine. Countries expected to perform relatively better than their peers are Slovenia, Bulgaria, Romania, Estonia, Latvia, Lithuania, Georgia, and Serbia, reflecting less severe economic exposures to the repercussions of the war. Large and persistent external shocks alongside wider external deficits and the strength of the dollar have exerted downwards pressure on regional currencies and foreign currency reserves.

Middle East & North Africa

Looking ahead into 2023, prospects for the Middle East appear to be mixed. The oil-rich GCC economies will continue to grow, though we have downgraded their growth prospects a little because of lower oil production and cooling energy prices. On the other hand, troubled states face a very uncertain future, especially war-torn Syria and Yemen, where conditions could easily deteriorate.

The region’s travel and tourism industry is well on the way to recovery and international visitor arrivals are likely to return to pre-covid levels by the end of 2023, due to effective promotional campaigns, major investments, and the release of pent-up demand. Several popular destinations are ramping up tourist-friendly measures; e.g., Dubai recently removed its 30% municipality tax on alcohol sales and reduced the tariff on taxis and other public transportation.

The path to achieving a nuclear deal with Iran got a lot harder after the execution of a British-Iranian national on charges of espionage. Talks on restoring the Iran nuclear deal have been stalled since August last year and relations between the West and Iran have continued to deteriorate following widespread and large-scale protests in Iran.

Israel recently elected a new government under Prime Benjamin Netanyahu, which is being touted as the country’s most far-right, religiously conservative government in history. A visit to Jerusalem's Al-Aqsa mosque by extreme-right minister Itamar Ben-Gvir has raised concerns among both Palestinians and the US. Such acts undermine the improving relationship with the Arab world and increase the risk of retaliation by extremist groups.

Sub-Saharan Africa

Prospects for major commodity exporters in Africa are bright, though they will face some challenges due to a global economic slowdown. However, export prices remain reasonably high, and Europe has been increasingly looking towards Africa as it looks for alternatives for Russian oil and natural gas.

With failed monsoons for the fifth year in a row, a famine in East Africa is becoming increasingly likely, the most severely affected countries being Ethiopia, Somalia, and Kenya. Efforts to aid the needy population are being undermined by violent conflicts in the Horn of Africa. The exceptional drought underlines the vulnerability of the region to climate-related risks, which are expected to intensify because of climate change. Along with delayed aid, Russia’s invasion caused a spike in global food and fuel prices, making aid delivery more expensive.

High food inflation remains a major concern in the North Africa region, since most countries import a significant quantity of agricultural products. Countries such as Egypt, which historically imported 85% of its wheat supplies from Russia and Ukraine combined, are especially vulnerable. There have been ongoing protests in several major economies, and the excessive cost of living is an especially sensitive topic. Even for agro-based countries, high costs of fertilizers are proving to be a huge challenge. The added expenditure on food/fuel price caps and stimulus spending is also exerting pressure on the fiscal metrics.

Global monetary policy tightening will increase the debt burden on governments which are already struggling under debt distress post the pandemic and the Russia-Ukraine war. Instability created by-election cycles, geopolitics, and war, as well as the continuing threat of food shortages brought on by conflict and unfavorable weather, are major causes for concern.

 

Dun & Bradstreet Risk Indicator 

Dun & Bradstreet’s Country Risk Indicator provides a comparative, cross-border assessment of the risk of doing business in a country. The risk indicator is divided into seven bands, ranging from DB1 to DB7 – DB1 is lowest risk, DB7 is highest risk. Each band is subdivided into quartiles (a-d), with ‘a’ representing slightly less risk than ‘b’ (and so on). Only the DB7 indicator is not divided into quartiles.

The individual risk indicators denote the following degrees of risk: 


DB1

Lowest Risk

Lowest degree of uncertainty associated with expected returns, such as export payments and foreign debt and equity servicing.


DB2

Low Risk

Low degree of uncertainty associated with expected returns. However, country-wide factors may result in higher volatility of returns at a future date.



DB3

Slight Risk

Enough uncertainty over expected returns to warrant close monitoring of country risk. Customers should actively manage their risk exposures.


DB4

Moderate Risk

Significant uncertainty over expected returns. Risk-averse customers are advised to protect against potential losses.


DB5

High Risk

Considerable uncertainty associated with expected returns. Businesses are advised to limit their exposure and/or select high-return transactions only.


DB6

Very High Risk

Expected returns are subject to large degree of volatility. A very high expected return is required to compensate for the additional risk or the cost of hedging such a risk.


DB7

Highest Risk

Returns are almost impossible to predict with any accuracy. Business infrastructure has, in effect broken down.

 

Ratings and Outlook Changes:

Ratings changes: Changes in rating are made when we judge that there has been a significant alteration in a country’s overall circumstances – this could stem from a one-off event (e.g. a major natural disaster) or from a change in something structural/cyclical (e.g. an important shift in growth prospects). An upgrade indicates a significant change for the better, a downgrade a significant change for the worse. The number of quartiles of change indicates the extent of the improvement/deterioration in circumstances.

Outlook changes: The outlook trend indicates whether we think a country’s next rating change is likely to be a downgrade (‘Deteriorating’ trend) or an upgrade (‘Improving’ trend). A ‘Stable’ outlook trend indicates that we do not currently anticipate a rating change in the near future. 

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