ECR Survey Results Q3 2014: Looming China crisis adds to eurozone and emerging-market threats
The latest results from the Euromoney Country Risk survey point to an unprecedented rise in risk across almost all geographical regions since June, with emerging markets (EMs) taking the biggest hit as doubts over China, the eurozone and US liquidity support weigh heavily on experts’ evaluations.
Doubts about the world’s largest economies supporting the global economy have seen many EMs, including Brazil, Indonesia, Nigeria, South Africa and Turkey, downgraded this quarter.
They are among 118 of the 189 countries surveyed that are now riskier (with falling ECR scores) since the end of last year.
Russia and Ukraine, in freefall during 2014, and dropping more points in Q3, top the list of the worst performers worldwide so far this year, with Ukraine in particular joining Argentina and Venezuela with heightened default risk.
The Russian trade embargo, coupled with US quantitative-easing tapering and China entering a slower growth phase, is aggravating fears over bond-market safety for EMs across Central and Eastern Europe.
Estonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia – affected by reduced capital and trade flows, links to Germany and in some cases domestic political upheaval – are all riskier.
Western Europe is still safer in comparison with 2013, but many countries have also seen their risk scores sag as question marks are raised over structural reforms with economies underperforming.
Larger EU sovereigns more vulnerable to existential threats from the Russian blockade, Middle East conflict and Ebola implications have seen their risk scores slip during the third quarter – among them Germany, France and the UK – whereas the hardest-hit defaulters, Cyprus, Greece, Ireland and Spain, pursuing restructuring programmes, have been spared the rout.
EM party is over
Russia has slipped further down ECR’s global rankings during the third quarter (to 71st), with its economic desperation and emerging fiscal problems attenuated by the trade war with Europe, and sliding oil prices affecting the risk profiles of many trading partner EMs.
Falls in industrial production and consumer spending, too, are warning of a return to a slow-growth era for EMs, not least with China – marked down heavily this quarter – now settling into a slower expansion phase, and possibly worse with bank credit pressures rising.
With rising US interest rates also factored in, many of the EMs offering huge and moderately safe returns potential for years now appear to be decidedly riskier options.
Among them are several of the Brics (Brazil, South Africa), Mints (Indonesia, Turkey, Nigeria) and a raft of other hot spots, including Malaysia, South Africa, Sri Lanka and Thailand, considered less safe thanks to a combination of downgraded economic growth profiles and domestic political problems.
“The main risks stem from a faster-than-expected [US] Fed tightening, with Indonesia still being relatively vulnerable within emerging Asia, or from an unorderly deleveraging from high debt levels in some countries,” says ABN Amro senior economist Arjen Van Dijkhuizen.
“Though, of course, as recent developments in, for instance, Thailand, Indonesia and Hong Kong have shown, political risks may cloud the outlook as well,” he adds.
Keenly watched frontier markets, ranging from the Bahamas, Bosnia Herzegovina and Barbados to Moldova, Mongolia and Montenegro, have similarly fallen down the pecking order.
Yet there are still some interesting, safer prospects to be found, with Mexico in particular bucking the trend, alongside smaller markets – FYR Macedonia, Paraguay, Trinidad and Tobago, and Vietnam.
G10 wobbles with France the biggest concern
More than half the G10 industrialized nations succumbed to increased risk during the third quarter, but only France has a lower score compared with the end of last year, with its missed fiscal targets and lack of economic recovery highlighting both competitiveness and political failings.
Germany (slipping one place in the global rankings to 11th), Switzerland (still second, only to Norway as the world’s safest) and the UK (20th) are among those countries affected more by the Russia-Ukraine crisis now harming trade and financial flows.
Italy and Japan, by contrast, are buttressing the trend, not because of their recent, rather weak economic performance, but more in terms of their potential as structural reforms proceed. The US, at a stronger phase of the economic cycle, is also holding up in 16th place.
Europe’s risks back in focus
The structural problems plaguing Finland, France and several other European countries have become a renewed focal point for risk experts. Germany’s poor growth performance in particular has highlighted the weaker trade in luxury and higher value-added capital and consumer goods, with China, Brazil and Russia, the large, globally-important economies either slowing or contracting.
A relatively robust recovery in Ireland and a more moderate one in Spain have seen their risk scores improve, while Portugal’s fragility contrastingly has seen its score slide in Q3.
Constantin Gurdgiev, adjunct professor at Trinity College Dublin, attributes rebounding growth in the majority of peripheral eurozone countries more to “the depth of the crisis period than structural reforms”.
In that context, it is the monetary easing both expected from and already deployed by the European Central Bank (ECB) influencing the assessment of risk. Gurdgiev adds: “The ECB has plenty of printing ink left, [but the] risks are rising, not abating, and multiplying in complexity.”
With China’s growth slipping and its political interference fuelling regional tensions, some of Asia’s key markets have invariably succumbed to increased risk (falling scores) this year.
Hong Kong’s demonstrations and their ramifications, for one, have seen China’s special administrative region slip. Malaysia is downgraded, too, while for various reasons – mostly politically related – Mongolia, Myanmar, Sri Lanka and Thailand have been marked down.
By contrast, Singapore and Japan – the latter in spite of its poorly performing economy of late – are offering contrasting safety, reflecting in Japan’s case the government’s legislative strengths and its landmark structural reforms.
Reality check for SSA issuers
The exuberance accompanying the raft of bond issuance from central and southern African borrowers these past few years has been halted by commodity price falls, heightening investor risks for the majority of the 45 sovereigns across the region.
Only a handful of mostly small markets are presently directly affected by the Ebola virus, but with its potential to spread, and many more sovereigns exposed to weaker minerals and soft commodity demand from China and the advanced industrialized nations, Africa’s prospects are dimming.
South Africa, Botswana, Namibia, Gabon and Nigeria – the five safest sovereigns in the region – have all seen their risk scores fall this year.
Others, including Ghana, Angola, Zambia, Tanzania and Senegal, have similarly slipped as experts question political stability, corruption, weak institutions and ultimately their ability to become self-financing if the rapid growth rates to secure development remain out of reach.
MENA faces familiar struggles
All of the Middle East and North African (MENA) countries bar Oman and the UAE have seen increased risk since June, in many cases furthering their longer-term declining score trends.
Political instability and internecine conflict heightened by the Shia-Sunni turmoil raging across Iraq, Libya, Syria and Yemen have led to these and other countries suffering from its consequences marked down heavily this year.
Bahrain and Israel, with their own troubles, are similarly lower, though as usual there is a clear distinction between the conflict-riven countries in the Middle East and the comparative safety offered by the wealthier, more stable Gulf states.
Across North Africa too, while all five sovereigns saw their scores dip during Q3, Morocco (73rd in the rankings) and Tunisia (78th) have higher risk scores in relation to last year, benefiting from their relative stability, better-functioning economies and fiscal reforms.
Brazil-Mexico trends highlight LatAm’s shifting kaleidoscope
With Latin America’s risk profile constantly shifting, Colombia, Peru and Paraguay have made ground this year, notably compared with Brazil, which is struggling to convince experts of the merits of its growth model.
Besides Argentina and Venezuela, the two prominent defaulters, LatAm’s largest country has seen its risk score decline more than any other.
Mexico, by contrast, although marked down slightly in Q3, has continued to find favour among risk experts in recent years. Ranking second in the region to Chile, the country’s image as an investment destination is much improved, particularly since its risk rating surpassed Brazil’s in 2013.
More than 400 economists and other experts from a range of financial and other institutions take part in Euromoney’s Country Risk Survey. They evaluate the risks faced by international investors in more than 180 markets, scoring countries across a range of political, economic and structural criteria. These are added to values for capital access, credit ratings and debt indicators, and aggregated each quarter to provide a total risk score.
To view the survey methodology, go to: www.euromoneycountryrisk.com.
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