ECR Survey Results Q1 2016: Heightened concern over Brazil, China and other EMs accentuates global shock prospects
Country risk scores for many of the large emerging markets (EMs) continued to fall in the first months of the year. Risk scores have now reached levels that do not preclude another global shock if China hits the skids.
The knock-on effects if China hits the skids will reverberate globally
The world’s most populous nation shed another half a point from its risk score total in Q1 2016, as Euromoney’s survey experts took account of the lower growth trajectory and structural reform risks perplexing Beijing’s policymakers and prompting another round of instability in financial assets.
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 186 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.
China’s gradually deteriorating investor safety is a concern for investors in both developed and emerging markets, especially since currency and fiscal adjustments are still affecting Nigeria, Russia, Saudi Arabia and other leading oil producers.
“China’s high and rising debt levels remain one of the key risk factors,” says Arjen van Dijkhuizen, senior economist at ABN Amro, adding this is “presenting a difficult balancing act between stabilizing growth and preserving financial stability, including the longer-term requirement for deleveraging”.
Commodity shock persists
Meanwhile, persistently low resource prices are hitting the world’s commodity producers hard.
Although some of the Gulf and other leading oil producers have substantial wealth funds to withstand temporary shocks, weakened growth and fiscal imbalances demand spending cuts.
Plus, the longer the crisis continues, the more it will put pegged exchange-rate regimes under pressure.
Economic and political risks, exacerbated by the tightening of US monetary policy still contributing to outflows of capital from EMs, have seen many of the world’s investor hotspots become even riskier since last year.
Philipp Mayer, country risk analyst at Erste Bank, believes “oil producers/exporters will be downgraded in 2016, although the relative starting position in terms of ratings is, of course, quite diverse”.
So far in 2016, 92 of the 186 countries surveyed by Euromoney have been downgraded by risk experts.
EM rout continues
Brazil, once seen as a prime bond prospect, growing rapidly, remains mired in recession in the wake of the commodity price falls; indeed, the economic collapse is worse than feared.
Brazil’s central bank is now predicting a 3.5% real-terms contraction for GDP this year, compared with just 1.9% previously. That follows a similar decline in 2015, which is pushing unemployment higher.
Shedding another 1.3 points from its total risk score, Brazil has slipped to 59th out of 186 countries surveyed in Euromoney’s country risk global rankings, below India, Turkey and the Philippines.
The political crisis enveloping president Dilma Rousseff’s government has, moreover, touched on not only the mesh of state-level and big-business corruption in Brazil, but also the wider problem of judicial independence.
Institutional risk belying other EMs tends to be overlooked when economies are expanding rapidly; it is one of six political risk factors regularly monitored by Euromoney’s experts.
South Africa, lying below Brazil in 63rd spot and also becoming riskier in Q1, provides another case in point.
The sovereign is now less than three points from falling into the fourth of ECR’s five tiered categories commensurate with a BB+ credit rating at best, which begs the question as to why South Africa is still clinging on to investment grade.
Other EMs on the slide include Azerbaijan, Kenya, Egypt, India, the Philippines and Turkey.
However, the biggest faller is Nigeria, where political tensions are rising as the oil shock and sliding naira weaken the economy and worsen the fiscal metrics.
On a score of just 38.3 from a maximum 100 points, Nigeria shed 3.1 points in Q1, slipping six places in the rankings to 90th.
Myriad factors weighing on G10 prospects
Risks experts are less than convinced about the safety of the advanced industrialized world, too, driven by the uncertain outlook for China and other large EMs dampening export trade.
Other key issues include the political uncertainties tied to the US elections this year, and the weak economy and policymaking troubles in Japan.
Risk scores are generally higher for advanced nations: Portugal, Slovenia and Spain are bouncing back in spite of their niggling difficulties; Bulgaria and Romania are still decent prospects, and Slovakia is in particularly good health.
Yet Europe’s prospects also hinge on the effects of the refugee crisis, terrorist threats, the ongoing saga surrounding Greece and the possibility of Brexit in June when UK voters decide in a referendum whether to remain a member state of the European Union.
Prospects for France are still deteriorating as they are for Finland in recession. They join Poland, Croatia, Macedonia and Hungary in incurring higher fiscal expenditures to cope with the asylum-seeker crisis.
Europe’s problems are compounded by the unresolved crisis in Ukraine, and the flaring of tensions in the Nagorno-Karabakh enclave undermining the risk profiles of Armenia and oil-producer Azerbaijan.
Kazakhstan, by contrast, rebounded in Q1 2016, but the general picture across the CIS region remains one of stagnation, with Russia’s and Ukraine’s fortunes still uncertain.
Asia’s prospects wavering
Numerous sovereign borrowers across Asia succumbed to increased risk perception in the first months of the year, mainly due to China’s fragility, but the picture is a nuanced one.
Among the countries downgraded were low-risk Singapore, Taiwan and Macau, and other higher-risk options, including Brunei, Cambodia, Sri Lanka and the Philippines.
The latter, reflecting uncertainty over a tight four-way race for the presidency on May 9, indicates how political choices can affect economic growth if promises for more infrastructure spending and the anti-corruption drive fall short of expectations.
Asia risk experts are, moreover, concerned by three issues: the possibility of Brexit causing ripple effects across the region; a stronger US dollar enticing capital outflow; and tensions in the South China Sea.
Risk experts have nevertheless shrugged off conflict-risk anxieties related to North Korea’s nuclear build-up, meaning South Korea was one of several countries becoming safer from an investor perspective in Q1.
Others are Malaysia (recently discussed by two Euromoney experts), Thailand and high-risk Myanmar, now benefiting not just from economic reforms but also political change.
Egypt sends Mena into another spin
Investor risks invariably increased again for Mena investors in Q1 2016, extending the region’s long-term score decline, as political instability, terrorism and warfare continued, and oil producers succumbed to lower growth profiles and fiscal vulnerabilities.
Bahrain is notably exposed, with its risk score falling below 50 out of 100 points in the survey for the first time.
With its tourism sector in decline, weakening the forex reserves and the trade balance, Egypt took a turn for the worse in Q1, alongside Morocco, while Libya, and inevitably Syria, succumbed to further downgrades.
Iran’s prospects improved, however, following elections that are signalling a positive, albeit gradual, improvement in foreign relations, which should bring an easing of trade sanctions and open up new business opportunities to support the economic recovery.
Argentina strikes back as LatAm wavers
The commodity price outlook impairing Brazil is casting a shadow over other parts of the region, affecting Chile, Ecuador, Mexico, Paraguay and Uruguay, but not Argentina – now making a comeback.
As Venezuela flounders, Argentina is making a new start under president Mauricio Macri with austerity policies ushered in to rectify the deficit and improve medium-term growth prospects.
Senate approval of a bill to resolve outstanding payments owed to the ‘holdout’ bondholders is enabling the sovereign to emerge from default and restart debt issuance.
It’s a long walk back for Argentina, but the sovereign has shown the biggest improvement in risk score worldwide so far this year, gaining 3.3 points and climbing 22 places in the rankings. It is now close to moving from tier five (highest default risk), to tier four.
Safety of sub-Saharan borrowers questioned
Alongside downgraded risk-profiles for the two largest economies in the region, Nigeria and South Africa, risk experts are also taking a dimmer view of prospects for other borrowers affected by either the commodity shock, political turmoil, conflict or restricted aid and lending programmes.
The region is also more exposed than most to meteorological disaster shocks.
Among the countries weakening in the survey so far this year are Kenya, Ghana and the Republic of the Congo; the latter in the wake of turmoil surrounding the disputed presidential elections.
Higher-risk Mozambique, Zambia and Cameroon are also downgraded, with only five of the region’s 46 sovereigns improving in Q1, according to Euromoney’s experts, led by Cote d’Ivoire enjoying the fruits of stability in the wake of peaceful elections.
With conflicting trends prevalent in all regions of the world, global investors as usual face considerable challenges selecting suitable risk-return portfolios.
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