Country Risk and the Global Outlook - November 2020

IMF’s ‘baseline scenario’ looks too optimistic

Commentary:

“Even with successful disease control in some parts of the world, the global coronavirus shock will easily eclipse the 2008-09 financial crisis. While the baseline forecast in the IMF’s October World Economic Outlook is for world output to regain its pre-pandemic level in 2021, Dun & Bradstreet forecasts say this will not occur before 2022. The IMF’s adverse scenario assumes a resurgence in the virus, a slow roll-out of vaccines and treatments, and unequal country access to the latter. We believe that the resurgence of the virus where community transmission was not eliminated in Q2, alongside uncertainty about vaccines and treatments, means that  some elements of such an adverse scenario will inevitably be realised,” said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.

INTRODUCTION

Policymakers now realise that emergency controls on high-contact sectors are required to limit a second wave of the epidemic, but that these alone will not eliminate the virus. Thus no V-shaped recovery is possible without pharmaceutical interventions that do not yet exist, or are as yet unproven. Accordingly, part of the large shocks seen to date in 2020 could endure in any ‘new normal’, including the 9% fall in global emissions in Q1-Q2 and the 5-10% y/y drop in manufacturing output in many economies in July-August. Problematically for the outlook, more and more countries, especially in Europe, have reintroduced lockdown measures since the start of October as the Covid-19 caseload has reached new all-time highs.

Meanwhile, the sectoral footprint of the crisis is becoming clearer. The pandemic is most of all a crisis of the transportation and hospitality sectors, and the services sector globally has been more shocked than manufacturing. The latter shrank 11.6% y/y in output terms in Q1-Q2, ahead of construction’s 9.0% contraction, but short of the 14.6% decline in retail, wholesale, transportation and accommodation sectors.

OECD governments with investment grade ratings have paid up to limit the contagion impacts of the shock, for example by maintaining household incomes. Central bank interventions, which were mostly complete by June, have masked solvency problems in stressed sectors with plentiful liquidity and loosened bankruptcy frameworks. The result has been a global financial crisis averted, limited credit impairments, and many financial sectors reporting a good Q2 despite the global crisis.

However, all these feats only pay off if the disease is contained quickly. Given that escaping the crisis looks hard due to the epidemiological situation, such bail-outs may only delay insolvency in vulnerable sectors until 2021, failing to build a ‘bridge to recovery’, while inviting new challenges for fiscal debt servicing and bank capital. Indeed, the plunge in net savings rates into negative territory of OECD economies in Q2 is a concern in the US, but also for Canada, France, the UK, Italy and Spain. It reduces the financial resources of firms, household and governments – resources they need to rebound from the pandemic shock.

Ratings Upgrades

  1. Italy: positive impact on the outlook from regional elections, referendum vote, and economic developments.

Ratings Downgrades

  1. Azerbaijan: armed conflict with Armenia poses serious threat to the political environment.
  2. Czech Republic: lockdown imposed as coronavirus cases increase, affecting economic prospects.
  3. Singapore: rise in payments performance risks as the outlook for externally-oriented sectors darkens.

Monthly changes in country risk ratings and outlook trends

Dun & Bradstreet Country Risk Analysis
Country October 2020 November 2020 Change
 
Country Risk Rating Upgrades (risk level has improved)

Italy

DB4d

DB4c

1 quartile

 
Country Risk Rating Downgrades (risk level has deteriorated)
Azerbaijan
DB5c
DB6a
2 quartiles
Czech Republic
DB3b
DB3d
2 quartiles
Singapore DB2d
DB3a
1 quartile
 
Outlook Trend Upgrades (from/to)
Bangladesh
Deteriorating
Stable
 
Ecuador
Deteriorating
Stable
North Macedonia
Deteriorating Rapidly Deteriorating
Pakistan
Deteriorating
Stable
Panama
Deteriorating
Stable
Philippines
Deteriorating 
Stable
Sweden
Stable
Improving
 
Outlook Trend Downgrades (from/to)
Albania
Improving Stable  
Australia
Stable Deteriorating
Bosnia & Herzegovina
Improving Deteriorating
Croatia
Improving Stable
Germany Improving
Stable
Romania Improving
Stable
Ukraine Stable Deteriorating

REGIONAL SUMMARIES

North America

October’s surge in positive Covid-19 cases creates new risks of disruption for the recovery and delays in reopening the North American border. Despite our standard risk scores having begun to improve in the US, payment difficulties remain historically high, bringing added risks given the weakened base relative to early 2020.

Western and Central Europe

The regional outlook is deteriorating as more and more states re-implement lockdown measures amid a second Covid-19 wave (resulting in a higher case load than in March/April 2020). As consequence, real GDP growth as well as credit risk will be adversely affected. Brexit uncertainty also adds to the bleak outlook.

Asia Pacific

China is the best-placed major global economy, but even its private sector and private consumption are flagging, with the recovery driven primarily by the supply-side boosting projects; its demand for commodities has outpaced its actual final demand due to strategic reserve purchasing so far in 2020, boosting regional trade and global commodity prices.

Latin America & Caribbean

Easing Covid-19 restrictions are supporting the region’s multi-speed recovery, although containment of the virus is yet to be achieved. Austerity measures and fiscal rules (where applicable) will help rein in expanded budget deficits and ultimately contribute to the attainment of medium-term debt sustainability.

Eastern Europe & Central Asia

An armed conflict between Armenia and Azerbaijan is destabilising the Caucasus region, with Turkey and Russia, the region’s leading powers, unable to force their respective allies into an armistice. Meanwhile, economic headwinds are also increasing as the number of Covid-19 cases rises in most economies in the region.

Middle East & North Africa

Geopolitical tensions remain high, but the outcome of the US presidential election could see these ease – as would further treaties between Israel and Arab countries. However, economic conditions remain weak, as oil prices remain below USD45 per barrel, undermining regional growth potential and therefore business activity.

Sub-Saharan Africa

Sovereign debt is the biggest threat to regional economic growth, with countries calling for greater support from the international community; Zambia is the first country in the pandemic era to threaten to delay debt repayments. Meanwhile, poverty is set to increase sharply across the region, undermining business activity into the medium term.

Real GDP Growth (%)

  2019 2020f 2021f
World 2.2 -5.1 4.0
Advanced economies 1.6 -6.3 3.7
US 2.2 -5.1 3.5
Euroland 1.2 -8.0 4.9
Japan 0.7 -5.6 1.7
UK 1.3 -10.5 6.7
Emerging economies 3.4 -3.2 4.6
Brazil 1.1 -5.7 2.5
Russia 1.3 -4.5 2.6
India 4.2 -9.8 6.3
China 6.1 1.1 5.5

Sources: Haver Analytics; Dun & Bradstreet

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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