Business environment risk: Upgrades still prevail over downgrades

In the framework of its regular review of business environment risk, Credendo has upgraded 11 countries and downgraded 9 others. Those changes in ratings show more balanced developments overall, reflect the impact of the global economic slowdown, country-specific developments and, recently, for some MENA countries, the negative fallout from the ongoing Hamas-Israel conflict. 

Business environment risk

• Burkina Faso: downgrade from E/G to F/G

Most member states of the West African Economic and Monetary Union (WAEMU) are classified in category E/G (or better). Despite the economic turmoil, their membership to the monetary union provides stability in terms of inflation containment, evolution in policy rates and liquidity management. For Burkina Faso, the business environment is deeply affected by the detrimental security situation in large parts of the country and the political turmoil following the military takeover. A second internal coup took place in 2022, owing to the failure of the junta to contain the worsening jihadist insurgency and, in September 2023, another internal coup attempt was foiled. Insecurity in more than half of the country’s territory cuts growth potential and diverts financial resources to the war. In order to reflect this in the business environment risk classification, it was decided to downgrade Burkina Faso from E/G to F/G, aligning it with the classification of Mali, a regional peer experiencing a comparable political and security crisis. 

• Georgia: upgrade from E/G to D/G

Following Russia’s invasion of Ukraine, Credendo downgraded the business environment risk category of many countries in the CIS (including Georgia to category F/G). However, the economic fallout from the war was much less severe than originally feared. Hence, the business environment risk rating of Georgia was upgraded to category E/G in March 2023. Credendo has decided to further upgrade the business environment risk rating to category D/G to highlight Georgia’s robust economic performances even if the economic activity is expected to decelerate in 2024. Inflation is low (see graph below) but the policy rate and, hence, the lending rate remain high. As a result, access to credit is expensive. The exchange rate appreciated until April 2023 and, since then, it has depreciated slightly. All in all, the exchange rate remained broadly stable last year. Last but not least, Georgia was granted the candidate status by the European Union, which should motivate the country to implement reforms that would strengthen further the institutional framework. 

• Kenya: downgrade from E/G to F/G

The Kenyan shilling has been devaluating at a steeper pace since early 2023 (see graph below).
 

Higher import prices, caused by a depreciating currency, are a driver of inflation, which remains elevated, though it has come down from its 2022 peak. This decline in inflation is in large part due to a more restrictive interest rate policy by the Kenyan Central Bank, which raised its main policy rate to 12.5% in December 2023, i.e. the highest rate since 2012. These increased rates are expected to create a significant increase in lending rates charged by Kenyan banks. Real GDP growth, driven by a buoyant private sector, is expected to remain robust in 2024 (at around 5%). While El Niño is leading to more rains, which is positive after years of drought conditions, it increases the risk of floods. This could worsen food insecurity and lead to lower growth. The state of Kenya’s public finances also means that it will not have a lot of room to provide fiscal support in case of additional shock.

• Jordan: downgrade from D/G to E/G 

The Hamas-Israel conflict – among other things – has heightened geopolitical tensions in the Middle East, with concrete impacts on vulnerable countries. Jordan is very exposed, given its geographical proximity to the conflict and its reliance on the tourism sector (around 10% of GDP and almost 25% of current account receipts). The fallout from the conflict, notably the reported disruption of the region’s tourism sector and growing social discontent related to the acute humanitarian crisis in Gaza, could dampen the Jordanian economic prospects. From this perspective, a long conflict could impact economic growth and liquidity. Moreover, a prolonged conflict could inflame more intense forms of support for Palestinians. Even before the outbreak of the conflict, Jordan was facing important downside risks, given its challenging socioeconomic situation and weak macroeconomic fundamentals (e.g. poor public finances).  

• Nigeria: downgrade from F/G to G/G

Since President Tinubu came to power in May 2023, he immediately embarked on sweeping market reforms, such as the exchange rate liberalisation and the (partial) end to fuel subsidies. Ever since, we have seen periods of very sharp fluctuations in the value of the naira, with records lows (1000 NGN/USD) in October and November. The Central Bank of Nigeria (CBN) is again managing the naira to stabilise it, while trying to converge the official dollar exchange rate to the unofficial parallel market’s rates. Liquidity pressure remains high due to low investment inflows and concerns over oil revenues, and leads to ongoing hard currency shortages in the market. With inflation reaching double digits for over 7 years now, the impact on the poverty rate and the general cost of living has been severe. Despite policy efforts, inflation is expected to remain high and to reach 31% and 15% in 2023 and 2024 respectively. As a result of low growth prospects, sharp currency volatility, soaring policy rates (19%), high inflation and significant security risks, Credendo downgraded the business environment risk rating to its highest level, from F/G to G/G. 
 

• Taiwan: downgrade from B/G to C/G

Taiwan’s GDP growth is expected to have ended the year 2023 at a modest 0.8%, i.e. its lowest level since 2009. Even during the Covid-19 pandemic, the economy had shown impressive resilience, with an average 5% in 2020-2021, driven by strong manufacturing exports. Given Taiwan’s export-oriented economic structure, last year’s weak performance directly resulted from the deteriorated global economic and geopolitical context. The drop in Chinese demand has particularly harmed Taiwan’s exports – including tourism – as China accounts for 40% of Taiwan’s exports of goods. More generally, after a boom during the Covid years, the manufacturing sector has been suffering from a sharp moderation. Tighter monetary conditions and uncertain prospects amid high geopolitical tensions have also hit hard corporate investments. Therefore, Credendo decided to downgrade Taiwan’s business environment risk rating to C/G. Economic forecasts for 2024 might be more promising, not only as a base effect vis-à-vis a poor year 2023, but also taking into account a potential uptick in technology goods demand (especially AI-related), coupled with a stronger services sector. However, high global political and economic uncertainty, including coming from China, will definitely weigh on this year’s outlook. The fallout of the 13 January 2024 elections could also translate into persisting Chinese pressures on the island, should the ruling DPP party remain in power.