What a difference just a few short weeks makes. As late as February, there was a general sense that some of the instability that had beleaguered 2019 was heading toward resolution. China and the United States trade tensions were easing, Europe and the United Kingdom were finalizing Brexit and economic growth was consistently returning across the continent. Unfortunately, the outbreak of COVID-19 abruptly put those good news stories—and life as we know it—on pause.
While we still aren’t able to fully evaluate the magnitude of the COVID-19 outbreak—either from a health, economic, or political perspective—we know the implementation of containment measures has radically altered political and economic fortunes across the globe.
Unfortunately, the impact has been almost uniformly negative on Export Development Canada’s (EDC) risk ratings outlook, at least in the short term, as the global economy struggles with the virus’ twin shocks to supply and demand. At this juncture, the only variance in outlook across the world is a differentiation between bad and worse.
For most developed economies in North America and Europe, the record contraction in economic activity in the first half of 2020 has certainly precipitated recessions in each for this year. The steep economic declines have led to downgrades in our short-term commercial risk ratings across all regions. How they respond—both in terms of when and how they reopen their economies and the scope and scale of their stimulus packages—will likely determine the duration of their current holding pattern. Even when the storm passes, however, the debt incurred will likely rival or surpass those accumulated during the Second World War.
In emerging markets, the cracks that were appearing before the outbreak have only been exacerbated. Troubled waters in Argentina, Nigeria, South Africa, Turkey and India to name a few, are getting choppier. For these and other emerging markets, high levels of debt and evaporating access to credit amid investor unease, will make it challenging to mobilize the fiscal firepower needed to maintain growth. Combine this with volatile commodity prices and plummeting global demand and the effects from a likely protracted economic and financial crisis could require years of recovery.
As a result, one gets the sense that we would be on the verge of a wave of sovereign defaults were it not for news of widespread debt service relief from international creditors. Rising debt risk is resulting in swaths of rating downgrades in the sovereign space as governments feel the pinch. EDC, in the first three weeks of April, downgraded 16 markets, 12 of which were emerging markets and most in Latin America, Middle East and Africa. While recent measures taken by the Group of 20, the International Monetary Fund and the World Bank will free up liquidity for low-income economies, middle-income markets may be left as the most vulnerable with limited options.
Typically, sovereign risk is accompanied by other elevated risks in the market’s business environment, including a higher likelihood of government interference and restrictions on foreign currency conversions as governments look to offset their losses by changing the rules of the game. As such, along with a decline in the creditworthiness of sovereigns, we also see a commensurate decline in foreign exchange access and liquidity.
While the financial and economic woes continue to compound around the globe, one significant wild card remains: the outlook for political stability. On one hand, we’ve seen a drastic reduction in political unrest since a tumultuous 2019. Protests in France, Hong Kong, Chile, Lebanon and elsewhere have for the most part subsided; partly in response to government restrictions on large gatherings and partly in response to personal reticence to gather in groups for fear of contracting the virus. But as increased frustration with closed economies and disrupted supply chains builds, so does the likelihood of a resurgence in political unrest if governments are perceived as moving too slowly in getting basic goods and services to those that need it most.
