Bulgaria and Croatia on negative ECR trend

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Focusing on the larger, fragile EMs has deflected attention away from worrying risk trends afflicting other borrowers.

Amid all the talk of political troubles in Thailand and Turkey, unorthodox policy manoeuvres in Argentina and Venezuela, and conflict in Russia and Ukraine, ECR score trends highlight several other countries on a worrying downward spiral that investors should take note of before embarking on risky investment strategies.

ECR data has shown the rising risks among SSA borrowers in recent months. Yet there are other issuers as far afield as Bulgaria, Croatia, Jordan, Taiwan and even the Bahamas and Barbados that have seen ECR scores downgraded during the past year or more. Many are on long-term, multi-year declines, questioning their viability for inclusion in a medium risk-return portfolio.

Don’t bank on Bulgaria

However, bigger worries surround other, more enticing higher-return markets, including Bulgaria, falling seven places in the global rankings (to 69th) since 2013 and into the fourth of ECR’s five tiered categories commensurate with a B- to BB+ credit rating. Fitch, Moody’s and S&P still have the Balkan borrower rated triple-B, with S&P the only agency considering a downgrade.

Bulgaria’s problems might seem a recent phenomenon but its rising risks extend back to 2007, when the country was granted EU accession alongside Romania.

The sovereign’s current score of 48.7 out of a maximum 100 is some 3.1 points lower than in 2010 and 10.1 in total since 2007, with concerns growing over government stability, the regulatory and policymaking environment, and its institutions. Corruption, the worst indicator of all, scores just 3.8 out of 10.

Of course, all of the neighbouring eurozone states – bar Estonia – have been marked down heavily since the 2008 global financial crisis. However, with many embarking on a long road back, Bulgaria – a country still to decide when to lodge its own euro application – is failing to convince risk experts of its merits.

Contrast that with Romania and Hungary, two similar EMs in the region, and both have been upgraded recently.

Tzvetomir Tzanov, chief assistant professor at the Bulgarian University of National and World Economy, points to the "unstable political status quo" in Bulgaria – a governing coalition between socialists (the BSP) and liberals (the DPS) which in a minority creates "unwillingness and lack of support for major reforms".

The government is under pressure to call early national elections after considerable opposition support in this month’s European Parliament vote.

These risks are weighing on the economy as households and businesses delay important decisions, especially with question marks hanging over "whether a clear majority can be found to establish a stable coalition government", says Tzanov.

Bleak summer in Croatia

Bulgaria is not the only country on a longer-term decline. Croatia, a fellow tier-four sovereign and a more recent EU member, gaining membership in July, has seen its score plummet virtually in tandem (see chart).

Shedding 4.6 points since 2010 and 16.7 since 2007, Croatia now ranks 70th on a score of 48.1. A country mired in a five-year recession with a government unpopular for its unfailing commitment to fiscal austerity, the removal of finance minister Slavko Linic in recent days for alleged irregularities in the tax administration has ratcheted the political stakes even higher.

Forecasts released this month by the European Commission point to real GDP declining again this year (by 0.6%). The unemployment rate is heading towards 18% and the general government deficit, though improving, will still be close to 4% of GDP. A high structural deficit and mounting debt burden rising to 69% of GDP this year are notable worries for EM investors.

Other warning signs

Meanwhile, Jordan, suffering from the turmoil in Syria, its fractious domestic politics, a large fiscal black hole and sluggish economy, has similarly failed to reverse a long-term decline, pushing its score down to 42.8 points to keep the sovereign anchored within tier four at 79th on the global rankings.

Taiwan, a far safer investment, has succumbed to unusually large political risk-score downgrades in recent years, as the governing party’s longstanding dominance has come to be challenged by popular protest. Rooted to 18th spot in the rankings, Taiwan’s ability to emulate Hong Kong and move into ECR’s top tier remains in question as its strained relationship with China is placed under more scrutiny by presidential ambitions for closer trade ties.

The Bahamas (tier three, ranked 59th) and Barbados (tier four, 73rd) have also seen their scores sharply downgraded, with the former weighed down by delays to the introduction of VAT aimed at plugging a fiscal hole, and the latter suffering from a prolonged recession.

Similar long-term score declines have been seen for Thailand, where recent political chaos was flagged more than a year ago, and for Argentina, Ukraine and Venezuela, all racking up double-digit score declines since 2010.