Special country risk survey: US investor confidence is returning under Biden

US investor risk has eased since the presidential transition, according to economists and other experts taking part in Euromoney’s global country risk survey, with key political indicators improving such as government stability.

Euromoney’s special risk survey, conducted in early May, is also an opportunity to evaluate the risks after the reopening of the economy in the wake of the pandemic last year.

The US score remains well down on a five- and 10-year trend basis, with the country still lying 18th in the global risk rankings, embedded in the second of five tiers, or risk categories, into which all 174 countries are divided.

That makes the US a similar risk to Hong Kong and Estonia, which have similar risk scores.

Underlying this, however, are some different concerns, and it is these that will most interest investors eyeing US assets, notably to ascertain whether an overdue correction is likely in 2021.

To find out, Euromoney asked its survey contributors for their thoughts on the economic, political and structural risk outlook for the US as the Covid-19 crisis evolves and Biden’s policies are rolled-out during the first months of his presidency.

As of Q4 2020, allocated reserves denominated in US dollars constituted around 59% of the world’s total foreign-exchange reserves 

 - Rafah Toubia Farah

The analysts were also given an opportunity to rescore the risks, should they choose to, since the Q1 survey was conducted through to March.

Opinions were elicited on how the Biden administration’s economic and foreign policy is likely to impact on investor risk relative to Trump’s, and whether the experts foresee any troubling aspects of the fiscal stimulus plan and/or foreign relations, with China say, which might impact on asset safety.

Contributors were asked whether the growing deficit and debt burdens are manageable, and among other issues they provided some comments on the government's climate policy, as Euromoney delves more into global environmental risk and its effects.

The results appear quite conclusive: the US risk profile is still steadily improving, with the total risk score closing in on its pre-pandemic level in Q1 2020.

However, analysts do have some interesting views on aspects of US economic, foreign and environmental policy for investors to contemplate, while noting several risks that require careful monitoring.

Rafah Toubia Farah is a country and financial institutions risk management specialist, with a keen interest in the US.

She notes how the new administration’s response to Covid-19, speeding up the vaccination programme and testing for mutations, is bolstering public confidence, accelerating the services sector recovery and generally improving the economy, assisted by policy stimulus.

The IMF’s latest World Economic Outlook, published in April, predicts 6.4% real-terms GDP growth for the US this year, after last year’s contraction of 3.5%, and it is no coincidence that all of the survey’s economic risks indicators have been upgraded.

Echoing the views of other experts, Toubia Farah believes vaccine efficiency is crucial for either establishing herd immunity or delaying it beyond 2021.

She also stresses the importance of Biden’s American Rescue Plan Act, approved by Congress, containing a $1.9 trillion relief package to accelerate the vaccination programme and provide more security to households and businesses.

This, along with monetary policy support from the US Federal Reserve, will help to underpin the economic recovery and provide employment.

The fiscal deficit already expanded to $3.1 trillion (15% of GDP) in fiscal year 2020 (to end-September), according to the Congressional Budget Office, up from $1 trillion (4.5% of GDP) in fiscal year 2019, with the debt burden rising from 79.2% of GDP to 100.1%.

However, this has had no discernible effect on the US government finances risk indicator.

Investor risk can increase if Biden’s economic policies begin to shift too far to the left 

 - Marco Vicenzino, Global Strategy Project

As Toubia Farah explains: “This increase in debt levels is mitigated by the high capacity of the US to undertake a larger debt load than other countries in general, because of the dominance of the dollar as the world’s primary reserve currency.

“As of Q4 2020, allocated reserves denominated in US dollars constituted around 59% of the world’s total foreign-exchange reserves.”

The impact of such large deficits on debt sustainability is mitigated by high growth and low interest rates, while the government has tax-raising options and the ability to cut expenditure programmes.

Biden’s tax plan is estimated to raise between $2.8 trillion to $3.3 trillion during the next decade, while some experts also believe the spending may be diluted.

Dan Graeber, geopolitical analyst and founder of the GERM Report, acknowledges that the US economy is “booming on the back of a steady string of stimulus checks from both administrations”.

He notes that many of Biden’s stimulus measures have been met with concerns about the size of government, prompting “murmurs of socialism from those Republicans still loyal to Donald Trump”.

It is those issues on the Republican side that could up-end some of the mega-spending that the new administration is aiming for.

Marco Vicenzino, director of the Global Strategy Project (GSP), believes the Biden administration's more predictable approach will initially provide an element of basic certainty in the short term. 

“However, in the medium-to-longer term, this can change, and investor risk can increase if Biden’s economic policies begin to shift too far to the left – primarily to satisfy the progressive wing of the Democratic Party,” he says.

As stimulus is reduced over time, the real state of economic affairs will be become apparent, Vicenzino warns.

“Unquestionably, Covid has inflicted considerable economic damage,” he says. “The question remains: to what extent?

“In America, there will inevitably be winners, particularly those involved on the forefront on the new tech economy. On the other hand, the US economy runs the risk of leaving many left behind and joining the ranks of those who never fully recovered from the 2008 financial crisis.”

It is the adverse impact of this reality that presents the real potential for increased political instability in the US in the longer term, according to Vicenzino.

On foreign policy, GERM’s Graeber sees most of the risks subsiding with Trump out of the picture, given the “more tempered tones coming out of the White House”.

Toubia Farah foresees challenges to the US strategic defence plans from the military and diplomatic alliance of pariahs, between China and Russia, which have increased their bilateral trade in arms and energy, while sharing military technology and – informally – certain foreign policy goals.

This makes future events unclear and complicates Biden’s plans to reaffirm US global leadership.

Research analyst Erik Henningsmoen believes the Biden-vice-president Kamala Harris administration’s approach to US-China relations will be no different to that under Trump, characterized by hostility.

“Taking a harder stance on US relations with China is one of the few real policy issues that have wide bi-partisan support and a tougher stance with China is popular with American voters,” he says.

This does lead to risks that in the extreme could pit the two super-powers against each other militarily, over Taiwan for instance, and more immediately disrupt business activity between them.

The US is behind the curve when it comes to climate policies, so the energy transition is an opportunity 

 - Dan Graeber, GERM Report

GSP’s Vicenzino believes foreign relations in general situation will not drastically change or improve anytime soon. 

“The key challenge for US foreign policy is trying to effectively manage this new emerging status quo, which will endure for the foreseeable future, and potentially beyond,” he says. 

Constantin Gurdgiev, professor at the Middlebury Institute of International Studies, agrees, arguing that “the current state of geopolitical uncertainty will remain in place, with China continuing to test the boundaries of the US willingness to put tangible resources and responses to counter Beijing’s longer-term interests in the Pacific and elsewhere”.

Although the US has sought to reinforce its relationships with Australia and Japan, Biden’s difficulties formulating a comprehensive strategy to address China are becoming clear.

Also, despite the booming US economy, Biden’s domestic plans and policies contain no direct response to China’s ambitious new five-year plan, containing strategic economic policy reforms and targeting China’s global leadership in key new technologies.

This lack of a US response is “dynamically destabilizing”, according to Gurdgiev. Only Trump’s trade war represented a strategic plan, but it was “misplaced and poorly thought out”, he says.

The failure of its approach was particularly visible in April, as India – the world’s largest democracy and a key US ally – struggled with the pandemic, with the US refusing to lift restrictions on exports of raw materials required to produce vaccines and sales of critical medical supplies and equipment.

The sudden reversal of the US position towards the end of April was only prompted by China’s approach to India to help secure these essential items.

“This made it clear that Washington is still incapable of formulating pro-active and anticipatory strategic responses to major challenges emerging in the region of critical importance to its geopolitical and economic objectives,” Gurdgiev concludes.

The change in attitude towards environmental protection under the Biden administration, involving stricter enforcement of environmental regulations and CO2 targeting, will require a faster energy transition – which raises challenges for the automotive and energy sectors – but it is expected to have a positive impact overall on the US credit profile, according to the experts.

This positive effect is largely down to the fact “the US is behind the curve when it comes to climate policies, so the energy transition is an opportunity”, says Graeber.

Although in the short term certain sectors will be adversely impacted, Vicenzino notes that the US remains an agile and flexible country that will, over time, adapt to these new realities as new economic opportunities arise.

Henningsmoen sees the US recommitting to the Paris Agreement and its promise to cut carbon emissions as contributing to international goodwill towards the US, although it also a threat to oil and gas assets and a potential source of dispute with allies.

He cites the Enbridge Line 5 dispute between Canada and the State of Michigan as an example. This involves a pipeline transporting 540,000 barrels per day of hydrocarbons from western Canada to refineries in southern Ontario, which passes through two US states, Michigan and Wisconsin.

Environmental concerns have led to the Michigan State government ordering Enbridge to shut down Line 5 by May 12 and revoking the pipeline’s easement. Enbridge refuses, arguing Michigan does not have the legal authority. With negotiations failing, it looks likely to end up in a federal court, with the pipeline operations depending on protection vested in the Canada-US 1977 Transit Pipeline Treaty.

Any shutdown is critical for Canada’s energy security, and the Canadian government views its continued operation as non-negotiable in its relations with the US. Canada is a key ally and the failure of the US administration to intervene could damage bilateral relations.

“If Line 5 is shut down, the continued viability of an integrated hydrocarbon energy infrastructure in North America would be called into question, and cross-border oil and gas-pipeline assets would suddenly look much more vulnerable to policy changes in the US,” says Henningsmoen.