Lebanon at the bottom, Switzerland at the top, Great Britain in the middle as the pressure mounts
External vulnerabilities of countries struggling to leave the Covid-19 crisis behind are particularly relevant today, given the uneven recovery, rising inflation and a new cycle of tighter monetary policy.
With the risk of a wider emerging market crisis, close monitoring of external risk is vital at this very stage of transition between the ups and downs of the pandemic and new swings in markets as central banks begin to “normalize” exceptional policies.
Argentina and Turkey are among the 10 most vulnerable economies in an expanded 95-country sample
Argentina and Turkey are among the most vulnerable economies in the expanded country sample of this annual study of 95 nations in 2021. Great Britain in 43rd placeapprox, is just one example of an advanced economy whose exposure to external risks is greater than is often assumed. Others can be Sweden (35), France (30), Canada (24), and the United States (20).
Belgium (6) and Italy (8), on the other hand, are two of the heavily indebted countries in Europe, which nonetheless rank in the top 10 for their external sectors. Switzerland, Malta and Japan are a “robust 3” of the most resilient nations.
Scope’s external risk framework assesses economies based on the underlying risks of external shocks
Scope’s annual external vulnerability and resilience rankings rate economies based on 1) underlying vulnerability to a potential balance of payments crisis; and 2) the degree of underlying resilience of economies when exposed to such external crises, with an overall ranking that combines vulnerability to and resilience to crisis situations.
The US and UK are examples of advanced economies that do comparatively poorly on external vulnerability – 70NS and 55NS respectively – due to open economic structures, current account deficits and negative net international investment positions – but much better in terms of resilience – 3approx and 35NS – not least as an issuer of two of the world’s safest reserve currencies in dollars and pounds sterling.
Lebanon, Zambia and Angola are the world’s 3 riskiest of the three most vulnerable nations in 2021
In stark contrast, Lebanon, Zambia and Angola are the 3 riskiest of the most vulnerable and least resilient economies to external shocks in 2021. The risky 3 of 2020, Georgia, Argentina and Turkey, together with El Salvador, Belarus, Sri Lanka and Armenia, form a remainder of the 10 most vulnerable countries for 2021. These countries share characteristics such as high foreign currency exposures, currencies prone to periods of risk aversion for international investors, high current account deficits and the risk of capital outflows, exacerbated by low foreign exchange reserves and / or significant foreign debts due.