ECR Q1 2016: Heightened concern over Brazil, China and other EMs accentuates global shock prospects

Country risk scores for many of the large emerging markets (EMs) continued to fall in the first months of the year. Risk scores have now reached levels that do not preclude another global shock if China hits the skids.

China skids military-R-600
The knock-on effects if China hits the skids will reverberate globally

The world’s most populous nation shed another half a point from its risk score total in Q1 2016, as Euromoney’s survey experts took account of the lower growth trajectory and structural reform risks perplexing Beijing’s policymakers and prompting another round of instability in financial assets.

More than 400 economists and other experts from a range of financial and other institutions take part in Euromoney’s country risk survey. They evaluate the risks faced by international investors in 186 markets, scoring countries across a range of political, economic and structural criteria.

These are added to values for capital access, credit ratings and debt indicators, and aggregated each quarter to provide a total risk score.

China’s gradually deteriorating investor safety is a concern for investors in both developed and emerging markets, especially since currency and fiscal adjustments are still affecting Nigeria, Russia, Saudi Arabia and other leading oil producers.

"China’s high and rising debt levels remain one of the key risk factors," says Arjen van Dijkhuizen, senior economist at ABN Amro, adding this is "presenting a difficult balancing act between stabilizing growth and preserving financial stability, including the longer-term requirement for deleveraging".

 

Commodity shock persists

Meanwhile, persistently low resource prices are hitting the world’s commodity producers hard.

Although some of the Gulf and other leading oil producers have substantial wealth funds to withstand temporary shocks, weakened growth and fiscal imbalances demand spending cuts.

Plus, the longer the crisis continues, the more it will put pegged exchange-rate regimes under pressure.

Economic and political risks, exacerbated by the tightening of US monetary policy still contributing to outflows of capital from EMs, have seen many of the world’s investor hotspots become even riskier since last year.

Philipp Mayer, country risk analyst at Erste Bank, believes "oil producers/exporters will be downgraded in 2016, although the relative starting position in terms of ratings is, of course, quite diverse".

So far in 2016, 92 of the 186 countries surveyed by Euromoney have been downgraded by risk experts.

EM rout continues

It was a disappointing picture for Brics investors with the economic and political crises in Brazil and South Africa intensifying.

Brazil, once seen as a prime bond prospect, growing rapidly, remains mired in recession in the wake of the commodity price falls; indeed, the economic collapse is worse than feared.

Brazil’s central bank is now predicting a 3.5% real-terms contraction for GDP this year, compared with just 1.9% previously. That follows a similar decline in 2015, which is pushing unemployment higher.

Shedding another 1.3 points from its total risk score, Brazil has slipped to 59th out of 186 countries surveyed in Euromoney’s country risk global rankings, below India, Turkey and the Philippines.

The political crisis enveloping president Dilma Rousseff’s government has, moreover, touched on not only the mesh of state-level and big-business corruption in Brazil, but also the wider problem of judicial independence.

Institutional risk belying other EMs tends to be overlooked when economies are expanding rapidly; it is one of six political risk factors regularly monitored by Euromoney’s experts.

South Africa, lying below Brazil in 63rd spot and also becoming riskier in Q1, provides another case in point.

The sovereign is now less than three points from falling into the fourth of ECR’s five tiered categories commensurate with a BB+ credit rating at best, which begs the question as to why South Africa is still clinging on to investment grade.

Other EMs on the slide include Azerbaijan, Kenya, Egypt, India, the Philippines and Turkey.

However, the biggest faller is Nigeria, where political tensions are rising as the oil shock and sliding naira weaken the economy and worsen the fiscal metrics.

On a score of just 38.3 from a maximum 100 points, Nigeria shed 3.1 points in Q1, slipping six places in the rankings to 90th.

 

Myriad factors weighing on G10 prospects

Risks experts are less than convinced about the safety of the advanced industrialized world, too, driven by the uncertain outlook for China and other large EMs dampening export trade.

Other key issues include the political uncertainties tied to the US elections this year, and the weak economy and policymaking troubles in Japan.

Risk scores are generally higher for advanced nations: Portugal, Slovenia and Spain are bouncing back in spite of their niggling difficulties; Bulgaria and Romania are still decent prospects, and Slovakia is in particularly good health.

Yet Europe’s prospects also hinge on the effects of the refugee crisis, terrorist threats, the ongoing saga surrounding Greece and the possibility of Brexit in June when UK voters decide in a referendum whether to remain a member state of the European Union.