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2018 Global Outlook Webinar

Political Risk Could Undermine the Global Recovery. Review Dun & Bradstreet's research on global trade and the political risks that could impair global economic outlook. Dun & Bradstreet partners with international finance departments, World Bank Governance Indicator publications, and other global economic outlook experts to create comprehensive fiscal world view.

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2018 Global Outlook Webinar

  1. 1. Dun & Bradstreet: 2018 Global Outlook Webinar Wednesday 29th November 2017
  2. 2. 2018 Global Economic Outlook Political Risk Could Undermine the Global Recovery COUNTRY INSIGHT SERVICES Wednesday 29th November 2017 A DUN & BRADSTREET SPECIAL BRIEFING
  3. 3. Why is Country Insight Important? Economic downturns, political upheaval, and natural disasters can all have an impact on global trade. Unrest can result in overnight barriers to imports, added taxes to exports, piracy activity in key shipping lanes, and other substantial obstacles to global business. D&B Country Insight provides comprehensive analysis on over 130 individual countries that account for more than 95% of the global GDP, helping you understand: • Political Risk: How stable is the country’s government? • Economic Risk: Is the economy expanding or contracting? • External Risk: Is the currency stable or unstable? • Commercial Risk: Will I get paid and how quickly? • Trade Environment: Have import regulations changed? 3Follow us @DnBUS | @DnBUKTeam
  4. 4. Agend a Global Recovery Update Special Focus: Political Risk North America Western Europe Eastern Europe & Central Asia Latin America Asia-Pacific Middle East & North Africa Q&A
  5. 5. Political Risk is Increasing… Follow us @DnBUS | @DnBUKTeam 5 Rank Region Risk Likelihood (%) Global Impact (1-5) 1 Pan-regional Rapidly growing cyber-dependence and connectivity lead to increasingly frequent and more damaging cyber incidents, with global ramifications. 90 3 2 Middle East & North Africa The crackdown by the Crown Prince in Saudi Arabia leads to an increase in social tensions, which disrupts oil supplies and pushes the global oil price above USD80/b. 50 2 3 North America Shifts in trade policy by the US and its withdrawal from multilateral agreements impacts global trade flows as other countries re-evaluate their own stance and cultivate new partnerships. 40 4 4 North America The Federal Reserve raises rates too fast, to pre-empt inflationary pressures, choking US expansion and heightening volatility in the currency markets. 35 2 =5 Middle East & North Africa Saudi-Iranian tensions lead to actual military conflict between the countries, in which oil installations are targeted, boosting oil prices to USD120/b. 25 3 =5 Latin America Mexico's rejection of the US's NAFTA proposals in the fifth round of talks pushes approval of a new deal (if agreed) to the tenure of the incoming president, who rejects the deal, leading to the collapse of NAFTA. 50 2
  6. 6. Global Business Impact Follow us @DnBUS | @DnBUKTeam 6 Source: Dun & Bradstreet 274 226 265 283 272 250 254 260 231 230 235 243 281 225 222 239 228 200 220 240 260 280 300 Q32013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Quarterly GBI score Average GBI Score (248.1) Global Business Impact Score
  7. 7. 7 … and is One of the Main Pillars of our Approach A comparative, cross-border assessment of country risk and opportunity for 132 countries globally D&B COUNTRY RISK POLITICAL ENVIRONMENT COMMERCIAL ENVIRONMENT ECONOMIC ENVIRONMENT • Scores & Forecasting • Reporting, Commentary & Recommendations • Integration with D&B company intelligence Follow us @DnBUS | @DnBUKTeam
  8. 8. 88 Country Risk Scores The D&B Country Risk Score: A unique and comparative, cross-border assessment of the operational risk of doing business in a country, distilled into a single, unique rating Follow us @DnBUS | @DnBUKTeam High Level Granula r Level Granular Scores for specific use cases: Provide a drill-down on key areas of interest according to use-case
  9. 9. The Role of Political Risk in D&B Country Risk Scores
  10. 10. 10Follow us @DnBUS | @DnBUKTeam What Do We Mean by Political Risk? • Government policies • Political system • Powerful interest groups • Decentralisation • Radical groups • External threats
  11. 11. 11 Reasons for Changes to Risk Score: 2012-2017 Follow us @DnBUS | @DnBUKTeam * Until End of September 2017 Source: Dun & Bradstreet Reason 2012 2013 2014 2015 2016 2017 * Total % of Change Politics 15 12 18 10 9 13 77 33.33 Economics 18 17 26 19 22 9 111 48.05 Combined 17 5 5 5 5 3 40 17.32 Natural Disaster 0 1 0 2 0 0 3 1.30 Total 50 35 49 36 36 25 231 100
  12. 12. 12 Political Factors Impact Downgrades More Than Upgrades * Until end of September 2017 Source: Dun & Bradstreet Follow us @DnBUS | @DnBUKTeam Reason for Change Downgrades Upgrades Number % Number % Politics 56 38.36 21 24.7 Economics 57 39.04 54 63.5 Combined 30 20.55 10 11.8 Natural Disaster 3 2.05 0 0.00 Total 146 100 85 100
  13. 13. 13 Regional Differences Follow us @DnBUS | @DnBUKTeam 8 20 8 8 36 6 Downgrades Latin America Western & Central Europe 1 9 64 8 3 Upgrades Asia Pacific Middle East & North Africa
  14. 14. 14 Political Risk Was Falling in MENA, But… Follow us @DnBUS | @DnBUKTeam * To end of September 2017 0 2 4 6 8 10 12 2012 2013 2014 2015 2016 2017* Downgrades Upgrades
  15. 15. 15 Political Difficulties for the EU Rumble On Follow us @DnBUS | @DnBUKTeam * To end September 0 1 2 3 4 5 6 7 8 9 2012 2013 2014 2015 2016 2017* Downgrades Upgrades
  16. 16. 16 Why is Political Risk Important? • Capital inflows can slow or even reverse • Pressure increases on the local currency • Foreign currency borrowing becomes more expensive • Bond spreads widen • Imported inflationary pressures rise • Interest rates subject to upward pressure • The local stock market tends to fall • Business partners demand stricter payment terms • Access to credit can become more difficult Follow us @DnBUS | @DnBUKTeam
  17. 17. North America
  18. 18. Political Risk Mars an Otherwise Stable US Outlook As early as March 2017, we had downgraded the PE Outlook from amber to red, indicating that political risk is now a bigger impediment to operating risk Overall Rating at DB2a (only 3 countries with higher ratings) But, rating outlook downgraded from ‘stable’ to ‘deteriorating’ on Sep 11,2017 Follow us @DnBUS | @DnBUKTeam 18
  19. 19. Policy Design that Ignores Business Cycle Risks Has Long Run Consequences Follow us @DnBUS | @DnBUKTeam -10.0 -9.0 -8.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 Total Budget Balance, % of GDP Projections Deficits Surpluses Average Deficit, 1967 to 2016 Sources: Congressional Budget Office, Dun & Bradstreet 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 Federal Debt Held by the Public, % of GDP Projections
  20. 20. 20 Follow us @DnBUS | @DnBUKTeam Canada -50000 -40000 -30000 -20000 -10000 0 10000 20000 30000 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Department of Finance Canada, Dun & Bradstreet Canada: Federal Govt Budget Surplus[+]/Deficit[-] (SA, Mil.C$) Initial projected budget deficit for the current fiscal year (Mil.C$) {March 2017} -4.500 -2.500 -0.500 1.500 3.500 5.500 7.500 1993-Q1 1994-Q3 1996-Q1 1997-Q3 1999-Q1 2000-Q3 2002-Q1 2003-Q3 2005-Q1 2006-Q3 2008-Q1 2009-Q3 2011-Q1 2012-Q3 2014-Q1 2015-Q3 2017-Q1 Source: Statistics Canada Contribution to Real GFCF Change: General Government: Total (%PT)
  21. 21. Western Europe
  22. 22. 22 The Economic Outlook is Improving Follow us @DnBUS | @DnBUKTeam • Most countries in the region posted robust growth figures in April-June, and recent data hints that positive economic developments will last throughout 2018-19. • Inflation rates remain low, albeit rising, amid an ongoing improvement in labour market conditions but still subdued wage growth as a result of slack productivity growth.
  23. 23. 23 Risk of Late Payments is Generally Falling Follow us @DnBUS | @DnBUKTeam 2007 2014 H2 2017 Europe 41.0% 37.6% 44.3% Germany 53.9% 74.8% 64.6% France 32.4% 38.3% 43.4% UK 32.6% 24.1% 30.1% Share of prompt payments as % of total payments (2007-2017) Germany Spain France Italy Ireland Share of prompt payments as % of total payments in H2 2017 Sources: Altares, Dun & Bradstreet • The average prompt payment delay in the EU has fallen from 13.4 days in Q1 2017 to 13.2 days. • However, significant differences remain across member states. • Payment performance is likely to continue to improve throughout our forecast horizon: the gap between the best and the worst performers will narrow, but differences will persist. Sources: Altares, Dun & Bradstreet
  24. 24. 24Follow us @DnBUS | @DnBUKTeam  Nationalist politicians in the Eastern flank of the EU, especially in Poland and Hungary, have defied EU laws by streamlining media, state-owned enterprises and the judiciary.  The EU is already increasing political pressure as well as threatening to reduce subsidies. However, Political Risk is Rising Again  In Spain, the central government has taken de facto control of Catalonia by triggering article 155 of the Spanish constitution.  Early elections have been called, but tension between the Catalan authorities and the central government is set to remain elevated well beyond the vote.  In Italy, polls are in flux ahead of the general elections in early 2018.  We rule out an EU membership referendum even if anti-EU parties should win a parliamentary majority.
  25. 25. Eastern Europe & Central Asia
  26. 26. 26 Subdued Growth Outlook Amid Slow Oil Price Recovery Follow us @DnBUS | @DnBUKTeam Sources: Dun & Bradstreet, Haver Analytics
  27. 27. 27 Political Climate Snapshot Follow us @DnBUS | @DnBUKTeam Sources: Freedom House Nations in Transit 2017; Transparency International Corruption Perceptions Index 2016; World Bank Worldwide Governance Indicators 2017; Freedom House Freedom in the World 2017; Dun & Bradstreet Calculations Political Regime Public sector corruption (Corruption Perceptions Index 2016 Rank/176) Government Effectiveness (Governance Score: -2.5 to +2.5) Political Stability & Absence of Violence/Terrorism (Governance Score: - 2.5 to +2.5) Political Rights (1= Most Free; 7 = Least Free) Civil Liberties (1= Most Free; 7 = Least Free) Lithuania Consolidated Democracy 38 1.09 0.80 1 1 Latvia Consolidated Democracy 44 1.00 0.39 1 2 Romania Semi-Consolidated Democracy 57 -0.17 0.27 2 2 Bulgaria Semi-Consolidated Democracy 75 0.29 0.03 2 2 Georgia Transitional Government/Hybrid Regime 44 0.51 -0.29 3 3 Ukraine Transitional Government/Hybrid Regime 131 -0.58 -1.89 3 3 Belarus Consolidated Authoritarian Regime 79 -0.51 0.12 7 6 Azerbaijan Consolidated Authoritarian Regime 123 -0.16 -0.87 7 6 Kazakhstan Consolidated Authoritarian Regime 131 -0.06 0.04 7 5 Russia Consolidated Authoritarian Regime 131 -0.22 -0.89 7 6 Kyrgyz Republic Consolidated Authoritarian Regime 136 -0.90 -0.66 5 5 Tajikistan Consolidated Authoritarian Regime 151 -1.02 -0.79 7 6 Turkmenistan Consolidated Authoritarian Regime 154 -1.14 -0.31 7 7 Uzbekistan Consolidated Authoritarian Regime 156 -0.60 -0.34 7 7
  28. 28. 28 Key Political Risks Follow us @DnBUS | @DnBUKTeam Russia and the West: Rapprochement or Continuing Cold War 2.0? • Sharp deterioration in relations over recent years, with a number of issues continuing to cause tension, including: Russia’s revanchism (e.g. Ukraine & Georgia); Syria intervention, alleged election meddling and hostile cyber activities • No significant rapprochement expected over the coming years Russia after Putin? • Putin to win 2018 presidential election but is constitutionally barred from running in 2024 • No credible successor and opposition does not yet offer a viable alternative Ukraine: Forwards, Backwards, or Perpetual Limbo? • Oligarchic elite still controls the levers of power, and as such, vested interests remain a key impediment to progress • Political and economic progress could be stunted – or even reversed – if a less Western-leaning government emerges in 2019
  29. 29. Latin America
  30. 30. 30Follow us @DnBUS | @DnBUKTeam Economic Indicators Broadly Improving but Political Risks Raise Uncertainty Brazil  -3.6 (2016)  0.7 (2017)  1.8 (2018) Argentina  -2.3 (2016)  2.5 (2017)  2.7 (2018) Colombia  2.0 (2016)  1.7 (2017)  2.5 (2018) Mexico  2.3 (2016)  2.1 (2017  2.2 (2018) Growth* (%) 2016 - 2018 Real GDP (%), 2019 – 2022 (f) 2019 2020 2021 2022 Argentina 2.9 3.0 3.1 3.1 Brazil 2.0 2.1 2.3 2.3 Colombia 2.7 3.0 3.2 3.5 Mexico 2.0 2.3 2.4 2.3 Venezuela -1.9 -1.5 -1.4 -1.4 Annual Average Inflation (%), 2019 – 2022 (f) 2019 2020 2021 2022 Argentina 14.8 11.7 10.1 9.1 Brazil 4.2 4.2 4.1 4.2 Colombia 3.5 3.4 3.3 3.0 Mexico 3.9 3.7 3.6 3.3 Venezuela 3,475 3,950 4,500 4,600  -16.5 (2016)  -12.0 (2017)  -5.9 (2018) *Dun & Bradstreet estimates and forecasts
  31. 31. 31Follow us @DnBUS | @DnBUKTeam Lower Tolerance for Corruption, Power Grabs …but perception still high 2014 2015 2016 Rank/174 countries Score * Rank/167 countries Score Rank/176 countries Score Argentina 107 34 106 32 95 36 Brazil 69 43 76 38 79 40 Chile 21 73 23 70 24 66 Mexico 103 35 111 31 123 30 Uruguay 21 73 21 74 21 71 Venezuela 161 19 158 17 166 17 Source Transparency International Corruption Perceptions Index 2014-2016 *Score: 0 (highly corrupt) to 100 (very clean) Business Impacts of Continued Discontent: • Operational disruption • New spotlight on corporate compliance • Heavier fines for non-compliance, possibly bankruptcy • Longer project approval processes • Divert efforts from structural reforms • Higher probability of reputational damage Recommendations: • Conduct due diligence on third parties – vendors/partners • Ensure anti-corruption programs are designed to prevent, expose and decisively respond to instances of graft • Also, ensure that policies and procedures are in alignment with laws/guidelines in all jurisdictions. • Plan for continuation of public protests; high degree of discontent
  32. 32. 32Follow us @DnBUS | @DnBUKTeam Domestic Politics Hardening Negotiating Positions Sticking Points: • A higher “local content” threshold for goods to enjoy tariff-free entry. • Limit the number of US federal public works contracts that Canadian and Mexican firms could win • A sunset clause which allows NAFTA to expire after 5 years if all members do not vote to continue it • Amendment to the dispute resolution mechanism specifically, curtailing investor- state dispute settlement • Eliminating mechanism which allows members to challenge others’ anti-dumping and counter- vailing duty decisions before and independent panel.
  33. 33. 33Follow us @DnBUS | @DnBUKTeam Uncertainties Mexico • Q4: Primaries • New coalition ideologically discordant (PRD, PAN and MC – Citizen’s Front for Mexico • Independents (for the first time) • Leftist front-runner – Lopez Obrador (currently) • Embattled PRI • End-Q1 2018 target to conclude talks/get an agreement • 1 July 2018: Presidential election • 1 December: Inauguration Day Deal/No Deal • PRI win: Deal = ratification; No deal = continued talks • Citizen’s Front win: Deal = ratification; No deal = continued talks likely • Lopez Obrador win: Deal = possible renegotiation; No deal = continued talks (possibly) United States • 30 June 2018: fast-tracking law ends • Allows for approval/rejection of a deal (if struck) with a simple majority • Unless 3 year extension requested by President Trump Recommendations • Note the changing rhetoric – “There is life after NAFTA” • Pay attention to new alliances/trade deals being explored by Mexico • Assess business implications if US-Mexico trade revert to WTO rules • Determine impact of reversion to US-Canada trade pact
  34. 34. Asia-Pacific
  35. 35. 35 The Most Militarized Frontier in the World Abuts One of The Largest Concentrations of Wealth In the World Follow us @DnBUS | @DnBUKTeam Map Source: Dun & Bradstreet Map Vector Layers Source: geofabrik.de Demilitarized Zone since 1953 Armistice Size of proportional to population
  36. 36. 36 Analysis of cross-border shipping transactions can scope supply chain risks Follow us @DnBUS | @DnBUKTeam 3.2m Businesses nationally 52% in high-risk zone in artillery conflict 440,000 export shipments to US since 2015 25,000 US unique importers 18,000 South Korean suppliers 24% transactions with South Korea, with Seoul 22% South Korean suppliers based in Seoul US consignees: CA 6k ($100k mean value) NY 3k ($70k mean value) TX 2k ($250k mean value) Source: Dun & Bradstreet
  37. 37. 37 The demographic ‘war risk index’ does track major national political crises – but not reliably Follow us @DnBUS | @DnBUKTeam Dun & Bradstreet version of index depends on ratio of male 15-24 year-olds to male 50-60 year-olds. Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, custom data acquired via website. High war index crisis Low war index crisis
  38. 38. 38 World  Arrived via India where centuries of co-existence with other, polytheistic religions encouraged tolerance  Affirmative action programs to target inequalities (Malaysia)  Popular mass movements that counter extremist thought (Indonesia)  Secular political leaders & focus on economic reform  Religion less relevant for regional powers (compared to Saudi Arabia, Israel, Iran)  Transition from colonialism bears less historical baggage  Democratic institutions resilient if imperfect, against autocracies and executive monarchies in Middle East × Religious credentials increasingly important in politics (Malaysia, Indonesia) × Schools & charities funded by Saudi Arabia; workers returned from Saudi Arabia proselytise (Malaysia, Indonesia) × ISIS efforts (SE Asian ‘regiment’, social media efforts, use of region as training ground due to porous borders) × Persuasive alternative narrative in regions without effective administration (Philippines) × Political discontent reframed as religious struggle (Philippines, Thailand) × Narrative of victimisation Follow us @DnBUS | @DnBUKTeam
  39. 39. Middle East & North Africa
  40. 40. 40 Oil Prices in 2017 (USD/b) Follow us @DnBUS | @DnBUKTeam 44 48 52 56 60 64 Jan-17 Jan-17 Jan-17 Feb-17 Feb-17 Mar-17 Mar-17 Apr-17 Apr-17 May-17 May-17 Jun-17 Jun-17 Jul-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Sep-17 Oct-17 Oct-17 Brent Crude Oil: European Free Market Price Sources: Haver Analytics, Financial Times, Dun & Bradstreet
  41. 41. 41 Oil Prices (USD/b): 2016 - 2022 Follow us @DnBUS | @DnBUKTeam 44.0 54.0 58.1 56.0 63.0 75.0 87.0 30 40 50 60 70 80 90 2016 2017f 2018f 2019f 2020f 2021f 2022f Sources: Haver Analytics, Financial Times, Dun & Bradstreet
  42. 42. 42 High Political Risks • Sunni Saudi Arabia vs Shi’a Iran o Proxy wars in Yemen, Syria and Iraq o Lebanon • Washington vs Tehran • Presence of radical groups including Islamic State and al-Qaeda • Quartet vs Qatar • Kurdish independence vote • State of emergency’ in several countries • All underpinned by a weak policy-making environment and corruption. Follow us @DnBUS | @DnBUKTeam
  43. 43. Q A Follow us @DnBUS | @DnBUKTeam 43
  44. 44. COUNTRY INSIGHT SERVICES countryinsight@dnb.com @DnBUS @DnBUKTeam Thank You!

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