How COVID-19 Has Impacted Business: A 6-Month Retrospective

 

Written by Kipp Bodnar

It's been over six months since COVID-19 was declared a global pandemic. As we reported in March, the initial impact was painful on businesses. But now, six months in, businesses appear to be adapting to the new normal. Digital transformation is accelerating. Inbound marketing strategies are working incredibly well, while outbound sales strategies are struggling. Buyers are more in control than they've ever been, and companies delivering a great digital customer experience are winning.

COVID-19 forced many businesses to start operating online, and since then we've seen a huge spike in online buyer interest that has steadily increased over the past two months. This digital transformation was already occurring before the pandemic, but COVID-19 accelerated its timeline pressuring businesses and buyers to pivot to an online environment. Now that brands are experiencing the benefits of on-demand tools like live chat, these features will be standardized as consumers come to expect them more over time.

We've also seen a simultaneous decline in the effectiveness of outbound strategies. Take sales emails as an example — sends have nearly doubled since March, but open rates continue to remain well below pre-COVID levels. It's not that buyer interest isn't there; it's that consumers now have the liberty to choose when and where they want to interact with businesses. This places greater emphasis on inbound tactics as brands need to prioritize new channels like chat where consumers can interact with marketing, sales, and service at their own pace.

As more businesses learned how to successfully make this pivot, and the global economy slowly started to reopen, sales outcomes started to gradually improve. In June, we saw a significant change in deal performance as both deals won and deals created increased from just below pre-COVID levels to well above the benchmark by the end of July. Currently, global deal performance is hovering at and above pre-COVID levels as more businesses are getting used to working under these new circumstances. While it's certainly still a difficult time for businesses, the sales data suggests that we are slowly starting to move forward.

In this post, we'll take an in-depth look into buyer interest, marketing and sales outreach, and sales outcomes over the past six months. We'll examine how different industries, regions, and company sizes have been impacted by COVID-19, and offer suggestions for investments that make sense right now.

HubSpot can't make predictions about what will happen, and nobody knows what the future looks like. But we hope this report from our customer base provides a helpful reference as businesses enter the next quarter, and that the insights are useful to you in some way. To explore the accompanying dataset on your own, you can find our interactive microsite here.

1. Buyer Interest

2. Buyer Outreach

3. Sales Outcomes

4. Takeaways

This data is based on benchmarks calculated using weekly averages from Q2 vs. post-holiday weekly averages from Q1. Because the data is aggregated from our customer base, please keep in mind that individual businesses, including HubSpot's, may differ based on their own markets, customer base, industry, geography, stage, and/or other factors. While certain data is reported by industry, please note that we do not track all industries, and that HubSpot's industry classifications may not correspond with standard industry classifications.

COVID-19 6-Month Marketing, Sales, & Service Retrospective

1. Buyers Are in Control.

Customer-Initiated Chat Conversations

Buyer research has shifted to a more on-demand, in-the-moment experience than ever before, and live chat usage strongly supports that. Chat volume has steadily increased over the past six months, and have been trending over 90% above the benchmark since September. Since businesses have moved online, consumers have flocked to chat as a resource for real-time help. Now, consumers expect a live chat option when interacting with brands and businesses are slowly starting to implement them on their websites.

Additionally, now that a significant number of people are working from home and communicating on their preferred time and channel, research is happening on the buyer's schedule -- and they want real-time answers, even if the sales team is asleep. Marketing teams have pivoted to chat to engage prospects. Sales teams are using it to nurture leads, and customer service personnel are using it to support customers. Live chat is proving to be one of the most effective channels for communicating with customers because it allows people to interact with a company on demand. The arc of technology bends toward convenience, so even if demand for chat doesn't stay at this level forever, we feel confident that the pandemic has made chat a table-stakes channel going forward.

Regionally, APAC engaged in the most chat conversations compared to LATAM, EMEA, and NORTHAM. Just three weeks ago, APAC reached 144% above pre-COVID levels and it's been the highest above the benchmark since July. While every region has experienced significant increases for live chat volume, APAC's chat conversations have increased 132% since March, EMEA 86%, LATAM increased 81%, and NORTHAM 81%.

We're not surprised that APAC has been leading the way when it comes to live chat conversations as we've seen this region using more chat and SMS technology for quite some time. Apps like WeChat have gained popularity in the region for years, not only because they make it easier for customers to chat with sales and service people, but also because they give brands the opportunity to launch engaging campaigns. For example, in 2019, India alone had 340 million WhatsApp users, which was a significantly higher proportion of the population more than any other country in the world. Countries in APAC have also been early adopters of SMS and chat — Japanese retailers were using WeChat to advertise and offer customer discounts as a way to incentivize Chinese tourists as far back as 2016.

Web Traffic

Two weeks ago, total web traffic was at a year-high 34% above the benchmark and we've seen this metric increase over 25% since March. Global web traffic seems to be holding steady at this rate as we push past summer and into fall. In fact, this metric has been over 20% above the benchmark for the past 10 weeks. As buyers continue to do their shopping online, businesses with the most established online presence seem to be seeing the most benefit.

If we look at the industry breakdown, computer software leads the way with the most web traffic at 51% above the benchmark. This reflects the digital transformation that was already occurring before COVID-19 but was sped up due to the effects of the pandemic. Compared to where we were in March, nearly all industries have returned to about pre-COVID levels. For example, entertainment, a structurally impacted industry, was 18% below the benchmark in July but has been above or right below the benchmark for the past seven weeks.

2. Inbound Strategies Continue to Prove Effective for Buyer Outreach.

Marketing Emails

With buyer interest so strong, marketers have reinvested in email. Marketing email volume has increased a total of 49% since the start of the pandemic and is currently a year-high 52% above pre-COVID levels. This is a continuation of the steady increase in traffic we've seen over the last few months. At the start of the pandemic, marketing email volume had increased nearly 30% by the end of March. Over the summer, send volume was steady at about 30% above pre-COVID levels and has risen again in the fall.

Response rates are also performing well, remaining at 10-20% above the benchmark since April. In the spring, we saw open rates shoot up immediately following the start of the pandemic, then they leveled out throughout the summer and fall. It's encouraging to see response rates holding up since email marketing has been declared "dead" many times over the last few years as channels like chat have been on the rise. But, in marketing, it's not what channel you're using, it's how you're using it. Highly relevant, helpful content will reach buyers in almost any medium, and we're glad to see marketing teams sustaining high-levels of engagement via email.

Sales Emails

On the sales side, email activity has also increased, but response rates have been on the opposite trajectory. Global send volume has increased 79% since March, but response rates have consistently stayed nearly 30% below the benchmark since April. Send volume continues to grow through the fall as it's increased 25% over the past five weeks.

It's not that this approach isn't working, it's just not great for customer experience. Consumers are getting overloaded with emails as sales teams try to engage their new online audience. Since the pandemic has placed even more control into the buyer's hands, they're really only engaging with sales teams on their terms.

Email is still a valuable channel for salespeople, but blindly emailing prospects isn't going to increase responses. You need to make sure you're being deliberate in your prospecting mix because buyers have a lot more options these days to signal interest (visiting a site, converting on an offer, signing up for a demo, etc.). The key is to understand the intent behind these channels instead of just doubling down where it's easy to spray-and-pray — like with email.

Sales Calls

Even though sales email engagement has been stagnant, a really positive takeaway for sales teams is that call events are now trending 21% above the benchmark and have increased 18% since March. This is a significant turnaround for call prospecting as it dropped to around 25% below the benchmark from March to June, but picked up again later in the summer — about the same time that deal performance began to return to pre-COVID levels.

If we look at call prospecting by company size, smaller companies seemed to have called their prospects sooner than larger ones. Companies with 1-25 employees saw their call prospecting return to pre-COVID levels at the start of July, while 26-200 and over 201 companies are just starting to return to those levels now. Since smaller companies have fewer customers and not as many "set and forget" channels, their sales reps typically have stronger relationships with their customer base. When the pandemic pushed buyers and businesses into a time of uncertainty, these trustworthy relationships are what both sides could lean on to get through hardships. It makes sense that as deal performance began to stabilize in July, smaller companies were the first to return to the phones because they rely so heavily on these close-knit relationships as well as traditional prospecting channels like phones.

Currently, call events are 31% above the benchmark for companies with 0-25 employees and are up 26% since March. We can compare that to other company sizes like 26-200 employees, which is 18% above the benchmark and has increased 17% since March. Over 201 companies are only 2% above the benchmark right now, but this number has increased nearly 30% over the past four months. We'll look for 201 companies to increase their call prospecting as sales outcomes continue to gradually improve.

3. Sales Outcomes Are Gradually Improving.

Deals Won

Over the last few months, we have seen businesses adapt to new circumstances very rapidly. There was a lot of fluctuation in sales outcomes due to changing buyer circumstances, economic uncertainty, etc., all driven by the spread of COVID biologically. At the 6-month mark, businesses are simply more used to operating under these circumstances, and while it's certainly a difficult time, the data suggests that companies of all sizes are starting to move forward.

In April, we hit the lowest point for total deals won at 36% below the benchmark. Following that, we saw steady recovery from late-April to mid-June where deals-won returned to the same levels they were at before the start of the pandemic. Deal performance continued to improve through July and August, and at the end of September, deals won reached 10% above the benchmark. That's more than a 45% increase since the first week of April.

The pandemic has changed the definition of what a "good fit" customer is. Cashflow issues rendered some customers unable to purchase products that they could afford in the past. Changing circumstances affected the urgency customers had around purchases in both directions, accelerating some deals while stalling out others. Businesses have had to reassess their target personas because buyers' circumstances had changed so dramatically. To be successful, brands need to update their definition of a "good fit" customer as well as their sales motions.

Deals Created

In April, we not only saw the lowest number of deals won recorded, but the lowest number of deals created as well. During the week of April 6, deals created fell to 30% below the benchmark and remained below pre-COVID levels until mid-June. Over the summer, deal creation continuously improved and now it's at 35% above the benchmark. That's 65% more deals being created now than they were at the start of April. As businesses pivoted their strategies and learned to operate in a digital world, many found success and are starting to benefit from their new prospecting channels.

Regionally, it appears LATAM was hit the hardest for deal creation in the first three months of the pandemic. It reached its lowest point in April at 43% below the benchmark, but fortunately, bounced back over the summer and is now 16% above the benchmark. EMEA also had a recent return to pre-COVID benchmarks as it was trailing behind all the other regions up until July and August. It was 18% below the benchmark while all other regions sat at least 10% above it. In September, EMEA deal flow surpassed the benchmark for the first time since March and is now 20% above pre-COVID levels.

Construction, Manufacturing, and Computer Software have all been trending above the benchmark since the start of September. Construction is the top-performing industry and has been trending roughly 20% above pre-COVID levels since May. This is expected though, as these industries haven't been as structurally impacted as others. Industries like Travel, Entertainment, and Human Resources are still working their way back towards pre-COVID levels. While they're not exactly at the benchmark, deal creation for these industries has been significantly better than it was at the start of the pandemic.

Takeaways

Online Conversion Isn't New and It's Not Going Anywhere.

Businesses didn't suddenly discover ecommerce and live chat when COVID-19 forced them to adapt their operations. Brands and consumers were already moving online before the pandemic, but COVID accelerated their timeline and pressured them to embrace a digital transformation at a rapid pace. What were once novelty features and services — like live chat — are now vital to day-to-day operations. Without these tools, businesses can't engage or prospect customers like they could before the pandemic.

Now that many companies have pivoted online and are discovering the benefits that come with it, there's no returning to the way things were before. Companies will continue to invest in digital channels as these are proving to be highly-effective options for engagement, prospecting, and support. And, consumers are getting more familiar with these channels as well. As they continue to interact with brands through a digital landscape, they'll come to expect this environment as the standard for businesses moving forward.

Resources to Help:

• Learn how chat should and shouldn't work in this blog post
• Get up to speed with this beginner's guide to conversational marketing
• Get your sales team started by learning how to add live chat to your website

Free Software to Get Started:

• Free conversational marketing tools are included in HubSpot CRM
• Facebook Messenger integration with HubSpot

Inbound and Buyer Interest Aren't Optional.

With businesses operating in a digital world, buyer interest has turned into an on-demand experience. More consumers are working from home and spending more time online, which means they're interacting with brands when and where they please. Buyers now have a variety of channels to choose from when they want to contact your brand and they also have the luxury of switching between these channels as they see fit. So, if you want to successfully engage your digital audience, your brand needs to be available on all of the platforms your customers are using. That will also help you maintain a noticeable digital presence as more companies follow suit and go online.

You'll also need to focus more on your inbound methodology since consumers now have more power to interact with brands at their preferred pace. If you prioritize quantity over quality when it comes to messaging — like what we've seen with sales emails — you won't get far with engaging your audience and you may end up damaging the customer experience in the process. Instead, try focusing on sending high-quality content to your "good-fit" prospects. You may have to reassess what "good-fit" means since COVID has significantly impacted buyer profiles, but this should get you on track in terms of engaging buyers that are an ideal match for your sales team.

Resources to Help:

• Use these prospecting strategies to find new channels to engage your prospects
• Watch the replay of our Adapt 2020 webinar on selling through uncertainty
• Refresh your email outreach with these sales templates
• Start using video in your sales outreach to engage more prospects
• Use this guide to increase your sales close rates
• Streamline your sales process with this guide to frictionless selling (and this course)

Free Software to Get Started:

• HubSpot CRM is free and comes with included advertising and sales acceleration tools, including free 1:1 video, meetings, and chatbot tools
• Gmail and Google Calendar integrations with HubSpot
• Zoom integration with HubSpot
• LinkedIn Sales Navigator integration with HubSpot
• Check out what HubSpot's app partners are offering at this time with this list of relief initiatives

Businesses Have to Adapt.

Compared to where we were in March, global sales outcomes look a lot better. But, for many businesses — especially those in structurally-impacted industries — we're nowhere near where we were prior to the pandemic. Businesses have had to adapt their approach to operate under very different circumstances and some have done this successfully while others are still working to come up with an effective plan. The good news is it seems like most businesses understand they need to adapt their strategies in some way if they want to continue to operate in a post-COVID world.

Resources to Help:

• Create an effective SEO strategy using this helpful guide and template
• Prevent traffic loss altogether using this guide to predictive SEO
• Use this editorial calendar template to plan educational content
• Get started writing with these blog post templates
• Optimize content and get found online with our guide to SEO

Free Software to Get Started:

• HubSpot for Wordpress integration
• Google Search Console integration with HubSpot

https://blog.hubspot.com/

2020 External Vulnerability and Resilience rankings for 63 countries: COVID-19 Crisis Update

Amid the 2020 global pandemic, Georgia, Turkey and Argentina are the “risky-3” in Scope’s biennial update of its external vulnerability and resilience framework, whereas Taiwan, China and Switzerland are the 2020 “sturdy-3” of the most well positioned economies against external shocks from a sample of 63 economies.

Fraught global trading and “risk-off” market conditions exacerbated by the coronavirus outbreak and oil price declines of 2020 expose vulnerabilities that many economies face due to balance of payment pressures. This year, Lebanon defaulted on a USD 1.2bn Eurobond, Argentina and Ecuador’s debts re-entered selective default, and Zambia is on the brink. There are concerns about a wider emerging market crisis. Meanwhile, with Brent prices at below USD 30 a barrel, this level is significantly under prices all oil exporters require for balanced budgets. With severe stressing factors in play, external vulnerabilities are key to monitor in assessing countries’ debt repayment capacities.

In this report, Scope provides an update of its external vulnerability and resilience two- axis coordinate grid, introduced in 2018, which assesses countries on a) vulnerabilities to balance of payment crisis and b) degrees of resilience in the advent of such crises.

Figure 1: Top 5 weakest and strongest countries, external risk framework

Top 5 strongest

Top 5 weakest

1Of 63 countries. Full scores and rankings for 63 countries in Annex I. ²Change in axis rank since 2018 update.

Scope’s 2020 external vulnerability and resilience rankings indicate a fresh “risky-3” of Georgia (rated BB/Negative), Turkey (BB-/Negative) and Argentina (unrated) – three economies that not only have vulnerability to the onset of balance of payment issues but also show significant weakness in abilities to withstand crises. Argentina slides into this year’s risky-3, edging out Ukraine, which was in the original 2018 risky-3 roster. Ukraine, Colombia, Indonesia, Egypt and Pakistan (all unrated) are highly at-risk economies just outside the riskiest 3. In addition, Scope observes a 2020 “sturdy-3” of Taiwan (unrated), China (A+/Negative), and Switzerland (AAA/Stable) – economies that are the most robust to external shocks. Taiwan replaces Japan (A+/Stable) in this year’s sturdy-3.

Scores for major Western economies vary: the United States (AA/Stable) receives strong marks on external resilience, supported by dollar primacy (4th most resilient of 63), and Italy (BBB+/Stable) and Germany (AAA/Stable) continue to display external sector strengths – supported by current account surpluses. France (AA/Stable) has average scores but Spain (A-/Stable) continues to score weakly on both framework axes. The UK (AA/Negative) displays deficits especially on external vulnerabilities.

Inside the EU, Scope finds that Cyprus (BBB-/Stable), Croatia (BBB-/Stable) and Romania (BBB-/Negative) are the three EU member states facing the greatest external sector risks. On the other end, Malta (A+/Stable), Luxembourg (AAA/Stable) and Denmark (AAA/Stable) are the EU sturdy-3.

Scope’s external vulnerability and resilience framework

Scope’s sovereign credit rating assessments are based on five analytical pillars, of which “external economic risk” represents one of these five dimensions, with a 15% weight in the overall sovereign rating review process. However, the significance of external sector risks may be disproportionately important in 2020 as global trade flows weaken to multi- decadal lows and capital outflows escalate amid a global sudden stop due to the Covid- 19 crisis. Emerging economies exchange rates have been hit hard, making their foreign- currency-denominated debt more difficult to repay, while foreign and local currency borrowing rates have increased as investors become more sceptical about the most vulnerable issuers. International reserves decline as the crisis wears on and sources of FX revenues and capital inflows dry, threatening countries’ capacities to source  and repay external loans. With these risks to remain significant over the course of 2020, a lens on economies especially vulnerable to sudden deterioration in external trading and financial conditions is warranted.

In this spirit, this report presents a biennial update on Scope’s external vulnerability and resilience two-axis evaluation framework that assays countries on: i) their respective external vulnerabilities to the onset of balance of payment crises and ii) the extent of their resilience in the event of a balance of payment crisis.

Figure 2: External vulnerability and resilience framework (design)

While external vulnerability assessments and rankings have traditionally centred on emerging markets, Scope notes that external risks are not unique to developing  countries, but rather shared across nations, as evidenced over the European sovereign debt crisis when risks from large current account deficits, increasing Target 2 liabilities and external competitiveness gaps were exposed across peripheral Europe – instigating capital outflows and increases in bond yields. As such, this report is based on assessing a global set of economies – including advanced and emerging.

External vulnerability and resilience framework: global results

Figure 3 (next page) displays the external vulnerability and resilience framework results for 63 countries1. The graph is divided into four quadrants: Quadrant I. countries that are vulnerable and not resilient to external shocks; II. countries that are not vulnerable to external shocks but also not resilient; III. those that not vulnerable to and resilient in the advent of a crisis; and IV. countries that are vulnerable but resilient. The dividing lines between quadrants reflect the median country scores on the vulnerability and resilience axes. Individual country scores and rankings are summarised in Annexes I and II, underlying data is summarised in Annex III, and the summary of component variables is located in Annex IV.

In considering overall country rankings on the basis of a two-axis framework, we take into account the sum-score of the two axis-level scores.

Scope’s two-axis framework identifies a 2020 “risky-3” of:

1) Georgia

2) Turkey

3) Argentina

These are economies in Quadrant I of Figure 3 that not only show vulnerability to the onset of balance of payment crises but also exhibit prevailing weaknesses in abilities to cope with crisis. Other countries amongst the most at risk in Quadrant I include Ukraine, Colombia, Indonesia, Egypt and Pakistan.

In addition, Scope observes a 2020 “sturdy-3” of economies in:

1) Taiwan

2) China

3) Switzerland

These are countries in Quadrant III of Figure 3 that are not only less vulnerable to the onset of balance of payment crises but are also well positioned to deal with a crisis were one to take place. Thailand, Malta and Singapore are further economies amongst the least at risk.

Furthermore, Quadrant IV portrays a set of countries that are vulnerable to crisis but highly resilient in one, notably incorporating the US, the UK and Japan – reserve currency countries able to bridge global external shocks and paper over prevailing external vulnerabilities through currencies’ safe haven statuses. Russia (BBB/Stable), with much enhanced FX reserve coverage (Figure 4), cushioning vulnerabilities from sharp drops.

Brent crude prices in 2020 to under USD 30 a barrel, alongside Brazil and New Zealand (both unrated) are also Quadrant IV countries.

Scores for major Western countries vary. As noted, the United States is in Quadrant IV of Figure 3 as the 20th most vulnerable (of 63 nations) to external crises – in view of a significant current account deficit of 2.3% of GDP in 2019 (moreover the world’s largest current account deficit in nominal dollar terms), however anchored by the fourth highest resilience score in the 63 country-set, related to dollar primacy and limited foreign currency debt. Germany ranks strongly overall as the 7th least vulnerable economy – boosted by a 2019 current account surplus of 7.8% of GDP alongside a strong net international investment asset position – but Germany has only middling scores on resilience owing in part to high non-resident holdings of German government bonds. France is mid-table as the 33rd most vulnerable economy but 23rd most resilient. Italy is only the 41st most vulnerable, weakened though by capital outflows of recent years, but receives a very strong resilience mark (11th most resilient), helped by not only the euro reserve currency but also a high share of Italy’s government debt held domestically (almost 70% as of Q2 2019). Spain is a Quadrant I economy and receives a weak overall score – as the 17th most vulnerable economy, weakened by net international investment liabilities of 78% of GDP as of Q3 2019, alongside receiving the 24th poorest mark on external resilience due to high non-resident holdings of government debt and significant foreign-currency-denominated lending in the Spanish banking system.

Among Scandinavian economies – Sweden, Norway and Denmark (all rated AAA/Stable) receive strong scores, with healthy current accounts and robust net international investment positions (NIIPs), as well as developed-market, safe-haven currencies.

The UK ranks as the 9th most vulnerable economy (a modest improvement from 8th most vulnerable in the 2018 report), but nonetheless weighed upon by a wide current account deficit (of 3.8% of GDP in 2019), and sterling volatility in recent years related to Brexit uncertainties. While the UK’s resilience mark is bolstered by sterling’s reserve currency status (4.6% of all global allocated reserves were held in sterling in Q4 2019), the UK ranks overall as only the 25th most resilient country, weakened by high foreign-currency lending in the City of London.

Scope’s Risky-3 in more detail

We next discuss the 2020 risky-3 of Georgia, Turkey and Argentina, as well as Ukraine (as the fourth weakest country in the 2020 rankings) in greater detail.

As was the case in the 2018 update, the weakest country in the 2020 report is Georgia (BB/Negative). Georgia displays high external vulnerability and low resilience to balance of payment crises. The economy has displayed elevated current account deficits, reflecting high investment needs of a developing economy with inadequate domestic savings, a narrow export base, and a dependence on goods imports. The current account deficit has, however, declined from -6.8% of GDP in 2018 to -5.1% in 2019 and has been, moreover, predominantly financed over the last decade by more reliable foreign direct investment (FDI) flows. Nevertheless, Georgia’s small, open economy depends on external financing, as reflected in a large, negative NIIP, amounting to USD 23.8bn or -135% of GDP as of Q4 2019 – a core driver of the weak vulnerability score, alongside the Georgian lari’s volatility in recent years.

External public sector debt, amounting to around 80% of total public debt (with total public debt of 41.4% of GDP in 2019), is denominated in foreign currency (mostly in US dollars or euros), leaving the government balance sheet vulnerable to significant exchange rate fluctuations. Moreover, 58% of government debt does represent concessional multilateral loans, and an ongoing IMF Extended Fund Facility programme institutes a buffer against balance of payment disturbances over the programme duration to April 2021.

While foreign currency transactions inside the Georgian banking sector have declined through the proactive actions taken by authorities in recent years, the level of FX lending and deposits nonetheless remains very elevated at 55% of all loans and 62% of all deposits (mostly in US dollars and euros). FX reserves stood at USD 3.2bn as of March 2020, down slightly compared with USD 3.3bn in March 2019. While reserves’ coverage level of short-term external debt had previously improved, it remains below an IMF adequacy threshold of 100%.

Turkey (BB-/Negative) remains a member of the risky-3 in this year’s list. The Turkish lira is 27% weaker compared with recent August 2019 peaks vs the dollar (trading near 7 against the dollar), which represents a dilemma given 52% of central government debt denominated in foreign currency (meaning FX devaluation automatically feeds through to impairment of public debt serviceability) alongside a significant private sector net FX debt position, which, while cut from February 2018 peaks of USD 223bn, totalled nonetheless USD 175bn as of January 2020. In addition, non-residents hold 39% of Turkey’s government debt.

In data through March, past improvements in Turkey’s trade balance had sharply reversed since 2019 – with much wider recent monthly trade deficits. Official reserves declined to USD 89bn as of 10 April, compared with a 2013 peak of USD 135bn, while – netting out Turkey’s short-term FX borrowings – official net international reserves had declined to USD 26.3bn as of 10 April, from USD 41.1bn at end-2019. Weakened FX reserves mean Turkey is less resilient should capital outflows escalate – and will be an area requiring constant monitoring going forward. Turkey has rejected suggestions of turning to the IMF for support over this crisis.

External sector risks in Turkey are also exacerbated by mismanagement of the economy, in part due to ongoing consolidation of power in the hands of President Recep Tayyip Erdoğan. The policy one-week repo rate has been reduced to 9.75% (from 24% as recently as July 2019) – partly under suspected political influence, resulting in a negative real policy rate in view of March inflation of 11.9% YoY. Accommodative monetary policy had brought lira lending to the domestic economy to elevated levels of +19.1% YoY as of March. Such prevailing macro-economic imbalances sap foreign investor confidence especially in moments of weakness in global sentiment, making Turkey more susceptible to capital outflows that drain reserve stocks, weaken the currency and inhibit the economy. Turkey (BB-/Negative) is the lowest rated issuer in Scope’s rated sovereign universe.

Argentina rounds out Scope’s 2020 risky-3, performing weakly on both assessment axes. Argentina’s public debt increased to nearly 90% of GDP at end-2019, from 56% in 2017, with around 53% of public debt denominated in US dollars. Amid a deep recession in 2020 – exacerbated by nationwide lockdowns since 20 March to impede a coronavirus outbreak in Argentina – President Alberto Fernández announced on 5 April that the government will suspend payments on foreign-currency securities issued in the domestic market for potentially the remainder of 2020 to save remaining resources to support the economy – sliding the government back into selective default – while restructuring talks continue on the side-lines over USD 69bn in foreign-law debt.

Since July 2019 peaks, the Argentine peso has depreciated around 37% against the US dollar and international reserves have dropped by USD 24bn to USD 43.6bn as of March 2020.

Argentina’s private sector is exposed to currency fluctuations in view of elevated foreign- currency-denominated loans outstanding, accounting for 23% of total bank loans.

Moving just off this year’s risky-3 is Ukraine, displayed in Figure 3’s Quadrant I. Ukraine needs to repay around USD 10.7bn in dollar debt over 2020-21, which is significant relative to FX reserves of only USD 23.6bn as of March 2020 (FX reserves have nonetheless increased compared with March 2019 levels of USD 19.6bn). Inadequate FX reserve coverage represents a core danger to Ukraine’s resilience in external crises. Against this backdrop, a continued commitment to reform and cooperation with international financial institutions are keys to maintaining external debt sustainability. The IMF and Ukrainian authorities reached agreement on a new three-year Extended Fund Facility programme of USD 5.5bn in December, which will replace the 14-month Stand-By Arrangement of USD 3.9bn approved in December 2018.

Scope’s Sturdy-3 in more detail

The sturdy-3 represents three economies with the lowest levels of external risk: Taiwan (unrated), China (A+/Negative) and Switzerland (AAA/Stable) – each displaying limited external vulnerability and greater resilience in the event of an external shock.

Taiwan is this year’s most robust economy to external sector risks. Taiwan’s low vulnerability is helped by a very large current account surplus of 10.6% of GDP in 2019. In addition, low volatility of the Taiwan new dollar and a large net international asset position (Figure 6) support vulnerability marks. On resilience, Taiwan’s scores are secured by a robust 2.7x reserve coverage of short-term external debt, low non-resident holdings of government debt, a lack of FX debt in overall government debt and low foreign currency loans in the domestic banking system (with FX loans totalling only 5% of GDP). Taiwan has been one of the most successful countries to date with respect to government mitigation actions in response to the Covid-19 crisis, including aggressive containment, quarantine, and monitoring measures that started early on (in December 2019), creating a response framework for emulation elsewhere in the world. Supported by this, the Taiwan dollar has been stable through this crisis.

China maintains its placement within the sturdy-3 in 2020 with the second strongest overall score in this year’s rankings. This includes status as the most resilient economy in the 63-country sample to external stress factors (up from 3rd most resilient in the 2018 report) alongside 12th least vulnerable of 63 economies (up from 19th). China’s foreign currency reserve stock of USD 3.06trn – by some distance the world’s largest nominal reserve stock – represents 26% of all global FX reserves, presenting the People’s Bank  of China an abundant resource to preserve macro-economic stability and stem balance- of-payment issues. This is even though FX reserve levels declined sharply in March amid global economic stress and remain well off 2014 peaks of USD 3.99trn. Strong reserve adequacy bolsters China’s external resilience, a key credit strength considered in China’s A+/Negative sovereign ratings.

The increased use of the renminbi in the global economy enhances China’s significant external strength. The internationalisation of the renminbi has in the past seen its inclusion in the IMF’s Special Drawing Rights basket of currencies (of five currencies) since October 2016 and the establishment of a new renminbi-denominated Shanghai oil futures market in March 2018. Presently, the share of yuan claims in total global FX reserves stands at 2.0% as of Q4 2019, double the 1.1% as of Q2 2017.

The supervision of China’s financial system remains in a transition stage and the capital account remains largely closed (although gradually opening up), with investors in China’s onshore bond market still predominantly being domestic institutions. Foreign currency denominated government debt amounts to only 2.4% of general government revenues (although foreign currency borrowing is increasing). While China’s comparatively closed, mostly renminbi-premised financial system shields the government from global financial volatility, increased opening to foreign investors and rising demand for foreign currency borrowing from domestic institutions might lower this resilience in the future.

China’s net international investment position peaked in 2007 (at 33.4% of GDP) and has dropped to a still robust +15% of GDP as of Q4 2019. The current account balance has dropped from a peak surplus of 9.9% of GDP in 2007 to 1.0% in 2019, weighed upon moreover by trade conflicts with the United States, higher tariffs on Chinese goods and tariff impacts on export volumes. While reductions in China’s current account support global rebalancing and reduce global risks, a nearly balanced Chinese current account represents a major change in the global economy as China posted the world’s largest nominal current account surplus as recently as in 2015.

However, slower economic growth this year due to the Covid-19 pandemic – which we estimate at about 4% in China with significant downside risk (China grows, for example, only 2% under one alternative scenario) – may nonetheless endanger ambitious goals of purchases of an extra USD 200bn of US goods over the next two years as part of the phase-one trade compromise with the United States and has contributed to weakening the yuan, which now trades above 7 to the dollar. Such events could risk that an unpredictable US government might re-visit the trade truce – which, if so, could test China’s external resilience. Higher capital outflows since H2-2018 are another relevant risk area to track.

Switzerland maintains its role within Scope’s sturdy-3 in 2020 (though falling from the #1 overall rank), ranking as the second least vulnerable economy of 63 countries (down one spot from first in 2018) and the 20th most resilient (up one rank). Since 1981, Switzerland has persistently generated large current account surpluses, which have averaged almost 10% of GDP since 2015, underpinned by the high competitiveness of its exporting sector alongside a large portion of fairly price-insensitive export products, such as in pharmaceuticals. This has helped shape a prodigious net international asset position of 116.2% of GDP at end-2019. Switzerland’s economic resilience to international shocks, including to the 2020 corona crisis (even as cases and mortalities in Switzerland have increased significantly), is supported by the franc’s reserve-currency status and highly liquid capital markets that provide unabated access to liquidity in times of international financial market volatility.

Switzerland’s high national savings, totalling 33% of GDP, support a predominantly resident holding of the country’s government debt, at over 85% ownership of the total. Foreign exposures (claims) of Swiss banks fell steadily after the global financial crisis to USD 1.08trn in Q3 2019 (from USD 2.66trn in Q2 2007). However, a sizeable share of loans denominated in foreign currency (around 40% of total loans) weakens Switzerland’s resilience score.

Most and least at-risk countries in the EU-27

Figure 7: 2020 EU risky-3 and sturdy-3

Top 3 strongest

Top 3 weakest

¹Of the 27 EU member states. ²Change in axis rank since 2018 update adjusting the 2018 results to exclude the

UK from EU rankings (to have a like-for-like comparison).

In the EU, among the least vulnerable countries to external shocks include an EU sturdy- 3 of:

1) Malta

2) Luxembourg

3) Denmark

In addition, Italy, Estonia, Belgium and Germany score well. For Malta, Luxembourg, Denmark and Germany, large positive net external financial assets (with an average NIIP of +66% of GDP in 2019), sustained current account surpluses that averaged 7.5% of GDP in 2019, as well as strong safe haven currencies (in the euro and the Danish krone), liquid capital markets and moderate levels of public debt underpin external positions.

On the other hand, the three most at risk member states of the EU (Figure 7, previous page) are:

1) Cyprus

2) Croatia

3) Romania

Cyprus (BBB-/Stable) is displayed in Quadrant I in Figure 8; Croatia (BBB-/Stable) and Romania (BBB-/Negative) in Quadrant II. Hungary drops off the EU risky-3 roster in this year’s report, with Cyprus taking its place. Greece (BB/Positive), Spain (A-/Stable) and Poland (A+/Stable) represent three other EU countries with comparatively high vulnerabilities to external shocks.

The EU Risky-3 in detail

Cyprus leads the EU risky-3. Cyprus’s current account deficit widened to 6.7% of GDP in 2019, from 4.4% of GDP in 2018. The economy’s external position is characterised by high deficits in its trade in goods (21.5% of GDP in 2019), offset by very high surpluses in services trade (21.3% of GDP), the latter due to Cyprus’s standing in tourism services and as a financial services hub. Nonetheless, current account deficits have resulted in one of the largest negative NIIP levels among EU economies at -116%, alongside very high gross external debt levels of 936% of GDP in Q4 2019, which, nonetheless, still represent deleveraging against a 2015 peak at 1,263% of GDP. In addition, well above 70% of government debt is held by non-residents (Figure 9, next page).

We, however, note that special purpose entities (SPEs) in Cyprus considerably distort the economy’s external position while having limited links to real economic activity: excluding SPEs, the NIIP and gross external debt were more modest at -34.3% of GDP and 262% of GDP respectively as of Q3 2019, even if nonetheless still worse than the euro area average. Importantly, Cyprus benefits from euro area membership, unlike in the cases of peers in the 2020 EU risky-3: Croatia and Romania, giving Cyprus access to credit strengths in crisis moments such as reduced FX volatility and capped borrowing rates deriving from the common reserve currency.

Croatia stands out as a Quadrant II economy in Figures 2 and 8, a characteristic shared, for instance, by Bulgaria (BBB+/Stable). Croatia and Bulgaria are economies with lesser balance of payment vulnerabilities but also less resilient than most nations were a balance of payment crisis to nonetheless occur. As such, while risks for a balance of payment crisis might be lower than in most countries with both economies holding current account surpluses alongside successful, long-standing fixed or managed floating exchange rate regimes against the euro, resilience in a currency crisis, however unlikely, would be more subject to question, with both economies highly euroised – meaning any break in Croatian kuna or Bulgarian lev exchange rates against the euro could threaten financial stability.

Croatia is the 4th least vulnerable economy in the EU (and 10th least vulnerable overall in the 63-country set) but is the EU economy with the weakest scores on external resilience (and 2nd least resilient overall of 63). Croatia’s current account surpluses have averaged over 2% of GDP over the past two years, driven by large surpluses in services trade, while goods trade has been in deficit. Current account surpluses have helped to curtail Croatia’s negative NIIP to -50.8% of GDP as of Q4 2019, from -65.6% in Q3 2017.

Any unforeseen depreciation in the kuna would adversely impact government and private sector balance sheets by raising the value of foreign-currency debt in local currency terms, with 51% of private sector loans and almost 70% of government debt denominated in foreign currency. Croatia’s (as well as Bulgaria’s) resilience to short-term external shocks will be materially enhanced after the countries join the EU's Exchange Rate Mechanism II (ERM II) and, eventually, adopt the euro, a process which both countries are making important progress towards.

Romania remains in the 2020 EU risky-3 as an economy in Quadrant II of Figure 8. Romania’s current account deficit widened modestly to 4.7% of GDP in 2019, from 4.4% in 2018. The current account is expected to remain below -5% of GDP over the 2020-21 period. A high share of foreign-currency-denominated public debt (amounting to 18% of 2019 GDP) and widening fiscal deficits constitute significant risks to Romania’s debt sustainability. The country’s negative NIIP was relatively unchanged at -43.5% of GDP in 2019. Romania’s external sector competitiveness remains a weakness due to high inflation, which is only partly compensated for by depreciation in the Romanian leu.

Annex II: Country external vulnerability score (sorted by rank) and resilience score (sorted by rank)

Source: Scope Ratings GmbH

Source: Scope Ratings GmbH

Annex III: Vulnerability/resilience grid by components, hard figures (sorted by world region)

Source: IMF, Eurostat, BIS, Bloomberg, JP Morgan, national central banks, national statistical offices, ministries of finance, Haver Analytics, Scope Ratings GmbH; *for Venezuela and Vietnam, the data is equal to (total reserves - total external debt) as a % of GDP; **for countries not covered by BIS, data is calculated by multiplying their GDP share in the world by the BIS OTC turnover for residual currencies; ***for Belgium and Japan, data equals foreign-currency-denominated deposits, % GDP.

Annex IV: Indicator definitions and rationale

*The exception is for euro area countries, which receive a fixed score of 7.5 on the resilience against currency crises variable, owing to a lack of currency adjustment flexibility in the event of balance of payment issues (from being in a currency union). This is despite having a strong reserve currency in the euro.

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