ECR Survey Results Q4 2014: Negative oil shock creates new threats


Jeremy Weltman
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With falling oil prices sending the currencies of hydrocarbons producers tumbling, amid political instability, conflict risk and weak, unbalanced economies persisting, almost half the world’s sovereigns endured higher risk in 2014.

Libya and Russia witnessed the biggest falls in their survey scores (indicating higher risk) in their total risk scores, underlining the conjoined effects of negative politics and conflict with falling oil prices.

Lower risk scores for Argentina, Venezuela, Ukraine and other high-risk countries underlined the potential for payment difficulties and outright default for global bond investors.

Emerging markets affected by capital constraints with the US tapering its quantitative easing programme performed, questionably depending on their economic strengths, giving rise to renewed investor uncertainty in some (but not all) Brics, Mints and frontier markets.

In addition to falling ECR scores for oil producers, ranging from Nigeria and Kazakhstan to virtually the entire Gulf region, economists and other risk experts raised doubts over some of the larger EMs with fiscal and external imbalances and domestic political problems.

Among them were Pakistan, South Africa, Thailand and Turkey, all of which saw their scores downgraded in 2014.

The double whammy of a poorly performing eurozone and a huge Russian market in decline invariably saw vast tracts of central and eastern Europe succumb to increased risk.

Albania, Bulgaria, Estonia, Hungary, Slovakia and Slovenia were all perceived to be less secure compared with 2013 by the 400-plus economists and other experts taking part in Euromoney’s survey.

Their assessments of a range of risk parameters were added to credit ratings and debt indicators to yield a total risk score, where a rising value denotes increased safety.

Countries linked to Russia, such as Azerbaijan and Belarus, were similarly affected. However, the advanced industrialised world became safer, with improving economic prospects in the US and UK aiding their gradual fiscal improvement.

Norway remained the safest credit in 2014, topping Euromoney’s global rankings again in spite of the hit from falling oil prices. The Nordic nation’s $830 billion sovereign wealth fund and its very strong fiscal and external balances have built up a useful firewall to withstand the shock.

China, India and South Korea were upgraded last year. Australia held its ground and Mexico improved (distinguishing it from struggling Brazil). Morocco and Tunisia resisted the Middle East and north Africa regional instability risks, alongside Egypt staging a comeback.

The eurozone began to bounce back, too, spurred by the recoveries in Ireland and Spain.

However, a cloud of uncertainty was still hanging over the eurozone’s prospects by year-end, with risk experts harbouring doubts over the political and policymaking framework in France, which, like others in the region, is still struggling to combat stagnation.

Greece ended the year in tier 5 – the lowest of ECR’s categories and that contains the highest risk defaulters – having been thrust back under the spotlight for 2015 with early elections looming.

Negative oil shock compounds Russia crisis

The year began with experts questioning safety in emerging markets affected by US QE tapering, then saw the Russia-Ukraine crisis predominate and ended with the negative oil shock and a possible Greek exit from the eurozone.

Although lower oil prices are a boon to energy importers, ECR experts from BBVA led by emerging-markets chief economist Alicia Garcia-Herrero note the risks to Russia’s finances and “in terms of the economic and security situation in some Middle East countries.”

“Beyond economic deterioration, revenues to contain ‘social pressures’ will be reduced,” they argue.

Russia and Ukraine were among the worst performers in the survey last year. Russia plummeted to its lowest risk score since 1998, although EM prospects generally were rather mixed.

The survey experts downgraded the world’s oil producers in light of the worsening fiscal and current account picture, which in Algeria’s case has already seen a large shift from surplus to deficit in the latter variable.

Contrastingly some of the EMs were deemed safer, among them Kenya, South Korea, Vietnam and notably Egypt hauling itself back from the Arab Spring crisis with its external balance improving as tourism and other inflows revived.

Large EMs, including China and India, saw their scores upgraded on the back of stable political and economic prospects. India has benefited from soaring confidence in the new government led by Narendra Modi and an improved current account alleviating pressure on the rupee.

China’s score remained depressed, however, compared with mid-2014, which hints at uncertainty over the country’s economic direction, with slower growth, deflation and banking sector frailties in the background.

Deflation and Grexit fears loom large over Europe

Eurozone countries saw some improvement to their risk scores last year, though it was mostly among a handful of debt-distressed sovereigns (Cyprus, Ireland, Portugal and Spain) all benefiting from fiscal adjustment programmes delivering positive sustained growth rates for the first time since their crises erupted.

However, the picture was clouded by the effects of the Russian trade embargo undermining exports, high unemployment pinpointing structural problems to be resolved, and lingering political factors highlighted by the early elections in Greece and the prospect of an anti-bailout government being returned that could spell renewed tensions with Brussels and another bout of instability.

Falling oil prices should support recoveries in domestic demand across the region, but risk scores remain hugely depressed compared to levels in 2010, with the onset of deflation complicating debt reduction and potentially deterring household and corporate capital spending.

Moreover, even before the latest terrorist atrocities, France was struggling to convince experts of its merits and was further downgraded last year – the only G10 country with a lower score by year-end.

Norbert Gaillard, an independent consultant, noted three main problems for France last year: “Uncertainty surrounding the 2017 presidential elections” because of the National Front’s rise; “the persistent decline in competitiveness”; and the government’s “incapacity to launch reforms to lower pensions, improve labour-market flexibility and cut the number of civil servants”.

Oil shock compounds Mena’s conflict-riven instability

Most of the Middle East and North African region succumbed to increased risk as familiar conflict-driven instability combined with the onset of falling oil prices during the second half of the year to undermine oil producers’ strong budget and current-account surpluses.

Although enormous sovereign wealth ensures that many Gulf producers can survive temporary falls in hydrocarbons prices, the speed and magnitude of the oil shock caused lower risk scores for Algeria, Kuwait, Oman, Qatar and Saudi Arabia.

James Reeve, deputy chief economist with Samba Financial Group, argues that “unlike a developed economy, which can run-up huge fiscal deficits and debt, Saudi Arabia is a relatively undiversified economy and is hostage to the oil price.”

Israel, Jordan, Lebanon and Iraq were also marked down in 2014, affected by Syria’s ongoing civil conflict and their own domestic political pressures.

Yet not all the region’s sovereigns plunged.

Morocco and Tunisia withstood the regional trend, benefiting from improved diplomacy with the west and some economic improvement. Iran, too, saw some improvement, predominantly by reporting its debt figures for the first time, and Egypt came back on to the radar – rebounding in the survey for the first time since the Arab Spring uprising.

Asia’s prospects marred by political risk

Although fears over China subsided somewhat during Q4, civil protests in Hong Kong, political uncertainty in Japan and Sri Lanka, and the impact of democracy stalling in Thailand continued to weigh on Asia’s investor profile.

Frontier markets, such as Macau, Mauritius and Mongolia, also endured lower risk scores, but not Vietnam, which emerged strengthened from rising South China Sea tensions as attacks on Chinese-owned commercial interests eased.

India, Indonesia, Myanmar, South Korea and the Philippines were better off on the survey at the end of 2014 than at the beginning of the year, highlighting a mixed outlook for the region.

LatAm’s mixed fortunes continue

A similarly varied picture emerged across Latin America where Argentina and Venezuela’s problems kept both countries rooted in tier 5.

Copper producers Chile and Peru struggled to convince experts because of question marks hanging over China’s thirst for commodities affecting market prices, while Brazil flat-lined as elections, a weakened economy and debt financing concerns prevailed.

Other countries in the region, however, performed creditably in 2014, notably Bolivia, Colombia and Paraguay, where comparative political stability and economic reforms spurred interest among EM investors.

Mexico also maintained its trend improvement, testifying to the consensus-driven reforms under president Enrique Peña Nieto, and its solid growth prospects benefiting from Nafta integration.

African enthusiasm dampened

Commodity price falls, coupled with constraints on creditor loans and aid, have reminded African investors of the dangers of complacency following a raft of successful bond listings in recent years seemingly pointing to one-sided upside potential for a region delivering strong economic growth.

Several countries succumbed to the increased risk emanating from the resentment among local populations for dynastical autocratic rule, which saw Burkina Faso heavily downgraded in the wake of instability and in the Gambia a military coup spring up.

In fact more than half of the region’s 46 countries endured increased risk in 2014, including Angola, Gabon, Namibia, Nigeria and South Africa, many of them hitherto the continent’s safest borrowers.

Botswana and Kenya, both net oil importers, proved exceptions to the rule, benefiting from their stronger economic position; Botswana now runs a current account surplus.

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.

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