Business environment risk: Six upgrades and thirteen downgrades

Under the framework of its regular review of business environment risk, Credendo has upgraded six countries and downgraded thirteen others.

Business environment risk

• Türkiye: upgrade from G/G to F/G

Since Erdogan’s re-election in May 2023, we have witnessed a turnaround in Türkiye, where the president has appointed a new, more orthodox economic team. As shown in the graph below, since May 2023, the country’s central bank has implemented a more conventional monetary policy, gradually increasing benchmark interest rates to 50% (up from 8.5% in early June 2023) and allowing the Turkish lira to depreciate, while progressively removing certain unorthodox financial instruments. As a result, and amid a more prudent fiscal policy, the economy is slowing down, inflation has decreased, the current account balance has improved and the exchange rate of the lira is now more stable (see graph below). While the short-term political risk category remains in 5/7 for the moment, Türkiye’s liquidity has also improved, resulting in a positive outlook for its short-term political risk. In this context, Credendo decided to upgrade the business environment risk to category F/G.

• Mexico: downgrade from D/G to E/G

Amid fierce rhetoric from US President-elect Trump towards Mexico, the Mexican peso has been depreciating rapidly in the past six months (see graph below). Increased currency volatility is likely to continue in the coming months due to Trump’s unpredictability and greater uncertainty around his trade policies, given the United States’ position as Mexico’s top trade partner (accounting for more than 80% of its exports). Following the depreciation of the Mexican peso, inflation is expected to rise (4.5% at the end of November) and interest rates are likely to remain higher for longer – or might even increase, leading to higher borrowing costs for companies and slower economic growth, currently forecast at a meagre 1% for next year. A shallow recession may even be on the cards, depending on how far Trump pushes his trade agenda, namely 25% blanket tariffs on all Mexican imports, and his migrant and mass deportation agenda. Lastly, domestic developments such as the controversial judicial reform, which would subject all of Mexico's judges to public election, could further negatively affect the business environment. In this context, Credendo decided to downgrade the business environment risk classification from D/G to E/G.
 

• Austria, the Czech Republic, Germany, Hungary, Italy and Slovakia: downgrade from D/G to E/G.
• Finland and Ireland: downgrade from C/G to D/G.

Business sentiment in the European manufacturing sector has been persistently low, as reflected by the consistently contracting manufacturing PMI across these countries. One major concern is the struggling automobile sector in Europe.
 

The European automotive industry is currently navigating a challenging landscape marked by several disruptive factors. New EU environmental regulations, particularly the Green Deal’s ban on the sale of new combustion engine cars after 2035, have put significant pressure on car manufacturers to transition to electric vehicles. This transition is further complicated by fierce competition from Chinese manufacturers, who are producing competitively priced electric vehicles and thus putting additional pressure on the profit margins of European companies.

As a result, major players such as Volkswagen and Audi have announced the closure of several manufacturing plants in Europe. These closures are not just a blow to the companies, but also to the broader supply chain, particularly in Central European countries such as Hungary, Slovakia and the Czech Republic, which heavily rely on the German automotive sector. The potential imposition of new tariffs by the Trump administration adds another layer of uncertainty, by threatening to reduce sales to the US market. This combination of environmental regulations, competitive pressures and geopolitical uncertainties is expected to lead to a decrease in production and a deterioration in the financial situation of the entire European automotive sector, which will most likely result in job losses and economic challenges in those countries that are key parts of the automotive supply chain.

Other countries, such as Finland, Ireland and Italy, are also expected to face challenges due to their high exposure to the US market when it comes to exports, in the context of potential tariffs from a new Trump presidency.

Under this difficult context, Credendo decided to downgrade the business environment risk classification for Austria, the Czech Republic, Germany, Hungary, Italy and Slovakia from D/G to E/G and for Finland and Ireland from C/G to D/G.