RoundMap® : Framework 1 System

 

A Unified Approach to Systemic Change: Building Future-Fit Organizations

For years, our pivotal question has been: ‘What if we could shatter the traditional barriers of silos that limit our collective potential?’ After seven years of rigorous research and introspection, we’ve forged a groundbreaking understanding. Our mission transcends merely dismantling silos; it’s about nurturing a collaborative ecosystem where stakeholders are empowered to co-create and invest in a mutually desired future. It’s a commitment to collectively envision, craft with precision, and passionately chase a unified vision. This method evolves our collaboration into a potent force, marching us toward a future we all yearn to shape.

Breaking Silos with Visionary Dialogue

Silos within organizations create barriers to communication and collaboration, often stifling innovation. These silos persist not just due to organizational structure but also due to the cultural comfort they offer to individuals. People cling to silos because they provide a sense of security, recognition, and community. However, enforcing change is rarely effective, as it doesn’t address the underlying emotional and cultural ties that bind people to these silos.

A more effective strategy is to offer individuals compelling reasons to venture beyond their siloed environments. This involves initiating an open dialogue about the organization’s future—a vision that is co-created by involving everyone in the system. Through this inclusive conversation, individuals can collectively imagine the future they desire and contribute to designing the journey towards it.

When people are part of crafting a future that promises greater fulfillment, excitement, and alignment with their passions, they become more open to re-evaluating their current allegiances. This openness is crucial for questioning their present values and behaviors. It creates a space for new cultural norms to emerge, facilitating the dismantling of outdated structures and the formation of new, more collaborative, and innovative ways of working.

By ensuring that the envisioned future is more appealing and rewarding than the present, organizations can inspire their people to embrace change willingly. In doing so, they not only break down silos but also foster a culture that is agile, interconnected, and primed for continuous innovation.

One System: Building Resilient Organizations

Navigating away from the limitations of siloed structures, we adopt the Future-Fit Organization approach, centered around four critical components integral to sculpting organizations poised for systemic success in the future. The first two are what we refer to as the twin vectors of ethical prosperity, and the final two are critical learnings taken from ‘Team of Teams’ and ‘One Mission’ to build truly responsive organizations (see the figure below): 

1. Equitable Distribution of Profit: This step involves ensuring that profits generated by the organization are distributed in a fair and just manner among all stakeholders, including employees, shareholders, suppliers, and the community. By prioritizing equity in profit distribution, organizations can foster trust, loyalty, and collaboration among stakeholders, breaking down silo barriers by aligning everyone’s interests towards a common goal.
2. Striving for Responsible Growth: This step emphasizes pursuing growth in a manner that is sustainable, ethical, and considerate of social and environmental impacts. Instead of prioritizing short-term gains at the expense of long-term sustainability, organizations commit to responsible growth practices that balance economic prosperity with social and environmental responsibility. This approach unifies siloed departments by fostering shared values and objectives while bolstering the organization’s reputation and resilience.
3. Sharing Collective Insights: By encouraging open communication channels and platforms for sharing ideas, data, and best practices, organizations enable employees at all levels to contribute their insights and expertise. This not only fosters a sense of belonging, empowerment, and ownership but also breaks down silos by promoting cross-functional collaboration and innovation based on a collective understanding of challenges and opportunities.
4. Empowering Action: This step focuses on empowering employees with the autonomy, resources, and support they need to take initiative and drive positive organizational change. By fostering a culture of empowerment and accountability, organizations enable employees to break free from silo mentalities and hierarchies, encouraging collaboration, creativity, and problem-solving across departments and teams. Empowered employees feel motivated to work towards common goals, leading to greater agility, resilience, and success for the organization.

By embracing these principles, we envision an organization that is not just surviving but thriving—one that is equipped to face the future with resilience, innovation, and a deep sense of purpose. This is the essence of the Systemic Future-Fit Organization approach, a roadmap to success in a world that demands we think and act not just for today but for the sustainable future we all share.

Systemic Future-Fit Organizations

Systemic Future-Fit Organizations (SFOs) are conceptualized as inherently designed for longevity and prosperity in a rapidly evolving business ecosystem. These organizations adhere to:

1. Forward-Thinking: These organizations are characterized by their proactive approach to envisioning and preparing for the future. They anticipate trends, challenges, and opportunities, positioning themselves ahead of the curve to shape the future rather than react to it.
2. Business Vitality: These organizations prioritize building enduring vitality—beyond mere fitness to thrive in the current environment. They focus on creating a resilient and dynamic foundation that supports long-term growth, adaptability, and innovation.
3. Systems Thinking: They deeply comprehend their operational environment’s intricate and dynamic interplay, recognizing that every decision can ripple across the entire system.
4. Adaptability: They are nimble, capable of weathering and embracing the winds of change, constantly evolving to meet the shifting tides of market demands and global challenges.
5. Sustainability: Their strategies are rooted in the pursuit of enduring success, prioritizing the well-being of the environment, society, and the economy for generations to come.
6. Collaboration: They practice inclusive engagement, valuing the contributions of all stakeholders and actively working to unite diverse perspectives and skills in a common quest for excellence.
7. Empowerment: Empowering individuals across the organization is central to their ethos. By distributing authority and decision-making, these organizations cultivate a culture of trust and accountability, enabling every member to contribute to their full potential and drive collective success.
8. Purpose and Impact: Guided by a visionary purpose, they drive towards creating significant and positive change, ensuring their actions resonate with profound and lasting effects.
9. Aligning Strengths: These organizations understand how to leverage their inherent strengths and the positive core underpinning their past successes, using it as a springboard for future innovations and growth.
10. Innovation: A perpetual quest for breakthroughs characterizes their ethos as they seek out and implement novel solutions that redefine what’s possible.

This refined definition emphasizes a holistic, integrated approach to business, sustainable, adaptable, and forward-thinking, resonating with RoundMap’s ethos of promoting transformative, collaborative, and innovative practices for a sustainable and prosperous future.

Achieving Operational Excellence

In the heart of RoundMap’s philosophy lies the bedrock of enduring success: the Four Pillars that underpin the operational excellence of future-fit organizations. These pillars are not mere guidelines but the strategic cornerstones that organizations must internalize to navigate the complexities of tomorrow’s business landscape. 

Each pillar represents a fundamental aspect of our Unified System Approach ─ bolstering business vitality, designing for impact, harmonizing strengths, and cultivating empowerment ─ fostering a robust foundation for sustainable and resilient growth. Together, they form a coherent blueprint for companies aspiring to adapt to change and lead it. 

We invite you to explore these pillars, detailed comprehensively on our website, as they are instrumental in steering organizations toward a prosperous, interconnected, and innovative future.

Fostering Responsible Growth

Why should organizations adopt sustainable leadership?

1. Addressing Global Challenges: Adopting sustainable leadership allows organizations to directly contribute to solving global challenges such as climate change, inequality, and resource depletion. By integrating sustainability into their core strategies, businesses can innovate to reduce environmental impact, enhance social equity, and drive economic growth without harm. This proactive approach addresses pressing global issues and positions organizations as leaders in sustainability, attracting support from consumers, investors, and employees who prioritize ethical and sustainable practices.
2. Stakeholder Expectations: Meeting stakeholder expectations is crucial in today’s context where individuals and investors alike seek organizations with firm ethical, environmental, and social commitments. Sustainable leadership signals a commitment to these values, making organizations more attractive to prospective employees who prioritize purpose in their work. This alignment with broader societal values not only helps in attracting talent but also in retaining employees who are motivated by meaningful work and a positive organizational impact on global challenges. It meets the rising demand for corporate responsibility and sustainability, enhancing the organization’s reputation and competitive edge.
3. Long-Term Viability: Adopting sustainable leadership enhances an organization’s long-term viability by ensuring its operations are environmentally sound, socially equitable, and economically viable. This approach helps mitigate risks associated with sustainability challenges, such as regulatory changes, environmental disasters, and shifts in consumer preferences. By prioritizing long-term over short-term gains, organizations can adapt to market changes, innovate sustainably, and secure their future in a rapidly evolving global landscape, ensuring resilience and continued relevance in their industry.
4. Innovation and Competitive Advantage: Adopting sustainable leadership drives innovation and competitive advantage by encouraging organizations to develop new products, services, and processes that are both profitable and environmentally friendly. This approach fosters a culture of creativity focused on sustainability, attracting customers and partners interested in ethical and responsible business practices. It differentiates companies in the marketplace, making them more attractive to investors and consumers who prioritize sustainability, thereby securing a leading position in the transition towards a more sustainable economy.
5. Regulatory Compliance: Adopting sustainable leadership for regulatory compliance means aligning with current and anticipating future sustainability laws and standards, reducing legal risks, and avoiding fines. It positions organizations as industry leaders in compliance, enhancing their reputation and trust among stakeholders. This proactive stance can also lead to influencing policy developments, ensuring that the organization not only meets but shapes the standards of sustainable practices within its industry.

Embracing Equitable Profit Distribution

Organizations should consider an equitable distribution of profits among stakeholders for several reasons that resonate with sustainability, innovation, and whole-system thinking, akin to those espoused by RoundMap®. Here’s why equitable profit distribution is essential:

1. Sustainability: Equitable profit distribution aligns with sustainable business practices by ensuring that the organization’s success benefits not just its shareholders but all stakeholders, including employees, customers, suppliers, and the community. This broader focus helps build a resilient business model that can sustain long-term growth and stability.

2. Stakeholder Engagement and Loyalty: Fairly sharing profits helps build stronger stakeholder relationships. It can mean better wages and benefits for employees, leading to increased engagement and productivity. For customers and suppliers, it can foster loyalty and long-term partnerships. Engaged stakeholders are more likely to support the organization through ups and downs, contributing to its resilience.

3. Social Responsibility: Businesses have a role in the broader social fabric. By distributing profits equitably, organizations reduce income inequality and support community development. This approach can enhance the organization’s reputation and brand image, aligning with consumers’ growing expectations for businesses to act responsibly.

4. Innovation and Continuous Improvement: When profits are reinvested into the organization for R&D, employee training, and other areas, it can spur innovation and continuous improvement. Equitable distribution can also mean allocating resources to initiatives that drive innovation rather than focusing solely on dividends and executive compensation.

5. Adaptability: An equitable approach to profit distribution can make organizations more adaptable. By ensuring that profits are used to bolster the organization’s foundation—through investment in technology, people, and processes—businesses can better navigate changes in the market and emerging challenges.

6. Brand Differentiation: In a competitive market, how a company treats its stakeholders can be a significant differentiator. Organizations known for fair and equitable profit-sharing can attract customers and talent who prioritize ethical considerations in their decisions.

7. Legal and Regulatory Compliance: In some regions, there are increasing legal and regulatory expectations for corporate social responsibility and equitable treatment of stakeholders. Proactively adopting equitable profit distribution practices can help organizations stay ahead of these requirements and avoid potential legal issues.

8. Collective Success: Ultimately, equitable profit distribution embodies the principle of collective success. It recognizes that the contributions of all stakeholders are vital to the organization’s achievements and seeks to reward them in a manner that reflects their value. This holistic approach to business success fosters a more cohesive, motivated, and committed stakeholder base.

By considering the equitable distribution of profits, organizations can align their operations with a model that promotes long-term success, stakeholder well-being, and a positive societal impact, resonating with the transformative and holistic principles advocated by RoundMap®.

Cultivating Customer Excellence

Why should organizations cultivate customer excellence?

Organizations should cultivate customer excellence for several compelling reasons, which align closely with the principles of sustainability, innovation, and whole-system thinking inherent in RoundMap’s vision. Here’s why focusing on customer excellence is crucial:

1. Enhanced Customer Loyalty: Customer excellence leads to higher satisfaction rates, fostering loyalty. Loyal customers are more likely to make repeat purchases, provide valuable feedback, and advocate for the brand through word-of-mouth. This loyalty is a sustainable source of revenue and organic growth.

2. Differentiation in Competitive Markets: Customer excellence can be a significant differentiator in crowded marketplaces. Organizations dedicated to understanding and meeting their customers’ needs can stand out from competitors, attracting more business and establishing a stronger market position.

3. Increased Customer Lifetime Value (CLV): By focusing on customer excellence, organizations can enhance the lifetime value of their customers. Satisfied customers are more likely to purchase additional products or services and less likely to switch to competitors, increasing the overall value they bring to the organization over time.

4. Improved Feedback and Innovation: Engaging with customers and striving for excellence provides valuable insights into customer needs and preferences. This feedback loop can drive innovation, helping organizations to adapt their offerings and develop new products or services that better meet customer demands.

5. Risk Mitigation: Excellent customer service can also mitigate risk. By effectively addressing complaints and turning negative experiences into positive ones, organizations can prevent escalations that might otherwise damage their reputation and financial health.

6. Employee Satisfaction and Engagement: Cultivating customer excellence often requires empowered, engaged employees who understand the value of the customer experience. This focus can improve employee satisfaction and engagement, as team members feel part of a purpose-driven effort to deliver outstanding service.

7. Sustainability and Social Responsibility: Customer excellence aligns with the broader goals of sustainability and social responsibility. Satisfied customers are likelier to engage with brands that demonstrate ethical practices, environmental stewardship, and community involvement, furthering the organization’s impact beyond its immediate customer base.

In summary, cultivating customer excellence is not just about improving transactions or solving immediate problems; it’s about building a sustainable, adaptive, and innovative organization that thrives by putting the customer at the center of its strategy. This approach aligns with RoundMap’s holistic, system-thinking philosophy, driving long-term success and differentiation in a competitive landscape.

The Biggest Challenge for Corporates

The biggest challenge of the corporate world is scaling for efficiency and maintaining the agility to innovate and adapt. Many corporations are initially designed for scale, leveraging efficiencies to drive down costs and capture market share. While effective for achieving rapid growth and competitive advantage, this strategy can become a double-edged sword, especially in rapidly changing markets. 

Here’s a deeper look into the issues associated with this scale-focused design:

1. Loss of Flexibility: As corporations scale, their processes and structures become more rigid. This rigidity can limit their ability to respond quickly to market changes, technological advancements, or shifts in consumer preferences. The focus on efficiency can inadvertently suppress creativity and innovation.

2. Innovation Paradox: Large corporations might find innovating within their existing operational frameworks challenging. The systems and processes that enable them to operate at scale can create barriers to exploring new ideas and approaches, leading to an innovation paradox where maintaining operational efficiency comes at the expense of adaptability and creative problem-solving.

3. Cultural Challenges: Scaling often leads to a more hierarchical and departmentalized organizational structure. This can dilute the entrepreneurial spirit and culture of collaboration that often drives effective solution development in smaller, more agile organizations. As a result, corporations might struggle to cultivate the internal dynamism needed for continuous innovation.

4. Overemphasis on Short-term Gains: A focus on scaling for efficiency frequently aligns with emphasizing short-term financial performance. This can divert attention and resources from investing in longer-term, potentially riskier initiatives that could drive sustainable growth and adaptability.

5. Market Disruption Vulnerability: Corporations optimized for efficiency are particularly vulnerable to disruption from more agile competitors who can introduce innovative solutions that better meet changing customer needs. These disruptors often prioritize effectiveness and customer value over operational efficiency, at least in their early stages.

6. Reversibility Challenge: As you’ve noted, the path to scaling for efficiency does not easily allow for a return to a more flexible, innovative posture without significant restructuring. Transforming a highly efficient operation into one that prioritizes adaptability and effectiveness requires a fundamental shift in corporate strategy, culture, and processes.

Addressing these challenges requires a balanced approach, as encapsulated in RoundMap’s principles of fostering business vitality, designing for impact, harmonizing strengths, and cultivating empowerment. Corporations must design systems and cultures that maintain operational efficiencies while enabling flexibility, encouraging innovation, and staying responsive to the evolving needs of customers and markets. 

This might involve adopting more fluid organizational structures, investing in continuous learning and development, and fostering a culture that values experimentation and accepts failure as part of the innovation process. By doing so, corporations can strive to navigate the complexities of scaling for efficiency without sacrificing their ability to create effective, adaptive solutions.

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How do you build resilience at work?

 

”I have missed more than 9,000 shots in my career. I have lost almost 300 games. On 26 occasions I have been entrusted to take the game winning shot… and I missed. I have failed over and over and over again in my life. And that’s precisely why I succeed.”

Michael Jordan

No matter what your focus is with your clients or your organisation, leadership, management performance, team potential etc' as we recover from COVID19 building resilience is likely to be a big factor.

Defined as the ability to recover from adversity; Resilience is the ultimate tool because it allows us to adapt, to learn, to turn setbacks into progress.

It can be tough enough to manage your own stress. But how can you, as a manager, help the members of your team handle their feelings of stress, burnout, or disengagement?

Because work is getting more demanding and complex, and because many of us now work in 24/7 environments, anxiety and burnout are not uncommon.

Especially as we move back to office or to hybrid working.

In our high-pressure workplaces, staying productive and engaged can be challenging.

Although it’s unlikely that the pace or intensity of work will change much anytime soon, there’s a growing body of research that suggests certain types of development activities can effectively build the capacity for resilience.

One approach is to focus on employees’ personal growth and development.

But how does this teach people to be more resilient?

Research tells us there are four key components that resilient people have:

Confidence - having feelings of competence, effectiveness in coping with stressful situations and strong self esteem are inherent in being resilient.

Social Support - building good relationships and seeking support so individuals overcome adverse situations.

Adaptability - being flexible and changing in situations which are beyond our control are essential to maintaining resilience.

Purposefulness - having a clear sense of purpose, clear values, drive and direction helps individuals persist in the face of setbacks.

These four components of resilience can be learnt and grown through understanding and developing your Emotional Intelligence at work (Business EQ).

For example, we are not born with self confidence. It is a learned skill. We either learn it by accident, or on purpose. Or we live our lives never learning it at all.

By using Emotional Intelligence to focus on building resilience you can quickly help people to deal better with the stresses and strains of work and raise performance at the same time.

How to introduce Emotional Intelligence at work?

Build your expertise with assessments and tools, such as the EBW, and help leaders and teams understand how their emotions impact their behaviour and what to do about it.

By using EBW emotional intelligence assessments and tools you will be able to explore the reasons why your colleagues and clients may struggle at work and how to change their performance by:

• Shifting performance blocks by using unique insights & powerful conversations

• Successfully deal with turbulent change with tools that focus on action generating results

• Building sustainable results by using a series of reinforcing ‘motivational nudges’ and steps to develop and embed new emotional behaviours

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Ten Questions Every CEO Should Ask Themselves

 

	Mort Feinberg sent me this list which illustrates his role has ‘Executive Coach’:
	1)	Am I getting honest answers, accurate information and unfiltered opinions/feedback from each of my senior team … or am I getting the answers they perceive I want to hear?
	2)	To whom do I turn for mentorship, coaching, advice, and feedback?
	3)	How do I get better at what I do and what I am expected to do?
	4)	What have I done or am I doing to ensure the business will continue long after I am gone (succession)?
	5)	Is the title/role of CEO the right one for me or are my talents better served in a different role with different responsibilities?
	6)	Do I really know our customers, the external and internal drivers or our business, the competitive challenges we face and the opportunities/challenges in front of us?
	7)	Am I willing to let go and allow others to flourish?
	8)	Do I have a long-range plan for success that is understood and embraced by all key stakeholders?
	9)	What has our Company done recently that is creative, innnovative, and step ahead of our competitors?
	10)	What have I done today to get closer to our customers, assemble/empower the best talent and assure the long-term competitive edge for the enterprise?
	I believe the source of this list is:  CEL & Associates

Workplace Resilience Statements

 

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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