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For historical country risk data please visit the Euromoney Country risk website |
| Global Projections | Methodology
IN JULY AND August, trackers of portfolio investors started reporting rising fund flows into east Asian equities as portfolio managers placed their bets on where best to reap the benefits of the global economic recovery. Economists and country risk analysts support their choice – up to a point.
“The fastest-growing economies in 2002 and likely this year are the east Asian economies,” says Linda Yueh, who lectures in economics at the London School of Economics and Oxford University. “Looking in terms of world trade, more than 10% of growth is attributed to transition economies, including China,” she says. Even taking into account the Sars epidemic, the rate of growth in the region is expected to be about 5% in 2003, with China (49) leading the way.
China has surpassed the UK (6) as the world’s fifth-largest exporter and it is the sixth-largest economy. It has averaged growth rates of 9% over the past 25 years of market-oriented reforms. In terms of confidence reflected through foreign direct investment, China overtook the US last year as the largest recipient of inward capital flows.
Indeed, China grew at a phenomenal 9.9% in the first quarter of 2003 with no signs of slowing. However, the country’s future outlook will rely heavily on the possibility of macroeconomic shocks, given its opening to the global economy.
Daniel Skubik, principal at the US-based International Legal and Political Risk Consultancy, believes that “relations between the People’s Republic of China and the United States of America have been enhanced over the past nine months by each formally recognizing, or at least informally acquiescing in, many of the steps taken by each to deal with terrorist threats – actual and perceived – in their respective spheres of influence. There has even been significant cooperation by China on managing talks with and between the US and North Korea that is itself changing the overall complexion of northeast Asian political realities.”
Concerns about the Iraq war and North Korea’s nuclear arms hurt consumer sentiment and slowed spending in South Korea (38). Analysts expect the South Korean economy to continue to struggle because of the impact of Sars and labour unrest, raising fears that South Korea could fall into recession for the first time since 1998.
And while portfolio investors now appear to be pinpointing Asian exporters as prime beneficiaries of worldwide recovery, Euromoney’s team of experts are far from convinced. Skubik predicts shrinking value-added export activity throughout east Asia during the coming fiscal year, with little expectation of significant growth in the US or EU yielding stronger demand for Asian imports.
Skubik further cites the “poor investment climate in the face of terrorism and Sars, and potentially disruptive financial market reactions associated with attempts to increase FDI in such areas as Seoul, Taipei, Shanghai, Guangzhou or Hong Kong at a time of increasing pressure for revaluation/appreciation of the yuan against the dollar and other regional currencies.” [See China’s currency conundrum, this issue.]
Crunch time for Turkey “Next year will be a key year for Turkey,” says James Ker-Lindsay, executive director (Greece, Turkey, Cyprus) of Nicosia-based Civilitas Research consultancy. A decision on whether Turkey (80) should start formal EU membership talks is expected to be made in December. In the run-up to the decision a lot of attention will be given to the extent to which the government ensures the implementation of key reforms.
Tensions between the military and the ruling AKP look likely to increase in 2004 and this may well result in attempts by senior military officers to stifle the implementation of reforms, especially if these are seen as having a direct impact on national security and the unity of the state. Given that many of these reforms are required for EU membership, if the military does stand in the way questions may well be asked about Turkey’s overall EU prospects.
Both Turkey and the US will try to put the acrimony that arose over Iraq behind them. However, it is clear that Turkey is no longer seen as the invaluable ally that it once was. This could well dampen Washington’s willingness to assist Ankara in the event of another economic crisis and will obviously affect investor confidence.
Economists downgraded Germany in the country poll, with a drop of four places to 16th overall. The country’s worst economic performance in 10 years has caused those polled to downgrade it to 38th spot in the economic projections from 24th place in the March survey, the worst performance of any of the eurozone countries. With growth rates of 0.5% and 1.6% predicted by the panel for 2003 and 2004 respectively, it appears that it can expect only a slight upturn in the short term.
Russia rises Russia (72) rose four points in the rankings, despite concerns about politically motivated interference in the economy as a result of the Yukos affair (see Euromoney August 2003). The Russian stock market had stabilized in early August after falling in the aftermath of the arrest of Yukos’s co-owner Platon Lebedev.
On June 25, president Vladimir Putin’s economic adviser, Andrei Illarionov, outlined a vision of how Russia could double national GDP by 2010. In addition to 7.2% annual growth, Russia had to follow China’s example by cutting public spending from 37% of GDP to between 20% and 22%. Our panel predicts growth rates of 5.5% for 2003 and 4.3% for 2004.
Sruti Patel of the London-based Afrinvest consultancy says that while war and political upheaval has dominated recent headlines relating to Africa, investors appear to be less wary about the risk of such disruption spreading to neighbouring countries than in previous years.
“The trend is for African markets to be assessed more on the basis of their individual risks and rewards rather than regional risk levels – a significant development,” Patel says.
He believes that “the appointment of an internationally respected finance minister in Nigeria (123) and the inevitable resumption of IMF lending to Kenya (108) is also likely to be perceived as a green light by previously wary investors”. This is reflected in a rise of four places by Nigeria in the economic projections rankings and a predicted GNP growth rate for 2003 and 2004 of 3.3% and 3.7% respectively. It seems likely that recent developments, along with US president George W Bush’s African tour, should provide a sharp boost to economic growth and market confidence in the key markets over the next couple of years, according to Patel.
Brazil (75) rose four places in the overall risk rankings. With a projected growth rate of less than 2% for 2003, the country has a long road to economic recovery, despite president Luiz Inacio Lula da Silva’s commitment to structural reform and conservative macroeconomic policies.
Overall country risk in developing countries is again showing a paradox: the major macroeconomic balances have improved, and the immediate threat of new crises looks low.
“Conversely,” says Thierry Apoteker, managing director of TAC-Applied Economic Research, “insufficient economic growth is fuelling social, and therefore political, tensions, notably in Latin America, Africa and the Middle East, while in some large Asian countries, many indicators of inefficiencies’ are appearing – administrative issues in India, return on investment in China, for example.”
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For historical country risk data please visit the Euromoney Country risk website |
