American poet and civil rights activist Maya Angelou famously said that “you can’t really know where you are going until you know where you have been.” We came into 2022 with hopes of finally putting the COVID-19 volatility behind us, but the lingering fallout continues to cause global economic hardships.
In EDC Economics most recent Country Risk Quarterly, our country risk outlook assesses the impact of the deeply rooted pandemic-related setbacks. In addition to the unspeakable human toll, the resulting supply chain disruptions left many countries with reduced access to critical staples and having to contend with the ensuing rise in prices. While transport disruptions have eased since last fall, they remain at elevated levels and still subject to ongoing government restrictions, geopolitical tensions and extreme weather events. The war in Ukraine piled on the hardship, further pushing up the price of essential commodities, especially in food and energy.
In response to inflationary pressures the world’s central bankers dutifully raised interest rates, rightfully calculating that weaker growth is a preferred alternative to runaway inflation. As a result, many countries are now dealing with declining consumer purchasing power, rising business pessimism and a move into a tighter credit environment, hitting both the supply and demand side of the equation.
What’s more, China’s Omicron surge in the spring happened at precisely the wrong moment for that country’s economy, following a debt crisis at several large real estate companies that spread through the property sector. The subsequent slowdown of the Chinese economy, a driver of the weakness across developing markets, is having repercussions from Asia to Latin America. EDC Economics’ risk rating most tied to current market conditions, the short-term commercial risk rating, is flashing red across many markets.
While food and fuel prices have started to come down, they remain high by historical standards. This will continue to hit large importing countries, like Egypt, India, and Turkey, also dealing with largescale currency weakness. In response, some governments have drawn down foreign exchange reserves, boosted subsidies, or limited non-essential imports. These dynamics, together with higher borrowing costs, will pressure EDC’s commercial country ceiling rating in a number of key markets. Energy exporters such as Qatar and Algeria will continue to benefit from the positive terms-of-trade impact, especially as Europe looks to reorient its supply networks.
