Country Risk and the Global Outlook

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April 2022

Europe Seeks New Energy Sources


Commentary:
“Global growth forecasts for 2022 are lower as the war in Ukraine fuels inflation to multi-year highs, disrupts global shipping and increases business uncertainty. Erosion of consumers’ spending power and higher uncertainty related to food and energy security elevate political and insecurity risks, particularly for import dependent economies,” said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.

INTRODUCTION
The war in Ukraine drove up European petroleum prices resulting in sharp price increases for gasoline, diesel and heating gas oil between late-February and March. This accelerated a pre-war upward trend in inflation. The price of Brent rose 7% in March and was up 39% in the first quarter of the year settling at USD107.9 per barrel on 31 March. Headline inflation in the euro zone hit a new record high of 7.5% in March from 5.9% in February, according to a flash estimate from Eurostat, with the energy component of the inflation index registering the highest annual rate of increase in March with a 44.7% jump from 32.0% in February.

In the near term, firms in the chemicals, transportation, and energy-dependent manufacturing industries will be among those that are most heavily impacted. In annual terms the euro-zone members which recorded the highest annual inflation rates in March, measured by the Harmonised Index of Consumer Prices (HICP), were Estonia, Luxembourg, Netherlands, Latvia, and Spain. Added to this, Europe’s efforts to wean itself from Russian energy in the short term will be extremely challenging, given that Europe imports around 41% of its natural gas and 26% of its crude oil from Russia.

The EU’s importation of Russian gas stood at 155bn cubic metres in 2021 with the bloc seeking to reduce imports by two-thirds by end-2022. This requires massive investments in infrastructure - the cost of which has substantially risen because of recent sharp increases in industrial metals’ prices including steel, aluminum, and copper since the start of the war. These are critical to the bloc’s plans aimed at switching to different suppliers in Europe and transitioning to alternative energy sources such as wind, solar and nuclear.

REGIONAL SUMMARIES

North America
Growth and inflation forecasts deteriorate because of the war in Ukraine. The tight labour market should see some easing in the coming months, as rising inflation, reduced savings, and higher wages push or lure workers back to the workplace. Pandemic mobility restrictions are much less restrictive as government policies shift to ‘living with Covid-19’.


Western & Central Europe
The war in Ukraine and imposition of sanctions on Russia by the EU and other allies bring renewed pressure on supply chains and expose the fragility of EU's energy security. Faced with a possible stagflation scenario, the European Central Bank signals a somewhat more hawkish policy pattern but keeps interest rates unchanged.


The Nordics
The outlook remains on ‘deteriorating’ due to high energy and commodity prices which are driving resilient inflationary pressure. Growth prospects are tapering as the Russia-Ukraine war continues and threatens to eclipse the economic momentum registered earlier in 2022.


Asia Pacific
The outlook remains on ‘deteriorating’; although the region’s direct exposure to the Russia-Ukraine war is low, higher inflation from commodity prices and capital outflows damage the growth outlook, barring a few commodity exporters such as Australia and Malaysia. Following the US Fed, interest rate hikes across the region are now likely to be swift.


Latin America & Caribbean
The start of tightening by the US Fed in March will exert downward pressure on regional currencies and increase dollar debt financing. Higher export earnings, to some degree, offset tailwinds from higher commodity prices for regional net exporters of oil, metals, and grains. Aggressive regional monetary tightening continues.


Eastern Europe & Central Asia
The outlook for the EECA region remains on 'deteriorating rapidly' as the ongoing Russia-Ukraine war exacerbates economic uncertainty and threatens to prolong business disruptions. Despite high commodity prices that are favourable to some regional economies, debt-burdens are high, with elevated currency volatility and stubborn inflation.


Middle East & North Africa
The outlook remains on ‘improving’, as oil prices remain around USD100/barrel. However, there are downside risks as imported inflation impacts consumption negatively and increases input costs for firms. Smaller countries in the Levant and North Africa will continue to struggle with excessive energy and food prices.


Sub-Saharan Africa
The outlook is now ‘deteriorating’, as inflationary pressures increase, especially for fuel and food items. The region has been able to avoid stringent lockdowns due to the outbreak of the omicron variant, but is still likely to trail the rest of the world in recovering from the pandemic. Higher prices are a positive for commodity exporters.

 

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:

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Rating and Outlook Changes:
Rating 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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