ECR Survey Results Q4 2014: Negative oil shock creates new threats

With falling oil prices sending the currencies of hydrocarbons producers tumbling, amid political instability, conflict risk and weak, unbalanced economies persisting, almost half the world’s sovereigns endured higher risk in 2014.

Libya and Russia witnessed the biggest falls in their survey scores (indicating higher risk) in their total risk scores, underlining the conjoined effects of negative politics and conflict with falling oil prices.

Lower risk scores for Argentina, Venezuela, Ukraine and other high-risk countries underlined the potential for payment difficulties and outright default for global bond investors.


Emerging markets affected by capital constraints with the US tapering its quantitative easing programme performed, questionably depending on their economic strengths, giving rise to renewed investor uncertainty in some (but not all) Brics, Mints and frontier markets.

In addition to falling ECR scores for oil producers, ranging from Nigeria and Kazakhstan to virtually the entire Gulf region, economists and other risk experts raised doubts over some of the larger EMs with fiscal and external imbalances and domestic political problems.

Among them were Pakistan, South Africa, Thailand and Turkey, all of which saw their scores downgraded in 2014.

The double whammy of a poorly performing eurozone and a huge Russian market in decline invariably saw vast tracts of central and eastern Europe succumb to increased risk.

Albania, Bulgaria, Estonia, Hungary, Slovakia and Slovenia were all perceived to be less secure compared with 2013 by the 400-plus economists and other experts taking part in Euromoney’s survey.

Their assessments of a range of risk parameters were added to credit ratings and debt indicators to yield a total risk score, where a rising value denotes increased safety.

Countries linked to Russia, such as Azerbaijan and Belarus, were similarly affected. However, the advanced industrialised world became safer, with improving economic prospects in the US and UK aiding their gradual fiscal improvement.

Norway remained the safest credit in 2014, topping Euromoney’s global rankings again in spite of the hit from falling oil prices. The Nordic nation’s $830 billion sovereign wealth fund and its very strong fiscal and external balances have built up a useful firewall to withstand the shock.

China, India and South Korea were upgraded last year. Australia held its ground and Mexico improved (distinguishing it from struggling Brazil). Morocco and Tunisia resisted the Middle East and north Africa regional instability risks, alongside Egypt staging a comeback.

The eurozone began to bounce back, too, spurred by the recoveries in Ireland and Spain.

However, a cloud of uncertainty was still hanging over the eurozone’s prospects by year-end, with risk experts harbouring doubts over the political and policymaking framework in France, which, like others in the region, is still struggling to combat stagnation.

Greece ended the year in tier 5 – the lowest of ECR’s categories and that contains the highest risk defaulters – having been thrust back under the spotlight for 2015 with early elections looming.


Negative oil shock compounds Russia crisis

The year began with experts questioning safety in emerging markets affected by US QE tapering, then saw the Russia-Ukraine crisis predominate and ended with the negative oil shock and a possible Greek exit from the eurozone.

Although lower oil prices are a boon to energy importers, ECR experts from BBVA led by emerging-markets chief economist  Alicia Garcia-Herrero note the risks to Russia’s finances and "in terms of the economic and security situation in some Middle East countries."

"Beyond economic deterioration, revenues to contain 'social pressures’ will be reduced," they argue.

Russia and Ukraine were among the worst performers in the survey last year. Russia plummeted to its lowest risk score since 1998, although EM prospects generally were rather mixed.

The survey experts downgraded the world’s oil producers in light of the worsening fiscal and current account picture, which in Algeria’s case has already seen a large shift from surplus to deficit in the latter variable.

Contrastingly some of the EMs were deemed safer, among them Kenya, South Korea, Vietnam and notably Egypt hauling itself back from the Arab Spring crisis with its external balance improving as tourism and other inflows revived.

Large EMs, including China and India, saw their scores upgraded on the back of stable political and economic prospects. India has benefited from soaring confidence in the new government led by Narendra Modi and an improved current account alleviating pressure on the rupee.

China’s score remained depressed, however, compared with mid-2014, which hints at uncertainty over the country’s economic direction, with slower growth, deflation and banking sector frailties in the background.


Deflation and Grexit fears loom large over Europe

Eurozone countries saw some improvement to their risk scores last year, though it was mostly among a handful of debt-distressed sovereigns (Cyprus, Ireland, Portugal and Spain) all benefiting from fiscal adjustment programmes delivering positive sustained growth rates for the first time since their crises erupted.

However, the picture was clouded by the effects of the Russian trade embargo undermining exports, high unemployment pinpointing structural problems to be resolved, and lingering political factors highlighted by the early elections in Greece and the prospect of an anti-bailout government being returned that could spell renewed tensions with Brussels and another bout of instability.