ECR survey results Q2 2017: Russia, India, rest of Asia back on radar; Portugal most improved


Jeremy Weltman
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Euromoney’s latest Country Risk Survey shows a gradual rebalancing of risk scores this year, as the aftershocks of the global banking and sovereign debt crises wear off, political risks tied to the European electoral cycle fade, and capital access improves for EMs.

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In total, 80 of the 186 countries surveyed by Euromoney have been downgraded for the year so far, but 79 are upgraded with the remainder unchanged.

Leading the improvement is Portugal, gaining almost four points this year, and climbing nine places in Euromoney’s global risk rankings, with the economy recovering smartly.

The average global risk score for 186 countries in the survey has fallen slightly to its lowest level since Q3 2014, but generally investor risk has stabilised since the global financial turmoil in 2007/08 and the sovereign debt crisis of 2010.

The rebalancing of country risk scores reflects a ‘broad brush’ tightening of sovereign CDS spreads, and signals a very gradual shift in favour of credit rating upgrades rather than downgrades.

This year has seen improved risk scores for emerging markets (EMs) attracting $18 billion of capital inflows in June according to the Institute of International Finance, most notably in Asia.

However, debt problems and political instability have seen worsening scores for countries in Latin America and the Caribbean. Jamaica has fallen 11 places in the risk rankings this year, second only to Suriname. Barbados, St. Lucia, and Trinidad and Tobago are other large fallers.

There are worsening average scores for the Middle East and North Africa, Central and Eastern Europe, and in Sub-Saharan Africa where economies weakened by the commodity crunch are posing increased default risk (as the experience of Mozambique highlights).


Typically, the global picture is varied, with low oil prices, inter-state conflict, and domestic political upheaval among the many factors affecting sovereign borrowers, bank stability, currency volatility and debt-dynamics influencing yields.

Elections in Germany and Italy are tail-risk events for Europe, US president Donald Trump’s policies remain a concern, and with Brexit, the Qatar crisis, and weakened economies caused by the commodity crunch to figure, the kaleidoscope is constantly shifting.

Devil’s in the detail

Capital access has tightened for 50 sovereign borrowers, including Barbados, Chile, Gabon and Jamaica, but improved for 51, led by Kazakhstan, Lebanon, Russia and Saudi Arabia.

Political risk has increased in 72 countries, including the United States, and other countries in the Americas — namely Barbados, Bolivia, Cuba and Paraguay.

It’s a bigger problem, too, for investors in Myanmar, South Africa, the United Kingdom and Zimbabwe, among others, but less so for 51 countries, especially India.

Economic risk is higher in 56, predominantly frontier markets, but also in EMs, such as Colombia, Slovakia, South Korea, Sri Lanka, and Turkey; and also in the UK, US, and Switzerland.

It has improved for 83 countries experiencing strong GDP growth, such as Australia, Iceland, and the Philippines, but bank stability is more of a problem for 33 countries, including China.

BBVA country risk economists taking part in Euromoney’s survey say: “The probability of banking crises in oil producers has diminished. However, China remains the main country with a significant probability of a banking crisis.”


Mixed picture for emerging markets

Concerned by the loss of investment grades for some of the larger emerging markets — the Brics and Mint countries — investors will note the improvement in Russia’s risk score in Q2, responding to economic recovery, and improving capital access on the Eurobond market, as well as financial assistance from China.

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

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, 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. The higher the score, the lower the assessed risk.

Russia’s risk score is still languishing, placing it 71st in ECR’s global rankings behind Brazil, India, Indonesia, Hungary and Turkey, among other EMs.

Russia is vulnerable to a renewed fall in commodity prices, tighter sanctions, and sluggish reforms, but is ticking up sufficiently for it to ultimately regain its complement of investment grades, not least because fiscal correction is on track and external economic risk indicators are benign, supporting the rouble.

ECR survey contributor Lilit Gevorgyan, senior economist and country risk analyst at IHS Markit notes the rouble gaining strength, and inflation decelerating, bringing some easing of the pressure on household disposable incomes.

“Credit is tight, but is far more affordable than in the past two years,” she says.

Other factors to consider include the slow recovery of Russia’s reserve and sovereign wealth funds, and the fact industrial production is expanding, which is down to the monetary policy and fiscal discipline exercised by the authorities.

“Interestingly, while Russia pursues often populist and nationalist objectives on the international stage, the management of the recent recession suggests a strong and positive influence of economic liberals,” adds Gevorgyan.

“They rebuffed calls for halting the extremely unpopular but necessary floating of the rouble, continued with inflation targeting rather than depleting already declining hard currency reserves to defend the rouble, and introduced significant reduction in budget spending.”


India’s score rebounded in Q2 as concerns over the economic slowdown dissipated, and risk experts delivered a more confident endorsement of the government’s policies and long-term prospects,

Debashis Acharya, professor of economics at the University of Hyderabad, believes India is going through exciting changes under prime minister Narendra Modi, whom he says, “is a strong political leader, embracing inclusive policies and expediting pending reforms on finance, banking, taxation”.

That should see India gain long-term advantages over China.

China’s political stability, continuing economic growth and strong asset position make it the safest Bric in terms of its total score, but there are many doubts over its spiralling debts, and policymaking inconsistencies, causing it to flatline in the survey; its long-term issues need to be addressed according to a recent Euromoney report

Political factors and a weak economy have meanwhile caused risk experts to deduct points from South Africa’s tally, extending a worsening trend leading investors to search for alternatives, especially since Mexico is failing to impress, and both Turkey and Nigeria are yet to stage any meaningful upturn.


The search is on for prospective investment grades since Indonesia reclaimed its complement of them following the uprating by S&P in May, called correctly by Euromoney’s survey data.

That leaves Serbia (in 76th place in the global risk rankings) as one country in contention, which is steadily improving. It’s a long shot, but eventually it could justify an investment grade. The same can be said for Croatia, lying 65th. ECR plans to return to this topic soon.

Elsewhere, there are improving scores for emerging markets in Asia, including Malaysia, the Philippines, Thailand and Vietnam.

In the CEE, Czech Republic, Montenegro, Poland, and Turkey have improved, while for others the investor climate has worsened.

In Latin America, risk scores for Chile, Mexico and Peru have fallen, and the crisis in Venezuela is still taking its toll, but Argentina is improving.

Middle Eastern investors will note the huge bounce for Saudi Arabia adjusting to the new oil price, with Bahrain, Israel and Lebanon also making ground. However, risk scores for Qatar, most north African countries (excluding Egypt), and Iran, have worsened.

France rebound gives G10 a lift

The improvement in eurozone safety this year has been driven by the election results in the Netherlands and France maintaining a pro-Europe and reformist policy direction, diminishing the prospect of more countries attempting to leave the EU.

It also reflects economic recovery, with GDP growth responding to ultra-loose monetary policy stimulus and improving global trade, which is lowering unemployment and brightening the fiscal picture.


Eurozone risk scores are nevertheless considerably lower compared with the levels prevailing before the debt crisis of 2010.

There are still concerns surrounding the Greek crisis, and the tail-risk event of political instability in Italy tied to the onset of elections and a victory for the populist Five Star Movement. Brexit risks are also dominating, and elections are due in Germany in September.

The fall in the UK score has accelerated since the snap general election in June led to prime minister Theresa May’s Conservative Party losing its majority in the House of Commons ahead of the Brexit negotiations now underway.

Investors in UK assets are facing myriad risks, including the possibility of a repeat election if the government cannot maintain parliamentary support, and the uncertainty over what deal the UK will end up with as it leaves the EU.

On Brexit, Danske Bank’s senior analyst Mikael Olai Milhoj says: “We think it is difficult to say what the UK election result means.

“It seems like the probability of both a softer Brexit and a clash/no-deal Brexit have increased, so basically more probability mass in the two tails, and it will be important to follow how the negotiations proceed, not least how the perception is in the UK.”

So, it is possible the outcome will be positive, but equally possible it will not.

More immediate risks are tied to a slowing economy (the worst performing of any EU member state in Q1 2017), with high inflation, personal debt growth, and bank stability concerns warning of an imminent squeeze on borrowing as the Bank of England contemplates raising interest rates.

US investors are also facing higher risk as the Trump administration rolls out its agenda, and the Federal Reserve tightens monetary policy. There are lower political risk scores across the board, highlighting institutional interference, and unorthodox, negative trade policies and fiscal expansion, but a nuanced picture is developing, with more concern for dollar volatility and the government finances than other real economy indicators.


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