ECR survey results Q2 2019: China, Mexico, Turkey’s wobbles spotlight risks


Jeremy Weltman
Published on:

Global investor safety stabilized in Q2, but the failure to improve after Q1 gains highlights the negatives of global protectionism, warn risk analysts.


China wobble: Challenges associated with ageing in the world’s most populous nation shouldn’t be over-looked

Euromoney’s country risk survey metrics indicate that the unweighted mean average global risk score for 186 countries remains higher in comparison with last year’s levels, with 71 countries upgraded, 58 unchanged and 57 downgraded to end-June.

China’s economic risks have edged higher in response to the ongoing US trade dispute, also impinging on South Korea’s risk score, but improving Vietnam’s.

Other countries are likely to be affected as supply chains shift, if the dispute rattles on and potentially sparks a currency war.

China has seen a deterioration in many other risk factors, including certain aspects of its political profile, which may become more prominent in light of reactions to the Hong Kong extradition-bill crisis harming business confidence.

Its structural risk is steadily worsening too, highlighting what are often over-looked longer-term challenges associated with ageing in the world’s most populous nation.

China is down one place in the global risk rankings to 43rd, and is now sandwiched between Italy and Peru on similar scores.

Elsewhere, analysts continue to downgrade Turkey, thanks to political interference in monetary policy, a hefty external financing requirement and a heavily indebted private sector all exerting pressure on the lira. It lies 62nd in the global rankings.

Mexico is also more suspect, given the risk of recession exacerbated by uncertain trade relations with the US, fiscal liabilities accruing from state-owned oil company Pemex, and leftist policies prompting finance minister Carlos Urzúa to resign.

Risks from trade wars

North America is marked down more than any other world region so far this year, with the US economic outlook predicted to take a hit from the Trump administration’s protectionist policies and a stronger dollar undermining exports.

“The escalation of trade tensions since early 2018 has negatively affected global business confidence, investment, trade and growth,” says survey contributor Arjen van Dijkhuizen, a senior economist at ABN Amro.

“Given the unexpected twists and turns in the trade/tech war so far – with an unexpected re-escalation of US-China tensions in May, Trump’s threat to sanction Mexico for non-trade related reasons, and a recurrent threat to tariff cars and/or other imports from the EU – we think that on a global scale firms will remain cautious for the time being.”

This caution is echoed in the survey results, which show a reluctance among analysts to upgrade countries exhibiting strong economic growth in the first quarter, signalling there is a risk of global prospects worsening as trade frictions persist, despite monetary-policy easing.


Safe spots

Positively, capital flows to non-China emerging markets held up in the second quarter, according to the Institute of International Finance’s tracking mechanism, at a lower level than in Q1, but still totalling $23 billion.

Asia, the Caribbean, and central and eastern Europe are among the regions gaining the most in Euromoney’s risk survey.

Countries improving in Asia are Japan, Nepal and fast-growing Philippines.

Also climbing is Bangladesh, one of the world’s most rapidly expanding economies this year, and a trailblazer in Euromoney’s Belt & Road Index, showing how the investor climate has altered for countries involved in the project since China initiated the New Silk Road.

Other improvers in the country risk survey include Russia, Egypt and Colombia, as well as numerous other, mostly emerging and frontier markets, not least in the Caribbean. Here, higher scores for Barbados, Jamaica, the Bahamas and St Lucia have raised the regional average.

In Latin America, copper-producers Chile and Peru have higher scores, so has Uruguay, along with Honduras and Panama, but by balancing progress on pension reform with disappointments on the economy, Brazil has flat-lined, and both Argentina and Venezuela remain very high risk, despite a minor bounce.

Quantifying risk

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 is consistently the world’s safest country, just pipping Norway, with Switzerland, Denmark and Sweden making up the top-five safest domains.

More G10 countries have improved in the survey so far this year, including, surprisingly, the United Kingdom as Brexit risks have taken a breather, with analysts taking on board the fact the economy is holding up and improving the borrowing requirement.


However, scores for the United States and Canada are down in response to global trade risks, and Germany’s economy is struggling, causing it to be downgraded.

Worries over Italy persist as well.

The country has been marked down this year as questions over government stability and policy, not to mention the weak and vulnerable economy hampering fiscal control, fail to convince the experts that authorities can deal effectively with the debt problem.

Reflecting the views of many of Italy’s survey contributors, Norbert Gaillard, an independent sovereign risk expert, says: “The country will post negative GDP growth in 2019, and the government is in a stalemate, but does not want to admit it.

“I remain convinced the Italian public debt is hardly sustainable in the medium term.”

Gaillard and others have been consistently negative on Italy, underpinned by the fact the economy is not expected to produce any growth this year, according to a consensus of independent forecasters polled in Euro Zone Barometer.

Given that scenario, the unemployment rate will remain above 10%, with public debt rising to 133% of GDP, testing the patience of financial markets, given the lack of an effective expenditure-cutting programme to satisfy European negotiators.

European prospects

Among other highly indebted sovereign borrowers in Europe, Portugal and Spain are still steadily rising on the back of improving macro-fiscal fundamentals, and Greece improved ahead of the elections that saw a landslide for the centre-right, market-friendly conservatives New Democracy, ousting the left-wing Syriza government.

Greece has improved by almost seven points during five years, but remains a very high-risk borrower in Euromoney’s second-lowest risk category (tier four) – on a par with lowly Argentina – after being downgraded a whopping 41 points in total since the crisis began, with the economy recovering only haphazardly.

Some countries across central and eastern Europe have been enjoying stellar growth, supported by loose monetary policies and generous EU funding co-financing investment projects – boosting domestic demand.

However, in Q2, they have seen their risk scores deteriorate slightly, given what would appear to be a less propitious outlook.

Among them are Estonia, Latvia, Poland, Romania and Slovenia, but not Hungary, which is still steadily improving under Viktor Orbán’s conservative-nationalist Fidesz government, whose illiberal policies are still being overshadowed by racy economic growth, a tight labour market and declining public debt ratio.


Elsewhere, the majority of sub-Saharan African borrowers have seen their risk scores improve in line with better growth prospects, linked to higher commodity prices and plans for an African Continental Free Trade Area, although it has yet to take effect.

Scores for comparatively safe bond issuers, Botswana, South Africa, Ghana, Côte d’Ivoire and Nigeria, are all upgraded this year.

On the other hand, countries with debt sustainability concerns, namely Sudan, Tanzania, Zambia and Zimbabwe, have had their scores lowered.

Across North Africa, Algeria’s political and economic crisis has seen its score dip, whereas Egypt and Tunisia have improved.

Meanwhile, Morocco – the lowest risk investment in the region – is unchanged and is still showing the most improvement on a five-year trend basis, along with Egypt.

Across the Middle East, invariably Iran’s improvement has taken a backward step after the breakdown of the nuclear agreement and the resumption of hostilities with the west, but other countries in the region, mostly Gulf oil producers, are struggling to adjust fiscal policies to the new oil-price realities.

With political problems also factored in, countries failing to convince the experts are Gulf Cooperation Council (GCC) members Bahrain, Kuwait, Oman and United Arab Emirates, as well as Jordan and Lebanon – all marked down this year.

The two remaining GCC members Qatar and Saudi Arabia have seen their scores bounce back a little, and Israel is holding up amid the political uncertainty, with fresh elections due in September.

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