On a related note, the steady chilling effect of the U.S.-China strategic rivalry is causing many to reconsider their up-till-now enthusiastic Chinese expansion plans. According to Oxford Economics, 87% of respondents view a China-Taiwan conflict as likely over the next five years. Outright conflict in the South China Sea, a risk which caused us to recently downgrade China’s political violence rating, could hasten a further bipolarization of the global economy.
One of the few beneficiaries of escalating Sino-American tensions—to say nothing of rising labour costs and a shrinking population in China—has been Vietnam. EDC Economics recently upgraded its Vietnam rating, in part due to higher investment flows resulting from the market’s status as an alternative to China. In fact, a mix of economies across Asia, which has come to be known as “Altasia,” may present a reasonable substitute for China.
Drilling down to the country risk level, over the last quarter, EDC Economics imposed more downgrades than upgrades across our various risk-rating categories. Short-term commercial risk ratings were negatively impacted by a deteriorating economic outlook. While unseasonably warm winter weather helped Europe avoid the effects of high energy prices and rationing, we expect Europe’s economy to come to a standstill this year, in the context of a higher price environment.
Inflation-fighting interest rate hikes in developed markets have encouraged capital outflows from several African countries, and forced a global repricing of risk. Many developing countries came into the pandemic with elevated debt levels already and spent the last few years experimenting with larger budget deficits and unconventional monetary policies. The stronger American dollar also makes U.S. dollar-denominated debt more expensive to carry. Higher food and energy costs are another pressure point for many of these countries. As a result, we downgraded several African markets, due to rising debt servicing costs and sustained inflationary pressures.
Previously a darling of frontier investors, Ghana defaulted to external creditors in late 2022. While support from the International Monetary Fund (IMF) and other multilateral institutions is necessary to prevent more countries from defaulting, it may not be sufficient. Nearly 25% of all sovereigns rated by EDC are now at high risk of default, including several medium-sized economies such as Egypt, Pakistan and Nigeria.
