Short-term political risk: Downgrades following Russia’s invasion of Ukraine mitigate the dominant number of countries upgraded

In the framework of its regular review of the short-term (ST) political risk and after the Russian invasion in Ukraine, Credendo has upgraded 12 countries and downgraded 3 countries after already downgrading Belarus, Russia and Ukraine. With twice as many upgrades as downgrades – mainly thanks to a wave of upgrades in the Caribbean region – this year might bring continuity with last year’s trend of gradually recovering country risk classifications. However, this is misleading as the overall outlook has darkened since 24 February and the Russian invasion of Ukraine.

Fallout of the war in Ukraine: downgrades of Georgia and Moldova

Credendo has decided to downgrade the short-term political risk of Georgia and Moldova to category 4/7 and 5/7 respectively since these two countries are the most likely to suffer under Russian pressure. Indeed, both would like to have closer ties with the EU and Georgia would even like to join NATO. Like Ukraine, both countries have signed an association agreement with the EU and officially applied for membership to the European Union following Russia’s invasion of Ukraine. Armenia has also signed an association agreement with the EU. However, despite sporadic tensions between Russia and Armenia, the latter seems less at risk, as it already relied on Russia for its security, and as it is a member of the Eurasian Economic Union (along with Russia, Belarus, Kazakhstan and Kyrgyzstan).

Mexico: upgrade from 2/7 to 1/7

Liquidity indicators have improved for the second-largest Latin American economy. In 2021, Mexico’s current account revenues swiftly rose, by almost a fifth compared to 2020. As a result, the current account was in balance in 2021 while nominal foreign exchange reserves rose (also thanks to the SDR allocation in August) and stood at an adequate level covering about 4.3 months of imports in December 2021. Furthermore, short-term external debt vis-à-vis current account revenues stands at a low level. Looking forward, nominal current account revenues are expected to increase further in 2022, supporting liquidity indicators. As a result, Credendo has upgraded the country’s short-term political risk rating to category 1/7 – the lowest risk category.

Zambia: upgrade from 6/7 to 5/7

Zambia was upgraded from ST political risk category 6/7 to 5/7, driven by improved current account data thanks to soaring commodity prices (especially copper). Moreover, the recently elected President Hichilema and his government are expected to gradually stabilise the political situation while economic performance should be stronger thanks to higher export revenues and recovering domestic demand. Foreign exchange reserves now cover almost 4 months of imports. Although near-term prospects have improved, the country is still in a financial crisis and cut off from external financing after the sovereign defaulted on its Eurobond debt in November 2020.