Asian country risk is increasing less than other parts of the world, as investors remain gripped by the eurozone crisis. However, divergent risk patterns are becoming evident across the region, according to Euromoney’s latest Country risk survey results.
Confidence in Southeast Asia is high, but several of the Asean emerging markets are perceived to be even riskier than at the start of 2012. Moreover, the South Asian Indian sub-continent, which was already the lowest-ranking part of the region in ECR’s survey, is fast decoupling from the rest of the region.
As we have now passed the halfway mark in 2012, and with all the focus still very much on the eurozone’s intractable problems, one of the key questions in investors’ minds is how are Asia’s emerging markets faring, both in relation to each other and in comparison with the rest of the world?
Once the darlings of the investment world, Asia’s sovereigns performed comparatively well in the wake of the 2008 crisis, shielded in part from Europe’s debt problems by continuing, albeit slower, growth in China and India, stronger fiscal dynamics and more liquid, and better-capitalized, banking systems.
Declines for other parts of the world, especially the eurozoneand Middle East, were far greater (see table, below), highlighting the global impact of the 2008 crisis. Higher scores were recorded for parts of Central Asia (see appendix for constituent countries) and, interestingly, for three of Asia’s larger investor targets, Singapore, Malaysia and Taiwan, where economic growth returned with a vengeance.
However, the region’s positive risk profile was undermined in the second half of last year as global risk increased sharply in conjunction with the intensification of the eurozone crisis. Large falls in ECR risk scores occurred across the region, led by the Asean-5 – Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
This year, with question marks hanging over the durability of China and India’s economic miracles, and rising political risks to contend with, ECR contributors have further reassessed Asia’s strengths.
Growth will be less spectacular. Real GDP is forecast to expand by 8.2% in China this year, down from 9.2% in 2011, before policy stimulus pushes it up to 8.5% in 2013, according to the latest July forecast update from the Asian Development Bank.
India’s growth is predicted to remain at 6.5% in 2012 – the same rate as in 2011 – before accelerating to 7.3% in 2013. However, the region is hardly braced for the deep recessions forecast for parts of Europe and average bank stability scores have remained fairly stable across the region – even in East Asia, where the score has declined, it is still higher than for the eurozone (see table).
Reflecting this, Asia has performed comparatively well in the ECR survey, underpinned by more confidence (a higher score) in Southeast Asia and an unchanged score for Central Asia.
More than 400 economists and country risk experts from a range of financial and other institutions take part in the ECR Country Risk Survey. They evaluate the risks faced by international investors in 186 markets, scoring countries across a range of political, economic and structural criteria. The ECR survey combines these contributor assessments with other data regarding access to capital, credit ratings and debt, to formulate an overall score out of 100 (where 100 is the least risky and 0 the most).
East Asia, safe but deteriorating
Despite a 1.4 point fall since January, East Asia remains the safest part of the Asian region, on an average score of 65.6.
The scores for all five constituent countries (see appendix) began to fall in the second half of last year and have continued on a downward trend since, mostly as a result of weakened economic profiles, with more volatile financial markets affecting investment and retail sales, and industrial production dampened by diminishing export demand. The economic assessment score for East Asia has fallen by an average of 1.2 points since January.
China’s score has eased in reaction to the slower economic expansion now materializing, as well as domestic political uncertainty ahead of the upcoming party succession, and related worries about corruption and transparency.
However, its relative strengths remain intact – in fact China has moved up three places in ECR’s global rankings to 37, overtaking Italy and Spain. Hong Kong, East Asia’s safest sovereign on a score of 82.2, has slipped one place to 11, displaced by Germany in ECR’s current top 10 (Germany climbs into top 10 in ECR’s global rankings).
And whereas structural development appears to be one of the concerns for China’s contributors, the region’s story mostly centres on the weakening economics and politics assessments, all except for South Korea, where ECR contributors have upgraded the sovereign despite lower data scores for access to capital and debt indicators.
South Korea has risen three places in the global rankings to 25, closing the gap with Japan, in 24th spot, to just 0.2 points (South Korea closes in on Japan as both climb rankings). Although Korean exports have been affected by the weaker external climate, ECR contributors have upgraded their scores for monetary policy/currency stability – reflecting lower-than-expected inflation – as well as government finances, with the authorities able to boost infrastructure spending while also lowering the budget deficit in 2012 and targeting a surplus for 2013. Scores for South Korea’s government stability and information access/transparency have also improved.
Thailand bucking trend as Asean risk increases
The Asean-5 grouping has also seen increased risk since January, but not as severe as that witnessed in East Asia or South Asia. Vietnam has suffered the most, due to declining construction activity and stalled industrial production, plus question marks over the stability of the government and its banks – its score has fallen by 2.2 points since January, dragging the sovereign down three places in ECR’s rankings to 86.
Robust growth in the Philippines – with high consumer confidence levels – has nonetheless shielded Asean from a large score loss, and, as with South Korea, Thailand is bucking the trend with a stunning 1.7 point rise in its score. Bolstered by a rejuvenated economy, with reconstruction taking place after the floods last year, the sovereign has climbed seven places in ECR’s global rankings to 46 (Thailand and Mexico to cross paths).
However, even by excluding Thailand, Asean would still be in second place, nestled between East Asia and Southeast Asia. This is because the Asean-5 region has the lowest score dispersion of any Asian grouping – a difference of just 21.9 points separates Malaysia’s 62.3 points – down 1.2 points this year, and ranking 36 on ECR’s global scale – with 86th-placed Vietnam, on 40.5, down 2.2 points.
Compare that to score dispersions of 33.1 for Central Asia, 39.5 for South Asia, 41.8 for East Asia and a whopping 82.0 for Southeast Asia, which differentiates lowly Laos (ranked 178) from high-rising Singapore – the world’s third-safest sovereign on a score of 88.0 behind Switzerland in 2nd place and Norway in 1st.
Mixed bag for Central Asia
The average score for Central Asia, mostly comprising the former Soviet Republics, has uniquely stayed unchanged since January. However, the picture is blurred by a mixture of economic, political and structural indicators affecting the countries in various ways.
While confidence in Armenia, Kazakhstan and Uzbekistan has improved, the overall effect has been negated by large falls for Georgia and for low-ranking Tajikistan and Turkmenistan, down three places to 159 and five to 154 respectively. The average score for Central Asia is unchanged, but the region is still 12 points adrift of the LatAm average and 14.2 below Central and Eastern Europe, underlining its political and structural development deficiencies.
South Asia’s decoupling might see it drop below Africa before too long
Interestingly, South Asia, although previously the riskiest part of Asia, is fast becoming one of the most risky parts of the globe. With a 2.2 points fall in H1 2012, South Asia has not only become more decoupled from the rest of Asia, it is also converging with Africa. The score differential between the two has narrowed from 2.7 in January to just 0.9 in June.
Despite the relative stability of remittance income, larger trade deficits fuelling currency depreciation and inflation are partly to blame against the backdrop of a softening of exports and investment inflows.
All seven South Asia countries are perceived to be more risky since January, according to ECR contributors, led by Sri Lanka, which has seen downgrades to 13 of its 15 indicators (India’s waning economic outlook affecting Sri Lanka); this, despite a heavily oversubscribed sovereign bond listing in July, illustrating strong confidence in the government’s ability to overcome such fears.
Large falls have also occurred to Pakistan (Pakistan riskier than Iraq and DRC), Afghanistan, Nepal and India as a result of domestic security threats and altered perceptions of export revenue, given the dominance of intra-regional trade flows. All three main categories of risk for South Asia (economic, political and structural) have deteriorated, whereas all three have improved for Africa. If the trends persist, South Asia could move below Africa before too long.
Appendix:For this study, a series of sub-sets has been constructed from ECR’s Country Risk Survey data, broadly in keeping with those used by the Asian Development Bank for its economic forecasts. Therefore, Southeast Asia comprises the narrowly defined Asean-5 (Indonesia, Malaysia, the Philippines, Thailand and Vietnam), together with Brunei, Cambodia, Laos, Myanmar and Singapore. Central Asia, composed of Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan, is mostly former Soviet Republics. East Asia, dominated by China, also includes Hong Kong, South Korea, Mongolia and Taiwan. South Asia, grouped around India, collates it together with Afghanistan, Bangladesh, Bhutan, Nepal, Pakistan and Sri Lanka. The Maldives is excluded as an outlier to avoid skewing the averages; ECR data for that country is still thin and with a short history.