Country Risk and the Global Outlook: Geopolitical Events Trigger Energy Price Forecast Increases

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By Dr Arun, Global Chief Economist, Dun & Bradstreet

Uncertainty is growing in natural gas markets because of Russia’s troop build-up on the border with Ukraine- Country Risk Global Outlook February 2022

Commentary

“Supply-chain disruptions will persist throughout 2022 prolonging delivery delays and goods shortages, keeping inflation elevated, and prompting firms’ recalibration of supply-chain management. Monetary tightening in advanced economies, kicked off by the Bank of England in October and soon to be followed by the US Federal Reserve, will add upward pressures for major currencies and increase financing costs in the coming monthsIn India, recovery in domestic economic activity is yet to be broad-based prompting the Central Bank to keep policy rate unchanged for the 10th time. While this raises depreciation pressures on rupee, high FX reserve buffers and modest level  of the current account deficit provide a cushion against external shocks. Reopening of the economy as the 3rd wave moderated as quickly as it surged is likely to supporttraction in business continuity and economic activities”said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.

Introducation

Fuel supply constraints, which will continue for the rest of Q1 (at least), have led to markets pricing in sizeable risk premia; these will help offset headwinds from a more hawkish Fed and a potential – although still-distant – nuclear deal with Iran. OPEC, especially Nigeria and Libya, is struggling to increase output in line with the agreed rise in quotas. Crude oil prices recently rallied as fears of a collapse in demand caused by omicron failed to materialise: in the US, gasoline demand is only 4% below 2019 levels.

Meanwhile, uncertainty is growing in natural gas markets because of Russia’s troop build-up on the border with Ukraine. Sanctions against Russia, if it invades Ukraine, could affect 30bn cubic metres of gas earmarked to enter the continent this year. Despite a wave of LNG cargo hitting Europe, sanctions will elevate natural gas prices in the short term. Forecasts of colder temperatures have seen utilities keen to restock depleted inventories, which could lead to demand for LNG cargo rising sharply in the coming weeks.

Developing nations continue to lag advanced countries in terms of the percent of population that is fully vaccinated, elevating the probability of new, highly-transmissible Covid-19 variants emerging. The stop-start cadence to business reopening, notwithstanding more governments adopting a ‘living-with-Covid-19’ position, could make the global recovery more difficult. Notably, there is substantial divergence in the pace at which advanced and developing economies will grow this year. In January 2022, the IMF sharply revised down its forecast for advanced economies – particularly US and China – as supply-chain problems, higher energy prices, and stubborn inflationary pressures continue.

Ratings Upgrades

  • Albania
  • Bahrain
  • Oman
  • Serbia
  • Sudan

Ratings Downgrades

  • Fiji
  • Sri Lanka
  • Trinidad & Tobago

Regional Summaries

North America

Daily Covid-19 infection rates have peaked, although lagging hospitalisation and death rates have risen in several Canadian provinces and territories. Normalisation of business, particularly services, is gradually resuming with easing mobility restrictions. Elsewhere, the US FOMC is expected to announce in March the first of at least three rate hikes for 2022.

Western & Central Europe

The regional outlook remains on ‘deteriorating’ as the emergence of omicron led to a sharp rise in Covid-19 cases in continental Europe in Q4 2021, triggering mixedresponses from European governments. Countries like Germany and France re-introduced restrictions on a larger scale, while others such as the UK re-imposed milder measures.

The Nordics

The region has already returned to its pre-pandemic economic growth trajectory. Despite mobility restrictions, levels of business sentiment, consumer confidence and PMIs have been buoyed. Key challenges to commercial activity are high electricity and energy prices, capacity constraint, tighter labour markets, and expected interest rate hikes to tame inflation.

Asia Pacific

The region remains at ‘stable’ having, so far, avoided the worst of omicron, inflation, and supply-chain problems. However, China’s growth slowdown and exports moderation will temper growth expectations. China, Hong Kong, and Taiwan Region aside, domestic mobility restrictions are unlikely. Non-tourism dependent ASEAN countries remain economic bright spots.

Latin America & Caribbean

Central banks are combatting rising inflation with further monetary tightening: in late-January, Colombia, Chile, and Paraguay hiked policy rates by 25bps to 150bps, increasing financing costs. Extreme weather and logistics delays exacerbate supply-chain problems, driving inflation and heavily clouding the region’s prospects in 2022.

Eastern Europe & Central Asia

High commodity prices and easing mobility restrictions, despite rising omicron cases, support economic output in most EECA countries. However, high and rising inflation is driving monetary tightening, and in addition, fiscal policy uncertainty, currency depreciation, and waning consumer confidence have also started hurting growth.

Middle East & North Africa

We upgraded our outlook to ‘improving’, as elevated oil prices and healthy demand have led to improved fiscal positions. As oil production picks up in the coming months, we anticipate stronger growth and narrowing fiscal deficits. Investment activity will benefit from an accelerating reform momentum in Saudi Arabia and UAE.

Sub-Saharan Africa

We upgraded our outlook for the region to ‘stable’, although it is likely to trail the rest of the world in recovering from the pandemic. While inflation is expected to ease, price levels will remain elevated, and a hawkish turn by major central banks will put pressure on SSA central banks to hike. Elections in several economies could trigger social unrest.

Dun & Bradstreet Risk Indicator

Dun & Bradstreet’s Country Risk Indicator provides a comparative, cross-border assessment of the risk of doing business in a country. The risk indicator is divided into seven bands, ranging from DB1 to DB7 – DB1 is lowest risk, DB7 is highest risk. Each band is subdivided into quartiles (a-d), with ‘a’ representing slightly less risk than ‘b’ (and so on). Only the DB7 indicator is not divided into quartiles.

The individual DB risk indicators denote the following degrees of risk:

Rating and Outlook Changes:

Rating changes: Changes in rating are made when we judge that there has been a significant alteration in a country’s overall circumstances – this could stem from a one-off event (e.g. a major natural disaster) or from a change in something structural/cyclical (e.g. an important shift in growth prospects). An upgrade indicates a significant change for the better, a downgrade a significant change for the worse. The number of quartiles of change indicates the extent of the improvement/deterioration in circumstances.

Outlook changes: The outlook trend indicates whether we think a country’s next rating change is likely to be a downgrade (‘Deteriorating’ trend) or an upgrade (‘Improving’ trend). A ‘Stable’ outlook trend indicates that we do not currently anticipate a rating change in the near future.

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(Economy India)