How the world got more risky: Historical country risk ratings
A reveiw of 13 years of country risk, region by region. Emerging markets are now established as part of the fabric of international investment. But don't be fooled into thinking that the increased flow of investment follows a decline in risk. Research and analysis by Chloe Hayward.
Historical ratings (Subscriber only):
ALL INDIVIDUALS WORKING in global finance are in essence risk managers. You try to calculate the risks and weigh up the rewards. And surely over the past decade or more, as investment has flowed freely around the globe and information has become more readily available, the risks of investing have declined?
Well, no, if Euromoney's long-term monitoring of country risk is taken as the measure. We have analysed Euromoney's semi-annual country risk rankings, based on our evaluation of political and economic risk, from the introduction of the current methodology in 1993 to the present day. The results might surprise many readers. With the exception of central and eastern Europe, the country risk rankings show a general decline in scores over the past 12 years.
Euromoney calculated the percentage change in country risk ranking score of every nation involved in the survey since 1993. To show the progression over that period, we also produce analysis of the changes in score over three time periods: 1993 to 1995, 1996 to 2000 and 2001 to 2005.
On these figures, the Middle East, Africa and Asia are the least stable regions, with vastly shifting percentage changes – the majority in a negative direction. This contrasts strongly with the stability in western Europe. Scandinavian countries, particularly Sweden (ranked 5 in the September Country risk 2005 table), Norway (3) and Finland (7), have experienced the largest increases for this region. It should be noted that western Europe started our polling period from a low base, as it was just starting to emerge from the collapse of centralized government in the early 1990s when the current ranking system was introduced.
France (18) suffers the greatest percentage decrease in economic performance and political risk in western Europe during the period 1993 to 2005. Economist Maxine Koster of Credit Suisse First Boston suggests that the score deterioration reflects "a lack of progress on its structural issues, as well as a lack of willingness to deal with them. Unemployment remains very high, the government budget deficit has deteriorated and the country has gone from having a current account surplus to having a deficit."
In the Middle East, while large debt and minimal sector diversification throughout the region has had an impact, Koster attributes the general decline almost entirely to "increasing political tensions".
Every Middle Eastern country suffered from overall percentage declines and very few had a single period of improvement. Saudi Arabia (43), like other countries in the region, has substantial oil wealth creating opportunities. However, structural difficulties persist and hinder progress. Two countries, Iran (73) and Qatar (30), did experience percentage increases in the last period of 5.78% and 12.54% respectively, between 2000 and 2005. Since September 2004's country risk data the Tehran Stock Exchange is reported to be up 400% in terms of daily transactions, with Moody's awarding a positive B2 rating in 2000. It appears that investors and institutions alike are finally willing to take on Iranian risk – all vital steps towards growth and stability. Qatar's impressive political structure has led to the development of a substantial and respected financial centre, with Qatar National Bank at the forefront of recent investment. Further diversification and expansion of tertiary services, such as those seen in the United Arab Emirates (31), now seems the next inevitable step for development throughout this region.
Most African countries have also suffered substantial and continuing declines in economic performance and political risk. Many countries continue to fight against huge national debts, corrupt governments and natural disasters. However in the latest five-year period there are finally signs of improvement, with more countries experiencing increases in performance rather than decreases. Countries such as Côte d'Ivoire (171 in this year's ranking), Gabon (135), Cameroon (149) and Kenya (126) have all experienced substantial declines over the past decade, with the past five years posting declines of more than 20%. It seems the limiting factor for these countries is minimal economic diversification. In West Africa, a 30% fall in world cotton prices since the start of 2004 has resulted in countries including Benin (133), Burkina Faso (146), Mali (142) and Togo (163) needing help from the international community because of a lack of economic diversity.
In Latin America, political stability has improved while economic performance has declined over the whole 12-year span. However since 2000, with the exception of Argentina and Uruguay, economic improvements have occurred across the continent. Ecuador (116 this year, 2000-2005 = +41.53%) has restructured its debts. In Mexico (49) the banking system has been internationalized through foreign ownership. This, combined with improved supervision, has led to the development of a relatively stable macroeconomic environment. Following close behind Mexico are Brazil, Chile, Colombia, and Peru. The banking systems emerging from these countries bear little resemblance to the thinly capitalized, profit-challenged, purely local institutions of a decade or more ago. However, underlying political instability persists. Most countries in the region border on at least one corrupt, autocratic, coup-led state.
In Asia, countries with relatively stable political frameworks are starting to experience economic slowdown because of a decrease in demand in the industrialized nations and continuing oil price increases. The Asian Tiger nations of Taiwan (25), Singapore (19), Thailand (58), and Malaysia (47) have all experienced overall slowdowns in their economic performances. As new nations surge into an industrializing phase, particularly China (52) and India (59), the Tigers will need to respond by shifting from their investment-driven stage into an innovation-driven phase if their growth is to be maintained.
In central & eastern Europe, 17 of the 22 countries ranked have experienced absolute and sustained growth (illustrated by their positive percentage changes over the 12-year period). Current or future membership of the EU should help sustain this trend.
These trends indicate a new stage in global risk and finance. Rising oil prices and public debt are recognized as the most influential short-term to medium-term risk factors. Public debt structures for emerging markets will have a large impact on their progress over the next decade, with tax reforms playing an important role in Latin America. Other medium-term risk factors include the trade imbalances of developed nations. Several European nations are not far behind where the US has taken the lead, with ageing populations starting to pose serious budget concerns throughout the developed world. Housing price booms and huge personal debt are another threatening economic bubble for industrialized countries.
In developing nations the results of economic diversification and financial and corporate reform are all likely to strongly influence their progress, as well as have an impact on the success of poverty-reducing strategies that are being implemented.
Finally it must be noted that changes in risk percentages are vulnerable to error bands. Most deterioration seems to be concentrated in the developing countries, which, with recent increases in interest and information, might have received over-estimated scores in the past that are now subject to some mean reversion.