2016-17: Tectonic shifts and risk of local tremors

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    The world economy is never still. Even when GDP and trade growth seems sluggish on the surface – as they do for quite a while - massive movements may occur. Economic plates slide and push against one another. Bubbles form, and sometimes erupt as the money magma flows rapidly underneath. Fault lines may deepen. And quakes tend to hit just when you felt the world is a sleepy giant.

Our latest global scenario is titled “Economic Tectonic shifts​”. But before we take a deep dive into reservoirs of money magma, here’s a quick rundown of the updates in Country Risk Ratings Euler Hermes produces each quarter.


The 20 new Country Reports include six changes in risk ratings. First there are 2 upgrades for recovering economies on the Eurozone’s periphery. Portugal’s short term risk moves up a notch from B2 to BB2 and Cyprus​’s from B3 to B2. 

The first upgrade is due to declining fiscal deficit (-2.9% of GDP in 2016f) and a better external position. Financing the public debt does not seem to be an issue anymore. Credit is due to the ECB’s quantitative easing program, launched in 2015 and extended to EUR80bn per month. Cyprus’s upgrade is a result of improved current and fiscal accounts and lower interest payments on public debt. Exit from the bailout in March 2016 has proven sustainable as three sovereign bonds were issued in 2016

Then there are 4 downgrades: Mexico ​(BB1 to BB2), Trinidad & Tobago (BB2 to B3), Mongolia​ (D3 to D4), Papua New Guinea (C3 to D4).

In Mexico’s case growth shrunk to -0.5% q/q (Q2) and the full year forecast stands at +1.7%. Ongoing export contraction due to unimpressive industrial activity in the US and low oil prices, a rising current account deficit, and pressures on the local currency all contribute to a less-than-optimistic outlook. The still-high vulnerability to a Fed rate hike is another issue.

Let’s go back to why economic tectonic shifts are important as companies approach 2016 year-end, and finish off budget and planning for 2017. Remember, just like geologists, economists point to potential risks of (economic) disasters but the actual hazard is not forecastable with precision. Yet prevention is important.


  • The US’s much awaited (and in some cases feared) interest-rate hike brings us back to earthquakes and faults territory. The world’s still-biggest ‘plate’ is the US. Elections put everything on hold, and consumption should pick up after a new president is anointed. But post-electoral policymaking could shake things up especially as fiscal stimulus is on both candidates’ to-do list. 
  • China might ease its monetary policy, while budgets should continue to support domestic growth. But the transition from manufacturing to services could become bumpy once more. If this were the case the world might have to reckon with lower demand growth, negative price pressures, and financial stress. Earthquakes alerts can still emanate from the Asia.
  • Or from Europe. An unprecedented political season is upon the continent. While the Brexit referendum is over and its impact has been less intense than expected, the effect might just be delayed. When Britons get around to launching secession negotiations with the EU (March 2017 is the British PM’s deadline), growth and investment may take a hit. Add to that a constitutional referendum in Italy scheduled for December 16’ and a host of elections, including in France and Germany, and you get an interesting, perhaps even worrying, big picture.
  • So will emerging markets save the day with a return to more robust growth? Maybe. Brazil and Russia clawing their way out of deep recessions should be helpful. But strains on liquidity in frontier markets remain significant. Portfolio inflows are recovering, but remain below long-term average. And locally, banking credit conditions remain weak, stemming notably from a high share of nonperforming loans. The commodity curse and exchange rate crises have paved the way to more fragility. Set your seismographs to Venezuela, Nigeria, and Turkey. 


I could go on about the pickup in insolvencies worldwide (+1% this year, first rise since 2009). I might lament trade’s fickle contribution to GDP (still contracting in value terms), or the flow of money magma that remains buried in savings and bonds but barely flows where it is most needed.

But all this just goes to show one thing: When the next eruption comes it might not be catastrophic on a global scale, at least not at first. But threats, alas, are not off the books.

Ludovic Subran 

Chief Economist 

Euler Hermes 


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