ECR Survey Results Q4 2015: China, Brazil and South Africa lead EM credit rout
Political instability, falling commodity prices, central-bank policy uncertainties and conflict were the principal negative risk factors for investors to contemplate at the turn of the year, as China’s troubles were brought into focus by another round of financial volatility.
Brazil and Saudi Arabia endured the biggest falls in their total risk score among the 186 countries included in Euromoney’s survey of risk experts in 2015.
They, like many others, were affected by commodity price turmoil, and in Brazil’s case compounded by political instability linked to an evolving corruption crisis. Saudi Arabia’s fall, meanwhile, made its credit rating questionable.
In total, 73 countries’ scores fell – indicating they had become riskier – compared with 2014. Many extended their declines in Q4 as the US Fed’s tightening of monetary policy and the uncertainty surrounding G7 central bank policies prompted more capital outflow from emerging markets (EMs).
Some $270 billion-worth of capital outflows in Q4 alone highlighted the biggest exodus from EMs since the 2008 global financial crisis, almost 60% of which fled from Chinese assets.
With China encountering difficulties in managing the transition from an industrial powerhouse to a consumer-driven economy, and its real-estate market downturn putting the steel sector in a spin, invariably the slide in Chinese demand for raw materials increased the risks of investing in copper producers Chile, Peru and Zambia, as well as other commodity-rich sovereigns.
Angola, Bahrain, Kuwait, Mexico, Oman and Qatar also endured large falls in risk scores last year as they came to terms with the fiscal impairment caused by depressed oil-export prices, putting currencies under pressure and complicating public spending.
Oil prices fell consistently throughout 2015, sliding to less than $40/barrel at year-end compared with a peak of $115/barrel in June 2014 – with no sign of imminent recovery in the wake of further falls early on in the new year.
Norway, consistently the highest-scoring, safest country in the world in Euromoney’s survey since the global financial crisis of 2008, fell to second in the global rankings, behind top-ranking Switzerland, as oil-sector investment cuts undermined GDP growth, weakened the fiscal and current-account surpluses, and pushed unemployment higher.
Finland and Russia, both battling against recession, endured lower scores last year.
Invariably there were falling scores, too, for Libya, Syria and Yemen as internecine conflict continued in the Middle East.
Meanwhile, South Africa and Turkey were among those countries marred by political instabilities, weak institutions and/or foreign-policy risks downgraded by economists and other risk experts taking part in the survey.
G10 and Europe back in vogue
Risk scores contrastingly improved for the majority of the advanced, industrialized nations in 2015, including the US, Japan, Italy and UK, as investors sought out safe havens amid the turmoil affecting EMs.
The rise of anti-austerity parties, the refugee crisis and Greek tail-risks remain notable problems facing Europe, but economies are growing and fiscal problems slowly easing.
A recent Euromoney end-of-year survey indicates the region is overcoming traditional concerns, such as the lack of business investment, the failure to reform and bad debts. Country risk scores are now rising as a result.
Cyprus, Iceland, Ireland, Portugal and Slovenia, which were all in debt distress in the wake of the financial crisis in 2008, made partial recoveries in 2015.
It wasn’t all plain-sailing though. Poland and Spain were marked down by political risks tied to elections.
However, Hungary chalked-up the biggest improvement of all the European countries surveyed, gaining 5.9 points and climbing 11 places in the global rankings – helped along by improving capital access, which led Euromoney to reiterate the borrower’s credentials for investment grade.
Bulgaria, Romania, the Czech Republic and Slovakia also improved.
Mixed bag for Asia
The slowing Chinese economy and the stronger dollar emerged as risks to trade and capital flows across Asia, along with other threats posed by the flaring of South China Sea tensions and North Korean provocation.
Taiwan, South Korea and Mongolia endured lower risk scores, and China slipped three places in the global rankings to 41st, further behind Malaysia while barely remaining higher than a resurgent Italy.
Johns Hopkins University economist Steve Hanke, a contributor to the Euromoney survey who has extensive public-policy experience as an adviser on EM currencies, says: “China has chosen instability by experimenting with different exchange-rate regimes.”
ABN Amro’s Arjen van Dijkhuizen, another survey contributor, believes the change and uncertainty associated with China’s FX policy is unnerving the financial markets, but the “economy is experiencing a soft landing, which is expected to be bumpy, but not a hard one”.
The vast majority of countries in the region, with political stability and decent growth prospects, were unaffected by China’s concerns.
India, too, stood out among the Brics with a higher score and a two-place rise in the global rankings to 56th, based on its superior economic growth trajectory compared with China.
Darkening skies over LatAm
The troubles in Brazil and global commodity markets reverberated around Latin America in 2015, dragging down four of the five safest countries in the region – Chile, Mexico, Colombia and Peru, but not Uruguay, which withstood the rout.
Venezuela’s heightened default risk remained largely the same, but Argentina showed the first signs of bouncing back after an election that saw Cristina Fernández de Kirchner ousted and her presidential replacement Mauricio Macri promising reforms to restore fiscal-macro stability.
Economist Gabriela Nudel, one of Euromoney’s survey contributors at the Buenos Aires consultancy Fundación Capital, believes time is at a premium for Argentina.
However, she expects “a faster recalibration of the economy, supported by a comprehensive economic programme, a reunification of the FX market and, if feasible, some debt issuance in financial markets”.
Oil conflict weighs on Mena
The difficulties continued for several countries across the Middle East and North African region as the combination of declining oil prices and conflict-driven instability weakened fiscal-macro indicators.
Many of the Gulf producers are able to withstand a temporary oil shock, but as the crisis dragged on many were facing the consequences of mounting pressures on dollar peg exchange rates and unavoidable fiscal adjustments.
Nevertheless, prospects improved in Egypt, Israel, Jordan and Morocco thanks to their comparative stability, falling import costs and more diversified export base.
Commodity crisis splits SSA
Africa’s prospects were dealt a blow by the commodity price falls, putting local currencies under pressure, weakening fiscal and external balances, and undermining growth prospects.
The region is facing climate-related disasters as drought spreads, while political risks highlighted South Africa’s frailties, sending the rand into a tailspin and junk status closer, alongside growing concern for Angola, Ghana and Zambia.
Nonetheless, many of the region’s sovereign issuers ended the year safer than they began it owing to political stability, improved capital access, solid support from creditors and donors, and because some are net importers of raw commodities, benefiting from the terms-of-trade shock.
Botswana – the safest credit in sub-Saharan Africa – Cote d’Ivoire, Kenya, Namibia and Senegal were among the countries with higher risk scores last year.
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.
For further information on ECR and its methodology click here.
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