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For historical country risk data please visit the Euromoney Country risk website |
Country analysts were remarkably bullish when Euromoney quizzed them for our latest country risk survey. Even president George W Bush’s “axis of evil” countries were not down-rated – although North Korea and Iraq were already ranked among the most risky countries. Iran actually rose by two places, from 76 to 74, although it was downgraded in the political risk rankings.
The one major exception to the mostly optimistic view shown by Euromoney’s panel was the blow given to Latin America’s three “axis of weakness” countries: Argentina, Brazil and Uruguay. Argentina, whose long-standing troubles already ranked it 107 in March 2002, fell another 39 places to 146; Brazil fell 15 positions to 83; and Uruguay fell 28 spots to 81.
The down-rating makes complete sense for Argentina, which has fallen foul of the US government’s erratic judgements about which are good countries and which are bad. But it is possibly overstated in the case of Brazil and Uruguay.
Argentina’s Perónist government is understandably desperate to receive another aid package from the IMF and to that end will resist the demands for protectionist legislation until a deal is agreed.
However, once a lending agreement is reached, the government will come under overwhelming pressure to enact legislation protecting vulnerable industries to bolster its support ahead of the 2003 elections.
Despite its troubles, positive growth is expected to return in 2003 unless the next elections result in a decisive victory for the populist parties.
Possibly because of the greater US business involvement in Brazil, the US has been more forthcoming in promoting aid there. Among the immediate benefits: a $30 billion loan promise from the IMF, the organization’s largest-ever single aid agreement. One reason for the downgrading of the country (by both Euromoney’s panel and investors) is the presidential election scheduled for October. Recent opinion surveys show that the establishment candidate Jose Serra, much-favoured by investors, is running a weak third behind Ciro Gomes, a former state governor, and Luiz Inacio Lula da Silva, (long known simply as “Lula”) the perennial left-wing candidate. The election outcome is especially crucial since the IMF is withholding the great bulk of the aid package until after the new government takes power in January 2003.
Though the down-rating of Brazil is therefore understandable it is possibly excessive. All three candidates – even Lula – have promised to abide by the terms of the IMF agreement despite the pain of reduced spending that this will inflict. Furthermore, Brazil’s financial situation is less dire than Argentina’s (see story on page 196).
In Uruguay, already damaged by contagion from Argentina, president Jorge Batlle and his government have taken decisive steps to protect the currency and the economy generally. The result has been a $1.5 billion emergency loan from the US in anticipation of another agreement with the IMF that will help stabilize the economy.
In contrast to the pessimistic ranking of key countries in Latin America, Euromoney’s panel showed relative optimism in their ranking of southern African countries. Most significantly South Africa increased its ranking by seven positions to 52, despite its troubles.
Worryingly, the government’s plans to reinvigorate its stalled privatization programme have drawn sharp criticism from Cosatu, a member of the tripartite alliance that forms the core of the ANC-led government, which has threatened to organize protests to prevent the sale of institutions responsible for the delivery of public services.
President Thabo Mbeki’s inability to impose internal discipline on members of the government will contribute to continuing wariness on the part of potential investors. Their caution will be reinforced by concerns about the deteriorating security situation in neighbouring Zimbabwe (whose relative ranking improved as other countries fell but whose overall score declined), rampant crime, and the brutal residue of apartheid still dividing white and black.
If the pragmatists in the ANC can maintain their influence in government, economic growth may rise above 3% in 2003, although the government will be hard pressed to keep inflation below double digits during the period in light of all the conflicting pressures it faces.
As a consequence, the government will struggle to attract foreign capital, a central requirement for the efforts to improve the lives of impoverished South Africans. Despite hopes of attracting overseas investment, greater restraints are being imposed on business through changes in access to underground mineral rights – which have been reserved for the government – capital gains tax, hiring and promotion requirements, and regulations on the movement of assets.
Meanwhile, government has shown short-sightedness in its approach to the HIV/Aids epidemic. This doubtful attitude has been led by Mbeki, who has weighed in with the opinion that Aids results from poverty rather than HIV and that emphasis must be placed on prevention rather than treatment.
The government’s unhelpful approach threatens to produce both social and economic crises. It has been estimated that 30% of the country’s workforce could be HIV-positive by 2005.
Nigeria in the balance
Nigeria’s position also improved slightly to 159 from 166, gaining slight favour with the panel in both economic and political rankings, despite growing signs of political disarray. The most serious question is not whether President Olusegun Obasanjo will be re-elected in 2003 but whether he can stay in power until the vote – or indeed whether the vote will be held before his term expires next May. Opposition MPs are demanding that the president resign or face impeachment.
The charges against Obasanjo range from budget disputes to the claim that he has spent an inordinate amount of his tenure on foreign trips of doubtful benefit. The local elections that were to be part of the run-up to the national elections in 2003 have already been postponed because of irregularities in registering voters and disputes over which political parties should be allowed to compete.
Obasanjo’s regime has been remarkably free of corruption (at least by Nigerian standards) and has made moves towards privatization and other measures that should attract foreign investment. But it is not at all clear that the president will be able to overcome his political foes and persist with his business-friendly policies.
Indonesia has failed to impress the Euromoney panel, despite moving impressively to settle its social distress and improve its political structure. It was nudged up six positions by mostly relative gains but still remains mired at 96. Hopes for continued financial stability have been boosted by an agreement with the Paris Club to reschedule some $5.4 billion in foreign debt and continued IMF assistance.
President Megawati Sukarnoputri’s success in repairing relations with the international financial community will provide much-needed economic stability as her government contends with sectarian and separatist violence.
Over the long run, the recent political changes give even greater hope for increased stability. The constitution is being rewritten to reduce the corrosive political role of the military, to provide for direct national election of the president and generally establish the foundations of a modern democratic society.
A great deal remains to be done, especially in the light of the country’s regional dissent and large Muslim population, but the country has come a long way since Megawati became president and appears headed for better days.
China, despite its accession to the WTO and acceptance as an international sporting venue – it will host the 2003 women’s World Cup championship, the 2004 Asian Cup and the 2008 Olympic Games – has attracted less favour from Euromoney’s panel, falling 11 position to 58.
Despite the prospect of slowing growth and pressure for economic restructuring stemming from WTO membership, the government has adopted an unusually conservative reform agenda in response to signs of growing social tensions. Disappointing growth in revenues and increasing strains on the banking system threaten to undermine the impact of the substantial fiscal stimulus component in the 2002 budget.
Nevertheless, healthy inflows of foreign direct investment and an expectation of recovery in demand for exports should enable the government to meet easily its target of annual real GDP growth of 7%. The risk of rising domestic and international tensions will encourage the pragmatists in the government to maintain a cautious approach to reforms.
Membership in the WTO will open the country to even more foreign investment and trade, and will oblige the government to reduce a wide range of subsidies and controls with which it has so far managed the tricky task of liberalizing the economy while firmly maintaining political controls. These are likely to increase unemployment.
The political situation has been confused by recent indications that president Jiang Zemin may not, as expected, retire by the end of 2002, giving way to vice-president Hu Jintao, another pragmatic leader.
If Jiang’s continuation in power upsets former allies, or if his departure coincides with deteriorating economic performance, the pragmatist leadership team could come under challenge from conservatives. The danger to the pragmatists could be greater in light of Taiwan’s recent indications that it is promoting an independence agenda, a course of action rejected by all Chinese government factions.
A divided Turkey
Turkey was downgraded eight positions to 80, no doubt reflecting the remarkable array of conflicting developments in the country. On the one hand, the economy has been shattered through most of 2002, and the government has slowly disintegrated to the point where only new elections can give any hope of political stability. On the other hand the government, for all its weaknesses, has made significant steps towards reforming its laws regarding business and human rights that are slowly (and not so surely) moving towards harmony with the standards of the EU, which most Turkish civilian leaders claim they are keen to join.
Nevertheless, the culture remains sharply divided among Muslim, secular, and nationalist. And the next elections, scheduled for November, are by no means certain to produce a government that will push forward with modernizing reforms.
One of the largest improvements in country rankings was achieved by Algeria, up 24 places to 85. This positive shift can be attributed largely to a more complete reporting of economic information – eliminating default zeros in the country’s score. Algeria’s political risk score remains quite low and its already dismal economic performance figures suffered a slight decline.
A marked improvement in either of the above categories under current circumstances would be highly questionable in the light of the failure of president Abdelaziz Bouteflika’s government, largely a civilian veneer over military control, to halt the country’s persistent violence.
The May 30 parliamentary elections were marked by only limited violence but also saw participation plummet as most Algerians concluded that the elections were largely a sham. President Bouteflika has attempted to modify policies to attract foreign business through such measures as widespread privatization.
However, the continuous violence and the conflict between the government and the Berber community threaten to scuttle the president’s efforts to improve the country’s image. Average annual growth through 2007 is expected to fall three percentage points below the 7% threshold that the government has admitted is required to improve conditions.
Easily understandable is Russia’s rise 21 places to 77. With president Vladimir Putin’s control of the legislature now secure, he will focus attention on enhancing policy implementation through administrative reforms aimed at reducing the power of the entrenched bureaucracy.
Reform of the banking sector will be necessary to increase the availability of capital for small and medium-size enterprises whose development is crucial to the realization of the country’s economic potential. Even Putin’s active relations with Iran, Iraq, and North Korea have not significantly damaged his domestic or international standing.
Michael K O’Leary is a director at the PRS Group
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For historical country risk data please visit the Euromoney Country risk website |
