ECR survey results Q2 2018: Global risk subsides but the US, South Africa and Asian EMs dive as anxiety returns
Global risk subsided in the first half of the year, according to Euromoney’s country risk survey, with confidence in Europe maintained and commodity producers benefiting from better terms of trade. Yet with US interest rates rising, and Brexit, Russia and protectionism risks prevailing, investor prospects have more recently become uncertain for the remainder of 2018.
Global risk is in a safer pair of hands in H1, but that could slip through investors’ fingers by the year-end
The unweighted mean-average global risk score for 186 countries improved during the first half of the year, with 102 countries upgraded in total, 49 downgraded and 35 unchanged, according to the survey’s metrics.
Among the more notable improvers were Egypt, gaining almost five points and jumping 19 places in the global risk rankings to 100th. Angola, Côte d’Ivoire, Ghana and Lebanon shot up, alongside improvements to Greece, Italy, Portugal and Spain.
Higher risk scores also occurred to a raft of commodity-reliant countries in Latin America, sub-Saharan Africa and high-risk former Soviet states, rebounding from previous falls, but such scores occurred more in Q1 than Q2, with market uncertainty creeping in:
The risk survey is conducted quarterly among more than 400 economists and other experts – both financial and non-financial sector based – with the results compiled and aggregated along with other relevant investor risk data.
They include sovereign debt statistics and the private opinions of capital-market participants reporting on accessibility to bank finance, and international bond and syndicated loan markets. These quantitative data and qualitative assessments are compiled and weighted, according to relevance, to provide total risk scores and rankings for 186 countries worldwide.
Economic growth underpins lower-risk environment
“Moderation in global risk perceptions in H1 2018 was driven by relatively robust economic growth across advanced economies, and by a small reduction in markets’ assessments of the risk of a major credit crisis arising in China,” says ECR survey contributor Constantin Gurdgiev, a university professor at the Middlebury Institute of International Studies (MIIS).
China performed better than expected, contributing to global economic growth spurred by monetary-policy stimulus and more favourable financing conditions for 81 countries.
Capital access improved for a raft of Middle East and African sovereign borrowers, including Angola, Côte d’Ivoire, Egypt, Ghana, Lebanon and Nigeria, but worsened across Asia-Pacific, affecting Malaysia, the Philippines, South Korea, Taiwan, Thailand and Vietnam.
Regionally, the eurozone became safer, with GDP still growing and unemployment falling to 8.4% of the labour force in May, compared with 9.2% a year earlier. Increased tax revenue and fewer government transfers improved the fiscal outlook, and the European Central Bank avoided higher interest rates, slowly dispensing with quantitative easing to avoid dislocation.
These economic factors pushed political risks into the background, although the potential problems stemming from Italy’s new populist-right government is still lurking, and the clock ticking on the UK’s exit from the European Union is a factor for Europe as a whole. There is also renewed uncertainty over economic prospects following recent data pinpointing a slowdown.
Adverse emerging-market reaction
The extreme markets volatility in February-March and acceleration in capital outflows from Asia, which started around the end of Q1 2018, “provide a more complex image of the underlying risk dynamics”, says Gurdgiev, highlighted by the differences in the Q1 and Q2 survey score trends.
Among the large emerging markets (EMs), improving prospects for many of the Brics (notably China) were outweighed by South Africa waning through to end-June as concerns for government policy and the current-account deficit put renewed pressure on the rand.
Similarly, with elections held and the lira tumbling, Turkey’s score declined, while for others – such as Indonesia, Mexico, and notably Nigeria responding to improving oil prices – risk scores revived:
Many of the central and eastern European states improved, bolstered by commodity prices rising, and stabilizing prospects for Russia and other export markets – among them Belarus, Moldova, Tajikistan, Uzbekistan and also Ukraine, where political risk is high, but macro-stability attained.
Tighter capital access for Poland and Romania weighed on their scores, but improvements occurred for Bulgaria, Czech Republic and Slovakia, as well as Serbia and Montenegro.
Other commodity producers gaining from higher prices include Côte d’Ivoire and Ghana, Bolivia and Chile, Mongolia and Angola, which Euromoney previously stated had turned a corner, but not for those where bigger fiscal shocks occurred. The risks in Algeria, Brunei, Qatar and UAE rose, alongside Bahrain, where the fear is of a debt spiral forming.
Developed world better off… but with trade wars looming
Overall, Singapore remains the world’s safest country in the survey, ahead of Norway, Switzerland, Denmark and Sweden – the top five – with similarly safe Luxembourg, Netherlands, Finland, Australia and Canada completing the top 10.
Investor risk has been improving in the eurozone, bar Germany (in 11th place), where internal political conflict over immigration and asylum policy only narrowly avoided the government collapsing.
It remains a background concern for other countries affected by the flow of migrants across Europe, heavily influencing political agendas and outcomes. There are parliamentary elections in Sweden (September) and in Belgium, Denmark, Estonia, Finland, Greece, Poland, Portugal and Switzerland to keep an eye on in 2019 in western Europe alone.
Meanwhile, improved economic prospects and diminished political risk have led to analysts upgrading the eurozone periphery.
Greece, Ireland, Italy, Spain and Portugal have been caught up in the tailwind of Italy’s political crisis, but have brighter long-term prospects: declining unemployment rates and stronger corporate sectors are bolstering revenue and helping to limit public spending.
However, these improvements have more or less stalled, or continued at a vastly reduced pace since end-March, flattening the risk trends:
And as the survey was being completed, at end-June, there was a rise in concern for the adverse effects of trade wars and currency revaluations affecting Asia-Pacific, one of three groups – alongside North America and the Caribbean – with increased risk in the latest survey.
Risk scores for several EMs and frontier markets in the region were affected, including Malaysia, the Philippines, South Korea, Taiwan and Thailand, with trade dislocation and the US Federal Reserve normalizing monetary policy affecting capital flows.
Non-resident portfolio outflows from EMs increased to $8 billion in June, following $6.3 billion of outflows in May, according to the Institute of International Finance. That contrasts with $18 billion of capital inflows in June 2017 and the first time EMs have shown net outflows for two straight months across both debt and equities since the onset of the global financial crisis.
Fed tightening alone is expected to reduce portfolio inflows into EMs by around $70 billion during the next two years, claims the IMF, making it more difficult to refinance maturing debt. This would also be expected to impact on global economic growth predictions, shaving the IMF’s April forecast of 3.9% real growth, which is unchanged from 2018.
Capital flows reflect concerns about the global trade cycle and trade wars, Gurdgiev confirms, saying: “A large share of the outflows from EMs was accounted for by investors selling out of Chinese assets during the periods of accelerating pressures on Sino-American trade relations.” The onset of tariffs on Chinese goods – affecting $34 billion of trade – is marginal, with China’s central bank defending the yuan, but it could easily escalate, says Nordea Markets’ Amy Yuan Zhuang.
Trade issues are a theme raised by ECR survey expert M Nicolas Firzli, director-general of the World Pensions Forum (WPF), who says: “German and, to a lesser extent, Japanese manufacturers, could see their multi-billion-dollar industrial investments in Mexico go sour as Nafta [North American Free Trade Agreement] comes under renewed pressure.
“In the weeks leading up to the November mid-terms, the Trump administration may be tempted to ‘triangulate’ the trade war, targeting specifically the German-owned car plants of Baja California and Coahuila south of the US border… It's a bumpy road ahead for international trade and investment.”
Invariably, this also increases the risks for the United States as well – lying 16th in the global rankings – where longstanding issues surrounding the deficit and debt profile are compounded by the Trump administration’s economic and foreign policies.
Concern that North Korea might be reneging on the nuclear deal after Trump’s landmark summit with Kim Jong-Un is creating some renewed anxiety in the background, but the prospect of escalating trade wars with China and Europe is the predominant risk.
So far, the US manufacturing sector has proven resilient to the fear-factor over trade policy, with solid output and orders underpinning growth prospects. However, protectionism harms business confidence, causes supply-chain disruptions and impacts on trade volume, undermining investment and weakening economic growth.
“Notwithstanding China’s trade resilience, global PMI export sub-indices have come down in recent months, particularly for emerging markets,” says Arjen van Dijkhuizen, survey contributor and senior economist at ABN Amro.
“That is an early indication of risks to the global trade (and growth) outlook, although part of this decline may have been driven by sentiment against the background of rising trade tensions between the US, China and other parts of the world, including Europe.”
Looking ahead, there are other risks to consider. One is a stronger US dollar. “This is adding more pressure on the risks of a growth slowdown, and potentially increasing risk pressure on carry trades and corporate debt markets,” says Gurdgiev at MIIS.
Another is higher energy prices beginning to adversely impact on producer price inflation and corporate margins. “All in all, H2 2018 is likely to see investors re-appraising the prospects of the continued Goldilocks economy, says Gurdgiev. “As a result, risk profiles for the majority of the advanced economies and the EMs highly integrated in global trade and financial flows are likely to tilt up in September-October.”
He and others also note one aspect of the markets not yet reflected in experts’ risk perceptions is the fact the recent tech stocks sell-off coincided with lower growth expectations for the world economy. And as WPF’s Firzli points out, recent European elections have brought to power unorthodox policymakers whose socio-economic projects diverge visibly from the neoliberal ‘open borders and open societies’ agenda of the past 40 years.
“For the EU, this means a dangerous loss of cohesion at a time when the White House is stepping up the pressure on Brussels,” he says.
“As the German-American trade war escalates, it remains to be seen whether Italy, Austria, Hungary, Poland or even France, for that matter, will be inclined to fight for Stuttgart in the name of an increasingly elusive pan-European solidarity.”
This all suggests the EM blowout will be followed by broader contagion to the advanced economies.
To access the survey and view the latest results, go to: www.euromoneycountryrisk.com.