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Around the World – Regional Insights, Upgrades and Downgrades

The Americas, Western and Central Europe, Eastern Europe and Central Asia, Asia Pacific, Middle East and Nort Africa, Sub-Saharan Africa

Global Risk Insights

  • The recovery from the 2008-09 recession remains the most challenging in the past century.
  • However, we are more optimistic about growth in 2014 and beyond, particularly in the U.S.
  • Headwinds remain in the form of potential policy errors related to quantitative easing tapering, the healing process in advanced economies, and imbalances in the emerging markets.
  • Austerity programs are also increasing political and social unrest.

Global Economic Outlook: Improving Long Term Sentiments

In the six months since our mid-year 2013 report, we have become more optimistic about the recovery from the 2008-09 recession. Nevertheless, the global economy is still far from achieving trend growth, making the recovery the most protracted in the past century. Of the 132 countries Dun & Bradstreet assesses, 93 are rated worse than at the start of 2008, of which 55 are rated at least three quartiles lower. In contrast,only 15 economies have seen their rankings improve over

TABLE 1: CHANGES IN RISK RATING JANUARY 2013 TO JANUARY 2014 BY REGION

REAL GDP GROWTH (%)

UPGRADED

SAME

DOWNGRADED

Sub-Saharan Africa

0

20

1

MENA

1

11

7

Western Europe

4

20

6

Eastern Europe & Central Asia

2

13

1

Asia Pacific

1

18

4

The Americas

0

20

3

Total

8

102

22

this period, and only two are rated more than two quartiles better. Furthermore, this far into the recovery, we would expect to be raising the risk ratings for the majority of our countries. However, in 2013, the risk ratings of 22 countries(16.7 percent of the countries covered) finished the year lower than they started it and with only eight (6.1 percent)countries improving.

Our increasing confidence in the slow recovery is highlighted by the improved forecasts for 2014 onward compared to one year ago. The forecast for real global growth for 2014 has increased from 2.5 percent to 2.7 percent, while the forecasts for the next three years have climbed to 2.9 percent in 2015, 3 percent in 2016, and 3.1 percent in 2017. However, the headline figure hides disparities across regions; our view of North America is considerably more optimistic, with growth forecast at 2.8 percent to 3 percent between 2014 and 2017, compared with an average of 2.3 percent one year ago. We are also cautiously optimistic about average annual growth in Western and Central Europe, which we have increased by 0.2 percentage points (pp) to 1.8 percent in 2014-17. Growth in Sub-Saharan Africa will also increase by an average 0.2 pp over the same period, while Asia-Pacific’s growth figures have increased by an average 0.1 pp to 3.9 percent. In contrast, we are more pessimistic about growth in Latin America and the Caribbean (down an average 0.4 pp), the Middle East and North Africa (down 0.7 pp), and Eastern Europe and Central Asia (down 1.1 pp).

TABLE 2: REAL GDP BY REGION 2012-2018

REAL GDP GROWTH (%)

2012

2013E

2014F

2015F

2016F

2017F

2018F

North America

2.7

1.9

2.8

2.9

3.0

3.0

2.9

Europe

-0.3

0.1

1.2

1.8

2.1

2.2

2.3

Asia Pacific

4.3

4.1

4.1

4.0

3.6

4.0

3.6

Latin America & Caribbean

3.0

2.5

3.1

3.4

3.7

3.7

3.7

Eastern Europe & Central Asia

2.7

2.2

2.7

3.0

3.4

3.7

3.9

Middle East & North Africa

4.4

3.3

3.4

3.9

4.1

4.5

4.8

Sub-Saharan Africa

4.3

4.5

4.8

5.0

5.2

5.1

5.1

World

2.3

2.0

2.7

2.9

3.0

3.1

3.1

Potential for Policy Error Undermines the Risk Outlook

Although we are more optimistic about longer-term global growth trends, driven by a stronger U.S. private sector, potential for policy error is still high. Political and social tensions could also distract politicians from addressing their specific economic challenges. There is little margin for error in the pace and timing of the Federal Reserve’s decision to end its quantitative easing program (similar programs will eventually end in the EU, Japan, and U.K.). In addition, economic policy-makers in developed countries are still walking a tightrope in attempting to reduce high levels of public debt while supporting growth in their economies. Furthermore, the need to accelerate structural reform is key to long-term sustainable growth in developing markets. In both cases, political expediency rather than economic necessity could derail progress made to date. Finally, austerity programs across the globe have hit the middle classes in countries such as Brazil and Turkey, raising social unrest. Governments will be tempted to ensure short-term stability and boost their chances for re-election by adopting populist economic policies at the cost of ensuring long-term economic growth.

Progress on the Healing Process in the Advanced Economies

During the 2008-2009 recession debt levels in advanced economies became a major risk issue. Levels of household and corporate debt had become unsustainable, fuelled by years of cheap credit. Public sector debt increased significantly as tax revenues fell and governments hiked spending to revive their ailing economies and rescue their banks. The healing process in advanced economies is underway but uneven (see table 3 for our assessment of the situation).

In terms of household debt, levels in the U.S. have fallen from a peak of 95.5 percent of GDP at end-Q1 2009 to 77.4 percent of GDP at end Q3 2013, while those in the U.K. have fallen from 108.7 percent of GDP to 94.4 percent of GDP. In Japan levels have fallen from a peak of 82.7 percent of GDP to 75.3 percent of GDP in the same period. In contrast, household debt levels have climbed in The Netherlands from 116.1 percent of GDP at end-Q1 2008 to a peak of 141.4 percent of GDP at end-Q1 2013. Since then it has fallen slightly to a still worrisome 139.7 percent of GDP at end-Q3 2013. In Canada household debt levels jumped from 68.3 percent of GDP at end-Q1 2006 to 93.2 percent of GDP at end-Q3 2013. Similarly, French household debt levels continue to increase, albeit to a less concerning level of 67 percent of GDP at end-Q2 2013 from 51.2 percent of GDP at end-Q1 2006.

TABLE 3: HEALING PROCESS IN SELECTED ADVANCED ECONOMIES

REGION

COUNTRY

PROGRESS

TREND

North America US
North America Canada
Europe Germany
Europe France
Europe Italy
Europe Spain
Asia Pacific Japan
Progress has been made since 2008
Little/no progress achieved since 2008
Improving
Status Quo
Declining

In terms of non-financial sector corporation debt, progress continues to be made in Japan (154.7 percent of GDP at end-Q1 2009 to 142.4 percent of GDP at Q3-2013), Spain (199.1 percent of GDP at end-Q1 2009 to 173.8 percent of GDP at end-Q2 2013), Germany (106.0 percent of GDP at end-Q1 2009 to 88.8 percent of GDP at end-Q2 2013) and the U.K. (118.5 percent of GDP at end-Q1 2009 to 100.6 percent of GDP at end-Q3 2013). However, non-financial corporation debt has grown in France from 149.9 percent of GDP at end-Q1 2009 to a peak of 157.3 percent of GDP at end-Q1 2013. On a positive note, non-financial corporation debt in France fell to 154.9 percent of GDP at end-Q2 2013.

In relation to financial sector debt, the greatest progress has been in the U.S., with debt levels falling from 122.8 percent of GDP at end-Q1 2009 to 83.5 percent of GDP at end-Q2 2013. In Germany financial sector debt declined from 123.7 percent of GDP at end-Q1 2009 to 94.5 percent of GDP at end-Q2 2013. In contrast, levels have increased between end-Q1 2009 and end-Q2 2103 in Italy (90.5 percent of GDP to 105.6 percent of GDP), representing a decline from the peak of 109.2 percent of GDP at end-2012. Spanish financial sector debt levels have virtually returned to the end-Q1 2009 level of 109.4 percent of GDP, after climbing steeply to 121.3 percent of GDP at end-2012. Meanwhile, otherwise stable financial sector debt levels in The Netherlands remain elevated at around 400 percent of GDP.

The build-up of public sector debt has created the greatest concern, impeding governments from pump-priming their demand deficient economies. General government debt as a percentage of GDP in the major economies was still rising at the end of 2012. By the end of Q2 2013, levels were rising in Italy (130.7 percent of GDP), Greece (183.1 percent of GDP), and Spain (125.1 percent of GDP). Japan’s levels rose to 230.4 percent of GDP at end-Q3 2013. However, general government debt as a percentage of GDP appears to have peaked in Q2 2013: in Canada (80.3 percent of GDP, before falling to 78.3 percent of GDP in Q3) and The Netherlands (83.3 percent of GDP, before falling to 82.5 percent of GDP in Q3). Levels peaked earlier at end-Q1 2013 in France (115.8 percent of GDP down to 115.1 percent of GDP in Q2 2013), the U.K. (97.1 percent of GDP down to 93.3 percent of GDP in Q3), and the U.S. (124 percent of GDP down to 121.3 percent of GDP in Q3). In Germany general government debt peaked significantly earlier at 89.1 percent of GDP in Q2 2012 and now stands at 84.6 percent of GDP at end-Q2 2013. However, all countries are still significantly above their pre-crisis norms; therefore, public sector rebalancing remains a core issue going forward.

Progress on Restructuring in the Emerging Markets

Resurgent growth in the emerging markets helped pull the global economy out of the 2008-09 recession. However, the success of the emerging markets in the years prior to and following the recession masked the need for structural reform. As global growth has struggled to maintain momentum, the difficulties facing many emerging markets have become more apparent and urgent. It is increasingly obvious that emerging economies cannot be treated as a homogenous set.

By analyzing these economies across three dimensions—short-term vulnerabilities, longer-term supply side restructuring, and political and social pressure—we are able to highlight their strengths and weaknesses. We have assessed 25 of the leading emerging markets (Angola, Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Iran, Malaysia, Mexico, Nigeria, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, Ukraine, Venezuela, and Vietnam) to ascertain the risks and opportunities of cross-border trade and investment with counterparties in these countries.

By assessing 15 separate macro-economic and financial indicators over the past five years (significant indicators of domestic banking distress and financial crisis), we have created an analytical framework that scores the short-term vulnerability of these 25 major emerging economies against each other comparably. Our analysis includes an evaluation of the relative growth of asset prices and credit extension, as well as of the build-up of public and external debt, while accounting for mitigating factors such as high foreign exchange (FX) reserves. Countries most vulnerable to short-term financial pressures are South Africa, Malaysia, India, Turkey, Brazil, and Venezuela. Countries such as Saudi Arabia, Angola, Vietnam, Russia, Nigeria, and China were considered to be less vulnerable to the negative impacts of sudden short-term capital outflows. This was due primarily to the strength of their FX reserves, lower relative capital inflows, and reduced financial openness to global capital markets.

FIGURE 1: SHORT-TERM VULNERABILITY SCORE

Short-term vulnerabilities can hide more positive news about the strength of the economy in the longer term. Countries that appear to be able to weather short-term crisis are less well-structured to grow at their maximum potential. We have assessed changes in four pillars on the supply side over the past decade to ascertain how well the country has used the capital inflows experienced during the boom years. The four pillars are 1) human capital, in which we measure the quantity and quality of a country’s labor force; 2) physical capital, in which we measure gains in productive capacity through infrastructure and innovation; 3) competitiveness of the economy, in which the comparative advantage over its peers is assessed; and 4) openness of the economy, in which the country’s integration with the rest of the world is assessed.

FIGURE 2: LONGER-TERM SUPPLY SIDE RESTRUCTURING

The third leg of our assessment accounts for political factors, which can impede or assist with the implementation of the necessary supply-side restructuring. By assessing the timing of elections (the closer to January 2014, the less likely the country is to start on a painful restructuring path), the capability of the institutions to implement policy change, and the type of political system, we highlight seven countries in which impediments to change and positive reaction are high. These are Thailand, Ukraine, Venezuela, Angola, Iran, Egypt, and Nigeria. In contrast, Chile, Poland, Turkey, Hungary South Africa, and the Philippines have political environments and institutions that would be able to better adapt to and cope with a sudden change in global investor sentiment.

FIGURE 3: ABILITY TO IMPLEMENT POLICY CHANGE

Assessing the three dimensions of risk, the weakest country is Venezuela, which falls into the lowest category in each dimension. Angola, Iran, and Nigeria are all rated in the weakest category in terms of long-term supply-side adjustment and ability to implement necessary political and policy changes. Other countries of concern are Argentina, Colombia, and Indonesia. The countries ranked strongest include China, Hungary, and Saudi Arabia, with Chile, the Philippines, and Poland also performing well. These countries also face a number of policy challenges in the years ahead but are better positioned to weather exogenous shocks, including changes in the position of the U.S. Federal Reserve and other central banks

Ten Key Regional Risks

The Dun & Bradstreet Overall Global Business Impact (GBI) score for January 2014 stands at 226, down from 274 in July 2013. The score suggests the global economic recovery is becoming embedded and headwinds are slowly dissipating. Of the top 10 risks facing the global business environment over the next 24 months, the top two involve the world’s largest economy, the U.S. As such, U.S. recovery remains important to support global growth. According to our GBI score, the greatest risk comes from the transitional phase of U.S. monetary policy, resulting in substantial disruption in global stock, bond, and currency markets (GBI score of 45 out of a maximum of 100). Either the transition will not have been signaled effectively, resulting in markets misreading the situation, or the transition is implemented too rapidly, not giving markets or emerging economies time to react.

In second place with a GBI score of 30 is the possibility of U.S. regulatory restrictions on non-U.S. banks setting off retaliatory measures. We are concerned that attempts by U.S. regulators to set restrictions on non-U.S. banks under the Dodd-Frank Act could lead to retaliatory measures by the governments of those banks implicated. An escalation of tit-for-tat actions would have serious implications for the global financial system and trade and investment flows.

Other pressing risks also warrant attention beyond the U.S. Topping the list is the impact on global business of the EU banking stress test, resulting in larger-than-expected financing needs and straining the financial sector (GBI score of 27). U.S. legal attempts to force Argentina to pay $1.3 billion to holdout bondholders who did not accept terms of a $100 billion debt default in 2002 has earned a GBI score of 24. If the courts find against Argentina, it will be difficult, if not impossible, for other deeply indebted sovereign governments to write-off their debts. That would trigger a global repricing of sovereign risk debt and potentially undermine any further sovereign debt restructuring. Meanwhile, a reversal of capital inflows in Sub-Saharan Africa would significantly impact domestic economic growth and curtail commodity sector expansion, thus raising manufacturing input prices and creating global inflationary pressures (GBI score of 24).

TABLE 4: TOP 10 RISKS BY Dun & Bradstreet GLOBAL BUSINESS IMPACT SCORE FOR THE GLOBAL BUSINESS ENVIRONMENT

REGION

RISK

LIKLIHOOD OF EVENT (%)

GLOBAL IMPACT (1-5)

GLOBAL BUSINESS IMPACT SCORE
(1-100)

North America

Transitional phase of US monetary policy results in substantial disruption in global financial markets

45

5

45

North America

US regulatory restrictions on non-US banks sets off retaliatory measures

50

3

30

West & Central Europe

EU banking stress test leads to bigger than expected refinancing needs

45

3

27

Latin America

A US Supreme Court ruling against Argentina results in global re-pricing of sovereign risk

40

3

24

Sub-Saharan Africa

Episodes of reversal in foreign capital inflows as SSA countries adjust to the varying pace of monetary withdrawal in the U.S.

40

3

24

Latin America

Anti-government protests inspired by Brazil spread through emerging markets, damaging policy stability and global investor sentiment

30

3

18

North America

Political standoff over fiscal re-balancing fosters continued policy uncertainty

20

4

16

Asia Pacific

Macroprudential policies to rein in credit growth trigger a substantial correction in China’s property market

35

2

14

Asia Pacific

China’s interbank market freezes and mid-tier banks require emergency capital issues and seek state rescues

35

2

14

Middle East & North Africa

Syria breaks up into mini-fiefdoms and violence spreads into neighboring countries

70

1

14

Another concerning risk includes political unrest in Brazil resulting from unfulfilled middle-class aspirations following the global downturn. Such a scenario threatens to spread into other emerging markets, a possibility we rate at 30 percent. The trigger is likely to be different in each country but the result would damage policy stability and erode investor confidence, triggering capital outflows. In seventh place with a GBI score of 16 (down from third in the July 2013 ranking of 32) is the political uncertainty of the U.S. budget deficit. Until resolved, global markets will remain volatile when activity in Washington, DC, heats up.

Two Asia-Pacific risks share eighth place with GBI scores of 14. First, government policies could lead to a substantial correction in Chinese property prices, significantly undermining attempts to increase the domestic demand share of economic growth. Potential problems in the Chinese financial sector and a freezing of the interbank market—leading to mid-tier banks seeking a government bailout—pose an additional challenge. Second, a break-up of Syria into a series of mini-fiefdoms would destabilize neighboring countries and create a base for launching attacks on western interests across the globe.

Key Observations

  • Global rebalancing is underway but growth will remain below previous trend rates into the medium term
  • The recovery process will not be a straight line and businesses should be prepared for ups and downs
  • The end of quantitative easing programs will bring further uncertainty, particularly if timed badly or signaled poorly
  • The importance of the recovery becoming embedded in the US is highlighted by the Dun & Bradstreet Global Business Impact scores in relation to the transitory phases of monetary easing and fiscal rebalancing
  • In addition, structural imbalances in China and other emerging economies need to be handled with care, not just for the Chinese economy but also businesses across the globe

Regional Insight: The Americas

Trend: Stable

Headline Regional Issues

  • Regional economies are expected to gather pace (to varying degrees) in 2014 as the U.S. recovery accelerates and the global economy continues to heal
  • Downside risks linked to commodity price volatility and the impact of U.S. Fed tapering will continue in the near term
  • Venezuela, Argentina, and Brazil will face stubborn price pressures in Q1, with other economies likely to see an uptick in the second half as spare capacity is utilized
  • Economic reform is unlikely to be undertaken in the near term by incumbents facing re-election 2014; instead stop-gap measures to appease disenchanted voters are likely to be implemented
  • International reserves are broadly solid, providing adequate buffers against moderate external shocks in the near term, but current account balances will remain under pressure in Q1

Regional Outlook

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