ECR Survey Results Q2 2015: In search of safe havens with Greece on the brink


Jeremy Weltman
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The latest quarterly round-up from Euromoney’s crowd-sourcing country risk survey – a unique poll of more than 440 expert participants – shows no fewer than 80 of the world’s 186 sovereigns becoming riskier during the first half of 2015.

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As the risk of a eurozone exit and payments default heightens in Athens, economists ponder China’s wobbles, the Russia/Ukraine crisis and potential safe havens.

Greece is second only to Burundi as the worst performing of all, shedding 2.5 points to push the troubled borrower on to a score of just 31.3 out of 100, and down to 126th in the global rankings, synonymous with the heightened risk of default.

Greece is now ranked 126th alongside the lowest income Sub-Saharan economies.

Greek-based survey contributor Panayotis Gavras, who is head of policy and strategy at Black Sea Trade and Development Bank, merely confirms the worst expectations coming out of Greece, stating bluntly: “Economic activity has more or less come to a halt.”

However, investors looking for safer alternatives are faced with some troubling options.

Heightened risks

Many of the large emerging markets (EMs) worldwide have become riskier, not just because of the flaring up of the Greek debt problem, but also renewed market pressure in China, where a financial crisis is threatened, and other difficulties including the developments in Puerto Rico.

The prospect of a rise in US interest rates in the second half of this year, moreover, is still focusing attentions on the twin deficits problem afflicting many of the potentially high returns, but also high-risk issuers – underlining the dependency of EMs on foreign capital to finance these fiscal and current-account imbalances.

Brazil, China, Indonesia, Mexico and South Africa, for various reasons, are all downgraded in Euromoney’s survey this year thanks to a combination of falling scores for political, economic and structural risks.

Euromoney’s survey contributors are asked to regularly evaluate 15 indicators, which are then added to values for capital access, credit ratings and debt indicators to provide a measure of risk, a total score adding up to 100 where a higher value indicates greater safety.

Tip-toeing across Europe

Russia, too, in the light of western sanctions, the negative oil shock, its currency difficulties and aversion to structural reforms, has sunk further into the mire, down to 74th in the rankings.

The borrower remains a tier-four (high-risk) sovereign – compared with a tier-five brink-defaulter such as Greece and Ukraine – supported by its fiscal buffers, but with the economy now in a disconcerting decline.

Many industrialized economies more exposed to banking-sector or fiscal frailties, such as Austria, Belgium and France, have been marked down to a lesser or greater degree.

Experts are also now questioning Switzerland’s prime safety with the currency exposed since the decision earlier this year to decouple the franc from the euro.

Similarly, Norway, the world’s safest sovereign, has succumbed to a downgraded score as the oil price decline necessitates offshore investment cuts, unemployment is gradually rising and personal debt reaches unpalatable levels.

In its case, the huge sovereign wealth fund is sufficient to withstand substantial shocks. Indeed, Norway, Sweden and much of the G10 – including the US, UK, Germany and the Netherlands – are considered safe-haven fixed-income assets compared with other parts of the world.

Global ripples

Many oil producers, ranging from Angola and Gabon to some of the Gulf states, have seen their risks rise as fiscal adjustments are made, despite oil prices partially rebounding from their January lows.

Academic António Francisco, an associate professor at the IESE, a university in Mozambique, commented to Euromoney: “In the case of Angola, Nigeria, Russia, Venezuela and others, there is potential for political and social tensions to increase rapidly.”

Oil exporters across the Middle East and North Africa (MENA) region – Iraq, Libya, Syria and Yemen – remain extremely risky, of course, as internecine conflicts flare up with the spread of ISIS.

There are many smaller, potentially high-returns options where the risks are similarly attenuated. They include parts of the Caribbean (including Barbados) and almost all of the CIS, with the notable exception of Azerbaijan, one of several countries less exposed and enjoying improved capital-market access.

Much of Central and South America has become riskier, and the South Pacific region, too, including Papua New Guinea where a political crisis is brewing and macro-fiscal metrics are a problem in spite of the expansion of the liquefied natural gas industry.

On the rise

The survey, nonetheless, shows many countries with improving risk scores. Top of the list is Cape Verde, benefiting from political stability and decent tourism. It has gained 3.5 points this year, but remains a very high-risk option.

Bosnia-Herzegovina and Mozambique have also improved, but similarly have low total risk scores.

Euromoney has therefore compiled the top-10 improving sovereigns in the survey data with the highest total scores:

Estonia, Malta and Slovenia in the list might seem counter-intuitive, given heightened eurozone risk, but are viewed as more resilient to the dangers posed by possible financial-sector vulnerabilities and the problems in Russia and Ukraine.

Israel’s political uncertainties have been alleviated with the elections now over. Amid the ongoing regional tensions and a slim parliamentary majority for the governing coalition, stronger growth is returning with natural gas exploitation underpinning the country’s credentials.

Italy and Portugal, too, are both gradually improving again as reforms bolster their macro-fiscal profiles, although care is warranted as it might be more a case of “a delayed reversion to the mean average”, says adjunct professor at Trinity College Dublin Constantin Gurdgiev; in other words the risks had been over-played to an extent and the moves are a natural correction.

Another is Botswana, now the safest borrower in sub-Saharan Africa (SSA), the survey suggests, benefiting from its comparatively strong institutions, political stability and decent economic record.

Namibia also makes the grade, underpinned by the pro-business agenda of the new president and hitherto prime minister Hage Geingob contributing to broad-based economic growth.

Romania, in conjunction with Hungary bubbling just below the top 10, is another on the rise partly through economic, but also its structural risks, easing.

They are two sovereigns with risk scores also underpinned by better capital access – another is Egypt, which is climbing back, but remains a high-risk investment.

Across MENA, Qatar is still the safest option, but Jordan is improving. “Its Eurobonds are a particular case in that they are guaranteed by the United States,” says Byblos Bank chief economist and survey contributor Nassib Ghobril.

India, a stronger Bric in Asia

India, meanwhile, is rapidly closing the gap to Brazil, only six places higher in the global rankings.

The world’s second most-populous country and its largest democracy has gained almost a point this year, and is two points better off since Q2 2014, prompting ABN Amro senior economist Arjen Van Dijkhuizen to question whether the country is now the jewel in the crown again.

Although India lags China in terms of its economic development, and is vulnerable to shifting market sentiment, its growth is expected to be stronger than China’s, and its external risks have eased. This highlights its “catch-up potential”, says Van Dijkhuizen, if reforms proceed.

Asia is otherwise a veritable mix, with Hong Kong, Japan and South Korea all becoming a little riskier this year – although all three are still among the safer options in the region.

Confidence in Thailand is still lacking with the junta in control and economic recovery under-performing, and hopes for improvement in Cambodia, MyanmarSri Lanka and Vietnam have all faded for varying reasons, flagging warning signs of the risks involved in under-developed markets.

However, some of Asia’s borrowers are bucking the trend, notably Malaysia, which is “running a current-account surplus of around 3% of GDP and, as such, is less exposed to any potential fallout from an expected Fed rate hike”, says survey contributor and sovereign risk economist at National Australia Bank John Sharma.

Malaysia scores more favourably than Indonesia in terms of bank and currency stability, for government payments, corruption, transparency, institutions and its regulatory environment.

LatAm offers diminishing pockets of safety

While the US becomes safer, countries south of the border have become generally more risky this year as oil and other commodity prices have increased investor risk.

Argentina and Venezuela’s long-term decline is now legendary.

However, in addition to Brazil, Chile and Mexico, there are others, such as Peru, Costa Rica, Bolivia, Guatemala, Ecuador and more, which have been downgraded.

Colombia too has slipped a little, but much less so, benefiting from a solid business environment and progress on a peace deal with Farc rebels.

The sovereign has climbed above Mexico into 39th spot on the global scale, to become the second-highest scoring country in the region, even if it is still some way off top tier-two sovereign Chile in 15th position.

Difficult choices on the African continent

African borrowers facing the usual mix of political risk, in some cases conflict and aid dependency, are also split along oil export and import lines, in addition to the other commodities mined across the region.

Nigeria’s score has stabilized, despite suffering the blow from lower oil prices as elections-related uncertainties have settled down. The sovereign is, nevertheless, still languishing on just 40 points from a possible 100, emphasizing the challenges facing new president Muhammadu Buhari.

They include foreign-exchange controls, an extensive system of patronage, fuel rationing and the threats posed by the Boko Haram insurgency, all focusing investors’ minds.

Only 11 of SSA’s 46 nations succumbed to heightened risk during H1 2015, but among them was South Africa still providing a bumpy ride for investors, plunging 1.8 points in response to weakened economic growth and high unemployment, with the risk of strikes, and problems in the power supply industry affecting the macro-fiscal metrics.

Moreover, it should be remembered SSA has more higher-risk options than any other region, with the vast majority of borrowers scoring well below half the 100 risk points available – which is also a salutary reminder of the inherent dangers of global fixed-income investing.

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:

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