In our most recent Economic Commentaries, we argue that the future will belong to those who are bold enough to take it on. Trade diversification is an imperative demanded by the need to increase our growth potential and create wealth for future generations of Canadians. But while diversifying to new markets can be rewarding, it also comes with risk. Every quarter, EDC Economics looks at what key data and trends tell us about the relative riskiness of global markets in our Country Risk Quarterly, an informative, interactive tool.

At the system level, post-Cold War geopolitical risk has been steadily trending upward since at least 2016, as the United States and China began more openly competing for influence in the areas of finance, commerce, defence, technology, diplomacy and others. But it was Russia’s invasion of Ukraine one year ago that disturbed the measured pace of this escalation, causing a sudden spike in global geopolitical risk. 

In response, many western firms have been forced to adapt to new sanctions and yet another supply chain disruption. While some of the impacts are temporary, such as higher food prices, increasingly geopolitical risk is influencing long-term investment considerations. Friend-shoring, the buzzword du jour coined by U.S. Treasury Secretary Janet Yellen, describes the perhaps exaggerated trend toward containing production systems within the borders of allied nations, to enhance supply chain resiliency.

Our base-case scenario continues to see an ongoing war of attrition that’s unlikely to escalate beyond Ukraine’s borders. However, as fighting continues, risks increase around the exit ramp, what an increasingly cornered Putin might do, and what impacts that might have on the broader global economy. 

On a related note, the steady chilling effect of the U.S.-China strategic rivalry is causing many to reconsider their up-till-now enthusiastic Chinese expansion plans. According to Oxford Economics, 87% of respondents view a China-Taiwan conflict as likely over the next five years. Outright conflict in the South China Sea, a risk which caused us to recently downgrade China’s political violence rating, could hasten a further bipolarization of the global economy. 

One of the few beneficiaries of escalating Sino-American tensions—to say nothing of rising labour costs and a shrinking population in China—has been Vietnam. EDC Economics recently upgraded its Vietnam rating, in part due to higher investment flows resulting from the market’s status as an alternative to China. In fact, a mix of economies across Asia, which has come to be known as “Altasia,” may present a reasonable substitute for China. 

Drilling down to the country risk level, over the last quarter, EDC Economics imposed more downgrades than upgrades across our various risk-rating categories. Short-term commercial risk ratings were negatively impacted by a deteriorating economic outlook. While unseasonably warm winter weather helped Europe avoid the effects of high energy prices and rationing, we expect Europe’s economy to come to a standstill this year, in the context of a higher price environment. 

Inflation-fighting interest rate hikes in developed markets have encouraged capital outflows from several African countries, and forced a global repricing of risk. Many developing countries came into the pandemic with elevated debt levels already and spent the last few years experimenting with larger budget deficits and unconventional monetary policies. The stronger American dollar also makes U.S. dollar-denominated debt more expensive to carry. Higher food and energy costs are another pressure point for many of these countries. As a result, we downgraded several African markets, due to rising debt servicing costs and sustained inflationary pressures. 

Previously a darling of frontier investors, Ghana defaulted to external creditors in late 2022. While support from the International Monetary Fund (IMF) and other multilateral institutions is necessary to prevent more countries from defaulting, it may not be sufficient. Nearly 25% of all sovereigns rated by EDC are now at high risk of default, including several medium-sized economies such as Egypt, Pakistan and Nigeria.

While we aren’t forecasting a systemic sovereign debt crisis, 2023 will be a challenging year for many low-income countries, as credit conditions tighten, and emerging market debt reaches a record $98 trillion. In many of these markets, a sovereign default would also impact the private sector’s ability to meet its obligations.

In Latin America, growing policy uncertainty appears to be taking hold, as the Lula government takes power in Brazil and social unrest engulfs Peru. EDC Economics also recently downgraded Colombia’s sovereign rating, to sub-investment grade, due to a lack of policy predictability and the impact on the business environment.

The bottom line?

As the global economy fights to emerge from the pandemic, volatility has increased over the last quarter, and we expect geopolitical and country risk to remain elevated for the foreseeable future. But the bold few who are ready to brave this complicated backdrop will find immeasurable opportunity. Those who are well-informed will be best-positioned for success. 

This week, a very special thanks to Ian Tobman, manager of our Economic and Political Intelligence Centre.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you would like us to explore, please email us at and we’ll do our best to cover them.

This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.