ECR survey results Q3 2015 dominated by China’s jitters, Brazilian crisis and EM capital shock

The third-quarter survey took place amid considerable uncertainty over economic growth and financial stability in the world’s most populous nation after years of impressive state-fuelled expansion.

Euromoney survey data now begs the question of whether China, lying 41st in the global rankings, still deserves to be an A-rated credit:

With China’s concerns affecting global commodity prices, Euromoney’s unique survey of more than 440 expert contributors shows no fewer than 60 other sovereigns (out of 186 surveyed) becoming riskier during Q3 2015.

Brazil is in meltdown and has similarly suffered a 1.5 point fall during the quarter, pushing the sovereign down four places to 54th.

The commodity slump is hardly helping, but with its capital-access score falling, the real under pressure, inflation pressure building and the economy flat-lining, Brazil is mired in a crisis of its own making.

These risks were previously flagged by ECR, pointing to a disappointing fiscal adjustment weighing on its credit rating, and highlighting Euromoney survey’s predictive qualities.

Heightened risks in Asia

Scores for a raft of other sovereigns have taken a hit, too, notably because the financial markets are still expecting the US Federal Reserve to raise interest rates, heightening risk aversion and bleeding capital from EMs.

The Institute of International Finance is warning of a record net outflow of more than $500 billion from EMs this year, exceeding the level that occurred after the 2007-08 global financial crisis.

It is countries devoid of economic balance, flagged by twin fiscal and current-account deficits, and with short-term debt vulnerabilities, which are most at risk.

A swath of Asian sovereigns, from Hong Kong and Malaysia to South Korea and Taiwan, have been swept up in its wake.

Euromoney has recently flagged up Malaysia’s worsening prospects.

Its purchasing managers’ index, as with other borrowers across the region, is languishing below the 50 line dividing expansion from contraction.

John Sharma, a macro-economist in sovereign risk at National Australia Bank, says: “Malaysia is a concern, with a short-term external debt to foreign reserves ratio as high as 88%.”

Sharma also cites figures showing a “substantial foreign holding in the local currency government bonds of Malaysia (31.4%), suggesting it is more at risk of capital outflows”.

Indonesia’s risk score hasn’t worsened in Q3, but is already much lower than Malaysia’s – a gap of more than 10 points – and other Asian sovereigns, including Myanmar and Japan, have seen their risk scores weaken due to domestic factors, such as government stability, institutional risk and demographics.

They are among 15 indicators Euromoney’s survey contributors are asked to evaluate on a regular basis, which highlight the multifaceted nature of sovereign risk, and the importance of political and structural metrics alongside pure macro-fiscal trends.

These scores are then added to values for capital access, credit ratings and debt indicators to provide a total risk score adding up to 100 points, where a higher value indicates greater safety.

Across Latin America, Brazil’s crisis, compounded by the global commodity slump and the threats posed by the approaching severe El Niño weather conditions, have seen scores downgraded for Colombia, Mexico and Peru.

One or two states in Central America, along with Paraguay, are also losing their lustre.

Turkey worries as regional fissures surface

Turkey is another notable EM struggling to convince the experts, as political uncertainty and a weakened economy have cast the spotlight over its twin deficits still deterring investors and putting the currency in a tailspin.

Panayotis Gavras, who is head of policy and strategy at the Black Sea Trade and Development Bank, says: “Turkey’s economy is in a more precarious position than it was during the first half of the year, with global uncertainty rising and markets under stress.”

Among the world’s riskier prospects, too, are Angola, Botswana and numerous other commodity producers in sub-Saharan Africa, highlighting their increased vulnerability to China’s diminishing appetite for imported raw materials.

Fewer countries in Europe have been downgraded this time around, although Germany is a notable exception, along with one or two others further east – Albania, Croatia and FYR Macedonia – as Europe’s migrant crisis causes political ructions and a rising economic cost, adding to groaning budgets.

Australia and Canada have succumbed to increased risk in Q3 2015, but both countries are still comparatively safe prospects, racking up four-fifths of the total risk points available.

Contrast that with the Middle East, where risk scores are invariably lower, oil producers have been marked down again as the price of global crude languishes, and conflict in the region continues to take its toll on Syria and Yemen.

Developed nations offering safety

G10 prospects were evenly balanced during Q3 2015, but as Canada, Germany and Japan saw their scores shaved, accompanied by another familiar downgrading of France, prospects for other countries mostly improved.

The US, the Netherlands, Belgium and Sweden added to their points tally in Q3.

Italy, too, now appears to be on a more convincing upward trend with its economy gradually reviving.

The country’s nascent recovery is still in first gear, and the debt burden is very high, but Matteo Renzi’s government has made some encouraging progress on economic and political reforms, pushing Italy two places higher, to 47th in the rankings.

Other sovereigns in the European Union have for the most part seen their growth prospects ameliorate backed by quantitative-easing programmes, not least from the European Central Bank spurring liquidity in the eurozone.

Denmark, Ireland, Poland, Portugal, Slovakia and Estonia are among those countries perceived as safer options since June. Plus, Cyprus is now fighting back as the economy revives and new foreclosure laws help to put a line under its debt crisis.

Beyond Europe, India stands out

Scores for Russia and South Africa have partially rebounded from downgrades stretching back a few years, but risks are still prevalent with their survey scores still lower than at the start of the year, alongside familiar high-default risks Argentina, Greece, Venezuela and Ukraine.

That leaves India’s prospects still standing out among the larger EMs as one of the fastest-growing economies worldwide.

Economic growth is running a little below that required for development, considering its population size, but at more than 7% in real terms, India is offering decent prospects among the Brics, supported by low commodity prices, rising investment and reforms.

Meanwhile, low oil import prices and strong remittances are keeping India’s current-account deficit within a comfortable range.

Other markets becoming safer in Q3 include Thailand, but not because of its growth or fiscal improvement. It is mainly because the political situation has stabilized and the country is enjoying better capital access.

The Philippines, Sri Lanka and Vietnam have also seen their scores improve, too, along with parts of Eastern Europe, and a number of others stretching from the Caribbean to as far north as Iceland.

A total of 100 sovereigns became safer in Q3 2015, which is something, but many of those had low scores to begin, meaning they are still medium-to-high risk credits.

In view of these challenges, global fixed-income investors must remain vigilant.

More than 400 economists and other experts from a range of financial and other institutions take part in Euromoney’s country risk survey. They evaluate the risks faced by international investors in more than 180 markets, scoring countries across a range of political, economic and structural criteria. These are added to values for capital access, credit ratings and debt indicators, and aggregated each quarter to provide a total risk score.

To view the survey methodology, go to: <em>www.euromoneycountryrisk.com</em>.

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