ECR survey results Q1 2017: Europe marches on without the UK


Jeremy Weltman
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Euromoney’s country risk survey shows disparate risk trends emerging in Q1 2017 as leading economists and political experts reassess their views on asset safety in the wake of changing commodity prices, currencies and populist political trends.


The shifts in country risk scores were more evenly split in Euromoney’s first quarterly survey of 2017 compared with the larger weighting of downgrades relative to upgrades in previous quarters stretching back to the sovereign debt crisis in 2010 and financial crisis in 2007/08.

ECR scores for 79 of the 186 countries surveyed were downgraded (indicating higher investor risk), but 77 improved, with the remainder unchanged.

This perceptible shift is signalling how the commodity crisis is stabilizing and populist politics might be peaking after the surprises of Brexit, Donald Trump and even Rodrigo Duterte’s election as president of the Philippines last year.

The UK aside, Europe’s prospects are now improving thanks to better economic fortunes, and there are more stable risk profiles for many emerging markets (EMs), including commodity exporters adjusting to the fiscal shock, as reflation trends boosting capital inflows lend support to currencies.

As economists at BBVA research, contributing to Euromoney’s survey, point out: “Financial tensions, global risk aversion and sovereign credit default spreads have all been easing significantly across the board.”

This is reflected in investor fortunes turning, although the world average score of 42.49 out of a maximum 100 points is still four points below the level prevailing in 2010, signalling global fortunes remain impaired:


The survey is updated at the end of each quarter, quantifying the opinions of more than 400 expert contributors.

Their scores on 15 key economic, political and structural risk indicators are added to values for capital access, credit ratings and debt indicators to provide a total risk measure, ranging from a maximum 100 points (total safety) to zero (certain default), with each country divided into five risk categories.

This crowd-sourcing approach provides an important snapshot of global risk changes, broken down into major world regions and investor groups, here showing the Caribbean becoming riskier in Q1 2017 and the G10 safer:


Remaining wary

There are, of course, numerous geopolitical risks that will further weigh on global prospects in myriad ways.

“They include North Korea’s recurrent sabre-rattling, the potential cancellation of the Iran nuclear deal, or the resurgence of tensions between India and Pakistan,” says ECR expert Max Schieler, an economist at RobecoSAM.

In parts of Africa and the Middle East, conflict will continue to damage prospects in those regions, “nurturing radical Islamic ideology and laying the ground for further acts of terror around the world”, he adds.

The unresolved South Sea China crisis is another factor to be wary of, amid possible new shocks, including Greece perhaps leaving the eurozone – which remains an extreme, but not wholly unlikely, option – as well as famine exacerbating the refugee crisis.

Developed economies safer; Singapore safest

Norway’s pre-eminence as the world’s safest sovereign borrower has taken another beating from a weakened economy due to the oil crisis.

The hydrocarbon-rich state is now the third safest borrower worldwide in the global rankings, with Switzerland leapfrogging into second place and Singapore retaining its edge as the safest of all the 186 countries Euromoney surveys.

The G10 risk score has notably improved, buoyed by rosier economic prospects in Europe where confidence is gaining as monetary policy stimulus and reviving global trade spur recovery, leading to stronger employment trends and improving fiscal positions.

This is despite the resurgence of inflationary pressure, which is largely considered a temporary, commodity-induced phenomenon that will fade, and is unlikely to lead to a surge in wage growth or a strong tightening of borrowing rates.

Risk scores for the US and Japan were unmoved during the quarter, but increased for Germany, France, Italy, the Netherlands and several other G10 members:


Experts shrugged off the political risks, with Italy’s banking and political crisis calming, and Dutch voters rejected the populist politics offered up by Geert Wilders’ Party for Freedom in the March parliamentary elections, which has quietened talk of a larger break-up of the EU.

Even in France, where the two mainstream parties are failing to chime with voters, the pro-business reformer Emmanuel Macron is still expected to beat Marine Le Pen as the more likely pairing in a run-off.

There is also the growing perception the problems in Greece are adequately ring-fenced.

Concerns are diminishing, too, where Brexit is concerned, with the initial shock impact quelled. For the UK, however, its investor profile is deteriorating, with the score falling to a new low prompted by higher institutional risk.

Evidently, Brexit has not delivered the worst-case scenarios depicted by Project Fear, with overseas, and notably Middle East investors enticed by the more competitive sterling exchange rate.

However, uncertainties persist with the triggering of Article 50 resulting in two years or more of intensive talks with Europe to withdraw from the EU and shape a new relationship, which could still lead to trade tariffs imposed under World Trade Organization rules.

Mixed fortunes for emerging and frontier markets

Stabilizing oil prices and rebounding market values of other natural resources, such as iron ore used in steelmaking prompted by China’s economy performing better and the US planning an infrastructure boom, means there is less negative impact on commodity producers compared with last year.

Nigeria’s score is steadying and Saudi Arabia’s improving, although investor risk is still rising where fiscal damage must be addressed.

Consequently, the scores for Azerbaijan, Gabon, Kuwait and Venezuela are all marked down for Q1 2017.

Many other emerging and frontier markets have suffered a similar fate, highlighting repayment problems, currency volatility, heightened political risk and/or diminished capital access, among the other relevant factors.

One is Mongolia, which has been forced to secure an international bailout from bilateral and multilateral creditors, including the IMF, China, Japan and South Korea, to avoid a state-bank default.

Others are Bolivia, Georgia, Jordan and Moldova, as well as Barbados, where political risk tied to the 2018 elections is aggravating debt and deficit concerns, and has led to a recent credit rating downgrade from S&P in March.

With reduced capital access also affecting Jamaica, the Caribbean is the investor region with the biggest increase in risk to date in 2017.

Across Central and Eastern Europe, Hungary is marked down due to political and fiscal risks, along with Bulgaria, Estonia and FYR Macedonia, but there are brighter fortunes for Croatia, which is heading for investment grade.

Brics and Mints kaleidoscope refocuses

China, Brazil, Nigeria, Russia, Turkey and other large EMs have stabilized in the first months of the year, although in most cases scores remain heavily depressed on those prevailing just a few years ago, signalling the outlook remains highly uncertain.

ECR contributor and independent sovereign risk expert Norbert Gaillard still has doubts where Russia and Turkey are concerned, stating: “Bad news may arise from these countries in the short term.”

On Mexico – which had a weaker score in Q1 2010, and is considered an attractive investor prospect by Bloomberg, it “may remain threatened by Trump’s policy”, he adds.

And, reflecting the opinion of other contributors, Gaillard expresses doubts about South Africa, which has succumbed to heightened political risk, culminating in the recent ousting of the market-friendly finance minister Pravin Gordhan, sending the rand into a spin.


In fact, capital access tightened for 49 countries in total, including sub-Saharan borrowers Gabon, Namibia and Uganda, among others worldwide.

Bank stability is less concerning, becoming more of a risk in just 15 countries.

The largest falls for the bank stability indicator are in Mongolia and other smaller, mostly frontier markets, although Luxembourg and Switzerland are also marked down, and there are improvements in just 11 countries.

Barbados, Bolivia, Dominican Republic, Gabon, Kazakhstan and Papua New Guinea are among 22 countries with lower scores for their government finances.

Currency risk has increased for 16 sovereign borrowers, corruption for 39 – notably in sub-Saharan Africa, although also in Brazil and Malta – and government stability is a bigger risk in 43 countries where electoral uncertainty persists, such as Germany, Italy and South Korea.

Brighter picture for Asia…

China’s score remains low reflecting longstanding fears surrounding the build-up of debt, but has stabilized after falling since 2014 in recognition of an improved economic outlook, evinced by the manufacturing-sector purchasing managers’ index soaring to its highest level in five years.

Across the region, there are improvements to investor profiles for Macau, Malaysia and Thailand, as well as Bangladesh, Pakistan, Sri Lanka and Vietnam, to varying degrees.

However, Mongolia’s debt problems, and political risks in South Korea and Taiwan, have removed some of the gloss on Asia’s investor prospects.

…but a darkening one for Latin America

Coming to terms with US protectionism, domestic political problems and the after-effects of the commodity crash, several Latin American borrowers became riskier prospects in Q1 2017.

Among them are Chile, which is struggling with lower growth, has elections in November and is involved in a harmful territorial dispute with Bolivia – affecting trade – which also became riskier in Q1 2017.

Other countries with lower risk scores include Costa Rica, Paraguay, Suriname and the perennial under-achiever Venezuela, which has fallen the most of any country since 2010 (63 places in the rankings) and has the “world’s worst oil company”, says ECR contributor Steve Hanke, whose roles include senior fellow and director of the Troubled Currencies Project at the Cato Institute.

However, Argentina’s uneven progress is continuing due to improved credit access and new business legislation. Moreover, as ECR contributor and ABN Amro Marijke Zewuster states: “The economy is poised for strong growth in 2017. Exports remain the main growth engine, but consumption is picking up, and inflation falling.”

Oil and conflict shape MENA’s prospects

The oil crisis and conflict affecting parts of the Middle East and North Africa (MENA) means investor risk has continued to rise for many countries, including Kuwait, Oman, Qatar and United Arab Emirates, although all four remain among the least risky on a regional basis.

Prospects are dire – and worsening – for war-torn Libya, Syria and Yemen, and have also deteriorated for Iran with a harder line expected from the US Trump administration.

There are downgrades for Algeria, Jordan and Morocco, but contrasting fortunes for Saudi Arabia, which has become safer due to a huge diversification programme and improved capital access through bond issuance.

Other improvements have occurred to medium-risk Israel and to higher-risk Lebanon – showing the biggest improvement in the global rankings during the quarter, rising nine places to 116th.

Another is Egypt, which has been struggling with its political and economic problems since the Arab Spring, and by terrorism outbreaks affecting tourism, but seems poised for a comeback.

No solace in sub-Saharan bonds

The average country risk score for the sub-Saharan region continued to fall in Q1 2017 to its lowest level in more than four years, with no fewer than 13 borrowers becoming riskier, added to which there are 22 already low-scoring countries that failed to improve.

Greater scrutiny of the region’s bond issuers is imperative in the wake of the Mozambique debt default, a country that has lost nine points in ECR’s survey since 2010.

It was the first to default on a dollar bond since Côte d’Ivoire in 2011.

Others with declining score trends include Angola, Gabon and Namibia amid a startling rise in external liabilities since multilateral debt relief was secured a decade ago.

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