IN THE 21st century an extraordinary transformation has taken place in the way business is done. Cross-border transactions and multinational linkages have created truly international organizations. Today there is a growing need to situate the local within the international.
With this in mind, Euromoney has sought to provide its readers with a dynamic and global analysis of the political, social and economic factors that influence the commercial attractiveness of a particular market. We have updated and enhanced the data sources that make up our semi-annual country risk ranking (see methodology). And the new-look results make for interesting reading in the light of the global financial crisis and its aftermath. The technologically driven age we live in has created a seamlessly flat world in which knowledge, resources and ideas are being transported globally at breakneck speeds. Globalization has facilitated this, making foreign direct investment cheaper and more efficient. This process has been coupled with the rapid resurgence of the emerging markets, which are now dominating the geopolitical landscape.
Joyce Chang, head of emerging markets and credit research at JPMorgan, says: "Emerging market sovereigns this year alone have had 10 credit rating upgrades. Developed countries, particularly in Europe, have experienced downgrades and remain on a negative outlook in many cases, such as Ireland, Spain, Greece and Portugal. The last developed country ratings upgrade occurred back in 2007."
Big changes
Uncertainty continues to surround the direction of the global economy. The effects of the sovereign debt crisis are still being felt because of the collapse of the banking sector and consumer spending and the bursting of the real estate bubble. Last September the US fell out of the top-10 safest countries for investment and this year it has been unable to regain that ranking, dropping a further two places since March, when Euromoney last compiled country risk data.
Many western European countries have struggled too thanks to the sovereign debt crisis – UK (down one place) Spain (down 12), Italy (down eight), Portugal (down two). Greece has fallen a staggering 23 places in Euromoney’s country risk report since March. Elsewhere in Europe, Hungary has fallen seven places as its struggles with the IMF and the imposition of a new bank tax have scared investors.
Not surprisingly, the Nordic countries remain safe havens for investment. Eva Molyneux, a political analyst at Maplecroft, says the strength of the Nordic countries lies in a "combination of political stability, institutional strength and longevity". These democracies have a rule-based system that people respect, making for a predictable business environment and giving businesses reliable access to remedies should things go wrong.
In emerging Asia, the two big economies of China and India have fared relatively well. China, now the world’s second-biggest economy, is up seven places and India has risen three places.
Other highlights include Hong Kong and Macau faring better than ever. Hong Kong has found its way into Euromoney’s top 10 of the country risk ratings at number nine and Macau has risen 15 places since March.
In southeast Asia, Thailand’s red shirt anti-government demonstrations, mainly supporters of former prime minister Thaksin Shinawatra, are creating political upheavals. Despite these clashes, Thailand has climbed 17 places after generating GDP growth of 12% during the first half of the year – its highest rate in 15 years. Indonesia rises nine places and Singapore five.
Chile and Brazil are lifting Latin America’s prospects, with Chile rising 22 places, and Brazil moving up nine. Opinions are mixed on the Middle East, with some countries, such as the UAE and Qatar, faring relatively poorly. UAE is down six places and Qatar has dropped out of the top 10.
The riskiest countries for investors remain the ones most affected by high levels of conflict, which include Somalia, the Democratic Republic of Congo, Iraq, Burma, Central African Republic, Chad and Nigeria.
UK and US tumble together
Growing pressure on household finances, rising fears of job insecurity and still-tight lending criteria are creating a slippery slope for the US and UK in Euromoney’s country risk report. The US has dropped four places and the UK one, as worries mount of a double-dip recession.
In July the US had a record slump of 27% in home sales, and the UK has had an 18.5% drop in mortgage lending over the past year. These signs of stagnation are likely to dent consumer confidence. Xavier Denecker, managing director at Coface, says: "We believe the real estate bubble is not yet completely resolved. We see property prices dropping plus an unusual unemployment rate for the US, which will probably lead to household behaviour of saving more than spending."
However, Rob Downey, partner of International Risk Consultants, believes these risks are overblown. "I don’t think debt is the big issue for the US and the UK right now – we can grow out of debt," he says.
Andrea Keenan, country risk group department at A.M. Best Co., says: "With the US and UK, given that they’re both triple A-rated and both have reserve currencies, they do not have as much impact on each other as they do on developing countries."
She adds: "Even in an economic crisis there is a large consumer base in these countries that sustains a minimal level of growth."
Escalating risk of Greece
Europe’s biggest fall since Euromoney’s country rankings in March is Greece, which fell 23 places from 33rd to 56th. Greece’s woes show no signs of diminishing despite receiving a €110 billion aid package from the EU and IMF in May in return for reining in its fiscal deficit.
Greece’s security forces have warned of social unrest as the government implements painful cuts and higher taxes. These include public-sector pay freezes, VAT rises, a higher retirement age, and laws making it easier to lay off company workers.
