ECR survey results Q1 2019: Increased risk for US, Canada, Mexico caught in slipstream of protectionism

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By:
Jeremy Weltman
Published on:

Protectionism is undermining an otherwise moderate global outlook as growth continues, labour markets tighten and geopolitical crises calm.

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Euromoney’s first quarterly risk survey of the year reveals a balanced global profile, with 57 countries becoming riskier (having lower risk scores) and the same number that are now safer (with higher scores).

For many countries, economic growth is creating jobs, lowering welfare bills and eroding debt-to-GDP ratios, while the return to more normal commodity price patterns, coupled with the prospect of economic activity improving in the second half of the year, has seen asset prices stabilizing after severe volatility in autumn.

Yet the global kaleidoscope of risk is constantly shifting, with North America more of a concern now that the shine has been taken off the economic outlook by US monetary policy tightening and protectionist policies.

Trump’s threats to close the Mexican border and the delays sparked by the deployment of border officials to deal with Central American migrants are adversely affecting trade flows.

The US remains the 16th safest country worldwide, according to Euromoney’s global risk rankings, but its risk score has dived this quarter, despite reaching a new US-Mexico-Canada Trade Agreement that will modernize the existing North American Free Trade Agreement.

US forecasters are busy downgrading GDP growth prospects in response to a weaker-than-expected annualized growth rate of 2.2% in the fourth quarter of 2018, prompting the Federal Reserve to postpone further monetary policy tightening for this year.

The views of many US contributors to Euromoney’s survey are summed up by Tiago Freire, economist at Roberts Capital Advisors, who has expressed concern for slowing growth.

“While numbers in the first quarter were mixed, and the slowdown in the previous quarter was probably not as bad as some people expected, the inversion of the yield curve is a bad omen for the future,” he says.

Freire believes there is much “sabre-rattling” where US trade tariffs are concerned, certainly as far as Europe goes, and progress with China – which is seeking to address US concerns about technology transfers and market access – is signalling a way forward for resolving the impasse.

However, the risk of failure, and of Washington following through with its plans to stop immigrants crossing the southern border, merely add to a growing list of issues – read risks – that could prove troubling for the region, according to analysts.

They are eyeing with alarm the growth in US debt totalling $22 trillion, and the possibility of worse growth numbers, not least when factoring in weak activity rates in parts of Europe.

That fact is underlined by downgraded risk scores, not only for the US but for Canada and Mexico, ranking 10th and 38th in the survey respectively.

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Mexico’s political risk outlook has weakened slightly due to the policies of president Andrés Manuel López Obrador, adding to investor concerns about slowing growth and the liabilities of state-owned oil company Pemex complicating the fiscal metrics.

North American experts have also lowered their scores for economic risk factors in all three countries, such as economic growth, employment/unemployment and monetary policy/currency stability. They are among 15 notable risk factors the survey contributors are asked to rate each quarter.

Euromoney’s unique 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, including 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.

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Europe stutters

Other world regions have seen increased risk since December, including core Europe, where analysts are worried by recession or stagnation in Germany and Italy spreading across the continent.

Italy’s economic growth prospects are downgraded, and the Organization for Economic Cooperation and Development sees the deficit and debt rising in 2019-2020.

Norbert Gaillard, independent sovereign risk expert and survey contributor, sees risks for both Germany and France from the weakening credit position of Italy, “which might lead to a severe eurozone debt crisis”, he says.

Most of the G10 countries – all except Belgium, Japan and Sweden – have been downgraded since December, notably the UK, where slower growth in export markets and Brexit uncertainty continue to weigh on the investor climate.

Although the UK has a remarkably strong competitive and regulatory environment, the interminable constitutional and political crisis associated with the UK’s delayed departure from the EU has worsened key risk indicators.

They include policymaking, institutions and government stability, given the various paths to accepting a withdrawal agreement, and prime minister Theresa May announcing she will then stand down raises a question mark over who will take over and whether the direction of travel will alter.

With the clock ticking to a possible no-deal exit, an extended delay appears likely, but is complicated by participation in the European elections in May, and the EU’s say-so.

The unprecedented turmoil within the cabinet, the governing Conservatives as a whole and main opposition party Labour is underpinning UK risk, amid constant pressure for a confirmatory referendum on the deal or snap election.

That said, the economy is holding up… just, unemployment and inflation are low and fiscal problems are seemingly diminishing.

At 21st in the global rankings, the UK is still one place above France, also experiencing increased risk evinced by public protests over reforms and subdued economic growth jeopardizing fiscal targets, but neither country has moved in the rankings.

Indeed, not one of the top-50 countries in Euromoney’s rankings has exchanged places this month, which means that Singapore, Norway and Switzerland are still considered the safest countries worldwide, heading up a list of other triple-A credits:

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Divergent EM risks

There are a number of notable fallers in the survey within the emerging markets (EMs) asset class, including Bermuda, Costa Rica, Jordan, the newly named Republic of North Macedonia, Montenegro, Pakistan and Serbia, as well as Romania (falling two places to 62nd) and Turkey (61st), with South Africa’s score remaining depressed after previous falls.

Various survey contributors have expounded their views on the challenges that lie ahead for South Africa (65th) facing elections on May 8, with questions remaining over the financial viability of the state-owned electricity provider Eskom, causing load-shedding.

Tony Hawkins, a professor at the University of Zimbabwe Graduate School of Management, and a regional expert, documents a number of risk factors for the country, including exports growth undermined by global slowdown and “a poor fiscal outlook, with a deficit-to-GDP ratio of 4.5% in 2019 – the worst since 2010 when it exceeded 6%”.

He adds: “The debt ratio is worsening and debt-service costs, which have been growing by 10.7% a year, are the fastest rising component of the budget.”

Turkey is similarly struggling to put over a convincing argument to investors amid various negative factors, which besides the politics includes a large external financing requirement contributing to lira volatility and prompting risk experts to mark the country down on a five-year trend basis.

Slowing growth, falling confidence and higher unemployment do not imbue any great faith in Turkish assets, with its score lowered again in the first quarter to make the country a riskier bet than Brazil, Indonesia, Hungary, Croatia, the Philippines and other EMs higher up the scale.

Romania’s risks have similarly increased after a year of political and social instability stemming from the pursuit of legal reforms, and anti-government protests against corruption.

The downgrade puts further space between Romania and improving Hungary and Croatia, which recently receiving a credit rating upgrade in line with its ameliorating country risk score.

Having said that, Romania has hardly become an acute risk, as it continues to enjoy favourable economic conditions and a low debt burden.

Economists at the European Bank for Reconstruction and Development taking part in the survey state in their latest forecast report that GDP “will continue to be supported by investment linked to EU funds and consumption linked to the tightening labour market”.

Among the largest EMs – the Brics and Mints – Nigeria has seen its risk score improve after the elections granting Muhammadu Buhari another term, but the country remains low-ranking, at 89th, with analysts expressing concern for security, interventionist policies and high inflation, despite improving economic growth and external balances bolstered by higher oil prices.

Scores for Brazil, China and Russia have shown modest improvement – the latter also benefiting trading partners such as Azerbaijan and Kazakhstan – but India’s risks have increased amid sluggish growth, currency volatility and government stability concerns ahead of the impending general election in April-May.

In Brazil, political stability has improved, and there is some excitement over the free-market, reformist approach of president Jair Bolsonaro. There are also improving fortunes for Chile, Peru, and other commodity producers across South America.

Scores for Colombia and Panama have similarly increased, but Bolivia’s fortunes are fading alongside Argentina’s, with Venezuela, remaining mired in a political and economic crisis, off the radar.

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Asia bounce

The biggest improvement in risk scores by region has occurred in Asia, as many countries have rebounded after the market volatility last year caused by capital outflows linked to US monetary policy tightening.

Although there are still lingering concerns surrounding the health of China’s economy, with over-capacity and banking sector debts in mind, the combination of pro-growth policies from Chinese authorities, and the US Fed putting further interest-rate hikes on the back burner, has helped to contain fears.

Scores for China, Hong Kong, Japan, Taiwan and Vietnam have climbed, although analysts are more cautious over prospects for Indonesia, Malaysia, South Korea and Thailand.

Africa heats up

These diverse risk trends are also apparent across Africa, showing general improvement in the survey.

Although the picture is brighter partly because of stabilizing risk scores for Nigeria and South Africa, the outlook has also become more favourable due to commodity prices recovering and financing conditions improving in all but the region’s most notable concerns harbouring unsustainable debts, such as Mozambique, Sudan, Tanzania and Zimbabwe, where the risks are still rising.

Across North Africa, investor risk has continued to fall in Egypt, as recovering tourism, remittances and the start-up of gas production narrow the current-account deficit, among other factors.

Risk is also lower in Tunisia, with Morocco – a moderately safe option – unchanged, but Algeria is a bigger concern, as are countries in the Middle East still struggling with the after-effects of the oil crisis, the Gulf region diplomatic crisis and specific social instability or fiscal risks, chiefly Lebanon, Oman and Qatar.

To see the latest survey results, go to: www.euromoneycountryrisk.com


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