Business environment risk: The upgrade trend is about to stop as a result of the war in Ukraine and the global energy crisis

In the framework of its regular review of business environment risk classifications, Credendo has upgraded 41 countries and downgraded 3 countries. The overwhelming dominance of upgrades, gradually reversing the worldwide downgrade trend of 2020, has continued. However, this trend is about to stop as the conflict in Ukraine and related geopolitical tensions and economic sanctions are definitely clouding the 2022 outlook. These could keep inflation at high levels, fuel the global energy crisis for a prolonged period and weaken many currencies. The expected gradual tightening in global monetary conditions is another risk. All those factors will negatively hit economic prospects.

Business environment risk

• Angola: upgraded from category G/G to F/G

Following six consecutive years of recession and 0.1% GDP growth in 2021, Angola’s economy is finally expected to grow again by 2.9% in 2022. The economic recovery is mainly driven by private consumption. Furthermore, the unwinding of the OPEC+ production cuts should raise investments in the Angolan oil sector in 2022. Nevertheless, inflation is still expected to reach 18% by the end of this year, following years of very high inflation rates (peak at 41% in 2016) – and with global food prices set to sharply increase as a consequence of the Russian invasion of Ukraine, this expectation is likely to be to optimistic. Soaring international oil prices, on the other hand, will provide more fiscal space and foreign exchange revenues, at least in the short term. A domestic lending rate of 20% continues to weigh on the economic growth potential and the non-oil sector development. However, as business environment risk has improved, the rating has been upgraded from the highest risk category G/G to F/G.

• Azerbaijan upgraded from category E/G to D/G

In the short term, the oil- and gas-dependent economy is benefiting from the sharp increase in energy prices. Moreover, despite its location in the Caucasus region, it is much less reliant on Russia than other countries in the region. Hence, despite the large shock affecting the CIS region, Credendo has decided to upgrade the business environment risk classification of Azerbaijan to category D/G, which is the classification it was assigned before the onset of the Covid-19 pandemic.

• Malaysia: upgraded from category D/G to C/G

Malaysia’s economic rebound in 2021 is expected to accelerate this year to more than 5%. Exports of manufacturing goods – notably electronics – have remained on a strongly positive trend so far and have supported the economic activity. As a net fuel exporter, Malaysia will benefit from the sharp increase in hydrocarbon prices, and their likelihood to stay high for an undetermined period, as a result of the war in Ukraine, sanctions against Russia and geopolitical tensions. Robust forecasts are confirmed by low inflation (i.e. less than 2.5% in January), in a context of upward global inflation pressures, and by the stability of the Malaysian ringgit in spite of the prospect of a global tightening in financial conditions. Those positive developments have allowed a rating upgrade from category D/G to C/G. Nevertheless, the Malaysian economy is faced with the risk of a downward revision in economic prospects due to persisting supply chains bottlenecks, weakened Chinese growth and global demand. Moreover, the highest Covid-19 wave currently hitting the country could also slightly affect GDP growth this year, even though the peak of infections might soon be reached and vaccination is high around 80%.

• Panama: upgraded from category E/G to D/G

After a deep recession of -18% in 2020, one of the worst contractions in the region, the Panamanian economy is expected to have recovered 10% in 2021. Moreover, unlike other Latin American countries, Panama is expected to continue its strong rebound in 2022 with a further recovery of 7.8% thanks to copper mining operations and infrastructure projects. In addition, the fully dollarised economy has been enjoying rather low inflation compared to other economies and it has not been prone to large exchange rate depreciation contrary to other economies in the region. As business environment risk has improved, the rating has been upgraded from category E/G to D/G.

• Qatar: upgraded from category E/G to D/G

The currently high hydrocarbon prices are significantly benefiting Qatar – one of the world’s top liquefied natural gas (LNG) exporters. The ramifications of the Russia-Ukraine conflict on hydrocarbon markets are projected to further support Qatar’s positive momentum. Moreover, the non-oil sectors are also recovering from the pandemic shock, supported by high Covid-19 vaccination rates (73% of the population is fully vaccinated). As a result, the country is expected to recover from the pandemic shock this year. For these reasons, Qatar has been upgraded from category E/G to D/G. Looking ahead,  the country could however be faced with moderate inflation pressures, as a result of supply chain disruptions, high gas and oil prices, and the prospects of high food prices following the Russia-Ukraine conflict. Moreover, policy interest rates are projected to increase this year, together with the tightening of monetary conditions in the USA, as the Qatari riyal is pegged to the US dollar.

• Russia : downgraded from category E/G to G/G

Following the imposition of severe sanctions on Russia, the Russian rouble tumbled, many western companies are leaving the country, access to western financing and technologies are cut. Hence, the Russian economy is expected to contract sharply and inflation is expected to increase strongly. The central bank reacted swiftly by rising its benchmark interest rate to 20% from 9.5% previously. The abrupt shock provokes a sharp deterioration of the business environment risk. Hence, Credendo has decided to downgrade Russia’s rating by two notches to category G/G.