Investor risks have increased to their highest level in almost three years, according to Euromoney’s latest crowd-sourcing global country-risk survey, with political risk rising in sync with economic risk.
Global risk experts have become more pessimistic about the country-risk outlook as the year has progressed, with prolonged high inflation, rising borrowing rates and the war in Ukraine contributing to a darkening picture, made worse by pockets of corruption, government instability, and institutional and policymaking failings, among other factors.
Euromoney’s Q3 survey reveals an aggregate global country-risk score hitting its lowest level since Q1 2020, with 107 of the 174 countries surveyed becoming riskier since Q2, led by Ukraine and Russia. They are the worst performers, once again, during the quarter, with the war still raging.
This has led to developed markets, including the US and many Western European countries, becoming riskier alongside many of the large emerging markets (EMs):
Euromoney’s survey condenses the views of around 300 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.
Russia has slipped 57 places so far this year, to 131st, and Ukraine by 34 to 141st, with country-risk scores also downgraded substantially for Belarus, Libya and Sri Lanka, among others.
The current geopolitical climate is proving especially challenging for the UK and Germany, where the risks tied to the energy crisis and worsening economic outlook are being compounded by political risk, notably in the UK, with analysts downgrading its government stability and policymaking, among other factors.
Government stability risk has increased sharply during the quarter for many countries, including Malawi, Israel and Pakistan, institutional risk is higher in countries as diverse as Malta, Bulgaria and Mongolia, and corruption risk on the up in Honduras, North Macedonia and Thailand.
With global economic prospects fading and financial instability becoming more of a concern as liquidity is squeezed, bank-stability risk has increased in more than 90 countries so far this year, notably so in Russia and Ukraine, but also in Argentina, Hungary and Myanmar, to name but a few.
Risk scores have worsened for almost all of the largest EMs this quarter, notably China, South Africa and Turkey.
Across Africa, confidence in Ghana has deteriorated, along with Egypt and Morocco. Asia’s fallers include Japan, Hong Kong, Myanmar, Singapore and Thailand. There are downgrades for Iran and Lebanon, most of Central and Western Europe, several countries in Latin America – including Bolivia, Chile, Paraguay and Peru – to Canada and the US, and not to mention Kazakhstan and New Zealand.
There is also some uncertainty about how Italy’s new right-wing government will change the country and affect the EU. Plus the new UK government led by prime minister Liz Truss is in open warfare over the policymaking tax U-turn and benefit cuts- Roberto Cervelló-Royo
Commenting on Kazakhstan, Dmitri Fedotkin, director of research in macroeconomics and country risk at the Russian Agency for Export Credit and Investment Insurance (EXIAR), notes the general intensification of geopolitical risks, other risks stemming from still-rising inflation and higher interest rates with harder access to capital markets, post-Covid logistics issues and the “testing of neighbourhood relations”.
The January protests forced the authorities in Kazakhstan to accelerate existing or start new reforms aimed at improving the distribution of social benefits from the state-owned economy, reduce corruption, and build better links between the population and authorities. Changes have also been made to the presidential mandate, increasing it to seven years, and the number of presidential terms has been reduced to one.
“During such significant transitory times, even if most of things go as planned – and often they do not – the efficiency of a state and its institutions can temporarily subside, adding to the aforementioned global negative trends and affecting experts’ perceptions and scoring,” he says.
As for New Zealand, the score change is relative, as the country is still considered a low risk overall.
David Tripe, associate head of the School of Economics and Finance at Massey University, puts it down to deteriorating economic sentiment, as the likelihood of recession has increased, with house prices down from their post-pandemic peaks.
He says New Zealand is also facing labour shortages, prompting some easing of the previously tightened immigration restrictions in New Zealand. This, combined with the weakening of the exchange rate, is helping to boost inflation, in response to which the Reserve Bank of New Zealand (central bank) has been increasing its interest rate.
The possibility of political change at the next general election, expected in late 2023, has increased, with this being reflected in the polls and in the results of the municipal elections in early October, which were seen as indicating a strong swing against the government.
“It is in any case very unlikely that the current Labour government would retain its absolute majority, and there is always the prospect of some uncertainty of outcome as negotiations to form a government proceed after the general election – even if that is 12 months away,” he says, going on to mention that the heightened uncertainly is likely to be the driver for the deterioration in the political assessment.
Tripe adds that the structural assessment for New Zealand is also a little weaker. Infrastructure spending has been promised, but few projects have been completed. Moreover, there are ongoing contradictions between the development of infrastructure and responding to climate change, which often militates against proposed developments.
The global economic outlook is clearly worsening. The IMF’s latest forecasts depict global GDP growth slowing in real terms from 6% last year to 3.2% in 2022 and 2.7% in 2023, with inflation peaking at 8.8% in 2022 before easing to 6.5% in 2023.
China’s growth rate is seen slowing to just 3.2% this year, with the US down to 1.6%, and Russia and Ukraine in deep decline. GDP growth is also envisaged to slow down to a snail’s pace next year in the UK, and contracting in other countries, including Chile, Germany and South Africa.
Current trends indicate increasing risks of bigger and more widespread falls in economic activity, along with house-price declines, rising debt loads and currency volatility, alongside general financial-markets distress.
Downgraded currency-stability scores this year indicate the higher risk of falls in the Polish zloty, Hungarian forint and Turkish lira, as well as pressure on the Hong Kong dollar peg.
Economic risks are inflaming political tensions, fuelling protests over the cost of living and wage strikes, putting governments at loggerheads with opposition parties, as well as internally fractious; pushing some down the road of authoritarianism and populist policies that risk worsening pre-existing debt problems.
These problems are not confined to EMs, illustrated by the risks in Western Europe that are ostensibly tied to the doorstep conflict in Ukraine and the economic fallout from the energy crisis, as well as the rise of right-wing nationalism.
Regardless of the [US midterm] outcome, expect both the Republican and Democrat partisans to continue raising doubts about the legitimacy of elections that do not go in their favour- Erik Henningsmoen
Worsening economic growth and high inflation have undermined expectations for Germany, Italy, the UK, Sweden, France and Spain, and increased their associated risks, says Roberto Cervelló-Royo, associate professor at the Universitat Politécnica de Valencia.
He mentions the various problems concerning energy politics as key risks, noting there does not seem to be a clear agreement regarding the France-Spain MidCat gas pipeline project and that France and Germany are also dealing with their own energy politics.
“There is also some uncertainty about how Italy’s new right-wing government will change the country and affect the EU,” he says. “Plus the new UK government led by prime minister Liz Truss is in open warfare over the policymaking tax U-turn and benefit cuts.”
With the tensions between Russia and Western nations escalating, this could also lead to serious threats to British and European critical infrastructures, remarks Norbert Gaillard, of NG Consulting, who notes the recent sabotage of Nord Stream pipelines.
He says Western governments must realize that they will have to spend more than expected to prevent sabotages and cyberattacks, while many European governments will also experience hard times in the next 12 months, but for different reasons.
“On the one hand, the industrial capacity of the most competitive countries – eg Belgium, Germany, Slovakia, and Czech Republic – will be reduced, which will involve recessionary risks as early as Q4 2022,” says Gaillard. “On the other hand, southern European economies – Italy, Greece, Cyprus and to a lesser extent Spain and Portugal – will be hit severely by the tightening of the monetary policy and will struggle to preserve their credit position.”
As for Germany, he notes that the Olaf Scholz government has not secured alternative energy sources, and the economy will remain fragile with recession in Q4 2022 and Q1 2023 likely.
“Beyond March 2023, a recovery is possible, but it will be contingent on the economic position of Germany's key industrial suppliers – ie Slovakia, Czech Republic, Poland and Hungary,” says Gaillard.
Meanwhile, the UK is facing an exceptionally challenging time for the economy at the same time as there are question marks over Truss. Her Conservative Party is split over key parts of her government’s programme, with warnings of possible electricity blackouts this winter potentially worsening social tensions during a cost-of-living crisis, leading to strikes and financial liquidity problems, which the Bank of England (BoE) has already responded to.
Scores for Canada, Mexico and the US have also worsened, with the US slumping five places in the global rankings to 24th.
Independent researcher Erik Henningsmoen mentions that political discourse in the US is as acrimonious as ever in the lead-up to the 2022 midterm elections this November.
“Regardless of the outcome, expect both the Republican and Democrat partisans to continue raising doubts about the legitimacy of elections that do not go in their favour,” he says.
“For the right, it will be a continuation of the Stop the Steal movement. For the left, rumours of shadowy cabals of right-wing activists taking control of local election commissions, supressing Democratic voters and tipping elections in the Republicans’ favour.”
Whatever the merits, or lack thereof, of these concerns, he says it points to a US democracy where voters are losing faith in the legitimacy of their electoral system.
“A system that produces results that are continually called into question by both sides is a system that will be prone to ineffective governance and even bouts of political violence – as we witnessed during the January 6 riots.”
This political drama is taking place alongside a distressed post-pandemic economy, with soaring inflation, high energy prices and rising interest rates. What is more, for the first time in decades, Americans are contending with the heightened risk of a nuclear exchange with Russia, with New York City releasing a public service announcement in July instructing residents what to do in the event of a nuclear attack.
Johan Krijgsman, of Krijgsman & Associates, says there is a general feeling of fear spreading through the financial markets and so far the US Federal Reserve’s monetary-policy tightening has had little impact on inflation, house prices or employment.
Given US president Joe Biden’s high disapproval rating, inflation, unaddressed immigration issues and crime, it is likely that the mid-term elections next month will not go well for the Democrats, says Krijgsman, and this will further complicate federal-government policymaking.
The brutal reality is that Hong Kong may just be sucked into this colossal, super-competitive growth zone and be degraded into just another Chinese city.- Friedrich Wu
As for Canada, Henningsmoen notes it is experiencing a post-pandemic economic and governance malaise that continues to grip the country. Inflation is high, interest rates are rising, house prices have fallen somewhat as a result, but housing affordability remains low. Soaring rents in cities such as Toronto and Vancouver are increasing financial stress.
He also mentions that federal and provincial governments are struggling to deliver core services in the aftermath of the pandemic.
“The 2022 summer travel season was marred by chaotic and dysfunctional airports and months-long delays to obtain passports at government passport offices,” says Henningsmoen. “Many Canadians even struggle to access healthcare – outside of spending hours, or even days in emergency waiting rooms – due to staffing shortages and lagging capacity within Canada’s oft-vaunted public healthcare system.”
With a sense of post-pandemic normalcy yet to return to Canada, it is no wonder that faith in institutions waivers while support for populism rises, he says.
Krijgsman says favourable terms of trade for agricultural and energy products have helped the Canadian economy, which is the only G7 country with an improving current-account surplus in 2022, according to the IMF.
However, slower growth is emerging and as the household sector is highly indebted, so rising interest rates to address inflation increase the risk of a hard landing.
Krijgsman also mentions political risks. “The government has kept a low profile since the Freedom Convoy of last winter and the Conservative’s new leader is latching on to the need for less of a nanny state in Canada,” he says. “How refreshing voters will find this remains to be seen. Constitutional fights between the provinces (Quebec, Alberta) and the federal government are waiting in the wings, but are currently not on the agenda.”
As for Mexico, Krijgsman says GDP growth forecasts continue to be revised downwards, the pro-business economy minister resigned in October, and criminal activity and violence continue, despite the president’s decision to transfer policing to the new National Guard.
A tough monetary policy to dampen inflation has been pursued, resulting in the peso appreciating against the US dollar. However, neither confidence nor business investment have recovered. In the longer term, the restrained fiscal policy during the Covid pandemic, remittances and tourism could put Mexico on a firmer base if other issues are successfully addressed.
The majority of Asian countries have been downgraded in the survey, partly in response to the economic outlook for China, which has seen its country-risk score fall; pushing the country further down the global rankings, by six places in Q3, and 14 overall so far in 2022, to 59th.
Friedrich Wu, a professor at Nanyang Technological University, remarks that it is a “supreme irony” that as president Xi Jinping is set to be confirmed for a third term, China’s economy will suffer one of the worst annual performances in four decades since 1979.
Under the combined weight of Covid-19 lockdowns, real-estate sector meltdown, rising financial instability among smaller and regional banks, crackdowns on private enterprises and weakened consumer spending, the Chinese economy is likely to grow at only 2.8% to 3.0% in 2022, he says, a level well below many emerging economies in Asia.
“This low point will make a dent on Xi’s statute and much-propagated wisdom,” says Wu.
What is more, longer term, with 10.8 million fresh college graduates entering the jobs market each year, a persistently high youth unemployment – currently hitting 20% – is worrying. Without a sound policy to address this conundrum, Wu warns that it will be a source of social and political instability ahead.
As for Hong Kong, he says that the new administration of chief executive John Lee has recently relaxed some of his predecessor’s draconian Covid-19 restrictions, but they are “too little and too late”, with the economy predicted to register either flat or negative growth in 2022, led by continuous contractions in private consumption and the logistics/transport industry.
“The special administrative region is also bleeding from an exodus of financial and tech talent,” says Wu. “In the latest [September] London-based Global Financial Centres Index, Hong Kong has fallen behind Singapore, while the UN World Intellectual Property Organization’s Global Innovation Index has ranked Hong Kong a low 14th against China’s 11th and Singapore’s 7th.
“The administration likes to brag that Hong Kong’s ostensibly bright future lies with its leading position in the Beijing-conceived Greater Bay Area, but the brutal reality is that Hong Kong may just be sucked into this colossal, super-competitive growth zone and be degraded into just another Chinese city.”
I do not think the current Japanese politics as dysfunctional, but have to say it lacks the sense of urgency- Kenji Sekiguchi
Regarding Singapore, Wu says it is currently enjoying the fruits of its successful Covid-19 policy and benefiting from the frailties in China and Hong Kong. There is an abundance of capital and talent inflows from these two sources and locally a big demand for workers.
Consumer spending is being powered by pent-up demand and strong tourist arrivals, and the property market is propped up by persistently high wage growth and wealthy foreign buyers. However, there are perceivable threats looming on the horizon from possible global recession and/or a widening and escalation of the war in Ukraine in 2023.
With respect to Japan, Kenji Sekiguchi, chief analyst at Rating and Investment Information, has downgraded his monetary policy/currency stability the most due to depreciation of the yen against the US dollar and the stubbornness of the Bank of Japan (BoJ) not to join other central banks in their concerted effort to raise interest rates to combat inflation.
Sekiguchi believes the BoJ has missed the timing and this is attributable in part to the economic difficulties Japan is facing.
“But the true risk in the medium term lies in the background factors that have, in a way, necessitated the BoJ to adhere to such an obvious policy contradiction,” he says. “Something has long-hindered kick-starting healthy demand-driven inflation in the country and that something is not confined to an economic factor. I do not think the current Japanese politics as dysfunctional, but have to say it lacks the sense of urgency.”
On Thailand, with a general election approaching, he is not convinced the change of government will take place without upheaval, which could also affect business confidence.
In the Philippines, another country to be downgraded in the region, but to a lesser extent, Sekiguchi says the newly elected president Ferdinand Marcos Jr’s economic team has reduced the risk associated with the reorientation of economic policies. The more noteworthy point, he says, is that the president’s political skill is yet to be confirmed.
A number of countries across the Latin American region have been downgraded again this quarter, including Argentina, Bolivia, Brazil, Chile, Colombia, Paraguay and Peru, contrasting with Uruguay, the region’s safest option and a notable improver this year.
As in other parts of the world, the region is facing a challenging global economy. High inflation in the context of poverty, unemployment and income inequalities is a perfect recipe for social tension, says Gaby Nudel, an independent economic advisor and consultant.
From a macro-perspective, most of countries are experiencing poor GDP growth – except Colombia – twin deficits and capital outflows, she notes. Some of the countries are commodity exporters of mostly agricultural products and minerals, but elevated levels of price inflation of food and fuels are putting pressure on a worn-out economic policy after the Covid pandemic.
“In Argentina, Bolivia, Chile, Paraguay and Peru, political and institutional issues add to a cloudier scenario,” says Nudel, going on to explain that Argentina is a melting pot of all sorts of problems, including government legitimacy, coalition disruptions and poor economic performance.
Chile, once a shining star of predictability, is in a waiting game after the rejection of a constitution and the delivery of a new one that could take another year, with president Gabriel Boric’s approval diminishing quickly.
[There is an] arc of instability stretching from Iran to the Maghreb- Owais Arshad
Another contributor mentioned in confidence that the results of the constitutional referendum have led to stronger feelings of uncertainty, thinking about how the new government will be able to manage expectations in the following months and avoid the risk of new threats of social unrest.
Related to that, the ongoing conflict with the Mapuche people in the south is being monitored to see how the government will address this type of conflict – that is if the rule of law will be enforced and/or other mechanisms will be put in place to solve it.
Meanwhile, Peru is witnessing corruption events, says Nudel. President Pedro Castillo reshuffled his government in August, the head of congress was pushed out in September, and in October a constitutional complaint was made against the president by the general prosecutor for alleged crimes of criminal organization aggravated by his status as leader.
Bolivia, she says, faces the shattering of the ruling political party, with former president Evo Morales challenging the incumbent Luis Arce within Movement for Socialism (MAS), the ruling party, which is also under investigation for links with drug trafficking.
The Caribbean region, by contrast, has held-up well, with notably improving scores evinced for Barbados, Jamaica and Trinidad & Tobago since June. ECR plans to cover the region in more detail in the coming weeks.
Invariably, with oil prices at higher levels, and given the levels of political stability, scores for all of the Gulf Cooperation Council member states are higher in this survey, along with Iraq.
Israel remains low risk, but its score has been downgraded on account of political instability, with the government collapsing and a snap election to be held in November.
Scores for Iran – enduring protests – Jordan, war-torn Yemen, and Lebanon, have all worsened, as they have for Egypt, Libya, Morocco and Tunisia, where political problems are being compounded by the tensions surrounding the rising cost of living.
Owais Arshad, global economic sanctions expert at RBC, points to an “arc of instability stretching from Iran to the Maghreb”.
Much of this turmoil, he says, has been exacerbated by broader geopolitical instability, particularly the impact of the Russian invasion of Ukraine on energy and grain markets. Both Lebanon and Egypt, for example, are traditionally highly dependent on wheat imports from Ukraine, which have been disrupted due to the invasion and has resulted in elevated bread prices.
The economic crisis in Lebanon is now so severe that even delayed shipments of wheat from the Ukrainian port of Odesa only made a marginal difference to an economy that has been imploding since 2019.
The Levant, specifically Syria, has also become “ground zero for the Middle East’s narcotics production”. Under the proposed Captagon bill, the US seeks to sanction key elements of Bashar Al Assad’s regime that have used their connections with the Syrian army to boost the production of amphetamines that are then smuggled and consumed all over the Middle East.
“Jordan is a key smuggling route, although the impact of these narcotics has been felt widely across the region,” says Arshad.
He goes on to mention Iran’s brutal crackdown against protesters, resulting in widespread global condemnation and growing calls for further increasing sanctions against elements of the ruling regime, including stricter sanctions against the Islamic Revolutionary Guard Corps and other elites to deny them the ability to operate freely in Western countries.
“Hopes for a deal under a revised joint comprehensive plan of action are also fading, and recent reports of Iranian drone sales to Russia may result in more, rather than a loosening of, restrictions against Tehran,” he says.
Egypt’s development is largely driven by external financing, which exposes the country to global liquidity and monetary conditions, says Soumendra Dash, principal credit risk officer at the African Development Bank, and the prevailing geopolitical tensions around the world are not conducive for extending uninterrupted long-term financial support for the development of Egypt.
Dash notes the high inflation rate “pulling down the attractive high real interest rate in the country”, that investors are disillusioned and shying away from long-term investment commitments, and remarks upon the growing balance-of-payments problems.
The future appears more uncertain [in Tunisia] now that the government can no longer manage imports of primary food and energy products- Mohamed Chemingui
As for Morocco, price inflation has extended virtually to all commodities, with food and energy prices touching historical levels. Apart from the rising interest rate and high unemployment rate, Dash notes that rising corruption is another perceived obstacle to investing in Morocco.
Corruption is one of several political risk indicators downgraded. Dash says it is “committed by highly influential people who are rarely prosecuted in the country and this is perceived as a serious threat to investment”.
RBC’s Arshad also points out Morocco’s ongoing dispute with Algeria, which has complicated exports of Algerian energy to Spain via a gas pipeline that transits its territory.
“Algerian elites are also piqued by reporting from last year that indicated Morocco used Israeli cyber weapons to eavesdrop on Algerian government communications, including politicians and generals,” he says. “Algeria, meanwhile, continues to back the Polisario front, a separatist group that lays claim to Rabat-administered Western Sahara.”
Algeria and Morocco field Africa’s second- and third-largest armies, and the possibility of conflict remains elevated. Given the critical role Algerian gas has played in supplanting Russian energy for the EU’s Mediterranean states, actual conflict would be disastrous for regional economies, he warns.
Mohamed Chemingui, senior economist and chief of regional integration section at United Nations Economic and Social Commission for Western Asia (UN-ESCWA), mentions the inflation problem, noting that most non-oil Arab countries – including Tunisia, Morocco, Egypt, Jordan, Lebanon and Sudan – have been forced to stock up on food at exorbitant prices, causing the deficit in their public budgets and external payments accounts to increase.
In Tunisia, he says, both the shortage of foreign-currency supply and the difficulty of accessing external credit markets in the absence of an agreement with the IMF are contributing to a scarcity of primary food and energy products. It is a crisis never encountered by Tunisia since its independence and is one that is likely to worsen in the coming months.
“The recent decisions to restrict imports of a wide range of products as well as capital outflows will exacerbate uncertainty and, as a result, lower private actors’ willingness to send funds to Tunisia (remittances) or invest in the country,” says Chemingui.
“The future appears more uncertain now that the government can no longer manage imports of primary food and energy products, which are monopolized by heavily indebted state companies. The absence of an economic growth policy is costing the entire economy, and the outlook is undoubtedly bleak.”
He goes on to discuss the crisis in Lebanon, where the approval of the 2022 budget law is a critical step towards reducing the enormous costs on public finances imposed by maintaining the exchange rate at 1,500 LBP/USD versus 39,000 on the parallel market; already the only foreign-exchange rate.
“Raising the threshold from 1,500 to 15,000 will increase government revenue from customs duties and other indirect taxes by 1,000%,” he says. “Moreover, the maritime border agreement that will be signed soon between Lebanon and Israel will improve the country's economic prospects.”
As for Libya, Arshad points out that Turkish aid has helped stabilize the UN-backed government and, in return, Ankara has extracted valuable offshore energy exploration rights, a move criticized by Cyprus, Egypt and Greece.
“At issue is Turkey’s refusal to recognize the maritime boundaries that are enshrined in the UN’s Convention on the Law of the Sea, which effectively restricts Turkish access to the Mediterranean,” he says. “Egypt also backs the armed insurgency against the Libyan government through its support for Khalifa Haftar, a military general based in the East of Libya.”
Meanwhile, across the rest of Africa, the risks have increased for Burkina Faso, Cameroon, Congo Republic and Democratic Republic of the Congo (DRC), Ghana, Malawi, South Africa and Tanzania.
Next week, ECR plans to elaborate on the sub-Saharan region, looking at the key political risks for African investors, as inflation takes hold in many countries, and debts rise, while also highlighting those countries that are proving more resilient.
For more information, go to: https://www.euromoneycountryrisk.com.