Euromoney’s latest crowd-sourcing risk survey shows a total of 109 riskier countries since March, led by sharp falls for Belarus, Russia, Ukraine, Hungary, Sri Lanka and Hong Kong.
The pessimistic mood among global risk experts at the beginning of the year has only increased in the light of Russia intensifying its war in Ukraine, worsening inflation and new Covid waves affecting workforces and leading to further restrictions in some Asian countries.
As illustrated in the first quarter 2022 survey, most of the world’s main regions took another hit in the second quarter, with the exception of sub-Saharan Africa, where many countries benefited from higher resource export prices, an easing of pandemic-related risks and a relatively small exposure to geopolitical issues.
The countries heavily downgraded this time include Belarus, Hungary, Poland, Turkey, Sri Lanka, and China plus Hong Kong.
El Salvador, Ethiopia, Ghana and Pakistan are some of the higher risk countries with worsening survey scores, raising concerns about possible debt defaults.
They are among a large number of developed, emerging and frontier markets to have been reassessed by economists and other risk experts according to their various economic, political and structural factors.
Ukraine, with its failing economy and mass emigration, has crashed another 13 places in the global risk rankings of 174 countries and is now down to 129th. The cost of reconstruction is estimated at $750 billion and there is no end in sight for the war.
The harm done to the economy by China’s zero-Covid policy is reflected in its eight place slide to 53rd. Struggling with high inflation, Egypt and Morocco have both fallen seven places to 117th and 58th respectively, with Albania, Bhutan and Malawi also notable fallers this quarter.
Fiscal risks have risen generally as soaring inflation means that more scarce resources are spent on subsidizing poorer households. Moreover, sharply rising prices are increasing the risk of slower growth and even recession.
With debt levels already heightened by the pandemic, the government finances indicator has been downgraded in 105 countries, most notably for Russia, Ukraine and bankrupt Sri Lanka.
Beset by economic turmoil and political unrest that has seen the president forced out of office, Sri Lanka is also among 110 countries with a deteriorating government stability rating.
Others affected the most by government instability this quarter include North Macedonia, enduring violent protests; Israel, where the coalition government has just collapsed; and Fiji with a general election scheduled for November.
Soaring global inflation due to extraordinary economic policy stimulus during the pandemic, exacerbated by supply chain issues in China and shortages of goods caused by the war in Ukraine, has led to downgraded scores for monetary policy/currency stability in 99 countries.
There are also increased risks tied to labour market/industrial relations in 94 countries, as trade unions and other organized groups are prepared to strike and protest for more pay, putting pressure on government finances and threatening wage-price spirals.
Euromoney’s country risk survey condenses the views of around 300 experts in economic, political and financial risk from across the public and private sectors to provide an up-to-date assessment of global asset security.
Conducted quarterly, the results are compiled and aggregated, along with measures of capital access and sovereign debt statistics, to provide total risk scores and rankings for 174 countries worldwide.
With its strong institutions, safe haven currency and relative economic strength Switzerland has retained its position as the least riskiest country in the global risk rankings, just ahead of second-placed Australia, with Finland, Denmark and Norway comprising the remainder of the top five.
Australia and Israel have shown the most impressive long-term gains.
Soaring inflation, pay pressures, tightening monetary policies and weakening economic growth are among the main features causing experts to downgrade most of the G10 in Q2. Scores for Canada, Germany, Italy, the UK and US have deteriorated the most.
Robert Neal, professor of finance at Indiana University, says the primary risk factor for the US is inflation and the disruption costs from it may be larger than commonly recognized.
“In periods of rising inflation, profit margins will tend to shrink and firms will scale back their investments,” he says. “Wage growth will lag the increase in consumer prices so real household consumption will fall. Plus, the Federal Reserve’s policy of increasing short-term rates will further constrain growth in the short term.”
Neal notes that these trends are reflected in recent data. Real GDP declined at an annualized rate of 1.6% in Q1 and the Atlanta Fed’s GDPNow model is projecting a 1.2% decline for Q2. Consequently, it is likely that the US is now in recession.
Scores for all US economic risks have been downgraded, with the economic-GNP outlook indicator falling the most. All of the structural and political risk indicator scores for the US also have fallen.
Neal is concerned about the “mission creep” of US institutions, which he believes will eventually limit their effectiveness.
“Political forces are increasingly using institutions to implement policy goals that ought to be decided through the legislative process. The regulatory authority of the Fed should be focused on monetary policy and capital adequacy instead of climate change issues.”
Johan Krijgsman of Krijgsman & Associates says the weakening ratings for Canada and the US are more political than economic. The political leadership in both countries is trying to pursue agendas unrelated to current domestic problems (primarily inflation).
In the US the divisiveness of domestic politics continues. Examples of this, he says, include the January 6 Commission; the Supreme Court adding to the pressure from the Roe versus Wade decision; mid-term elections only four months away; the states’ rights issues; and gun control legislation in response to frequent mass shootings. This leads to a sense of little forward movement, he argues.
The miracle hoped for is financial deflation, without too adverse employment effects- Johan Krijgsman
Environmental policies have hindered investment in fossil fuels and not taking president Putin’s NATO concerns seriously enough has compounded the problem with respect to energy and grain prices.
“At the same time, Covid-related labour shortages, supply chain issues (especially ports and transport costs), US tariffs on Chinese goods and corporate efforts to recoup two years of lost revenue are having inflationary effects.
“The policy medicine being administered is more government spending and slowly rising interest rates. The inflation fighting logic is difficult to grasp. It would seem more attention needs to be put on immigration policy and, perhaps surprisingly, lower-skilled immigrants.”
Krijgsman says the central banks in both countries are moving too slowly to rein in the inflation problem, as they believe a recession is avoidable and until recently denied inflation was becoming entrenched.
The more speculative, highly leveraged and low interest rate dependent activities will likely bear the brunt.
“The miracle hoped for is financial deflation, without too adverse employment effects. However, secondary impacts from the non-bank financial sector are a risk and this scenario also suggests that at least one source of inflation pressure – labour costs – will be with us for some time to come,” says Krijgsman.
To gain free access to the full Q2 2020 Euromoney Country Risk Survey Results, submit your detail below