The transition to normalcy means economic risk is improving in Euromoney’s latest ‘crowd-sourcing’ country risk survey, with global risk experts becoming more confident as lockdowns are easing and vaccine deployment is on a war footing.
Euromoney’s latest quarterly survey of risk experts reveals 100 nations with improving risk profiles in the first quarter of 2021. They include countries in Central Asia, Australasia and the Caribbean as well as parts of Central and Eastern Europe, such as Croatia, Hungary and Romania.
The risks are receding for sovereign states with highly advanced Covid-19 vaccine rollouts. Among them are Israel, up two places to 21st in Euromoney’s global risk rankings of 174 countries, and the United Arab Emirates, climbing six places to 31st.
Similarly, the United States (rising three places to 18th) and United Kingdom (up two to 32nd) are leading the bounce-back in the advanced industrialized world.
However, Canada, France and Sweden have become riskier. They are among 61 countries with worsening profiles that also include Gabon, Namibia, conflict-riven Myanmar and Argentina, which is struggling to manage the pandemic and its economic impact along with pre-existing financing difficulties.
For many countries, geopolitical risks are just as prevalent as those relating to the pandemic, with analysts considering various issues ranging from Chinese and Russian muscle-flexing and cyberwarfare to gas politics in the eastern Mediterranean and climate change effects.
Euromoney’s country risk survey is conducted quarterly among several hundred economists 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 for 174 countries worldwide.
The ‘crowd-sourcing’ approach 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.
A feature of the pandemic last year was the divergence between improving political risk and worsening economic risk. Movement control orders, business closures and foreign travel restrictions dealt a heavy blow to the world economy and fiscal risks increased as pandemic-related expenditures spiralled.
By contrast, governments were entrusted to ensure security and confidence increased. Political stability improved and ratings for government policy were notably upgraded as rapid and effective monetary and fiscal stimulus was introduced rapidly on an international scale.
However, with Covid-19 restrictions gradually being eased, allowing economies to function more normally, and vaccine deployments gaining momentum and alleviating pressure on healthcare systems, economic risk has begun to improve in many countries.
That said, there are still some notable divergences in country-by-country experiences. This is illustrated by the world’s largest emerging markets.
With Covid-19 restrictions gradually being eased, allowing economies to function more normally, and vaccine deployments gaining momentum... economic risk has begun to improve in many countries
With Brazil (103rd), India (84th) and Mexico (86th) still battling to control the virus, their risk score improvements have been softer than for China (up to 45th) or Russia (rising to 75th), while risk assessments for both Indonesia (110th) and Nigeria (122nd) have led to downgraded scores.
Russia’s across-the-board improvement ahead of its parliamentary elections in September highlights improving investor confidence in the economy, but some analysts pointed out the country’s susceptibility to geopolitical risk.
This is highlighted by the rouble’s recent wobbles in response to the risk of US sanctions and following the build-up of Russian military on the Ukrainian border.
Switzerland is still considered the safest country worldwide, with Singapore, Denmark, Norway and Finland completing the top five.
Australia, which has had enormous success managing the pandemic, has risen one place to sixth; for similar reasons, New Zealand has climbed two places to seventh.
“Both countries have experienced multiple periods of lockdown which have been limited in time and geographic coverage and therefore most of the economy has been able to continue to operate”, says Claire Matthews, senior lecturer in banking at Massey University.
She highlights the fact there has been considerable government support and that optimism is building from the opening of a travel bubble between the two countries.
Key risks include international tourism and rising house prices, now widely seen as a global phenomenon sparked by ultra-loose monetary policies.
Matthews goes on to explain differences in political risk: “The Australian government has had a string of issues with poorly behaved members and mis-steps. New Zealand’s Labour government [by contrast] continues to enjoy a high degree of support, primarily for its handling of the pandemic and other crises such as the 2019 mosque attack.”
One factor worsening for New Zealand is in information access/transparency, due to growing concerns about the lack of information, such as the level of vaccination and “a heavily cleansed (and delayed) report on mental health”, she says.
Jan Philip Moyle Mairhöfer from the School of Political Science and International Studies at the University of Queensland says economic risk indicators have strengthened due to relatively low numbers of Covid-19 cases, a strong response by federal and state governments, the lifting of local lockdowns and expectations of continuing policy support.
“For businesses, key political concerns are likely to be Australia’s relationship with China (focus on exports), and the government’s vaccine programme. Prime minister Morrison abandoned his target to vaccinate all Australians by the end of the year, highlighting a sluggish delivery of vaccines,” he says.
“The other key risks are associated with international travel and social distancing as stimulus is set to wind down. With international travel likely delayed until 2022, tourism, education and agriculture are negatively impacted by travel restrictions. Likewise, arts and recreation, hospitality and events are at risk because of social distancing measures.
“Work and skilled visa arrival numbers from February also suggest that the travel restrictions may force a labour shortage as JobKeeper and JobSeeker schemes are unlikely to fill positions that migrant workers would fill under normal circumstances.”
Although the pandemic is of course still a problem for the US, the opening up of the economy, the advanced vaccine rollout and the $1.9 trillion fiscal stimulus approved by president Joe Biden’s administration have led to an upgraded risk score for the country for the first time since the crisis began.
“The markets generally do a good job of forecasting the near-term economy, and now seem to be suggesting a positive outlook. Year-to-date, the S&P 500 is +8% and the Nasdaq Composite is +6%,” says Robert Neal, a professor at Indiana University.
“We have seen an uptick in the 10-year Treasury rate, but the interest rate environment still looks favourable. The inflationary expectations in the 5-year TIPS are about 2.1% annually, up from about 2% at the start of the year.
“The Fed has signalled its intent to keep short-term rates low and the Fed Funds Futures show a 90%+ likelihood of remaining at their near-zero rate through the end of the year. The rise in long-term rates is more likely the result of improved growth prospects.
“The volatility in the data over the past year has made forecasting a more challenging task for traditional models. GDPNow, which uses real-time data, has been more accurate and is currently predicting 6.2% for Q1. This is a very strong quarter and above the consensus forecast.”
President Biden is pushing for a massive infrastructure bill just as more stimulus cheques make their way into the bank accounts of individual taxpayers. Stock markets continue to rally, and investors seem happy- Dan Graeber
Neal is optimistic on Q2 and Q3 because the availability of the vaccine will lead to a recovery of deferred consumption in many areas. Consumers will be more comfortable resuming their traditional spending patterns, he says, and this is difficult to capture in many forecasting models.
This optimism is backed up by the IMF’s latest World Economic Outlook, April 2021, predicting US GDP will increase on a real-terms basis by 6.4% in 2021 following last year’s 3.5% contraction.
Dan Graeber, geopolitical analyst and founder of The GERM Report says that, on the surface, it does indeed look as if optimism is prevailing in the US.
“President Biden is pushing for a massive infrastructure bill just as more stimulus cheques make their way into the bank accounts of individual taxpayers. Stock markets continue to rally, and investors seem happy."
That said, some of the underlying social issues remain. Much of the attention in the US is focused on the murder trial of Derek Chauvin, the Minneapolis police officer accused of using excessive force in last year's death of George Floyd, an unarmed Black man.
Graeber believes that the trial could set the tone for the nation's mood in the coming months, given the increasing influence of the Black Lives Matter movement against racial injustice. (He commented on this just before another man was shot dead, allegedly by accident, in Minnesota, inflaming tensions even further.)
As social restrictions ease, Graeber also notes that frustrations with the pandemic are being vented in the open, and there has been an increase in mass shootings.
Across Europe, the risk picture is rather mixed, given that another wave of Covid-19 is currently putting healthcare systems, economies and governments under pressure across a large swathe of the continent.
Countries such as the UK and Hungary, which have seen their risk scores improve, are among those with the fastest vaccine rollouts in Europe and are likely to outperform their neighbours, according to Norbert Gaillard of NG Consulting.
Italy has also shown improvement in the survey, despite the fact it is still battling Covid-19. Economic risk has eased, but so too has political risk, and not least government stability following the change of government.
Italy’s score is still one of the worst in the EU though, with the country sliding three places to 60th. A poor business environment and fragile business sector are among the key medium-term issues for the experienced Mario Draghi to address, after becoming prime minister in February.
Gaillard does not expect any surge in political risk in Italy this year and believes the business environment will improve due to confidence in Draghi, the EU’s Recovery Plan and the 2021-2022 economic rebound.
Spain (38th) is also improving gradually. The Spanish government may be less business-friendly than in Italy, but “confidence among international investors has been robust so far”, says Gaillard, and the “public debt should be sustainable thanks to the ECB’s accommodative monetary policy”.
Despite this, the country still has many problems, including a very high unemployment rate requiring a strong social safety net, putting pressure on public finances worsened by the coronavirus crisis.
“Any austerity measures could be rejected by Spanish citizens who already experienced tough times in the early 2010s. This harsh social climate is likely to boost the electoral score of Vox (the far-right party) and exacerbate political and institutional risk (for example in Catalonia),” he adds.
In France, the government is positively perceived by international investors, but more effort is required to reindustrialize the country and boost manufacturing competitiveness, says Gaillard.
“The deindustrialization in suburbs and semi-rural areas is a key issue for president Macron and the government led by Jean Castex, because this process has fed populism and accelerated the political fragmentation of the country.”
Noting the political risks, recent polls have shown that the election of Marine Le Pen next year is no longer considered a highly unlikely scenario, he adds.
Other countries with improving scores to note are Romania, climbing four places in the rankings to 58th, Croatia (up six to 68th) and Bulgaria (up five to 74th). Sweden, by contrast, has been downgraded quite sharply in the wake of another wave of Covid-19 leading to restrictions, but it remains ultimately a safe country (9th in the rankings) with strong public finances and political institutions.
Across Asia, China’s broad-based improvement in risk has continued, leading to a four place rise in the global risk rankings to 45th. Other countries reliant on Chinese trade and tourism, or with improved stability, such as Hong Kong, Macau and Mongolia, are also upgraded.
Japan is showing some improvement too, but tentatively.
“The Olympics go-ahead has had a marginal positive effect on economic sentiment,” says Prachi Gupta, adjunct professor at Temple University, adding: “The virus continues to surge in Tokyo and the vaccine rollout has been slow, so questions over its viability still loom.
“The worst-hit sectors are the service industry, such as tourism, which do not expect strong recovery as the Olympics, if held, will still be without the audience. Any change in the way the Olympics are held or not, will not influence the economy much for now.”
As for other countries in the region, Reid Click, associate professor at George Washington University, notes an economic risk divergence reflecting the different policies employed during the pandemic along with vaccination prospects.
The macroeconomic situation is much less favourable for the Philippines and Thailand than for Malaysia, he points out. Indonesia is also at a disadvantage compared to Malaysia, but also because of its fiscal situation. This is reflected in their respective risk score changes.
“The IMF’s Asean-5 (Indonesia, Malaysia, Philippines, Thailand and Indonesia) collectively suffered a 3.4% contraction of GDP in 2020.Based on recent projections (April 2021) from the IMF’s World Economic Outlook, the region will fully recover in 2021. However, aggregate data mask individual differences," Click says.
“The Philippines and Thailand will take longer to recover. The Philippines has been hit the hardest, contracting by 9.5%. The WEO forecasts suggest that full recovery will not be complete until 2022 and this will still not close the gap with potential output. The situation in Thailand is only modestly better. Thailand’s contraction was 6.1%, and growth is forecast to be slower, but full recovery is expected in 2022.
“Malaysia is expected to fare better. The contraction in 2020 was 5.6%, but a full recovery is expected this year with growth of 6.5%, and continued growth in 2022.”
The IMF’s Asean-5 (Indonesia, Malaysia, Philippines, Thailand and Indonesia) collectively suffered a 3.4% contraction of GDP in 2020. Based on recent projections... the region will fully recover in 2021- Reid Click
Indonesia, he states, is a bit of an outlier in the macroeconomic analysis, and faces a different fiscal situation.
“Unfortunately, Indonesia is not in a good position because it started with a lower capacity to collect government revenue, and has suffered more than the other countries. For the three years ending 2019, Indonesia collected revenue amounting to 14.4% of GDP, and it is registering a drop of two percentage points in 2021. Revenue is not expected to fully rebound during the next five years.
“In contrast, Malaysia, Philippines and Thailand each collected revenue amounting to approximately 20% of GDP. Malaysia and the Philippines did not see a drop in revenues relative to GDP, so their revenue situation is relatively stable. Thailand showed a decrease of just 0.6%, and is expected to recoup this in 2022.
“That leaves Indonesia in the weakest fiscal situation, therefore depressing its rating but for a different reason.”
On India, Johan Krijgsman of Krijgsman & Associates has concerns that have not abated. The continuing tragic escalation of Covid cases in India, as well as deglobalization tendencies, are likely to impact the economy.
“Both factors make the IMF's April 2021 upgrade in forecast growth this year to 12.5% improbable. Other troubles relate to a controversial, albeit slow, reform process (currently upsetting farmers), unresolved Kashmiri and China border problems and a sharp increase in public sector debt,” he says.
A swing in foreign relations towards the West, in recognition of real and potential threats from China, is to be welcomed, he adds. In March prime minister Modi met with leaders of Australia, Japan and the US – forming with India the Quadrilateral Security Dialogue (Quad) countries – and has been invited to the June G7 meeting in the UK.
“To the extent that China will be penalized for its bad behaviour (concerning Hong Kong, the Uighurs), India may benefit. A complication is that it will not be easy to reconcile India's complex value system (eroding democratic standards, accusations of religious discrimination) with those usually regarded as liberal western democratic values.
“Given the current debates regarding China's behaviour, as well as domestic concerns about discrimination, unreserved support for India could be perceived as inconsistent.”
In Central Asia, growth in China and Russia and improving commodity prices have led to a general improvement in risk scores for all of the Commonwealth of Independent States – notably for high-risk Kyrgyz Republic, Moldova, Turkmenistan and Ukraine, but with risks only stabilizing at a high level for troubled Belarus, which heads up Euromoney’s tier-5 containing the highest risk countries in the survey.
The pandemic situation in Latin America is still a dominant factor dampening enthusiasm over an improving trade outlook underpinned by higher commodity prices, a rejuvenated US economy and reviving tourism industry.
Brazil in particular is struggling to control the viral spread and has not improved by much this quarter. Mexico similarly is showing marginal gains. Low-risk Chile, Colombia and Peru are all marked down, and both Argentina and Venezuela remain “red-flag” high-risk options.
There are improving risk profiles for parts of Central America, however, including Guatemala, Honduras and Nicaragua, as well as for Guyana, Ecuador and Uruguay.
Ann Modica, an economist at AM Best, expects economic activity to rebound in the region as lockdowns are eased, but points out that in recent years the economy has faced headwinds in the form of the end of the commodity super-cycle, political instability and the resulting policy uncertainty, growing levels of inequality and volatile investment flows. These will be exacerbated in the aftermath of the pandemic.
“Particularly concerning is the growing amount of debt by many governments to mitigate the effects of the pandemic, worsening the risk profiles of already vulnerable sovereigns,”she says.
The Latin America and Caribbean region suffered the largest average decline in GDP last year, according to the IMF’s World Economic Output report published this month – a 7% real terms contraction, with 15 countries registering unprecedented double-digit declines.
However, the Bahamas, Barbados, Dominican Republic, Jamaica and Trinidad & Tobago have all seen their scores improve in the survey so far this year despite the evident loss of tourism income from the pandemic.
Moawia Alghalith, a professor in the Department of Economics at the University of the West Indies, notes the fact that tourism will recover shortly as a key factor.
“Also, in the case of Trinidad, the price of oil will increase. Since Trinidad's economy is mainly based on oil, there will be an economic boost,” he says.
Winston Moore, professor of Economics and deputy principal at the University of the West Indies, says that Barbados has been working very closely with the international community as it attempts to address the challenges associated with the Covid-19 pandemic.
“In its last press release after its visit to the island, the IMF noted that the implementation of the Barbados recovery programme remains strong and that programme targets have been met," he says. "This has allowed the country to access international funds to support its balance of payments and its efforts to fight Covid-19.
“After seeing its case numbers rise significantly during the second wave, the country has managed to reduce them due to its efforts at vaccination and other traditional public health measures. The island is now getting ready to reopen for international tourism.”
The Middle East and North African region has come through a negative oil shock, tourism shake-out and instability, with some countries now improving again – including Israel and the UAE, which are both benefiting from vaccinating more of their populations than their rivals.
Israel has displayed resilience to economic shocks and has shown strong growth potential owing to one of the best inoculation campaigns globally, an improved security situation helped by the Abraham Accords, and the start of natural gas exports from the Leviathan gas fields, according to Richard Abdallah, head of market risk and ALM at Credit Libanais.
“Israel’s economy stands to benefit the most from normalized relations with its Gulf neighbours through agreements to supply these countries with natural gas as well as substantial FDI inflows from the Gulf, such as the $10 billion UAE investment fund aimed at strategic sectors in Israel, including technology, energy and agriculture, among others.”
Other countries recovering include Bahrain, Iran and Saudi Arabia, which along with UAE, “have been boosted greatly by the recent surge in oil prices [back above $60/barrel] owing to effective OPEC+ supply restraints combined with disruptions due to bottlenecks in the US and a pick-up in global economic activity as countries relax containment measures”, Abdallah says.
The Middle East and North African region has come through a negative oil shock, tourism shake-out and instability, with some countries now improving again
He believes the Gulf may even see stronger economic growth in the short term due to vigorous vaccination campaigns, committed fiscal reforms and better-targeted subsidies under the Fiscal Balance Program.
Other positive factors include the return of religious tourism in Saudi Arabia and large events such as Expo 2020 in UAE (now scheduled for October 2021) and the 2022 Fifa World Cup in Qatar, which are expected to significantly boost consumer demand.
On the other hand, Qatar (marked down in the survey this quarter) is considered distinct from other GCC members due to divergences in its foreign policy, which may result in instability in the future.
Qatar has close relations with Iran and while some GCC countries have normalized their relations with Israel, Qatar has ruled it out completely.
“Add to that the blockade on Qatar, which lasted three years and was only recently lifted in January 2021. Qatar is also among the Gulf countries that recorded the highest number of Covid-19 cases and its economic outlook may yet worsen due to a renewed spread of the virus,” says Abdallah.
“Moreover, infrastructure projects ahead of the 2022 World Cup are close to 90% completion. This implies reductions in government spending which can impair the country’s future growth prospects.”
Abdallah also comments on Iran, noting that its economic outlook has improved with the rise in oil prices and preliminary talks to revive the 2015 nuclear deal.
“However, this is likely to be only temporary due to the country’s slow vaccination rollout, weak demand from regional trading partners, persistently high inflation levels and low chances of a breakthrough in talks, at least for the short to medium term.”
Across Africa, several countries that are bouncing back are Angola, Kenya, South Africa and notably Madagascar and Côte d’Ivoire – on the back of improving financing conditions, rebounding commodity prices are boosting the extractive industries and brightening prospects for other key sectors such as tourism, with borders expected to be gradually reopened.
The outlook for countries such as Kenya and Côte d’Ivoire is strong, says Crystal Byrd, an economist at USAID, despite uncertainty over the pandemic and the global economy.
On Côte d’Ivoire specifically, she comments: “Mired by president Alassane Ouattara's violent re-election in October, there is hope surrounding the ongoing parliamentary elections; and the African Development Bank projects that real GDP will grow by 6.2% in 2021 and 6.5% in 2022.
“These projections are driven by petroleum products, transport and trade, as well as stringent efforts to manage the global pandemic. Ivory Coast benefited from the UN-backed CoVax distribution initiative in March, focused on reaching the most vulnerable populations.”
However, the economic and political impact of the pandemic is combining with some pre-existing structural problems, civil conflict instability and climate-related risks afflicting the African continent and, as such, countries like Nigeria are struggling in the survey.
Nigeria’s security is becoming increasingly problematic in parts of the country, not least the north-east, where Boko Haram jihadists roam, and in the independence-seeking Biafra region. The economy is weak, unemployment sky-high and the investor environment bedevilled by unclear government policies and regulations, with multiple exchange rates.
Botswana, Cameroon, Gabon, Ghana, Mozambique, Namibia and Senegal are also among the countries downgraded so far this year. Another is Ethiopia, which for years had been attracting investors, fuelling strong economic growth.
The country has seen increased civil conflict and risks have increased due to the inclusion ofcommercial creditors in the government’s debt restructuring plan, says Nassib Ghobril, chief economist at Byblos Bank Group.
Egypt is the only Arab economy to post a positive growth rate in 2020- Nassib Ghobril
He notes the risk of selective default if the government undertakes a debt exchange offer with commercial creditors, and/or if it concludes that Ethiopia is unwilling or unable to service the interest payments on its commercial obligations, including the interest payment on the Eurobond due on June 11, 2021.
“Another reason for the increase in the level of country risk is that Ethiopia's external balance sheet has substantially weakened in recent years due to persistent current account deficits. This is leading to an uncertain outlook, as S&P forecasts the country’s external debt to exceed 270% of current account receipts in 2024, compared to about 115% of current account receipts in 2014,” says Ghobril.
It is expected that the country's gross external financing needs will average more than 170% of current account receipts and usable reserves in the 2021-24 period.
“Therefore, the metrics of the sector are concerning, given the low level of the country’s gross foreign currency reserves. The conflict may add to these risks, depending on its evolution, but the country risks existed prior to the infighting.”
Across North Africa, the risks for most countries have increased – all except for Egypt, which is still showing improvement.
Ghobril says Egypt has built on its track record of reforms since it took a decision to engage with the IMF and reached a Stand-By Arrangement (SBA) with the Fund that opened the door for external financing from multilateral institutions and then from the private sector. It has implemented the reforms according to the SBA, and the external and fiscal metrics have improved as a result.
“Egypt leveraged its track record of reforms to attract multilateral funding after the outbreak of the Covid-19 pandemic, which has supported the economy and public finances. In fact, Egypt is the only Arab economy to post a positive growth rate in 2020,” Ghobril says.
“So the image that Egyptian authorities have projected, of discipline in implementing reforms despite some challenges, has provided credibility and reassured the markets.”
Egypt’s record proves that not all countries are struggling from an investor perspective, and not all investor decisions are dominated by the pandemic. Other factors are just as important.
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