ECR Survey Results 2016: Italy, UK and US shocks underline the risks of populism, as oil exporters take a caning


Jeremy Weltman
Published on:

ECR’s crowd-sourcing survey shows global risk rising in 2016, with leading economists and political experts revising their views on asset safety.

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Country risk scores continued to plunge in Q4 2016, prompted by uncertainty over Italy’s political and banking sector problems, and the outlook for global trade, with the rise of populism emanating from Brexit, Donald Trump’s election victory and prospective elections across Europe coming into view this year.

The ECR survey is conducted on a quarterly basis, and quantifies the opinions provided by more than 400 contributors, uniquely aggregating the views of experts within the finance and non-finance sectors.

Their scores on 15 key economic, political and structural factors are added to values for capital access, credit ratings and debt indicators to provide a total risk measure, ranging between a maximum 100 points (total safety) or zero (certain default).

These final results update the preliminary figures recently published by ECR.


Global rout

G10 scores weakened in Q4, as the investor outlook darkened for Belgium, the Netherlands, Italy, Japan and the US particularly.

Worsening economic and fiscal problems for net oil producers saw Azerbaijan, Bahrain, Gabon, Nigeria, Saudi Arabia, the UAE and Venezuela downgraded, despite the mini-bounce in global oil prices towards year-end.

There were large score declines for emerging and frontier markets, including Bolivia, Mongolia, Myanmar, Vietnam and several in sub-Saharan Africa (SSA) as capital access tightened.

Scores fell for China, India and Turkey, with currency stability questioned.

In total, 97 of the 186 countries included in the survey became riskier in 2016 (their total risk scores fell), 69 became safer and the remainder were unchanged.

Economic risk increased for 85 countries, and political risk for 80, with the global mean average total risk score languishing almost eight points below the level prevailing in 2007, after the collapse of Lehman Brothers.

Eight years on from the worst global financial crisis in living memory, bank stability deteriorated in 2016 for 53 countries, including Azerbaijan, Germany, Italy, Kazakhstan, Luxembourg, Switzerland, Turkey and Venezuela.

The financial system remains a key weakness of the global investor climate, despite the tightening of regulation bolstering capital and liquidity requirements, and restricting higher-risk lending.

The transfer risk associated with government non-payment or non-repatriation of capital increased in 51, mainly frontier, markets, including Barbados, Republic of the Congo, Haiti, Lebanon and Mozambique.

Currency stability was questioned in 43 countries, including Azerbaijan, Egypt and Japan, corruption in 40 countries – notably in Brazil, Liberia and Montenegro – and the policymaking and regulatory environment in 35, especially the UK in the wake of the June referendum favouring a withdrawal from the European Union.


Italian crisis foretold

Italy proved to be one of the biggest global concerns of all in 2016, as the contributors to ECR’s survey weighed up the implications of a conjoined political and banking crisis developing, and marked down their scores accordingly.

Italy’s total risk score fell more than any other country outside the scope of the African continent and some of the leading oil producers. It precipitated a nine-place drop in ECR’s global risk rankings, to 51st place, pushing the eurozone’s largest borrower, besides Greece, below Spain to its lowest rating in three years.

Then prime minister Matteo Renzi’s pursuit of institutional reforms to improve future government stability and policymaking outcomes risked bringing down the government at a time of rising popularity for the anti-establishment, euro-sceptic Five Star Movement led by former stand-up comedian, Beppe Grillo.

The populist party capped a fine year by gaining the mayoralty of the city of Rome, among other notable sub-national electoral victories, prompting risk experts to fear the prospect of extensive political turmoil, heightened by a legacy of debt weighing down the creaking banking sector.

Those concerns were soon realised in December when the referendum was rejected, and Renzi resigned, putting pressure on the euro, causing a spike in Italian bond yields and promising months of uncertainty.

Italy’s capital-access score plunged more than any other country worldwide, eclipsing the tightening of financial conditions experienced by 56 other sovereign borrowers, including Nigeria, Kenya, and predominantly many other SSA nations.


China fears

China dominated global risk perceptions. The survey experts took a dim view of its lower economic growth trajectory and structural reform risks tied to high and rising debt levels perplexing Beijing’s policymakers, which contributed to another bout of financial instability early in the year.

By December, China’s risk score was lower than at any time since the global liquidity crisis erupted in 2008, falling in ECR’s risk rankings, below Cyprus and Spain, to 43rd place.

“China’s extreme tail risks of disorderly deflation in real estate, and debt bubbles in the economy, became more prominent in 2016,” says Constantin Gurdgiev, from the Middlebury Institute of International Studies, who is one of ECR’s regular survey contributors.

These problems are compounded by the continued stagnation in global trade flows, and are also weighing on the Chinese banking system.

China’s bank stability score of 5.1 out of a maximum 10 points is lower than the corresponding values for Brazil, India, South Africa and Turkey.

Russia’s score, by contrast, rebounded slightly after having fallen sharply in 2014-15 in tandem with plunging oil prices, and as relations with Ukraine plumbed new depths, sparking the tit-for-tat trade war with the EU.

The improvement was partly due to the oil price recovering a little from its lowest point in response to Opec production cuts, and in anticipation of better relations with the US under Trump.

However, Russia is still marked down heavily, and many other large emerging markets (EMs) also became riskier options during the year.

“Many of the larger emerging-market economies witnessed the repricing of risk in line with poor macroeconomic and geopolitical fundamentals,” says Gurdgiev.

Turkey, experiencing a brief military coup and subsequent tightening of authority heightening institutional risk, succumbed to a lira shock, pressuring the survey scores for currency stability and other economic indicators, including GDP growth prospects.


The morphing of Turkish foreign policy saw relations with Russia move back on to an even keel, but were more complicated where the EU and the US were concerned over the war in Syria and how to resolve the refugee crisis.

The China factor, moreover, contributed to the reassessment of Asian borrowers more generally, although the prospective tightening of US monetary policy enticing capital outflows from EMs played an important role, alongside the natural interplay of domestic political factors.

They include the pro-democracy forces provoking uncertainty in Hong Kong, the ousting of the pro-China administration in Taiwan causing a freeze in cross-strait relations, political risks rising in Malaysia, and the dangers posed by Philippine president Rodrigo Duterte, whose heterodox approach to policymaking and foreign diplomacy led to a spike in institutional risk.

Shock impact

ECR’s broad cross-section of experts also became more conscious of the rise in populist fervour influencing the surprise outcome of the June referendum in the UK favouring Brexit, and the ensuing victory for Trump at the US presidential elections in November.

Brexit might deliver longer-term advantages to the UK, but the uncertainty over future trade relations, the impact on financial services, and the huge administrative and legal minefield involved in leaving mean its score worsened, and the risks of investing in the UK are higher than at any point since the global financial crisis.

UK experts took a dimmer view of prospects for economic growth, the stability of sterling (rocked by Brexit and a weak current-account), institutional risk (reflecting the legalities involved), and government stability.


The US risk profile has also deteriorated since the elections, although the protectionism Trump is promising is more of a problem for other countries with which the US trades.

“It’s hard not to overstate the importance of Trump’s victory, the notion that, beyond America’s Rust Belt, Trumponomics could have a transformational impact on the global economy – notably the emerging markets of Latin America, MENA and Asia,” says ECR expert M Nicolas Firzli, director-general of the World Pensions Forum and advisory board member of the World Bank Global Infrastructure Facility.

Factoring in the consequences of a Trump administration tearing up the North American Free Trade Agreement, and placing limits on immigration, Mexico’s risk score weakened in Q4 in tandem with the peso depreciation.

The sinking currency, along with those of other countries affected by the political change in Washington, among them Canada, India and Malaysia, to name but a few, is “an indication of how a certain degree of protectionism (Trump’s ‘fair trade’) will be combined with unembarrassed deficit spending to fuel massive infrastructure, construction and defence spending: call it self-seeking populist capitalism,” Firzli adds.

The political risks also increased in Germany, where chancellor Angela Merkel is seeking to defend Europe’s liberal consensus by contesting the elections in October, but is facing growing opposition to her immigration policy from the emergent populist-right.

Germany is, moreover, facing up to the threat of Brexit creating another existential crisis for the EU, where 13 countries became riskier in 2016 despite the gradually improving economic situation, highlighting how investor risk is a multi-faceted concept and can be hugely affected by nuanced political factors.

“The year turned out to be one of unthinkable outcomes as the survivability of elites ruling the roost unchallenged turned out to be democratically wrong,” says the Canada-based ECR expert Johan Krijgsman, of Krijgsman & Associates.

“The populist, nationalist and revolutionary tags being used to explain the changes are superficial. Generally, it seems the masses are just fed up with their lack of progress, and the sense of entitlement that the powers that be exuded.”

Risk scores for Estonia, Finland, Hungary and Poland were among several others in Europe downgraded in 2016 due to a combination of economic, political and structural factors.

This occurred against the backdrop of depressed commodity prices, sovereign bond yields sinking to new lows and prospects dimming for EMs, as improved returns on US assets following Trump’s victory caused a sharp rise in capital outflow, including more than $11 billion-worth of liquidated bond and equity holdings in Asian markets in November alone.

Nigeria leads oil credits into the red

Persistently low oil prices added a further complication to portfolio decision-making in 2016, resulting in large score declines for many of the world’s net hydrocarbons exporters.

Higher-risk Republic of the Congo crashed 25 places to 123rd in the global rankings. Angola and Azerbaijan also chalked up double-digit declines.

There were downgrades, too, for Gabon, Saudi Arabia and near-bankrupt Venezuela, among others, many of which also saw a spike in credit default swap spreads.

Nigeria proved to be the biggest faller among the oil producers, with its more acute fiscal and external financing problems manifesting,

Unlike Norway and most of the Gulf states, which are better able to manage the crisis due to their net wealth positions, political stability and stronger macroeconomic fundamentals, Nigeria’s acute financing constraints are exacerbated by corruption and weaker institutions, prompting a huge spike in risk for Africa’s largest economy.


The country plunged into recession, amid rumours of bad debts in the financial system, insufficient currency to pay for imports and other worrying trends, including attacks by militants on the oil-pipeline infrastructure and drought risking starvation for millions, leading to an across-the-board downgrading of economic risk factors, a worsening of debt ratings and capital access severely tightened.

Falling 16 places in the rankings to 100th, Nigeria is barely a point above a tier-five rating, the lowest of ECR’s categories containing Greece, Egypt, Pakistan, Ukraine, Zimbabwe and other high-default risks.

London-based survey contributor Gregory Kronsten, head of macroeconomic and fixed income research at FBN Capital, says: “Nigeria’s outlook has deteriorated because the recovery in the oil price has not materialized, and therefore the exchange-rate system, designed to be floating, is starved of the autonomous (non-central bank) inflows to make it work.”

New alternatives emerge

The balance of risk was undoubtedly skewed in 2016, resulting in fewer countries becoming safer than riskier, yet there were several notable prospects moving up the risk rankings.

Argentina registered one of the most impressive comebacks in recent years on the back of the presidential election victory for Mauricio Macri overturning years of populist policymaking, which had brought the country to the brink of another default.

The country is still rated a medium-to-high risk with many difficult challenges ahead; its score reversed a little in Q4. However, Macri’s devotion to more orthodox policymaking, and improving the transparency of Argentina’s statistics and institutions – backed by a new inflation-targeting regime, a credible budget and better creditor relations – saw the country gain almost five risk points to soar 24 places overall in the rankings, to 96th, and move from tier five to tier four.

Among the other countries becoming safer in 2016 was Romania, with scores for its economic growth and unemployment situation improving as low interest rates, tax cuts and wage rises spurred domestic demand. The country can withstand some deterioration in the fiscal deficit in view of a low debt burden compared with its peers.

Bulgaria’s risk profile also improved in 2016, pushing the sovereign borrower four places higher in the global rankings, above South Africa and Turkey, to 59th, which raises the question why S&P still rates it sub-investment grade.

All five of Bulgaria’s economic risk factor scores were upgraded in 2016, and its capital access score, just like Romania’s, also improved.

Bulgaria’s favourable prospects are largely down to the decision taken years ago to introduce a currency board arrangement, a type of fixed exchange rate with full convertibility fixing the Bulgarian lev to the euro.

Furthermore, the Sofia government is handling the fiscal situation with great care, resulting in the general government deficit falling below 1% of GDP this year.

There is little inflation, strong growth continuing, the current account is in surplus and the sovereign debt has been held below 30% of GDP.

Spain, counterintuitively, also improved last year, despite the persistent political crisis involving twice-held elections, leaving the country without a government for almost the entire year.

Spain’s economy continued to grow at a rapid clip, leading to an eight-place rise in the risk rankings, to 40th.

Although the delay to structural reforms caused by the government crisis led to a fall in Spain’s government finances score, alongside several political risk indicators, the structural infrastructure score improved and there were upgrades to several economic indicators, including the growth and employment outlook.

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