Allianz Trade upgraded 48 country risk ratings in 2024
Allianz Trade publishes its second Country Risk Atlas. The Country Risk Atlas is based on a proprietary risk assessment model that is updated quarterly with the latest economic developments and Allianz Trade's proprietary data. It provides comprehensive analysis and insight into economic, political, business conditions and sustainability factors that influence default risk trends for companies on a macroeconomic level.
The Swiss economy recorded a slowdown in growth of +0.8 % in 2023. This is due to the real appreciation of the Swiss franc in the past, weak foreign demand and the decline in investment. However, a gradual recovery in foreign demand, coupled with lower inflation and a looser monetary policy, should boost growth to +1.5 % in 2025. Growth will be supported by a strong structural foundation in private consumption. This includes a robust labor market and a more dynamic industrial sector.
However, the downside risks currently outweigh the upside potential, as uncertainty regarding international economic and trade policy is very high. It is worth noting that insolvencies in Switzerland are still increasing slightly and are at a historically high level. Following an increase in 2024, insolvencies are likely to stabilize in 2025 and then fall by -8 % in 2026.
Inflation within a manageable range
"Inflation is continuing to fall in Switzerland. This is even in the face of high service costs, which are exerting upward pressure on core inflation. On the one hand, the disinflationary trend is supported by lower goods and energy prices, which were boosted by last year's nominal appreciation. On the other hand, this decline will be dampened by rising rents and persistently high service inflation," explains Jan Möllmann, CEO Allianz Trade Switzerland. "As wage growth has slowed, we expect the pressure on the services sector to ease in 2025. For this year, we expect an inflation rate of +0.9 %, followed by +1.1 % in 2026. This should keep inflation in Switzerland within a manageable range and below the central bank's target."
Structural deficit at the federal level
The federal government slipped into a slight structural deficit as both expenditure and revenue fell short of budget expectations in 2023. This resulted in a structural deficit of -0.5 % and a debt ratio of +17.8 % of GDP, which is very low by international standards. Cost-cutting measures in 2024 aimed to reduce the federal budget by CHF 2 billion per year. However, rising military expenditure, higher pension, survivors' and healthcare costs, expenditure in connection with the Ukraine conflict and climate protection are likely to push the deficit up further. Despite this, government debt is likely to remain stable at just under +14 % of GDP, with total government debt set to fall by 2025.
Very favorable business environment in Switzerland
The business environment in Switzerland is proving to be very strong. The country scores very well in the areas of regulatory quality, rule of law and control of corruption and also has a well-educated workforce. However, Switzerland could simplify the requirements for setting up new companies and the licensing system. Regulatory hurdles in the areas of energy, transport and electronic communications are higher than the OECD average, but trade barriers are low.
Country risk has improved significantly, but challenges loom
In 2024, global country risk improved significantly: 48 economies were upgraded and only 5 were downgraded. The positive trend of 2023 is now even more pronounced. Upgrades have more than doubled (+27) and downgrades remain stable (+1).
"The economies whose ratings were upgraded represent around 17 % of global GDP. The upgrades were mainly distributed among the emerging markets. Latin America was the most affected (13), followed by emerging Europe (10) and Asia-Pacific (9). Most of the downgrades were in the Middle East region, including Bahrain, Israel and Kuwait. This is due to ongoing supply chain tensions and crude oil prices below breakeven," says Luca Moneta. He is Senior Economist for Emerging Markets at Allianz Trade.
However, country risk remains heavily dependent on the geopolitical and financial tensions expected in the coming months. These could be exacerbated by the further materialization of downside risks.
"While the global economic outlook has improved thanks to slowing inflation, recovering credit flows and improved liquidity conditions, business conditions remain unfavorable in many low-income countries. At the same time, high-income economies face ongoing political uncertainty. Furthermore, we must not forget that two thirds of the country risk upgrades we made last year were based on short-term indicators. This suggests that these improvements are cyclical and potentially reversible. Against this backdrop, companies should be vigilant in their growth strategies in light of geopolitical tensions and rising protectionism. Supply chains are likely to become even more complex, making it all the more important to monitor country risk," says Aylin Somersan Coqui, CEO of Allianz Trade.
The complete Country Risk Atlas from Allianz Trade is available herecountries with upgrades and downgrades here.
Source: www.allianz-trade.com
