ECR survey results Q3 2019: US, China, Canada, Mexico punished by tariffs

One step forward, two steps back: The effects of the US-China trade war have had more of a global impact in Q3

Euromoney’s latest quarterly country risk survey has an aggregate risk score that is still below 50 points out of a maximum 100, where it has remained since the 2007/08 global financial crisis, weighed down by notable downgrades to countries affected by trade frictions, including Canada, China, Mexico and the US.

The US and Canada scores have fallen sharply.

Trump’s self-defeating foreign policies, and the start of an impeachment inquiry contributing to asset-price volatility and undermining US growth prospects, are rippling across the border, as consumer and manufacturing confidence slides.

Canada is caught in the tailwind and has its own political uncertainty ahead of this month’s elections.

Other countries affected by trade risks and other macro-fiscal and/or domestic political challenges are Germany, France, Italy and the UK, plus Australia and New Zealand, where the economic outlook is softening and unemployment edging higher.

There are downgrades to Brazil, Hong Kong, Jordan, Malaysia, Mozambique and Venezuela in this latest survey.

Moreover, the problems besetting debt-challenged South Africa and Turkey have continued, with both countries on longer-term trend declines and equally struggling to convince the financial markets their respective policymaking programmes are appropriately designed.  

Euromoney’s survey nevertheless shows an unexpected improvement to the unweighted mean average global risk score in Q3 2019, with 110 countries upgraded by participating analysts, compared with 63 downgraded, and one unchanged since Q2 2019.

An upturn might seem counterintuitive in view of the status of global trade talks, the looming Brexit deadline and multifaceted geopolitical risks, notably involving Iran and North Korea altering experts’ perspectives.

However, the kaleidoscope of risk is constantly shifting, affecting investor locations in myriad ways.

Countries improving in the survey are still growing, and their debt loads receding. Among them are those that were hit hardest by the debt crisis, including Cyprus, Greece, Ireland and Portugal, all on improving trajectories in 2019, extending their double-digit five-year rising trends.

Portugal is benefiting from political stability with the newly re-elected Socialist Party, supported by left-wing partners, rewarded for its prudent macro-fiscal programme producing favourable GDP growth and overseeing a narrowing of the deficit to just 0.5% of GDP in 2018 – an all-time low during its 45 years of democracy.

A raft of emerging and frontier markets are similarly upgraded, including Barbados, Jamaica and other countries in the Caribbean.

Survey contributor Winston Moore, professor of economics and deputy principal of the University of the West Indies, says: “Jamaica has seen significant benefits emerging from the implementation of the IMF-supported reform programme. Economic growth has picked-up in recent months, largely due to expansions in mining, construction and tourism.

“Unemployment is now at an all-time low of less than 8% and there has been a significant improvement in the level of business confidence in the country.”

He adds: “Barbados is also in an IMF programme and based on the last assessment by the IMF it has achieved all of the targets set for the country and has successfully concluded its domestic debt restructuring programme. This has significantly reduced interest costs for the government and has helped to move the fiscal position of the government closer to its target for the primary balance.

“The island has begun to rebuild its stock of international reserves, an important indicator of the sustainability of the exchange-rate peg, and these reserves are now estimated at more than 15 weeks, well above the 12-weeks target.”

Egypt has continued to impress – upheld by political stability, and improving confidence in the currency buttressed by gas production, tourism and remittances, keeping inflation and external imbalances in check – despite the emergence of popular protests.

Another big improver is Ukraine, after parliamentary elections produced a majority backing president Volodymyr Zelensky. This has raised hopes for political stability and policymaking, by making it easier to push through anti-corruption measures and structural reforms.

Russia’s risk score, too, has risen partly thanks to policymaking, as the government spends more of its accumulating sovereign wealth fund assets to foster economic growth. This is also despite public protests, and foreign policy risks, including the prospect of tighter sanctions.

Euromoney’s crowd-sourcing approach to measuring investor risk provides a responsive guide to changing perceptions of participating 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 300 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 174 countries worldwide.

Each country is then divided among five categories of risk according to their total risk score, with tier one containing the lowest risk/highest score countries and tier five the highest risk countries with the lowest scores.

Top-rated Singapore, Switzerland (lying second), and Norway (third) are among the triple-A sovereign borrowers that are consistently ranked among the safest investor locations worldwide.

Within a broader group of tier-one countries, Austria has improved since elections were held. Tier-two Ireland has also gained, contrasting with Canada and the US that, as mentioned, have both lost ground.

The 18-month long trade war between China and the US has hit both countries in the survey this year as negotiations to end the zero-sum game flounder and the Trump administration is poised to increase tariffs on $250 billion of Chinese imports from 25% to 30% on Tuesday.

Economists expect GDP growth to slow down in both countries: in the US from 2.3% in 2019 to 1.8% in 2020, according to the latest survey by the National Association for Business Economics, and from 6.2% to 6.0% in China based on downgraded predictions just released by the Asian Development Bank.

The World Trade Organization sees merchandise (goods) trade growth of just 1.2% this year, compared with a previous forecast of 2.6%. It should pick up in 2020, although it admits that very much depends on a return to more normal trade relations.

The prospect of a no-deal Brexit raising tariffs on British-European trade has invariably made UK analysts gloomier as institutional and policymaking risks are heightened by the prospect of a snap general election to resolve the predicament caused by Parliament resisting a no-deal breakaway.

The UK government’s recourse to increased public spending to lift the public mood and aid a potential election victory is further raising concern for fiscal stability as the UK economy struggles to grow along with its core European trading partners Germany, France, Italy and Spain still showing strength.

Slowing growth in China and the effects of tariff rises rippling along product chains will negatively affect Asia’s growth prospects, although some countries are benefiting from increased investment as manufacturers relocate to avoid the higher shipment costs. 

Scores for Cambodia, Myanmar and Vietnam have improved in this latest survey, as they have for Thailand, but Malaysia is struggling due to its exports contracting.

Experts have downgraded Japan, where industrial production and business confidence were sliding ahead of this month’s delayed rise in consumption tax – and put into effect on Tuesday – and tensions rose with South Korea concerning wartime reparations undermining bilateral trade.

And invariably, the protests in Hong Kong are tarnishing the territory’s business reputation, affecting the economy and heightening its institutional risks – one of six political indicators included in the survey.

Brazil, Mexico and Venezuela have taken the biggest hits in Latin America, in an otherwise improving region, as analysts have adopted a more negative slant.

In Brazil, Jair Bolsonaro’s popularity has decreased partly due to his handling of the Amazon crisis, highlighting environmental risks. Tensions in Congress are overshadowing stop-start progress on pension reform, and there is some resilience as far as the economy is concerned.

Venezuela’s crisis has shown no let-up under the weight of tighter US sanctions, the loss of human capital from migration, and shortages of essential food, fuel and medicines.

The health of Mexico’s economy and slow pace of reforms are a worry for many of Euromoney’s risk survey contributors, including Neil Pyper, associate professor in business and management at Coventry University, who says: “My concern is the current government will pursue an increasingly populist agenda across multiple areas of policymaking.

“Checks and balances/safeguards within the country’s institutions are not particularly strong, nor is the ability of opposition parties effectively to hold to account the government.”

This is likely to become more of an issue, he says, as things start not going the government's way.

“While relations between the Trump and Amlo [president Andrés Manuel López Obrador] government have been relatively cordial so far (all things considered), the potential for tensions, particularly in the context of Trump populism and nationalism targeted at Mexico and Central America during the 2020 election campaign, exacerbate the risk of populist responses,” he says.

Analysts’ confidence in Czech Republic and Poland has waned in sync with their diminishing economic outlooks and specific political risks.

Nevertheless, countries in eastern Europe have been less affected by trade and geopolitical risks.

This is partly because growth rates are slowing to a more normal pace from unsustainably high levels underpinned by ultra-loose monetary policy and the absorption of EU structural funds, with employment still rising and public finances improving.

Bulgaria, Hungary and Romania are among the countries upgraded in Q3 2019.

Risk experts are aware these are testing times for some of sub-Saharan Africa’s higher-risk borrowers shouldering enormous debt problems. The survey shows downgraded scores for Angola, Burundi, Mozambique, Sierra Leone, Zambia and Zimbabwe.

Zambia has hardly enticed investors with its interference in the mining sector and payments problems racking up domestic arrears. Zimbabwe is struggling to rein-in a return to high inflation as the latest economic crisis bites, and Mozambique is still suffering the after-effects of a debt scandal precipitating an economic and financial crisis.

While South Africa’s debt, unemployment and electricity-sector problems still fail to convince analysts, a handful of countries are upgraded, including Ethiopia, Seychelles, Ghana and Nigeria.

Kenya’s risks are also receding, despite the concerns about its public debt due to “inflation on a downward trend, dropping to 3.8% year on year in September from 5.7% in June”, says survey contributor Rafiq Raji, chief economist at Macroafricaintel.

“And while economic growth slowed to 5.6% in Q2 2019 from 6.4% in the same period in 2018 owing to delayed rains which weighed on the dominant agriculture sector, it is still relatively decent growth.

“In any case, real GDP growth was similarly 5.6% in Q1 2019. Besides, a likely buoyant tourism sector in the year is expected to support a likely 6% full-year growth headline for 2019.” 

Namibia is also improving, which ECR expert and Efficient Group chief economist Dawie Roodt mentions is primarily due to the conservative finance minister Calle Schlettwein.

He is imposing fiscal austerity in response to a credit-rating downgrade by Fitch largely caused by exogenous factors, including global economic slowdown and the drought affecting other countries on the continent.

“It is also due to the South African central bank keeping interest rates relatively high, as Namibia for all practical purposes is subject to South African monetary policy,” he says.

Kuwait and Saudi Arabia became riskier in Q3, with attacks on Saudi oil facilities highlighting the risks spewing from the ongoing conflict between the Sunni and Shia factions in Yemen since 2015.

“The last six months have seen an unprecedented build-up of tensions in the Middle East and, more specifically, in the Persian Gulf, driven by a combination of the misguided US policy of brinkmanship with Iran and the Iranian strategy of responding to these pressures through escalation of indirect tensions,” says survey contributor Constantin Gurdgiev.

“The attacks on the Saudi refineries, attributed to Iran or the Iran-backed Houthi movement in Yemen, pushed the world even closer to the point where a military conflict between the US and Saudi Arabia on the one hand, and Iran on the other, becomes inevitable.”

The professor at the Middlebury Institute of International Studies adds: “Only the prospect of such a conflict evolving into a devastating (to the regional and global stability) war that neither the US nor Iran will be able to win is holding back outright hot conflict from taking place.

“This gives a false sense of comfort to some political risk analysts and geopolitical strategists, accustomed to the steady state equilibrium of the Mad [mutually assured destruction] doctrine of the past. In reality, the Persian Gulf is just one incident away from a hot war breaking out.”

Although financial markets have calmed and are not pricing in the prospect of military confrontation, a war with Iran – either run directly from Washington or via Saudi Arabia as a proxy – would be highly complex, volatile and most likely “an internecine disaster for the world, and the global economy”, Gurdgiev believes.

Any such conflict, he adds, would “draw in proxy participation – on Iran’s side – of Russia and China, both heavily vested in the regional politics and both putting increasing emphasis on Iran as their core ally in the region.

Gurdgiev notes that Iran would be a formidable adversary and the US has a history of failing to provide convenient political outcomes through the military option.

And when it comes to the global economy, he says: “The Persian Gulf tensions add to the already high complexity and uncertainty relating to the US policies and leadership across a range of geopolitical pressure points.

“President Trump’s erratic and often irrational decision-making, his propensity to escalate unnecessary trade conflicts not only with China but also with Europe, his administration’s clear inability to secure functional trade agreements with Nafta trading partners, the failure to lead in the developing conflict between South Korea and Japan, as well as myriad other failures are already contributing to the decreasing prospects for global economic growth in the second half of 2019 and into 2020.”

Gurdgiev adds: “The threat of war breaking out in the Persian Gulf is contributing to this trend through increasing risk premium required for new investments by regional and globally trading companies, reducing potential demand and raising the risk of global trade routes disruption.

“While energy prices so far have been relatively immune to these risks, with oil and gas prices showing heightened volatility and moderate upticks, today’s channels for risk contagion from a Persian Gulf war to the rest of the global economy are quite different from those that existed last time the region went into an outright major conflict [the Iraq War].”

Given the potential scale of the conflict that is brewing in the Gulf, there are no direct and easy hedges against its impact on the world economy, Gurdgiev states.

“Geopolitical ‘winners’ in this game, eg China and Russia, are likely to suffer financially and economically as much as the geopolitical losers, eg Iran, the US and Saudi Arabia,” he says.

Russian fiscal strength and economic policy management experience acquired since the onset of 2014 western sanctions would help it weather the economic storm somewhat better, he says.

Brazil, Indonesia and to a lesser extent India would benefit from being more stable, less partisan suppliers of core commodities and investment opportunities should the Persian Gulf conflict develop into a longer-term, lower-intensity regional war.

Russian energy trade into western Europe would also benefit from both higher energy prices and increased global supply-chain uncertainty.

Escalation of long-term tensions in the Middle East also favours investment opportunities in the Arctic.

“As a reminder, Russia, Canada and Denmark dominate this region as far as potential for growth is concerned,” says Gurdgiev.   

And while the threat of a war with Iran may not be as high as persistent trade tariffs, Brexit, global economic slowdown, or even a new credit crunch hitting the banks, it could, as analysts previously warned about North Korea, prove to be the ultimate risk.

For the latest on country risk and more information: https://www.euromoney.com/country-risk and https://www.euromoney.com/research-and-awards/research