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For historical country risk data please visit the Euromoney Country risk website |
The September report on country risk shows Euromoney’s analysts reacting to the global slowdown by carefully choosing among the countries expected to suffer and those that should protect themselves against the downturn. Their choices show that though economic prospects are closely associated with overall risk, there are also several significant exceptions to this pattern. And in their selective identification of gainers and losers, they have indicated scant concern with fears of contagion, except, perhaps in the case of Argentina and Brazil. Most countries can be seen to gain or lose in the risk table on the basis of their own situation, rather than on the basis of the presumed spread of troubles across international borders.
Significant losers
Only someone who is fervently dedicated to avoiding the news can be surprised at the most prominent countries that have lost favour with Euromoney’s analysts. There is scarcely a question as to the reasons for the downgrading of Zimbabwe (which fell by 23 places from the March ranking), Argentina (which fell by 11), Indonesia (which fell by 9), Algeria (which fell by 7), and Turkey (which fell by 6). The more crucial question is whether their ratings have been sufficiently lowered in light of the troubles they still face.
For Zimbabwe (which is now ranked 164=), Argentina (ranked 77), and Algeria (ranked 92), the lower ranking is more than justified. Zimbabwe’s neighbours have been unwilling either to give aid to the devastated economy, or to put pressure on president Robert Mugabe to rein in his increasing offences. In effect he has been given a free hand in mounting his own style of campaigning for re-election by the seizure of farm land, harassing the press, imposing his will on the judiciary, and terrorising the opposition. The industrialized nations seem likewise unable to do anything to improve the situation. Even the UK, which has some 25,000 of its expatriate citizens in the country, has done little but express concern and dismay.
Despite widespread fears of contagion, the Zimbabwean crisis has not particularly concerned Euromoney’s analysts. Of Zimbabwe’s five neighbours, only Namibia (which dropped by four ranks) was downgraded; the other four either remained at the same rank or actually received higher ranks.
There are also good reasons for Argentina’s deteriorating position. The populist Perónist opposition is expected to make gains in the October congressional elections, producing an even more gridlocked government. The Perónists are also favoured to win the presidency in the October 2003 vote. Political tumult and risky policy initiatives are likely to aid the Perónists’ return to power. The Perónists will also be helped by an economy that in 2001 is expected to experience its third consecutive year of decline or stagnation. The bleak outlook for Argentina may be one of those few instances of a knock-on effect as Brazil fell four places to a rank of 68.
President Abdelaziz Bouteflika of Algeria has long been desperately struggling to restore his government’s legitimacy from the debased 1999 election. To have any hope of succeeding, he must find a way to end the country’s endemic violence while maintaining at least a semblance of civilian authority, especially with respect to the military. He has so far shown little success in coping with any of his challenges. In fact, there are signs that senior officers are harbouring doubts about allowing him to serve a full term. Needless to say, the re-emergence of the military from the political shadows will do little either to produce greater stability or to invigorate the economy.
Despite the violence and political uncertainty, the Euromoney panel expects some slight economic improvement in Algeria: the country rose by six places in the economic rankings. However, annual GDP growth is expected to hover around 4%, scarcely enough to bring down unemployment or reduce other social ills, especially since annual inflation is running in excess of 6%.
On the other hand, a glimmer of hope can be held out for some of the downgraded countries. The dire outlook for Indonesia (ranked 95) is at least partly tempered by greater uncertainty if not actual optimism. The replacement of president Abdurrahman Wahid by president Megawati Sukarnoputri was accomplished through generally democratic procedures, at least by Indonesian standards. And the worst of the threats of violent retaliation from Wahid’s supporters have so far failed to materialize. In addition, the remarkably resilient economy is expected to begin a revival in 2002. Nevertheless, the new president is bound to tread a politically rocky path. She will face serious difficulties in parliament where she will encounter resistance from the Muslim parties and Golkar, whose hostility toward Megawati was responsible for her losing the presidency to Wahid in 1999. If anything, she is even more nationalist than her predecessor. She will be inclined to give the military a free rein to prevent any more losses of provincial territories. And she will not hesitate to invoke the IMF and foreign investors as convenient scapegoats to deflect her political troubles.
Turkey (ranked 75) also shows some upside potential as well as the obvious downside risks. The government has managed to swap some debts and to revive its deal with the IMF, both of which will provide short-term relief and allow the prospects for economic revival in 2002. But sustained recovery will require the unsteady coalition government to push through legislation to restructure the financial and telecommunications sectors. And it is by no means certain that the fractious parliament can be persuaded to agree to these changes. Even worse, the resulting political battles could split the coalition, possibly even triggering early elections – not required until April 2004. In that case the intensified political conflict could revive the awkward issue of permitting the political participation of an avowed Islamic party and the volatile question of the role of the military as the self-styled guardian of democracy – at least democracy as defined by its senior officers.
Ecuador is a prime example of a country where an improved economic outlook does not prevent a decline in its overall risk ranking. Although Euromoney’s analysts boosted its standing on economic performance by 15 places (to a rank of 114) they dropped it by five places on total risk score (to a rank of 118). President Gustavo Noboa Bejarano enjoys the support of the international community and the critical backing of the military, who approved such controversial initiatives as the proposed rise in value-added tax. Yet while these allies are vital, they also create serious liabilities. Both international financiers and the military are regarded with suspicion, if not outright hostility, by Ecuadorians, including many whose violent resistance helped bring down the previous government.
Even such economic giants as Germany have not escaped demotion. Germany’s expected economic downturn in 2001, now clearly on the cards, meant that it fell by 15 places (from 6 to 21) in the economic league table, and by five places on overall risk ratings. Of course, it still remains near the top of the risk league, falling to 11. The analysts do not see risk contagion as a serious danger in Europe. None of Germany’s European neighbours fell by more than two rank positions, and most either remained steady or actually rose in the risk league; the leading European gainers were Sweden (ranked seven) and Belgium (ranked 15), both of which gained five positions on the previous year’s position.
Significant gainers
Vietnam (which rose 11 places to a rank of 81) made one of the most significant improvements in risk rating, apart from a number of smaller Pacific and Caribbean nations that had much higher scores than in the previous survey chiefly because of changed ratings by a small number of analysts.
Vietnam’s elevation appears to be based not on economic factors, since it moved a single place downward on economic performance. Rather, the improvement may arise from encouraging domestic and international political signs.
The key international step was the final approval of a trade agreement with the US that will give Vietnam access to US markets on the normal trade terms shared by most other countries.
On the domestic side in Vietnam, earlier in the year, the Communist Party congress made a significant change in leadership when it replaced the party’s conservative secretary-general with Nguyen Manh Cam, a centrist who is well known as a reformer. The new secretary-general is a member of a minority ethnic group, which may incline him to direct more government attention to dealing with minority questions that have been at the heart of recent unrest. In any event, the promotion of Manh should help the mainstream group in the party maintain its dominance beyond the July 2002 presidential and National Assembly elections.
Pakistan (which rose seven places to 104) evidently gained from a slight preponderance of good news over bad. The good news is that the economy is improving under the direction of finance minister Shaukat Aziz (see page 326), and that the self-appointed president, Pervez Musharraf, has established a plan for the return of civilian rule.
The bad news is that even the improved growth will fall short of 5% annually. Furthermore, the political schedule may well return to power the same lot who so badly botched their responsibilities as to allow then-general Musharraf to easily push aside the civilian institutions.
Iran (which rose six places to 80) appears to have benefited from the exuberance – irrational or otherwise – attendant upon the landslide re-election of reformist president Mohamad Khatami in June. Analysts seem confident that Khatami’s capture of some 75% of the votes places the country safely on the road to reform, stability, and improved international relationships.
But such optimism may have been diminished by the reformers’ subsequent troubles. The well-entrenched conservatives managed to delay Khatami’s inauguration and to ensure that conservative views would be powerfully represented in institutions such as the Guardian Council that have the power to block legislation approved by both the president and the legislature.
Nonetheless, although the reformers’ job remains difficult, it will take a major crisis to reverse the movement, however slow, toward the country’s modernization. Contrary to earlier hopes, they can expect little help from the US in the near future. Some Iranians and many US analysts had believed that the new government in the US, headed by a former oil executive, would be more sympathetic to removing sanctions on investments in Iran’s energy industries. In fact, president George W Bush renewed the sanctions for another five years.
Venezuela (which improved five positions to a rank of 72) can count on high oil prices to compensate for weaknesses in the wider economy and uncertain steps by the political leadership.
The country’s prospects depend heavily on which version of president Hugo Chávez shows up for work. If it is the Chávez who is sympathetic to the competitive market, concerned about fiscal probity, inclined to support privatization, and desirous of infrastructure development, the country’s mediocre economic prospects (ranked 76 by Euromoney analysts) may be significantly exceeded. However if it is the Chávez who is the bombastic tormentor of foreign business, economic interventionist, and diplomatic grandstander, a ranking of 72 may be much too favourable.
South Korea gained five places to rank 42 on the country risk league table although it fell by six places (to 37) on the economic performance table. Justifying the moderately-improved risk rating will require careful work by political leaders, especially since the informal campaign for the presidential election of December 2002 has already begun.
The long partisan season means that president Kim Dae-jung’s coalition will become even more timid about initiatives that threaten to unleash protest or otherwise undermine the government’s popularity. Of all the looming choices, none is more difficult than the disposal of the ailing Daewoo conglomerate. A deal for selling assets to General Motors is close to being finalized, but is still blocked over the question of exactly which components GM will be allowed to exclude from the purchase, and how many jobs will be lost as a result of the change. Even if the agreement goes through, it will produce a mixed result for the government. Although it will provide a vital infusion of cash, it will also provoke intense nationalist hostility.
Michael K. O’Leary is a director at PRS Group
Methodology
To obtain the overall country risk score, Euromoney assigns a weighting to the nine categories listed below. The best underlying value per category achieves the full weighting (25, 10 or 5); the worst scores zero and all other values are calculated relative to these two. The formula used is the following: A – (A / (B-C)) x (D-C), where A = category weighting; B = lowest value* in range; C = highest value* in range, D = individual value.
* NB for Debt indicators and Debt in default, B and C are reversed in the formula, as the lowest score receives the full weighting and the highest gets zero.
* Political risk (25% weighting): the risk of non-payment or non-servicing of payment for goods or services, loans, trade-related finance and dividends, and the non-repatriation of capital. Risk analysts give each country a score between 10 and zero – the higher, the better. This does not reflect the creditworthiness of individual counterparties.
* Economic performance (25%): based (1) on GNP* figures per capita and (2) on results of a Euromoney poll of economic projections, where each country’s score is obtained from average projections for 2001 and 2002. The sum of these two factors, equally weighted, makes up this column – the higher the result, the better.
* GNP figures were unavailable for the following countries, so GDP data were used instead: Afghanistan, Antigua&Barbuda, Bahamas, Bahrain, Cuba, Cyprus, Iraq, North Korea, Kuwait, Liberia, Libya, Macau, Myanmar, New Caledonia, Oman, Qatar, Singapore, Somalia.
* Debt indicators (10%): calculated using these ratios from the World Bank’s Global Development Finance 2000: total debt stocks to GNP (A), debt service to exports (B); current account balance to GNP (C). Scores are calculated as follows: A + (B x 2) – (C x 10). The lower this score, the better. Figures are for 1999
Because of lack of consistent economic data for OECD and rich oil-producing countries, these score the full weighting, except where they report debt figures to the IMF. Developing countries which do not report complete debt data get zero.
* Debt in default or rescheduled (10%): scores are based on the ratio of rescheduled debt to debt stocks, taken from the World Bank’s Global Development Finance 2000. The lower the ratio, the better. OECD and developing countries which do not report under the debtor reporting system (DRS) score 10 and zero respectively.
* Credit ratings (10%): nominal values are assigned to sovereign ratings from Moody’s, S&P and Fitch IBCA. The higher the average value, the better. Where there is no rating, countries score zero.
* Access to bank finance (5%): calculated from disbursements of private, long-term, unguaranteed loans as a percentage of GNP. The higher the result, the better. OECD and developing countries not reporting under the DRS score five and zero respectively. Source: the World Bank’s Global Development Finance 2000.
* Access to short-term finance (5%): takes into account OECD consensus groups (source: ECGD) and short-term cover available from the US Exim Bank and NCM UK. The higher the score, the better.
* Access to capital markets (5%): heads of debt syndicate and loan syndications rated each country’s accessibility to international markets at the time of the survey. The higher the average rating out of 10, the better.
* Discount on forfaiting (5%): reflects the average maximum tenor for forfaiting and the average spread over riskless countries such as the US. The higher the score, the better. Countries where forfaiting is not available score zero. We would like to thank Standard Bank, WestLB, and Richard Tull at LTP Trade Plc, who kindly supplied data.
Euromoney received replies from 31 economists at leading financial and economic institutions. They gave each country’s economic performance for 2001 and 2002 a score out of 100. The world’s fastest-growing, best-performing economy in an ideal year would score 100; the worst economy in a disastrous year would score zero. Respondents were asked to consider economic growth, monetary stability, current-account, budget deficit or surplus, unemployment and structural imbalances. Economists also gave their GNP growth forecasts for 2001 and 2002. Countries which received no votes were excluded from this table.
Our thanks go to the 38 political analysts and economists who took part in our surveys. Those who did not wish to remain anonymous were:
Dr. Michael O’Leary, The PRS Group; Bernard Butticker, UBS AG; Conrad Schuller, Erste Bank; Francis Nicollas, Credit Lyonnais; Gregor Eder/Claudia Henke, Dresdner Bank; John Krijgsman, CIBC; Luigi Ruggerone, Banca Commerciale Italiana; Sruti Patel, Afrinvest; CSFB; Terry Dunn, Aleb Project; Ian Leung, Dun&Bradstreet; Ewoud Schuitemaker, ABN Armo; Dr. Thierry Apoteker, TAC; Subhash Agrawal, India Focus; Gloria Ho, Bank of East Asia; Daniel Skubik, IL &PRC; Jochen Teufel, GZ-Bank AG; Ioannis Monastiriotas, Alpha Bank AE; Helmut Bernkopf, Banka Romania; David Twigg, Barclays; Hassan Abdul-Ghani, Gulf International Bank; Richard Tull, LTP Trade Plc.
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For historical country risk data please visit the Euromoney Country risk website |
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For historical country risk data please visit the Euromoney Country risk website |
