ECR Survey Results Q2 2016: Global risk hits new high as Brexit adds to China and EM concerns


Jeremy Weltman
Published on:

The UK’s decision to withdraw from the EU has opened a Pandora’s box for global investors at a time when commodity prices are depressed, sovereign bond yields are sinking to new lows and prospects are still dimming for many emerging markets (EMs).

Hidden agenda: But countries’ decisions have had a huge domino effect in H1 2016

The UK’s risk score has fallen in concert with its credit ratings as experts weigh up the implications of the shock June 23 referendum result.

Although Brexit might provide longer-term advantages, the political fallout, uncertainty over future trade relations and Scottish independence, plus the impact on financial services and real estate, have sent Europe’s hitherto improving risk outlook into a spin.

ECR expert Johan Krijgsman says: “Brexit is a crisis for the UK, but it is also one for the EU.

“At a mundane level, the EU budget must find €7 billion. More importantly, Germany loses an ally favouring freer market conditions, and deeper economic and political integration is likely no longer on the table.”

Another survey contributor, Christian Richter, says: “Nobody knows at this point in time for how long this uncertainty will last. Likewise, an economic recovery is unlikely.”

The UK is one of several EU member states to become riskier with economic and financial market stability in doubt, as risk aversion piling pressure on bond yields creates a rush for gold and other safer assets.


Clamour for the Swiss franc as a safe haven is undermining economic growth prospects and means Switzerland’s score – counter-intuitively – has fallen sharply. Relations with the EU are now even more uncertain following the 2014 Swiss referendum coming out against mass immigration, a binding plebiscite that must be implemented by February but is complicated by a bilateral protocol establishing the free movement of labour.

Risk scores for France, Finland, Italy and the Netherlands have all fallen as the Brexit outcome raises the prospect of similar referendums taking place eventually, as high unemployment and unending austerity fuel the rise of the Eurosceptic, populist-right.

Investor safety in Belgium, Luxembourg, Cyprus, Ireland, Hungary and Poland has taken a hit, but not in Germany, or indeed Spain where political risk is calming and the economy booming, fuelled by tourism.

Neither is it a problem in all countries across Eastern Europe, as Bulgaria, Romania, Slovakia and Slovenia’s improving fortunes attest.

Record number of downgrades

This year has already seen a record number of sovereign rating downgrades: 14 by Fitch, 16 by Standard & Poor’s and 24 by Moody’s, highlighting waning creditworthiness across the globe. Euromoney’s survey merely suggests there are more rating actions in the offing.

The survey has a longstanding favourable track record of predicting credit rating actions as experts’ views change quickly, pre-empting the rating agencies’ announcements.

The views of more than 400 economists and other experts from a range of financial and other institutions are collated, evaluating the risks faced by international investors in 186 markets, scoring across a range of political, economic and structural criteria.

These scores are added to values for capital access, credit ratings and debt indicators, and are aggregated each quarter to provide a total risk score.

Wide-ranging problems

The rise in investor risk is a broadly worldwide phenomenon, which might become worse with Europe’s outlook uncertain, China’s worries lurking in the background and the US elections pending.

Only two countries in the G10 are considered safer this year than last: Canada and Sweden. The US, Japan and most other countries are marked down.

In all, no fewer than 97 of the 186 countries surveyed by Euromoney have been downgraded by risk experts so far this year, with capital access tightening for 62 sovereign borrowers.

Political risk has increased for 88 countries and is spreading from less developed countries to the more advanced, industrialized world.

The average country risk score has fallen to 42.7 out of a maximum 100 points, remaining well below 50 points since the global financial crisis struck in 2007/08.


Referendums in Hungary (on EU refugee quotas) and notably in Italy (on constitutional reform) are huge risks coming down the line this year, say Citi economists taking part in Euromoney’s survey, illustrating how political issues are complicating portfolio selection as much as economic or structural indicators.

EMs offer little sanctuary

With commodity prices in retreat, putting currencies under pressure, many of the world’s EMs have succumbed to increased risk this year.

The resource slump, combined with persistent, devastating drought conditions, institutional failings and donor fatigue mean Africa’s problems particularly have magnified.

Nigeria, Mozambique, Kenya and South Africa are among the numerous sub-Saharan countries downgraded this year as fiscal problems arise from worsening export earnings and mounting liabilities, with the positive impact of multilateral debt forgiveness a decade ago beginning to fade.

Brexit is even revitalizing the Biafra state secessionist movement in Nigeria, a sign of how ‘people-power’ around the world is on the rise.

South Africa’s fortunes, meanwhile, hang in the balance as the economy plunges headlong into recession, magnified by risk aversion linked to policy errors aggravating social instability, suggesting it might not avoid a credit rating downgrade for too long.

Gulf oil producers Bahrain, Saudi Arabia and Oman are facing huge fiscal crises with oil prices still languishing around the $50/barrel mark, and similarly Azerbaijan, forcing governments to scale up diversification strategies and execute painful public spending cuts.

Brazil, careering downwards just like South Africa, exemplifies the riskier profile of formerly eye-catching growth markets.

More than 70% of respondents to a Euromoney Country Risk poll believe Brazil will require a financial support programme from the IMF, most likely in 2017. It’s a far cry from the days of Brics and Mints offering tantalizing bond returns.

Turkey, Mexico, Egypt and Uruguay are all riskier, Russia and Ukraine still low-scoring, despite a modest rebound this year, and Venezuela’s descent into economic chaos raises an altogether different prospect of outright default.


Brexit compounds China factor

Some 60% of Asian borrowers are riskier in Euromoney’s survey this year as the region grapples with the fallout from Europe’s downgraded economic outlook, a stronger dollar causing capital constraints, and uncertainty over China’s smooth transformation to a consumer-driven economy without incurring shocks.

China’s risk score has fallen by half a point, and is down by more than five points in the survey since 2010.

The economy is still performing admirably, but concerns persist as GDP growth decelerates, corporate earnings decline, bank lending tightens and increased leverage among state-owned enterprises and households takes place in the context of a real-estate bubble portending a possible future shock.

Rising tensions in the South China Sea are making investors doubly nervous, but a nuanced picture is emerging across the region depending on the particular economic and political characteristics of the country concerned.

Taiwan, Japan, Macau, Vietnam and Cambodia are all downgraded. India and Bangladesh, also, and the Philippines is another in decline, where the election of new president Rodrigo Duterte suggests his pro-business agenda will be overshadowed by potential instability and foreign-policy issues stemming from controversial social policies including support for extra-judicial killings.

Yet Hong Kong, Indonesia, Malaysia, South Korea and Thailand are all showing some resilience to the prevailing trend, proving the region is far from a one-way bet.

ABN Amro’s senior economist Arjen van Dijkhuizen acknowledges the possibility of an adverse scenario for EMs stemming from Brexit, but expects only limited fallout, stating: “Asia will be barely hit, given weak trade links and room for [policy] support.”

LatAm’s bright spots few and far between

With the Brazilian shock pointing to weaker trade in the region, and some countries succumbing to domestic political shocks and structural constraints, risk scores for the majority of Latin American borrowers have fallen this year.

They include Chile, but not Peru, where major expansion in copper-producing capacity and a pro-market, reform-minded new president are underpinning creditworthiness.

Argentina’s re-emergence, meanwhile, continues. The sovereign has gained more than four points this year, climbing out of tier five (containing the world’s worst default risks), back into tier four. That’s a rise of 26 places in Euromoney’s global rankings, more than any other country surveyed. Only Liberia (climbing 11 places) and Albania (nine) come close.

MENA favours the brave

The vast majority of countries across the Middle East and North Africa (MENA) region have become even riskier as regional conflagration, terrorism and political instabilities mix with an uncertain economic outlook linked to depressed commodity prices and the reluctance of donors and creditors to commit loans and aid.

With the Gulf picture darkening, and prospects for Egypt, Libya, Syria and Yemen undermined by warring factions, and a floundering tourism industry, investor attentions are turning towards Iraq, and notably Iran where foreign investments are soaring since the easing of sanctions.

Investors require strong hearts and clear minds, but where traditional prospects are in decline, other opportunities clearly exist.

To view the methodology and follow the changing risk trends more closely in the coming months, go to:

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

To find out more about expert risk ratings on the Euromoney Country Risk platform, register for a trial