It is 40 years since Euromoney began quantifying country risk, later introducing a survey to help investors gain greater insights into their risk-return trade-offs.
Euromoney’s country risk survey was rather unique from the outset. The aim was to quantify investor risk by polling experts in the field, using the ‘crowd-sourcing’ approach, and not just those working in finance, but right across a range of public and private sector organizations.
As with consensus-style surveys of economic forecasts (such as Euro Zone Barometer), many of the contributing experts were economists working in central banks, commercial banks or other leading institutions, but many were not.
University academics, consultants and industrialists have all been part of a diverse panel more than 300-strong since its inception in 1993. The survey was conducted less frequently at first, but then quarterly assessments were made.
An in-depth knowledge of political risk proved just as useful as economic, plus most experts had essential insights to divulge, supporting weekly articles of topical interest.
Values would be awarded by the experts to 15 economic, political and structural factors.
The economic risk factors included bank stability, the economic-GNP outlook, monetary policy/currency stability, employment/unemployment and government finances.
Political risks were considered through government non-payments/non-repatriation, corruption, information access/transparency, institutional risk, regulatory and policy environment and government stability.
The structural assessment included hard and soft infrastructure (the latter being education and healthcare systems, for example), demographics, hard infrastructure and the labour market/industrial relations.
Debt ratings were calculated and a measure of capital access assigned.
This gave rise to a holistic country risk score that all markets worldwide could be compared with, and a ranking system to judge them by separating the lowest risk countries, like Switzerland, from North Korea, the highest risk, and applying a statistical approach enabling longer-term trend changes in risks to be identified.
Of course nothing is infallible, the social sciences are imprecise after all.
But over the years the underlying model calculating the total score from its constituent factors was refined to provide enhanced data for investors to make these global comparisons.
This made it extremely useful, on many occasions providing an essential guide to payments difficulties, outright sovereign defaults, currency crises and changes in credit ratings.
More generally, it provided a useful guide to the relative risks in advanced industrialized countries, and among emerging and frontier markets in the developing world.
This author began reviewing the results back in 2012, in the wake of the pro-democracy Arab Spring protests that took place across the Middle East and North Africa and the ensuing Syrian civil war.
There was also the fallout from the European sovereign debt crisis, in turn the legacy of the 2007-2008 banking crisis when Lehman Brothers collapsed and Iceland was brought to its knees.
At the time there was discussion about Greece potentially leaving the euro zone. Interest rates were falling, and by 2014 the European Central Bank had adopted a negative interest rate for the first time.
Royal rulers died and were succeeded, governments fell and were replaced, and populism came and went, along with commodity super-cycles and the familiarity of economic boom-and-bust. Public finances became stretched, austerity embraced, and protests erupted for better wages, institutions and policymaking.
Politics oscillated between left and right on concerns for asylum, immigration and social injustice. Climate change prompted renewed vigour for environmental action, and resistance to it from defiant, but transitory, leaders in Australia, Brazil and the US.
The world was shaken by a pandemic, economies became dislocated and public coffers emptied to protect the needy, with corruption rising. Civil strife occurred in places as diverse as Cameroon, Kazakhstan and Sri Lanka, and for similarly diverse reasons, among other hotspots of violence.
In 2022, the survey’s total average global risk score has reached its worst since before the pandemic took hold in early 2020
Experts became concerned about key emerging markets, such as Brazil, South Africa and Turkey, as their currencies wobbled.
Argentina succumbed to yet another debt crisis and other countries endured payments pressures or outright defaults. Chile embarked on an ill-fated constitutional reform, and Venezuela fell permanently out of favour.
More recently, China tightened its tourniquet on Hong Kong, meddled with business regulations and issued threats to Taiwan. It even persisted with zero-Covid until people-pressure forced it to change.
The US, of course, was buffeted by Trump’s protectionism, social division and fiscal constraints, and Europe endured Brexit, heightening not least the UK’s political risks with tensions over unresolved trade arrangements and an independence-seeking Scotland.
Inflation has soared and the world is grappling with increased labour force militancy as trades unions protect their members’ standard of living.
All of which has spiralled from Russia attacking Ukraine, creating the risk of a Third World War that is highlighting food and energy security while underlining the importance of geopolitical risks.
Euromoney’s survey has reacted to the build-up of these and many more issues over the years.
In each instance its devoted experts, some focusing on just one or two countries of specialism, others with a much broader perspective, have scored the various factors on a quarterly basis, providing investors with a rapidly changing view on relative risk in more than 170 countries worldwide.
All of the countries have been split into five categories according to their degree of overall risk. A leap from tier 4 to tier 3 is often, but not exclusively, indicative of an impending investment grade, as illustrated in the case of Croatia, among others over the years.
And, in 2022, the survey’s total average global risk score has reached its worst since before the pandemic took hold in early 2020 and the lockdowns were subsequently imposed.
According to the survey data, in total 107 countries have become riskier in 2022 alone, with 70 worse off over the past decade, led by Lebanon with a 25 points fall. Others with just as substantial longer-term (10-year) trend falls are Brazil, Russia, Sri Lanka, Turkey and Venezuela.
Contrastingly, those showing the greatest improvements include a plethora of Caribbean countries, Bosnia-Herzegovina, Uzbekistan and Greece – the latter showing a remarkable recovery from the debt crisis years when experts could not downgrade the country fast enough.
The survey has highlighted which factors are behind those movements. It has done so for several decades, and the results have been used also for Euromoney’s Belt & Road Index, a quarterly assessment of the potential and impact of China’s New Silk Road.
Euromoney’s Country Risk Survey is now coming to an end, but the risks it attempted to quantify will always be pertinent to investor decision-making, in 2023 and beyond. They should never be ignored.