The Covid-19 crisis has raised the stakes worldwide, plunging the global economy into recession and creating unanticipated fiscal pressures for many countries already struggling with domestic problems, geopolitics and global trade wars.
Consequently, analysts have downgraded Bulgaria, Cyprus, Malta, Romania and Turkey in Euromoney’s risk survey.
Greece is the main exception, but lying 60th in the global rankings with a legacy of debt and another economic downturn to endure, it remains one of the riskier EU member states, worse off than Italy or Spain.
For some, such as Turkey, there are domestic risks to consider, which Euromoney has detailed previously.
The lira is on the backfoot again because of concerns about policymaking and institutional risks, two factors that have been consistently downgraded (among others) in the risk survey.
Meddling in the central bank’s independence is scaring investors, prompting both a current-account deficit, underpinned by increased lending, and portfolio outflows, with capital withdrawn, resulting in the central bank depleting its FX reserves to prop-up an ailing currency.
However, there are also three themes with cross-country – indeed, region-wide implications – putting southeastern Europe under the radar, and all three are interconnected.
Covid is clearly one. Economies are struggling, not least because of the lack of tourism.
In Romania, crashing 14 places in the global risk rankings this year, to 69th out of 174 countries, political risks are rising again ahead of parliamentary elections scheduled for November, to be preceded by local elections in September.
The main opposition this week called a no-confidence vote that it is close to winning amid unwanted macro-fiscal strains and tensions created by the government’s handling of the crisis.
Romania also has a migration crisis of its own, with around 3.5 to four million emigrants, accounting for around a quarter of the population. Many of them work seasonally in the agricultural and tourism sectors, and in healthcare in other parts of the EU.
“Since April, return migration has brought back 1.3 million Romanians from abroad, of which around 350,000 will be looking for work, putting pressure on the labour market and unemployment rate,” says Gheorghe Savoiu, a contributor to Euromoney’s country risk survey and a professor at the University of Pitesti.
He also highlights the background political risks with the elections approaching and the fiscal deficit.
Real GDP is forecast to decline in Romania by more than 6% in real terms this year, the unemployment rate is seen scaling up to 9% and the fiscal deficit widening to 8% of GDP, causing a rise in public debt, according to the OECD.
The organization paints a bleaker picture under a “double-hit” scenario, factoring in a possible second wave of the virus.
There are similar downturns in other countries, with Bulgaria and Greece enduring an 8% real-terms decline in GDP. Greek debt (in gross terms, on a Maastricht basis) will rise again to 197% of GDP, and its unemployment rate to 20% by 2021. In Turkey, the unemployment rate is seen peaking at just over 15% this year.
With tourism and trade buckling, Cyprus and Malta are struggling, and analysts have downgraded in particular the GNP-economic outlook and employment/unemployment indicators for these countries in Euromoney’s risk survey this year.
However, Covid is not the only source of anxiety. In a region troubled by doorstep instability, in Libya, Syria and now Lebanon, the Middle East and North African immigration crisis is also rearing again, driving a wedge between Turkey and Greece, on the one hand, and with other countries affected, too, by the flow of refugees, stretching all the way to France and the UK.
“In late February, Turkey declared it would apply an open-border policy, no longer trying to stop migrants trying to reach Europe, creating tensions with Greece,” says ECR survey contributor Monica Bertodatto, a public finance consultant.
For small countries, the risk of outbreaks of Covid due to sick migrants is an issue, as many test positive and the healthcare systems in such states are not sufficient to cope with such sanitary emergency
– Monica Bertodatto
The migrant flows stopped when the Covid crisis erupted, with Greece suspending asylum applications and increasing border patrols, but the situation has reverted.
“The first-entry countries are facing higher costs in terms of Covid-related sanitary controls and quarantines on top of regular healthcare and identification and screening of asylum applications,” she says.
“For small countries, like Cyprus or Malta, the risk of outbreaks of Covid due to sick migrants is an issue, as many test positive and the healthcare systems in such states are not sufficient to cope with such sanitary emergency.”
However, immigrants rarely stay and are travelling vast distances to destination countries, which also shoulder the costs in terms of housing, language skills, workforce integration and social support.
The immigration crisis is complicated by the third factor: the gas exploration dispute driving a wedge between Greece and Turkey, which are Nato members and allies of the US.
The Turkish-Greek dispute over refugees has a complex backdrop, according to country risk expert and ECR survey contributor Owais Arshad.
“While Athens has been recently criticised for its apparent deportation of thousands of asylum-seekers back into the Mediterranean, its dispute with Turkey is also arguably about the exact delineation of maritime economic zones and energy,” he says.
“Ankara’s military might has helped secure the survival of Libya’s UN-backed government. As a reward for its intervention, Tripoli has inked several agreements with Turkey delineating their maritime borders and agreeing to cooperate on energy exploration.”
However, Arshad adds: “Greece, Egypt, Libya’s rebel factions, France and the Gulf states oppose these agreements and are eager to claim their own share of these prized resources.”
The proxy war in Libya will continue to drive the population overseas, but Arshad sees the economic prizes taking priority over resolving the human crisis, with Greece doing little to assist Libya’s government after Nato abandoned the country.
[The] weaponization of immigration [will] expose countries to sovereign risks [and create a] more durable paradigm shift in managing the relationship between land and people
– Alexander Heneine
Another survey contributor and country risk analyst, Alexander Heneine, believes the depressed outlook for the Middle East will “continue to present a distinct challenge for countries along the Mediterranean basin”.
He says: “As economies juggle between containing an acceleration of Covid cases and exercising financial limitation, existing social structures are increasingly prone to buckling under pressure.”
The “weaponization of immigration”, as Heneine calls it, and the mounting economic and political disputes will “expose countries to sovereign risks [and create a] more durable paradigm shift in managing the relationship between land and people”.
The fact the Middle East is feeling the full force of the global recession and souring political relations, worsening already poor standards of living, “threatens to reinforce the exodus towards southern and southeastern Europe’s major entry points”, says Heneine.
On top of that, he notes the aggressive stance of Turkey towards Greece and Cyprus, and the EU more generally.
“At face value, an altercation over the rights to offshore natural gas exploration … embodies the geopolitical and even cultural tug of war that has truly intensified in recent months,” says Heneine.
“Economies across southern and southeastern Europe are railing from Covid-19 and its economic implications, but the region is also suffering from a lack of clarity on the part of the EU when it comes to immigration.”
For Heneine, the answer is clear: the EU needs to have a conversation about immigration and it needs to control its borders more effectively.
The lack of consensus on this, and other issues, is the largest source of sovereign risk.