HomeAnalysts revise Country external risk rating: world's risky economies named

Analysts revise Country external risk rating: world’s risky economies named

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In the Scope Ratings’ latest assessment of the world’s most vulnerable economies to external shocks, the UK ranks one place above Ireland but slightly below Cyprus and Russia, with Lebanon, Zambia, and Angola making up the “risky-3” for 2021.

“External vulnerabilities of countries struggling to put the Covid-19 crisis behind them are particularly relevant today given uneven recoveries, rising inflation and a new cycle of tighter monetary policy,” says senior analyst Levon Kameryan.

“Amid threat of a wider emerging market crisis, close monitoring of external risk is crucial at this exact stage in the transition between the ups and downs of the pandemic crisis and fresh undulations in markets as central banks begin ‘normalisation’ of extraordinary policies,” says director and co-author of today’s report and rankings Dennis Shen.

Argentina and Turkey remain among the top 10 most vulnerable economies in a larger 95-country sample, while the United Kingdom, rated 43rd, is only one example of an advanced economy whose exposure to external risk is more than often assumed. Sweden (35), France (30), Canada (24) and the United States (20) are possible candidates.

Belgium (6) and Italy (8), on the other hand, are two of Europe’s most heavily indebted countries, but their external sectors rank in the top ten. Switzerland, Malta, and Japan are three of the world’s most resilient countries.

Scope’s annual external vulnerability and resilience rankings rank countries based on 1) their underlying vulnerabilities to a potential balance of payment crisis, and 2) their economies’ underlying resilience when exposed to such an external crisis, with an overall ranking that considers both vulnerability and resilience in a crisis.

The United States (AA/Stable) and the United Kingdom (AA/Stable) are two advanced economies that rank low in terms of external vulnerability – 70th and 55th, respectively – due to open economic structures, current account deficits, and negative net international investment positions – but high in terms of resilience – 3rd and 35th, respectively – not least as issuers of two of the world’s safe-haven reserve currencies, the dollar and sterling.

Lebanon, Zambia, and Angola, on the other hand, are the risky-3 of the most vulnerable and least resilient economies to external shocks in 2021. The top 10 most at-risk countries in 2021 include Georgia (rated BB/Stable), Argentina (unrated), and Turkey (B/Negative), with El Salvador, Belarus, Sri Lanka, and Armenia rounding out the top 10. These countries have high foreign-currency exposure, currencies that are susceptible to periods of risk aversion among international investors, large current-account deficits, and the risk of capital outflows, which are exacerbated by low foreign-exchange reserves and/or significant maturing external debt.

“The risk of further credit events entering 2022 is high under more inflationary conditions globally and potential of ‘taper tantrum’ as central banks remove stimulus, with possibility of further rises of global bond yields,” according to Shen.

During the Covid-19 crisis in 2020, sovereign credit defaults reached a new high. Zambia and Lebanon both defaulted on their debts. Argentina, one of Scope’s 2020 risky-3, defaulted on both of its debt obligations.

“Developing economies are particularly at risk,” says Kameryan. “Unlike mature economies, they have less-sophisticated domestic financial systems and are burdened with ‘original sin’ in more limited capacity to issue debt in domestic currencies to a sizeable-enough domestic investor base, resulting in higher structural dependency upon external credit, posing debt-payment risk when foreign funding becomes more expensive.”

This year’s Scope report looks at a regional “fragile-4” comprising Georgia, Belarus, Armenia, and Turkey in Central and Eastern Europe, the Caucasus, and Central Asia, as well as a 2021 Africa risky-3 of Zambia, Angola, and Gabon. El Salvador, Argentina, and Costa Rica are the three most risky economies in Latin America, while China, India, and Thailand make up a “resilient-3” in developing Asia.

Download the 2021 external vulnerabilities and resilience report and rankings (full report).

See video explainer: Scope updates its 2021 external vulnerabilities and resilience rankings.

Download 2021 external vulnerabilities and resilience report annexes (rankings and underlying data) in Excel.

Image Credit: iStock

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