Risk levels in global supply chains are moderating, dropping in Q2 2017 compared with the previous quarter, according to the Chartered Institute of Procurement and Supply (CIPS) Risk Index and data by Dun & Bradstreet.
It’s the second straight time in 2017 the measurement of risk has declined.
Why?
- Economic growth around the world is picking up
- Political risk in places such as Europe, where a moderate President in France has been elected, has recently declined
- Operational risks for businesses are moderating
But risk lurks below the surface.
Today, the biggest risks that could disrupt the global supply chain are:
- Uncertainty over trade agreements currently being negotiated, including ones like NAFTA that will be negotiated in the near future
- Higher threat of cyber attacks
- Brexit negotiations that will ultimately impact tariffs in Europe
- Financial uncertainties such as fluctuations in commodity and currency prices
- Persistently low oil prices that impact both oil-exporting and importing countries
- Political risks in the form of new elections and waves of protests around the world
While the improvement in the CRI (CIPS Risk Index) is definitely encouraging, the index remains in high risk territory.
The risk score remains at one of the highest in 25 years:
Recent Supply Chain Risk Levels by Country and Region
Recent Supply Chain Risk Levels by Country and Region
North America
Supply chain risk in North America was unchanged in the second quarter.
Still, Dun & Bradstreet has downgraded its near-term growth forecast for the US, due to headwinds for small businesses and uncertainty surrounding the Trump administration’s stance on global trade.
Growth has improved in Canada, but recently hiked rates may create hardships for smaller members of the economy. Canada also faces the prospect of renegotiating NAFTA with an administration in the US that has openly attacked the free-trade agreement in the past.
Western and Central Europe
Five countries in Europe received risk ratings upgrades.
Political stability and robust growth led to ratings upgrades in Iceland, Macedonia, Cyprus and Albania. France, which has an outsized impact on global trade in comparison, was upgraded due to the victory of pro-EU centrist Emmanuel Macron in the Presidential elections in May. Macron has pledged to reform the heavily regulated labor market and support free-trade agreements in Europe and overseas.
Since the US has withdrawn from the Trans-Pacific Partnership (TPP), a trade agreement between 12 nations, it is very likely the EU will exploit the vacuum of leadership in the Pacific area and negotiate several more free-trade arrangements.
The biggest uncertainty also comes from the UK, where snap elections in June led to a hung parliament and thus no clear path ahead for Brexit. The impact of Brexit and the relationships to be renegotiated around it will have a large impact on supply chains.
Eastern Europe and Central Asia
Global supply chain risks in Eastern Europe and Central Asia are rising.
The main issues dogging the region are low oil prices, banking sector stresses across a number of the former Soviet countries, a rising amount of cyber threats, domestic political instabilities, and geopolitical tensions.
Particularly troubling for private businesses and government institutions is the increase in cyber attacks in the region. Two ransomware cyber-attacks crippled companies and government agencies in the second quarter, hitting more than 150 countries, including Russia, Ukraine, Kazakhstan, and Romania.
For Russia, the region’s heavyweight, previous hopes of warmer relations with the new US administration have not yet materialized.
Asia-Pacific
The risk outlook in the Asia-Pacific region remained stable as major countries held relatively stable.
In India, where a demonetization effort roiled the economy in the first quarter, a new goods and services tax was instituted in July. As India’s first national value-added tax, it could lead to smaller warehouses consolidating and more operational efficiencies in the supply chain.
In China, pollution continues to be a problem in the north, though this quarter saw no visible changes to that risk.
Middle East & North Africa
The supply-chain environment worsened in the Middle East and North Africa.
The leading areas of risk are, again, weak oil prices, ongoing high levels of instability, particularly in Iraq, Libya, Syria and Yemen, and a diplomatic fight between Saudi Arabia and its allies and Qatar.
The shock move by Qatar’s neighbors to isolate the small oil-rich country will have dire consequences for its supply chains. The central bank will have to expend more reserves to prop up the ailing riyal to maintain its dollar peg.
Iran has been downgraded following President Trump’s declaration of more sanctions and closer relations with Saudi Arabia at the expense of Iran.
Latin America
Supply chain risk improved in Latin America. Still, political uncertainty overshadows the business environment in many countries.
Brazil saw aggressive monetary loosening and significant declines in borrowing costs. Resilient price pressures in Mexico kept production costs elevated.
Looking forward, stronger commodity prices and export demand will boost expenditure on infrastructure projects as several leading governments ramp up spending ahead of key elections in 2017 and 2018.
Sub-Saharan Africa
Sub-Saharan Africa saw no change in the amount of supply chain risk it faced in the second quarter. Yet risks loom, even as the economy is expected to grow moderately in 2017.
Lower commodity prices will force countries to find alternative sources of growth this year. And on the backs of higher rates in the US, regional economies may suffer from periods of capital outflow and weaker currencies. Political risk has also increased, with several countries seeing bouts of civil disorder that hamper a return to faster growth.
South Africa, the region’s largest economy, saw a ratings downgrade over political concerns of weaker institutions and rising public debt. Its borrowing costs have spiked as a result, which means it will have a harder time gaining momentum this year.
Other countries, such as Nigeria, are plowing funds into infrastructure investment. That should have positive effects on supply chains.