Country Risk: Has politics become the number-one problem for investors?

By:
Jeremy Weltman
Published on:

From west to east, political risks remain in the foreground, challenging investor decision-making, but with such risks more difficult to quantify than economic data, the views of experts may be the best there is to go on.

The importance of political factors to the assessment of a sovereign’s overall risk profile should not be overlooked. Political risk has increased in 116 of the 186 countries over the past two years, according to Euromoney’s Country Risk Survey, with 28 sovereigns witnessing double-digit falls in their political risk assessment scores. The Arab Spring and the eurozone crisis are key protagonists of course, but there are other causes, and with varying effects. Monitoring and evaluating political changes have become crucial for investment strategy, Jeremy Weltman reports.

Measuring political risk may be more fraught with difficulty than dealing simply with the raw numbers of economic data, but that should not relegate it to the background. Indeed, political risk is not only an important constituent of a sovereign’s country risk profile, alongside economic and structural indicators, it has become the main issue for many countries.

This has been demonstrated in recent days by developments in Italy and in the failure to seal a new EU budget for 2014-20, because of the intransigence of the UK. There are of course many other examples.

Although political risk may be difficult to quantify, Euromoney’s Country Risk Survey provides a useful guide. Economists and other country-risk experts are asked to qualitatively assess six political factors in all – those that are deemed most relevant to the investor environment. They include: government non-payments or non-repatriation, corruption, information access/transparency, institutional risk, the regulatory and policy environment, and government stability; factors that are often interlinked and can upset the fiscal dynamics, creditworthiness and investor image of a country.

Of those sovereigns to have seen the largest attenuation in their political risk in 2012 (see chart), Syria, perhaps unsurprisingly, leads the pack. We have omitted Antigua and Barbuda as an outlier – it is a small country with an already low score and limited coverage.

 

Currently ranking 161 on ECR’s Global risk data table, Syria, unrated by all three of the main agencies (Fitch, Moody’s and S&P), but regularly assessed by ECR, has seen its political risk assessment score fall by 6.6 points, to 20.4, this year, as the internal political strife and civil warfare have intensified.

Not far behind, though, is Argentina, now down to 111 in the global rankings, and another country whose political risks have intensified. Rated CC by Fitch, B3 by Moody’s and B- by S&P, the unpredictable policymaking of the Buenos Aires government led by president Cristina Fernández de Kirchner, with its desire for resource nationalism, a lack of respect for property rights and opaque statistics, creates an uncertain playing field for foreign investors. Picking a fight with the UK over the Falkland Islands (Malvinas) has hardly instilled confidence in the political leadership either.

These problems have been variously picked over by ECR and its contributors over the past few years, and the country’s political risk score has fallen by 11.8 points during that time, nearly double the 6.6 point drop in its economic assessment score. Noticeable is the two-point slippage in the score for the regulatory and policy environment. But with falls almost as large for institutional risk, information access/transparency and government non-payments/non-repatriation, all of Argentina’s sub-factors are now scoring less than 3.0 out of 10.

Eurozone woes are political in nature

Other countries with heightened political risk this year include Greece and Slovenia. Greece, languishing at 112th place on the ECR scoreboard, still burdened by its enormous debt problems, despite being given additional debt relief and two more years to reduce government spending, has seen many street protests and strikes since the crisis began. Its debt burden, forecast to be as high as 124% of GDP in 2020 even if the austerity programme is kept on track, highlights the complexity of its risk profile.

Politics is central to the debt resolution and in turn this has implications for creditors, of which France is the most exposed, accounting for 10% of Greece’s €327 billion of total liabilities. Greece currently scores just 42.6 for its political profile, some 17.3 points below the level prevailing two years ago and almost exactly half the score that Germany receives from ECR’s experts.

“The government is viewed more positively in Greece, but policy execution is still a problem,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy. “Creative solutions must be found to trim the [Greek] debt and avoid the one clear outcome – official debt write-downs resisted by its creditors.”

Spiro goes on to state that political risk “has now taken centre-stage as the number one issue in Europe, but it is difficult to price. We are in uncharted waters.