Corruption and transparency mar too many country risk profiles

Corruption and transparency are becoming bigger problems for investors to contemplate, according to Euromoney’s country risk survey of 174 countries.

In 2021, the survey’s corruption indicator scores were downgraded for 96 sovereign states, and the information access/transparency indicator for 92.

Typically the risk of corruption is high, and worsening, almost without exception in many dictatorships as well as countries that are smaller and institutionally fragile, where ‘graft’ is often deeply engrained in the local business culture.

Among the worst examples (with the lowest corruption scores of all) are Afghanistan, North Korea, Somalia, Syria, Venezuela and Zimbabwe, not to mention Cambodia, Guatemala, Lebanon, Turkmenistan and far too many in sub-Saharan Africa. They include the DRC, Equatorial Guinea, Madagascar and Mozambique on a lengthy list of states where corruption is commonplace and transparency sadly lacking.

But corruption and transparency are becoming bigger problems too for investors in advanced, industrialized nations.

Take corruption first. Two of the countries downgraded the most last year were Luxembourg and Malta, among others predominantly in Africa and Latin America. Singapore, though, also sprung a surprise:

As for transparency, it was Malta once again, plus Austria:

Maltese problem

In Malta, the parliamentary elections held on March 26 delivered another majority for the incumbent Labour Party, now led by Robert Abela, in line with the opinion polls signalling defeat for the opposition Nationalist Party.

The elections took place in the wake of the pandemic and concerns in Europe over Russia’s invasion of Ukraine, and in the aftermath of the car bombing of journalist Daphne Caruana Galizia in 2017.

Her investigations had unearthed a barrel of worms at the heart of the previous Labour government led by Abela’s predecessor, Joseph Muscat. He was re-elected in 2017, but resigned in 2020 following street protests after he failed to take action against his chief of staff Keith Schembri and tourism minister Konrad Mizzi, both of whom were subjected to investigations for their underworld links.

Several men were involved in Caruana Galizia’s murder, one of whom admitted guilt and was convicted.

However, the scandal identified a culture of impunity on the small Mediterranean island that authorities have failed to address, embarrassing the EU and highlighting deep flaws in Malta’s investor environment.

Another perpetrator of the crime mentioned in his witness statement receiving tip-offs about Caruana Galizia from another named government minister.

The journalist’s son, Matthew Caruana Galizia, has vowed to continue her fight, arguing that not enough is being done to combat organized crime. This is underlined by the country’s worsening score for that particular risk factor in Euromoney’s survey.

In fact, corruption is the worst performing of Malta’s political risk indicators, and its downgraded score is one of the reasons for the country slumping to 50th in Euromoney’s global risk rankings, putting the country on a par with Bahrain and Morocco overall.

Compare that to Cyprus, which is 40th, Ireland (15th), and Estonia (11th), among the smaller EU nations.

Austrian failings

Similar failings have been discovered in Austria, where Sebastian Kurz, the country’s youngest chancellor, was forced to resign last October after he and other MPs were investigated for using public funding to pay for party-friendly newspaper advertising.

This followed the Ibiza affair scandal, which led to the collapse of the previous government coalition with the far-right Freedom Party when recorded evidence of the party’s leader and deputy leader discussing underhand practices became known.

Subsequent details have emerged of “side letters” revealing secret deals running parallel to the official coalition agreement that not everyone in the Greens, the current junior coalition partner, was aware of.

One such deal involved the Greens accepting a ban on headscarves for schoolteachers in return for a top position in government. Although it was a proposal that would not have got far, by failing to receive constitutional approval, it underlines the fact that some Green leaders were willingly accepting side letters despite criticizing them in opposition.

Austria still ranks the 13th least-risky country worldwide, but its score and rankings have fallen partly due to a downgraded score for the information access/transparency indicator.

Expert view

Nicolas Firzli, director of the EU Asean Centre at the Singapore Economic Forum, explains the importance of such indicators for country risk.

"Country risk metrics are about present perceptions of future hazards in precise geographies: a delicate spacio-temporal balance sometimes lost to issuers, investors and credit rating agencies,” he says.

“In the case of Malta, even well-meaning analysts have to recognise that the government's governance is mediocre at best: the ruling Labour Party, which just won a third mandate last week, has been accused of fraud and prevarication multiple times in the past ten years, with little electoral impact. Labour grandee Joe Debono Grech even said he was proud of speaking for ‘the party of generous thieves’, implying the country's centre-right politicians were ‘selfish crooks’!”

In the post-Covid era, a connected citizenry will require constant engagement and total transparency from rulers and CEOs alike

 - Nicolas Firzli

That kind of rhetoric is not confined to Gozo or Palermo, Firzli adds, but it does not always go down well with the populace.

“[UK prime minister] Boris Johnson's refusal to admit any wrongdoing regarding Downing Street's bootleg revelries ("socially distanced drinks", "lockdown rules weren't really broken") has turned a bureaucratic breach of Covid regulations into the Partygate saga, a major political scandal threatening Her Majesty's government,” he says.

“In the past three months, the Conservatives have plunged in the polls, and Johnson was only saved by the Ukraine war diversion.”

But Partygate won't go away, Firzli states, adding that scandal marks a turning point on multiple planes.

“In the post-Covid era (the age of ESG data and digital egalitarianism), a connected citizenry will require constant engagement and total transparency from rulers and CEOs alike: more ‘Swiss austerity under Jean Calvin’ than Renaissance ribaldry!”