ECR survey results Q1 2018: Economic growth eases global risk; US downgrade highlights fragility


Jeremy Weltman
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The risk picture has improved, but geopolitical tensions over North Korea, Russia and Syria, the prospect of global trade wars and other concerns including monetary tightening remain key threats, warn analysts.


Euromoney’s country risk survey shows a generalized improvement in risk scores in Q1 2018, arising from brighter political and economic prospects, and improving capital access for sovereign borrowers.

Persistent monetary policy stimulus, reviving commodity prices, and an easing of concerns surrounding China’s managed slowdown have reinforced the global trade cycle lending support to economic growth.

Political noise has diminished, with fewer elections, and as euro zone break-ups and debt default fears have eased.

Capital market participants report in confidence improved accessibility to international bond and syndicated loan markets, and bank finance for several countries, among them Egypt, Nigeria and Ukraine.

The resultant unweighted average global risk score for 186 countries has improved for a third consecutive quarter, according to Euromoney’s survey, with 99 countries upgraded, 48 downgraded and 39 unchanged.

The survey shows investor risk subsiding in numerous world regions and investment groups, notably in the eurozone, large parts of central and eastern Europe, including the Commonwealth of Independent States (the CIS), and many but not all large emerging markets (EMs):


Buoyed by clarity on the political situation and its economic strengths, China has risen four places in the global rankings to 42nd increasing the gap to India where there is less confidence ahead of the elections due in 2019, and with unimpressive manufacturing indicators and concerns about inflation and the fiscal deficit to figure.

Brazil is up six to 55th, retaining its advantage over Argentina, which is also improving. Indonesia, following a six-step jump, is 58th, Mexico, now three places higher, is 35th, and Nigeria, climbing nine places to 90th, is recovering with oil prices up to $65-70/barrel more than double the lows of 2016.  

These EMs would be affected by rapidly rising interest rates, but this seems unlikely, and besides many of these countries remain ‘business-friendly’.

A total of $43 billion has therefore wound its way into emerging market equity funds in Q1 according to the Financial Times, more than double the usual first quarter volume. 


Fragile optimism

Russia also improved in Q1 2018, endorsing its popularity among investors and its status as the best-performing country in the MSCI Emerging Markets Index, but confidence has evaporated in recent days given the tightening of sanctions and rising tensions over Syria.

ECR survey contributor and independent sovereign risk expert Norbert Galliard is not very confident on Russia, saying: “Putin has not managed to increase diversification of the economy since the 2000s.

"Russian capital markets are fragile, and the country remains dependent on foreign partners. The current geopolitical context is really credit negative."

South Africa’s fortunes are under the microscope, with elections held in February and the borrower narrowly avoiding a downgrade from Moody’s. Experts have upgraded their economic and political indicators, but capital access has declined.

Meanwhile, confidence in Turkey continued to wane in Q1, with analysts downgrading the monetary policy/currency stability indicator in advance of the lira sinking to new lows.

By contrast, Indonesia’s stock continued to rise, with the risks to borrowing costs and the rupiah stemming from rising state-owned enterprise debts outweighed by economic performance, political stability and its investment grade rating.

Many countries have seen higher scores for economic factors, but generally speaking global risk remains heightened since 2010.

The global average risk score is 43.2 from a possible 100 points, which is still below the levels prevailing in 2010 during the sovereign debt crisis, and in 2007 just before the financial meltdown.

ECR survey contributor Constantin Gurdgiev, a professor at the US Middlebury Institute of International Studies puts analysts’ caution down to a range of factors, including advanced economies that are at or near a cyclical peak, with debt levels remaining at critical levels or elevated relative to historical norms.

“Key uncertainties weighing on the global economy include monetary tightening and market volatility, geopolitical risks surrounding US-Russia relations, the volatile situation in Syria, the prospect of renewed tensions around Iran, and the continued threat posed by North Korea,” he says.

“Other top-level concerns include uncertainty around the fate of the North American Free Trade Agreement [Nafta] and the extremely unpredictable nature of US domestic and international policies.”

The markets have recovered somewhat from recent falls, but analysts remain wary with risk scores over a long-term historical horizon remaining depressed.

This means: “The latest bout of optimism in financial markets is misplaced. Even allowing for the recent correction, the markets continue to structurally under-price risks,” Gurdgiev says.


Much of this caution is echoed by survey contributor Ebrahim Rahbari,  managing director and head of global economics at Citi, who is confident about short-term global growth prospects, but says: “The latest data are reinforcing our expectation that momentum in the global economy is peaking.

“Concerns about trade policies and rules are creating uncertainties about the outlook that are beginning to affect business sentiment.”

His concerns extend to monetary stimulus fading, and other more “idiosyncratic risks”, such as uncertainty about the Italian government, important upcoming elections in Brazil and Mexico, and rising tensions in the Middle East.

Unique scoring system

Euromoney’s crowd-sourcing approach to measuring country risk provides a responsive guide to changing perceptions among analysts in both the financial and non-financial sectors, focusing on a range of key economic, political and structural factors affecting investor returns.

The survey is conducted quarterly among more than 400 economists and other risk experts, with the results compiled and aggregated along with other data including sovereign debt statistics to provide total risk scores and rankings for 186 countries worldwide.

On that basis Singapore remains the world’s safest sovereign, slightly ahead of Norway, which is slowly recovering from the oil shock and has ample sovereign wealth.

Investor risk for all the top-20 safest sovereign issuers diminished in Q1 2018, except Canada and the United States.

The US has slipped in Euromoney's global risk rankings to 16th, below Chile, in response to increased trade protectionism.

Although the risk of an all-out trade war with China may be inflated, and there are signs of a breakthrough in the North Korean nuclear stand-off, clearly those risks could quickly reverse.

US experts have concerns for the widening fiscal deficit and public debt trajectory worsened by Trump’s tax cuts already reaching 75% of GDP, doubling since the 2007-2008 banking crisis, and predicted by the Congressional Budget Office to hit 150% in 2047 assuming unchanged fiscal policy.

Most US economic risk indicators were downgraded in Q1 2018, including the government finances:


G10 prospects brighten for third consecutive quarter

Along with the US, Belgium and Canada were the only G10 members with worsening total risk scores in Q1 2018, Germany was unchanged and seven other countries improved.

Italy registered the largest rise in score (fall in risk) of all, mainly because the uncertainty surrounding the parliamentary elections lifted.

Despite this, its total risk score of 59.4 remains well below the G10 average of 76.4, meaning Italy is still the biggest concern among the large developed countries. 

This stems from the ongoing difficulties in forming a government, the type of coalition that is likely to be formed - with the threat of it being more populist and Eurosceptic - and pre-existing concerns for the weak banking system and structural problems impeding economic growth.

Similarly, the score for the United Kingdom has rebounded slightly this quarter.

The fear factor surrounding Brexit has eased following the progress made in the negotiations to agree on the exit date, the transition period and the post-Brexit trading arrangements, and there has been some good news on Treasury revenue.

That said, there are numerous outstanding issues to be settled, including the Irish border problem, future customs arrangements, weak productivity growth and the debt problem to resolve, vexing potential investors.

It is one of only three G10 members – the others are France and Italy – that have endured double-digit declines in risk scores since 2010.


Gaillardbelieves: “Italy is the biggest issue, but we must also monitor the capacity of France to implement reforms.

“So far President Macron’s track record is good, but there are now many strikes, and trade unions are very angry at the government.”

On the UK, he says: “The economy will be negatively affected by Brexit, damaging its credit rating,” but he is confident it will overcome these problems over time.

Europe on a bounce

Investor risk across Europe more generally has improved thanks to stunning economic growth across the region displacing political risk as the dominating theme.

Although most countries remain heavily marked down since the twin financial and sovereign debt crises 8-10 years ago, the combination of economic growth, manageable inflation, improving fiscal situations and enhanced market access has lowered the risk of investing.

Scores for Bulgaria, Czech Republic, Greece, Portugal, Slovakia and Slovenia have increased, alongside those for Ireland and Spain.

There are rosier prospects for Azerbaijan, Ukraine and Uzbekistan, but not for Hungary, Poland or Romania which are all at loggerheads with the EU over rule of law transgressions putting funding at risk, and pursuing unorthodox fiscal policies undermining structural improvements, while (to varying degrees) closing the democratic space.

Pockets of uncertainty worldwide

Most emerging and frontier markets across Latin America improved in Q1 2018, with the notable exceptions of Colombia and Peru, while across the Caribbean more downgrades than upgrades are prevalent, with fiscal indicator warnings affecting Barbados, and Trinidad and Tobago.

Malaysia is a concern in Asia, but mainly for political reasons ahead of last week’s dissolution of Parliament paving the way for early elections on 9th May.

The same is true of Thailand, where continual rule by the military junta and uncertainty surrounding the elections to be held in 2019 restoring the country to semi-autonomous civilian rule has made analysts more cautious.

Risk scores have worsened for South Korea, Taiwan and Vietnam. In the Middle East and North Africa, there are improving scores for high-risk Iraq, Jordan and Lebanon, but downgrades for Algeria and the UAE, and in sub-Saharan Africa a return to the longer-term upward trend in fortunes for Ghana, Cote d’Ivoire, Ethiopia and Senegal.

These countries, affected by the falls in commodity markets in previous years, have returned to previously rising trends, with capital access also improving.

This is despite concerns about rising debt ratios, political instabilities and institutional weaknesses incorporated into the scores signalling medium-to-high risks.

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