Maplecroft news

United Kingdom tops ranking of countries most exposed to Euro crisis – BRICS at ‘high risk’

25/07/2012

The United Kingdom’s high level of economic integration with the countries using the Euro, together with its lack of domestic resilience to an economic slowdown, makes it the most exposed nation, outside of the Eurozone, to any worsening of the crisis, according to a new global index by risk analysis firm Maplecroft.

With the IMF predicting GDP growth of just 0.7% in 2013, the outlook for the Eurozone remains precarious and any further slowdown for the region would have the most severe impact on United Kingdom struggling economy, says Maplecroft. Moreover, a potential collapse of large euro economies such as Spain or Italy would reduce the UK’s trade by approximately 7% and prompt losses around £95bn (7% of GDP) in Britain’s banking sector.

The UK, along with Poland, Hungary, the Czech Republic, Mozambique, Sweden, Denmark, Morocco and Côte d’Ivoire, are among 17 countries classified at ‘extreme risk’ by Maplecroft’s Eurozone Exposure Index (EEI).

Maplecroft's Eurozone Exposure Index 2012

Legend
Extreme risk
High risk
Medium risk
Low risk
No Data

Rank	Country	Rating
1	United Kingdom	Extreme
2	Poland	Extreme
3	Hungary	Extreme
4	Czech Republic	Extreme
5	Mauritania	Extreme

Rank	Country	Rating
6	Mozambique	Extreme
7	Mauritius	Extreme
8	Sweden	Extreme
9	Iceland	Extreme
10	Cape Verde	Extreme

© Maplecroft, 2012

The quantitative index includes 169 countries outside of the Eurozone and measures trade and foreign direct investment with the Euro area; bank claims of Eurozone countries; and domestic economic resilience indicators such as fiscal balance; public debt; levels of inflation; and foreign reserves.

The findings are significant as the index identifies the most economically dependent countries on the Eurozone, which are most likely to falter in the face of worsening economic conditions. Impacts for these economies include lowered industrial outputs, competitiveness loss and sovereign debts that could reach unsustainable levels due to rising yields.

With approximately 50% of its trade coming from the Eurozone, the UK is the most exposed country to the Euro crisis and ranks 1st in the EEI. The drivers for the UK’s ranking also include foreign direct investment (FDI) from the Euro region that accounts for 20% of the country’s GDP; while British banks are exposed to £380billion in Eurozone banks and sovereign bonds, which represents 27% of UK’s GDP – an exposure that could enhance solvency problems for financial institutions.

According to Maplecroft, the situation is compounded by a large and unyielding fiscal deficit of approximately 8% of GDP and net public debt over 80% of GDP, making the UK’s capacity for a fiscal response to further economic crises in the Eurozone severely limited.

Due to their high integration with the Eurozone, Eastern European and Scandinavian countries, including Poland (2), Hungary (3), Czech Republic (4), Sweden (8) and Denmark (11), also rank among the most at risk in the EEI. Despite Poland’s second place ranking, Maplecroft expects the country’s resilience to Eurozone exposure to improve over time. Measures, including raising the retirement age to 67 for men and women and introducing a permanent fiscal rule to reduce fiscal deficit will therefore help buffer the country to any future Eurozone crisis.

The emerging economies of the BRICS are also not immune to Europe’s economic woes. South Africa (49), Russia (50), Brazil (62) and India (85) are all classified as ‘high risk’ countries in the index, while China (112) is rated as ‘medium risk.’ The BRICS economies represent a potential offset to the negative impact of the Eurozone economic crisis due to their importance in global markets. Nevertheless, these economies are not fully insulated from the slowdown themselves due to trade and investment relations with Europe and an escalating Eurozone crisis could further exacerbate current domestic slowdown in growth forecasts across the BRICS.

“Investors should follow closely the developments in the Eurozone as the implications will continue to influence global economic behaviour,” states Maplecroft Analyst Daniel Anavitarte. “Trade and investment flows may be disrupted from and to emerging economies while large developed nations could see their growth forecast offset due to their large exposure to euro area banks.”

African nations also emerge among the most at risk in Maplecroft’s study, with Mauritania (5), Mozambique (6), Mauritius (7), Morocco (12),  Côte d'Ivoire (16) classified at ‘extreme risk’ due high trade dependence with the euro area and low resilience against global economic slowdown. As a result, firms operating in the region may suffer lower demand for their export products. For example, the Eurozone accounts for almost 60% of Mozambique’s total fuel and mining exports and 30% of Côte d'Ivoire agricultural products.

Maplecroft concludes that the economic difficulties in the Eurozone have highlighted the disadvantages of high levels of integration for member countries, but also for those economies that are integrated with one or more members, which are facing a wider exposure risk.

“Both economies and business may seek to manage this risk by diversifying trading patterns to account for lower demand, either in third countries or by concentrating on domestic markets,’ says Mandy Kirby, an Associate Director at the company. “Short-term policies that seek to defend local economies could result in new controls on business operations or additional business costs.”

For more information on Maplecroft’s Eurozone Integration Index contact info@maplecroft.com or call +44 (0)1225 420000.

Register for trial access to see examples of Maplecroft's indices, interactive maps, scorecards, briefings and in-depth reports.