Asean country risk: Malaysia and Philippines buck negative regional risk trend

Matthew Turner
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Malaysia and the Philippines saw the largest improvements in overall risk assessment scores of any Asean countries in the Q3 results of the ECR survey – but worsening access to capital markets (ATCM) and bank finance had a negative impact for the region.

Malaysia and the Philippines were the only large Asean economies whose sovereign risk outlook improved during the third quarter of 2012, according to the results of Euromoney’s Country Risk Survey. Robust growth elsewhere in the region was not enough to support country risk scores for large economies such as Indonesia, Thailand and Singapore, which all saw declines during the period.

Worsening scores in the survey’s ATCM and bank finance category had a negative impact on country risk survey results for Indonesia, Thailand, Singapore and Vietnam. The weak growth outlook across the global economy, the continued uncertainty regarding the eurozone crisis and the approaching fiscal cliff in the US had a negative bearing on the outlook for capital flows into the region.

Leif Eskesen, an economist at HSBC in Singapore, says: “The region awaits either a gradual global economic recovery or a deeper global slowdown, which could mean feast or famine for capital flows and credit growth. Either way, policymakers need to get it right.”

More than 40 macroeconomists covering the Asean region took part in the quarterly survey, which measures analysts’ perceptions of political and economic risk in more than 180 markets worldwide.

Asean Country Risk Scores, Q3 2012

Country name




Q3 score change

Q3 rank change





























































Asean overview

Malaysia’s overall Euromoney Country Risk (ECR) score improved by 0.9 points, to 63.2 in Q3 2012, bucking global and regional trends. Strong GDP growth forecasts of 5.3% in 2012 despite difficult global conditions, along with a healthy external position due to a high current account surplus of 5.9% of GDP, helped boost Malaysia’s score. This has left Malaysia with the largest score improvement in the region in Q3.

The Philippines also fared well in Q3, and was the second-strongest performer in the region for overall risk assessment. The Philippines overall risk assessment score has improved Q/Q on the back of 6.6% real GDP growth forecast for 2012 – the highest in the region. This has left the sovereign’s ECR score improving by 0.2 points, to 50 in Q3 2012, with a global rank of 69 for risk assessment globally.

Indonesia’s risk assessment deteriorated the furthest this quarter, after ECR analysts downgraded the sovereign by 1.4 points. Although Indonesia’s economy performed strongly in Q3, real GDP growth reached 6.2%. Such growth rates have raised concern among economists, with fears they might be pushing above the sustainable rate by a loose monetary stance, a point raised recently by ECR (Indonesia’s ECR score decline reflects overheating concerns).

Thailand’s score deterioration has left the sovereign slipping furthest in the Asean regional rankings, after falling five places to 52nd position globally in Q3 2012. Thailand’s growth is forecast to reach 5.5% in 2012. Although strong, analysts note that political risks still pose a threat to the country’s stability. 

Vietnam’s score slid by one point in Q3, coinciding with Moody’s downgrading of the sovereign’s foreign and local currency government bonds. 

Malaysia’s debt burden offset by favourable financing conditions

Malaysia’s score improvement was largely driven by improvements in the country’s economic assessment criteria, which improved by 0.3 points. Malaysia benefited from score improvements in the country’s bank stability, economic outlook and employment indicators.

The sovereign’s economy expanded by 5.2% y/y in Q3, leaving Capital Economics to revise its growth forecasts upwards for this year from 4.8% to 5.2%. However, with exports down 3% this quarter, Capital Economics predicts a slowdown in 2013, in keeping with consensus forecasts. 

“Malaysia is still heavily trade-dependent,” states Capital Economics. “Exports are equivalent to around 100% of its GDP, and they will continue to be a drag on growth over coming quarters. We expect the eurozone to head deeper into recession next year, and it looks unlikely that there will be a significant pick-up in the Chinese or US economies.” 

Malaysia’s government debt-to-GDP ratio of 53% remains stubbornly high, when compared with other Asean economies. This factor, combined with an expected budget deficit of 4.5% in 2012 – among Asia's biggest – means the government lacks fiscal space in raising government spending to counter the effects of external pressures. 

ECR analysts have highlighted the strain on the country’s government finances, after the sovereign’s government finances score fell by 0.2 points to 4.2 in Q3. 


                                                                  source: Euromoney Country Risk

However, Malaysia’s position is bolstered by favourable financing conditions that might assist the sovereign in tackling the country’s rising debt burden. This is reflected in ECR’s ATCM survey: The country saw a strong improvement in the ATCM indicator, which improved by 1.4 points to 8.8 in Q3 2012, bucking the regional and global trend. 

Moody’s, in a report in July, cited “deep and liquid domestic capital markets that assure favourable financing conditions” as a main reason in assigning the sovereign with a stable outlook.

It continued: “The country's financial system and strong corporate sector contribute to the country’s net international investment surplus. These advantages have ensured the finance-ability and affordability of Malaysia’s large fiscal deficits and higher government debt relative to its peers.”


                                                                      source: Euromoney Country Risk   

Improving growth forecasts boost Philippines

The Philippines overall risk assessment score has improved Q/Q on the back of higher growth forecasts, with the sovereign’s ECR score improving by 0.2 points to 50 in Q3 2012. This score improvement leaves the Philippines ranked 69th globally.

The Philippines’ rise was largely driven by improvements in the country’s economic assessment criteria. Its GDP grew by 7.1% y/y in Q3, up from the 6.0% expansion recorded in Q2 and the 6.2% growth during the first half of the year.The sovereign’s economic outlook indicator, with a score of 6.0 points, is now only 0.9 points adrift from China’s real GDP indicator.

Capital Economics now expects the economy to expand by 6.3% this year, up from its previous forecast of 5.0%. “Reflecting the economy’s resilience, we are also raising our growth forecast for 2013 to 4.5%, up from 4.0% previously,” reports Capital Economics.

Nomura puts the country’s strong growth trajectory down “to stronger progress in infrastructure projects under the public-private partnership (PPP) scheme and higher fiscal spending ahead of the mid-term elections in May 2013. [Nomura] expects private consumption to remain robust with resilient remittances and buoyant consumer sentiment.” 


Indonesia’s ATCM score deteriorated the furthest in the region, falling by 1.6 points to 6.2 in Q3. Rising external pressures from falling commodity prices, combined with a relatively under-developed regulatory and policy environment to tackle financing concerns are among reasons playing into analysts’ risk perceptions.

Institutional bottlenecks and structural impediments have hindered access to capital and bank finance. Although, the incumbent administration has embarked on ambitious reforms to strengthen the country’s policy and regulatory environment, challenges still remain. 

A report by Standard and Poor’s (S&P), (How far, or close, is Indonesia to an investment-grade rating?) points out that: “Indonesia’s institutions and bureaucracy are still evolving and are in a comparatively weaker state than for most of the BBB-rated sovereigns.

“Corruption remains high compared with other sovereigns [ranked 111th on Transparency International’s Corruption Perception Index, well behind the above-mentioned peers] and still acts as a deterrent to foreign investment.

“As checks and balances develop among Indonesia’s political institutions and as the country’s legal framework becomes more predictable, these political factors are likely to become less of a binding constraint on the government's rating.”

Some of the impediments to investment in Indonesia are explained by HSBC’s Eskesen: “In order for the Asean 5 – Indonesia, Malaysia, Vietnam, Philippines and Thailand – to continue to attract investment, it needs to begin to address some of the structural constraints on growth.

“In Indonesia, red tape is still a problem. There needs to be a further effort to create a more enabling business environment, and cutting back on red tape will be a top priority in addressing investment impediments.”

This view is reflected in ECR data, which shows that Indonesia’s regulatory/policy and corruption sub-factor scores fall well below the regional average. ECR analysts assigned Indonesia a score of 3.2 points in the country’s corruption indicator. Although unchanged in Q3, this leaves the sovereign ranked 121 for corruption globally in ECR’s rankings.

Similarly, the country’s regulatory and policy environment sub-factor score is below that of the regional average, with a score of 4.4 points.


                                                                 source: Euromoney Country Risk

“Another factor important for investment growth is that they address basic infrastructure bottlenecks,” says Eskesen. “For example, road and power infrastructure in some of the larger economies, such as Philippines and Indonesia, is not sufficiently developed to keep pace with economic growth rates.

“The main challenge for the Asean 5 economies will be the need to shift the focus from demand-led support to growth, from fiscal and monetary policy towards more structural support for growth in terms of introducing more structural reforms. This is the kind of transition we need to see for the Asean region to sustain its recovery and strong pace of growth.”

Thailand slips furthest in rankings

Thailand’s risk profile was also negatively affected by the downturn in the country’s ATCM indicator. 

Thailand’s overall risk assessment score has gone through a turbulent patch this year, with the country’s overall ECR score reverting back to Q1 levels as of November.

A Nomura fixed-income report pinpoints downside risks emanating from “a deepening of the euro area recession, and domestically from increased political uncertainty over the constitutional amendment and reconciliation bill. Slow progress on infrastructure plans could weaken investment sentiment.”

The sovereign’s deterioration this quarter is a setback from the marginal gains Thailand achieved in Q2. In Q2, the sovereign’s ECR score improved by 0.2 points, amid a combination of strong domestic consumption, a boost in government expenditure and higher rates of investment in the manufacturing sector – after last year’s severe flooding prompted the government to exert a fiscal stimulus.

Real GDP growth slipped to 3.9% in Q3, down from 5.4% in Q2. On the plus side, Thailand’s public debt-to-GDP has risen steadily since early 2012, from 40.6% to 43.9% in September. This still falls well below the debt ceiling of 60%, “so there is plenty of scope to run expansionary fiscal policies,” according to a report by Nomura.

However, higher institutional and political risks mean that the sovereign could find it harder to access capital markets and bank finance. Fitch notes that political risks will continue to be a main obstacle to the country’s credit rating: “[There are] risks to fiscal transparency and policy management, while buoyant credit growth means the banking sector will need to be monitored.”


                                                               source: Euromoney Country Risk

Fitch believes it is too early to conclude that Thailand's “deep political divisions” have been resolved. The agency still sees a certain degree of political “event risk”. This suggests that political event risk might be playing into analysts’ risk perception and is part of the reason why the country is seeing worse ATCM and bank finance scores.

According to Nuchjarin Panarode, economist at Nomura and a member of ECR’s expert panel: “The extent to which political unrest will impact on Thailand’s credit rating will be the effectiveness to which the government moves ahead in tackling sensitive issues associated with corruption and cronyism.” 


Vietnam’s overall ECR score has continued to fall during each quarter this year. The sovereign’s ECR score deteriorated by 0.9 points to 39.6 in Q3 – this follows a 2.2 point score decline in Q2.

This leaves Vietnam ranked well into the bottom half of tier four on ECR’s global risk rankings. Vietnam’s position has fallen four places since Q3 2012 to 89 in November. The sovereign now ranks alongside Ukraine, Lebanon and Macedonia for overall country risk assessment.

Again, Vietnam suffered a substantial score decrease in the country’s ATCM indicator, falling by one point to 2.8 in Q3. This leaves the sovereign with one of the lowest-rated ATCM indicators in the region.

Vietnam’s score fall in the ATCM survey and in the rankings coincided with Moody’s downgrading the sovereign’s foreign- and local-currency government bonds to B2 from B1 in October, negatively affecting its overall risk profile.

Vietnam’s five-year yields rose to a two-month high on the back of the news.

The rating agency also downgraded eight of Vietnam’s leading financial institutions, citing a continued deterioration in asset quality and a weaker operating environment, as government support for the banking sector will remain ineffectual.

These developments have impacted negatively on Vietnam’s already fragile banking sector. Vietnam’s bank stability, which is a measure of a country’s banking-sectors strength, is the second-most unstable in southeast Asia, with a score of only three points. This leaves Vietnam’s banking-stability indicator as the lowest among the sovereign’s economic indicators. 

This article was originally published in Euromoney Country Risk.