ECR survey results Q3 2017: Economic recovery sees Greece, Ireland, Portugal stage fight-back; US, UK flatline; Brics bounce

In safer hands: Global risk is easing, with recoveries galore, but some countries continue to flat-line

Despite the uncertainty caused by the North Korean crisis, global investor fortunes have become more evenly balanced in the absence of major shocks, according to the latest quarterly results of Euromoney’s unique crowd-sourcing country risk survey.

Developed country assets are safer compared with the volatile years caused by banking crises, sovereign debt shocks, harsh austerity, commodity price falls and populist political trends, with the risks assessed according to the values attached to a range of political, economic and structural indicators by the survey’s 400-plus respondents.

G10 scores have increased the most of any world region or country grouping in Q3 and for the year so far, but are still marked down heavily since 2010:

Singapore remains the safest country to invest in worldwide, coming first in Euromoney’s global risk rankings. Norway is second and Switzerland third.

They are among the few remaining triple-A credits, within the first of five tiered categories into which Euromoney divides all 186 sovereign issuers worldwide.

Syria, Zimbabwe and Venezuela, meanwhile, are still among the highest-risk defaulters.

Unsurprisingly, most countries are still riskier – their scores are lower – compared with five and 10 years ago, with policymaking concerns, bank stability and debt accumulation among the factors urging investors to remain cautious despite the recent bounce.

However, the average global risk score has increased for the first time in a year, with analysts upgrading 83 of the 186 countries since end-June.

Only 59 are downgraded, and cumulatively there are 84 countries with higher risk scores in 2017, signalling a shift towards more credit rating upgrades than downgrades.

Euromoney’s survey trends have a strong track record of pre-empting the ratings actions, as illustrated by Portugal’s upgrade this year.

The G10 has shown notable improvement in Q3 2017, as advanced, industrialized countries have become safer harbours again for mooring global capital.

Confidence is returning notably to continental Europe, where the EU’s ability to survive Brexit, the asylum crisis and populist politics has been greatly assisted by a stronger-than-expected economic recovery boosting activity, job prospects and fiscal trends.

Much of that is down to the European Central Bank avoiding turning off the taps of liquidity support by maintaining record low interest rates and a substantial quantitative-easing programme of asset purchases.

Analysts remain perplexed by the UK given the uncertainty surrounding future trade relations with the EU.

Prime minister Theresa May’s Conservative Party government has a slim majority, she faces internal party challenges and the UK economy is slowing, with heightened inflation risk caused by currency depreciation presaging an interest-rate rise from the Bank of England.

Its risk score stabilized in Q3, but it remains one of only two G10 countries marked down this year.

The other is the US, resulting from the Trump administration’s fiscal spending plans, political moves and legal challenges overshadowing economic momentum, and the risks associated with the North Korean crisis developing unpredictably.

For other G10 members, global trade growth and strong domestic economies spurred by ultra-loose monetary policies have prompted higher risk scores.

Political risk has calmed since elections were held in the Netherlands and France earlier this year, easing the prospect of a populist leader gaining influence.

Country risk scores have improved for Greece, Portugal and other borrowers hit hard by the banking crisis, with fiscal corrections aided by the economic recovery, but not for Spain, where analysts anticipated the crisis in Catalonia stemming from the unofficial independence referendum.

Greece on the other hand has risen four places in the global rankings to 106th, its highest since the crisis began.

Its debt problems are legendary, but economic indicators have improved across the board, and University of Thessaly assistant professor Paschalis Arvanitidis does not believe there will be any problems on the political front.

“Even if there are elections and another party takes over, there will be no real changes in the policies followed and the commitments the country has undertaken,” he says.

“Both this government and all other political parties with a strong electoral base are committed to Greece’s participation in the eurozone.”

The improving trend has fanned out to almost every country across Central and Eastern Europe – extending longer-term upward trends in country risk scores for Croatia and Serbia, signalling credit rating upgrades.

Scores for Cyprus and Slovenia are among those most improved, and there are several former Soviet Republics on the rise. They include Ukraine, with the economy rebounding and better access to financing via Eurobond listings, even if there remains concern for corruption, the slow pace of reform frustrated by vested interests and heightened inter-state relations.

Brazil, Russia, India and China (Bric) all improved in Q3, endorsing the increased interest in EMs this year. All four remain heavily marked down in the survey since 2010, but are benefiting from improving macroeconomic trends.

EMs are expected to attract more than $1 trillion of capital inflows from non-residents in 2017 for the first time in three years, on the back of strong global economic growth and low inflation, according to the Institute of International Finance.

China’s bank stability score, however, is downgraded, underlining the concerns many analysts have for its growing debt problems, preventing it from rising into the top 40 in the rankings.

And although Turkey’s risks have stabilized, there are lower scores for Indonesia and Mexico, and South Africa’s political problems remain.

“The period leading to the ANC Conference in December, at which a new party leader will be elected, will be turbulent,” says Isaac Matshego, an economist working in sovereign risk at Nedbank, adding: “This political uncertainty is spilling over into policy uncertainty.”

Four of South Africa’s political risk indicators were downgraded in Q3 2017, and all six are lower during the first nine months of the year, overshadowing economic improvement and highlighting the dangers of political risk for investor prospects.

Indeed, sub-Saharan Africa has become noticeably less safe as debts rise in the aftermath of the commodity crunch and political tensions flare across a volatile continent.

Gabon, Democratic Republic of the Congo, Ethiopia, Namibia, Rwanda, Senegal and Tanzania are among the issuers with falling risk scores.

In Nigeria, concerns about the health of the president, internal security and the country’s budget funding are weighing on its risk profile. Ranking 100th in the global rankings, it remains the riskiest of all the Brics and Mints.

Across Asia, risk scores have improved for 11 countries, including Taiwan since a cabinet shuffle installed a new reform-minded, pro-business premier.

Others include Malaysia, the Philippines and Sri Lanka, as well as South Korea, brushing off the unlikely possibility of conventional or nuclear conflict on the Korean peninsula due to strong export growth and diminishing inflation risk.

Across Latin America, there is increased confidence in Argentina, Bolivia and Uruguay, but concerns surrounding Chile and Peru, two of the biggest fallers in the region this year. Both countries are slowly coping with the after-effects of the slump in copper prices, but are experiencing heightened political risks.

In Chile, where elections are due in November, and in Peru where political divisions are affecting policymaking, there have been major shake-ups in personnel.

Meanwhile, the Qatar crisis has sent shockwaves through the Gulf region.

Negative headlines about the banking system caused by capital outflows since the diplomatic crisis erupted have increased the risk of investing in Qatar.

Its risk score has declined further since end-June; this, in a region where most countries have become riskier, for a variety of reasons.

They include the trade contagion and negative perceptions caused by the dispute, the after-effects of the oil crisis requiring fiscal adjustment, and the conflicts and humanitarian disasters raging in Libya, Syria and Yemen.

John Sharma, a macroeconomist specializing in country risk at National Australia Bank, believes the rating agencies had been too generous with Qatar.

“Its socio-political risks were underestimated – areas like governance, the treatment of foreign workers, support for questionable groups, etc,” he says.

“Moreover, despite its financial strengths, in terms of large gas deposits and sovereign wealth funds, it does have weaknesses in the economic-financial sphere. There is a very high dependence on hydrocarbon exports (90% of GDP) and high external debt (125% of GDP), which are clear risk factors.”

Euromoney’s country risk survey is updated at the end of each quarter, quantifying the opinions of more than 400 expert contributors. Their scores on 15 key economic, political and structural risk indicators are added to values for capital access, credit ratings and debt indicators to provide a total risk measure, ranging from a maximum 100 points (total safety) to zero (certain default), with each country divided into five risk categories. To access the data, go to: www.euromoneycountryrisk.com

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