Japan and the US saw their scores continue on a downward trend, as various economic and political problems continued to raise alarm bells among economists and country-risk experts regarding their medium-to-long term fiscal viability, given growth constraints and ageing populations.
Japan’s crippling debt problems, stunted growth and deflation have seen its score fall to 65.5 out of 100 and to 32nd out of 185 countries surveyed – a new record low, when 20 years ago Asia’s former powerhouse was ranked the world’s safest sovereign.
Eurozone countries, similarly, saw shrinking levels of confidence as Slovenia, Cyprus, Spain and Italy endured the largest falls in country risk scores of any of the countries surveyed worldwide, weighed down by creaking banks, rising debts, contracting economies, and the political and structural dimensions to the crisis.
The eurozone score fell by 3.1 points, the largest drop of any of the main geographical or economic regions.
Risk differentials between the G10 and the emerging market regions narrowed by between two and three points in 2012, and by 25 points for the Middle East and 30 points each for Asia and Latin America. Differentials between the eurozone and emerging markets saw even larger shrinkage, highlighting that, although traditional markets are still safer, their comparative advantages have diminished.
Some of the emerging markets became safer in 2012: those that were largely decoupled from Europe’s debt problems – growing rapidly in many cases – and with fewer domestic issues. In northern Europe, Iceland recovered briskly from its own volcanic banking crisis, and with its debts diminishing it climbed four places in the rankings to 43rd.
The Baltic States, benefiting from close trade and investment links with Sweden, also saw risks ease. Fiscal problems there are less acute, particularly in Estonia, one of Europe’s success stories and the safest sovereign in Central and Eastern Europe.
Malaysia and Thailand, meanwhile, bucked the Asian trend in 2012, which saw risk perceptions increase for most other countries. Improved scores for monetary policy/currency stability illustrate the importance of positive external balances. Both countries are growing, and Malaysia it seems is on the brink of displacing Poland and moving into the second tier of Euromoney’s five-tiered groups, a precursor normally to a ratings upgrade.
Other improvers included the Gulf countries, which were mostly able to avoid the conflict and social tensions ravaging other parts of the Middle East, and were buoyed by strong oil and gas prices swelling budget surpluses.
Latin America saw three distinct patterns emerging. Brazil, Chile and Colombia continued their long-term ascent in the global rankings, despite having their economic scores shaved by a slowdown in China paring back commodity demand. Argentina and Venezuela struggled with their domestic crises, which caused both countries to slide further down the rankings. Mexico, Peru, Uruguay and Bolivia all emerged on the radar, benefiting from strong policy management, good growth and other factors.
However, as China slowed, and aid, trade and lending were undermined by Europe’s debt crisis, many of Africa’s key commodity producers (Botswana, Namibia, Ghana, Nigeria, Tanzania and Kenya) all struggled to maintain experts’ confidence, contrasting with the wave of euphoria seen toward African sovereign bond issuance in recent years.
South Africa, a notable faller, which has seen its ratings downgraded, has similarly suffered from a combination of economic, political and structural concerns; confirming that it was a year in which the kaleidoscope refocused, but without a brighter picture forming overall.
In total, 100 of the 185 countries included in the survey became riskier in 2012.
Euromoney Country Risk evaluates the investment risk of 186 countries across 15 criteria (or factors) to determine the risks of default on a bond, losing direct investment or to global business relations, by surveying more than 400 international economists and other risk experts. The qualitative scores are averaged and combined with three basic quantitative values to give an overall ECR score on a 100-point scale, where 100 is the safest and zero the riskiest.
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