Country Risk Global Outlook - October 2020

Resurgence of Covid-19 Causes Economic Headwind

Commentary:

“The resurgence in Covid-19 cases is the main headwind for the global economy, with new cases in many countries in late September approaching or even exceeding their earlier peaks. Governments seem reluctant to bring back the full lockdown measures that halted the spread of the virus in H1 – the fear is that lockdowns would disrupt any nascent economic recovery. And the pandemic will induce long-term structural changes in the global economy. According to the OECD, households in the advanced economies will increase their propensity to save as a precaution against any further crises, while business investment will be lower, particularly for companies with high levels of debt. Both developments will mute demand and therefore economic growth,” said Dr Arun Singh, Chief Economist, Dun & Bradstreet.

INTRODUCTION

The global economy descended into acknowledged depression conditions in Q2 despite the huge policy stimuluses. If the governments and populations of countries fail to eliminate the virus and its direct/indirect economic effects, only a few economies will be net beneficiaries of the ‘global’ recovery. That list would certainly include China, Vietnam and Taiwan Region: only the first two of these saw real GDP grow in Q2, while these three were the only countries to see goods exports rise, y/y, in July-August.

The short-term economic outlook remains highly uncertain, with significant variations across countries and sectors; in September, our GDP forecasts for 2020 range from a high of 2% growth for Vietnam and Malawi to double-digit contractions, as for Argentina (12.0%), Spain (12.0%) and Italy (11.5%). Of the three economic powerhouses, China will grow by just 0.6%, while the US and the euro zone will contract by 5.5% and 8.3% respectively.

US employment recovered by 10.4% in August compared with three months previously, that in Canada 11.8%, and that in the Philippines, another early reporter, 22.3%; yet the y/y loss in jobs was 6.7%, 5.3% and 2.9% respectively. Many jobs will not return, and the layoffs from heavily affected sectors are just beginning. Labour force participation rates globally are falling, with female workers especially hard hit during the crisis’ early stages. If such developments are not reversed, long-term growth potential will be lower.

Our most recent cycle of analysis saw two countries undergo ratings downgrades: Kazakhstan, and Trinidad & Tobago. There were no ratings upgrades this month – for the second month in a row. Meanwhile, we upgraded the overall outlooks for three countries this month, and downgraded the outlooks for a further three.

Ratings Upgrades

None.

Ratings Downgrades

  1. Kazakhstan: The slump in global demand for the country’s raw materials, alongside lockdowns, will cause real GDP to contract in 2020.
  2. Trinidad & Tobago: The Covid-19 pandemic and low energy prices have throttled economic activity, driving a severe contraction.
Dun & Bradstreet Country Risk Analysis
Country September 2020 October 2020 Change
 
Country Risk Rating Upgrades (risk level has improved)
None      
 
Country Risk Rating Downgrades (risk level has deteriorated)
Kazakhstan DB5a DB5b 1 quartile
Trinidad & Tobago DB4c DB4d 1 quartile
 
Outlook Trend Upgrades (from/to)
Italy Stable Improving  
Malaysia Deteriorating Stable
Saudi Arabia Deteriorating Rapidly Deteriorating
 
Outlook Trend Downgrades (from/to)
Hungary Improving Stable  
Myanmar Stable Deteriorating
New Zealand Stable Deteriorating

Monthly changes in country risk ratings and outlook trends

REGIONAL SUMMARIES

North America

More macroeconomic indicators have climbed back above their pre-Covid-19 levels, indicating that the economic recovery was sustained through end-Q3; but the pace of recovery is slowing. Divergence between the effects on different income groups, demographics and sectors will create scars that may never disappear.

Western and Central Europe

The region is being hit by another surge in Covid-19 cases, and lockdown measures in many countries are tightening again, doing more economic damage. Our proprietary payments performance data for Q2 showed a deterioration, with the average payment delay in Europe rising from 13.1 days beyond agreed terms in Q1 to 13.6 days in Q2.

Asia Pacific

Even economies that contained the coronavirus, like New Zealand, face depressed conditions. We believe that much of China’s private and SME sector is in recession despite a jump-starting of the economy via infrastructure projects. India faces nervous months, with rural Covid-19 spreading and banks barred from classing debt as ‘in arrears’.

Latin America & Caribbean

The region is lagging behind others despite signs of gradual recovery in Brazil and Mexico from the nadir of the Q2 coronavirus-induced shock. Economic activity will accelerate unevenly throughout the region to the end of 2020 as trade, investment and remittances are severely reduced.

Eastern Europe & Central Asia

Russia’s economy will contract by 4.5% in 2020, pulling the regional GDP performance down to -4.8%. Despite the uncertainty around the pandemic in the 146m-population country, Russia is expected to post 2.6% growth in 2021. Street protests in Belarus are ongoing, but President Lukashenko has tightened his grip on power.

Middle East & North Africa

Regional growth remains constrained by weak oil prices, insecurity, geopolitical tensions and Covid-19. As each of these aspects will still be a consideration well into 2021 at least, business operating conditions will remain fraught, although opportunities should increase as the oil states open their economies.

Sub-Saharan Africa

Business activity is generally picking up as curfews, lockdowns, border closures and flight bans ease. Nevertheless, most economies will contract in 2020; those that do grow will be weaker than in 2019. We remain concerned about the sovereign debt build-up across the region, despite the relief offered by the IMF and World Bank.

Real GDP Growth (%)

  2019 2020f 2021f
World 2.2 -5.2 3.8
Advanced economies 1.6 -6.5 3.5
US 2.2 -5.5 3.2
Euroland 1.2 -8.2 4.7
Japan 0.7 -5.6 1.5
UK 1.5 -9.8 6.3
Emerging economies 3.4 -2.9 4.4
Brazil 1.1 -5.7 2.5
Russia 1.3 -4.5 2.6
India 4.2 -5.7 6.3
China 6.1 0.6 5.0

Sources: IMF; 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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