ECR Survey Results Q3 2014: Looming China crisis adds to eurozone and emerging-market threats

The latest results from the Euromoney Country Risk survey point to an unprecedented rise in risk across almost all geographical regions since June, with emerging markets (EMs) taking the biggest hit as doubts over China, the eurozone and US liquidity support weigh heavily on experts’ evaluations.

Doubts about the world’s largest economies supporting the global economy have seen many EMs, including Brazil, Indonesia, Nigeria, South Africa and Turkey, downgraded this quarter.

They are among 118 of the 189 countries surveyed that are now riskier (with falling ECR scores) since the end of last year.

Russia and Ukraine, in freefall during 2014, and dropping more points in Q3, top the list of the worst performers worldwide so far this year, with Ukraine in particular joining Argentina and Venezuela with heightened default risk.

The Russian trade embargo, coupled with US quantitative-easing tapering and China entering a slower growth phase, is aggravating fears over bond-market safety for EMs across Central and Eastern Europe.

Estonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia – affected by reduced capital and trade flows, links to Germany and in some cases domestic political upheaval – are all riskier.

Western Europe is still safer in comparison with 2013, but many countries have also seen their risk scores sag as question marks are raised over structural reforms with economies underperforming.

Larger EU sovereigns more vulnerable to existential threats from the Russian blockade, Middle East conflict and Ebola implications have seen their risk scores slip during the third quarter – among them Germany, France and the UK – whereas the hardest-hit defaulters, Cyprus, Greece, Ireland and Spain, pursuing restructuring programmes, have been spared the rout.


EM party is over

Russia has slipped further down ECR’s global rankings during the third quarter (to 71st), with its economic desperation and emerging fiscal problems attenuated by the trade war with Europe, and sliding oil prices affecting the risk profiles of many trading partner EMs.

Falls in industrial production and consumer spending, too, are warning of a return to a slow-growth era for EMs, not least with China – marked down heavily this quarter – now settling into a slower expansion phase, and possibly worse with bank credit pressures rising.

With rising US interest rates also factored in, many of the EMs offering huge and moderately safe returns potential for years now appear to be decidedly riskier options.

Among them are several of the Brics (Brazil, South Africa), Mints (Indonesia, Turkey, Nigeria) and a raft of other hot spots, including Malaysia, South Africa, Sri Lanka and Thailand, considered less safe thanks to a combination of downgraded economic growth profiles and domestic political problems.

"The main risks stem from a faster-than-expected [US] Fed tightening, with Indonesia still being relatively vulnerable within emerging Asia, or from an unorderly deleveraging from high debt levels in some countries," says ABN Amro senior economist Arjen Van Dijkhuizen.

"Though, of course, as recent developments in, for instance, Thailand, Indonesia and Hong Kong have shown, political risks may cloud the outlook as well," he adds.

Keenly watched frontier markets, ranging from the Bahamas, Bosnia Herzegovina and Barbados to Moldova, Mongolia and Montenegro, have similarly fallen down the pecking order.

Yet there are still some interesting, safer prospects to be found, with Mexico in particular bucking the trend, alongside smaller markets – FYR Macedonia, Paraguay, Trinidad and Tobago, and Vietnam.


G10 wobbles with France the biggest concern

More than half the G10 industrialized nations succumbed to increased risk during the third quarter, but only France has a lower score compared with the end of last year, with its missed fiscal targets and lack of economic recovery highlighting both competitiveness and political failings.

Germany (slipping one place in the global rankings to 11th), Switzerland (still second, only to Norway as the world’s safest) and the UK (20th) are among those countries affected more by the Russia-Ukraine crisis now harming trade and financial flows.

Italy and Japan, by contrast, are buttressing the trend, not because of their recent, rather weak economic performance, but more in terms of their potential as structural reforms proceed. The US, at a stronger phase of the economic cycle, is also holding up in 16th place.


Europe’s risks back in focus

The structural problems plaguing Finland, France and several other European countries have become a renewed focal point for risk experts. Germany’s poor growth performance in particular has highlighted the weaker trade in luxury and higher value-added capital and consumer goods, with China, Brazil and Russia, the large, globally-important economies either slowing or contracting.

A relatively robust recovery in Ireland and a more moderate one in Spain have seen their risk scores improve, while Portugal’s fragility contrastingly has seen its score slide in Q3.

Constantin Gurdgiev, adjunct professor at Trinity College Dublin, attributes rebounding growth in the majority of peripheral eurozone countries more to "the depth of the crisis period than structural reforms".

In that context, it is the monetary easing both expected from and already deployed by the European Central Bank (ECB) influencing the assessment of risk. Gurdgiev adds: "The ECB has plenty of printing ink left, [but the] risks are rising, not abating, and multiplying in complexity."