Country Risk and the Global Outlook – August 2021

Vaccine-privileged economies enjoy respite

Commentary: 

“Consumer and business sentiment indicators have recovered in countries with advanced vaccination programmes, and economic prospects are diverging sharply along the lines of vaccination rates and fiscal policy capacity. The pandemic delta variant’s increased transmissibility has caused the situation to deteriorate in much of the Asia-Pacific region,” said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.

INTRODUCTION

We are currently forecasting that the global economy will rebound strongly in 2021 at 5.3%, following the sharp Covid-19-induced contraction of 3.8% in 2020. The growth will be even stronger than the recovery in 2011 after the global financial crash. However, the divergence in vaccination programmes between advanced and emerging economies is reflecting in similarly diverging growth prospects; around 40% of the population in advanced countries have been fully vaccinated, compared with just 11% in emerging economies. 

In addition, divergence in growth prospects is being fed by the different abilities of governments to sustain fiscal support packages in 2021. According to International Monetary Fund (IMF) data, advanced countries have announced fiscal support packages worth USD4.6trn for 2021 and beyond, while many emerging economies have withdrawn fiscal support in 2021 and are looking to rebuild government finances. 

The Q2 2021 national accounts data so far shows powerful recoveries, lifted by the clear base effects from the situation in Q2 2020, but also by the extent of the recovery in household spending, mobility, employment and international trade, and continued fiscal support. 

Consumer and business sentiment indicators have recovered in countries with advanced vaccination programmes. However, despite this strong growth, we are concerned that the withdrawal of fiscal and monetary supports - including of furlough schemes (which will see household spending curtailed) - will start putting pressure on business’ cash flows and balance sheets among vulnerable small and medium enterprises (SMEs), even in economies that have secured hope of relief from the coronavirus. After the lull in bankruptcies in 2020, this will lead to a deterioration in payments performance and an increase in bankruptcies in many of the vulnerable SME sectors, with services sector bankruptcies in the US already having hit 2019 totals for 2021 by May, according to Dun & Bradstreet’s observation of the data.

In price-adjusted terms, domestic demand, a way to gauge economic activity without the addition from exports, leapt 13.8% year-over-year (y/y) in the US, 20.4% y/y in Spain, and 8.9% y/y in Hong Kong in Q2 2021. However, the average y/y growth taken over the two past years was still weaker than the pre-pandemic trend in all cases. Only in a very few economies has the boost from international trade in goods in high demand during the pandemic allowed output to exceed likely pre-pandemic trends, and then only in manufacturing: in South Korea, Singapore and probably Taiwan Region - with even Vietnam’s manufacturing sector output, albeit up 13.8% y/y in Q2 2021, only where it would have been in a no-pandemic scenario.

 

RATINGS UPGRADES

  • Azerbaijan
  • Costa Rica
  • Italy
  • Norway
  • Singapore

RATINGS DOWNGRADES

  • Slovakia
  •  Slovenia
Dun & Bradstreet Country Risk Analysis
Country July 2021 August 2021 Change
 
Country Risk Rating Upgrades (risk level has improved)

Azerbaijan

DB5d

DB5b

2 quartiles

Costa Rica

DB5b

DB4d

2 quartiles

Italy

DB4d

DB4c

1 quartile

Norway

DB2a

DB1d

1 quartile

Singapore

DB3a

DB2d

1 quartile

 
Country Risk Rating Downgrades (risk level has deteriorated)
Slovakia DB3b DB3c 1 quartile
Slovenia DB3c DB3d 1 quartile
 
Outlook Trend Upgrades (from/to)
Albania Stable Improving  
Angola Deteriorating Stable
Bolivia Deteriorating Stable
Bosnia & Herzegovina Deteriorating Stable
Brazil Deteriorating Stable
Croatia Stable Improving
Cyprus Stable Improving
Ethiopia Deteriorating Stable
Luxembourg Stable Improving
Morocco Deteriorating Improving
Nigeria Deteriorating Stable
Romania Stable Improving
 
Outlook Downgrades (from/to)
El Salvador Deteriorating Deteriorating Rapidly

Monthly changes in country risk ratings and outlook

REGIONAL SUMMARIES

North America 

An upsurge in Covid-19 infections in the US, driven by the delta strain, threatens to slow business reopenings and is a key risk to the pace of economic recovery in Q3 2021. Meanwhile, the Canadian economy accelerates as easing restrictions bolster retail trade, accommodation and food services.

Western and Central Europe 

Confidence indicators in the region are maintaining an upward trend, and in the eurozone, Eurostat’s Economic Sentiment Index had reached a new all-time high in July 2021. That said, slowing vaccination campaigns and the spread of the more contagious delta variant increase the likelihood of another set of lockdowns into Q4 2021.

Asia Pacific

Consumer Price Index (CPI) inflation has firmed across the region in line with food, energy and upstream prices, but is not yet presenting major macroeconomic challenges. The main near-term vulnerability is the delta variant, to which no local populations has much natural immunity - while even in South Korea and Japan, vaccination programmes are only starting to reach most adults.

Latin America & Caribbean

Upward revisions in growth forecasts for Brazil and Mexico boost the regional outlook for the rest of 2021. However, still-high unemployment, elevated inflation, and socio-economic discontent exacerbate governance challenges and keep political/insecurity risks broadly elevated.

Eastern Europe & Central Asia

The regional economy was recovering steadily as industrial output and services picked up and international travel gradually resumed - we still forecast annual GDP growth of 2.8% for Russia and 4.4% for the region in 2021. However, rapidly spreading new variants of Covid-19 pose a downside risk, given slow rates of vaccination.

Middle East & North Africa

The agreement by OPEC+ to release more barrels of oil on to global markets has had little immediate impact on oil prices. The y/y rise in oil prices is boosting business activity in the oil-producing countries. The oil-poor countries are benefitting from increased trade, investment and remittances flows. 

Sub-Saharan Africa 

The regional outlook indicator has been downgraded to ‘deteriorating’ on account of a resurgence or novel spread in Covid-19 cases, the slow roll-out of the vaccine programme, civil disorder in South Africa and escalating conflict in Ethiopia. However, an upswing in commodity prices will benefit most regional states, trimming debt risk. 

 

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 DB 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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