ECR survey results 2018: US decouples from improving G10 trend; Angola, Egypt lead Africa recovery


Jeremy Weltman
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With strong GDP continuing, global investor risk moderated in 2018, according to Euromoney’s country risk survey – but analysts are poised for a bumpy ride in 2019.

US investors have had a bumpy time, something many other countries might need to ride out in 2019

The mean average global risk score of 186 countries improved as economies continued to grow and political risk subsided, partly driven by the thawing of the North Korean crisis.

However, a more uncertain outlook developed towards the end of the year as financial markets’ volatility increased, and the global average risk score is worse off compared with 2010, before the sovereign debt crisis erupted.

Increased protectionism, tighter monetary policy leading to a strong dollar, and the government shutdown caused by the defiant Congress over Mexico wall funding led to a bumpy year for US investors, exemplified by large early year market gains and subsequent falls.

The new mood of trade protectionism – creating tariffs between the US and China on the one hand, and US and Europe on the other – resulted in more risks for America Inc than its trading partners, despite creeping concerns about China and European growth prospects.

Brexit uncertainty, bank stability, conflict and other geopolitical factors influenced risk scores, but only 37 countries became riskier in 2018, as the vast majority – 146 in total – gained points to become safer compared with 2017; with three unchanged.

Risk scores notably improved for European/Eurasian markets, including the eurozone, booming Central and Eastern Europe (CEE) and former Soviet republics recovering from the oil crisis, contrasting with a riskier picture for North America:


Scores also improved for larger emerging markets (EMs), the Brics and Mints, although longer-term trends indicate they remain worse off, along with the Caribbean, and Middle East and North African countries.

The crowd-sourcing risk survey is conducted quarterly among more than 400 economists and other experts working in the financial and non-financial sectors, including the corporate sector and academia.

The results are compiled and aggregated along with other relevant investor risk data.

They include sovereign debt statistics, credit ratings, and experts’ evaluations of 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.

Distinguishing risk metrics

In a bumpy year of fluctuating confidence in EMs, risk aversion led to declining scores for Poland, Romania, South Africa and, notably, Turkey, largely preceding the assault on the lira – with the risk score falling sharply in Q2.

A handful of countries in Asia deteriorated (Malaysia, the Philippines, South Korea, Taiwan and Thailand) and in the Gulf (Saudi Arabia, Qatar and UAE) as the after-effects of the oil crisis, renewed drop in market prices in Q4 and continuing isolation of Qatar took their toll.

As for Saudi Arabia, Fahad Al-Turki, ECR contributor and chief economist at Jadwa Investments, mentions the risk of lower-than-forecasted oil prices and “the possibility of a decline in consumption as a key risk”.

This is due to a net rise in the number of expats and their dependents leaving, as well as rising costs for corporates related to higher monthly expat levies.

Big fallers enduring tighter financing conditions last year included Algeria, Bermuda, Brunei, Iceland, Oman and Panama.

In contrast, the biggest risers in the survey were high-risk Greece and Uzbekistan, bouncing back, along with several countries in Africa with Uzbekistan on the cusp of moving from tier five – the lowest category containing the highest risk defaulters – to tier four.

Other notable improvers include Angola, posting the biggest jump in the global rankings of any country surveyed last year, rising 21 places to 104th, and Egypt – climbing 20 places to 99th – gaining from increased hard currency availability boosting economic growth, and better fiscal dynamics.

Côte d’Ivoire, Ghana, Nigeria and, to a lesser extent, Zimbabwe all became safer, highlighting a year of recovery for African issuers enjoying more favourable commodity prices and borrowing conditions.


Contrasting trends for Brics and Mints

Among the biggest EMs, South Africa improved in Q4 as the rand stabilized after a volatile year, but was down overall in 2018, sliding from tier three to tier four as concerns revolved around the financial health and load-shedding of the power utility Eskom affecting GDP growth.

Brazil’s fortunes, meanwhile, improved in line with its economic recovery prospects and virtue of the fact newly elected president Jair Bolsonaro is promising a more free-market approach encompassing state asset sales and pensions reform, despite facing formidable legislative hurdles.

Risk scores for China, India and Russia all gained to varying degrees, despite analysts downgrading numerous economic and political risk factors.

In India’s case, there was some uncertainty over government stability ahead of this year’s elections, weighing on the rupee, and survey contributors are also concerned about transparency and institutional risk in Russia, offset by improving government finances and labour-market prospects brightening.

China’s score also increased, which perhaps seems counterintuitive with the economy slowing.

However, as ABN Amro senior economist and survey contributor Arjen van Dijkhuizen explains: “If needed, the government still has a large toolbox to add more stimulus.

“On the fiscal front, the government could for instance lower tax rates [such as VAT] further and could take more steps to ease funding conditions for local governments.”

He adds: “On the monetary front, we expect the People’s Bank of China to cut bank reserve requirement ratios further, while it will keep using its open market and lending facilities to smooth liquidity pressures.”

All three countries saw improved debt ratings, although risk scores for all of the Brics bar India remain lower in comparison with five years ago.

The same is true of Turkey, but not Indonesia, Mexico or Nigeria, which have become safer.

Indonesia’s improving risk rating – ahead of elections this April muddying the waters – is underscored by strong growth, a narrowing fiscal deficit and solid investment prospects backed by reforms.

It may be an unsettling year ahead for the rupiah, but Indonesia remains the 56th safest country worldwide, higher than Hungary, Croatia, the Philippines, Romania and Turkey, and the currency has begun the new year on firmer ground.

Safest sovereigns

As usual, there is a certain familiarity among the global risk rankings, with the world’s safest countries Singapore, Norway, Switzerland, Denmark and Sweden among 13, mainly triple-A rated credits in the survey achieving scores higher than 80 from a maximum 100 points putting them in the lowest-risk bracket.

Sweden made further gains despite inconclusive elections leading to protracted coalition talks. Similarly, political risk considerations had little bearing on Germany, which became safer despite a fragmented spectrum and weakening support for governing parties.

Most G10 countries saw risk scores improve in 2018 in response to economic growth supported by ultra-loose monetary policies, tightening labour markets and ameliorating fiscal problems.

Forecasts released by the IMF indicate average GDP growth of advanced economies is likely to have accelerated from 2.3% in 2017 to 2.4% in 2018, greatly exceeding the 2000-2009 average of 1.8% and double the figure in 2012, despite slowdowns emerging in the second half of the year.

In Italy, a moderation of the political and banking-sector stability risks surrounding the elections, and moves to reach some form of compromise agreement with European leaders over the deficit target, helped the country bounce back – although it remains one of the riskier EU member states.

Risk scores for Japan, the Netherlands, Canada and France all improved, but the US proved the exception to the trend as the Trump administration’s policies accentuated political risk, and confidence in trade receipts waned.

“The US swung from a Goldilocks economy, with high liquidity, strong demand, low unemployment, and benign fiscal and monetary policies, to a synchronized risks economy, characterized by shrinking global dollar liquidity, fears of excessive monetary tightening, and debt overhangs looming over corporate and household finances,” says ECR expert Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies (MIIS).

The US score is nevertheless higher on a five-year comparison, along with all other G10 partners, except for Switzerland and the UK, which are coincidentally driven in both cases by deteriorating EU relations underlying the pursuit of new agreements with European partners.


All of the UK’s political risk scores were downgraded in 2018, although Brexit did not have the same effect on Ireland, which still benefited from strong economic growth and fiscal improvement.

Ireland’s general government deficit-to-GDP ratio is now close to balance, and gross debt is still falling ever closer to the 60% of the GDP EU target that is expected to be reached in either 2020 or 2021.

Other eurozone borrowers continued to strengthen, including Cyprus, Portugal and Spain.

LatAm diversity

Across Latin America, where Chile as usual remains by far the safest investment, risk scores improved for Mexico, Uruguay, Brazil and Paraguay, as they did for higher-risk Bolivia and Ecuador.

However, in many countries such as Mexico the improvements were largely due to better access to finance and improved debt ratings, offsetting worsening economic, political and structural risk indicators.

Argentina’s score improved at the beginning of the year, before flatlining as president Mauricio Macri – facing an election this October – grappled with debts and a weakening economy worsened by currency depreciation.

Venezuela once again remained the highest risk overall, lying 169th globally on a score of barely more than 20 points, with heightened political and economic risks worsened by the prevalence of hyperinflation.

Uncertain outlook

A flattening of the US yield curve, increased financial markets volatility, slowing Chinese economy and fall in US risk score are all providing clear warning signs for the year ahead.

“The new year is offering more risk-loaded prospects of a substantial maturity cliff in US treasuries coming against the declining demand for US government bonds in international markets,” says Gurdgiev at MIIS.

“In addition, the shift from monetary financing to fiscal financing is now wreaking havoc across corporate debt markets, while pushing up borrowing costs for households.”

The federal budget fight between the Trump administration and Congress is adding fuel to this brewing storm, Gurdgiev states, but the key problem is still the same: “Over the past decade, US economic recovery has been based on accumulation of debt across key productive sectors, absent any deleveraging on monetary and fiscal sides of the macroeconomic equation.”

With doubts about the US, and also China, clearly Europe’s economic prospects are also gloomier, says ECR contributor and independent sovereign risk expert Norbert Gaillard.

He is optimistic about countries in CEE, including the Czech Republic, Slovakia and even Poland, but less so with regards to Hungary, as Fidesz party leader and prime minister Viktor Orban pursues illiberal policies.

Hungary is 12 points and 24 places worse off than Poland in the ECR survey, highlighting risk differentials investors should not ignore.

“Sovereign ratings, country risk scores, sovereign yields and spreads for European countries will all diverge, which is normal during risk-aversion periods,” says Gaillard.

“France and Italy seem more vulnerable than 10 years ago. In contrast, Portugal and Spain may be more resilient, but any severe financial crisis could affect all peripheral countries.”

And political risk is never far from the equation.

Worldwide, there are several important votes taking place this year, in Nigeria and Senegal (February), Indonesia (April), Israel (April), and the Philippines (May).

There are also elections in Argentina, Australia, Belgium, Bolivia, Canada, Denmark, Finland, Greece, India, Poland, Portugal, South Africa, Switzerland, Tunisia, Ukraine and Uruguay – not to mention in smaller countries – and for the European Parliament in May.

Globally, investor risk declined in 2018, but given political risks surfacing, and as economic prospects nosedive, the next 12 months may well be a bumpier ride.

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