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Euler Hermes Social Risk Index (SRI): South Africa vulnerable to social unrest

08 June 2020 Euler Hermes

Each quarter, Euler Hermes assesses the evolution of country risk. The world leader in credit insurance has this year added environmental, societal and governance (ESG) risks to its analyses, to have a more precise and complete assessment.

This decision makes perfect sense in today’s context as the Covid-19 pandemic has a major impact on economies around the world. Concerns of recovery are growing, and suggest a possible resurgence of social risk in many countries.

In this context, Euler Hermes and Allianz present their Social Risk Index (SRI). This indicator identifies which countries are particularly vulnerable to systemic social risks such as social discontent, demonstrations and protests. These will have an impact on the political orientation and policymaking of a country, its companies, and its ability to generate and attract investment.

The SRI measures underlying strengths and weaknesses, ranking countries on a scale from 0 (highest social risk) to 100 (lowest social risk), and is defined using 12 sub-indicators, including growth in real GDP per capita, the share of the working population in the working-age population, income inequality, public social spending or even people's confidence in the government in place. In total, Euler Hermes calculated the SRI of 102 countries for the year 2020.

South Africa vulnerable social unrest

The SRI 2020 identifies South Africa as highly vulnerable to social unrest in the next 18 months or so. The SRI of 41.1 places the country 79th out of 102 countries in our assessment, reflecting weaknesses across almost all sub-indicators of the index. Factors include the relatively high-income inequality, the recent currency depreciation, which has raised the costs of imported consumer goods and thus potentially consumer discontent, a low labor force participation (56% of the working-age population), declining real GDP growth per capita (-0.5% on average in 2017-2019), perceived political instability, and a low level of trust in the government. Compared to five years ago – we calculated backward a 2015 SRI – South Africa’s SRI is almost unchanged but it lost eight positions in the ranking because other countries improved comparatively.

South Africa is one of the 17 sampled countries in Africa. Mauritius, which ranks 52, is the only country with a SRI of just above 50 in the region. Moreover, Covid-19 is likely to intensify the high of systemic social risk in Africa in the near future, owing to very weak health care combined with currently low commodity prices, which reduce the capability of governments to respond with fiscal stimulus to the crisis. All in all, it cannot be ruled out that several public protests could occur across the continent from the second half of 2020 to 2021.

“With containment measures, social movements have logically diminished despite us seeing some ‘social noise’ in multiple countries. However, the Covid-19 epidemic has, in our view, increased social inequality. The financial impact is very negative for many households and businesses around the world, which could lead to a new wave of social discontent. We can, therefore, fear a significant reinforcement of social risk in many countries this year,” analyses Ana Boata, Director of Macroeconomic Research at Euler Hermes.

Low social risk in advanced economies

Unsurprisingly, all advanced economies are among the 35 countries with the lowest social risk. Denmark occupies first place in the ranking with an SRI score of 82.5, ahead of Finland (81.3) and Sweden (78.1). Germany (76.5) is in 5th place, followed by Austria (76.9). Among the worst in this group of countries are Italy (30th - 63.9) and Greece (35th - 61.4). Despite its ranking, Greece’s score reflects an improvement of +6.2% from five years ago when the country was in the midst of its sovereign debt crisis. Similarly, Italy has improved by +2%. In both countries, the improvement was in part due to stronger real GDP per capita growth in the last three years and better employment conditions. Although we expect the SRI for both countries to deteriorate in the wake of Covid-19, the SRI for both should not fall below 2015 levels, also because local and EU stimulus should mitigate adverse effects on economies.

The US is ranked 23rd with a SRI of 66.4. Weaknesses are seen in labor force participation, income equality, public spending, and trust in government. In contrast, the country scores well on political stability, government effectiveness, corruption perception, per capita growth, and the low share of merchandise imports in GDP.

Emerging markets: regional disparity of social risk

Amongst emerging countries, the situation is more heterogeneous. In emerging Europe, social risk is moderate, with 12 out of 18 countries having an SRI score above 50, including nine with a score above 60. The country most vulnerable to social unrest in the region is Turkey with a SRI of just 38.8. Contributing factors include continued currency depreciation, low labor force participation, political instability, and income inequality.

In emerging Asia, seven countries out of 14 have an SRI score below 50; including China (49.3). Commonly, these countries have unfavorable employment and income conditions, and weak perceptions of public institutions. This suggests a significant vulnerability to systematic social unrest in the future. In the Middle East, the situation is uneven, with some countries showing a very high systemic social risk, such as Iran (28.7), while others seem less exposed to it, such as Qatar (66.9).

Social risk is particularly high in Latin America. Almost all countries obtain a bad SRI score in these regions. We expect a wave of public protests across Latin America in the next 18 months or so. We should notably expect in 2021 a moderate reinforcement of social risks in the United Kingdom, the United States and Belgium, and a high reinforcement of social risks in Latin America and in some African countries and the Middle East.

Read the full report here...

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