As we approach the end of 2017, let’s take stock of the Country Risk Quarterly’s (CRQ) country risk rating changes over the last twelve months. First a refresher: the CRQ covers 100 countries, with each country being assigned three risk ratings measuring different types of country risk. In a global environment that is never short of a country-agitating headline, our country risk ratings have moved in tandem. Throughout 2017, our analysis indicates that EDC country risk ratings experienced a balanced number of rating upgrades and downgrades driven by risks ranging from economic, political, and financial. Let’s breakdown some of the risk trends that piqued our interest.
Starting with the Americas, most of the rating movements were to the downside. Five downgrades to the sovereign’s probability of default and nine to our transfer and conversion of foreign currency risks. What led to these changes? Following a string of severe weather conditions, small Caribbean islands such as Antigua & Barbuda and Sint Maarten were downgraded due to limited government capacity to manage significant hits to physical infrastructure and economic activity. Additionally, the region continues to be weighed down by soft commodity prices causing a consistent drag on economic activity and investment in natural resource dependent country’s such as Bolivia and Trinidad and Tobago. Pressures on government finances and access to foreign currency remain the main risks in the region, particularly in those with limited sector diversification.
Moving over to Europe where country risk shifts in 2017 paint a rosier picture. Several western European countries have been reaping the benefits of a Euro Area recovery leading to sovereign rating upgrades for Croatia, Bulgaria and Cyprus. Cyprus is experiencing the green shoots predominantly from a domestic financial recovery while Croatia and Bulgaria move in tandem with the economic recovery of the Euro Area. Regionally, improving government finances and a stronger business climate will lead to a more stable outlook for most countries in the region.
Heading to the Middle East and Africa, we see several countries experiencing varying levels of turmoil. Weak commodity prices, shaky political environments and intra-regional tensions bleed into higher political violence and economic risks throughout the region. Algeria, Tunisia, and the Republic of Congo have felt the squeeze of lower oil prices and public discontent leading to downgrades to their sovereign probability of default ratings. EDC’s Global Economic Outlook expects crude oil prices to remain subdued hovering around $55/bbl over the few years causing further shrinkage of public and exports revenues. Governments’ ability to manage through the price downturn, attract financial flows as well as maintain social stability, will determine which countries will be able to maintain (or improve) their country risk ratings going forward. Debt sustainability risks in the region will also remain top of mind as global interest rates and financial flows normalize in conjunction with a US and Euro Zone consistent recovery. One bright spot in 2017 was Ghana which saw most of its risk ratings improve.
Finally, Asia. Political risks lead rating trends in the region. An ongoing Islamist insurgency and the government’s crackdown on the drug trade, which highlight some underlying risk factors, have led to a deterioration in the Philippines’ country’s political violence rating. On the upside, Indonesia saw a reduction of political violence and expropriation & government interference risks driven by improved governance and political stability, as well as a greater openness to foreign investment slowly leading to an ameliorated business climate.
The bottom line? 2017 was a year of many ups and downs. Weak commodity prices, political tensions and fundamental financial fragility balanced against recoveries in the world’s largest economies and structural improvements in those reaping the benefits of an increasingly globalized world. As we look forward to 2018, we know that volatility is here to stay but on the other hand, it looks as if recovery is as well, along with some countries’ better ability to withstand the storm.
This was written by Andrea Gardella, EDC Senior Economist, Economic & Political Intelligence Centre.