Pandemic control, supply-chain constraints, inflation and the US Fed poised for monetary tightening are increasing the risks, but a Balkans bounce highlights pockets of resistance.
Boka, Montenegro. The Balkan country has had a good tourism season, bolstering government revenue
From Brazil, India and Indonesia, to Mexico, Nigeria and South Africa, the risks of investing in many of the world’s key emerging markets (EMs) began to rise again in Q3 2021, according to the latest crowd-sourcing country risk survey published by Euromoney.
Domestic policymaking and institutional risks are a factor for many countries, including Brazil, Russia and South Africa, which are also grappling with soaring inflation rates pointing to social instability.
However, Central and Eastern Europe (CEE) is an exception, where the risk scores for most countries have improved, notably in the Balkans. Analysts have factored in superior economic growth potential fuelled by gas supplies, subsidized infrastructure investments, political calm and cooperative measures to foster free markets in goods, services and labour.
Although political issues and heightened inflation risk make downgraded Hungary a standout – and Turkey’s risks remain heightened with the lira vulnerable to inflation and unorthodox policy-related sell-offs – the CEE average risk score has reached its highest since the survey began in 1982.
It is also the region that has improved the most globally on a year-to-date basis:
“Most of these countries are aspirants to the EU and as a step in between they are forming a sort of mini-union named the Open Balkan Initiative that enables much freer movement of labour, goods and services,” says Milos Vulanovic, associate professor at the EDHEC Business School, who sees this as having a positive impact on investment.
Vulanovic also notes that countries such as Albania, Bulgaria and Montenegro – all of which have improved in the survey – have had good tourism seasons, bolstering government revenue. In Montenegro’s case, this has enabled the government to increase wages, which will help to support the economy.
Serbia’s trend improvement has continued, too, which Vulanovic puts down to the relatively swift resolution of the stand-off with its former province of Kosovo and Metohija.
“The peaceful outcome ensures investors that their investments in the region are safe,” he says, while going on to mention Serbia’s outstanding economic performance.
“The stable currency, high level of subsidies to foreign investors and huge investments in infrastructure make the country well positioned for continuing healthy growth.”
Nicolas Firzli, director of the G20 Pensions Forum and advisory board member of the World Bank Global Infrastructure Facility, is another survey contributor who keeps his finger on the rapid pulse of CEE investments.
He puts the improvements in risk scores for southeastern European countries down to a positive macroeconomic outlook and new-found investment attractiveness of these once-peripheral countries.
These countries will grow by 4.5% to 5% in 2022, he says, above the EU and OECD averages.
“The same dynamics can be found in Israel, Cyprus and Greece,” says Firzli. All three countries have performed well in the survey so far this year.
Euromoney’s country risk survey condenses the views of more than 230 experts in economic, political and financial risk from across the public and private sectors to provide an up-to-date assessment of global asset security.
Conducted quarterly, the results are compiled and aggregated, along with measures of capital access and sovereign debt statistics, to provide total risk scores and rankings for 174 countries worldwide.
The survey shows up interesting longer-term trends in country risk as well as shorter-term fluctuations and inflexion points in quantitative risk measurements. These are linked to domestic developments, global events or, invariably, a combination of the two.
The latest survey was, of course, undertaken against the backdrop of an evolving Covid-19 pandemic, with the race on to vaccinate populations to avoid having to incur further damaging restrictions on economic activity as the delta variant continued to spread.
It was a period in which financial pressures were intensifying, with supply-chain constraints prevalent and price inflation prompted by energy shortages and strong money flows.
Downgraded scores for industrial relations in 71 countries highlight the pressure from trades unions and other organized groups seeking better pay and conditions in the wake of the pandemic.
Fears of slowing economic growth in China and Beijing’s threats towards Taiwan have also become a bigger risk.
“China’s current soft patch is certainly a concern over the next few quarters, especially for Asean’s more export-oriented economies, such as Thailand and Vietnam,” says Miguel Chanco, senior Asian economist at Pantheon Macroeconomics.
“This is one area where India [marked down slightly in the survey] will be able to differentiate itself in the foreseeable future. It’s still largely a domestic demand-driven economy, and its exports aren’t as exposed to the weakness in Chinese demand.”
China’s overall score is higher, but its bank-stability risk has increased in the wake of some high-profile property-sector defaults, and there are downgrades to some of the political risk factors, including institutional risk and policymaking in response to increased regulatory control.
Heightened financial risk, generally, is reflected in downgraded bank-stability indicators for 59 countries, plus the monetary policy/currency risk indicator in 70.
Fiscal metrics have deteriorated, too, with yawning budget gaps and accumulating sovereign debt piles highlighted in 63 countries with downgraded scores for their government finances, and 95 for their debt ratings.
Taking into account domestic political instabilities and institutional risks, no fewer than 81 of the 174 countries surveyed were downgraded by analysts in Q3.
Among these, the biggest downward shifts in country risk scores (emphasizing less safety) occurred to some of the higher-risk options, such as Afghanistan, Mali, Suriname, Sri Lanka and Eritrea, but other countries are also down sharply on a year-to-date basis.
They include Myanmar and Tunisia, with their acute political problems, perennial risky hot spots of Argentina, Venezuela and Zimbabwe, not to mention Belarus, Lebanon, Nepal and Nigeria, which are still struggling to convince the analysts.
Concerning Tunisia, Mongi Boughzala, professor of economics at the University of Tunis El Manar, says the key issue is not president Kais Saied taking control of a deteriorating situation to remove the government, and therefore whether it was consistent with the constitution, as there is a consensus for amending the charter.
“The main issue is that this exceptional situation has been ongoing for more than two months and it is not clear how long it is going to last and according to which timeline,” he says.
With the president assuming power over the roles of executive and legislature, there is no clarity as to how much authority he will delegate to newly appointed prime minister Najla Bouden and cabinet.
Boughzala goes on to mention the lack of transparency in the president’s communications over his political and economic plans, which is a risk factor that has been downgraded in the Q3 survey.
Asian countries affected by economic and social restrictions imposed to contain spikes in Covid cases are among the worst affected in Q3 2021.
Risk scores for Hong Kong, Japan, Malaysia, Myanmar, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam have been downgraded en masse, partly due to lagging vaccinations campaigns and a zero-tolerance policy, leading to ongoing economic restrictions; and for various other reasons.
In some cases, these are political, due to military interference, corruption or regulatory and policymaking concerns.
Others are macroeconomic, or even structural, such as demographic shocks or the quality of healthcare systems that are under the spotlight because of the pandemic.
China’s rising economic risks are a concern for the region, with a power-supply crisis causing instability in the manufacturing supply chain.
“Even the demand for Taiwan’s exports will stagnate, with the risks intensified for industries that are highly dependent on Taiwan and China,” says survey contributor Chien Szu-Min, associate research fellow at the Taiwan Institute of Economic Research.
She notes that the external political risks have also increased for Taiwan as a result of China’s military threats, at a time when vaccine delivery delays have caused its citizens to become more dissatisfied with the government.
Several important policymaking questions bundled into a referendum in December are also a source of political and economic risk, with Taiwanese voters about to be asked about nuclear energy, US pork imports, siting a natural gas plant in a conservation area and the timing of plebiscites.
Hong Kong’s risks are spiralling again, too, for two main reasons, according to Szu-Min. First, China’s real-estate crisis endangers the special administrative region’s (SAR) financial industry. Second, policies to solve land and housing issues by recovering private land from developers to build public housing will jeopardize investor confidence.
Minh Nguyen, a socioeconomic specialist at the Mekong River Commission Secretariat, follows Vietnam and notes that its risk-score decline is mostly linked to a serious Covid outbreak leading to prolonged restrictions.
“This is impacting seriously on labour supply, product movement, slow disbursement of government investment and pandemic-related support credit, among other related factors,” he says, adding that the most serious constraint is labour supply.
More than one million workers have returned to their provinces, some nearly 1,500 kilometres to their homeland. Going back will be hard. Besides, the vaccination rate is very low and there is concern about the effects of slowing growth in China, highlighted by the Asian Development Bank downgrading its real GDP growth forecast for 2021 from 6.7% to 3.8%.
There are other concerns for banking stability – which is Vietnam’s lowest-scoring economic risk factor in the survey – and rising public debt reaching almost 60% of GDP by 2022, although Minh is not overly concerned, given the government’s rather prudent approach to fiscal policymaking.
As for Sri Lanka, Hugo Roussel-Corvin, southeast Asia consultant at String Theory Consulting, says the Rajapaksa family’s recent consolidation of power, is “out of the ordinary and is triggering significant worries, even though at this stage it is much too early to speak of threats to the constitutional order”.
The true cause of the country’s current predicament, he says, is profound economic malaise.
“Decades of financial mismanagement have made Sri Lanka overindebted, and runaway inflation – a chronic problem affecting the country’s economy, coupled with the Covid crisis and several lockdowns – is causing tremendous economic pain across the lower classes, while foreign-currency holders are seeing their purchasing power significantly rise,” says Roussel-Corvin.
The best hope for the country's fortunes is a revival of tourism, while the government should try to take advantage of a difficult situation on the inflation front by incentivizing foreign investment in Sri Lanka, “making sure to reach a diverse pool of investors, especially in the west where trillions of dry powder in dollars are still available to investment firms in America and Europe”, he adds.
Meanwhile, in Australasia, Fiji and Papua New Guinea are more of a concern for analysts, while Australia and New Zealand are more resilient.
Claire Matthews, associate professor at the Massey Business School, says: “It would seem likely the improvement in risk scores is based on expectations of the reopening [of the economies] that has been clearly signalled in Australia, and hinted at in New Zealand, rather than anything that has actually happened.”
Rapid vaccination rates have provided confidence the reopening will occur soon, with borders open to citizens and residents initially.
She says the economic benefits will be limited until tourists return, but “internal reopening will enable a widespread return to work, leading to increased productivity and enabling greater economic activity, which will have a more immediate impact on economic performance”.
The risk implications of recent state-level political instability in Australia – protests in Melbourne and the resignation of New South Wales premierGladys Berejiklian – plus the Aukus deal, in terms of relations with France, are more limited.
Meanwhile, in central Asia, Tajikistan has taken a hit, where the economy is under pressure and tensions with the Taliban are on the rise.
Analysts have also downgraded Kyrgyz Republic and Turkmenistan, but hydrocarbons producers Azerbaijan and Kazakhstan have avoided sharp downturns. In fact, Kazakhstan has bounced back, along with Georgia, Moldova, Ukraine and Uzbekistan.
In contrast, the risks are elevated for many of Africa’s sovereign borrowers, including Botswana, Ethiopia, Kenya, Namibia, Nigeria and South Africa, where economic and political concerns persist, and in certain cases – Ethiopia and Nigeria, for instance – there are conflict risks.
Economic growth prospects are improved for much of the region, but “Africa’s rising debt burden [averaging about 70% of GDP] is increasingly concerning even though much of the recent rise is due to C-19-induced economic stimulus policies,” says Rafiq Raji, a non-resident senior associate with the Africa programme at the Centre for Strategic and International Studies in Washington DC.
“An expected spate of new Eurobond issuances amid an incipient tightening of global monetary conditions raises the prospects of significant exchange-rate risk, with likely higher inflation in tandem,” he adds.
As Raji goes on to explain, Ethiopia and Nigeria are hampered by civil conflicts. The Ethiopian government appears to be undeterred by US sanctions and determined to prevail in the Tigray conflict, which has spread to Amhara and Afar. This is overshadowing structural reforms, in the telecoms sector for instance.
The Tigray conflict is weighing on commerce and Ethiopia is also struggling with high inflation (above 20%), constrained external financing and unresolved debts accentuating currency risk.
In Nigeria, “the fragile economic recovery is being constrained by insecurity hampering agricultural output, reduced crude production due to oil theft, declining investment and rising indebtedness, which is increasingly costly to service”, says Raji.
The foreign-exchange reserves are adequate, but “barring a market-based exchange-rate system, hard currency will continue to be scarce and expensive as arbitrageurs continue to do a brisk business with the ridiculously widespread between the official and parallel markets rates,” he adds.
In the Middle East and North Africa, a constitutional crisis has led to Tunisia sliding down the rankings. Egypt, Lebanon and Yemen are downgraded.
In Europe, experts have become more circumspect over the prospects for Austria, France, Malta, the Netherlands and Hungary, but despite this, the advanced, industrialized countries remain comparatively safe.
The vaccination rate has helped considerably. It is now exceeding 65% in the top-five European countries, and is even 78% in Spain, notes Norbert Gaillard of NG Consulting.
Gaillard is sanguine about political risk in the UK, where the Conservative Party has a solid majority, and in France and Germany.
In France, he notes the fact Emmanuel Macron’s re-election prospects for a second and final term are high, and that this will lead to economic and social reforms. In Germany, the election results will have little bearing on economic policy and the likely participation of the liberal Free Democratic Party in the coalition “should reassure international investors”, says Gaillard.
In his view, inflation is a key risk sustained by post-globalization effects, what he describes as “the revision and relocation of global value chains”, as is the prospect of serious post-Brexit trade tensions over the Northern Ireland protocol.
Investors in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela are facing uncertainty, along with some countries in the Caribbean such as Cuba, Jamaica and Trinidad & Tobago, as inflation and unemployment soars and confidence wanes in political solutions, notably where populist and far-left ideologies are prevailing.
Peru’s score declined a little more, but much of the hit – after the election of the leftist president Pedro Castillo and his Free Peru Party – had already taken place. Castillo has reined-in on plans to redraft the constitution and new prime minister Mirtha Vásquez is offering hope for a more moderate cabinet, reflected in the currency gaining in recent days.
The survey shows solid improvements to Ecuador, Honduras and Panama, but with contrasting fortunes for Bolivia and El Salvador.
Brazil’s plight has also continued. The country has shed almost 22 points in the survey during the past decade, and after falling four places in Q3 – plus 12 so far in 2021, to 115th overall – investors face considerable operating risks.
President Jair Bolsonaro’s Trump-style claims of not respecting the outcome of next year’s elections highlight political risks, while the country is struggling with supply-chain constraints hampering manufacturing, as well as high inflation, which has prompted the central bank to raise interest rates.
Steve Hanke, a professor of applied economics at the Johns Hopkins University, singles out Brazil’s inflation problem, which he explains is due to the central bank’s discretionary monetary powers and little credibility given its history.
“In my opinion, Brazil should retain the real and transform its central bank into a currency board,” he says. “With that, the real would be linked at a fixed exchange rate to the US dollar, be freely convertible into US dollars, and be backed 100% by US dollar reserves. As a result, the real would become a clone of the dollar.
For investors seeking out safe havens, Switzerland remains the safest country worldwide, just ahead of Australia, Finland, Norway and Singapore.
An improving risk score has seen Israel move into the top-10 safest countries for the first time, underpinned by an easing of political risk, ongoing economic strengths bolstered by effective pandemic control and improving bilateral relations with Arab states in the region.
Scores for the US, Canada and the UK have all improved on the back of government stability and economic growth. So has Italy with its investment-fuelled expansion, although it is still the riskiest G10 member state:
The Gulf states have improved enormously on the back of higher oil and gas prices, notably boosting Kuwait, Qatar and Oman. Higher-risk Algeria, Iran and Libya have also benefited, with Syria also bouncing back, although invariably from a low point – and its score is still indicating the country is a high-risk option because of the conflict.
Investors seeking out safer options in Asia will also note the Philippines has been upgraded, reflecting how well it has weathered the pandemic, according to survey contributor Erik Henningsmoen, who follows the country closely in his work for a higher education consulting firm.
“The Philippines has not experienced a catastrophic downslide as some may have feared,” he says.
The country faces elections in 2022, which will be a competitive race and a peaceful transition of power from Rodrigo Duterte at a time when the economy will be recovering.
The Philippine government and tourism industry are making strides to reopen the country, he says, which includes getting tourism workers vaccinated.
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