ECR Survey Results Q1 2014: Confidence in EMs nosedives as eurozone trust returns

The rise in global risk witnessed in 2013 continued during the first quarter of this year as experts taking part in Euromoney’s Country Risk Survey reassessed the investment prospects of EMs versus their developed-country counterparts.

The latest quarterly results from the ECR survey indicate that a majority of the world’s sovereign nations became riskier in Q1 2014.

Rising risk levels have continued among large emerging markets (EMs) – such as India, Indonesia, South Africa and Turkey – where investors worried about fiscal and/or external balances have been withdrawing capital in light of the tapering of the US Federal Reserve’s bond-purchase programme.

Russia and Ukraine, the two largest fallers in the survey during Q1, have seen their risk-scores plummet in the wake of the financial implications of the crisis becoming more apparent, which is now dragging in other countries in the region with close ties to Russia, notably Belarus and the Baltic states: Estonia, Latvia and Lithuania.

Bulgaria and Croatia have seen sharp falls in risk scores; Argentina and Venezuela, plagued by their political and economic problems, continue to suffer; while Thailand’s political crisis has also damaged its risk profile even further. It is one of several sovereigns across Asia, including the entire Indian sub-continent, to succumb to increased risk in Q1.

On the other hand, experts have ignored rising border tensions on the Korean peninsula to reward the strengthening economic situation in South Korea with a higher score, and some other EMs with stronger fundamentals, such as Mexico and Uruguay, continue to rise through the rankings.

Elsewhere, the entire G10, from the US and Canada, to large sections of western Europe, have also seen their country-risk scores bounce, with faith notably returning to Italy, Ireland, Portugal and Spain, as bailout programmes unwind and economic conditions gradually improve.

In total, 113 of the 186 countries surveyed saw their risk scores decline during Q1 2014, with three unchanged and 70 registering some improvement.

Bad quarter for EMs

Capital outflows spurred by the tapering of the Fed’s bond-purchase programme put riskier EMs – harbouring larger fiscal and external balances, and struggling to retain investor confidence – into a slide, with their currencies in a tailspin.

Scores for India, Indonesia, South Africa and Turkey all fell along with many other destinations, as experts questioned the safety of investing in Brics, Mints and other EM groupings.

China, bucking the trend, saw its score improve, with policy stimulus supporting its growth prospects. However, its score remains lower than in 2010, with the world’s most populous nation still failing to convince experts it can climb higher in the global rankings – it is still lodged in 37th place, within the third of ECR’s five tiered categories symbolizing medium risks commensurate with a BB+ to A- rating.

Alicia García-Herrero, chief economist for EMs at BBVA, attributes this to "growing indebtedness on the part of the corporates and the public sector, with the main immediate risk lying within a banking system saddled with bad debts and in need of a large recapitalization package".

India’s travails are equally symbolic of a failure to fully admonish heightened risk perceptions. Its 0.7 point fall in Q1 continues a longer-term trend decline that has seen the country shed more than eight points since 2010 and remain close to the bottom of tier three.

The government has made some progress in ameliorating the fiscal and current-account deficits, which economist Madan Sabnavis at Credit Analysis & Research expects to continue, while also noting that "economic growth is low and investment declining".

Moreover, India’s monetary policy will remain tight to quench inflation, which, as Sabnavis explains, "is more due to the extraneous forces of supply improving rather than any fundamental change in the structures".

Elsewhere, Turkey’s political problems have begun to weigh more heavily on its risk profile, with the sovereign sliding three places to 51st. Indonesia has also slipped.

Russian crisis complicates matters

Political instabilities, civil strife and military conflict are still ravaging large parts of the Middle East, but they are also pinpointing new frailties in Russia’s backyard after the annexation of Crimea in the wake of Ukraine’s political crisis.

Russia (rated BBB/Baa1; negative by Fitch) has notably suffered from an unprecedented 4.1 point score decline this quarter, pushing down the sovereign eight places in the global rankings to 62nd and to near the bottom of tier three.

Ukraine, already a trend faller, has shed another 5.4 points, plummeting 24 places to 146th, with Kiev’s financing problems escalating against the backdrop of heightened tensions with Moscow as its eastern parts risk falling under ethnic-Russian control.

The impact of the crisis across Central and Eastern Europe (CEE) varies nevertheless. Whereas the Baltic states, Belarus, Kazakhstan and some of the other former Soviet satellite states have seen their risks rise in response to a weakening Russian economy inflicting pain on bilateral trade and financial transactions – accentuated by the fear of Russia extending its arc of authority to its former Soviet strongholds – some countries in the region have managed to avoid the risks altogether.