Sovereign External Risk Ranking 2020: Covid-19 Lays Bare Country Risks to External Shocks

In the 2020 update of its external vulnerability and resilience rankings, Scope says volatile market conditions, vastly exacerbated by the coronavirus outbreak, and falling oil prices in 2020 have exposed the vulnerabilities of many countries’ balance of payments.

Lebanon defaulted on a USD 1.2bn Eurobond, Argentina and Ecuador’s debts re-entered selective default, and Zambia is on the brink. There are concerns about a wider emerging market debt crisis.

Meanwhile, with Brent prices at below USD 30 a barrel at the time of this writing (and US WTI trading around zero), crude is significantly below levels all oil exporters require for balanced budgets.

Assessments of external vulnerabilities are vital in evaluating debt repayment capacity

“Assessments of external vulnerabilities are vital in monitoring and assessing countries’ capacities to repay debt with economies under such severe stress,” says Levon Kameryan, analyst at Scope and co-author of the new report.

Scope has updated its external vulnerability and resilience two-axis grid, a framework it first introduced in 2018, which assesses countries on a) vulnerabilities to a balance-of-payments crisis and b) degrees of resilience in the advent of such a crisis.

Georgia (rated BB/Negative by Scope), Turkey (BB-/Negative) and Argentina (unrated) are 2020’s risky-3 as three economies that not only have vulnerability to the onset of balance of payment problems, but also show significant weakness in their respective abilities to cope in crisis.

“Argentina enters this year’s risky-3, edging out Ukraine, which was in the original 2018 risky-3 roster, while Ukraine, Colombia, Pakistan and Serbia (all unrated) remain highly at-risk economies just outside the top three most at risk,” says Kameryan.

At the other end of the spectrum, Taiwan (unrated), China (A+/Negative), and Switzerland (AAA/Stable) are home to economies that are the most robust to external shocks. Taiwan replaces Japan (A+/Stable) in this year’s sturdy-3.

Scores for major Western economies vary

Scores for major Western economies vary. The United States (AA/Stable) receives strong marks on external resilience, supported by dollar primacy (as the fourth most resilient economy in the 63-country sample), although the US displays significant external vulnerabilities. Italy (BBB+/Stable) and Germany (AAA/Stable) continue to display external sector strengths – supported by current account surpluses.

Italy’s external resilience is helped also by nearly 70% of Italian debt held by the resident sector. France (AA/Stable) has average scores, but Spain (A-/Stable) continues to score weakly on both axes of the framework. The UK (AA/Negative) displays deficits especially on external vulnerabilities.

Inside the EU, Scope finds that Cyprus (BBB-/Stable), Croatia (BBB-/Stable) and Romania (BBB-/Negative) are the three EU member states facing the greatest external sector risk.

On the flip side, Malta (A+/Stable), Luxembourg (AAA/Stable) and Denmark (AAA/Stable) are the EU’s sturdy-3, says Kameryan.

Read more in the 2020 external vulnerabilities and resilience report and rankings.

Levon Kameryan is Analyst in Public Finance at Scope Ratings GmbH.