The tapering of the US Federal Reserve’s bond-purchase quantitative-easing programme – having upset the flow of liquidity supporting the region’s economic expansion – has unnerved experts and taken its toll on several emerging markets (EMs) and frontier markets.
India and Indonesia, like South Africa and Turkey, have come under the spotlight because of their fiscal and external imbalances.
However, a more nuanced picture emerges of political uncertainties, lagging reforms and China fears imparting a heavy toll on Hong Kong, Taiwan, Sri Lanka, Bangladesh and other smaller, high-risk sovereigns (see chart).
The World Bank in its latest twice-yearly assessment remarked upon the downside risks to south Asia’s outlook, noting currency pressures, export-market vulnerabilities and the potential for reforms to career off track amid fiscal indiscipline.
India and Indonesia’s heightened risks factor in election-related uncertainties, highlighting the complexity of issues facing investors when weighing up their bond options.
India, now scoring just half of the 100 risk-points available in ECR’s survey, has been marked down by various economic and political risk indicators during the past year. Economic growth and government payments/repatriation risk are the two that have been downgraded the most.
Two places lower in the rankings, at 66th, Indonesia has suffered a modest 0.4 point correction since Q4. That continues a moderate longer-term trend decline contrasting with the Philippines (ranked 61st), considered a safer prospect on the back of a 1.8 point rise in its score since Q1 2013.
China held back
China is also safer, the survey suggests, but this is solely as a consequence of improved access to capital, one of three factors – alongside debt indicators and credit ratings – combined with experts’ score valuations to provide the total risk score.
Ranked 37th in the global rankings out of 186 countries, China would be a tier-two country commensurate with low to medium risk – and equivalent to an A- to AA rating – were it not for experts downgrading their scores, not least with respect to the economic outlook which has worsened during the first few months of the year according to industrial production and exports data.
Monetary policy/currency stability and government finances are the other economic factors downgraded, in conjunction with several of China’s political-risk indicators, as doubts are raised over transparency, institutional risk and the state’s purge on corruption.
Alicia García-Herrero, chief economist for EMs at BBVA, is moreover concerned about one factor in particular. In her view, “the main immediate risk is lying within a banking system saddled with bad debts and in need of a large recapitalization package”.
Thailand’s risk picture, meanwhile, is complicated by a political crisis after the annulment of elections in February. On a downgraded score of 51.78 out of a possible 100, the sovereign has slipped to 60th out of 186 in ECR’s global rankings. It was also one of the region’s worst performers in Q1, alongside North Korea and Mongolia.
A longer-term trend decline has seen the country plummet 11 places to within 2.4 points and five steps short of tier four, one of five categories symbolizing a credit rating of B- to BB+.
Thailand is rated BBB+ by Fitch and Standard & Poor’s, and is on a similar level on Moody’s scale. Significantly, though, not one of the agencies has its rating on review for a downgrade.
A combination of political risk, drought and rising inflation is undermining the economy, including its tourism outlook – this in spite of the central bank lowering interest rates, a generally favourable exports picture and protesters lately retreating from Bangkok.
The World Bank’s latest forecast revision, downgrading Thailand’s GDP growth to 3% this year from 4.5% previously, highlights weakened domestic demand stemming from the crisis.
Indian sub-continent takes a tumble
The Indian sub-continent also succumbed to increased risk in Q1, as economic and political concerns, partly stemming from the anticipated change of government in India, swept across the region.
Bangladesh, 1.7 points down since December on a score of 30.3, and 15 places lower at 131st – plummeting seven places since December – faces the uncertain prospect of restaging its own elections, after they were boycotted by the opposition in January, with uncertainty over political reforms also weighing on the scores for institutional risk and government stability.
While high global demand for its ready-made garments is fortuitous, Bangladeshi exports generally have slowed, undermining the country’s economic growth and labour-market outlook.
Sri Lanka has suffered a similar fate, with a 1.5 point fall to 44.1, and is now 76th in the rankings, four places lower than a year ago, affected by India’s outlook, its own religion-based politics, slowing credit growth and a drought pushing up food prices.
Bhutan and Nepal are lower, while Pakistan – caught up in the regional risk aversion – saw its score fall 1.6 points in Q1.
However, although various problems – including the security situation, energy shortages and a widening current-account deficit – mar its risk outlook and highlight financing challenges, the government’s strong mandate and successful auction of telecommunications licences are reasons to remain hopeful.
Indeed, while still evidently a high-risk sovereign, Pakistan’s score is one point above its year-earlier level – a feature ECR has remarked upon previously.
Korea moving to safety
Contrast that situation with the fate of South Korea, Asia’s best performer in Q1. Amid the background challenges posed by its belligerent sister-nation, the country has climbed seven places in tier two to 23rd, leapfrogging 26th-placed Japan, despite the latter’s higher score.
South Korea’s 3.5 point quarterly score increase – 4.9 on a year-on-year basis – has been driven by a range of improved economic risk indicators, including its banking and currency stability, and a more favourable employment outlook.
The available Q1 data show the economy still growing strongly, mainly due to exports, but supported by inward foreign direct investment and fiscal expansion, without endangering the surplus.
Political risk indicators ranging from corruption to government stability have also improved, in spite of political scandals, with the prime minister’s resignation seen as an isolated event linked to the ferry disaster.
John Sharma, macro-economist in sovereign risk at National Australia Bank, points out: “There are still challenges, the most notable being high household debt, as well as stresses in second-tier chaebol [conglomerates]. Household debt to disposable income has risen to 134.7%.
"On the corporate front, the somewhat weaker environment is impacting on certain companies in the form of lower profitability and reduced debt servicing capacity, particularly in segments such as Construction and Shipping. The Bank of Korea is aware of these risks and is monitoring these closely."
There are risks, too, linked to the Fed's QE programme, instability in some EMs and the possibility of a weakened Chinese economy. However, Sharma is bullish on growth and, in noting low inflation, says: “FX reserves have swelled to USD354.3bn as at March 2014, the current-account surplus is close to around 6% of GDP, and Korean banks have much reduced external risks, with lower spreads on long and short-term external borrowings.”
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.