COVID-19 and country risk implications

As we near the end of an unprecedented year, with no end in sight to the COVID-19 pandemic, much remains up in the air for when—and even if—we’ll return to a pre-pandemic “normal.” At this point, it may be best to stay calm and carry on. For those who prefer to also stay tuned, Export Development Canada has helpful resources to do so, including our latest Country Risk Quarterly, an interactive tool that offers timely information on 50 countries around the world. 

The economic bounce back remains incomplete, and the near-term outlook in many parts of the world is deteriorating. As the global pandemic proves to be no quick fix, the implications from the protracted downturn it has created is forcing many to adapt to more permanent, structural shifts, instead of waiting out the pandemic. 

This has translated into a slow and uneven economic recovery. We expect economic activity and employment to continue inching their way back to pre-pandemic levels over 2021, with global gross domestic product (GDP) growth forecasted to go from -4.3% this year to 6.6% in 2021. The strength of the recovery depends upon containing infections as well as government support—two features that aren’t guaranteed to continue until a COVID-19 vaccine becomes widely available.

This shaky global context is weighing on our outlook for sovereign governments, which in some cases are having to pull back from fiscal stimulus measures to maintain their creditworthiness. Since the pandemic struck, we’ve downgraded 68 sovereign risk ratings and only upgraded two. The growing sense is that even in our five-year outlook, many countries will struggle to regain the ground they’ve lost since March.

Even so, some governments are proving their resilience thus far, and we haven’t yet seen the steep debt cliff on the near horizon that would set up a series of sovereign defaults. So far, only markets with debt sustainability issues that were apparent long before the pandemic—such as Zambia, Lebanon and Argentina—have defaulted, and their unique challenges may mean that the risks of debt contagion—whereby other sovereigns participate in similar distressed debt exchanges—has yet to materialize.

Debt relief provided by the G20 to 43 of the world’s least developed economies—and the many emergency liquidity support programs rolled out to governments by the International Monetary Fund and other multilateral institutions throughout 2020—is helping to stave off a cascade of sovereign defaults.

If so, we may be on borrowed time: the G20 Debt Service Suspension Initiative only defers debt payments, it doesn’t forgive them. Such extensions are in place until the middle 0f 2021 with the aim of freeing up liquidity for governments to support their economic recoveries. Ultimately, the longer the pandemic drags on, the higher the credit pressures.

While sovereign risks are still at the top of our list, a close second is the social and political unrest that’s continued throughout the pandemic. With several different forces driving tensions, there doesn’t appear to be a common thread to many of the social movements that popped up in 2020, besides the fact that the global citizenry appears to have found its voice to demand change, even in the midst of a significant disincentive to do so like a widespread pandemic. Similar to how the pandemic has exacerbated pre-existing conditions with respect to finances and health, it has also sharpened the likelihood of social unrest in countries with simmering tensions ahead of time.

From Belarus and Hong Kong to Chile, Lebanon, Italy, France, Nigeria and the United States, people continue to show up en masse to press their governments and one another for a different future. Some have been successful in bringing about a new era of democracy, while others are either trying once again to replace their autocratic leadership, or are fighting to preserve their freedoms. COVID-19 lockdowns and their perceived inconsistencies have similarly provoked outrage in some corners of the globe, and, of course, the issue of police use of force has been a hallmark of 2020 and has galvanized social unrest from the U.S. to Nigeria.

Even more existentially for others, profound disagreements over the future of liberal democracy is at the core of unrest, with the sanctity of the electoral process increasingly under question. With a weakening consensus on the vision for democratic rules and norms, the potential for increased country risk is there as disagreements over free trade and freedom expression and the very definitions of liberty, equality and justice don’t appear to be fading anytime soon.