ECR survey results Q3 2020: Economic concerns persist but easing of global risk paints a brighter picture

Euromoney Country Risk’s scoring approach shows an easing of global risk since June, even though the economic fallout from the Covid-19 crisis continues to weigh on many individual country profiles.

Euromoney’s latest quarterly crowd-sourcing risk survey shows an improvement to the global risk score average in Q3 2020.

No fewer than 94 of the 174 countries have become safer to varying degrees since end-June, with 67 becoming riskier and the remainder unchanged.

Switzerland’s safe-haven status is reinforced, China’s improvement continues and other emerging markets (EMs) are bouncing back, including Indonesia, Russia and several in Africa that are less exposed to the negative oil shock, such as Egypt, Morocco, Botswana, Côte d’Ivoire and Kenya.

Those countries displaying the largest moves in either direction are predominantly smaller EM or frontier markets, reflecting their domestic political conditions, structural peculiarities, access to finance, and their experience managing the coronavirus pandemic and its economic impact.

Scores for high-risk Mauritania, Guyana, Liberia, Guatemala, Rwanda and Sierra Leone have all improved substantially, along with more moderate risks Bermuda, Papua New Guinea, Tajikistan, Paraguay and Mauritius.

However, scores have worsened for high-risk Bahamas, Gabon, Somalia and Yemen.

Algeria, Argentina, Brazil, Bulgaria, Chile, Hong Kong, Lebanon, the Philippines, Qatar, Slovakia and Tunisia are all showing downward trends this year. Argentina has crashed 45 places in Euromoney’s global risk rankings, and Lebanon 38 places, with Brazil, Mexico, Turkey and the Philippines also falling substantially.

The US (22nd), Canada (23rd) and the UK (31st) are struggling, as the US elections and Brexit create additional risks to those posed by the pandemic.

To date, 91 of the 174 countries surveyed have seen a rise in economic risk in Q3, with the GNP-outlook indicator downgraded in 139 countries, the employment/unemployment indicator in 127 and government finances in 106.

Offsetting this, several political risk indicators have improved, including government stability in 124 countries, the regulatory and policymaking environment in 123 and corruption in 109.

Euromoney’s unique crowd-sourcing risk survey provides a responsive guide to changing perceptions of participating analysts working in the financial and non-financial sectors, focusing on a range of key economic, political and structural factors affecting investor returns.

It is conducted quarterly among more than 300 economists, political risk analysts and other experts, with the results compiled and aggregated along with a measure of capital access and sovereign debt statistics, to provide total risk scores and rankings.

This, along with other commentaries that follow in October, incorporating the opinions of the contributing experts, will explore the more interesting changes and the reasons why.

Shock tactics across industrialized world

Several of the lower-risk, advanced industrialized nations that were sent reeling by the coronavirus shock have stabilized after the reopening of economies from lockdown, with analysts upgrading Belgium, France, Italy, Spain and Sweden in Q3, in recognition that – possibly – the worst of the shock has passed.

Switzerland, too, has had its score raised and it retains the top rating in the survey as the safest country worldwide, ahead of Denmark, Norway, Singapore – despite it slipping – and Sweden completing the top five.

Independent risk expert Norbert Gaillard, of NG Consulting, attributes this stabilization to the recovery and resilience facility (RRF) passed by the EU in July totalling €672.5 billion, comprising both grants and loans.

“This is a milestone for the EU because it involves the pooling of public debts,” he says. “The RRF has positive credit implications for all European countries, especially those most affected by the Covid-19 pandemic such as Italy and Spain.”

Gaillard notes the fact Spain (39th in the rankings) and Italy (56th) have averted a political crisis to date. However, he also alludes to how the crisis has caused enormous economic pain.

This is underlined by further downgrades to their respective economic-GNP outlook indicators, and in the data showing huge falls in GDP in the first half of the year and worsening debt metrics, which will be of concern to investors.

The deterioration in debt metrics is the most notable concern for France, in 25th place.

Gaillard says: “France has been unable to post a fiscal surplus for more than 40 years, though a positive point is that I don’t anticipate any significant political risk until the next presidential election in April-May 2022.”

Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies, says the improved credit outlook is due to better predictions for the GDP and unemployment outlook than at the height of the crisis, and to the shift in euro area monetary policy and fiscal stimuli, which is notably benefiting France and Italy.

“The ECB’s latest guidance on continuing ultra-low interest rates and potentially extending rollovers of its bond purchases beyond 2021 effectively signalled to the markets that French and Italian deficits will be underwritten into the foreseeable future, no matter what happens in terms of both countries’ creditworthiness,” he adds.

Nonetheless, Gurdgiev sounds a note of caution to analysts pricing in tangible upsides to extremely pessimistic forecasts for both economies.

“This implies [they] are currently at risk of severe revisions later this year, should the ongoing second wave of the pandemic gain stronger momentum,” he says.

Scores for Finland, Germany and the Netherlands have fallen in Q3, and a big drop has occurred for Slovakia, reflecting the economy and instability risk of the governing coalition after elections earlier in the year.

Experts are still losing confidence in Bulgaria, Cyprus, Lithuania, Poland and Turkey, with the latter falling six places in the global rankings, and 24 overall this year to 98th.

The US score is still sliding ahead of the presidential decider on November 3, not least because of the concern for a possible dispute over the outcome, which could heighten political and social tensions.

The markets may be more hopeful of a Trump victory, but NG Consulting’s Gaillard provides a contrary view, arguing that a Biden administration could be more positive for the economy than some investors expect.

“The tax and other fiscal measures in favour of the popular and middle classes, and the huge clean energy and infrastructure plan would result in higher GDP growth,” he says.

“In contrast, the re-election of Donald Trump would increase political risk and lead to more protectionism and isolationism.”

Meanwhile, Turkey’s appeal has been consistently fading over the years due to an unpredictable monetary policy, government interference, its trade imbalance, volatile foreign relations and weak economy failing to provide a convincing argument to support the lira.

The maritime dispute with Cyprus and Greece is hardly helping, according to Global Strategy Project director Marco Vicenzino, who says it should be viewed within the context of broader EU-Turkey relations and president Recep Tayyip Erdogan’s strategic and geopolitical ambitions in the eastern Mediterranean, Middle East and beyond.

“The bottom line is that Erdogan’s aggressive agenda is destabilizing the entire region at a very critical time when the Covid-19 pandemic is already wreaking enormous economic havoc globally and particularly in Europe’s southern flank,” he says.

It also provides a convenient distraction from Turkey’s domestic economic problems while the EU’s constant reluctance to act and confront his agenda will only “embolden him further to pursue his dangerous game of brinksmanship and further destabilize the region economically and politically”, says Vicenzino.

The regulatory and policymaking environment is one of several risk indicators downgraded.

China rises, but doubts surface in Asia

China’s risks have softened since the coronavirus shock earlier in the year led to draconian restrictions on personal movement and economic activity to limit its spread.

“The Chinese government has provided tax relief and specific assistance to enterprises, especially small and micro companies,” says Xianming Wu, a professor at Wuhan University.

“The fight against poverty in affected areas has also entered a decisive stage of the battle and the state has invested heavily in finance, while the opening up of the service industry to foreign companies has boosted confidence in China’s economy.”

Daniel Wagner, CEO of Country Risk Solutions (CRS), believes that Beijing has been much more effective at creating and implementing a domestic economic stimulus plan than Washington.

“This, in combination with its effective combating of Covid-19, has enabled the Chinese economy to increase its productivity in Q2 and Q3 2020,” he says.

“That said, we must take Beijing’s reporting of economic performance with a grain of salt. Its tendency to inflate levels of economic performance in the past imply that its current economic performance may not be as rosy as pictured.

“We should also presume that the depths of its economic malaise in Q1 was under-reported, which may make its current level of performance appear all the more remarkable.”

Several of the region’s EMs and frontier markets have seen their scores improve in the latest survey, including South Korea, although there are also reasons to remain cautious, according to Hyun Hak Kim, associate professor at the department of economics of Kookmin University.

He thinks one reason for the improvement is due to the fatigue of social distancing, which means households have consumed more than before, but the pandemic situation, which had been improving, began to get worse again in August, and consumer confidence, which improved in August, has since fallen in September.

“The South Korean government is trying some stimulus packages, but the public has a lot of doubts about this, as I have,” says Kim.

South Korea’s GNP-outlook and monetary policy/currency stability indicators are downgraded in this latest survey.

Also given the rise in political tensions with North Korea, Kim believes it is necessary to gauge the Q4 risk score to obtain a firm conclusion that South Korea is improving.

Other countries becoming safer in Q3 are Cambodia, India, Malaysia, Mongolia and Thailand, but the Philippines is a notable exception, falling 10 places in the global rankings, and 21 overall this year to 81st.

Wagner at CRS expects a 7% to 8% contraction in the Philippines’ GDP this year due to the strict lockdown implemented to address Covid-19.

“The country is officially in recession,” he says. “Domestic demand has been severely impacted and it should persist for the rest of the year.

“Record high unemployment and a severe drop in remittances by overseas migrant workers will also continue to weigh heavily on the Philippine economy.”

Singapore (fourth in the rankings) and Hong Kong (sliding below improving Macau to 18th) have seen their risk scores marked down.

Singapore is less concerning, says Friedrich Wu, a professor at Nanyang Technological University. The crisis has stopped construction activity and it should rebound strongly once Covid-19 is under control, but the situation in Hong Kong is more serious.

“Last year’s political unrest and this year’s Covid-19 have hurt and are still hurting the three pillars of the economy – trade, tourism and foreign capital –and Beijing’s national security law in June is a double-edged sword. It has managed to clear the streets from violent protesters. Yet it has also shaken the confidence of foreign investors,” says Wu.

“Mainland Chinese travellers will avoid Hong Kong because of its anti-China attitude. As for trade, even if global trade recovers, Hong Kong port’s status has declined inexorably over the years.”

He adds: “In 2000, it was the world’s number-one busiest container port. By last year, it had fallen to number seven, overtaken by Shanghai (first place), Ningbo-Zhoushan (third), Shenzhen (fourth) and Guangzhou (fifth).

“In financial services, Hong Kong mainly survives by serving as an IPO centre for mainland Chinese companies to raise funds. According to the last rankings by the London-based Global Financial Centres Index (September 2020), Hong Kong has fallen to world’s number five, overtaken by Shanghai (third), and some international asset managers are moving their funds and operations from Hong Kong to Singapore.”

Rise in LatAm default risks

With the coronavirus causing huge social and economic problems across the continent, Brazil Chile and Mexico have been downgraded in the survey along with Bolivia, Honduras and Nicaragua.

The economic performance of Brazil and Mexico “matters regionally and globally”, says Alessandro Rebucci, associate professor at Johns Hopkins Carey Business School.

“Both countries gradually turned away from sound economic management after the global financial crisis and are currently under-performing and vulnerable.”

Rebucci notes the correlation of their quarterly GDP figures has increased since the elections of Jair Bolsonaro and Andrés Manuel López Obrador, their respective populist presidents. He says both countries are vulnerable to the persistent and worsening Covid-19, pandemic given their weak healthcare systems and high levels of poverty, crime and corruption.

Both countries are bordering on political instability and the fiscal outlook is worsening.

“It is plausible to expect both countries to possibly default on their government debt after the next elections scheduled for 2022,” he warns.

Despite a recent debt restructuring, Argentina, ranking a lowly 142nd in the survey, has also failed to improve, with authorities struggling to contain Covid-19, economic activity depressed and the country still in desperate need of external financing.

Argentina comes off the worst from the crisis, says Guerson Salgado, professor of economics and finance at the Universidad Nacional de Ingeniería, and it might lead to it becoming even more dependent on loans.

“When the debt was renegotiated, it was known Argentina was not going to be able to comply with its payments in the medium term and therefore would have to renegotiate it again in the future,” he says.

“Covid-19 is a perfect excuse to reapply to renegotiate the debt and even request a larger loan from the IMF, because the economy has been hit harder than predicted by the current health crisis.”

In stark contrast, Paraguay’s risks have greatly eased during the past couple of quarters, causing the country to leap 12 places in the global rankings since June and 38 in total this year, and become safer than Brazil and Mexico, which are still sliding.

“Paraguay is simply doing what it takes to keep on a sustained developing path and has outperformed its neighbours, despite frequent financial and cross-border trade negative shocks,” says Germán Plessen, an adviser to the Bahía Blanca Stock Exchange.

He puts this success down to the independence of the central bank, fiscal discipline and the consolidation of a highly qualified bureaucracy running national government.

The country runs a current-account surplus more often than not, and is committed to both a fiscal-responsibility law limiting the fiscal deficit to 1.5% of GDP and an orthodox inflation-targeting monetary policy regime.

It has also adopted a successful Covid-19 containment strategy, which locals found to be excessively restricting initially, but is working.

Pessimism sweeps MENA

Analysts have become more cautious over prospects for countries across the Middle East and North Africa, including Israel after another national lockdown, in Jordan where elections are scheduled for November, in Tunisia, and Lebanon in the wake of the devastating explosion in Beirut exacerbating the country’s political and economic problems.

There are lower scores for war-torn Syria and Yemen, and for many of the hydrocarbon producers facing budgeting difficulties, including Algeria, Bahrain, Kuwait, Oman and Qatar.

Fadi Haddadin, an economist at the Foreign Policy Association, notes how Covid-19 enhances the possibility of complicating the Yemeni crisis. He also mentions how it is posing challenges to the private sector in the region, exacerbating unemployment (in Jordan and Tunisia), raising budget deficits and national debt (Israel, Jordan, Kuwait, Oman and Tunisia), exposing the banking sector (Qatar) and challenging local currencies (Israel and Yemen).

“Such countries showed severe weakness when attempting to mitigate these effects, while the governments of Bahrain, Saudi Arabia and the UAE have resorted to better measures providing financial benefits and incentives to affected businesses and economic sectors,” he says.

Haddadin goes on to explore the role of crisis-management models in the region, noting positively that Morocco, which has seen its risk score improve this year, has successfully managed its economic/healthcare crisis through “professional political management, enabling the state to preserve its vital interests, while avoiding domestic and regional confrontation”.

Risk and opportunity in SSA

South Africa’s risk has stabilized at a lower level after falling sharply in recent years, weighed down by concerns for the financial viability of the state-owned electricity provider Eskom, a rising debt burden and sky-high unemployment.

Several commodity exporters, such as Angola, are struggling. It faces notable challenges from the fact the economy it is hugely dependent on oil and diamond production.

Due to the sharp drop in oil prices, Angola is in recession and FX reserves are declining.

Regional country risk expert Soumendra Dash believes the structural reform programme will have limited impact on economic activity.

“The challenges arising from the Covid-19 shock, high unemployment rate and fall in oil prices outweigh the positive effects of various pro-growth policies adopted by the government,” he says.

“The development of the private sector, speeding up privatization of roughly 200 state-owned enterprises and the reduction of the country’s monolithic dependence on oil exports are key to steering the economy in the right direction.”

High-risk Gabon is another example of an economy struggling with the coronavirus and depressed oil prices, despite diversification and expansion of agri-business and other non-oil sectors.

Dash mentions not only the various restrictions and measures introduced to address the pandemic as deterring economic development in Gabon but also the lack of supply of skilled manpower.

More encouragingly for potential investors, Kenya has shown substantial improvement in the survey, climbing 11 places to 79th, reflecting its well-diversified economy.

“The favourable weather [supporting a large agricultural sector], stable foreign direct investments and rising banking sector credit to the private sector are helping the economy to overcome the challenges thrown up by Covid-19,” says Dash.

Ghana, now 74th in the rankings, is another country holding up because of rising production and stable global prices of its key exports: cocoa, gold and timber.

Dash remarks upon the country’s prudent public expenditure management and the deficit limit enshrined in the new Fiscal Responsibility Act as encouraging for investors and multilateral creditors.

Ahead of the general election in December, there is still confidence in Ghana, despite the economic hit and the risk of increased pre-election government spending.

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