ECR survey results Q4 2017: EMs back in vogue as global prospects soar


Jeremy Weltman
Published on:

Central banks pumped in more liquidity, inflation was held at bay and global trade thrived, but can favourable conditions continue in 2018?


Euromoney’s crowd-sourcing country risk survey shows how perceptions of risk improved in 2017 for most countries and regions free of military conflict or worsening fiscal problems caused by the slump in commodities.

Last year saw strong investment returns, with global risk subsiding after the commodity slump and volatile political risk events of 2016. These included the UK’s landmark referendum decision to leave the European Union and the shock election of Donald Trump as the 45th president of the United States.

Amid the usual spikes in geopolitical tensions – this time centring on North Korea’s nuclear ambitions – country risk scores for a wide range of developed and emerging markets (EMs) improved, as oil and other commodities rebounded, China’s wobbles were fixed, central banks kept the taps open and the global trade cycle churned.

For G10 investors a calmer picture emerged after the volatility of previous years, with risk rising the most in Belgium inflicted by politics, but falling sharply in Sweden, with its robust economy and enviable fiscal trends, among smaller changes for other countries:


Chasing higher interest rates, capital flowed into the United States, but also into the rest of the developed world, where economies improved, and EMs where foreign residents placed $235 billion-worth of portfolio investments – a 72% share in debt instruments – making it the largest sum pouring into EMs in three years, according to the Institute of International Finance.

Fast-growing Asian tigers latching onto the cyclical upturn in trade were able to shrug off the North Korea crisis and the encumbrance of any domestic political threats to offer investors lower-risk opportunities.

Among them, in addition to Japan – rising one place to 26th in Euromoney’s global risk rankings – were Malaysia (36th), Thailand (52nd), Philippines (54th), and Indonesia (64th).

Brics and Mint investors shunning South Africa, with its ongoing political strife undermining the rand and its credit ratings, were faced with an array of otherwise improving prospects, ranging from recovering Brazil and Russia, to Nigeria and Turkey.

Just a little uncertainty surrounding this year’s elections began to creep into Mexico’s profile, but it was not too badly affected.

Norbert Gaillard, independent country risk expert, academic and survey contributor, puts that down to the fact “most of the negative aspects of Trump’s programme – especially those that could jeopardize economic growth outside the US, the protectionist measures for example – did not materialize”.

Argentina, Colombia and Uruguay were among several ameliorating hotspots in Latin America; and Bulgaria, Croatia and Serbia led the way across Central and Eastern Europe.

However, there were relatively few in sub-Saharan Africa last year, where political transitions in Angola and Zimbabwe, various conflicts, political chicanery and factional infighting – notably within South Africa’s ruling party – sent out a salutary reminder of the huge political stakes of investing in a region where the average risk score is just 29 points out of a maximum 100.

This is one of the lowest in the world, less than half the average score for the Middle East and North Africa (MENA) region.

Ghana and Kenya were a couple of rare medium-sized exceptions, both becoming safer in 2017 on a continent where – despite upgrades to smaller countries – with little investor interest, political strife, rising debt burdens and donor fatigue should be urging caution amid the clamour for sovereign placements in recent years.

Eurozone renaissance defies Brexit

Last year was particularly notable for Europe’s ability to resist worst-case Brexit scenarios, and risks associated with other populist trends, as the refugee crisis eased, nationalist, right-wing parties were defeated – despite gaining – in the Netherlands, France and Germany, and economic growth spread out more liberally across the continent.

“The European Union turned out to be politically resilient, despite some structural challenges in terms of governance,” says Gaillard.

He also notes the positive effect stemming from the election of the youthful reformer Emmanuel Macron as French president, a figure perceived favourably by investors.

Buffing up a rather murky fiscal picture, greatly agitating investors since the banking and sovereign debt crises erupted, scores for numerous European countries improved.

However, the region’s economy is hardly motoring at full throttle, with heightened credit risk linked to housing-market bubbles and personal debt accumulation making policymakers and analysts fidgety in equal measure.

Unemployment is uncomfortably high, notably in Greece and Spain, and in France and Italy, where roughly 10% has become the norm. Added to that is one of Gaillard’s pre-eminent concerns, the political uncertainty tied to the forthcoming elections in Italy, which he says, “may still shake the eurozone”.

Yet with less austerity and substantial monetary stimulus leading to economies reviving, and employment growth soaring, what was proving to be a desperate situation in previous years has turned around to become much more favourable – a return to normality many experts agreed.

And with one or two notable exceptions – the United Kingdom, clearly, with its future relationship with European partners so uncertain – the year was one of rising confidence, with country risk scores improving more-or-less across the board.

Top of the list of best performers for 2017 were Sweden, France and Portugal.

Even in Greece, where the political trials and tribulations continued, by successfully overcoming another financing crisis and enjoying a tourism boom, the economy produced only its second-year of growth – its strongest in a decade.

Unique approach delivers results

The ECR survey is conducted on a quarterly basis, quantifying the opinions provided by more than 400 contributors worldwide.

The survey aggregates the views of experts from within both the finance and non-finance sectors to provide a unique system of measuring investor risk notably distinct from the approach of credit-rating agencies and investment professionals.

Scores on 15 key economic, political and structural factors are added to values for capital access, credit ratings and debt indicators to provide a total risk score, ranging from a maximum 100 points (complete safety) to zero (certain default).

At the top of Euromoney’s global rankings is ultra-safe Singapore, on a score of 88.6 points, eclipsing Norway, Switzerland and other prized European domains noted for their political and economic stability.

Just as important as a high score is an improving one, and in 2017 no fewer than 113 of the 186 countries in the survey underwent upgrades (signalling lower risk), outweighing the 72 with downgraded scores, and one country unchanged.


Among the 92 with improving economic risk factor scores are rapidly growing Iceland, with its balanced budget and declining debt burden, as well as Australia, Canada, the Philippines, Italy, France and others enjoying improved conditions spurred by ultra-loose monetary policies underpinning domestic demand and the global trade cycle supporting exports.

Political risk scores improved for many countries in Africa, Europe and Latin America, including Zimbabwe since the ousting of Robert Mugabe, and in countries where electoral uncertainty was resolved, in Argentina, Kenya and Papua New Guinea especially.

2017 was also a year in which capital access greatly improved for large commodity-backed borrowers, namely Saudi Arabia, Russia and Kazakhstan; for Lebanon, Sri Lanka and Turkey; and two of the higher-risk defaulters, Argentina and Greece – but not for Venezuela on the brink of default, for Barbados and Jamaica, causing concern, or Ukraine.

Looking ahead

So what can investors look forward to in 2018? More political uncertainty is guaranteed, a tightening of US monetary policy is probable and one or two shocks quite possible.

Big risks loom large. Gaillard notes the possible repercussions of the political uncertainty in Italy, the shadow banking risks in China, and the excessive financial leverage and latent financial instability in the US stemming from lax monetary policy.

Constantin Gurdgiev, an ECR expert and professor at the Middlebury Institute of International Studies, believes developed-country inflation will remain modest and monetary policy accommodating, in the euro area especially, but warns: “While the core macro-fundamentals remain supportive of only gradual moderation in monetary policy excesses, credit and growth conditions are unlikely to sustain the recent rates of market optimism, warranting a major financial markets correction.”

After all, the ECR global average risk score, while improving last year, is still only 42.77 out of 100. That is almost eight points below the level prevailing in 2007, before the banks collapsed.

This risk of a correction is compounded by already high levels of debt in major economies, and therefore risk repricing will favour developing and middle-income countries – the Brics and Mint etc, with their rising country risk scores.

If anything, 2017 has taught investors to adopt new thinking, underlined by survey contributor M Nicolas Firzli, director-general of the World Pensions Forum, who points out the frailties of the liberal-capitalist economic order, in the guise of more isolationist, populist policies, secessionist trends and challenges to monetary orthodoxies from crypto-currencies.

“Large asset owners, chief among them pension funds, insurance companies and university endowments, have decoupled so to speak from the short-medium term political signals coming from government bureaucrats and military strategists,” he says.

In other words, they have learned to distinguish between low-risk, high-impact events – the political noise associated with North Korea, Trumponomics, etc – from those more likely to influence returns.

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