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For historical country risk data please visit the Euromoney Country risk website |
The above tables take into account scores for each country’s:
Political risk
Economic performance
Debt indicators
Debt in default or rescheduled
Country credit ratings
Access to bank finance
Access to short-term finance
Access to capital markets
Discount on forfaiting
(click on any of the above terms to view the appropriate rating methodology)
Country risk and the global economy
OVERALL RATINGS IN this September’s country risk survey reflect increased optimism among analysts polled by Euromoney, despite fears of a worldwide economic slowdown, and concerns related to sub-prime mortgages in the US. The average rating has increased to 50.29, an improvement of 2.41.
Commodity prices are expected to remain strong and continue to boost figures for many countries. For example, in Nigeria violence in the Niger delta is still a risk, but a positive move up the rankings is likely because of increases in oil production and prices.
Average political risk ratings, assessed in a survey of 35 experts, have not shown an increase corresponding with the overall results, and many countries in Latin America, eastern Europe and Asia have divisive internal politics that will discourage investors. Iran’s nuclear plans are uncertain, and any progress towards viable weaponry is a cause for concern, and a source of volatility in the Middle East.
The US domino effect
Recent events in the US have led to it falling three places in the rankings to seventh. Saruhan Hatipoglu, director of Business Environment Risk Intelligence, says: “The current crisis in sub-prime loans is mostly local. The crisis will have a significant but temporary impact on the American market. Financial, brokerage and homebuilding stocks will suffer for over a year, as there will be a prominent correction.” A weak US will have a knock-on effect to countries in central and Latin America.
In Mexico, president Felipe Calderón has strengthened his power and gained in popularity, but Will Ollard, chief economist at Intelligence Research, believes that there will be a greater economic impact than the government estimates, with growth under 3% this year.
The economic situation in Latin America is positive, and Ollard doesn’t expect any balance of payments problems in the near future. Strong commodity prices are an important reason for this. In central America, however, this will be a negative influence, and the commodity boom will work against countries that are overall importers. Smaller countries, such as Nicaragua, Honduras and Belize, have slipped down the country risk poll rankings.
Argentina moves up another place in the rankings to 109, and economic performance is expected to hold steady. President Néstor Kirchner will not stand for re-election in October, but his wife Kristina, a popular senator, is expected to win the presidency. No significant financial policy changes are expected from the new government.
Internal political struggles affect several countries. Ollard notes that in Chile, “the government’s air of competence is being affected” due to unrest in the labour market and poor handling of a public transport scheme for Santiago. Colombia’s government struggles to shake itself from links with paramilitaries, and the US has concerns over a free trade agreement between the countries. Ecuador’s president, Rafael Correa, has been in conflict with the legislature, and a debt market scandal earlier this year raised concerns about the country’s balance of payments, and damaged confidence in the government.
European divergence
Western Europe is experiencing a slowdown of economic growth thanks to a strong euro and high oil prices. Scandinavian countries have performed more strongly, with Norway, Sweden and Denmark now in the top five places in the poll rankings. Norway will benefit from expected strong oil prices, and Sweden’s economy is buoyed up by high employment, and incentives to work.
Central and eastern Europe continue their strong recent growth trend for the moment, but this might not continue for long.
Several eastern European countries, such as Lithuania, Hungary and Croatia, have fallen in the rankings, although growth remains strong, and regional GDP is forecast to increase by 5.5% during 2007. Jon Levy, analyst with Eurasia Group, says: “We have seen good growth in most parts of the region. Foreign direct investment, particularly as part of multinational firm efforts to move operations into lower operating cost markets, has been a key growth driver.” The regional outlook is positive, but could be slowed down by world macroeconomic factors. Levy says: “The region is of course susceptible to broader macro factors, including a possible tightening of credit, or shifts in firm investment and operational decisions that lead to fewer relocations.”
Hatipoglu says: “It is not surprising at all to witness higher risks associated with eastern European countries. First, political situations in many of these countries are extremely untenable.”
Thierry Apoteker, managing director of TAC, says that his company’s quantitative analysis suggests: “Many eastern and central European countries, as well as the Baltic states, will enter more turbulent water, probably as soon as mid-2008.” Levy is concerned that in the long term, “labour shortages, in part as a result of out-migration, are a real risk, as are infrastructure impediments”. Economic policy reform is slow, especially in countries with fractious governments such as the Czech Republic.
Concerns about EU economic convergence might be behind the poorer performance of new members Romania and Bulgaria in September’s rankings. Amy Clarke, war and political risk consultant at AKE, says: “The economic issues from joining the EU should be short to mid term but, in the long term, membership will be a stabilizing factor. This may just be a downward blip.” Hatipoglu points to political problems that might also underlie poor performance. “Romania, for example, is suffering from political polarization. Disagreements exist not only between the government and the opposition, but also between the president and the prime minister.”
In Bulgaria the “political situation is also not encouraging, given the declining popularity of the Simeon II National Movement (SNM) and corruption allegations against the government”. These might lead to caution on the part of foreign investors.
Levy identifies positives in the EU’s influence to reduce bureaucracy. Getting into the EU “created a framework in which to build political support for reforms that make the business and operating climate more predictable by making regulations more transparent and effective.” He adds: “EU structural funds provide a key opportunity to mitigate these risks, including by addressing impediments to internal migration, but if they are inappropriately applied as a result of political failures, that opportunity could be lost.”
For other candidate countries, the incentives for EU economic convergence seem low and governments might not be paying them enough attention. New members are also finding the euro unattractive. Levy says: “There is far less political and public enthusiasm for adopting the euro in the new member states than there was for EU accession. This will happen, but some policymakers prefer to make this a lower priority if they fear that any of the Maastricht criteria will impede their preferred policy objectives.”
Hydrocarbons
The diplomatic tensions surrounding events such as the murder of Alexander Litvinenko, and territorial claims at the North Pole, should not discourage investors in Russia. Of greater importance is international hydrocarbon policy. Amy Clarke says: “Russia’s focus on playing the part of regional strongman – especially with regards to the hydrocarbons industry – will have more significant implications for regional political developments in the former Soviet Union than more isolated diplomatic issues such as the Litvinenko affair.” President Vladimir Putin’s successor after the March 2008 presidential election is not certain, but neither this or the earlier Duma elections are likely to lead to any significant policy shifts.
Ukraine will hold parliamentary elections on September 30 to resolve the dissolution of parliament by president Viktor Yushenko in April. The legitimacy of policies being formed at present will not be established until then. Olena Bilan, analyst at Dragon Capital, says: “The domestic economy and capital markets have shown a subdued reaction to the political mess, demonstrating that the political uncertainty has been discounted by investors, business and the general public.” Capital flight, which has been an issue at previous elections, should be limited in scope. A strong world steel price outlook is good for Ukraine, and Bilan expects that the economy will expand at a healthy 5% to 6% rate in the coming years.
China’s economy continues to grow rapidly, although slowing slightly from last year with 10% expected for 2007. The government can be expected to prioritize political stability through the 2008 Beijing Olympic Games and the Party Congress this autumn. Inflation is a concern in China, but Alex Pick, editor of Asia Intelligence, thinks: “Consumer inflation in China is isolated to food and should moderate towards the end of 2007 as meat prices in particular moderate. The mild producer inflation – a result of controls on energy costs – will ensure that prices calm down, although these same controls might become unsustainable in 2008.”
Strong growth in retail and domestic sectors will continue to provide pressure, however, with Chinese inflation a particular concern for exports to the US, already suffering from the weak dollar. Export prices are still low by global standards and the current account surplus will remain very large. There may be some tension over Chinese products in the US and EU after recent concerns over the safety of items as diverse as toys and toothpaste.
China must attempt to slow down the growth, which cannot sustainably continue at present levels in the long term, while not creating labour problems by slowing down job creation too much. Pick says: “Recent official pronouncements suggest that president Hu Jintao might be more prepared to countenance political reform at this autumn’s Party Congress than was previously expected. We put the chance of such reform at 35%. However, there is no evidence that Hu will allow the market to play a greater role in the economy despite the ever-more apparent structural weaknesses inherent to the present policies.”
The big question in Japan is when will the Bank of Japan raise interest rates. Pick says: “An increase in August seemed very likely until the sub-prime crisis knocked confidence. It is apparent that the BoJ is much keener on raising interest rates than the government. The cabinet frequently points to positive indicators and disregards negative ones in order to play up the progress of the economy, but when it comes to raising rates the government’s bearishness shines though.” The resignation of Japanese prime minister Shinzo Abe in September brings uncertainty to an economy that already looks ready to take off if the right economic conditions are met.
Asian instability
The political and economic situation in Thailand following the 2006 military coup remains unresolved. According to Pick: “The current government lacks clarity, and there is disunity between the military and the political figures that they have brought in.” A warrant for the arrest of former prime minister Thaksin Shinawatra was recently issued, and Amy Clarke warns: “Although there has been relative stability in Thailand since the coup of November 2006, it is somewhat likely that the military government will pursue a more interventionist and possibly hostile policy programme for critical industries in that country.”
Sixty years after partition, Pakistan is looking politically unstable, with elections scheduled to come later this year. Saruhan Hatipoglu, at Business Environment Risk Intelligence, says: “I see Pakistan as one of the riskiest countries in the next two years. Not only internal dynamics are shifting at a rapid pace, but there is serious threat of religious extremism.” President Pervez Musharraf faces increasing difficulty with the threat of violence posed by extremists, and dissatisfaction with attempts to control the judiciary. According to Hatipoglu: “An assassination is now a probability not a possibility. If this materializes, Pakistan will be led into chaos, which will seriously damage gradually improving relations with India.”
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For historical country risk data please visit the Euromoney Country risk website |
