Country risk: Hungary, India and Thailand among EMs resilient to shocks


Jeremy Weltman
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As sovereigns from Brazil and China to Malaysia and Mexico bomb, the search is on for increased safety for emerging market (EM) investors.

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A combination of shocks ranging from the industrial slowdown in China to an imminent interest-rate rise from the US Federal Reserve is weighing heavily on many of the world’s EMs this year.

Economic growth prospects have taken a reality check, and Brazil, Russia, China and South Africa, four of the five Brics, have all seen their country-risk scores downgraded by experts in Euromoney’s country risk survey, which polls more than 400 economists and other experts for their risk-factor ratings.

China is one of the worst-performing countries in the survey this year.

“Looking into 2016, China will have to make the call of whether to let exports flounder or let the currency absorb the shock,” says Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis.

A substantial depreciation is unlikely, she believes, but if it were to happen “it would have significant consequences for the rest of emerging Asia”.

Meanwhile, Brazil has seen its score plummet more than any other sovereign and is a major reason for EMs under-performing:

Others in danger

Mexico, Indonesia and Turkey, comprising a large share of the Mint group, have also had their scores adjusted downwards by the risk experts since the start of the year.

South Korea and Malaysia, too, are among many others to have become riskier amid a net outflow of capital from EMs for the first time since 1988, which is weighing on currencies and equity prices.

These sovereign issuers might eventually rebound in 2016, aided partly by excess liquidity flowing from the European Central Bank’s quantitative-easing programme, but low global growth, weak commodity prices and a strong dollar are all warning signs, urging caution.

Many of the commodity producers are facing budget shortfalls, necessitating fiscal adjustments to avoid debt distress.

China’s growth is reasonable, but its economy is embarking on a structural shift towards services, as demand from advanced economies remains weak.

Indonesia and Malaysia in particular seem exposed among the Asian EMs.

“Both are highly dependent on commodity exports, and both of them have significant foreign participation in their domestic government bond markets,” says John Sharma, sovereign risk economist with National Australia Bank.

A whole swath of LatAm borrowers are at risk, too, from further falls in energy and metals prices and further deceleration in China, which is a low probability event, but one which is nevertheless a nagging concern for EM investors.

Not all EMs are riskier

However, there are many EMs already showing resilience to these risks.

Among the best 10 improvers in Euromoney’s risk survey, those countries which have seen the largest upgrades to their risk scores this year, are Hungary, India and Morocco:

Filtering the results to include only EMs with the most improvement this year, and which also have total risk scores totting up to more than half the 100 points allocated – and are therefore comparatively safer overall – turns up an interesting list:

For those investors with increased risk appetite, EMs with scores lower than 50/100, which are also improving in the survey, provide additional value:

Dominating nationalism

It is interesting to note the dominance of right-wing, nationalist-populist governments in the list of EMs scoring more than 50, and improving the most, notes M Nicolas J Firzli, who is director-general of the World Pensions Council.

“Thailand is even a military dictatorship, which has dissolved all political parties and trade unions and banned freedom of speech – not to mention its heavy-handed treatment of Muslim minorities in the south,” he says.

Two of ECR’s experts recently gave their views on Thailand, pointing to political stability and growth-enhancing factors, including infrastructure spending and tourism.

Why these countries succeed is an interesting question, and one that Firzli puts down to the pursuit of narrowly defined national interests aided by “smart central bankers … using actively the full range of monetary tools at their disposal”.

Leading the pack is Hungary, a prime example, which has climbed three places in the survey to 65th from 186 countries, and back into the third of ECR’s five tiered categories, commensurate with a credit rating of BB+ to A-, signalling the borrower is on the right path to an investment grade.

“The relative strong improvement of Hungary is not a big surprise to us,” says Philipp Mayer, country risk analyst with Erste Bank.

“If you abstract from the political risk, the data out of Hungary isn’t really bad even if one takes into account the growing state influence on the economy,” he says.

Mayer expects Hungary to regain its investment grade from at least one agency in 2016.

Beyond Hungary

“Income shocks have been the name of the game for emerging Asia in 2016,” believes Natixis’ Garcia-Herrero.

“But not everybody has suffered. India is the big winner, followed by Vietnam at a distance.”

India’s improvement, stemming from political stability and the more growth-oriented, business-friendly policymaking adopted by the present Modi-government, contrasts with the volatility in 2013 when it was classed as one of the fragile five.

India also has an improved FX position and current account.

Meanwhile, the Philippines is heading for elections next year with its score rising despite acute foreign-policy tensions regarding territorial claims in the South China Sea.

There is strong GDP growth, solid remittance income and low inflation, providing ample room to adjust policies, plus the public finances are under control with debt falling.

Few analysts believe a change of government in the Philippines will alter this as there is a strong consensus for infrastructure-led growth utilizing the public-private partnership model. There might even be moves to try to liberalize the economy more, which has always been one of the main drawbacks.

Meanwhile, Erste’s Mayer concurs with the improvement in Bulgaria’s risk score, noting that “CEE countries generally are relatively shielded compared to other EM regions from the risks which might come from China and the Fed”.

His views are certainly reflected in ECR data, showing every CEE borrower bar Croatia and FYR Macedonia becoming safer this year.

It has been a tumultuous year for EMs, but not all, making portfolio selection an important exercise.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.